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

Supreme Court of NSW|2024-03-12|Before: Black J

Solicitors: Kardos Scanlan (Plaintiff) MinterEllison (Bidder) File Number(s): 2024/49972

Nature of the application and background

By Originating Process filed 8 February 2024, the Plaintiff, Millennium Services Group Ltd ("MSG") seeks an order that it convene a meeting of holders of its fully paid ordinary shares to consider a proposed scheme of arrangement, by which MS Journey Pty Ltd ("BidCo") would acquire all of the shares in MSG, and associated orders. By way of background, MSG is an Australian public company limited by shares which is admitted to the official list of the financial market operated by ASX Limited ("ASX") and its ordinary shares are quoted for trading on ASX. MSG provides a range of property services including cleaning, security, waste management, maintenance and property services to other entities. On 22 December 2023, MSG announced to ASX that it had entered into a Scheme Implementation Agreement which provided for BidCo to acquire all the issued capital in MSG, for cash or under alternative scrip consideration options, under a scheme of arrangement.
I made the orders sought by MSG at the conclusion of the hearing on 12 March 2024 and these are my reasons for doing so. I have drawn on the helpful submissions of Ms Scott who appeared for MSG in this judgment.

Affidavit evidence

MSG reads the affidavit dated 8 February 2024, of its solicitor, Mr Timothy Scanlan, which attaches a current and historical company extract for MSG.
MSG also reads the affidavit dated 8 March 2024 of Mr Royce Galea, who its Chief Executive Officer and Managing Director. Mr Galea exhibits the proposed scheme booklet to his affidavit, and Ms Scott took me through that scheme booklet at the hearing. Mr Galea outlines the form of scheme consideration payable by BidCo which involves three alternatives, namely cash consideration of $1.15 per MSG share, or unlisted scrip consideration in the form of one class B share in a company incorporated in the Republic of Singapore ("HoldCo") for each MSG share, subject to a scale-back mechanism; or a third alternative by which MSG shareholders can elect to receive unlisted scrip consideration within a specified percentage range of their MSG shares and cash consideration for their remaining MSG shares. The scrip consideration options are not available to ineligible shareholders (as defined) and small shareholders (as defined), who are only entitled to receive the cash consideration in respect of their MSG shares.
Mr Galea also outlines the conditions precedent to the scheme which include common conditions precedent, but also conditions directed to the retention of key managers, employees and consultants engaged by Millennium Group and the receipt of valid elections to receive HoldCo shares from Key Rolling Shareholders (as defined) representing a specified number of MSG shares, being approximately 30% of the MSG shares on issue. Mr Galea's evidence is that relevant key managers and other employees and consultants are presently employed or engaged by MSG and sufficient elections have been received from Key Rolling Shareholders to satisfy that condition precedent.
Mr Galea also addresses the consideration of the scheme by the MSG board, his interest in MSG shares and the interests of two other directors of MSG, Messrs Perry and Garnett, in MSG shares and Millennium performance rights, which are disclosed in the scheme booklet. Mr Galea also outlines the exclusivity provisions in respect of the scheme and provisions for a break fee and reverse break fee which I will address below. Mr Galea also outlines the treatment of performance rights held by Messrs Perry and Garnett in respect of the scheme and refers to the cancellation of MSG options held by a third party in connection with the scheme. Mr Galea also addresses the proposed conduct of the scheme meeting as a hybrid meeting; indicates that Mr Perry consents to act as chair of the scheme meeting and Mr Garnett consents to act as alternate chair of the scheme meeting and sets out their relevant interests; and addresses the proposed dispatch of documents relating to the scheme meeting to MSG shareholders and the process adopted for verification of the scheme booklet which was in common form.
Mr Galea also notes that MSG proposes to conduct an inbound shareholder information line and to send a reminder email to shareholders. I have reviewed the script for the shareholder information line and the draft reminder email and I have no difficulty with them, although the Court's approval is not specifically sought for them. In accordance with current scheme practice, MSG proposes to release an announcement to ASX indicating the date of the second Court hearing in respect of the scheme.
MSG also reads the affidavit dated 8 March 2024 of Mr Chow Kim Hoong Andrew, who is the Vice President, APAC Finance and Operations of Soft Bank Robotics Singapore Pte Ltd ("SBRS") the holding company of BidCo. He addresses the structure of the Soft Bank Robotics Group, the issue of scrip by HoldCo as scheme consideration in the manner which I have noted above, and the verification process adopted in respect of information relating to the Soft Bank Robotics Group included in the scheme booklet, which was in conventional form. He also refers to the execution of a deed poll by BidCo and HoldCo in favour of MSG shareholders and the manner in which the cash consideration for the scheme will be funded by BidCo, through a combination of equity funding from the SoftBank Robotics Group and third party debt financing.
MGS also tenders a letter dated 11 March 2024 from the Australian Securities and Investments Commission ("ASIC") which indicates, in customary form, that ASIC reserves its position as to s 411(17)(b) of the Corporations Act to the Second Court hearing and does not seek to appear or be heard at the first Court hearing.

Applicable principles

Ms Scott draws attention to the well-established principles that, to order the convening of a scheme meeting and approve the draft scheme booklet, the Court must be satisfied of several matters, including that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the scheme booklet will provide proper disclosure to shareholders; 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) ("Rules") have been met; and that the scheme is of such a nature and in such terms that, if it receives the support of the statutory majorities at the scheme meeting, the Court would be likely to approve it on the hearing of an application which is unopposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72; Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [8]-[10]; Re Centrebet International Ltd [2011] FCA 870 at [29]; Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 ("DUET Finance") at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]; Re Villa World Ltd [2019] NSWSC 1207 ("Villa World") at [15]; Re Healthia Ltd [2023] NSWSC 1296 ("Healthia") at [11]-[13]. As Ms Scott also points out, the Court is not concerned with the business or commercial efficacy of the proposed scheme, which is a matter for shareholders, and does not need to be satisfied that no better scheme could have been devised: Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44]; Re Orica Ltd [2010] VSC 231 at [8]; Re Texon Petroleum Ltd [2013] FCA 29 at [4].
Ms Scott here points out that Millennium's board of directors has unanimously recommended that Millennium shareholders vote in favour of the scheme at the scheme meeting in the absence of a superior proposal, and each Millennium director intends to vote for the scheme in respect of their personal holdings of Millennium Shares and any proxies placed at their discretion, in the absence of a superior proposal. An independent expert's report prepared by Lonergan Edwards & Associates Limited (Lonergan Edwards) has assessed the cash consideration in respect of the scheme to be fair and reasonable in the absence of a superior proposal and, by reference to that assessment and the potential advantages and disadvantages of the proposed Scheme, has concluded that the scheme is in the best interests of Millennium shareholders, in the absence of a superior proposal. I note that Lonergan Edwards did not evaluate the scheme by reference to the alternative scrip consideration options and has provided no opinion as to those options, other than to express a view as to the underlying value of those options in the immediate or short term after implementation of the scheme. Ms Scott submits that the scheme booklet provides proper disclosure to Millennium shareholders. I accept that no reason to doubt that matter has arisen at this hearing, where there is evidence as to the due diligence process and verification of the scheme booklet undertaken by Millennium and, in respect of bidder information, by BidCo and its affiliates as noted above. Ms Scott points out that the obligations of BidCo and HoldCo under the scheme are supported by a deed poll executed on 8 March 2024 by BidCo and HoldCo in favour of Millennium shareholders.
I accept that each of the preconditions to the exercise of the Court's discretion under s 411(1) of the Act is met here, where Millennium is a company registered under the Act and a Part 5.1 body and the scheme is an "arrangement" between Millennium and its shareholders; Millennium lodged the draft scheme booklet and its attachments with ASIC together with notice of the first Court hearing date; and, as I noted above, ASIC has confirmed that it does not currently propose to appear to make submissions or intervene to oppose the scheme at this hearing. The evidence to which I have referred above confirms that the scheme booklet has been the subject of a verification process and the applicable procedural requirements under the Supreme Court (Corporations) Rules have been met. I am satisfied that, if the scheme receives the statutory majorities required by s 411(4)(a)(ii) of the Act at the scheme meeting, there is presently no reason to think that the terms of the scheme, or in its effect on Millennium shareholders, would warrant the Court declining to approve the scheme at the second Court hearing. The Court therefore has power under s411(1) of the Act to convene the scheme meeting.

Particular aspects of the scheme

Ms Scott draws attention to several aspects of the scheme, some of which I have noted above in outlining the evidence led in the application. First, she notes that the scheme includes a scrip consideration alternative, which takes the form of "stub equity", so that Millennium shareholders are offered the opportunity to acquire a minority interest in HoldCo, subject to a pro rata scale-back mechanism. Ms Scott recognises that ASIC has previously expressed concern as to "stub equity" consideration offered in control transactions, where the consideration offered is shares in an Australian proprietary company and/or accepting shareholders are required to hold the scrip consideration through a custodial arrangement: ASIC Consultation Paper 312, Stub equity in control transactions (June 2019); Re Capilano Honey Ltd [2018] FCA 1568 at [35]-[53]. Ms Scott points out that the relevant equity is here offered in HoldCo, which is a Singaporean private company, and an independent third party trustee would hold the shares for Millennium shareholders who elect to take up the scrip option to ensure that HoldCo has no more than 50 non-employee shareholders.
Ms Scott submits and I accept that a structure of this kind has been accepted in other schemes, where the associated risks are adequately disclosed. I considered an offer of similar "stub equity" as scheme consideration in Re Aveo Group Ltd and Aveo Funds Management Ltd [2019] NSWSC 1348 at [34]-[37], 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 under this 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.
In Re BINGO Industries Ltd [2021] NSWSC 798 at [18]-[19], I reached the same result and accepted Counsel's submissions as follows: "[Counsel] 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. [Counsel 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. Counsel 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."
I also addressed alternative forms of scheme consideration in Re InvoCare Ltd [2023] NSWSC 1180 ("InvoCare") and observed at [3] that: "An InvoCare shareholder may elect the type of the scheme consideration that they receive and, if they make no election, will receive the all cash consideration option. The availability of the scrip consideration is subject to the aggregate number of Class B shares in Holdco to be issued under the scheme being 5% (or such lesser percentage as notified by TPG to InvoCare) of the total issued capital of HoldCo as at the date of the implementation of the scheme and, if that minimum threshold is not met, only cash will be provided as scheme consideration. If the aggregate number of Class B shares to be issued under the scheme exceeds 20% of the total issued capital of HoldCo as at the date of the implementation of the scheme, the number of Class B shares in HoldCo to be issued under the scheme will be scaled back on a pro-rata basis to stay within that maximum threshold. An InvoCare shareholder will not be entitled to scrip consideration if they are an Ineligible Foreign Shareholder (as defined) and will instead receive the all cash consideration option. I recognise that the alternative forms of consideration available to InvoCare shareholders are not simple, but it seems to me that they promote choice for shareholders who may prefer to receive different forms of consideration in different proportions. I also recognise that structures of this kind have been accepted in earlier cases to which InvoCare drew attention, including my decisions in Re Templeton Global Growth Fund Ltd [2021] NSWSC 1169, Re Australian Leisure and Entertainment Property Management Ltd [2021] NSWSC 1421 and Re Aventus Holdings Ltd and Aventus Capital Ltd as responsible entity of Aventus Retail Property Fund [2021] NSWSC 1711 and the decision of Halley J in Re Over Wire Holdings Ltd [2022] FCA 26."
In Healthia at [14], I again ordered that a scheme meeting be convened where the scheme contained a similar structure and observed that: "Mr Izzo points out that a choice of scrip consideration (subject to a scale-back) is now common and has been accepted in other cases, including InvoCare (at [3]) and he notes that, as in InvoCare (at [6]), the Healthia board makes no recommendation in relation to the scrip consideration options. He also points out that the scrip consideration option here takes the form colloquially known as "stub equity", under which shareholders of the target company are offered a minority interest in an acquiring entity; that (as disclosed at section 9.6(b) of the scheme booklet), shares in TopCo will be held through a custodian to ensure that TopCo has no more than 50 members; a structure of this kind was noted in Re Bingo Industries Ltd [2021] NSWSC 798 at [18]-[19]; and this arrangement complies with ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734, where a public company is used as the stub equity vehicle and the TopCo shareholders deed contains conversion and termination provisions of the kind envisaged by that instrument, as disclosed in section 9.7 of the scheme booklet."
I accept that the risks of the scrip alternative are here adequately disclosed in the scheme booklet. I note that, consistent with the practice in other schemes, the Millennium board here makes no recommendation in relation to the scrip consideration option. Ms Scott also points out that ineligible shareholders (as defined) comprising ineligible foreign shareholders (as defined) or small shareholders (as defined) will not be entitled to elect to receive the scrip consideration options, as is disclosed in the chair's letter) and sections 4 (frequently asked questions) and 6.9 of the scheme booklet. I accept that is not a matter of concern where such shareholders will receive the cash consideration and does not require that separate classes be established: Re Diverger Ltd [2023] FCA 1614 at [29]; Re Cirrus Networks Holdings Ltd [2023] NSWSC 1298 at [22]-[23].
Second, Ms Scott addresses the question of performance risk. She notes that cl 8.5(b) of the Scheme makes the transfer of Millennium shares to BidCo subject to the provision of the scheme consideration, so that no transfer of Millennium shares occurs unless and until the total scheme consideration to which Millennium shareholders are entitled has been paid into a trust account for the benefit of those shareholders, and BidCo's obligations under the Scheme are supported by the deed poll given by BidCo and HoldCo in favour of Millennium shareholders. I accept that this is a common structure in schemes of arrangement: Re ELMO Software Pty Ltd [2023] NSWSC 12 ("Elmo") at [27]-[28]; Healthia at [16]. Ms Scott recognises that BidCo is a special purpose vehicle which does not have the capacity to perform its obligations under the deed poll without financial support HoldCo, but points to a binding equity commitment letter given by SoftBank Robotics Group Corp, subject to the scheme becoming effective, and a binding debt commitment letter with an Australian bank which is subject to conditions precedent customary for facilities of this kind, as set out in section 9.6 of the scheme booklet. I am satisfied that the question of performance risk is sufficiently addressed by these matters.
Third, Ms Scott points out that it is a condition precedent to the scheme that valid elections to receive HoldCo shares have been received by Millennium from Key Rolling Shareholders (as defined, which include several members of Millennium's management team who are Millennium shareholders) representing not less than 14.15 million Millennium shares (which is about 30% of Millennium shares on issue) and are not withdrawn by the Election Date (as defined). Ms Scott notes that three Key Rolling Shareholders have provided signed statements to Millennium which confirm that, subject to no superior proposal (as defined) emerging and the independent expert continuing to conclude that the scheme is in the best interests of Millennium shareholders, they intend to elect to receive shares in HoldCo in respect of at least specified numbers of Millennium shares held or controlled by them, as is disclosed in section 12.2 of the scheme booklet. Ms Scott submits and I accept that this matter does not have the result that those persons would receive a collateral benefit in respect of the scheme.
Fourth, Ms Scott points out that cl 16 of the Scheme Implementation Agreement contains an exclusivity provision which includes "no shop", "no talk" and "no due diligence" restrictions, and a "notification" and "matching right" obligation. Ms Scott submits and I accept that exclusivity provisions in this form are now commonplace in schemes of arrangement and are not inconsistent with the Takeover Panel's Guidance Note 7: Lock-up Devices: Villa World at [23]. Ms Scott rightly recognises that the Court is concerned to ensure that an exclusivity period is a reasonable period and is capable of precise ascertainment; an exclusivity clause 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. She submits and I accept that the exclusivity clause is here capable of precise ascertainment, with an "End Date" (as defined) of 30 May 2024 or such other date and time agreed between the Bidder and Target, and is a reasonable period; the "no talk" and "no due diligence" restrictions are subject to the directors' fiduciary or statutory duties; the fact that the "no shop" restriction is not subject to fiduciary carve-out is consistent with authority; and matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive, for the reasons noted in DUET Finance at [24]. The exclusivity provisions are here clearly disclosed in section 7.1 of the proposed scheme booklet. I am satisfied that this matter does not give rise to any reason not to convene the scheme meeting.
Fifth, Ms Scott notes that two directors of Millennium, Messrs Perry and Garnett, have performance rights and it is a condition precedent of the scheme that Millennium enter into cancellation deeds with them by which those performance tights are cancelled, subject to the scheme becoming effective, in exchange for a payment equal to their face value. These matters are disclosed in section 7.2(b) of the proposed scheme booklet. Ms Scott submits and I accept that, consistent with the case law, Messrs Perry and Garnett need not vote in separate class of members by reason only that they also hold those rights: Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Oz Minerals Ltd [2023] FCA 197 at [50]-[53], [62]-[63]. For completeness, Ms Scott also notes that a third party holds 1,500,000 Millennium options and has entered into a cancellation deed providing for cancellation of those options with effect from the scheme record date for aggregate consideration in cash of $95,000.
Ms Scott also notes that the payments to Messrs Perry and Garnett for the cancellation of their performance rights are disclosed in the scheme booklet and also draws attention to the shares in Millennium held by its Chief Executive Officer and Managing Director, Mr Galea. She recognises that, where a director will receive a substantial benefit in relation to a scheme which other shareholders will not receive, that benefit should be fully and prominently disclosed as a matter for shareholders to take into account when considering a recommendation made by that director in relation to the scheme: Re SMS Management & Technology Ltd [2017] VSC 257 at [22]-[27]; Re Kidman Resources Ltd [2019] FCA 1226 at [115]; Villa World at [38]; Re Pendal Group Ltd (No 2) [2022] NSWSC 1648 at [25]. These matters are also sufficiently disclosed in the scheme booklet and provide no reason not to convene the scheme meeting.
Sixth, Ms Scott notes that the Scheme Implementation Agreement provides for the payment of a break fee and reverse break fee, being approximately 1% of the aggregate scheme consideration, which is disclosed in the "Frequently asked questions" in section 4 and in sections 6.7 and 7 of the scheme booklet. The break fee is not triggered solely by Millennium shareholders failing to approve the scheme and is not a disincentive to shareholders in their consideration of the proposal: Re Adelaide Bank Ltd [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513. The size of the break fee and reverse break fee is consistent with the Takeovers Panel's Guidance Note 7, Lock-up Devices, and break fees and reverse break fees are now commonplace in schemes. Seventh, the scheme provides for a deemed warranty by Millennium shareholders in common form, which is sufficiently disclosed in the scheme booklet. These matters also provide no reason not to convene the scheme meeting.
Eighth, Millennium has engaged a third party to establish and operate an inbound shareholder information line in connection with the scheme and also proposes to send a reminder email to Millennium shareholders. Consistent with the approach in recent case law, Millennium draws that script to the Court's attention but does not seek the Court's approval of that script: Re Essential Metals Ltd [2023] FCA 240 at [87]-[105]; Re DDH1 Ltd [2023] FCA 982; InvoCare at [23]-[26]. I have no difficulty with the terms of that script and this matter also does not give rise to any reason not to convene the scheme meeting.

Orders

For these reasons, I made the orders sought by MSG at the conclusion of the First Court hearing on 12 March 2024.

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: 27 March 2024

Corporations Act 2001(Cth)ss 411, 1319

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