In the matter of Vocus Group Limited [2021] NSWSC 630

In the matter of Vocus Group Limited [2021] NSWSC 630 | Case summary | Zoe

[2]

Background and affidavit evidence

By Originating Process filed on 21 April 2021 the Plaintiff, Vocus Group Limited ("Vocus") applies for orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) that it convene a meeting of its holders of ordinary shares to consider and, if thought fit, agree to a proposed scheme of arrangement and to associated orders. At a second Court hearing, Vocus will seek further orders under s 411 of the Act approving the scheme, if the relevant resolution is passed by its shareholders.
By way of background, Vocus is a specialist fibre and network solutions provider and is listed on Australian Securities Exchange ("ASX"). Vocus relies on the affidavit dated 22 April 2021 of its solicitor, Mr Kavanagh, who refers to a release made by Vocus to ASX in connection with the scheme on 9 March 2021. That release indicated that Vocus had entered into a Scheme Implementation Deed ("SID") under which Voyage Australia Pty Ltd ("Voyage"), an entity owned by a consortium comprising Macquarie Infrastructure and Real Assets and its managed funds ("MIRA") and Aware Super Pty Ltd as trustee of Aware Super ("Aware Super"), had agreed to acquire all of the shares of Vocus for $5.50 cash per share. That announcement also referred to the Vocus board's unanimous view that the offer was in the best interests of Vocus shareholders and to the board's unanimous agreement to recommend that Vocus shareholders vote in favour of the scheme, in the absence of a Superior Proposal (as defined) and subject to an independent expert concluding that the scheme was in the best interests of Vocus shareholders.
The total maximum aggregate consideration that would be payable under the scheme is substantial, in the amount of $3.42 billion. Mr Jackman, who appears for Vocus, points to evidence that Voyage intends to fund payment of the scheme consideration using a combination of debt and equity (as described in section 5.3 of the scheme booklet), comprising legally binding equity commitment letters to Voyage from Aware Super for A$1,322,730,274 and from MIRA Holdings and a MAIF3 Fund investment vehicle for, in aggregate, A$1,322,730,274 and legally binding debt commitment letters, under which several arrangers have agreed to provide certain secured debt facilities in an aggregate amount of no less than approximately A$2.15 billion to Voyage.
Vocus also relied on the affidavit dated 17 May 2021 of Mr Simon Lewin, who is the general counsel and company secretary of Vocus. Mr Lewin referred to the nature of Vocus' business and to the announcement made by Vocus to ASX on 9 March 2021, to which I referred above. He also refers to a Deed of Variation dated 4 May 2021, which amended the definition of "Implementation Deed" in the SID and the proposed scheme timetable and summarised the transaction steps. He outlined the contents of the scheme booklet and noted that the proposed scheme meeting would take place on 22 June 2021 and that it was proposed that information be sent to shareholders in respect of the scheme by electronic means where shareholders had nominated an electronic address for the purpose of receiving communications from Vocus and otherwise by post or, in the case of shareholders whose registered address is outside Australia, by pre-paid airmail or air courier. Mr Lewin also outlined the verification process adopted in respect of the scheme booklet, which was in common form, and referred to the negotiation of exclusivity provisions and a break fee to which I refer below. Mr Lewin also addressed the interests of Vocus directors in Vocus shares, to which reference is made in section 8.1 of the scheme booklet, and the treatment of options, legacy options and performance rights (as defined in the scheme booklet) under the SID. Mr Lewin also outlined the conditions precedent to the scheme, which included the Treasurer's notification that the Commonwealth had no objection to the transaction under the Foreign Acquisition and Takeovers Act 1975 (Cth), consent under relevant New Zealand legislation and counterparty consent in respect of specified contracts.
By an affidavit dated 10 May 2021, Mr Robert Mansfield, who is a non-executive director and chair of Vocus, indicated his consent to act as chair of the proposed scheme meeting. By an affidavit dated 11 May 2021, Mr David Wiadrowski, who is a non-executive director of Vocus, indicated his consent to act as chair of the scheme meeting if Mr Mansfield was unable or unwilling to do so.
An affidavit dated 14 May 2021 of Mr Wayne Hopkins, a senior client relationship manager at Computershare Investor Services Pty Ltd ("Computershare") outlined the manner in which Vocus' share register was maintained by Computershare and the services which Vocus had engaged Computershare to provide in respect of the scheme, including in respect of the dispatch of scheme materials, and the use of the Lumi virtual meeting platform to provide a secure platform for the conduct of a virtual scheme meeting. Mr Hopkins also referred to the process which would be adopted for registration of shareholders attending the virtual scheme meeting and to the manner in which a poll report would be prepared.
An affidavit dated 14 May 2021 of Ms Picciotta, a partner of Deloitte Touche Tohmatsu and an authorised representative of Deloitte Corporate Finance Pty Ltd, addressed the independent expert's report in respect of the scheme, and confirmed that she held the opinions contained in the draft independent expert report, and that that report had been prepared having regard to ASIC Regulatory Guide 111, Content of Expert Reports and ASIC Regulatory Guide 112 Independence of Experts. The draft expert report was exhibited to Ms Picciotta's affidavit.
By her affidavit dated 14 May 2021, Ms Anirudha Satchcroft, who is an executive director of MIRA and a director of Voyage, referred to the steps which had been taken to verify information provided by Voyage for inclusion in the scheme booklet; noted that associates of Voyage had relevant interests in Vocus shares as set out in the scheme booklet and that the manner in which they intended to vote in relation to the scheme was disclosed in the scheme booklet; and referred to the circumstances in which a break fee would be payable, the nature of the costs incurred by Voyage to which that break fee was directed, including financing and advisory costs, and the negotiation of the break fee in extensive and arm's length commercial negotiations between Vocus and Voyage. She also referred to the execution of a deed poll in favour of all scheme shareholders, by which Voyage had covenanted to perform its obligations under the scheme, including its obligations relating to the provision of the scheme consideration. A further affidavit of Ms Satchcroft dated 17 May 2021 addressed a revised scheme booklet, updating information relating to Voyage contained in the scheme booklet, and to the verification process adopted in respect of that updated information.
By his affidavit dated 17 May 2021, Mr Guy Alexander, a solicitor acting for Vocus in respect of the scheme, referred to ASIC's "no action" position in relation to virtual meetings and the electronic dispatch of documents in relation to such meetings and to the provision of materials to ASIC in respect of the scheme. By letter dated 17 May 2021, ASIC has indicated, in standard form, that it did not propose to appear or make submissions to intervene to oppose the scheme at the first Court hearing.

[3]

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

Mr Jackman points out that s 411(1) of the Act confers a discretionary power on 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 Part 5.1 body and its members or any class of them; 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; the proposed scheme booklet provides proper disclosure to shareholders; and the Court is 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 make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement. Mr Jackman submits, and I accept, that each of these matters has been satisfied with respect to the scheme, and I have noted above ASIC has advised that it does not currently propose to appear to make submissions or intervene to oppose the scheme. Mr Jackman submits, and I accept, that the Court has power to convene a meeting of Vocus, subject to the exercise of its discretion.
Mr Jackman in turn points to the factors relevant to the exercise of that discretion, as summarised by Farrell J in Re Associated Advisory Practices Limited [2013] FCA 761 at [22] as follows: "The Court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the Court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Limited at 504-505. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The Court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72."
I summarised the applicable principles in Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[26] 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 submits, and I accept, that the scheme is here 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 hearing of an unopposed application. As Mr Jackman points out, the scheme has received the unanimous support of Vocus' board in the absence of a "Superior Proposal" (as defined in the scheme booklet and SID) and, subject to that qualification, each director intends to vote all of his or her Vocus shares in favour of the scheme. The scheme is also straightforward in its operation and involves an all cash bid for the shares in Vocus at a significant premium to Vocus' recent historical trading prices. The independent expert retained by Vocus to consider the scheme has concluded that it is fair and reasonable and in the best interests of Vocus Shareholders, in the absence of a Superior Proposal (as defined). I am also satisfied, having regard to the matters address below, that the scheme booklet provides sufficient disclosure of the terms of the scheme, including the key features of the scheme and its advantages and disadvantages, and there are no circumstances that suggest the scheme is proposed by Vocus other than honestly and in good faith.

[4]

Particular issues Voting at scheme meeting

Mr Jackman draws several issues to the Court's attention, consistent with usual scheme practice. The scheme booklet discloses, in the Frequently Asked Questions section and in section 5.5(a) that Voyage is not the registered holder of, and it does have the power to control voting rights attached to, or the power to dispose of, any Vocus Shares; but it has voting power in 39,232,308 Vocus shares (which represents 6.32% of Vocus' issued shares) in which MIRA and Aware Super have relevant interests, and indicates that those shares will not be voted, except where permitted in accordance with a voting exclusion statement, including as proxy for a person who is not excluded from voting, in accordance with that person's directions on the proxy form; or where acting solely as an investment manager, custodian, nominee, trustee, responsible entity or other fiduciary on behalf of a third party beneficiary or third party investor, who is not an associate of Voyage. No concerns arise from that approach. Performance risk
Mr Jackman also addressed the question of performance risk. He pointed out that courts have considered the extent to which a bidder will comply with its primary obligation to pay the scheme consideration to scheme members: SFE Corporation Ltd (2006) 59 ACSR 82; [2006] FCA 670 at [4]; Re Brambles Industries (2006) 59 ACSR 501; [2006] FCA 1273 at [9]; Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [23]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484; [2008] NSWSC 745 at [43]; Re Simavita Holdings Limited [2013] FCA 1274 at [43]-[44]. 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. He notes that this risk is addressed by the terms of the scheme that require that Voyage pay the aggregate scheme consideration in cleared funds into a trust account, with that payment to be effected no later than the Business Day before the Implementation Date (as defined in the SID); that Vocus must then make or procure the payment of the relevant funds in the Trust Account to scheme shareholders; and the transfer of the scheme shares will not occur until the funds have been received by Vocus as trustee for scheme shareholders). As Mr Jackman points out, that structure avoids the risk that scheme shareholders would be left to bring a claim under the Deed Poll executed by Voyage in respect of the scheme consideration, and substantially the same arrangements have been accepted in earlier cases: Re Coles Group Limited (2007) 25 ACLC 1380; [2007] VSC 389 at [38]. Exclusivity arrangements
Mr Jackman also addresses the exclusivity arrangements contemplated by the SID. The Court is here 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 sufficiently disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re Andean Resources Ltd [2010] FCA 1190 at [20]; Re TPG Telecom Ltd [2020] NSWSC 772 at [22].
Mr Jackman points out that cl 11 of the SID contains a provision addressing the absence of any discussions, at the time of execution of the SID, regarding a "Competing Proposal" (as defined in the SID) (cl 11.1); "no-shop", "no talk" and "no due diligence" clauses (cl 11.2); an obligation to notify Voyage of Competing Proposals (as defined) (cl 11.4); and a clause conferring a "matching right" on Voyage in respect of a Competing Proposal (as defined) (cl 11.5). The "no talk" and "no due diligence" restrictions in clause 11.2 are subject to a "fiduciary carve-out" (cl 11.3), where not taking certain actions would likely be inconsistent with Vocus' directors' duties under applicable law. Mr Jackman submits, and I accept, that exclusivity restrictions in substantially this form are now commonplace in schemes of arrangement under s 411 of the Act and these restrictions are consistent with the terms of the Takeovers Panel's Guidance Note 7: Lock-up devices. He also submits and I accept that prior authority does not require a fiduciary carve-out with respect to "no-shop" provisions: Re Coles Group Limited above at [62]-[63]. The "Exclusivity Period" here is not short and can last for up to nine months from the date of the SID, unless a later date is agreed by the parties, although it ends if the SID is terminated within the 9 month period; but I recognised the exclusivity periods of some length that have previously been accepted by the Courts in other schemes: Re Ludowici Ltd [2012] FCA 489 at [8]; Re Tatts Group Ltd [2017] VSC 552 at [36]; Re Tawana Resources NL [2018] FCA 1456 at [33]-[34]; Re Sirtex Medical Ltd [2018] FCA 1315 at [37]. The relevant provisions are sufficiently disclosed in section 8.12(d) of the scheme booklet. On balance, they do not provide reason not to convene the first scheme meeting or approve the scheme if it is approved by Vocus shareholders. Break fee
Clause 12 of the SID in turn provides for the payment of a reimbursement (or "break") fee in specified circumstances and the negotiation of that fee is addressed in the evidence to which I referred above. Mr Jackman submits, and I accept, that break fees are common features in schemes of arrangement and have not prevented the making of orders under s 411(1) of the Act. The case law has accepted fees of this character 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 APN News & Media Limited above at [43]; Re Cytopia Ltd [2009] VSC 560; Re Webcentral Group Ltd [2020] NSWSC 1279 at [30]. The reimbursement fee is here not payable if the meeting of Vocus shareholders does not approve the scheme and will not influence voting at that meeting. The quantum of the break fee is approximately 1.02% of the equity value of Vocus as implied by the scheme consideration and about 1% of that equity value by reference to shares on issue on a fully diluted basis. That fee is not inconsistent with the Takeovers Panel's guideline of no greater than 1% of equity value in Guidance Note 7: Lock-up Devices, which has been applied in many subsequent cases. That fee is appropriately disclosed in the scheme booklet, and the affidavit also sets out the components of the break fee, in at least a general way, as suggested in Re Coca-Cola Amatil Pty Limited [2021] NSWSC 270 at [24]. Deemed warranty
Clause 8.4 of the scheme contains a deemed warranty by which scheme shareholders are taken to have warranted to Vocus and Voyage that all their scheme shares are fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and third party interests. I accept that clauses in these terms are permissible and are now commonplace, 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 APN News & Media Limited above at [62]; Re Coles Group Ltd above at [45]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World (2019) 139 ACSR 550; [2019] NSWSC 1207 at [25]. Virtual scheme meeting
Vocus proposes that the scheme meeting be held virtually, by reason of the ongoing COVID-19 pandemic. Clause 27.4 of Vocus' constitution allows for the holding of meetings at two or more venues by using technology in terms similar to section 249S of the Act. Mr Jackman submits, and I accept, that virtual scheme meetings were ordered throughout 2020, although reference was often made to that approach being consistent with or permitted by the various COVID determinations that were then in force and have now lapsed. Mr Jackman recognises that proposed legislation in relation to virtual meetings has not been passed, but points out that ASIC has outlined a "no action" position in relation to the convening and holding of virtual meetings and has updated its Guidelines for investor meetings using technology to reflect that position. Mr Jackman also points out that the Court have made orders in relation to virtual meetings before any determinations were in effect and since the expiry of the most recent COVID determination: Re Windlab Limited [2020] NSWSC 571; Re Redflex Holdings Limited [2021] FCA 417 at [41]-[46]; Re Asaleo Care Limited [2021] FCA 406 at [74]-[78].
Mr Jackman also notes that Vocus held its 2020 Annual General Meeting as a virtual meeting, and I can and do infer that a significant number of shareholders are already familiar with attending meetings in that manner. I also recognise that the intention to hold a virtual scheme meeting was drawn to ASIC's attention when the scheme booklet was provided for review and comment, and ASIC has not raised any concerns in relation to that approach, and there are or may in future be ongoing restrictions on public gatherings in the several states. I recognise that Vocus proposes to adopt a process for the dispatch of scheme documents to be undertaken by Computershare which provides share registry services to Vocus, which is consistent with that adopted in Re Coca-Cola Amatil Limited above at [26]. I will order the scheme documents be dispatched and the scheme meeting take place in that manner. Avoidance of takeovers provisions
Section 411(17) provides that the Court must not approve (at the second Court hearing) a scheme unless satisfied it is not proposed for the purpose of enabling avoidance of the takeovers provisions in Chapter 6 of the Act or ASIC provides a statement that it has no objection. The prospect of those circumstances is a relevant consideration in whether the Court determines the scheme is fit for consideration at a meeting. However, there is no presumption in the Act as to which statutory facility must be adopted to acquire shares in a company, and it is commonplace that ASIC will provide a statement under s 411(17)(b) of the Act at the second court hearing. This issue can be addressed at that hearing. Options, legacy options and performance rights
Mr Jackman points out that a condition precedent to the scheme, under cll 3.1(i) and 4.4 of the SID, is that arrangements have been put in place such that no Options, Legacy Options or Performance Rights (as defined in the SID) are in existence on the scheme record date. Section 8.3 of the scheme booklet outlines the treatment of Options, Legacy Options and Performance Rights and I have referred to Mr Lewin's evidence as to that matter above.
The scheme booklet discloses that each of Mr Kevin Russell (who is the Group Managing Director and Chief Executive Officer) and Mr Mark Callander (who is the Executive Director and Chief Executive, New Zealand and Wholesale) have been issued options under the Vocus Long Term Incentive Plan and that they are Vocus directors who recommend the scheme to Vocus shareholders. That interest and its value (following an amendment made to the scheme booklet at the hearing) is disclosed in the Chairman's Letter, and elsewhere in the scheme booklet. Mr Jackman points out that the case law indicates 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 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) 136 ACSR 628; [2019] FCA 878 at [28]; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226 at [115]; Re Villa World Ltd above at [38]ff; Re GBST Holdings Limited [2019] NSWSC 1280 at [24]-[30]. I am satisfied that the interests of Mr Russell and Mr Callander are sufficiently disclosed that their making recommendations in respect of the scheme does not provide reason not to convene the scheme meeting or approve the dispatch of the scheme booklet.

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