Lonsdale Financial Group Limited [2007] VSC 394 (2 October 2007)

1 I have before me an application under section 411 of the Corporations Act 2001 ("the Act") by the plaintiff, Lonsdale Group Ltd ("Lonsdale"), for orders convening meetings of its members for the purposes of considering two schemes of arrangement.

2 Mr J.G. Santamaria, one of Her Majesty's counsel, and Mr R.D. Strong of counsel appear for Lonsdale. There is no defendant to the application and there is no appearance by ASIC at this hearing.

3 Lonsdale is an unlisted public company established in 1985 operating in the financial planning industry. Lonsdale is 71 per cent owned by Zurich Financial Services Australia Ltd ("Zurich"). Wrap Account Ltd ("Wrap") conducts a portfolio service business and is wholly owned by Zurich. On 10 August 2007, Lonsdale, DKN Financial Group Ltd ("DKN"), a publicly listed company, and Zurich, announced that Lonsdale and DKN had entered into a Merger Implementation Deed for DKN to acquire all of the shares in Lonsdale.

4 It was also announced that DKN and Zurich had entered into an agreement for DKN to acquire Wrap from Zurich ("the Wrap Transaction"). Under the merger and Wrap transaction, DKN will acquire 100 per cent of ordinary shares and practice shares in Lonsdale. This acquisition will take place by way of two inter-conditional schemes of arrangement and DKN acquiring 100 per cent of Wrap. This acquisition will take place under a separate but inter-conditional agreement between DKN and Zurich.

5 Under the merger and Wrap Transaction, Zurich will acquire up to approximately 35 per cent of DKN's ordinary shares. In addition, Zurich and DKN will enter into a strategic marketing alliance called the Marketing Agreement. The merged entity will comprise DKN, Lonsdale and Wrap. The merged entity will also be party to the Marketing Agreement.

6 As indicated above, the schemes of arrangement proposed by Lonsdale with its members are part of a takeover whereby DKN as the bidder will take over and acquire all the shares in Lonsdale, the target. The takeover is to be affected as follows: the bidder (DKN) and the target (Lonsdale) entered into a Merger Implementation Deed on 9 August 2007, which was amended on 30 August 2007, under which the bidder and target agree to procure and effect the schemes of arrangement. Under the schemes of arrangement to be entered into between Lonsdale and its scheme shareholders, the shareholders for consideration agree to transfer their shares to the bidder. The bidder, for its part, has executed a deed poll in favour of each scheme shareholder pursuant to which it has covenanted to perform its obligations under the schemes, including to provide the consideration for the shares.

7 Under the first of the two schemes, DKN is to acquire all of the ordinary shares in Lonsdale for $16.04 in cash per Lonsdale ordinary share and 18.1 DKN ordinary shares per Lonsdale ordinary share. Under the second scheme of arrangement between Lonsdale and the holders of its practice shares, DKN is to acquire all of the practice shares in Lonsdale by issuing 35.9 DKN practice shares for each Lonsdale practice share. Each scheme of arrangement is separate but interdependent. Each scheme is conditional on the other being approved by the requisite majority of affected shareholders and subsequently being approved by the court.

8 Although technically not required by the Act, an independent expert's report has been obtained as to whether the Lonsdale ordinary shares scheme and the Lonsdale practice shares scheme is in the best interests of the Lonsdale ordinary shareholders and the Lonsdale practice shareholders respectively.

9 The independent expert, Pitcher Partners Corporate Pty Ltd ("Pitcher Partners"), has opined that the Lonsdale ordinary shares scheme and the Lonsdale practice shares scheme are both fair and reasonable, and in the best interests of the Lonsdale ordinary shareholders and the Lonsdale practice shareholders respectively.

10 The independent expert has found that the scheme is fair in the sense in which that term is used in the ASIC Policy Statement 75, where the policy defines an offer as "fair" as follows: "An offer is "fair" if the value of the offer price or consideration is equal to or greater than the value of the securities the subject of the offer."[1] The comparison must be made on the assumption of a 100 per cent ownership of the target company, i.e. including a control premium.[2] Further, Pitcher Partners has used the definition of "reasonable" as used in ASIC Policy Statement 75, being: "An offer is "reasonable" if it is fair. It may also be "reasonable" if, despite not being "fair" but after considering other significant factors, shareholders should accept the offer in the absence of any higher bid before the close of the offer."[3]

11 Pitcher Partners has said that it has construed "in the best interests" to have a similar meaning as "fair and reasonable."[4] Pitcher Partners has done a calculation based on the worst case scenario in the Westpoint litigation (discussed below) and under its worst case scenario it has come to the same conclusion that the offer is fair and reasonable.

12 The Westpoint litigation involves civil actions taken against a subsidiary of DKN known as DFS arising out of investments made by clients allegedly on the advice of agents of DFS to invest in Westpoint products which have turned sour. The explanatory statement dealing with the Westpoint litigation has been amended slightly from that approved by ASIC. In the ASIC form shareholders were informed about litigation in Queensland, and were told that the administrator of DFS and the court had declined to approve litigation being taken against DFS which was in administration.

13 Subsequent enquiries have ascertained that the court was not in fact asked to approve the proceedings. The correction being made in the explanatory statement is to record that approval was not sought from the court, rather than that the court declined to give approval.

14 Despite the fact that ASIC has not had the opportunity to make submissions about this slight amendment, Mr Santamaria submitted that I should nevertheless permit the meetings to be called and he relied on the following matters.

(1) that there has been extensive communication between ASIC and Lonsdale;

(2) that ASIC has agreed to a form of the disclosure statement;

(3) that subject to ASIC giving its approval, Lonsdale has decided that the disclosure agreed with ASIC should be made more precise in respect of the Westpoint disclosure as set out above;

(4) that the branch of ASIC which is responsible for the Lonsdale schemes is in Perth;

(5) that yesterday, Monday, was a public holiday in Perth and accordingly Lonsdale could not communicate with ASIC in Perth;

(6) that Lonsdale will not be able to send out the booklet unless it is registered by ASIC.

16 Mr Santamaria submitted that ASIC will have the opportunity to review the amendment to the explanatory statement as ASIC must register the explanatory statement before it is sent out to shareholders. He referred me to the following provisions of the Act.

17 Subsection 412(6) provides:

"In the case of a compromise or arrangement that is not, or does not include, a compromise or arrangement between a Part 5.1 body and its creditors or any class of them, the body must not send out an explanatory statement pursuant to subsection (1) unless a copy of that statement has been registered by ASIC."

18 The Lonsdale schemes do not involve a compromise or arrangement with its creditors. Accordingly, subsection 412(6) applies to the Lonsdale schemes.

19 Subsection 412(8) provides:

"Where a copy of an explanatory statement is lodged with ASIC for registration under subsection (6), ASIC must not register the copy of the statement unless the statement appears to comply with this Act, and ASIC is of the opinion that the statement does not contain any matter that is false in a material particular or materially misleading in the form or context in which it appears."

20 Accordingly, I am satisfied that the explanatory statement in its current form will not be sent out unless it is registered by ASIC, and I am satisfied that on the undertaking of Lonsdale, made on its behalf by Mr Santamaria, that ASIC's attention will be drawn to the slight variation between the form approved by ASIC and that put before me.

21 I am therefore satisfied that 14 days notice of the hearing and of the application has been given to ASIC; and I am satisfied that ASIC has had a reasonable opportunity (1) to examine the terms of the proposed arrangement to which the application relates, and a draft explanatory statement relating to the proposed arrangement; and (2) to make submissions to the Court in relation to the proposed arrangement in the draft explanatory statement within the meaning of section 411(2).

Section 411(3A) [Meetings Held Outside this Jurisdiction]

22 In each scheme the meetings are proposed to be held in Singapore at the Pan Pacific Hotel, 7 Raffles Boulevard, Marina Square. Mr Michael Geoffrey Hutton a director of Lonsdale deposes that a conference of the Lonsdale Associates (and their firm partners, fund managers and similar) is to be held at the hotel and he expects approximately 50 per cent of the ordinary and practice shareholders will be at the Singapore conference. He says for this reason, it is convenient to hold the ordinary shareholders meeting and the practice shareholders meeting concurrent with the Lonsdale annual conference.

23 Lonsdale also proposes to arrange for any voting ordinary shareholders and practice shareholders to be joined to the meetings by phone-link from Corrs' offices at level 36, 600 Bourke Street, Melbourne either in person or by dialling in.

24 Subsection 411(3A) provides:

"In considering whether to make an order under subsection (1) or (1A) for a meeting to be held outside this jurisdiction, the Court must have regard to where the creditors or members, or the creditors or members, included in the class concerned, as the case requires, reside."

25 I have been informed by Mr Santamaria that he has been unable to identify any authority that deals with this subsection.

26 I have been informed that essentially the members of Lonsdale reside through out Australia. Having regard to that fact as required by subsection 411(3A), I nevertheless consider it is appropriate to hold the meetings in Singapore in view of what I have been informed about the conference in Singapore.

27 In F.T. Eastment and Sons Pty Ltd v. Metal Roof Decking Supplies Pty Ltd [5] Street C.J. said:

"The approach taken upon a summons is that the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that if it achieves a statutory majority at the creditors meeting, the court would be likely to approve it on the hearing of a petition which is unopposed."[6]

28 This observation was subsequently approved by the High Court in ASC v. Marlborough Goldmines Ltd.[7]

29 In Sonodyne International Limited[8], Hayne J. of the Supreme Court of Victoria (as he then was) said:

"The question that is presented at this stage of the process of a company propounding an implementing a scheme of arrangement is whether the scheme is such that it could reasonably be supposed by sensible business people to be for the benefit of those concerned. That is, the test in the present case is whether it is reasonable to suppose that sensible business people might consider that the arrangement proposed by the company is of benefit to its members."

30 In my view, subject to the matters which I refer to below, the schemes are likely to be approved if they achieve a statutory majority and are unopposed. Further, in my opinion, sensible people might consider that the arrangements proposed by Lonsdale are of benefit to its members.

Section 411(17) [Takeovers Legislation]

31 In Re Mincom Ltd [9] Fryberg J, in the Supreme Court of Queensland, expressed the view that there is "an onus at this stage [being the application under s.411(1) of the Act] on the applicant to demonstrate that at the second hearing the court would be likely to approve the arrangement if the application be unopposed. That onus cannot be satisfied if there is a complete absence of evidence in respect of either the separate conditions of s.411(17)."[10]

32 Lonsdale submits that it is clear from the footnotes to his reasons at this point that Fryberg J. was seeking to apply the statement of Street J. in F.T. Eastment & Sons Pty Ltd v. Metal Roof Decking Supplies Pty Ltd[11] that I have quoted above. Mr Santamaria has submitted that Fryberg J has taken the authorities further than, correctly understood, they should go. Mr Santamaria submits as follows:

"Those authorities [referring to FT Eastment and Marlborough] are concerned with the nature and terms of the scheme itself, and not with its purpose. Section 411(17) is, like s.411(4), directed to the court's jurisdiction (or power) to approve a scheme. There has never been a necessity to require an applicant for an order for meetings to satisfy a preliminary onus in relation to the likelihood that the necessary majority would vote in favour of the scheme, thus giving the court jurisdiction to approve it. Such matters were expressly excluded from preliminary consideration by Street CJ in FT Eastment, which was a decision handed down at a time when s 411(17) did not exist. With respect to Fryberg J, the same approach should be taken to section 411(17)"

33 I have been informed that Lonsdale intends to rely upon a statement in writing by ASIC stating that ASIC has no objection to the compromise arrangement under paragraph 411(17)(b). Further, I have been directed to paragraphs 61-69 of the affidavit of Michael Geoffrey Hutton sworn 17 September 2007 where he deals with the merits of the scheme, the Board's recommendation and the expert's report.

34 I have also been provided with a letter from ASIC dated 28 September[12] which says as follows:

"I refer to the draft explanatory statement in relation to the proposed schemes of arrangement between Lonsdale... and the holders of ordinary shares and practice shares in Lonsdale, provided to ... ASIC on 17 September 2007 as amended in accordance with a final register of amendments provided to ASIC on 28 September 2007 (the Draft Explanatory Statement).

ASIC wishes to advise you that its policy in relation to statements under paragraph 411(17)(b) of the Corporations Act 2001 (the Act) is that it will not provide such a statement until the second or confirmation court hearing in relation to a scheme of arrangement. This is because ASIC will not be in a position to advise the court properly until it has had an opportunity to observe the entire scheme process. It is also consistent with the wording of the section which relates to the statement to the court's approval of the scheme. However, ASIC recognises that proponents of a scheme may reasonably wish for an indication of ASIC's views before committing to the expense of calling a meeting and printing the scheme documentation.

Therefore, I advise you that ASIC does not currently propose to appear to make submissions or intervene to oppose the proposed scheme between (a) Lonsdale and the holders of ordinary shares in Lonsdale and (b) Lonsdale and the holders of practice shares in Lonsdale, the subject of the draft explanatory statement at the hearing under sub 411(1) of the Act.

This current intention is based on the information provided in the Draft Explanatory Statement in relation to whether the scheme has been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Act. ASIC's position is liable to change if ASIC considers it appropriate."

35 Relevantly to subsection 411(17) the letter conveys:

(1) ASIC's policy is not to issue a paragraph 411(17)(b) statement until the second stage;

(2) ASIC has taken this approach as it will not be in a position to advise the court until it has had an opportunity to observe the entire scheme;

(3) ASIC recognises proponents of a scheme may reasonably wish for an indication of ASIC's views [presumably whether ASIC will issue a paragraph 411(17)(b) statement] before committing to the expense of calling a meeting;

(4) Therefore, ASIC does not currently propose to appear to make submissions or intervene to oppose the proposed scheme [thereby giving an indication of ASIC's views];

(5) This current intention [of ASIC] is based on the information in the Draft Explanatory Statement in relation to whether the scheme has been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the ACT [i.e. a reference to paragraph 411(17)(a)]; and

(6) ASIC's position is liable to change if ASIC considers it appropriate.

36 From this letter alone, one can reasonably infer that ASIC is likely to give the statement under paragraph 411(17)(b) but reserves the right to change its position.

37 I was further informed by Mr Santamaria that as a matter of policy ASIC will provide a letter under paragraph 411(17)(b) if it is satisfied that the shareholders in the target company are being given the same information as they would be given under a takeover subject to Chapter 6 and such information is being provided under the Lonsdale schemes.

38 As acknowledged by Fryberg J. in Re Mincom Ltd,[13] the test applied by Street C.J. and approved by the High Court assumes that at the approval stage, the application to approve will be unopposed (whether by ASIC or otherwise). If the application to approve the scheme is ultimately unopposed by ASIC, it seems likely that there will be produced to the court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement as provided in paragraph 411(17)(b). The letter of ASIC referred to above would gives further weight to that inference.

39 Under subsection 411(17), the court must not approve a compromise or an arrangement unless the court is satisfied under paragraph 411(17)(a) or a statement is produced to the court under paragraph 411(17)(b). As it is likely that a statement will be produced to the court under paragraph 411(17)(b), on the assumption the application for approval is unopposed, it might be argued that on an application for meetings, the court need not form a view whether it is likely that at the approval stage, the court will be satisfied that the compromise arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 under paragraph 411(17)(a).

40 Having regard to all these matters, in my opinion, subsection 411(17) does not present any bar to the meetings being convened and held as requested.

41 I will leave for another day the role, if any, of paragraph 411(17)(a) on an application to approve the scheme where ASIC has stated in writing that ASIC has no objection to the compromise arrangement.

42 Mr Santamaria submitted that in a number of recent decisions, courts considering applications under subsection 411(1) in relation to schemes of acquisition have directed attention to what has been called the "performance risk". As Gyles J in the Federal Court has put it:[14]

It seems to me, however, that schemes of this kind would be more acceptable if a procedure be devised whereby a mechanism were built in by which a third party such as a trustee company would have the role of suing on behalf of former shareholders in the target company. An alternative safeguard in relation to the cash portion of the payment would be to set aside a trust fund immediately before the vesting of the shares in the acquiring company. I do not see why shareholders whose shares are divested should run any performance risk so far as the quid pro quo is concerned.

43 Mr Santamaria submits that the MID and the ordinary share scheme provide that the cash component of the consideration is to be paid into a trust account controlled by DKN and Lonsdale before the Implementation Date.[15] In addition, in the Scheme Deeds Poll, DKN will covenant in favour of the shareholders of Lonsdale to provide the scheme consideration. Each Deed Poll provides in clause 2.1 that it may be enforced by any scheme shareholder.

44 In those circumstances, I do not consider there is a material performance risk, and what risk there is, to be a bar to the meetings being held.

45 Under subsection 411(1), where the court makes an order for meetings, the court may approve the explanatory statement required by paragraph 412(1)(a) of the Act to accompany the notice of the meeting. I have not been asked to approve the explanatory statement.

46 I have already drawn attention to provisions of the Act whereby Lonsdale will not be able to send out the explanatory statement until it is registered with ASIC. As indicated above, ASIC must not register it unless it appears to comply with the Act and ASIC is of the opinion that the statement does not contain any matter that is false in a material particular or materially misleading in the form or content of which it appears.

47 In those circumstances, I do not consider the court not approving the explanatory statement to be a bar to the meetings being held.

48 The affidavit of Michael Geoffrey Hutton referred to above explains at paragraphs 89-92 the arrangement between Lonsdale and DKN for the reimbursement (by means of a "break fee") of expenses incurred by DKN if, in certain circumstances, the schemes do not proceed and for the obligations of Lonsdale ("no-shop provisions") to refrain from soliciting competing interest in the acquisition of Lonsdale.

49 The detail of these provisions is to be found in clauses 13 and 14 of the MID.

50 In Re APN News & Media Ltd[16], Lindgren J gave particular attention to "no shop" provisions in the scheme he had under consideration (which unlike the present case also involved a break fee). His Honour cited and applied an earlier authority as follows:

"In Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 A.C.S.R. 758, Santow J gave attention to no-shop provisions. His Honour expressed the opinion (at [9]) that such a provision should satisfy the following concerns:

(a) it should be for no more than a reasonable period capable of precise ascertainment;

(b) while it may differentiate between actively soliciting an alternative merger proposal and simply dealing with an unsolicited one, in either case the provision should be framed so that it is subject to the overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful; and

(c) there should be adequate prominence given to the provision in the explanatory memorandum sent to shareholders".[17]

51 Lindgren J. indicated that he would require affidavit evidence to assist in satisfying him as to the reasonableness of the no shop provisions at the second Court hearing.[18] As indicated, that case involved a break fee, and Mr Santamaria submits that his Honour's requirements were directed substantially to that circumstance.

(a) the break fee is limited to the reimbursement of third party costs incurred by DKN after 16 March 2007 directly in relation to due diligence investigations of Lonsdale and the proposed implementation of the Schemes and is capped at $200,000;

(b) the Exclusivity Period as defined in the MID cannot extend beyond 31 December 2007, being a little less than 5 months after the execution of the MID; and

(c) the restrictions on Lonsdale are subject to exceptions allowing Lonsdale to respond to bone fide proposals (note solicited in breach of clause 14.2) and allowing for Lonsdale's directors to take the view that compliance with the restrictions is likely to breach their fiduciary duties.

53 I do not intend to address the extent, if any, to which the business judgment rule is relevant to the court's consideration of a break fee or an exclusivity provision. It is sufficient merely to observe the directors would not be entitled to enter into the break fee and exclusivity provisions unless they believed bona fide that they were in the best interests of the company as a whole. Under the business judgment rule the court is usually reluctant to substitute its own judgment for that of the directors on the merits unless specifically required by statute.[19] In Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance Oil Co NL Barwick CJ, McTiernam and Kitto JJ of the High Court said:

"Directors in whom are vested the right and duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgments, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts."[20]

54 These principles might be of some assistance to the court in forming a view about a break fee or exclusivity provision agreed to by the directors. It is unnecessary for me to make any findings on this point as in any event I find, if I am required to do so, that the provisions in this case are prima facie reasonable. In my view they are not a bar to the meetings being held.

55 I asked Mr Santamaria whether any of the schemes adversely affect the creditors of DKN and its subsidiaries. As discussed above, there is material in the explanatory statement about the litigation that DKN and its subsidiaries may be subject to following the Westpoint problems.

56 Mr Santamaria informed me that the schemes did not adversely affect creditors, save for the fact that DKN would be expending moneys in acquiring the shares in Lonsdale. He pointed to the evidence that DKN would be obtaining equal value for what it spent, and I accept that.

57 Accordingly, for these reasons I propose to make the orders sought by Lonsdale.

[1] Policy Statement, Independent Expert Reports to Shareholders [26].

[5] (1977) 3 ACLR 69.

[7] (1993) 117 CLR 485 at 504.

[8] (1994) 15 ACSR 494 at 499.

[9] [2007] QSC 37; (2007) 61 ACSR 266.

[11] (1977) 3 ACLR 69.

[12] Exhibit MAM8 to the affidavit of Mario Anthony Modiker sworn 1 October 2007 from ASIC to Mr Justin Fox, partner, Corrs Chambers Westgarth.

[13] [2007] QSC 37; (2007) 61 ACSR 266.

[14] Re SFE Corporation Limited, Federal Court of Australia, 31 May 2006, unreported: [2006] FCA 670 at [4]

[15] Exhibit CJH-2, paragraph 4.2(a) at page 17; Ordinary Share Scheme cl. 5.1

[16] [2007] FCA 770; (2007) 62 ACSR 400.

[19] Ford's Principles of Corporation Law, 8.060.

[20] [1968] HCA 37; (1968) 121 CLR 483 at 493.