Ludowici Limited, in the matter of Ludowici Limited [2012] FCA 489

REASONS FOR JUDGMENT 1 The plaintiff, Ludowici Ltd (the Company), has applied under s 411(1) of the Corporations Act 2001 (Cth) (the Corporations Act) for orders convening a meeting of shareholders of the Company to vote on a proposed scheme of arrangement. The Company is described as a world leader in the design, manufacture and supply of high quality minerals processing and materials handling equipment. Its headquarters are in Brisbane, and it is described as having an expanding global presence. It currently operates in various markets in Australia, South America, Africa, North America, Asia and India. The Company is a public company and its shares are listed for quotation on the official list of ASX Ltd. 2 Under the proposed scheme, all of the issued shares in the capital of the Company will be acquired by FLSmidth Pty Ltd (the Bidder), a wholly owned Australian subsidiary of FLSmidth & Co A/S (the Parent). The Parent is incorporated in Denmark, and is listed on overseas exchanges. The Parent has a market capitalisation of approximately $3.9 billion. 3 The effect of the proposed scheme will be that all holders of shares in the Company will transfer their shares to the Bidder, in consideration for which they will receive the sum of $11 per share, less the amount of any dividends or distributions declared or paid by the Company prior to the implementation of the proposal. The total value of the consideration to be paid under the proposed scheme is approximately $322.6 million. The Company will become a wholly owned subsidiary of the Bidder, which will be its only shareholder. It is proposed that the Company will then apply for removal of its shares from quotation. On 16 February 2012, the Company, the Parent and the Bidder entered into a Scheme Implementation Agreement. The Scheme Implementation Agreement was amended on 28 February 2012. 4 The proposed consideration of $11 per share is to be made up of three discrete payments. The first is a payment by the Bidder of $10.44 per share (the Scheme Consideration). The second is a fully franked Special Dividend of $0.45 per share held as at 19 June 2012. The third is a fully franked Ordinary Dividend of $0.11 per share held as at 24 April 2012. The Ordinary Dividend will be paid regardless of whether or not the scheme becomes effective. Whether the Special Dividend will be declared is yet to be decided by the directors of the Company. If the Special Dividend is not declared, the Scheme Consideration will increase to $10.89 per share. 5 The proposal is subject to the satisfaction of a number of conditions precedent specified in the Scheme Implementation Agreement. The conditions include obtaining certain regulatory approvals for the acquisition of the shares in the Company, including the approval of the Foreign Investment Review Board and any approval required from the Australian Competition and Consumer Commission. It may also be necessary to obtain regulatory approval from the appropriate authorities in South Africa, where both the Parent and the Company are said to have some current operations. 6 As at 31 December 2011, the Company's total assets were $226,282,000, and its total liabilities were $122,834,000, giving net assets of $103,448,000. The amounts to be paid as the Special Dividend and Ordinary Dividend aggregate in total $16,588,994. The payment of those dividends, therefore, would not materially prejudice the Company's ability to pay its creditors. 7 Under the Scheme Implementation Agreement, the Company has agreed to pay a break fee of $2.2 million to the Bidder in certain circumstances. The break fee represents approximately 0.41 per cent of the equity value of the Company, calculated on the basis of the proposed total consideration of $11 per share. The quantum is therefore well within the guidelines published by the Takeovers Panel. The break fee is not triggered by shareholders failing to approve the scheme. The directors of the Company have agreed to the break fee provision in circumstances where they believe that the implementation of the scheme will provide significant benefits to the shareholders of the Company. The Bidder and the Parent will incur significant costs in connection with the carrying out of due diligence in relation to the acquisition and with performance under the scheme, and the Bidder requested the inclusion of the break fee as a term of the Scheme Implementation Agreement. The directors of the Company are of the view that the scheme is in the interests of the shareholders, and that the break fee is appropriate to secure the Parent's participation. 8 Under the Scheme Implementation Agreement, the Company has also agreed to common exclusivity provisions described as no shop, no talk and no due diligence restrictions, as well as notification and matching right requirements in the event that a competing proposal is received. The no talk and no due diligence restrictions are subject to a fiduciary carve-out under the terms of the Scheme Implementation Agreement. The exclusivity period is for approximately 10 months. That is not unreasonable, having regard to the potential delay in obtaining regulatory approvals, both in Australia and in South Africa, particularly where there are lengthy review periods associated with the obtaining of such approvals. Both the break fee and the exclusivity provisions are disclosed in clear terms in the proposed scheme booklet to be sent to shareholders. 9 Mr Patrick Largier is the managing director of the Company. On 17 February 2012, Mr Largier entered into a deed with the Company and the Bidder, described as an Options and Rights Deed. As at the date of the Options and Rights Deed, Mr Largier held: 375,000 options to subscribe for shares in the Company, at an exercise price of $6.70, which expired on 25 February 2012; 150,000 options to subscribe for shares in the Company at an exercise price of $2.40, which vested on 24 February 2012; 150,000 options to subscribe for shares in the Company which were to vest on the date on which the Company issues its preliminary accounts for the year ending 31 December 2012, and which will expire 12 months from that date; and 250,000 rights granted under the long term incentive plan of the Company. 10 Under the Options and Rights Deed, Mr Largier agreed not to exercise any of the options that expired on 25 February 2012. The Bidder has agreed to pay him an amount equal to the sum of the Scheme Consideration multiplied by the number of those options, plus dividends, less the sum of the exercise price. He also agreed to exercise the options that vested on 24 February 2012, and, on 13 March 2012, he exercised those options. The options that were to vest when the 2012 accounts are published will be cancelled, and the Company will pay Mr Largier an amount equal to the sum of the Scheme Consideration multiplied by the number of those options, plus the dividends, less the sum of the exercise price. Finally, the rights under the long term incentive plan will be cancelled, and the Company will pay Mr Largier an amount equal to the sum of the Scheme Consideration, multiplied by the number of rights, plus relevant dividends. There does not appear to be any basis for suggesting that Mr Largier has received any special benefit by reason of the arrangements that have been entered into in connection with the options and rights that I have just described. I am satisfied that he should not be treated as constituting a separate class for the purpose of the scheme. 11 The proposed scheme is in a reasonably common form for a transaction such as that contemplated. If it becomes effective, the Bidder will pay the Scheme Consideration to each scheme participant, meaning each shareholder, on the Record Date. All the scheme shares will be transferred to the Bidder, and the Company will become a wholly owned subsidiary of the Bidder, the name of which will be entered into the register as the holder of all of the scheme shares. Under the proposed scheme, if the conditions precedent set out in the Scheme Implementation Agreement are satisfied, the Company must lodge with the Australian Securities and Investments Commission (the Commission) an office copy of any order made by the Court under s 411 of the Corporations Act. On the relevant implementation date, the Bidder must, under the scheme, deposit in cleared funds the aggregate Scheme Consideration payable to all scheme participants into an account in the name of the Company to be held on trust for the relevant scheme participants. The scheme shares will then be transferred to the Bidder without the need for any further act by scheme participants. 12 The obligation of the Bidder to pay the scheme consideration will be deemed to be satisfied if the Bidder deposits in cleared funds the aggregate Scheme Consideration into the account nominated by the Company, on the basis that that amount is held by the Company on trust for scheme participants for the purpose of paying the Scheme Consideration to them in accordance with the terms of the scheme. Under the terms of the scheme, the Company will pay the cash consideration to each scheme participant on the implementation date by either despatching, or procuring the despatch, to that scheme participant of a pre-printed cheque for the relevant amount, or making, or procuring the making of, a deposit for the relevant amount, in an account with any Australian ADI, as defined in the Corporations Act, notified by that scheme participant to the Company. 13 The scheme provides for a cut-off date for dealings in scheme shares. In order to ensure that the Bidder has a contractual obligation to each scheme participant, the Bidder has executed a deed poll under which it covenants to provide the Scheme Consideration as contemplated by the scheme. Having regard to the arrangements that I have described, it is clear enough that there is no performance risk from the point of view of the proposed scheme participants, and that there is a binding obligation on the Bidder to perform its side of the bargain. There is, however, no contractual obligation imposed on the Parent that is enforceable by scheme participants. Nevertheless, the Parent is bound to ensure the performance by the Bidder under the terms of the Scheme Implementation Agreement. 14 By a report of 3 April 2012, Grant Thornton Corporate Finance Pty Ltd (Grant Thornton) has given its opinion concerning the reasonableness of the proposed scheme from the point of view of the scheme participants. Grant Thornton has concluded that the proposed scheme is fair and reasonable, and is in the best interests of the present shareholders of the Company. In its report, it assesses the fair value of the issued shares in the Company on a controlling basis as being between $6.80 and $8.08 per share. That indicates a premium of between $2.92 and $4.20 per share, on the basis of consideration per share of $11. Expressed in terms of proportions, that premium is between 36.1 per cent and 61.9 per cent. 15 The Grant Thornton report indicates possible reasons for that significant premium. The principal justification appears to be that the change of control took place in an extremely competitive market, with two parties bidding for the shares. Having considered possible advantages and disadvantages, as well as other factors, Grant Thornton formed the opinion that the proposed scheme is reasonable for the shareholders of the Company. That opinion was formed after consideration of what Grant Thornton characterises as both quantitative and qualitative factors relevant for the shareholders of the Company. A copy of Grant Thornton's report will be included in the proposed scheme booklet. The author of the Grant Thornton report has also sworn an affidavit confirming that the opinions expressed in it are genuinely held. 16 One of the provisions of the scheme is that shareholders will be taken to warrant that the shares that they hold will be transferred free from encumbrance. That factor is given appropriate prominence in the proposed scheme booklet. 17 The Company's solicitors have provided the Commission with a draft of the proposed scheme booklet, which has been updated with proposed amendments. In a letter dated 3 April 2012, the Commission confirmed to the Company's solicitors that it has examined the terms of the proposed scheme and the draft scheme booklet in accordance with the Commission's regulatory guide. On the basis of that consideration, the Commission indicated that it does not currently propose to appear to make submissions or to intervene to oppose the convening of the meeting of shareholders to consider the proposed scheme. The Company, through its solicitors, has also applied to the Commission and to ASX for dispensation in certain respects. Those dispensations have been given. 18 The proposed scheme booklet contains information concerning the Company, the Bidder and the Parent. I have evidence in the form of affidavits from Mr Largier and from Mr Johannus Hansen, Group General Counsel of the Parent, indicating the steps that have been taken by them respectively to verify the contents of the scheme booklet in relation to both the Company and the Parent. I am satisfied that reasonable steps have been taken to ensure the accuracy of statements and information contained in the scheme booklet. 19 In all of the circumstances, I consider that it is appropriate to accede to the Company's application and to make orders that a meeting of the shareholders of the Company be convened for the purpose of considering the proposed scheme of arrangement. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.