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

Supreme Court of NSW|2021-05-06|Before: Black J, Mr J

Solicitors: Ashurst Australia (Plaintiff) King & Wood Mallesons (Acquirer) File Number(s): 2021/109964

Judgment

By Originating Process filed on 20 April 2021 the Plaintiff, Mortgage Choice Limited ("Mortgage Choice") seeks orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) to convene a meeting of the holders of its fully paid ordinary shares to consider a scheme of arrangement which involves the acquisition of all of its shares by a wholly owned subsidiary of REA Group Limited ("REA"). By way of background, Mortgage Choice is an Australian Public Company and is admitted to the official list of Australian Securities Exchange ("ASX") and its ordinary shares are quoted for trading on ASX. It is a mortgage and home loan broker and provides broking and financial planning services through franchisees across Australia.

Applicable principles

I now turn to the applicable principles, and I have drawn on my summary of these principles in Re Coca-Cola Amatil Ltd [2021] NSWSC 270 in this regard. The test commonly applied by Australian Courts in deciding whether to convene a scheme meeting or meetings was summarised 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."
I also summarized the applicable 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."
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].
The evidence here indicates that Mortgage Choice is a Part 5.1 body and the proposed scheme is an "arrangement" within the meaning of s 411 of the Act. There is no reason to think that the scheme booklet does not provide proper disclosure to shareholders. In particular, Mr Svehla addresses the position in respect of the treasury shares, share rights and tax exempt shares, to which I referred above, in submissions and those matters are disclosed in sections 9.2(a)-(c) of the scheme booklet. I am satisfied that the scheme is bona fide and properly proposed, where, as Mr Svehla points out, the independent expert (Mr De Cian of Grant Thornton), has expressed the view that the scheme is fair and reasonable and therefore in the best interest of Mortgage Choice Shareholders in the absence of a superior proposal, and the scheme consideration is at the high end of his assessed valuation range for a Mortgage Choice share; the scheme is unanimously recommended by Mortgage Choice's directors in the absence of a superior proposal and subject to the independent expert continuing to conclude that it is in the best interests of the Mortgage Choice shareholders; and no superior proposal has yet emerged, and the Independent Expert has not changed or qualified his opinion.
The evidence also indicates that ASIC has had a reasonable opportunity to examine the terms of the scheme and the explanatory statement for the scheme and make submissions and has had at least 14 days' notice of the proposed hearing date, and the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met.

Performance risk

Mr Svehla also addresses several specific issues which arise in respect of the scheme, in accordance with common practice. He first addresses the question of performance risk, where a practice has developed by which the transfer of shares in a scheme company to an acquirer is conditional on the payment of the consideration to target shareholders: Re Ellerston Global Investments Ltd above at [29]. Mr Svehla points out that this issue has been addressed, first, by a Deed Poll executed by REA in favour of all scheme shareholders by which REA undertakes to provide the scheme consideration to each scheme shareholder in accordance with the scheme. Second, before the transfer by scheme shareholders of their Mortgage Choice shares, REA must deposit, or procure the deposit of, an amount in cleared funds equal to the aggregate amount of the scheme consideration payable to all scheme shareholders into an Australian dollar denominated trust account operated by Mortgage Choice as trustee for the scheme shareholders and, subject to that deposit, Mortgage Choice must pay or procure the payment of the scheme consideration to each scheme shareholder from the trust account, and the transfer of the scheme shares to REA is subject to the provision of the scheme consideration in that manner. I accept that this structure addresses the risk that shareholders should not, once the scheme has become effective, be in a position where their shares have been transferred but there is a delay in provision of the scheme consideration and where their only remedy would be to sue on the Deed Poll to which the acquirer is party.

Exclusivity provisions

Ms Svehla points out that cl 8 of the SIA provides for exclusivity provisions which include no solicitation provisions (cl 8.1), no talk provisions (cl 8.2), requirements as to due diligence on competing proposals in certain circumstances (cl 8.3), a requirement to give REA notice of approaches and proposals regarding competing proposals (cl 8.5), matching rights regarding competing proposals (cll 8.6 and 8.7), a requirement to give REA any non-public information about the business or affairs of Mortgage Choice that Mortgage Choice Group disclosed or otherwise provided to any third party in connection with an actual, proposed or potential competing proposal (cl 8.8), and a limitation on ongoing discussions (cl 8.9).
Mr Svehla acknowledges 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 provision 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]. He points out that a matching right process similar to that in cl 8.6 of the SIA was accepted in Re Wridgways Australia Ltd [2010] FCA 1187 at [13]-[25]. I accept 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) 142 ACSR 1; [2019] NSWSC 1805; Re TPG Telecom Ltd [2020] NSWSC 772 at [22]; Re ERM Power Ltd [2019] NSWSC 1502 at [24]; Re Windlab Ltd [2020] NSWSC 571 at [18].
Mr Svehla submits, and I accept, that the "Exclusivity Period" is defined in the SIA and capable of precise ascertainment, and lasts from the date of the SIA until the earlier of its termination, the "End Date" (being 30 September 2021, unless otherwise agreed between the parties) and the Implementation Date of the Scheme, which is expected to be 2 July 2021. The "no talk" and "no due diligence" restrictions are subject to the overriding obligation that they do not to breach directors' fiduciary duties or are otherwise unlawful, under cl 8.4 of the SIA), and that the Courts have accepted that such a carve-out is not required in respect of a "no solicitation" provision, and the exclusivity provisions are clearly disclosed in section 9.5(i) of the scheme booklet. The period of the relevant restrictions seems to me to be a reasonable period and less than the 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]. There is evidence, as I have noted above, that the exclusivity provisions were also the result of arm's length negotiations and allow the proposed scheme to be put to shareholders for approval, which Mortgage Choice's board believes to be in Mortgage Choice Shareholders' best interests. These matters also do not give rise to any reason not to convene the scheme meeting.

Reimbursement fee

Mr Svehla points out that Mortgage Choice has agreed to pay a reimbursement fee of $2.4 million to REA if the scheme does not proceed by reason of the matters specified in cl 9.2 of the SIA, and REA has agreed to pay a reimbursement fee of $2.4 million to Mortgage Choice if the scheme does not proceed by reason of the matters referred to in clause 9.3 of the SIA. The reimbursement fees payable by Mortgage Choice and REA are disclosed in the scheme booklet and there is evidence that those fees result from commercial negotiations between Mortgage Choice and REA, which were assisted by professional advisers in those negotiations. Mr Stierli's evidence is that he considers that the reimbursement fees are appropriate and in the best interests of Mortgage Choice's shareholders in order to secure the opportunity of the scheme. The reimbursement fee which may become payable by Mortgage Choice represents just less than 1% of the equity value of Mortgage Choice having regard to the value of the scheme consideration.
That fee is not payable by reason of a decision of the Court not to approve the scheme or shareholders failing to approve the scheme with the requisite majorities, and is not a disincentive to Mortgage Choice shareholders not approving the proposed scheme: Re Adelaide Bank Ltd [2007] FCA 1582 at [31]. 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]. The amount of that fee is within the 1% guideline figure indicated by the Takeovers Panel, and it does not seem to me to provide a reason not to make the orders sought.

Deemed warranties

Each scheme shareholder is taken to have given specified warranties to REA or REA Financial Services and those deemed warranties are disclosed in the "Frequently asked questions" in section 2 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 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.

Constitution of classes

The test to determine whether some members are in a different class from others is whether the membership interests of those members are affected by the scheme in such a way that it is impossible for them to consult together with the other members with a view to their common interests: Re Boart Longyear Ltd (2017) 121 ACSR 328; [2017] NSWSC 567 at [68]-[69]. To the extent that any different approach may be taken by Beach J in Re Healthscope Ltd [2019] FCA 542 at [106]-[121], and any difference may be more apparent than real, I am bound by and would apply the approach taken in Re Boart Longyear Ltd above: Re The Trust Company (Re Services) Limited as responsible entity of the VitalHarvest Freehold Trust [2021] NSWSC 108 at [35]. Ms Svehla submits, and I accept, that the Mortgage Choice employees who have been awarded share rights which will vest early or be cancelled (and invited to participate in a new incentive program) in the event the scheme is implemented do not represent a separate class of shareholder. There is no reason to think that there are any differences in the rights of those persons and Mortgage Choice shareholders generally that would make it impossible for the respective groups of members to consult together with a view to their common interest.

Distribution of scheme materials and conduct of scheme meeting

An order is sought for the dispatch of the scheme booklet and proxy form by email where a Mortgage Choice shareholder has nominated an electronic address for the purposes of receiving notices of meeting and other documents from Mortgage Choice. The electronic version of that email will contain URL links to the notice of scheme meeting and scheme booklet and a link to the online proxy appointment facility. Documents will otherwise be sent by pre-paid ordinary post where the Mortgage Choice shareholder's address for notices is within Australia and by pre-paid air mail post where that Mortgage Choice Shareholder's address for notices is outside Australia. It is now commonplace for orders of this kind to be made in relation to scheme meetings: Re Ardent Leisure Ltd above at [27]; Re TPG Telecom Ltd above at [32]; Re WPP AUNZ Ltd [2021] NSWSC 388 at [17].
The scheme meeting is proposed to be held by a hybrid format, allowing attendance in person and virtually by an online platform. Mr Svehla draws attention to cl 33.4 of Mortgage Choice's constitution which permits a meeting to be held at two or more venues using any technology that gives Mortgage Choice shareholders as a whole a reasonable opportunity to participate in that meeting, and notes that Mortgage Choice Shareholders attending the scheme meeting by the online platform will be able to ask questions and vote by that online platform. Mr Svehla submits, and I accept, that the holding of a scheme meeting in person and virtually, with those attending virtually being able to ask questions and vote on the online platform, has also been accepted by the Court: WPP AUNZ Ltd above at [16].

Orders

For these reasons, I was satisfied that I should make the orders which were sought by Mortgage Choice and I made those orders at the end of the first Court hearing on 6 May 2021.

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: 20 May 2021

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