Solicitors:
Dentons Australia (Plaintiff)
File Number(s): 2020/101207
[2]
Background and affidavit evidence
By Originating Process filed on 2 April 2020 the Plaintiff, Windlab Limited ("Windlab") seeks orders in respect of a scheme of arrangement which would provide for the acquisition of all ordinary shares in Windlab for cash by Wind Acquisition 2 Pty Ltd ("WA2"), excluding some 18.72% of Windlab's shares which are held by Equity Trustees Limited and in which WA2 has a relevant interest. An order is sought, at this hearing, under s 411(1) of the Corporations Act 2001 (Cth) that Windlab convene a meeting of members in respect of the scheme, and directions are also sought under s 1319 of the Act regarding the scheme.
By way of background, Windlab is a wind energy development company, with its head office in Canberra, and operations in Australia, South Africa and East Africa, which applies proprietary technology to identify, acquire and develop wind farms in Australia and internationally. The proposed acquirer, WA2, is a special purpose vehicle which is jointly indirectly owned by Squadron Energy Pty Ltd, an Australian based company focused on exploration and development projects in the natural resources, renewable energy and infrastructure sectors and Federation Funds, which are managed by a private equity firm. On 4 March 2020, Windlab announced to Australian Securities Exchange ("ASX") that it had entered into a scheme implementation agreement with Wind Acquisition 1 Pty Ltd, the holding company of WA2. The terms of the proposed scheme are set out at Annexure B to the draft scheme booklet. Under the terms of the scheme, WA2 will acquire on the Implementation Date all of the Scheme Shares (as defined) and Scheme Shareholders (as defined) will receive cash consideration payable by WA2 of $1 per Scheme Share as consideration for the acquisition of their Scheme Shares.
Windlab reads several affidavits in support of the application. By his affidavit dated 24 April 2020, Mr Roger Price, who is a director, the executive chairman and chief executive officer of Windlab refers to the background of the scheme and identifies options, performance rights and warrants on issue by Windlab. Mr Price also refers to a strategic review process which was initiated by Windlab in late August 2019, which considered a range of options, and involved discussions between Windlab and its financial adviser and a number of industry participants, strategic investors and financial sponsors. Windlab received an initial approach from Federation Asset Management Holdings Pty Ltd ("FAMH"), a private equity firm, in late November 2019, which ultimately developed into the present proposal. Mr Price also refers to the circumstances in which Windlab granted exclusivity to FAMH to undertake due diligence and agreed to certain "no shop" and "no talk" restrictions.
Mr Price also notes that the proposed price of $1.00 per Windlab share for the scheme was consistent with pricing in FAMH's initial proposal to Windlab in late November 2019, and that price has not been affected by the current global COVID-19 pandemic or its effect on equity markets. This scheme therefore does not raise any additional disclosure or other issues that might arise if a scheme involved an acquisition of securities at a price that was depressed as a result of those matters. Mr Price also refers to the negotiation of the scheme implementation agreement between late January and early March 2020, and also deals with the treatment of options, performance rights and warrants issued by Windlab in respect of the scheme and refers to the interests of directors of Windlab in those options, performance rights and warrants.
By an affidavit dated 27 April 2020, Mr Charles Macek, who is a director of Windlab, refers to the history of the proposed transaction and to the establishment of an independent board committee to oversee progression of that transaction, which comprised Mr Macek, Mr O'Brien and a solicitor from Windlab's legal advisers, and was advised by a financial advisory firm. Mr Macek's evidence is that that committee was established because of the potential for a conflict of interest affecting Mr Price, in respect of convertible securities that he held in Windlab, which would be impacted by the scheme. Mr Macek also refers to negotiation of exclusivity arrangements and a break fee, to a secured loan facility provided by interests associated with WA2 at the time of execution of the scheme implementation agreement, and to the verification process which was adopted in respect of the scheme booklet. By a second affidavit of Mr Macek dated 27 April 2020, he consents to act as chair of the scheme meeting.
By his affidavit dated 24 April 2020, Mr Joseph O'Brien, who is an independent non-executive director of Windlab, consents to act as alternate chair of the scheme meeting. Mr O'Brien's further affidavit dated 27 April 2020 makes additional disclosure in respect of a commercial relationship between Windlab and a family company associated with his father, which is developing a privately owned electricity transmission line in North Queensland, although he indicates that he is not part of discussions between Windlab and that company and that no commercial agreement (other than a non-disclosure agreement) or transaction has been executed between Windlab and that company.
By his affidavit dated 24 April 2020, Mr Stephen Panizza, who is a director of WA2 and its holding company, provides information as to those entities, refers to a deed poll executed by WA2 and its holding company in respect of the scheme, and outlines the verification process undertaken by WA2 and its holding company in respect of the scheme booklet.
By his affidavit dated 24 April 2020, Mr Andrew Cooke, who is Windlab's company secretary, deals with the process for electronic communications with shareholders in respect of the proposed scheme and with the proposal for an electronic scheme meeting, where Windlab shareholders could not presently attend a physical meeting by reason of restrictions imposed as a result of the COVID-19 virus. An affidavit dated 27 April 2020 of Mr Gavin Reed, who is the general manager for Lumi Technologies Pty Ltd in New South Wales, deals with the process by which an electronic scheme meeting would be adopted. Mr Reed refers to his experience with the use of electronic systems to conduct company meetings since 2004 and notes that the system which would be used in this scheme had previously been used in two other schemes of arrangement that were respectively approved by the Supreme Court of Western Australia in 2018 and the Federal Court of Australia in 2019. Mr Reed sets out the process which would be adopted for the electronic scheme meeting at some length, and I am satisfied that that process is appropriate to allow the views of Windlab's shareholders to be ascertained at that meeting.
An affidavit dated 24 April 2020 of Ms Adele Thomas, who is a partner of KPMG and an authorised representative of KPMG Financial Advisory Services (Australia) Pty Ltd deals with the independent expert report prepared by KPMG Corporate Finance in respect of the scheme. Ms Thomas confirms that she holds the opinions contained in the draft independent expert's report at the date of her affidavit, that she has not become aware of any facts or circumstances which would cause her to change those opinions and that she has had regard to applicable regulatory guidance published by the Australian Securities and Investments Commission ("ASIC") in respect of her report and is bound by the Expert Witness Code of Conduct in respect of her report.
Windlab also relies on affidavits of its solicitor, Mr Geoffrey Cairns dated 2 April 2020 and 28 April 2020, and Mr Cairns' second affidavit refers to communications with ASIC in respect of the scheme.
[3]
The Court's power to make orders under s 411(1) of the Corporations Act
Mr Oakes, who appears for Windlab, points out that s 411(1) of the Corporations Act empowers 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; 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 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 Oakes also recognises, uncontroversially, that that jurisdiction has been used on numerous occasions to effect a change of control transaction.
I am satisfied that each of these matters has been satisfied with respect to the proposed scheme. Windlab 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 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.
Mr Oakes refers to the observation of French J in Re CSR Ltd [2012] FCAFC 34; (2010) 183 FCR 358 at [58], often cited in this context, that:
"… It is however important to bear in mind 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."
In Re Associated Advisory Practices Limited [2013] FCA 761 at [22], Farrell J summarised the matters relevant to the Court's discretion to convene a scheme meeting 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 Ltd (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 Ltd 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 Co [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."
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. As Mr Oakes points out, Windlab's directors have unanimously recommended that Scheme Shareholders vote in favour of the scheme at the scheme meeting in the absence of a superior proposal and the independent expert continuing to conclude that the scheme is in the best interests of Scheme Shareholders. The scheme consideration is at a significant premium to the share price of Windlab shares as calculated on several bases. In its draft report to which I referred above, KPMG Corporate Finance, has concluded that the scheme is fair and reasonable and therefore in the best interests of scheme shareholders and the scheme consideration of $1.00 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.
[4]
Particular issues
As is common practice in scheme applications, Mr Oakes 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.
At a first hearing in respect of a proposed scheme, the Court will consider the question of "performance risk", involving any risk that the acquirer will not comply with its obligation to pay the scheme consideration to shareholders of the scheme company: Re SFE Corporation Ltd (2006) 59 ACSR 82 at [4]; Re Brambles Industries Ltd (2006) 59 ACSR 501 at [9]; Re APN News & Media Ltd (2007) 62 ACSR 400 at [23]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [43]; Re Simavita Holdings Limited [2013] FCA 1274 at [43]-[44]. As Mr Oakes points out, this issue is addressed by WA2's entry into a Deed Poll dated 24 April 2020 in favour of the Scheme Shareholders (as defined) which contains undertakings in their favour to pay the scheme consideration (as defined), and by cl 4 of the Scheme which provides that the proposed transfer of the Scheme Shares to WA2 is subject to the Scheme Consideration having first been deposited by WA2 into the Trust Account (as defined) for payment by Windlab to the Scheme Shareholders. Similar arrangements have been accepted in previous cases: Re APN News & Media Ltd above at [23]; Re Coles Group Limited (2007) 25 ACLC 1380 at [38]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [32].
Second, Mr Oakes draws attention to exclusivity provisions adopted in respect of the scheme, as set out in cl 13 of the Scheme Implementation Agreement. He notes that these provisions comprise 'no shop', 'no talk' and 'no due diligence' restrictions that apply to Windlab, together with a 'notification' obligation that applies to Windlab and a 'matching right' for the acquirer's benefit. The 'no talk' and 'no due diligence' restrictions and 'notification' regime are subject to exceptions set out at cl 13.7 so as not to require action that would likely be inconsistent with fiduciary or statutory duties owed by Windlab's directors. Mr Oakes also submits, and I accept, that exclusivity restrictions in this form are now commonplace in schemes of arrangement. He also submits, and I also accept, that these restrictions are consistent with the limits set out in Takeovers Panel Guidance Note 7 - Lock up Devices, which does not require a fiduciary carve-out with respect to 'no-shop' provisions. These exclusivity provisions are disclosed in the scheme booklet and there is evidence that they resulted from commercial negotiations between Windlab and the acquirer, in which Windlab was assisted by external legal and financial advisers. I am satisfied that these provisions do not infringe the principles indicated by the Takeovers Panel's Guidance Note 7: Lock-up devices or the case law; see also Re Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [18]-[19]; Re Coles Group Limited above at [62]-[63]; Re Hostworks Group Ltd above 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].
Third, Mr Oakes notes that cl 14 of the Scheme Implementation Deed provides for Windlab to pay WA1 a break fee of $700,000 (exclusive of GST) in prescribed circumstances, which are summarised in section 4.3(e) of the scheme booklet. Mr Macek's evidence, in common form, is that the break fee and the circumstances and conditions in which payment would be triggered were "robustly negotiated". The Scheme Implementation Agreement records the parties' view that that fee represents WA1's reasonable costs of pursuing the proposed scheme; that Windlab considered that this amount is reasonable and appropriate in the circumstances to secure the benefits to Windlab and Scheme Shareholders resulting from the scheme; and that fee is not payable if Scheme Shareholders vote against the Scheme. Mr Oakes points out that the break fee payable slightly exceeds the 1% figure specified in Guidance Note 7, by about $3,700. He submits, and I accept, that that excess is de minimis.
The case law recognises that break fees are common features in schemes of arrangement and will 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 were some other unusual circumstances": Re SFE Corporation Ltd above at [6]-[7]; Re APN News & Media Ltd above 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]. 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 Ltd above at [55]. I am satisfied that the provisions for the break fee do not prevent the convening of a meeting to consider the scheme.
Fourth, Mr Oakes notes that cl 3.4 of the Scheme contains 'deemed warranties', by which Scheme Shareholders are taken to have warranted to Windlab and WA2 that all their Scheme Shares are fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind. Clauses in these terms are also permissible and now commonplace: Re Macquarie Private Capital A Limited above at [14]; Re Mitchell Communication Group [2010] VSC 423 at [10]-[12]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]. The existence of the deemed warranty is disclosed in the scheme booklet, as contemplated by Re APN News & Media Ltd above at [63].
Fifth, Mr Oakes points out that cancellation of warrants, options, and performance rights issued by Windlab is a condition precedent to the implementation of the scheme. That matter is addressed in Mr Price's evidence to which I referred above, section 3.2 of the scheme booklet and the extent to which Windlab's directors benefit from that cancellation is disclosed in section 11 of the scheme booklet. Mr Oakes identifies a first potential issue as to whether the cancellation of those warrants, options and performance rights creates a separate class of holders of both those securities and ordinary shares. Mr Oakes submits, and I accept, that the authorities establish that shareholders of other securities that are to be cancelled generally do not constitute a separate class for the purposes of s 411(1) of the Act and there is here no relevant distinction between the rights of Scheme Shareholders who do and do not also hold these other securities: Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525 at [82]; Re Healthscope Ltd [2019] FCA 542 at [167]; Re Amcor Ltd [2019] FCA 346 at [86]; Re DuluxGroup Ltd [2019] FCA 961 at [41]; Re Kidman Resources Ltd [2019] FCA 1226 at [93]-[95]. Mr Oakes submits, and I also accept, that that consideration does not constitute a collateral benefit by analogy where the amount paid in each case does not exceed the value of the security.
Mr Oakes also identifies a further question as to the disclosure that is necessary where a director holds some or all of the warrants, options and performance rights that are to be cancelled. He submits that:
"The Directors of Windlab have unanimously recommended that Windlab Shareholders vote in favour of the Scheme at the Scheme Meeting in the absence of a Superior Proposal and the Independent Expert continuing to conclude that the Scheme is in the best interests of Scheme Shareholder[s]. Subject to the above qualifications, all Directors intend to vote their Scheme Shares in favour of the Scheme.
The Windlab directors variously hold shares, warrants, options and performance rights in quantities set out in the Table at Section 11.1 of the Scheme Booklet. Save for Mr Roger Price, who was quarantined from the Independent Board Committee formed to consider the Scheme proposal, none of the amounts to be received by directors is substantial.
Windlab acknowledges that where a director will receive a substantial benefit in relation to the Scheme that other Scheme Shareholders will not receive, then that benefit should be fully and prominently disclosed as a matter for Scheme Shareholders to take into account when considering that director's recommendation …"
Mr Oakes submits, with reference to my decision in Re Villa World Limited above, that it is not inappropriate for all directors to make a recommendation, subject to disclosure of their interests. He refers to the relevant disclosure as set out in the lead independent director's letter in the scheme booklet, and notes that corresponding information is also set out in sections 4.2(a) (in the directors' recommendation) and 11 of the scheme booklet. Although I recognise this issue is still the subject of a degree of controversy, I propose to follow the approach that I adopted in Re GBST Holdings Limited [2019] NSWSC 1280 at [26]ff and Re Villa World Limited above. On that basis, the clear disclosure of the securities to be cancelled, their value and their potential relevance to the directors' recommendation in the scheme booklet sufficiently addresses this issue.
Subsection 411(17) of the Act provides that the Court must not approve a scheme unless satisfied that 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. This matter is properly deferred for consideration at the second Court hearing.
[5]
Virtual meeting of Scheme Shareholders
Mr Oakes also addresses the need for a "virtual meeting" of shareholders, given limits on gatherings in public places under the Public Health (COVID-19 Restrictions on Gathering and Movement) Order 2020 made under s 7 of the Public Health Act 2010 (NSW) and similar Victorian legislation. The scheme booklet discloses the process to be adopted for a virtual meeting and I have referred to Mr Reed's evidence as to that process above. The conduct of a virtual meeting is consistent with Article 6.2 of Windlab's Constitution which permits a general meeting to be held at two or more venues simultaneously using any technology which gives the members as a whole a reasonable opportunity to participate. Mr Oakes rightly points out that r 3.3(2) of the Supreme Court (Corporations) Rules 1999 in turn provides that, unless the Court otherwise orders, a meeting of members ordered under s 411 of the Act must be convened, held and conducted in accordance with the provisions of Part 2G.2 of the Act that apply to the members of a company and the provisions of the plaintiff's constitution that apply in relation to meetings of members and are not inconsistent with Part 2G.2. In these circumstances, Windlab did not need and did not seek any further directions as to the proposed virtual meeting.
[6]
Scheme consideration not affected by COVID-19
As I noted above, the evidence indicates that the scheme consideration has not been affected by matters arising from COVID-19 and it is not necessary to address any issue in that regard.
[7]
Approval of the scheme booklet
Mr Oakes points out that s 411(1) of the Act provides that, if the Court has made an order convening a meeting or meetings of members or creditors, the Court "may approve the explanatory statement", and the practice of Courts varies in this respect: Re DuluxGroup Ltd above at [63]. Mr Oakes did not seek an order approving the explanatory statement, if, as is the case, the convening orders sought by Windlab were made.
[8]
Orders
In summary, Mr Oakes submitted that the terms of the proposed scheme are in a conventional form for a change of control scheme with all cash consideration; Scheme Shareholders will receive the independent expert report addressing the terms of the transaction and its advantages and disadvantages; that the scheme is unanimously recommended by Windlab's directors; the scheme booklet meets relevant statutory requirements and has been appropriately verified; and there is no reason why the scheme, if considered and agreed to by the requisite majority of members, is of such a nature as would not be likely to be approved by the Court at the second hearing.
I am satisfied that there is no reason that the scheme should not be put to Windlab's shareholders for their consideration or that it could not be approved at the second Court hearing if it receives the requisite shareholder approvals. The Court should therefore make orders convening the scheme meeting. I therefore made orders in accordance with those proposed by Windlab at the hearing on 29 April 2020.
[9]
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Decision last updated: 19 May 2020