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

Supreme Court of NSW|2021-06-09|Before: Black J

Solicitors: Herbert Smith Freehills (Plaintiff) Gilbert + Tobin (Acquirer) File Number(s): 2021/148469

Background and affidavit evidence

By Originating Process filed on 25 May 2021 the Plaintiff, BINGO Industries Limited ("BINGO") seeks an order, at the first Court hearing, under s 411(1) of the Corporations Act 2001 (Cth) that it convene a meeting of BINGO shareholders to consider and, if thought fit, agree to a proposed scheme of arrangement between BINGO and BINGO shareholders. By way of background, BINGO is an ASX listed public company limited by shares, which provides services across the resource recovery and waste management supply chain.
BINGO relies on the affidavit dated 25 May 2021 of its solicitor, Mr Luke Hastings, which refers to an announcement made by BINGO to the Australian Securities Exchange ("ASX") on 19 January 2021 that it had received a proposal from certain funds to acquire the shares in BINGO by way of a scheme of arrangement. Mr Hastings refers to a further announcement by BINGO to ASX on 27 April 2021 that it had entered into a Scheme Implementation Deed dated 27 April 2021 ("SID") with Recycle and Resource Operations Pty Ltd, an entity owned by Macquarie Infrastructure and Real Assets and its managed funds (together, "MIRA") for the acquisition of all of the issued shares in BINGO by way of a scheme of arrangement. That proposal provided for BINGO shareholders to receive $3.45 in cash per BINGO share held by them, which may partly comprise a special dividend in an amount of up to 11.7 cents per BINGO share ("All Cash Consideration"). Alternatively, BINGO shareholders (other than ineligible foreign shareholders, as defined in the SID) may elect to receive cash and unlisted scrip ("Mixed Consideration) with a "notional value" of $3.30 per BINGO share, as an alternative to the All Cash Consideration. The Mixed Consideration comprises cash consideration of $1.32 per BINGO share, inclusive of any special dividend, and unlisted scrip in another entity, Recycle and Resource Holdings Ltd ("RollCo") which would indirectly hold all of the issued capital in BINGO after implementation of the proposed scheme. Mr Hastings also notes the unanimous recommendation of an Independent Board Committee of BINGO ("IBC") that BINGO shareholders vote in favour of the scheme, subject to specified matters, which is made by reference to the All Cash Consideration rather than the Mixed Consideration. Mr Hastings also notes the corresponding recommendation of other directors of BINGO.

Applicable principles

I now turn to the applicable principles, and I have drawn on Mr Jackman's helpful outline of submissions, and on my recent summary of those principles in Re Coca-Cola Amatil Ltd [2021] NSWSC 270 in that respect. Australian Courts have commonly applied the approach described 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 in deciding whether to convene a scheme meeting, as follows: "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."
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."
Mr Jackman also 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]. 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].
Having regard to the evidence to which I have referred above, I am satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the statutory majorities at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application. BINGO's directors (other than one director who is associated with MIRA's holding company and has not made a recommendation) have recommended that BINGO shareholders vote in favour of the scheme at the scheme meeting in the absence of a Superior Proposal (as defined) and the independent expert continuing to conclude that the scheme is in the best interests of scheme shareholders. In its report to which I referred above, LEA has concluded, by reference to the All Cash Consideration, that the proposed scheme is fair and reasonable and therefore in the best interests of scheme shareholders and the scheme consideration is at the high end of its valuation range. The terms of the scheme, including its key features and advantages and disadvantages, are sufficiently disclosed in the scheme booklet.
As is common practice in scheme applications, Mr Jackman draws attention to several particular matters that warrant the Court's attention in exercising the discretion conferred on it by s 411(1) of the Act.

Recommendation made by BINGO's Managing Director and Chief Executive Officer in respect of the scheme

Mr Tartak, who is BINGO's Managing Director and Chief Executive Officer, makes a recommendation in support of the proposed scheme. Subject to the proposed scheme becoming effective, Mr Tartak may be entitled to receive a substantial payment, comprising $2,487,198 in connection with the early vesting of incentives and cash bonus payments shortly after 30 June 2024 (or potentially earlier), subject to his continued service with BINGO in connection with the early vesting of unvested performance rights, which will be calculated with reference to the future performance of RollCo and BINGO. Details of the treatment of the incentive arrangements and the benefits that Mr Tartak may be entitled to receive if the scheme becomes effective are set out in the scheme booklet.
Mr Jackman submits that Mr Tartak may properly provide a recommendation in relation to the proposed scheme. He points out that the BINGO IBC considered that, despite the matters to which I have referred above, it is appropriate for Mr Tartak to make a recommendation on the scheme given his knowledge of BINGO and the industry, and that BINGO shareholders would wish to know his views in relation to the scheme, and that Mr Tartak also considers that it is appropriate for him to make a recommendation on the scheme. Mr Jackman notes that recommendation is set out, for example, in the letter from the Chairperson of the IBC in the scheme booklet. As Mr Jackman points out, and as I noted in Re Coca-Cola Amatil Ltd above at [15], several cases have addressed the question 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. Differing views have been expressed in decisions of the Federal Court of Australia as to this question, but it has previously been accepted in this Court 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. Several recent decisions in the Federal Court of Australia have adopted substantially the same view: 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].
I am satisfied that the disclosure regarding the nature and amount of Mr Tartak's interests arising from these matters places BINGO shareholders in a position to assess the weight which they give to his 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 proposed scheme meeting.

Special dividend, scrip component of the Mixed Consideration and treatment of ineligible foreign shareholders

Mr Jackman points out that, if a special dividend is declared, BINGO shareholders must hold their shares both on the scheme record date and the record date for any special dividend in order to receive the full amount of the All Cash Consideration, or the full amount of the cash component of the Mixed Consideration, to which I have referred above. This requirement is prominently disclosed in the scheme booklet including in the letter from the Chairperson of the IBC, the Frequently Asked Questions, and sections 4.2 - 4.4. It does not give rise to any reason not to convene the scheme meeting.
Mr Jackman also points to several complexities which arise from the Mixed Consideration alternative that is made available under the proposed scheme. He points out that the scrip consideration option offered under this alternative is in a form colloquially referred to as "stub equity", being a minority equity interest offered to shareholders of a scheme company or a takeover target by an acquiring entity or bidder. He notes that the rationale for the offer of "stub equity" is to allow existing shareholders the opportunity of continuing to have an equity interest in the company being acquired, on terms which ensure that the acquirer maintains control over the target and that the presence of a minority equity interest held by existing shareholders does not constrain the acquirer's future ability to deal with the company or its assets.
Mr Jackman fairly recognises that ASIC has previously expressed concern about offers of "stub equity" consideration in control transactions in some circumstances, including where the consideration offered is shares in an Australian proprietary company and where accepting shareholders are required to hold the offered scrip consideration through a custodial arrangement. He notes that ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734 modifies the Act to prevent the use of Australian proprietary companies as "stub equity" vehicles but does not prevent "stub equity" offers by a public company with compulsory custodial arrangements on specified conditions, and that the RollCo shares proposed to be offered to BINGO shareholders comply with the requirements of that Instrument. Mr Jackman in turn submits that: "It is submitted that the scrip consideration option made available to BINGO Shareholders is not a matter which would warrant the Court declining to convene the Scheme Meeting. The Scheme Booklet contains detailed and prominent disclosure of the risks involved in BINGO Shareholders choosing to invest in RollCo as part of the Mixed Consideration, including in the Letter from the Chairperson of the IBC and sections 6.4, and 7 ... That risk disclosure is fulsome and addresses the speculative nature of RollCo shares, their illiquidity, the fact that BINGO Shareholders will hold a minority interest in RollCo with limited management rights, the substantive differences between BINGO Shares and RollCo shares and the different regulatory regimes which apply to both securities. There is no public policy reason why an acquirer ought not be able to offer scrip consideration in the form of shares in an unlisted public company, provided adequate disclosure is made of the terms of issue and the risks of an investment in such securities."
Mr Jackman also refers to my consideration of an offer of similar "stub equity" as scheme consideration in Re Aveo Group Ltd and Aveo Funds Management Ltd [2019] NSWSC 1348, where securityholders could elect to receive scheme consideration in the form of either cash or a scrip alternative, which had several similar features to the scrip being offered as part of the Mixed Consideration under the BINGO scheme. I there concluded (at [37]) that the availability of a scrip alternative, with sufficient disclosure of its risks, did not warrant the court declining to convene the scheme meeting. It seems to me that the disclosure in BINGO's scheme booklet also adequately addresses this issue, at least for the purposes of a first Court hearing.
Mr Jackman also notes that the proposed scheme provides that Ineligible Foreign Shareholders (as defined) receive the All Cash Consideration under the scheme and any election by them to receive the Mixed Consideration will be invalid, and that matter is disclosed in the Frequently Asked Questions and sections 4.4 and 9.9 of the scheme booklet. That matter also provides no reason not to convene the scheme meeting and I accept that it also does not require that Ineligible Foreign Shareholders be treated as a separate class at the scheme meeting: Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104; [2002] NSWSC 897.

Break fee and reimbursement fee

Mr Jackman also points out that cl 11 of the SID provides that a break fee of $20 million (excluding GST) may be payable by BINGO to the acquiring company ("MIRA BidCo") in specified circumstances. BINGO has alternatively agreed to pay a partial break fee of $5 million (excluding GST) to MIRA BidCo in other specified events, and MIRA BidCo has also agreed to pay an expense reimbursement amount of $10 million (excluding GST) to BINGO if BINGO terminates the SID as a result of an unremedied material breach of the SID by that company that is material in the context of the scheme taken as a whole and the scheme is not implemented.
The break fee and partial break fee are here not triggered by BINGO shareholders not approving the scheme with the requisite majorities at the scheme meeting, or by the Court not approving the scheme, and I accept that they do not create an inappropriate disincentive to BINGO shareholders in their consideration of the proposed scheme: Re Adelaide Bank Ltd [2007] FCA 1582 at [31]. Mr Jackman also draws attention to my summary of the applicable principles in Re Coca-Cola Amatil Ltd above at [24], where I observed that: "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]." I also there noted the desirability of evidence as to the out of pocket or opportunity costs of an acquirer that support a reimbursement fee, and the identification of the components of that fee in the affidavit evidence in at least a general way, and the relevance of the 1% guideline figure indicated by the Takeovers Panel in Guidance Note 7: Lock-up devices, and that fact that such a fee is payable as the occasion of shareholders obtaining the opportunity to consider a substantial transaction at a significant premium.
Mr Zubrinich's affidavit sets out the components of the out of pocket and opportunity costs of MIRA that support the break fee which represents approximately 0.87% of the equity value of BINGO based on the All Cash Consideration, which is less than the guideline figure indicated by the Takeovers Panel. The break fee and partial break fee do not give rise to any reason not to convene the scheme meeting.

Exclusivity obligations

Mr Jackman points out that cl 10 of the SID imposes "No Talk", "No Shop" and "No Due Diligence" obligations (as defined in the SID) and that the "No Talk" and "No Due Diligence" obligations are subject to a fiduciary exception as set out in cl 10.2 of the SID. I recognise that restrictions of this kind are now common in schemes of arrangement and have been accepted in the case law: Re ERM Power Ltd [2019] NSWSC 1502 at [24]; Re Prime Media Group Ltd [2019] NSWSC 1805; Re TPG Telecom Ltd [2020] NSWSC 772; Re Windlab Ltd above at [18]; Re Coca-Cola Amatil Ltd above at [18]. Mr Jackman also refers to my observation in Re TPG Telecom Ltd above at [22] 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."
The "No Talk" and "No Due Diligence" restrictions are here subject to a fiduciary exception, and do not restrict any action or inaction by BINGO if compliance with that obligation would, in the IBC's opinion after receiving external legal advice, constitute a breach of any of the fiduciary or statutory duties of the IBC members. The exclusivity provisions are clearly disclosed in the Frequently Asked Questions and section 9.4 of the scheme booklet. Mr Jackman also points out that the exclusivity period is defined in the SID and capable of precise ascertainment and lasts from the date of the SID until the earlier of the termination of the SID; the End Date, being the date which is six months after the date of the SID, unless otherwise agreed between the parties; and the Implementation Date. He submits, and I accept, that an exclusivity period of 6 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, and refers to Re QMS Media Ltd [2019] FCA 2172 at [47]-[48], where O'Callaghan J noted that a six month period was "a reasonable period, as the cases make clear". These provisions do not give rise to any reason not to convene the scheme meeting.

Performance risk as to the scheme consideration

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. This issue is sufficiently addressed by cl 5.3 of the scheme, which provides that an amount equal to the Aggregate Cash Amount (as defined in the scheme) will be paid, or procured to be paid, by MIRA BidCo into an Australian dollar denominated trust account operated by BINGO as trustee for the BINGO shareholders by no later than the Business Day before the Implementation Date. BINGO will open, or will cause its share registry to open, that trust account with an authorised deposit-taking institution within the meaning of the Banking Act 1959 (Cth). Under cl 5.3(b) of the scheme, on the Implementation Date, BINGO must pay, or procure to pay, each BINGO shareholder such amount as is due to the BINGO shareholder in respect of all of their BINGO shares.

Deemed warranties

Clause 8.2(b) of the scheme provides that each BINGO shareholder is taken to have given various warranties to MIRA BidCo, including that on the Implementation Date all their BINGO shares are free from encumbrances and interests of third parties of any kind. 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]; Re Coca-Cola Amatil Ltd above at [25]. 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

Mr Jackman points out that BINGO shareholders who have elected to receive communications electronically will be notified by email of the scheme meeting, with URL links to the scheme booklet, an election form and a personalised proxy form. BINGO's constitution permits notice of meetings to be given electronically if the BINGO shareholder has nominated an email address for that purpose. It is now commonplace for electronic mail-out orders to be made by the Courts in relation to notices of scheme meetings: Re Signature Gold Ltd [2017] FCA 1481 at [55]; Re ERM Power Ltd above at [26]; Re TPG Telecom Ltd above at [32]. As has also been common practice since the coronavirus (COVID-19) pandemic, BINGO proposes that the scheme meeting will be held virtually by an online platform hosted by its registry services provider, LMS, which can be accessed using a web browser or mobile device. Mr Jackman points out that that approach is permitted by section 8.03 of BINGO's constitution, which allows for the holding of meetings at two or more venues by using technology in terms similar to section 249S of the Act. 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 [27]; Re Coca-Cola Amatil Ltd above at [28].
I also note that section 6.7 of the scheme booklet discloses that MIRA BidCo is not the registered holder of any BINGO shares and that it does not have the power to control voting rights attached to, or the power to dispose of, any BINGO shares. However, Mr Jackman points out that other entities within the Macquarie Group have relevant interests (as defined in ss 608 and 609 of the Act) in 5,899,865 BINGO shares, about 0.90% of BINGO's issued share capital. Section 6.7(a) of the scheme booklet discloses that certain Macquarie Group members who hold those shares beneficially intend to abstain from voting the BINGO shares they hold.

Section 411(17) of the Corporations Act

Mr Jackman also addresses the position as to s 411(17) of the Corporations Act. He rightly notes that it is now settled that the Court will address the question posed by s 411(17) on the application to approve a scheme at the second Court hearing: Re TPG Telecom Ltd above at [31]; Re Ellerston Global Investments Ltd above at [35].

Orders

For these reasons, I made the orders sought by BINGO at the conclusion of the first Court hearing in respect of the proposed scheme.

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: 04 July 2021

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