First Pacific Advisors LLC v Boart Longyear Ltd [2022] NSWSC 26 | Case summary

Specific issues arising in respect of the proposed scheme

Mr Foreman draws attention to several aspects of the scheme, in addition to the matters I have noted above. First, Mr Foreman notes that, under the SID, it is a condition to implementation of the scheme is that all Related Party Loans (as defined) are fully repaid prior to 5:00pm on the Business Day before the Second Court Date (as defined). As at 31 December 2021, amounts will be payable by Quantum to two Quantum directors in respect of Related Party Loans owed by it to them, namely $2,227,995 payable to Mr Walstab and $1,246,458 payable to Mr Townsend. Mr Foreman points out that those Related Party Loans are disclosed in sections 1.2.3 and 9.1.4 of the proposed scheme booklet, and also there disclosed in the context of the Quantum directors' recommendation that Quantum shareholders vote in favour of the scheme which I address below.
Mr Foreman draws attention to Quantum's Annual Report for 2021 which suggests that Quantum had sufficient current assets to repay the Related Party Loans, and to Mr Peters' and Mr Walstab's affidavit evidence that it is Quantum's current intention to repay the Related Party Loans in full prior to 30 June 2022 even if the scheme is not implemented, and consistent with the fact that the Related Party Loans were included (as "Borrowings") in the current liabilities of Quantum as set out in its 2021 Annual Report. Mr Tanner's affidavit evidence is also that Paragon required the condition precedent for repayment of the Related Party Loans for specified commercial reasons. Mr Foreman also draws attention to correspondence with ASIC concerning this matter and notes that ASIC has now advised it has no further comments on the scheme booklet.
Mr Foreman addresses the concept of a "collateral benefit" and notes the Takeovers Panel's approach to that matter as set out in Takeovers Panel Guidance Note 21: Collateral Benefits. He also refers to the case law that has considered the question of collateral benefits in the scheme context including Re David Jones Ltd (No 2) (2014) 101 ACSR 381; [2014] FCA 720 ("David Jones No 2") and Re David Jones (No 3) [2014] FCA 753 ("David Jones No 3").
In David Jones No 2 at [30]-[31], Farrell J noted a practice of providing an additional expert report where an issue of collateral benefit may arise in a scheme context. Mr Foreman points out that the question whether any collateral benefit is given to the directors whose related Party Loans are to be repaid has here been addressed by the independent expert's report, which expresses the view that nothing that has come to the independent expert's attention to indicate that the value of the Related Party Loans, as recognised in Quantum's financial statements, should be discounted and that the repayment of the Related Party Loans will not result in a net financial benefit to Mr Walstab and/or Mr Townsend to the detriment of other Quantum shareholders. In David Jones (No 2) at [33], Farrell J also noted that the second Court hearing is the time for the Court to determine whether or not a collateral benefit has been received and (if so) the relevance to the Court's discretion to approve the scheme having regard to the voting at the scheme meeting and the level of disclosure. Mr Foreman also rightly points out that, where one or more shareholders receive a potential collateral benefit under the scheme, then the Court will consider whether it is appropriate for the members to be placed into a separate class and that matter is properly addressed at the first Court hearing.
Mr Foreman also refers to Farrell J's observation in David Jones No 3 at [12]-[13] that: "…The transaction under consideration is a scheme of arrangement to which s 623 does not apply. The relevance of the principles set out in s 602 goes to the question of fairness and the desirability of there being, so far as relevant and possible, neutrality between "acquisition" schemes and Ch 6 takeovers. However, one of the reasons for the continued existence of the s 411 avenue for effecting mergers is that it is a flexible way of accommodating differences in the treatment of shareholders. It is for this reason that it is not illegal for a collateral benefit to be offered or given. Nor is it necessarily inappropriate for there to be differential consideration or collateral benefits subject to how the related questions of fairness and adequacy of disclosure to shareholders who will not participate in a benefit are addressed. The "fairness" issue is usually dealt with in one of two ways: first, by deciding whether there are differences which are "class creating" or, second (and arguably more appropriately where the issue is collateral benefits), by enquiring whether processes have been established by the scheme company to "tag" votes of interested shareholders or for interested shareholders to abstain from voting. Either approach allows appropriately informed shareholders who will not share in a benefit to determine the outcome of the approval resolution and prevents shareholders with greater bargaining power from being advantaged over shareholders with less bargaining power without the consent of the less powerful shareholders."
Her Honour also there addressed (at [15]-[16]) the question whether a scheme participant would receive a "net benefit" under the scheme so as to give rise to a collateral benefit as follows: "In the context of a scheme, I accept that the appropriate measure of whether a benefit exists is the 'net benefits' test which has been adopted by the Takeovers Panel in Guidance Note 21: Collateral Benefits (GN 21) at [15] and [31] in determining whether 'unacceptable circumstances' exist by reason of the existence of such an interest. This test was posited by Santow J in Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638 at 680: "The preferred holistic view instead takes into account whatever rights or benefits are conferred by each transaction, to be netted off against whatever rights or benefits are thereby given up, to the extent such benefits are commensurable at least in an approximate sense. The resultant net benefit is to be compared under each transaction. Only if there is overall disparity in favour of the party to the non-bid transaction is s 698(1) [now s 623] contravened. This is in the sense of a balance of advantage, profit or good in favour of the party to the non-bid transaction." I also accept that, as contemplated by GN 21 at [32], there may be 'inducement' arising from collateral benefits which should be taken into account where there is no material 'net benefit' but a shareholder is offered the opportunity to acquire or dispose of an asset for which there is no ready market or easily ascertainable value."
Mr Foreman also referred to the consideration of this issue in Re Aston Resources Ltd [2012] FCA 229. I also recently addressed questions of an independent expert's assessment of, and the disclosure of, a possible collateral benefit in Re The Trust Company (Re Services) Limited as responsible entity of the VitalHarvest Freehold Trust [2021] NSWSC 108 at [23]ff. Mr Foreman also draws attention to the case law concerning when shareholders must vote in different classes generally, in addressing the question whether Mr Townsend or Mr Walstab should be required to vote in a separate class at the scheme meeting: Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583, Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 at [12]; First Pacific Advisors LLC v Boart Longyear Ltd (2017) 121 ACSR 136; [2017] NSWCA 116 at [77]-[81]; Re Tronox Limited [2019] FCA 312 at [27].
Mr Foreman identifies relevant matters including that, as I noted above, Paragon here required that the Related Party Loans be repaid in arm's length negotiations and has identified apparently sound commercial reasons for that requirement; they will be repaid at their face value where there is no apparent reason to discount their value, where Quantum has significant net current assets including cash; the amounts to be repaid to Mr Townsend and Mr Walstab are small relative to the value of their shareholdings in Quantum; there is evidence that it was intended that the Related Party Loans would be repaid in any event during the FY22 financial year; and repayment of those loans will deprive Mr Townsend and Mr Walstab of the (relatively high) interest payable in respect of those loans; and the independent expert has concluded that there is no reason to discount the value of the loans and that their repayment will not confer any net financial benefit on Mr Townsend or Mr Walstab. Mr Foreman also points out that the treatment of the Related Party Loans is prominently disclosed in the scheme booklet (including where the directors' recommendation is referred to) and there will be a record of how Mr Townsend or Mr Walstab votes at the scheme meeting and the Court will be able, if necessary, to assess the result of that meeting excluding their votes. Mr Foreman submits for these reasons, and I accept, that the condition precedent in relation to and repayment of the Related Party Loans does not, in substance, give rise to a net benefit or a collateral benefit to Mr Townsend and Mr Walstab and does not require that they vote in a separate class. I am satisfied that these matters, where appropriately disclosed in the scheme booklet, do not give rise to any reason not to convene the scheme meetings or to require that Mr Townsend and Mr Walstab vote in a separate class at that meeting.
Second, Mr Foreman notes that all directors have made a recommendation, after disclosure of financial benefits they may receive from implementation of the scheme, and submits that approach is consistent with recent authority. He refers to my judgment in Re Afterpay Ltd [2021] NSWSC 1435 at [40]-[43] where I observed that: "I again prefer the approach adopted in Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Re Villa World Ltd [2019] NSWSC 1207 and Re GBST Holdings Ltd [2019] NSWSC 1280 to that taken in Re Gazal Corporation Ltd [2019] FCA 701 and Re Navitas Ltd (No 2) [2019] WASC 218. I have also taken the former approach in Re Coca-Cola Amatil Ltd [2021] NSWSC 270 and Re BINGO Industries Ltd [2021] NSWSC 798, and the same view has recently been taken in the Federal Court of Australia in Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580; Re RXP Services Ltd [2021] FCA 38 and Re Mainstream Group Holdings Ltd [2021] FCA 948. I accept that the interests of [two directors] do not prevent them from making a voting recommendation to [scheme company] shareholders where that interest is sufficiently disclosed in the scheme booklet and [scheme company] shareholders may take it into account in determining the weight to give to that recommendation."
Applying the same approach here, I am satisfied this matter does not give rise to any reason not to convene the proposed scheme meeting.
Third, Mr Foreman refers to the definition of "Ineligible Foreign Shareholders" under cl 1.1 of the scheme and to the disclosure as to that concept in section 3.3.5 of the proposed scheme booklet and notes that, under cl 5.4 of the scheme, in Paragon is not obliged to issue Paragon shares to "Ineligible Foreign Shareholders" (as defined) and the Paragon shares to which the Ineligible Foreign Shareholders would otherwise have been entitled to will be issued directly to a sale agent who will, as soon as reasonably practicable on or after the Implementation Date of the scheme, sell those shares on ASX and remit the applicable proceeds after costs to the Ineligible Foreign Shareholders. Mr Foreman also submits, and I accept, that Quantum shareholders who are Ineligible Foreign Shareholders under the scheme do not constitute a separate class for the scheme meeting: Re Hills Motorway Ltd above at [9]-[13]; Re TPG Telecom Ltd [2020] NSWSC 772 at [21]; Re Afterpay Ltd above at [39]. I am satisfied these matters do not give rise to any reason not to convene the proposed scheme meeting.
Fourth, Mr Foreman notes that, in a disclosure letter contemplated by the SID, Quantum and Paragon have agreed that Paragon is permitted to declare a dividend of up to $0.01 per Paragon share, and, if the record date for such a dividend is prior to the implementation date for the scheme, Quantum will then be entitled to declare a dividend of an amount equal to 0.243 multiplied by the amount of the dividend declared by Paragon. Paragon is required to provide Quantum with reasonable notice of such a dividend prior to it being declared but has not provided any such notice at this time. Mr Foreman submits, and I accept, that the application of that approach would have no impact on the scheme consideration. Mr Foreman also notes that the possibility of such a dividend is disclosed in section 9.3 of the scheme booklet and, following ASIC's comments, further disclosure of the agreement between Quantum and Paragon as to this matter is made at sections 3.5.1(d) and (j) of the scheme booklet.
Fifth, Mr Foreman notes that cl 9 of the SID sets out the exclusivity provisions applicable to the scheme, which are summarised in section 3.5.2 of the scheme booklet. These include "no shop", "no talk" and "no due diligence" provisions, a mutual notification obligation and a matching right. Quantum is not required to comply with the "no talk" and "no due diligence" provisions in the SID in relation to a bona fide Competing Proposal (as defined) from a third party if its board of directors has determined in good faith that that Competing Proposal is or may reasonably be expected to become a Superior Proposal (as defined) and, after receiving written legal advice from its external legal advisers, that compliance with those provisions would involve, or would be likely to involve, a breach of the directors' fiduciary or statutory duties. The "Exclusivity Period" in which these provisions operate is defined in the SID as the period commencing on the date of the SID and ending on, inter alia, the End Date, being seven months after the date of the SID or such other date as Quantum and Paragon agree in writing.
The case law recognises an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve-out, although that is not required for a "no shop" restriction; matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive; and exclusivity provisions must be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re DUET Management Company 1 Ltd [2013] NSWSC 817 at [24]; Re Bigair Group Ltd [2016] FCA 1296 at [21]; Re Villa World Ltd above at [23]; Re Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348 at [44]. Mr Foreman submits, and I accept, that the period of the exclusivity restriction is capable of precise ascertainment and reasonable; the "no-talk" and "no due diligence" restrictions and the notification obligation and matching right are subject to a fiduciary carve-out, which is not necessary for the "no shop" restriction; the restrictions are appropriately disclosed in the scheme booklet; and the evidence addresses the negotiations that led to agreement as to these provisions. These matters give rise to no reason not to convene the scheme meeting.
Sixth, Mr Foreman notes that a break fee of $1,000,000 ("Break Fee") is payable by either Quantum or Paragon in the circumstances specified in cl 10 of the SID. The fee is not payable merely because Quantum shareholders do not approve the scheme. That break fee of approximately 1.2% is higher than 1% of the total equity value of Quantum, and therefore is higher than the 1% percentage referred to under the Takeovers Panel Guidance Note 7. Mr Foreman points out that the reasonableness and appropriateness of the break fee provisions is supported by affidavit evidence of the kind referred to by Lindgren J in Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [55] and is disclosed in the scheme booklet. On balance, the size and structure of the break fees do not give rise to reason not to convene the scheme meetings.
Seventh, Mr Foreman notes that cl 7.3 of the scheme provides for a deemed warranty by scheme shareholders that their shares will be free from security interests and encumbrances, which is disclosed in sections 1.4.4 and 3.6 of the scheme booklet. The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd above at [57]-[63]; Re DUET Management Company 1 Ltd above at [23]; Re Villa World Ltd above at [25].
Eighth, Mr Foreman addresses the question of "performance risk", as described in Re APN News & Media Ltd above and Re Afterpay Ltd above at [45]-[46] (where the scheme consideration was shares), which has been mitigated here by provisions in common form in cll 4.2, 5.1 and 5.2 of the scheme, including a provision that the transfer of the scheme shares on the Implementation Date is "subject to the provision of the Scheme Consideration in the manner contemplated by clause 5… " of the scheme. A deed poll executed by Paragon is in evidence.
Ninth, Mr Foreman addresses the nature of the scheme consideration. Section 7.4.4 of the scheme booklet discloses that one of the risks of the scheme is that the value of the scheme consideration is not certain, where its implied value is liable to vary over time depending on the prevailing Paragon share price.
Tenth, Mr Foreman addresses the process for dispatch of the scheme booklet and associated documentation, which is consistent with that permitted in recent cases: Re PM Capital Asian Opportunities Fund Ltd [2021] FCA 1380 at [100]; Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [26]; Re Dragontail Systems Ltd [2021] FCA 834 at [44]-[46]. Mr Foreman also notes that, again consistent with recent practice, it is proposed that the scheme meeting will be conducted entirely online as a virtual meeting.
Eleventh, Mr Foreman submits, and I accept that that, in accordance with the usual practice, the question raised by s 411(17) of the Act is to be dealt with on an application to approve a scheme at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37]; Re Afterpay Ltd above at [48].

First Pacific Advisors LLC v Boart Longyear Ltd

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