REASONS FOR JUDGMENT
1 itX Group Limited (the Company) has applied to the Court for orders under s 411 of the Corporations Act 2001 (Cth) (the Act). The Company proposes that a meeting of its shareholders be convened for the purpose of considering a proposed scheme whereby the shareholders' shares will be transferred to Avnet Technology Solutions Australia Pty Ltd (Avnet). Yesterday afternoon I made orders under s 411 that a meeting be convened for the purpose of considering the proposed scheme. These are my reasons for doing so.
2 The Company has offices in Sydney, Melbourne, Brisbane, Adelaide, Perth and Canberra and claims to be a leading distributor of a broad range of IT software and hardware products, as well as a provider of specialised IT services throughout Australia. Its business began in 1983 as a business unit of GEC Australia Limited, selling DEC computers and providing internal IT services to the GEC Group, as well as to external clients. The consolidated accounts of the Company as at 30 June 2010 show that it had net assets of $23,150,000, compared with $18,818,000 as at 30 June 2009.
3 Avnet is a wholly-owned indirect subsidiary of Avnet Inc, which was incorporated in New York in 1955, and is listed on the New York Stock Exchange. Avnet is a direct, wholly-owned subsidiary of Avnet (Australia) Pty Ltd (Avnet Australia), which in turn is one of the operating entities set up by Avnet Inc to conduct business in Australia. Avnet Australia is a guarantor under the Scheme Implementation Agreement and Deed Poll to which I shall refer shortly. Avnet was incorporated in Australia and registered in Victoria in August 2010 for the purpose of acquiring shares in the Company under the proposed scheme. Avnet Inc and its subsidiaries constitute one of the world's largest global distributors of electronic components, computer products and technology services and solutions, with more than 300 locations in more than 70 countries throughout the world.
4 The proposal being propounded by the Company is that the Company's shareholders will transfer their shares to Avnet. Shareholders in the Company will receive for each fully paid share, a cash consideration of $1.55, less the cash amount of any special dividend of up to 20 cents that may be paid by the Company prior to the acquisition. I shall say something about the proposed special dividend shortly. By the proposed scheme, all of the issued shares in the Company will be acquired by Avnet, such that the Company will become a wholly-owned subsidiary of Avnet. The shares in the Company are presently listed on the Australian Stock Exchange. That listing, of course, will cease once the Company becomes a wholly-owned subsidiary of Avnet.
5 There are presently 50 million issued shares in the capital of the Company. Accordingly, the proposed transaction values the Company at approximately $77,500,000. Each of the present directors of the Company has recommended to shareholders that they vote in favour of the scheme in the absence of a superior proposal, provided that WHK Horwath Corporate Finance Limited (WHK Horwath), an independent expert to whom I shall refer shortly, continues to hold the view that the scheme is in the best interests of the shareholders of the Company.
6 WHK Horwath was engaged by the directors of the Company to prepare an independent report advising whether the proposed scheme is in the best interests of the Company's shareholders. Mr Bradley Higgs, a principal of WHK Horwath, is a team leader of WHK Horwath's corporate finance division. Mr Higgs has been responsible for the preparation of a report for the purpose of inclusion in the explanatory memorandum to be sent to shareholders of the Company in connection with the proposed scheme. Mr Higgs has confirmed that the opinions expressed in the written report that he has prepared are opinions held by him, and that he is not aware of any facts, matters or circumstances that cause him to change the opinions expressed in the report.
7 In their report, WHK Horwath concluded that the proposed transaction is in the best interests of the shareholders of the Company, and is fair and reasonable. In the report, WHK Horwath undertake a valuation of the Company and indicate various possible bases for valuation. The primary valuation methodology adopted was to apply to the Company's earnings a capitalisation multiple. Other methodologies were also considered in order to check the outcome of the methodology adopted.
8 In the report, WHK Horwath calculated the future maintainable earnings before interest, tax, depreciation and amortisation of the Company as at 30 June 2010 as $11.959 million. They considered that an appropriate multiple upon which a controlling interest in the Company should be valued was 5.6 to 5.9 times the estimated future maintainable earnings before interest, tax, depreciation and amortisation. Based on that calculation, the equity value of the whole of the issued capital of the Company was calculated as being in the range of $73.523 million to $77.737 million. That gave an assessed value per share of between $1.47 and $1.55 per share, with a midpoint of $1.51. The proposed consideration to be received by shareholders is more or less equivalent to the upper end of that range. In those circumstances, HWK Horwath concluded that the acquisition of the shares on the basis proposed is fair and reasonable, and in the absence of any better offer, is in the best interests of the shareholders of the Company.
9 The function of the Court in considering whether or not to convene a meeting of members of a company for the purposes of considering a scheme under s 411 is to determine whether the scheme as propounded is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court will be likely to approve it on the hearing of an application for approval that was unopposed. An important function of the Court in deciding whether or not to convene a meeting is to consider whether a fair picture of the proposed scheme is being presented. On the other hand, the need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, such that it is more likely to assist than to confuse.
10 There is a firm duty of disclosure on an applicant in cases such as this where the application is made ex parte. The absence of any contradictor sharpens that duty of disclosure, and the applicant carries the responsibility of bringing to the Court's attention all matters relevant to the exercise of the discretion whether or not to convene a meeting. It is in that context that I have considered the material which has been adduced on behalf of the Company.
11 The Company has raised several matters to which the Court's attention has been drawn. First, it is proposed that the materials containing the notice of the meeting and the explanatory memorandum and other documents will be sent to shareholders of the Company with the notice of the Company's annual general meeting. While the details of the agenda for the annual general meeting are not presently relevant, one matter is of consequence so far as the scheme is concerned. One of the items of special business is a proposed resolution authorising the payment of a special dividend, which may constitute financial assistance in connection with the acquisition of the shares in the Company by Avnet.
12 The proposed dividend of up to 20 cents is conditional upon obtaining from the Commissioner of Taxation a ruling that is regarded as satisfactory to both the Company and Avnet. It would be in the interests of shareholders, for the most part, for the 20 cents to be received by way of a fully franked dividend rather than as part of the capital consideration for the sale of the shares. Either way, the shareholders will receive the total amount of $1.55 per share. Whether that is by means of 20 cents of the special dividend and $1.35 by way of consideration for the transfer, or whether it is $1.55 as consideration for the transfer; the net cash result will be the same. The proposed explanatory memorandum contains a section dealing with the taxation implications of the proposal. The Commissioner's ruling when it is obtained, if it is satisfactory, will be made available on the Company's website and on the website of the Australian Taxation Office.
13 Avnet and the Company entered into a Scheme Implementation Agreement in connection with the proposal for the scheme. A copy of the Scheme Implementation Agreement will be included in the explanatory memorandum to be sent to the shareholders of the Company. The Company has drawn the Court's attention to a number of aspects of the Scheme Implementation Agreement, by way of frank disclosure.
14 Under the Scheme Implementation Agreement, provision is made for the payment of a break fee, either by the Company or by Avnet, in certain circumstances. The break fee in question is $775,000 plus goods and services tax, if applicable. By clause 14.1 of the Scheme Implementation Agreement, the Company and Avnet acknowledge that, if they enter into the agreement and the scheme does not proceed to completion, each will have incurred significant costs and losses, including significant opportunity costs. They also acknowledge and agree that the costs and losses actually incurred would be of such a nature that they cannot accurately be ascertained. They have, therefore, agreed on the break amount as being a genuine and reasonable estimate of the costs and losses that would actually be suffered by each of them in the circumstances in which it will be payable. The Scheme Implementation Agreement sets out the particular circumstances in which the break fee would be paid by Avnet to the Company or by the Company to Avnet.
15 Clause 13 of the Scheme Implementation Agreement contains a number of provisions relating to exclusivity. First, there is an undertaking by the Company that it will ensure that neither it nor any related entity will directly or indirectly solicit, invite, facilitate, or otherwise encourage any enquiries, negotiations, or discussions with a view to obtaining any expression of interest, offer, or proposal in relation to a competing proposal. The term competing proposal is defined in terms generally that would involve some party other than Avnet acquiring a legal or equitable interest in the share capital of the Company. There is also an undertaking by the Company that it will not, and will ensure that its related entities do not, directly or indirectly negotiate or enter into negotiations with any other person regarding a competing proposal, even if the competing proposal was not directly or indirectly solicited or encouraged by the Company.
16 Secondly, there is an undertaking by the Company that it will not solicit, invite, or encourage any party to undertake a due diligence investigation of the Company, and will not make available to any person any non-public information relating to the Company. That clause, however, does not prevent the Company from providing information to the stock exchange or the Company's auditors or advisors acting in that capacity in the ordinary course of its business. Finally, there is an undertaking on the part of the Company to inform Avnet immediately if the Company or any of its related entities is approached by any person to discuss or engage in any activity that would breach the exclusivity obligations to which I have just referred. There is, however, an exception in clause 13, generally along the lines that the restraints to which I have referred would not interfere with the discharge by the directors of the Company of their obligations to act in good faith and their general fiduciary obligations as directors. All of the provisions of the Scheme Implementation Agreement to which I have referred are summarised in detail in the proposed explanatory memorandum.
17 Mr Laurence Sellers is the managing director of the Company. Mr Sellers has confirmed that both the break fee and the provisions relating to exclusivity were included in the Scheme Implementation Agreement as the result of commercial negotiations between the Company and Avnet. Avnet required the provisions to be included, and the Company was satisfied that the final form of the provisions was acceptable. Mr Sellers does not consider that the break fee nor the exclusivity provisions operate against the interests of the shareholders of the Company. He considers that it was in the interest of the shareholders to include the provisions in the Scheme Implementation Agreement in order to ensure that the opportunity was made available to the shareholders. He gives a number of reasons for his conclusion:
(a) First, the break fee is payable by either the Company or Avnet in particular circumstances;
(b) Second, the break fee is not payable by either party in the event that the scheme is not approved by the Company's shareholders or is not approved by the Court, or if there was any other court or regulatory prohibition on the implementation of the scheme;
(c) Third, the break fee is not payable if the directors of the Company fail to make, change, or withdraw a recommendation to vote in favour of the scheme in circumstances where the independent expert has given a report that says that the scheme is not in the best interests of the Company's shareholders or that the independent expert changes a previously given opinion that the scheme is in the best interests of the Company's shareholders.
(d) Fourth, the amount of the break fee represents a genuine estimate of the transaction costs of both the Company and Avnet which would be incurred in the event that it becomes payable.
(e) The amount represents no more than 1 per cent of the aggregate of the value of all of the shares issued by the Company. That is consistent with the Takeovers Panel Guidance Note Number 7.
Mr Sellers also considers that the exclusivity arrangements are reasonable, having regard to the fact that the provisions take into account the significant transaction costs of both the Company and Avnet that would be incurred if the scheme is not to proceed. He also takes into account the fact that the provisions do not apply to a bona fide competing proposal.
18 Both the Company and Avnet have been represented by legal firms recognised as practising in the mergers and acquisitions area. I am satisfied that there is nothing in the provisions to which I have referred that should stand in the way of the proposed scheme, at least so far as the convening of a meeting of shareholders is concerned.
19 It is proposed that Avnet and Avnet Australia will execute a Deed Poll for the benefit of shareholders whereby they will have an obligation to procure the payment of the scheme consideration to the scheme shareholders in accordance with the provisions of the proposed scheme. A copy of the Deed Poll will be included with the explanatory memorandum.
20 The scheme that is to be put to the shareholders is in a reasonably standard form. The scheme deals with implementation in clause 4. Clause 4.2 deals with the proposed agreed dividend. Clause 4.3, clause 4.4 and clause 4.5 are the pivotal provisions of the scheme. The scheme defines the implementation date as the date which is the later of one business day after the scheme record date. That date is, in turn, nine business days after the effective date, which, in turn, is defined as the date when any order under s 411 of the Act becomes effective.
21 On the implementation date, and subject to the provision of the scheme consideration in accordance with clause 4.5, all of the issued shares and the capital of the Company will be transferred to Avnet without the need for any further act by the shareholder. By clause 4.4, each shareholder agrees to transfer the shareholder's shares to Avnet in accordance with the scheme. By clause 4.5, the obligation of Avnet to provide or procure the provision of the scheme consideration will be satisfied by depositing an amount in cleared funds equal to the aggregate scheme consideration payable to all shareholders into an account established by or on behalf of the Company before 10:00 am on the implementation date. That amount is to be held on trust for the shareholders and for the purpose of paying the aggregate scheme consideration to the shareholders in accordance with the scheme. By clause 4.5, the Company agrees to pay from the account the amount paid into it by Avnet.
22 Clause 7 contains further obligations imposed upon shareholders. By clause 7.2, each shareholder agrees to transfer the shareholder shares to Avnet in accordance with the scheme, and acknowledges that the scheme binds all shareholders. That, of course, is the effect of s 411 of the Act if approval is given by the Court. Clause 7.2 also provides that each shareholder is taken to have warranted to the Company and to Avnet that all shares transferred will, at the date of transfer, be fully paid and free from all encumbrances. Clause 7.3 provides that, to the extent permitted by law, the shares transferred will be transferred free of encumbrances.
23 Clause 7.3(b) provides that, on and from the implementation date, Avnet will be beneficially entitled to the shares transferred to it under the scheme, pending registration of Avnet as the holder. That would take effect, of course, subject to the payment of the consideration under clause 4.5. Clause 7.4 provides for the appointment of Avnet as proxy of shareholders pending the registration of Avnet as the holder of the shares. The terms of the scheme, when coupled with the obligations under the Scheme Implementation Agreement and the Deed Poll, are such that there is no risk that shareholders will be divested of their beneficial interest in shares before receipt of the consideration to be paid into the Company's account pursuant to clause 4.5.
24 Section 411(17) of the Act provides that the Court must not approve a scheme of arrangement unless it is satisfied that the arrangement has not been proposed for the purpose of enabling any person to avoid the operation of the provisions of Chapter 6, which is concerned with takeovers. Alternatively, the Court may rely on production of a statement in writing by Australian Securities and Investments Commission (the Commission) stating that the Commission has no objection to the compromise or arrangement. The mere fact that the Court receives a statement from the Commission that it has no objection to the arrangement does not necessarily mean that the Court must approve the scheme.
25 No evidence has been adduced in relation to s 411(17) on the basis that the question is one that must be considered at the time when the Court is asked to approve the scheme if that occasion arises. In the meantime, however, the Commission wrote to the solicitors for the Company on 19 October 2010 confirming that it has had 14 days notice of this application to the Court, and that it has had a reasonable opportunity to examine the terms of the proposed scheme of arrangement and to draft an explanatory statement relating to the proposed scheme. The letter confirms that the Commission has examined the terms and the draft explanatory statement in accordance with its policy. The letter states that the commission does not currently propose to appear to make submission or intervene to oppose the scheme at the hearing whereby the Court will be asked to convene the meeting of shareholders.
26 Section 411 provides that the Court, in making an order convening a meeting of shareholders, may approve the proposed explanatory statement required by s 412(1)(a) to accompany the notices of meeting. Section 412(1)(a) requires that where a meeting is convened under s 411, the company must, with every notice convening a meeting, send an explanatory statement to the recipient of the notice.
27 In the circumstances, I am satisfied that the proposed explanatory memorandum to be sent to shareholders should be approved for the purpose of s 411(1). The proposed scheme booklet, while it is somewhat voluminous, sets out adequately the disclosures that should be made in the circumstances, so far as it is possible to determine from the material before me. The scheme booklet will include the explanatory statement, a copy of WHK Horwath's report, the texts of the scheme, the Scheme Implementation Agreement and the deed poll. It will also include the formal notice of scheme meeting and a proxy form for shareholders who do not wish to attend the meeting in person.
28 The scheme booklet contains considerable factual information concerning the Company and Avnet. The evidence of Mr Laurence Sellers and Mr Gavin Lawless, on behalf of Avnet, sets out the steps that were taken to verify the accuracy of the factual information contained in the scheme booklet. I have also seen evidence from Mahendra Amin, the Chief Financial Officer of the Company, concerning the capacity of the company to pay the proposed special dividend, assuming the preconditions for its payment are satisfied.
29 In all of the circumstances, I was satisfied on the evidence before me that it was appropriate to convene a meeting of the shareholders of the Company to be held on 29 November 2010 for the purpose of considering, and if thought fit, agreeing to the proposed scheme of arrangement.
I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.