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

Applicable principles

1. In submissions, Mr Jackman, who appears for Amatil, points out that the RPC has formed the view that the scheme is in the best interests of the Independent Amatil Shareholders and has unanimously recommended that the Independent Amatil Shareholders vote in favour of the scheme in the absence of a superior proposal (as defined), and subject to the independent expert concluding (and continuing to conclude) that the scheme is fair and reasonable and in the best interests of Independent Amatil Shareholders. That recommendation is disclosed in the Chairman's letter and elsewhere in the scheme booklet. As I noted above, Ms Watkins, has also separately recommended that the Independent Amatil Shareholders vote in favour of the scheme, conditional upon the same matters. Mr Jackman also points out that the aggregate scheme consideration represents a premium to the Amatil share price calculated on several bases, and the independent expert has concluded that the scheme is fair and reasonable and, accordingly, is in the best interests of the Independent Amatil Shareholders. Mr Jackman also notes that, if the proposed scheme is agreed to by the Independent Amatil Shareholders and approved by the Court (and the other conditions precedent in the SID are satisfied or waived (if capable of waiver)), CCEP will hold at least approximately 80% and up to 100% of the issued shares in Amatil, depending on the elections CCEP makes in relation to the second tranche sale shares under the Co-operation and Sale Deed.
2. I now turn to the applicable principles, and I have drawn on Mr Jackman's helpful outline of submissions in that respect. Mr Jackman notes that the test commonly applied by Australian Courts in deciding whether to convene a scheme meeting or meetings is that articulated by Street J (with whom Hutley and Samuels JJA agreed) in FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69: "The approach taken upon a summons is that the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the creditors' meeting the court would be likely to approve it on the hearing of a petition which is unopposed."
3. Mr Jackman also refers to my summary of those principles in Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[27] as follows: "It is, of course, well-established that the Court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]- [20]; Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554 at [30]; Re Duet Finance Ltd [2017] NSWSC 415 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [15]. The Court will not ordinarily summon a meeting at the first court hearing unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. In Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44] (cited with apparent approval in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [58]), French J observed that: "... by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). ... The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court ... That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
4. Mr Jackman rightly points out that, at the first Court hearing, the Court is not concerned with whether final approval should be given to the scheme but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate for it to be submitted for shareholders' consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309 at [23]; Re Villa World (2019) 139 ACSR 550; [2019] NSWSC 1207 at [18]. He also submits and I accept that the Court need not be satisfied that no better scheme could have been proposed, and is concerned with whether sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [22].

Recommendation made by Amatil's Group Managing Director in respect of the scheme

1. Mr Jackman also draws attention in submission to several aspects of the scheme. First, Mr Jackman notes that Amatil's Group Managing Director, Ms Watkins, will be entitled to receive a very substantial payment, exceeding $9.8 million, if the scheme is implemented in connection with the early vesting of unvested Amatil Equity Incentives and the early release from restrictions of 15,868 Amatil Restricted Shares that she holds. These matters are disclosed in the scheme booklet, and Ms Watkins makes a recommendation in relation to the scheme.
2. Mr Jackman also points out that the Courts have recently considered the question of whether it is appropriate for a director, who will receive a cash payment in lieu of his or her incentive arrangements if the scheme becomes effective, to provide a recommendation in the scheme booklet. While differing views have been expressed in decisions of the Federal Court of Australia as to this question, I have previously accepted that such a recommendation can be made where clear disclosure is made in the scheme booklet of the securities to be cancelled, their value and their potential relevance to the directors' recommendation: Re Villa World Ltd above; Re GBST Holdings Ltd [2019] NSWSC 1280; Re Windlab Ltd [2020] NSWSC 571. Mr Jackman J notes that Beach J recently adopted substantially the same view in Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580, Re DWS Ltd (2020) 148 ACSR 616; [2020] FCA 1590 and Re RXP Services Ltd [2021] FCA 38 at [48].
3. Mr Jackman points out that the references to Ms Watkins' recommendation in the scheme booklet are accompanied by a statement drawing shareholders' attention to her entitlements if the scheme is implemented, and advising them to have regard to these arrangements when considering Ms Watkins' recommendation (for example, the Chairman's letter and sections 1.3, 2 and 10.3 of the scheme booklet). Ms Watkins considers that, despite her interests relating to her incentive arrangements, it is appropriate for her to make a recommendation on the scheme, and Amatil's RPC, in Ms Watkins' absence, has also formed the view that it is appropriate for her to make a recommendation in relation to the scheme. I am satisfied that the disclosure regarding the nature and amount of Ms Watkins' interest places Independent Amatil shareholders in a position to assess the weight which they give to her recommendation and the making of that recommendation does not give rise to any reason why the Court should not make the orders sought in respect of the scheme meeting.

Performance risk as to the scheme consideration

1. In Re Ellerston Global Investments Ltd above at [29], I referred to a practice that has developed to address performance risk, by which the transfer of shares in a scheme company to an acquirer is conditional on the payment of the consideration to target shareholders, and I referred to the many cases which have endorsed that practice. That practice has been followed in this case and, desirably, Amatil has also undertaken that the funds will be held in an Australian authorised deposit-taking institution, allowing shareholders the benefit of the prudential regime applicable to such institutions. The obligations of CCEP and its acquiring subsidiary under the scheme are supported by a deed poll given by them in favour of the Independent Amatil Shareholders and I have referred above to the evidence that those obligations are enforceable in the applicable jurisdictions.

"No talk" obligation and "reimbursement fee"

1. Mr Jackman also recognises in submissions that cl 10 of the SID imposes a "no talk" restriction subject to a fiduciary exception. The SID does not contain any other exclusivity obligations, such as "no shop" or "no due diligence" restrictions or "matching right" or "notification" obligations. The SID also provides for a substantial "reimbursement fee." As I noted above, Ms Ivanoff's affidavit addresses the exclusivity provisions and reimbursement fee and her evidence, given in a brief and somewhat conclusory form, is that: "The No Talk Obligation and the provisions requiring payment of the Reimbursement Fee were inserted in the [SID] as the result of what I understand to be normal commercial negotiations between Amatil and CCEP, both of whom were assisted in those negotiations by professional advisers (noting that a customary 'no shop' obligation has not been included in the [SID]). I understand that the Exclusivity Provisions and the provisions requiring the payment of the Reimbursement Fee were necessary in order to secure the [s]cheme and are therefore in the best interests of Independent Amatil Shareholders." Ms Ivanoff's evidence is also that the reimbursement fee, which is large in absolute terms, represents approximately 0.5% of the equity value of Amatil based on the original aggregate scheme consideration (Ivanoff 11.3.21 [44]), and that percentage would reduce against the increased scheme consideration. It is not apparent, from Ms Ivanoff's reference to her understanding of these matters, whether she had any direct involvement in the negotiations in respect of this fee.
2. Ms Wardle's affidavit also refers to Amatil's acknowledgement in the SID that, if the scheme is not implemented, CCEP will incur significant costs, and its agreement that the costs actually incurred by CCEP will be of such a nature that they cannot all be accurately ascertained and that the reimbursement fee is a genuine and reasonable pre-estimate of those costs. Ms Wardle's evidence is also that she was involved in the negotiation of the SID, including the "no talk" provision and the "reimbursement fee" and that those provisions: "were agreed to following extensive arm's length negotiations between CCEP and [Amatil] that were conducted over a period of approximately 2 weeks, during which the parties were separately advised and represented by external legal advisers and financial advisers, with experience of transactions of the kind proposed by the scheme." Ms Wardle also confirms the correctness of the statement in cl 11.1(b) of the SID as to CCEP's request for payment of the reimbursement fee in the relevant circumstances, and also confirms that CCEP required the inclusion of the "no talk" provisions in cl 10 of the SID to secure its entry into that Deed.
3. I also recognise that the "no talk" restriction is subject to a fiduciary exception, and does not restrict any action or inaction by Amatil if compliance with the no talk obligation would, in the RPC's opinion after receiving external legal advice, constitute a breach of any of the fiduciary or statutory duties of the RPC members. This approach is consistent with the approach recognised in Takeovers Panel's Guidance Note 7 and that "no talk" restriction is clearly disclosed in the "Frequently Asked Questions" and section 10.5(o) of the scheme booklet. I recognise that restrictions of this kind are now common in schemes of arrangement and have been accepted in the case law: Re Prime Media Group Ltd [2019] NSWSC 1805; Re TPG Telecom Ltd [2020] NSWSC 772 at [22]; Re ERM Power Ltd [2019] NSWSC 1502 at [24]; Re Windlab Ltd above at [18].
4. Mr Jackman also cited Re TPG Telecom Ltd [2020] NSWSC 772 at [22], for the proposition that: "the Court will be concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve out; and the provisions must be clearly disclosed in the explanatory statement sent to shareholders."
5. Mr Jackman points out that the period of the "no talk" restriction is defined in the SID and is capable of precise ascertainment, and continues from the date of the SID until the earlier of (i) the termination of the SID, (ii) the End Date (being 30 September 2021, unless otherwise agreed between the parties) and (iii) the date the scheme becomes effective, which is expected to be 21 April 2021. Mr Jackman submits that a "no talk" period of 11 months between the date of the SID and the "End Date" is a reasonable period and comparable with exclusivity periods in other schemes that have previously been accepted by the Courts: Re Ludowici Ltd [2012] FCA 489 at [8]; Re Tatts Group Ltd [2017] VSC 552 at [36]; Re Tawana Resources NL [2018] FCA 1456 at [33]-[34]; Re Sirtex Medical Ltd [2018] FCA 1315 at [37]. The proposed "no talk" period is at the upper end of acceptable periods, but I recognised that there is evidence of the possibility of delay in obtaining approval from the Overseas Investment Office of New Zealand, and temporary changes to the foreign investment review process in Australia as a result of the disruptions caused by coronavirus have extended the timeframes for reviewing applications. On balance, I accept that the period of 11 months is a reasonable, although long, period in the circumstances and in a transaction of this size.
6. Turning now to the "reimbursement fee", cl 11 of the SID provides that a fee of $46,400,000 (excluding GST) is payable by Amatil to CCEP if the scheme does not proceed in certain circumstances, which do not include a decision of the Court not to approve the scheme or the Independent Amatil Shareholders failing to approve the scheme with the requisite majorities. That fee is therefore not a disincentive to Independent Amatil Shareholders not approving the proposed scheme: Re Adelaide Bank Ltd [2007] FCA 1582 at [31]. The reimbursement fee is disclosed in the 'Frequently Asked Questions' and section 10.5(p) of the scheme booklet and represents approximately 0.5% of the equity value of Amatil based on the original total cash amount offered to Independent Amatil Shareholders of $12.75 per Amatil share, and a lesser percentage of the increased consideration.
7. The case law has accepted reimbursement (or "break") fees that are a genuine pre-estimate of the internal and external costs that would be incurred by an acquirer in respect of a scheme, including opportunity costs, and that are not payable if the shareholders did not vote in favour of the scheme and are unlikely to be a matter which could influence voting at the scheme meeting: Re Cytopia Ltd [2009] VSC 560; Re Webcentral Group Ltd [2020] NSWSC 1279 at [30]. While there is limited evidence as to the out of pocket or opportunity costs of CCEP that support the reimbursement fee, and it seems that it would have been preferable if the components of that fee had been addressed in the affidavit evidence in at least a general way, I recognise that the amount of this fee is significantly less than the 1% guideline figure indicated by the Takeovers Panel, and that fee is payable as the occasion of Independent Amatil Shareholders obtaining the opportunity to consider a substantial transaction at a significant premium. Although the reimbursement fee could have been better justified, it does not seem to me to provide a reason not to make the orders sought.

Deemed warranties

1. Mr Jackman notes that cl 8.2(b) of the Scheme of Arrangement provides that each Independent Amatil Shareholder is taken to have given various warranties to Amatil and its acquiring subsidiary, including that on the Implementation Date all their Amatil shares are free from encumbrances and interests of third parties of any kind. The deemed warranties given by the Independent Amatil Shareholders are disclosed at the "Frequently Asked Questions" and section 4.8 of the scheme booklet. As Mr Jackman points out, 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 Talent2 International Ltd [2012] FCA 771 at [16]; Re Atlassian Corporation Pty Ltd [2013] FCA 1451 at [36]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25], Re Windlab Ltd above at [21]. This matter does not give rise to any reason not to convene the scheme meeting

Electronic distribution of the scheme documents, proxy arrangements and conduct of virtual scheme meeting

1. As is now commonplace, Amatil proposes that the scheme documents be distributed by a cover email containing URL links to the scheme booklet, a personalised proxy form, and a Scheme Meeting Online Guide which contains instructions regarding how to participate in the virtual meeting, where Amatil Shareholders have an email address recorded with the share registry. That approach is permitted by s 5(1)(f) of the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Cth) and article 11.1(a)(iii) of Amatil's constitution, which permits notices to be sent electronically to the member's email address if one has been provided. Where Independent Amatil Shareholders do not have an email address recorded with the share registry, or electronic delivery fails, a hardcopy letter will be posted to their physical address which encloses a proxy form for the scheme meeting and otherwise contains the address of a website where they can access the scheme materials. Independent Amatil Shareholders who have not previously elected to receive shareholder communications electronically will be able to request a copy of the scheme booklet and other scheme materials via email, in addition to hard-copy dispatch, by calling a dedicated shareholder information line. A similar procedure was accepted in Re TPG Telecom Ltd above at [30].
2. Mr Jackman also notes that Amatil proposes to send an email approximately 7 days before the scheme meeting to electronic recipients of the scheme materials who have not yet submitted proxy instructions, reminding them of the date of the scheme meeting and the deadline for submitting proxy instructions. No difficulty arises from the proposed form of that email and proxy arrangements generally.
3. As has also been commonplace since the coronavirus (COVID-19) pandemic, Amatil proposes that the scheme meeting will be held virtually by an online platform hosted by its registry services provider, Link Market Services Pty Ltd, which can be accessed using a web browser or mobile device. The procedures for voting and participation in the scheme meeting are disclosed in the Chairman's Letter and Annexure 4 of the scheme booklet, and cross-references are given to them in the "Frequently Asked Questions" and section 3.2 of the scheme booklet. I accept that the proposed arrangements for the scheme meeting to be held virtually are permitted by s 249S of the Corporations Act, which permits companies to hold members' meetings online provided that the technology used gives the members as a whole a reasonable opportunity to participate, which is recognised in respect of scheme meetings by rule 3.3(2) of the Supreme Court (Corporations) Rules 1999 (NSW). I also note that, as Mr Jackman points out, article 5.5(a) of Amatil's constitution specifically permits a meeting being held in two or more places linked together by technology. I have made a direction, as requested, that permits Amatil to make ASX announcements regarding any corrections, clarifications or changes to the online platform which are required in respect of the scheme meeting, as and when required. As Mr Jackman points out, these arrangements are consistent with those accepted by the Court in cases since the commencement of the COVID-19 pandemic: Re TPG Telecom Ltd above at [19]-[20]; Re Ellerston Global Investments Ltd above at [28]; Re Windlab Ltd above at [26].

Orders

1. I am satisfied that in the circumstances I should make the orders which are sought and I note an undertaking offered by Amatil that the scheme consideration will be held in an account with an authorised deposit taking institution within the meaning of the Banking Act 1959 (Cth) so that shareholders will have the benefit of the Australian prudential regulatory regime in that regard. For these reasons, I make orders 1 - 15 of the orders signed by me and placed in the file, and I note the undertaking in paragraph 16 of those orders.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 March 2021