FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd

Federal Court of Australia|2008-02-12|Before: Mansfield J

THE NATURE OF THE APPLICATION 1 Hostworks Group Limited (Hostworks) sought an order under s 411(1) of the Corporations Act 2001 (Cth) (the Act) for the convening of a meeting of its members for the purpose of considering a proposed scheme of arrangement. The objective of the proposed scheme is to effect a merger between Hostworks and Broadcast Australia Pty Ltd (Broadcast Australia) whereby, if the proposed scheme is approved, Hostworks will become a wholly owned subsidiary of Broadcast Australia. 2 Hostworks' business is managing the availability, performance and running costs of business applications. It is a profitable enterprise, and has a substantial surplus of assets and liabilities. 3 It is apparent that, for the purposes of the takeover of Hostworks by Broadcast Australia, both Hostworks and Broadcast Australia have adopted the means available under Pt 5.1 of the Act in preference to the takeover procedure available in Chapter 6 of the Act. If the proposed scheme becomes effective, Broadcast Australia will pay to the "scheme participants", that is its members other than Broadcast Australia, $0.41 for each Hostworks share as at what is called the "record date" in the explanatory statement issued with the notice of meeting.

4 Hostworks presently has 163,625,550 fully paid ordinary shares. There are no classes of shareholders. It also has 9,350,001 options issued over its unissued share capital. Of those options, 4,350,001 have been granted to employees from time to time pursuant to the Employee Share Plan Options Rules, and 5,000,000 issued to Leonard Peter Shore, its non-executive chairman. 5 Mr Shore is also an executive director of Macquarie Capital Group Limited. It is a member of the Macquarie Communications Infrastructure Group, and the manager of Macquarie Communications Infrastructure Limited, which in turn, is the parent entity of Broadcast Australia. The ultimate holding company of those various entities is Macquarie Bank Limited. Mr Shore has not participated in any way in the decisions of Hostworks in relation to its negotiations with Broadcast Australia leading up to acceptance of the proposal of Broadcast Australia by Hostworks, and the implementation of the agreement then reached. Under the proposed scheme, if it proceeds to fulfilment, by the "record date", all options over Hostworks' unissued capital will have been cancelled, exercised or lapsed with the effect that, all shareholders other than Broadcast Australia, will have received the scheme consideration of $0.41 per share for each Hostworks share. All option holders will have had the opportunity to have their options cancelled, and have received a payment equivalent to the scheme consideration less the option exercise price, or alternatively have had the opportunity to have exercised their options and then to receive the scheme consideration for the shares issued following the exercise of the options. 6 It is not necessary to refer in detail to the negotiations leading to the proposed scheme. Following negotiations on a non-binding and confidential basis, on 7 December 2007 Hostworks and Broadcast Australia entered into an Implementation Agreement to give effect to the proposed scheme. It was subsequently amended in one respect on 14 December 2007 in relation to what is called the "Break Fee" payable to Broadcast Australia in the event that Hostworks' members do not approve the proposed scheme at the proposed scheme meeting. I will refer to that feature of the Implementation Agreement later in these reasons.

7 On the same day, Hostworks made an announcement to the Australian Stock Exchange in relation to the proposed scheme. 8 On that day, Broadcast Australia also entered into Option Deeds with three members of Hostworks, by which it was granted call options to acquire their shares in Hostworks. Those options relate to some 19% of the issued shares in Hostworks. Those call options are exercisable at the scheme consideration price, and will lapse if the scheme is not approved by Hostworks' members or by the Court. 9 Finally, in terms of documentation, on 7 December 2007, Broadcast Australia entered into a Deed Poll by which it covenanted in favour of each of the scheme participants, that is the members of Hostworks at the critical date, to performance of its obligations under the proposed scheme. I will also refer to that feature of the proposed scheme in more detail later in these reasons. 10 The Scheme Booklet to be sent to the members of Hostworks includes copies of the Implementation Agreement, the proposed scheme, the Deed Poll, notice of the proposed meeting and an independent expert's report accompanying the detailed explanatory statement provided by the independent directors of Hostworks. It appears to be comprehensive and candid. 11 KPMG Corporate Finance (Aust) Pty Ltd has provided an independent expert report to Hostworks by which it expresses a view that the proposed scheme is fair and reasonable and in the best interests of Hostworks members in the absence of an alternative offer on better terms. The KPMG report is Annexure A to the explanatory statement issued to Hostworks' members in the Scheme Booklet for the purposes of consideration at the proposed scheme meeting.

THE REQUIREMENTS OF SECTION 411(1) 12 On 21 December 2007, I made orders pursuant to s 411(1) of the Act that Hostworks convene a meeting of its members for the purpose of considering the proposed scheme. I also made orders as to the means of calling the meeting and as to its content. I indicated at the time that I would later deliver reasons for those orders. These are the reasons for those orders. 13 Section 411(1) provides: Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such a manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings. 14 Following the order of the Court to convene a meeting of the members of Hostworks, if the meeting approves the proposed scheme, the next step is for an application under s 411(4)(b) of the Act approving the proposed scheme. 15 It is, of course, clear that the Court's role on this application is not to pass a final view on whether the proposed scheme should be approved, either by the members at the proposed meeting, or then by the Court under s 411(4)(d). The decision must first await the will of the members to be expressed at the scheme meeting. Assuming the members support the proposed scheme, when the Court is then called upon to approve it, dissenting members or other interested parties will have the opportunity to oppose the Court's granting approval: Re Sonodyne International Limited (1994) 15 ACSR 494 at 497 per Hayne J. 16 However, the authorities indicate that, at this point, the Court should review the proposed scheme and the proposed explanatory statement, and may invite the plaintiff company to attend to any matters which seemed to the Court to require attention before the distribution of the documents. 17 In FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, Street CJ said: [T]he court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms, if it achieves the statutory majority at the creditor's meeting [in this case, the members' meeting] the court would be likely to approve it on the hearing of a petition which is unopposed. That passage was cited with approval by the High Court in Australian Securities Commission v Marlborough Goldmines Ltd (1993) 177 CLR 485, and has been followed in many decisions since, including recently Re Coles Group Limited [2007] VSC 389 per Robson J. 18 The Court's task when considering the convening of a proposed scheme meeting under s 411(1) of the Act was described by Santow J in Re NRMA Ltd (2000) 33 ACSR 595 at [3] as follows: The Court must be satisfied, at least at a prima facie level, as to the legality of what it proposed, that there has been proper disclosure with nothing misleading or deceptive in any material sense and that the scheme will, if and when approved by members, be likely then to be approved by the Court as being "so far fair and reasonable as an intelligent and honest man" may approve. It is not for the Court otherwise to be concerned with the merits of the proposal or to inhibit consideration by members so that they can form their own judgment whether to vote for or against. 19 Obviously, one focus of the Court in fulfilling that task is to ensure that there is sufficient disclosure to those who may be affected by the proposed scheme of its details and effect: see Re Central Pacific Minerals NL [2002] FCA 239. In that case, Emmett J at [9] said that, amongst the factors to which the Court should have regard in exercising its discretion whether to convene a meeting, were the acceptability of the documentation of the proposed scheme; the commercial viability and morality of the proposed scheme; the likely acceptability of the proposed scheme; the bona fides of the proposals; whether the proposal could be achieved by another method; and any objections or submissions by the Australian Securities and Investments Commission (ASIC). Both Conti J in Re CSR Ltd (2003) 45 ACSR 34 at 36-37 and Lander J in Re Adelaide Bank Limited [2007] FCA 1582 at [38] referred to those criteria with approval, and as conforming with the observations of Santow J in Re NRMA Limited 33 ACSR 595 referred to. 20 I therefore turn to consider the matters of which I had to be satisfied before making an order convening the proposed scheme meeting. The first is that there has been proper disclosure in the proposed explanatory statement as required by s 411(3) of the Act: see Re NRMA Limited 33 ACSR 595 at [15]-[49]. The explanatory statement must explain the effect of the proposed arrangement and set out any information that is material to the making of a decision by a member or members to approve or not to approve the proposed scheme. Section 411(3A) in effect requires a statement of all the main facts which will enable shareholders to exercise their judgment whether to support the proposed scheme. I carefully considered the proposed scheme. In my view, adopting the words in s 411(3)(a), the explanatory statement does explain the effect of the proposed scheme, including in particular stating the material interests of the directors of Hostworks, and the effect on those interests of the proposed scheme. On the material, its effect on them is no different from the effect on other members of Hostworks. 21 Section 411(3) requires the explanatory statement to set out the prescribed information, and other information that is material to the making of a decision by a member of Hostworks whether or not to agree to the proposed scheme. Regulation 5.1.01(1) of the Corporation Regulations 2001 (Cth) (the Regulations) provides that, unless ASIC otherwise allows, the explanatory statement must state the matters set out in Pt 3 of Sch 8 to the Regulations and have annexed to it the reports and copies of the documents mentioned. There is nothing to indicate that ASIC has agreed that less information than that prescribed should be provided. I considered each of the pieces of information prescribed in Pt 3 of Sch 8 to the Regulations to determine whether they are contained within the proposed explanatory statement. I will not go through them seriatim. In my view, they are each apparently covered by material in the explanatory statement. 22 In reaching that view, I was assisted by the schedule provided in the written submissions of counsel for Hostworks in which each of the requirements of ss 411 and 412 and Pt 3 of Sch 8 of the Regulations are set out and cross-referenced to the relevant parts of the explanatory memorandum or other materials. There is also evidence from Hostworks that a process of verification was undertaken in relation to each of those pieces of information to ensure that it is accurately reported in or with the explanatory memorandum. 23 There is one particular aspect I should mention. Clause 8303 requires the explanatory statement to be accompanied by an independent expert's report, stating whether or not that expert considers the proposed scheme is in the best interest of the members of the company the subject of the arrangement and setting out reasons for that opinion. That obligation arises only if the other party to the proposed arrangement, that is Broadcast Australia, has a prescribed shareholding in the target company, or that any director of Broadcast Australia is a director of Hostworks. Neither of those things apply. The way in which a prescribed shareholding will exist and the level at which a prescribed shareholding will exist is set out in cl 8306. Consequently, it was not required of Hostworks that its explanatory statement should be accompanied by an independent expert's report. Nevertheless, it has procured the KPMG report in the terms to which I have referred. That report appears to meet the requirements of cl 8303 of Sch 8 to the Regulations in any event. 24 From my understanding of the proposed scheme, which is a relatively straightforward one, I have not identified any other material which I might regard as potentially significant to the making of a decision by a member of Hostworks whether or not to agree to the proposed scheme and which is not referred to. Of course, that cannot be a decision that there is no such material because the Court is not in a position to know whether or not that is the case. But at least on the material before me, there is nothing else which attracts the application of s 411(3)(b) of the Act. I note that the obligation in s 411(3)(b) appears to be mirrored in s 412(1)(a)(ii). 25 Section 411 also requires that Hostworks, as the company proposing the proposed scheme, is a Pt 5.1 body. As it is a public company limited by shares, it meets that description: see the definition in s 9 of the Act. 26 Section 411 further requires that the Court is satisfied that the scheme can properly be described as a compromise or arrangement so as to come within its ambit. The word "arrangement" has been held to be a word of wide import, not limited by its relationship or the expression "compromise". An arrangement may extend to any subject matter which is something which a company is able to agree with its members, and is likened to a contract between a company and its members. As noted earlier, there have been a number of cases in which a scheme involving the acquisition of a company's issued capital for cash, so that the company becomes a wholly owned subsidiary of an acquiring entity, is a common use of the Pt 5.1 procedure. See also e.g. Re Mincom Ltd (No 3) (2007) 25 ACLC 207; and Re APN News & Media Ltd (2007) 62 ACSR 400.

27 Generally, there is no apparent reason, at this stage, and on the material now before me, to consider that the proposed scheme is improper. The independent expert's report has assessed the offer to be fair and reasonable and in the best interests of the shareholders of Hostworks in the absence of an alternative offer on better terms. The evidence indicates that the offer made by Broadcast Australia is at the upper range of the valuation of shares in Hostworks made by the independent expert, and is considerably in excess of any listed share price in the recent past. There is nothing to suggest that the scheme works unfairly as between members of Hostworks, or that in any other respect the directors of Hostworks or others associated with it, or with Broadcast Australia, will profit to the detriment of the members of Hostworks, or that they will profit differently from the other members of Hostworks. Consequently, if the proposed scheme is supported at the proposed meeting of shareholders of Hostworks, at present, there does not appear to be any reason why the scheme then would not be approved. That seems to be a test, perhaps even put at a slightly higher level than necessary, to determine whether the proposed scheme is a proper one: see e.g. Re Promentum Limited [2007] FCA 446 at [13]; IOR Friendly Society Ltd v IOR Group Ltd (2007) FCA 970 at [28]; Re CCI Holdings Limited [2007] FCA 832 at [21]; and Re Gloucester Coal Ltd [2007] FCA 1017 at [28]. Later in these reasons, I refer to particular features of the arrangement as contained in the Implementation Deed and the Deed Poll which warrant specific comment. 28 Finally, the Court is required by s 411(2) of the Act to be satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed scheme. Section 411(2)(a) requires that 14 days notice of the hearing of the application be given to ASIC or such lesser period of notice as the Court or ASIC permits. It contemplates that ASIC must have had a reasonable opportunity to examine the terms of the proposed scheme and the draft explanatory statements relating to it. ASIC was first provided with a copy of the draft explanatory statement on 10 December 2007, and was served with the documents filed in these proceedings on 17 December 2007, only seven days before the hearing. However, ASIC by letter of 19 December 2007, has indicated that it consents to a lesser period than the requisite 14 days notice of the hearing of the application, and has indicated that it does not intend to provide a statement under s 411(17)(b) until the Court is asked to approve the proposed scheme, that is after it has been considered by the members of Hostworks. However, in that letter, it recognises that proponents of the scheme may reasonably wish for an indication of ASIC's views before committing to the expense of calling a meeting and printing the scheme documentation. That letter therefore contains an indication that ASIC does not currently propose to appear to make submissions, or to intervene to oppose the application for the convening of the proposed meeting of the scheme. 29 It is convenient at this point to refer briefly to s 411(17) of the Act. It provides: The Court must not approve a compromise or arrangement under this section unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b). 30 There may be some difference of opinion, or perhaps only of emphasis, between the views of Robson J in Re Coles Group Ltd [2007] VSC 389 and Fryberg J in Re Mincom Ltd (2007) 61 ACSR 266 as to whether it is necessary to consider s 411(17) at the first stage of the two stage process for the Court to direct the meeting and then, after the scheme is voted upon, to approve it. If that consideration is relevant at this point, that is whether there is a likelihood (or prospect) of s 411(17) being satisfied at first stage, I have the necessary level of satisfaction at this point and on the material referred to. The provisional view of ASIC referred to above indicates that there is a prospect of it producing to the Court the form of statement referred to in s 411(17)(b), although of course the Court then clearly is not obliged to approve the proposed scheme. Alternatively, on the information presently available to me, as I have indicated, I do not see a reason why, if the members of Hostworks at the proposed meeting of the scheme support the proposed scheme, I would not be satisfied that the scheme has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6. That must necessarily be only a tentative and provisional judgment. However, it is accepted, as is now commonplace, that in circumstances such as the present, an entity such as Hostworks has a choice between following the takeover procedure in Chapter 6 in conjunction with Broadcast Australia or following the scheme of arrangement procedure supported by inter partes documentary agreements as contemplated by Pt 5.1 of Chapter 5 of the Act. Consequently, the mere choice of the procedure now being adopted is not an indication that a purpose of this procedure is to enable any person to avoid the operation of any provisions of Chapter 6. There will thus need to be some identification of which provision or provisions of Chapter 6 might relevantly operate so as to produce potentially a different outcome to that which would follow from the present procedure and an exploration of why the Pt 5.1 procedure has been used having regard to that provision or those provisions if s 411(17)(a) is to be enlivened. Such consideration may also be relevant to the discretion of the Court under s 411(17) if ASIC has provided a statement under s 411(17)(b). No such provision has presently been identified.

PARTICULAR FEATURES OF THE ARRANGEMENT 31 In Re APN News Ltd 62 ACSR 400, Lindgren J discussed at some length aspects of the proposed scheme then under consideration which may be described as performance risk; "no-shop" and "no-talk" restrictions; break fee; and a deemed warranty by the members of the target company. Each of those features is present in the proposed scheme. It is appropriate to consider them each in turn. 32 The performance risk concern has been raised in previous scheme of arrangement applications. They are referred to by Lindgren J in Re APN News 62 ACSR 400 at [23]. I will not repeat them. It is necessary to consider the so called "performance risk" of shareholders being left in a position, once the scheme has become effective, of their shares having been transferred to Broadcast Australia, but then facing a delay in the provision of the scheme consideration, so that their only remedy would be to sue on the Deed Poll. That risk has been overcome here by requiring the scheme consideration to be paid to Hostworks before 12 noon on the "implementation date" to be held in trust by Hostworks for the purpose of being paid to the scheme participants, that is the shareholders of Hostworks, before they are divested of their shares in Hostworks later on in the implementation date. Broadcast Australia must provide the funds to pay for the shares it is to acquire before they are transferred. A similar arrangement was satisfactory to Robson J for the purposes of authorising or directing the calling of the proposed meeting in Re Coles Group [2007] VSC 389; seeat [38]. The Deed Poll contains a covenant on the part of Broadcast Australia to provide the scheme consideration on the implementation date in accordance with the terms of the scheme so that it ties the settlement step of payment and transfer together. 33 Clauses 10.1 and 10.2 of the Implementation Agreement contain "no-shop" and "no-talk" provisions during the "exclusivity period", defined as the period from the date of the Implementation Agreement to the "sunset date" or the date when the agreement is earlier terminated. The sunset date is 31 May 2008. During that period, Hostworks is obliged to ensure that neither it nor its representatives directly or indirectly solicits or invites any discussions in relation to, or which may reasonably be expected to lead to, a competing transaction, that is defined as any expression of interest, proposal or offer by a third party to evaluate or enter into any transaction similar to the proposed scheme or by which a person would acquire an interest in 10% or more of the issued shares in Hostworks or engage in other like transactions. During the same period, under the "no-talk" provision, Hostworks is to ensure that neither it nor its representatives negotiates with any persons in relation to, or which might reasonably be expected to lead to, a competing transaction, even if it was not solicited or initiated by Hostworks in any way. It is also obliged under cl 10.3 to ensure that neither it nor any of its representatives in relation to a competing transaction, facilitates any other party undertaking due diligence investigations in relation to Hostworks, or makes any non-public information relating to Hostworks available to any such person. Because such clauses provoke obvious concerns as to the directors' potential breach of fiduciary duty or statutory obligations by entering into such agreements, cl 10.7 contains what is called "fiduciary and other carve-out" provisions. It provides that the restrictions in cl 10.2 and cl 10.3 do not apply to the extent that, in response to an approach by a third party, Hostworks informs the third party that it can only participate in negotiations or discussions with that third party if the third party proposes a competing transaction of a certain quality. If a competing transaction is then made which meets certain criteria, and if Hostworks' directors determine in good faith and acting reasonably that failing to respond to a bona fide competing transaction would "more likely than not" constitute a breach of their fiduciary or statutory obligations, they are not bound to comply with cl 10.2 or cl 10.3. Before that carve-out operates, the directors of Hostworks must be satisfied that the competing transaction is bona fide and in writing by a reputable entity, and they must have determined in good faith and acting reasonably (after independent advice) that the competing transaction is capable of being valued and completed, and is of a higher value to Hostworks and its shareholders than the proposed scheme. They must also have received written advice from Hostworks' external legal adviser that failing to respond to such a bona fide competing transaction would more likely than not constitute a breach of the independent directors' fiduciary duties or statutory obligations. In Re Arthur Yates and Co Ltd (2001) 36 ACSR 758, Santow J expressed the view that no-talk provisions should satisfy certain particular concerns, at [9] which Lindgren J in Re APN News Ltd 62 ACSR 400 at [29] described in the following terms: (a) it should be for no more than a reasonable period capable of precise ascertainment; (b) while it may differentiate between actively soliciting an alternative merger proposal and simply dealing with an unsolicited one, in either case the provision should be framed so that it is subject to the overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful; and (c) there should be adequate prominence given to the provision in the explanatory memorandum sent to shareholders. 34 I note that the Takeover Panel "Guidance Note: 7 Lock-up Devices" distinguishes between the anti-competitive effect of "no-talk" agreements and "no-shop" agreements. It identifies the former as inherently more anti-competitive at [7.30], and so considers it necessary for a "no-talk" agreement to contain an appropriate fiduciary carve out. It does not require generally that a "no-shop" agreement be similarly subject to a fiduciary carve out, because such a clause generally only prevents the target company from soliciting alternative or additional bidders or transactions, and does not prevent an interested party from bidding: at [7.31] and [7.7]. 35 As I have noted, the exclusivity period will expire by no later than 31 May 2008, and the "no-talk" provision in the Implementation Agreement is subject to a carve out recognising the directors' fiduciary obligations and statutory duties. The evidence also indicated that the directors of Hostworks (other than Mr Shore who did not participate in the decision-making processes at all) considered the interests of the members of Hostworks in agreeing to those provisions, including the procuring of legal advice about them.

36 As counsel for Hostworks pointed out, both those provisions are fully disclosed in the proposed explanatory statement. 37 The structure of the exclusivity clause in cl 10 of the Implementation Agreement is quite sophisticated. The effect is to put a potential rival bidder out of the opportunity to do so unless that rival bidder were prepared to make a specific, albeit informal, offer subject to certain conditions during the period that the Implementation Agreement is in force, in effect, up to 28 May 2008 (unless in the meantime the members of Hostworks at the proposed meeting do not support the proposed scheme). The independent directors, before discussing the proposed transaction with the third party offeror, must assess the offer as capable of being valued and as of being higher financial value to Hostworks and its members than that under the proposed scheme. It is only in those circumstances that Hostworks may through its independent directors engage in discussions with a competing potential offeror and may provide information to the potential offeror. Having considered those terms, in my view and consistent with the approach which has been adopted in other cases, there is no reason not to order the convening of the proposed scheme meeting in the circumstances. 38 Clause 11 of the Implementation Agreement imposes a break fee provision. Break fees are also now a commonplace feature in proposed agreements for schemes of arrangements and in merger and takeover agreements, both in Australia and overseas. See per Lindgren J in APN News Ltd 62 ACSR 400at [43]. As his Honour said at [44], break fees are justified by reference to the costs incurred by the offeror company; the benefit that that company confers on the members of the target company by increasing its value; and the desirability, from the viewpoint of those members, that takeover offers be made to them. His Honour then went on to consider contemporary practice in relation to break fees. There is a more lengthy discussion by his Honour of general considerations relating to break fees in Bolnisi Gold NL in the matter of Bolnisi Gold NL (No 2) [2007] FCA 2078 at [9]-[30]. It is a most helpful discussion. 39 There have been a number of orders made by the Court under s 411(1) of the Act in which the existence of provisions such as those in cl 11 of the Implementation Agreement concerning break fees have not been an obstacle to the making of orders for the convening of meetings. 40 In this case, the break fee is not payable if the members of Hostworks fail to support or approve the proposed scheme. A term to the contrary effect was removed from the Implementation Agreement by its amendment on 14 December 2007. There can therefore be no suggestion that the provision for the payment of the break fee will coerce shareholders to vote in favour of the proposed scheme. Those matters are fully explained in the draft explanatory statement. It is also fair to observe that, as reported in the Implementation Agreement, the break fee proposed is not of an inappropriate magnitude. It is identified as being $675,000, representing an estimate of Broadcast Australia's costs of and in relation to making the proposed offer. My general understanding is that that was not an unrealistic figure. It is a figure which the parties have agreed is a genuine and reasonable pre-estimate of the costs that Broadcast Australia will suffer if the proposed scheme does not proceed: cl 11.3. I note that the break fee is less than 1% of the equity value of Hostworks. To that extent, it accords with the Takeovers Panel Guidance Note 7: Lock Up Devices at [7.17]. I am not sure that it is appropriate to determine that an appropriate break fee may be fixed by reference to a percentage of the equity value of the takeover target as distinct from a genuine pre-estimate of the costs of the proposed offer. However, that is not of significance here because the break fee is less than 1% of the equity value of Hostworks. It is not necessary to take that further. There is in the circumstances no reason why that provision of the Implementation Agreement should have impeded the Court from making the order for the convening of the proposed meeting. 41 Under cl 7.3(a) of the Implementation Agreement, each scheme participant is deemed to have warranted that all of its shares in Hostworks which are transferred under the scheme will be free from all mortgages and encumbrances. Fryberg J in Re Mincom Ltd (No 3) (2007) 25 ACLC 207, regarded an almost identical deemed warranty clause as onerous and unreasonable and "calculated to catapult unsuspecting shareholders who have not read the small print of the arrangement in the schedule to the explanatory statement into a state of breach of warranty": at [21]. In Re APN News & Media Ltd 62 ACSR 400, Lindgren J disagreed with the approach of Fryberg J: see at [59]-[62]. I respectfully agree with and adopt the views of Lindgren J. I share the understanding of his Honour that the purpose and effect of such a clause is simply to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged. The amount of the damages payable for breach of the warranty would be equal to the amount required to discharge the encumbrance. I note that the approach of Lindgren J has been preferred in subsequent cases, including by Robson J in Re Coles Group Limited [2007] VSC 389 at [45]; by Lander J in Re Adelaide Bank Limited [2007] FCA 1582 at [33]; and by Gyles J in Orion Telecommunications Ltd [2007] FCA 1389 at [9]. 42 Counsel for Hostworks also drew to my attention the question whether there should be meetings of separate classes of shareholders and option holders, and whether the three major shareholders of Hostworks, who have each granted an option over their shares in favour of Broadcast Australia, should be a separate class for the purposes of the proposed meeting. 43 In my view, neither of those matters is necessary. The relevant question is to determine whether either the option holders, or the three major shareholders who have granted an option over their shares in favour of Broadcast Australia, have rights which are so dissimilar as to make it impossible to consult together with a view to their common interest: see e.g. per Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. Whilst not foreclosing the possibility that a dissenting shareholder might persuade me in due course that there should have been separate meetings of one or other of those classes, as well as of the other members of Hostworks excluding those three shareholders, so that the Court would not approve the scheme if the members otherwise approve it under s 411(4)(b), at this point I do not see that such separate meetings are necessary. 44 I do not regard the shareholders and the option holders as having different interests to such an extent that they could not consult together with other shareholders. The consideration payable for the cancellation of options takes into account the strike price of options. Upon exercise of the options, the option holders will receive consideration equivalent to the scheme consideration. The scheme consideration exceeds the exercise price of all the options. The only impediment to the immediate exercise of some of the options is the approval of the proposed scheme, triggering the operation of r 6.2(p) of the ESOP Rules, but I do not think that consideration renders the interests of the option holders so dissimilar from those of the shareholders of Hostworks as to preclude them from having a general common interest with the shareholders. Ultimately, they are proposed to be treated the same.

45 As the price to be paid by Broadcast Australia, if it exercises its call options over some 19% of the issued capital of Hostworks, is equivalent to the scheme consideration, and because if the scheme is not approved, those call options will lapse, in my view there is no sufficient reason to consider that the present holders of those shares should constitute a separate class for the purposes of the scheme meeting. The options do not affect the rights and obligations of those shareholders in relation to Hostworks. Those option grantors will not be advantaged or disadvantaged depending upon the outcome of the scheme in relation to other members of Hostworks. Broadcast Australia does not have the ability to exercise or to control the exercise of the votes attached to those shares in Hostworks before the exercise of the options, and effectively in practice before the meeting. 46 For those reasons, I made orders under s 411(1) of the Act that Hostworks convene the proposed scheme meeting for the purpose of considering and, if thought fit, approving (with or without notification) a scheme of arrangement for the transfer of all of the fully paid ordinary shares in the issued capital of Hostworks to Broadcast Australia, being the scheme contained in and more particularly described in what is Appendix C to the draft explanatory statement contained in the scheme booklet. The scheme booklet is Annexure PJW-8 to the affidavit of Peter John Wildy sworn on 20 December 2007, except that the definition of scheme booklet in Appendix C was amended by deleting s 412(b) and substituting s 412(6), that being simply a typographical error. I also ordered that the meeting be held at the Macquarie Graduate School of Management on 13 February 2008 at 11 am. I made further orders for the despatch of the scheme booklet to each member of Hostworks. I made orders then as to the conduct of that meeting. I do not need to set them out in these reasons. They were relatively routine. 47 The proceeding generally has been adjourned for hearing to 22 February 2008 to consider the approval of the proposed scheme in the event that it is passed by the members of Hostworks. 48 I note that subsequently I varied the order made by substituting for the dispatch date specified in the order, namely 7 January 2008, the date 8 January 2008. That was made on the application of Hostworks, having regard to an administrative difficulty, and I was satisfied that it made no practical difference to the orders I had made, and in particular that the prescribed time for the giving of the notice prior to the conduct of the meeting, and the opportunity in real terms for the members of Hostworks to be able to consider the material and to participate in the meeting, were not in any way qualified. 49 Finally, I note the considerable assistance I received by the full and frank submissions of counsel for Hostworks, as well as from senior counsel for Broadcast Australia. I certify that the preceding forty-nine (49) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Date of Hearing: 17 December 2007

Date of Orders: 21 December 2007

Date of Judgment: 12 February 2008

Corporation Regulations 2001(Cth)

Corporations Act 2001(Cth)s 411(1),(2),(3),(4)(d), s

At a glance

Court

Decision date

Before

Source

Judgment (11 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (9)