In the matter of Prime Media Group Limited [2019] NSWSC 1805

Affidavit evidence

1. Prime reads several affidavits in support of the application. First, Prime relies on the affidavit dated 1 November 2019 of its solicitor, Ms Alexandra Mason, which attaches a statement released by Prime to the ASX on 18 October 2019 in connection with the scheme. That statement described the elements of the scheme and noted that Prime's board of directors unanimously recommended that its shareholders vote in favour of the scheme in the absence of a superior proposal and subject to an independent expert concluding that the scheme was in the best interests of Prime shareholders. That announcement also attached a copy of a scheme implementation deed dated 17 October 2019 executed by SWM and Prime.
2. Prime also reads an affidavit dated 13 November 2019 of its non-executive chairman, Mr Hartigan, who consents to act as chair of the proposed scheme meeting. A further affidavit of Mr Peter Macourt dated 13 November 2019 indicates his consent to act as alternate chair of the scheme meeting, if Mr Hartigan was unable to act as chair of the meeting.
3. Prime also reads the affidavit dated 13 November 2019 of Mr Craig Edwards, who is the managing director of Lonergan Edwards & Associates Ltd ("Lonergan Edwards"), and has provided an independent expert's report in respect of the proposed scheme. Mr Edwards there confirms that the opinions expressed to be those of Lonergan Edwards in the independent expert's report are opinions which he holds; that he has not become aware of any facts or circumstances which would cause him to change those opinions; and that he was prepared to issue and release a copy of the independent expert's report for inclusion in the scheme booklet, subject to confirmation by Prime's management that there had been no material change between the date of swearing his affidavit and the date of the first Court hearing, and any matters raised by the Court. Mr Edwards also confirmed his compliance with the expert witness code of conduct in that regard.
4. By an affidavit dated 14 November 2019, Mr Michael Wright, who is a partner in Ernst & Young ("EY") addressed an investigating accountant's limited assurance report prepared by EY for inclusion in the scheme booklet, and confirmed, inter alia, that the conclusions in that draft report were conclusions which he held at the time of swearing the affidavit.
5. Prime read an affidavit dated 15 November 2019 of Mr John Palisi, its chief financial officer and company secretary, which set out the nature of Prime's business, referred to the announcement made by Prime to the ASX on 18 October 2019 and summarised the transaction steps involved in implementation of the scheme, and set out the content of the proposed scheme booklet.
6. The draft scheme booklet contained a chairman's letter, which referred to a recommendation made in respect of the scheme by Mr Ian Audsley, Prime's chief executive officer and managing director, and fairly disclosed that he would become entitled to a cash payment of a specified amount in connection with his retirement from office if the scheme became effective. The scheme booklet also contained a letter from the chairman of SWM, an overview of the scheme and a summary of reasons why shareholders might wish to vote in favour of or against the scheme, together with elaboration of those matters and a set of "frequently asked questions" addressing aspects of the scheme.
7. The scheme booklet, importantly, noted that the independent expert had concluded that the proposed transaction was reasonable and in the best interests of Prime shareholders in the absence of a Superior Proposal (as defined), but that it was not fair, by reason that the value of SWM shares to be issued pursuant to the scheme was below the independent expert's assessed range for the value of Prime shares on a controlled basis. The scheme booklet also, fairly, notes that the independent expert had also recognised that the exchange ratio contemplated by the proposed scheme would be reasonable and appropriate if considered as a merger or combination of the two businesses, rather than as a change in control transaction. Plainly, Prime shareholders can take those matters into account in assessing whether to vote in favour of or against the proposed scheme.
8. The scheme booklet also contained information as to Prime and information as to SWM and contained a combined group pro forma historical statement of financial position as at 29 June 2019, to illustrate the position if the scheme had been implemented on 1 July 2019, which was in turn the subject of EY's report noted above. The scheme booklet also contained detailed risk factors and identified tax considerations relating to the implementation of the proposed scheme.
9. Returning to Mr Palisi's affidavit, he also referred to arrangements that had been made for dispatch of the scheme booklet by electronic means to shareholders who had nominated an electronic address for receiving communications from Prime, and by post to other shareholders, and also described the process which would be adopted if Prime received notification that the scheme booklet and proxy forms had not been delivered by electronic means. Mr Palisi also dealt with the due diligence and verification process adopted by Prime in respect of the scheme booklet, which took the usual form, and referred to negotiation of the exclusivity provisions and reimbursement fee disclosed in the scheme booklet. Mr Palisi also addressed the process which would be adopted in respect of the payment of the scheme consideration, including the treatment of Ineligible Foreign Shareholders (as defined), and the steps which would be adopted in respect of the scheme meeting, and the second Court hearing.
10. Prime also read the affidavit dated 14 November 2019 of Mr Bruce McWilliam, the commercial director of SWM, which dealt with verification of information relating to SWM contained in the scheme booklet. Mr McWilliam also referred to the negotiation of exclusivity provisions and a break fee contained in the scheme implementation deed between SWM and Prime, and confirmed that the exclusivity provisions and break fee were included in the scheme implementation deed by reason of SWM's commercial requirements in respect of the transaction and in line with market practice in relation to an acquisition of this kind.
11. Prime also relies on an affidavit dated 15 November 2019 of its solicitor, Mr Blane, which referred to the provision of a draft version of the scheme booklet to the Australian Securities and Investments Commission ("ASIC") for review and comment, and to service of the Originating Process and supporting affidavits in the proceedings on ASIC. By letter dated 14 November 2019, ASIC has advised, in common form, that it does not currently propose to appear to make submissions, or intervene to oppose the scheme, at the first Court hearing. Mr Blane also referred to amendments, of an immaterial character, made to the draft explanatory statement on 14 November 2019. Mr Blane also refers to a revised version of Lonergan Edwards' independent expert's report, which updated share price calculations contained in that report to reflect market closing prices on 14 November 2019.

The Court's power to make orders under s 411(1) of the Corporations Act

1. Part 5.1 of the Corporations Act provides a procedure by which a compromise or arrangement between a company and its members can be made binding on all members by a specified process. That section allows the Court to order a meeting of members to be convened, and to approve the applicable explanatory statement, where a compromise or arrangement is proposed between a Pt 5.1 body and its members or any class of them; application for the order is made in a summary way by the body or by a creditor or member of the body; 14 days' notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and the proposed scheme booklet provides proper disclosure to shareholders. In order to make such an order, the Court must also be satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement and to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.
2. I am satisfied that each of these matters has been satisfied with respect to the proposed scheme. Prime is a Pt 5.1 body as defined in s 9 of the Act and the proposed scheme falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act. The Originating Process and a copy of a draft of the scheme booklet were provided to ASIC more than 14 days before the first hearing date, and ASIC has confirmed by letter that it does not currently propose to appear to make submissions or intervene to oppose the scheme. The Court therefore has power to convene the requisite scheme meeting.
3. Mr Lockhart, who appears for Prime, refers to my decision in Re DUET Finance Limited [2017] NSWSC 415 at [14], where I referred to the matters relevant to convening a scheme meeting as follows: "It is, of course, well-established that the Court will generally approve the convening of a meeting of shareholders to consider a proposed scheme if it seems fit for consideration by a meeting of members and a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court on an uncontested application: Re ACM Gold Ltd; Re Mt Leyshon Gold Mines Ltd [1992] FCA 89; (1992) 34 FCR 530 at 535; Re The Trust Company Ltd [2013] NSWSC 1680 at [5]. … [T]he Court's approach at the first hearing is that it "will not ordinarily summon a meeting 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": FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1997) 3 ACLR 69 at 72; Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. … [A]t the first hearing, the Court exercises a "supervisory jurisdiction" to review the scheme and raise any queries with the plaintiff, and the Court will intervene at the first hearing if it has any concerns, since the market will have regard to the orders made by the Court at the first hearing: Re Archean Gold NL (1997) 23 ACSR 143 at 146; Cleary v Australian Cooperative Foods Ltd [1999] NSWSC 991; (1999) 32 ACSR 701 at [46]. The Court does not substitute its commercial judgment for that of the members to whom the scheme is directed, but considers whether the scheme is one that sensible businesspeople might conclude is of benefit to members: Re Prime Infrastructure Holdings Ltd [2010] NSWSC 1104; (2010) 80 ACSR 193 at [13]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [13]; Re Aspen Group Ltd [2015] NSWSC 1718 at [11]."
4. The Court can here be 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. Relevant factors here include the unanimous support of Prime's board for the scheme, in the absence of a superior proposal; the nature of the scheme, involving an acquisition of all the shares in Prime in exchange for shares in SWM; and the sufficiency of the disclosure of the terms of the scheme, including its key features and advantages and disadvantages in the scheme booklet, to which I have referred above.
5. I also have regard to the conclusion reached by Lonergan Edwards that the scheme is reasonable, although not fair if a control premium is taken into account, and in the best interests of Prime's shareholders in the absence of a superior proposal. Lonergan Edwards' report notes that the scheme consideration is lower than the fair market value of Prime shares after applying a control premium, but expresses the view that there are reasons for Prime shareholders to vote in favour of the scheme, and that its terms are reasonable and in the best interests of shareholders, including that the exchange ratio is reasonable and appropriate if considered as a combination of the two businesses rather than a change in control transaction; and, if the scheme is implemented, Prime shareholders will acquire an interest in a larger, more diversified business which is better placed to deal with the current challenges being faced by participants in the traditional media sector.
6. As Mr Lockhart points out, that conclusion reflects a possibility recognised in ASIC Regulatory Guide 111, Content of expert reports, that if an expert concludes that the proposal was not fair but reasonable: "it is still open to the expert to also conclude that the scheme is 'in the best interests of the members of the company'. The expert should clearly say that the consideration is not equal to or greater than the value of the securities the subject of the scheme, but there are sufficient reasons for security holders to vote in favour of the scheme in the absence of a higher offer."
7. Mr Lockhart also submits, and I accept, that Lonergan Edwards' view that the proposed scheme is not fair but reasonable is not a reason for the Court to decline to order that the scheme meeting be held and to decline allowing Prime shareholders to make their own decisions as to the scheme. As Mr Lockhart observes, there are many cases where Courts have made orders convening a meeting for a members' scheme when the independent expert's report has reached such a conclusion: Re PR Finance Group Ltd [2013] FCA 504; Re CIC Australia Ltd [2015] NSWSC 557; Re Blackgold International Holdings Limited [2017] FCA 601; Re Signature Gold Ltd [2017] FCA 766; Re Bulletproof Group Limited [2018] FCA 497. Courts have also frequently approved a scheme of arrangement in those circumstances: Re GRD Ltd [2009] FCA 1595; Re Cytopia Ltd (No 2) [2010] VSC 4; Re CIC Australia Ltd (No 2) [2015] NSWSC 1314; Re Blackgold International Holdings Limited (No 2) [2017] FCA 772; Re Bulletproof Group Limited (No 2) [2018] FCA 868.

Particular issues

1. As is common in scheme applications, Mr Lockhart 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.
2. First, Mr Lockhart draws attention to the exclusivity provisions adopted in respect of the scheme. He points out that cll 11.1(a) and 11.1(b) of the scheme implementation deed place, respectively, "no shop" and "no talk" restrictions on Prime, and cl 11.2 of the scheme implementation deed requires Prime to notify SWM of approaches or attempts to initiate discussions in relation to an actual or potential competing proposal. Clause 11.3 of the scheme implementation deed limits the "no talk" restriction so as not to require action that would likely be inconsistent with the directors' duties owed by Prime's directors under applicable law. Mr Lockhart submits, and I accept, that exclusivity restrictions in this form are now commonplace in schemes under s 411 of the Act, and he points out that these restrictions are consistent with the requirements of Takeovers Panel, Guidance Note 7: Lock-up devices. He submits, and I accept, that neither that Guidance Note nor prior authority requires a fiduciary carve-out with respect to "no-shop" provisions: Re Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [18]-[19]; Re Coles Group Limited (2007) 25 ACLC 1380 at [62]-[63]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [34]-[37]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1766 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [23].
3. Mr Lockhart recognises that the case law indicates that such exclusivity restrictions should be in effect for no more than a reasonable period capable of precise ascertainment and that they should be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]. He submits, and I accept, that those requirements are satisfied here, where the "Exclusivity Period" is clearly defined in cl 1.1 of schedule 2 to the scheme implementation deed, and would last for no more than eight months from the date of the scheme implementation deed, unless a later date is agreed by the parties. He submits, and I accept, that the exclusivity provisions are sufficiently disclosed in the scheme booklet, in sections 6.3.4 and 15.2.2 and question 33 of the frequently asked questions at section 7.
4. Mr Lockhart also points out that cl 11.4 of the scheme implementation deed allows SWM a "matching right" in respect of a Competing Proposal (as defined). Mr Lockhart submits, and I accept, that, although the Takeovers Panel has noted the possibility that matching rights can be anti-competitive in Guidance Note 7 above, Prime would in any event be expected to publicly disclose a Competing Proposal under its continuous disclosure obligations: Re DUET Finance Limited above at [24]. Mr Lockhart also submits, and I also accept, that the process provided for in the matching right regime corresponds "to the course that a prospective bidder would expect [Prime] to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged": Re DUET Finance Limited above at [24]. Matching rights are also increasingly common in schemes of arrangement: Re Veda Group Ltd [2015] FCA 1506 at [10]; Re Toll Holdings Ltd [2015] VSC 123 at [35]-[36]; Re BigAir Group Ltd [2016] FCA 1296 at [20]; Re SAI Global Ltd [2016] FCA 1312 at [61]; Re Sino Gas & Energy Holdings Ltd [2018] FCA 1183 at [44]; Re GBST Holdings Limited [2019] NSWSC 1280 at [21].
5. Second, cl 12.2 of the scheme implementation deed provides for the payment of a "Reimbursement Fee", or break fee, by either Prime or SWM in certain prescribed circumstances. If payable, that break fee would be for the amount of A$600,000 (excluding any applicable GST), which represents approximately 0.8% of the equity value of Prime as at 12 November 2019. Mr Lockhart submits, and I accept, that break fees are now common features in schemes of arrangement and have not been an obstacle to the making of orders under s 411(1) of the Act, and a break fee will generally be permitted unless "the amount of the break fee was such that it could influence voting at the meeting to be convened or if there are some other unusual circumstances": Re SFE Corporation Ltd (2006) 59 ACSR 82 at [6]-[7]; Re APN News & Media Limited (2007) 62 ACSR 400 at [43]; Re Hostworks Group Ltd above at [40]; Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust above at [16]; Re Villa World Ltd above at [24].
6. Mr Lockhart submits, and I accept, that the break fee here does not create any reason not to convene the scheme meeting, where it is not payable if shareholders did not approve the scheme and its amount is less than the Takeovers Panel's guideline maximum of 1% of equity value in Guidance Note 7 above, which has been adopted in the case law: Re APN News & Media Limited above at [55]; Re Hostworks Group Ltd above at [40]ff; Re Coles Group Limited above at [69]-[74]. The break fee is also disclosed in the scheme booklet and the evidence addresses the matters relevant to its negotiation to which Lindgren J referred in Re APN News & Media Limited above at [55].
7. Third, Mr Lockhart points out that cl 8.2 of the scheme contains a 'deemed warranty', by which scheme shareholders are deemed to have warranted to Prime and SWM that the Prime shares are transferred fully paid and free from all mortgages, charges, liens, encumbrances and third party interests. He submits, and I accept, that clauses in these terms are also permissible and now commonplace in schemes: Re APN News & Media Limited above at [62]; Re Hostworks Group Ltd above at [41]; Re Coles Group Limited above at [45]; Re Macquarie Private Capital A Limited above at [14]; Re Sino Gas & Energy Holdings Ltd above at [51]-[53]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]; Re GBST Holdings Limited above at [23]. The existence of the deemed warranties will be disclosed in the scheme booklet, as contemplated by Lindgren J in Re APN News & Media Limited above at [63].
8. Fourth, Mr Lockhart notes that (and as In noted above), if the scheme becomes effective, Mr Ian Audsley (who is the chief executive officer and managing director of Prime) will be entitled to a payment of up to $1,237,000 (in aggregate) in connection with his retirement from office, as described in section 14.6 of the scheme booklet. Mr Audsley also holds or controls 973,940 Prime shares (as set out at section 14.1 of the scheme booklet) and, if the scheme is implemented, he will receive the scheme consideration for the Prime shares he holds at the Scheme Record Date (as defined). Disclosure of Mr Audsley's interest is made on several occasions in the scheme booklet where reference is made to the directors' unanimous recommendation in respect of the scheme. Mr Lockhart also notes that Prime's Board (absent Mr Audsley) and, separately, Mr Audsley, have determined that Mr Audsley can, and should if he wishes, make a recommendation on the scheme despite the nature and quantum of his interest, and he has joined in the directors'' recommendation. This is also disclosed in the scheme booklet in the letter from Prime's chairman and in section 4.5 of the booklet.
9. Mr Lockhart recognises that, where a director will receive a substantial benefit in relation to the 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 that director's recommendation: Re SMS Management & Technology Ltd [2017] VSC 257 at [22]-[27]; Re Nzuri Copper Ltd [2019] WASC 189 at [88]; Re Ruralco Holdings Ltd [2019] FCA 878 at [28]; Re Kidman Resources Ltd [2019] FCA 1226 at [115]. Mr Lockhart also recognises a recent controversy in the case law as to whether it is appropriate, as a general rule, for a director to make a recommendation in favour of a scheme where that person will receive a substantial financial benefit from approval of the scheme. I addressed this issue in Re Villa World Ltd above at [38]ff and in Re GBST Holdings Limited above at [24]-[30], where I preferred the approach adopted in Re SMS Management & Technology Ltd above and Re Kidman Resources Ltd above to the approach adopted in Re Gazal Corporation Ltd [2019] FCA 701 and Re Navitas Ltd (No 2) [2019] WASC 218 at [32]; see also Re Konekt Ltd [2019] FCA 1811. I continue to take that view. The recommendation made by Mr Audsley, in the context of disclosure of the financial benefits which he would receive if the scheme proceeds, does not provide reason not to convene the scheme meeting or approve the explanatory material in respect of the scheme for publication.

Orders

1. For these reasons, I am satisfied that there is no reason that the scheme should not be put to Prime's shareholders for their consideration or that it could not be approved at the second Court hearing if it receives the requisite shareholder approvals. I am also satisfied that the scheme booklet should be approved for distribution to Prime's shareholders. I therefore made orders in accordance with those proposed by Prime at the hearing on 15 November 2019.

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: 16 December 2019