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

Judgment - EX TEMPORE 1The Trust Company Limited ("TCL") applies under s 411 of the Corporations Act 2001 (Cth) for orders that it convene a meeting of members to consider and vote upon a proposed scheme of arrangement between TCL and its members and ultimately, if the proposed scheme is approved by its members, for approval of the scheme. The scheme in turn provides for a subsidiary of the Perpetual Limited ("Perpetual") to acquire all the shares in TCL. 2At this first court hearing, TCL initially seeks an order that the relevant meeting of the holders of fully paid ordinary shares be convened, and approval of the proposed notice of meeting and scheme booklet, including an explanatory statement as to the proposed scheme, for distribution to its shareholders. 3The commercial background to the proposed scheme is set out in the draft scheme booklet that is in evidence. In February 2013, a bid was made by Equity Trustees to acquire the shares in TCL. A target statement was subsequently issued by TCL on 19 April 2013 recommending rejection of that initial bid. On 7 May 2013, TCL entered into an initial scheme implementation agreement with Perpetual to implement a proposal for Perpetual to acquire all of the issued shares in TCL. Equity Trustees subsequently made a further takeover bid, and a third entity also made a proposal to acquire TCL. On 9 September 2013, TCL announced that it had received an improved proposal from Perpetual and had agreed to amend the scheme implementation agreement to reflect that improved proposal. 4The scheme that is now sought to be the subject of the meeting of members reflects that improved proposal and provides for TCL shareholders to receive 0.182 Perpetual shares for each share in TCL, which they can elect to receive in the form of share consideration, its cash equivalent subject to an aggregate cap with a floor price per share or a mix of the two, with a special dividend also to be paid by TCL if the scheme proceeds. I note that the availability of an election between cash and share consideration within a scheme of arrangement has been noted, without adverse comment, in schemes previously approved by the Court, for example, Re BRL Hardy Ltd [2003] SASC 97; (2003) 45 ACSR 397 at [7]; Re Alinta Ltd [2007] FCA 938; Re Dyno Nobel [2008] VSC 154, where Robson J described such a feature as an "attractive feature" of the scheme in issue in that case; Re Premium Investors Limited [2012] FCA 1211 at [1], where Jagot J noted the availability of an election between cash, scrip or a combination of the two; and Re Andean Resources [2010] FCA 1190 at [7], where Jagot J noted a corresponding election under that scheme. That structure, does not, in my view, provide any obstacle to submitting the scheme for the consideration of TCL's shareholders. 5The applicable legal principles, of course, are well established. The Court will order a meeting of company's members to consider a scheme of arrangement if the scheme proposed is such that, if it achieved the relevant majority at the meeting, the Court would be likely to approve it on hearing an application that was not opposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69; (1977-78) CLC 40-368; Re Central Pacific Minerals NL [2002] FCA 239 at [8]. In Re NRMA Ltd (No 1) [2000] NSWSC 82; (2000) 33 ACSR 595, Santow J summarised the matters as to which the Court must be satisfied at this stage as (1) whether there has been proper disclosure; (2) whether the scheme can properly be described as an arrangement or a compromise; (3) whether the applicant is a Pt 5.1 body; (4) whether the scheme is properly proposed for purposes of s 411; and (5) whether the Australian Securities and Investments Commission ("ASIC") has a reasonable opportunity to examine the terms of this scheme and make any submission to the Court. 6In Re AMP Ltd [2003] FCA 1465; (2003) 48 ACSR 540 at 545, Emmett J summarised the relevant factors as whether the proposal fits into the statutory concept of arrangement; whether there will be available to shareholders all the main facts relevant to the exercise of judgment on the proposal; and whether the scheme is so conceived and presented as to its structure, purpose and effect that there is no apparent reason, so far as can be foreseen why it would not, in due course, receive the Court's approval if the necessary majority of shareholders voted in favour of it. In Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734 at 736, Barrett J in turn referred to the formulation adopted by Santow J in Re NRMA Insurance Ltd and to a slightly different, but not conflicting formulation by Emmett J in Re Central Pacific Minerals NL above. I propose to approach the question of whether to order the first meeting by reference to the factors identified in the authorities to which I have referred above. 7TCL relies, in support of the application, on several affidavits. The chairman of its board, Mr Corlett, was also a member of relevant board committees, gives evidence that he is willing to be chairman of the scheme meeting and also sets out certain exclusivity arrangements and break fee arrangements agreed between TCL and Perpetual to which I will refer below. TCL also relies on an affidavit of Mr Macarthur-Stanham, also a director, who consents to act as alternative chairman of the scheme meeting if Mr Corlett is not available. 8Mr Bryant, TCL's Group General Counsel, gives evidence as to TCL's business, the background to the scheme, the structure of the scheme consideration, the treatment of a relatively small number of persons who would be treated as Foreign Shareholders (as defined) for the purposes of the scheme, the treatment of the performance rights provided to certain of TCL's employees under short term and long term incentive programs and the treatment of certain restricted shares held on trust for participants under those incentive schemes. Mr Bryant also deals with the preparation of the scheme booklet and the proposed process for the dispatch of the scheme documents and addresses a particular issue as to the fact that TCL would vote shares held in its capacity as responsible entity or trustee at the scheme meeting, which is also addressed in the scheme booklet. 9Importantly, Mr Bryant sets out the due diligence process which was appropriately adopted in respect of the scheme booklet and a verification process also adopted which is in the form typically undertaken in respect of schemes. He also deals with the process adopted by TCL to respond to shareholder enquiries in respect of the scheme. Mr Bryant gives evidence, having regard to the due diligence process and verification process, and having regard to his own knowledge of TCL, that he is not aware of any statement in the TCL information (as defined) contained in the scheme booklet likely to be false or misleading or deceptive; or of any material omission from such information; or of anything that causes him to believe that the issue of that information may involve misleading and deceptive conduct. 10The scheme booklet also contains information as to Perpetual, since one of the forms of consideration offered under the scheme is Perpetual shares. Mr McMartin, General Manager, Corporate Finance of Perpetual, gives evidence of the verification process undertaken by Perpetual in respect of the Perpetual information (as defined) contained in the scheme booklet and of the consideration of that process by Perpetual's due diligence committee. Mr McMartin in turn expresses the view that, based on that process, he is satisfied that all statements in the Perpetual information have been verified, as set out in his evidence, are true and correct, and are not misleading or deceptive and that the Perpetual information does not omit any information that would be material to shareholders in TCL in deciding whether or not to vote in favour of the scheme. 11The proposed scheme booklet is also in evidence and includes, properly, material set out in a "frequently asked questions" format, a yes and no case for the scheme in both summary and expanded form, risk disclosure and other information concerning TCL and Perpetual's affairs. 12Lonergan Edwards & Associates were in turn retained by TCL to provide an independent expert's report in respect of the scheme which will also be included in the scheme booklet. That report will express the view that the scheme is fair and reasonable and in the best interests of TCL's shareholders, and includes examination of other proposals received by TCL to which I have referred above. Mr Edwards, a principal of Lonergan Edwards & Associates, confirms that he holds the views expressed in the independent's expert's report in his evidence filed in the application. KPMG Financial Advisory Services (Australia) Pty Limited ("KPMG") was in turn engaged by Perpetual to prepare an investigating accountant's report for inclusion in the scheme booklet, which deals with the pro forma accounts if the business of Perpetual and TCL were merged, and Mr Saunders of KPMG gives evidence that he holds the opinions contained in that report. 13Mr Eliakim, a partner of TCL's solicitors, gives evidence of the provision of drafts of the scheme booklet and a copy of the scheme implementation agreement and the draft independent expert's report to ASIC and of amendments subsequently made to the scheme booklet. ASIC has in turn advised, by letter dated 15 October 2013 that is in evidence in the proceedings, that it has had notice of the hearing of this application and a reasonable opportunity to examine the terms of the proposed scheme as contemplated by section 411(2) of the Act and that it does not currently propose to make submissions, or intervene to oppose the scheme at the first hearing. I can therefore proceed on the basis that the requirements of section 411(2) of the Corporations Act are satisfied. Mr Eliakim also gives evidence that he represented his firm on TCL's due diligence committee in connection with the scheme and the signed due diligence report and verification report (omitting annexures) are also in evidence. 14The formal requirements as to which the court should be satisfied, in order to order the scheme meeting, are that the proposed scheme is within the scope of section 411 of the Act; which involves being satisfied, as is the case, that TCL is a Part 5.1 body for the purpose of the Act. I am also satisfied that the proposed scheme is an "arrangement" for the purposes of the Act, in a relatively common form; the evidence as to verification and due diligence, and the form of the draft scheme booklet and associated expert reports allow the Court to be satisfied that there has been proper disclosure to shareholders; and the circumstances in which the scheme has arisen and the evidence indicate that it is proposed in good faith. ASIC has confirmed, as I have noted above, that it has had a reasonable opportunity to examine the scheme and has had notice of the hearing date. 15Section 411(17) of the Corporations Act in turn provides that the Court may not approve a compromise or arrangement unless it is satisfied that it has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of Corporations Act, or there is produced to court a written statement by ASIC indicating that it has no objection to the compromise or arrangement. It may well be that such a statement will be available at the second hearing, or that the court will be satisfied, on evidence, that the delivery of the certainty available under a scheme is sufficient to mean that the scheme has not been proposed for a prohibited purpose. In any event, the balance of the case law indicates that it is not necessary for the Court to consider this matter at the convening stage and it should be deferred to the second hearing: Re Coles Group Ltd (No 2) [2007] VSC 523; (2007) 65 ACSR 494 at [16]-[24]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [15]. I will therefore take that course. 16Mr Oakes, who appears for TCL, draws attention to several other matters in submissions which should properly be addressed by the Court. First, TCL has formed the view that one class should be designated for voting purposes at the scheme meeting, although it or its wholly owned subsidiaries hold certain shares in TCL as responsible entity or trustee, as noted in section 8.10 of the scheme booklet, which will or may be voted at the scheme meeting. I accept that this matter does not require a separate class meeting, both because TCL in its capacity as trustee or responsible entity will receive the same consideration and enjoy the same rights as other shareholders in respect of the scheme, and also because the proportion of shares held by TCL as trustee or responsible entity is less than 5 per cent of shares in TCL, and those shares will be tagged so that the impact of their voting will be identifiable at the second hearing. 17Mr Oakes also draws attention to the questions of performance risk and of a deemed warranty given under the terms of the scheme, although he rightly notes that at least the second of those matters has become less controversial in the case law over time. Several cases have identified the need to address performance risk by ensuring that there is a mechanism for scheme members to enforce the right to entitlements that are to be received under a scheme: for example, Re APN News and Media Ltd [2007] FCA 770 at [23]; (2007) 62 ACSR 400. TCL submits, and I accept, that any such risk is properly addressed by the structure of the scheme, first, because Perpetual has given a deed poll which undertakes obligations in favour of scheme participants, to allow those obligations, and in particular its obligation to pay the scheme consideration, to be directly enforced by scheme participants; and, second, because clause 5.2 of the scheme provides that the transfer of TCL shares to the Perpetual subsidiary takes place only after the scheme consideration is provided, so that TCL shareholders would not be deprived of their interests in the shares without that consideration being paid. 18Clause 5.6 of the scheme in turn provides a deemed warranty, which is disclosed in the scheme booklet, as to the absence of encumbrances over the shares which are subject to the scheme, consistent with the approach now accepted in cases such as Re Macquarie Private Capital A Ltd [2008] NSWSC 323. 19Mr Oakes also draws attention to certain exclusivity and reimbursement provisions that are disclosed in the scheme booklet, and were also addressed in Mr Corlett's evidence to which I referred above. The scheme implementation agreement contains certain provisions in the nature of "no shop", "no talk" and notification and matching rights in favour of Perpetual. Mr Corlett's evidence is that Perpetual required such provisions and that, after taking advice, TCL's Board agreed provide them in order to maximise the prospect that a proposal would be obtained. With the exception of the "no talk" provision, the provisions are subject to exceptions recognising the fiduciary obligations of TCL's directors. Provisions in this form have been accepted in the case law, where appropriately disclosed in the scheme booklet: for example, Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137; Re Macquarie Private Capital A Ltd above at [19]; Re AXA Asia Pacific Holdings Ltd above. I also consider that they provide no reason not to submit the scheme for consideration by TCL's shareholders. 20The scheme implementation agreement also provides for a "break fee" payable to Perpetual if certain matters occur. Importantly, the break fee is not payable merely because the scheme does not proceed if TCL shareholders do not approve it. That fee was initially approximately 1 per cent of the equity value of the TCL but is now a lesser percentage since the scheme consideration was increased under Perpetual's improved proposal as noted above. The purpose of the break fee is recorded as reimbursing Perpetual for certain costs, both by way of economic and opportunity costs, in respect of its involvement in the transaction. The amount of the break fee is, as Mr Oakes points out, within the range accepted by Guidance Note 7 on Lock-Up Devices issued by the Takeovers Panel. I accept, for the reasons put by TCL in submissions, that a break fee of this amount would not deter, and indeed apparently has not deterred, competitive offers and would not coerce shareholders into approving the scheme. I also do not consider that this matter provides any reason not to approve the scheme booklet or order the scheme meeting: compare Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 at [7]. 21TCL also seeks certain ancillary orders, including an order under s 1319 of the Corporations Act that certain regulations referred to in rule 2.15 of the Supreme Court (Corporations) Rules 1999 (NSW) not apply to the scheme meeting, with the exception of reg 5.6.13 of the Corporations Regulations 2001 (Cth) which would continue to apply. The effect of such an order was considered in Re HIH Casualty and General Insurance Ltd [2006] NSWSC 191 and, for the reasons there noted, I would be prepared to make that order, which is commonly made in respect of schemes. In particular, it should be recognised that scheme meetings take place in accordance with the orders of the court, and a result of a meeting will not take effect without a further order of the court approving the scheme. 22TCL also seeks an order, under rule 3.4(2) of the Corporations Rules, that it be relieved from compliance with rule 3.4 of the Corporation Rules, conditional upon publishing a notice in The Australian newspaper on or before a specified date, in the form of annexure "A" to the order. That proposed notice is in substantially the form approved by Emmett J in Re Australian Gas Light Company [2006] FCA 1160, and I will also make such an order. For these reasons, I make orders in accordance with the Short Minutes of Order initialled by me and placed in the file.