Mainstream Group Holdings Limited, in the matter of Mainstream Group Holdings Limited (First Scheme Hearing) [2021] FCA 948

Federal Court of Australia|2021-08-04|Before: Mr J, Perram J

Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act), the Plaintiff convene and hold a meeting (Scheme Meeting) of the holders of ordinary shares in the Plaintiff (Scheme Shareholders): (a) to consider, and, if thought fit, to approve (with or without modification) the scheme of arrangement (Scheme) proposed to be made between the Plaintiff and its shareholders, the terms of which are as set out in Appendix A to these orders; (b) to be held as a wholly virtual meeting by means of audio-visual technology, with no physical assembly; and (c) to be held on 6 October 2021 commencing at 10:30 am (AEST).
The scheme booklet, substantially in the form of Exhibit RS-2 to the affidavit of Ron Smooker sworn 3 August 2021 (Smooker Affidavit), and which comprises the explanatory statement as required by s 412(1)(a) of the Act, be and is hereby approved (subject to any amendments required by the Court).
The Scheme Meeting be convened by sending on or before 18 August 2021: (a) in the case of Scheme Shareholders who have elected to receive shareholder communications electronically by way of email (Email Shareholders), an email substantially in the form contained at page 103 of Exhibit RS-1 to the Smooker Affidavit, which contains links to: (i) a document substantially in the form of the scheme booklet (which contains, among other things, the Notice of Scheme Meeting as Attachment 4 to the scheme booklet); and (ii) a personalised proxy form for the Scheme Meeting substantially in the form of Attachment 5 to the scheme booklet (Proxy Form); (b) in the case of Scheme Shareholders who have elected to receive shareholder communications by post (Postal Shareholders), the following documents to the registered address recorded in the Plaintiff's register (by pre-paid post to those addresses if in Australia or by airmail or international courier service to those addresses if outside Australia): (i) the scheme booklet (which contains, among other things, the Notice of Scheme Meeting as Attachment 4 to the scheme booklet); (ii) a personalised Proxy Form; and (iii) a reply-paid envelope for the return of the Proxy Form; and (c) in the case of Scheme Shareholders who are not Email Shareholders or Postal Shareholders and whose registered address recorded in the Plaintiff's register is in Australia, the following documents by pre-paid post addressed to those addresses: (i) a document substantially in the form contained at page 105 of Exhibit RS-1 to the Smooker Affidavit containing a URL link to the scheme booklet (which contains, among other things, the Notice of Scheme Meeting as Attachment 4 to the scheme booklet); (ii) a personalised Proxy Form; and (iii) a reply-paid envelope for the return of the Proxy Form; and (d) in the case of Scheme Shareholders, other than Email Shareholders or Postal Shareholders, whose registered address recorded in the Plaintiff's register is outside Australia, the following documents by airmail or international courier service addressed to those addresses: (i) a document substantially in the form contained at page 105 of Exhibit RS-1 to the Smooker Affidavit containing a URL link to the scheme booklet (which contains, among other things, the Notice of Scheme Meeting as Attachment 4 to the scheme booklet); (ii) a personalised Proxy Form; and (iii) a return envelope for the return of the Proxy Form.

Introduction 1 This is an application pursuant to s 411 and s 1319 of the Corporations Act 2001 (Cth) ('the Act') to convene a meeting of the members of Mainstream Group Holdings Limited ('Mainstream') to consider and vote upon a scheme of arrangement ('Scheme') between Mainstream and its ordinary shareholders. Mainstream is listed on the Australian Stock Exchange ('ASX'). The proposed Scheme is a scheme of arrangement under Pt 5.1 of the Act under which an Australian entity, Apex Fund Holdings Australia Pty Limited ('Apex Holdings'), will acquire 100% of the ordinary shares in Mainstream with each Mainstream shareholder to receive $2.80 per share, that is to say, it is a conventional cash acquisition scheme. If the Scheme is implemented Mainstream will cease to be listed on the ASX. Apex Holdings is a wholly owned indirect subsidiary of a Bermudan company, Apex Group Limited ('Apex Group') (together, 'Apex'). 2 The price of $2.80 was arrived at as a result of an escalating series of offers made to acquire Mainstream. There were three parties involved and the price escalations were as follows: Proposed acquirer Date Price Vistra Holdings (Australia) Pty Ltd 9 March 2021 $1.20 SS&C Technologies, Inc. and SS&C Solutions Pty Limited (together, 'SS&C') 12 April 2021 $2.00 SS&C 27 April 2021 $2.25 Apex Group 29 April 2021 $2.35 Apex Group 30 April 2021 $2.55 SS&C 6 May 2021 $2.56 Apex Group 6 May 2021 $2.60 SS&C 14 May 2021 $2.61 Apex Group 18 May 2021 $2.65 SS&C 25 May 2021 $2.66 Apex Group 26 May 2021 $2.75 SS&C 1 June 2021 $2.76 Apex Group 10 June 2021 $2.80

3 An independent report prepared by Deloitte has valued each ordinary share at between $2.17 and $2.64. The proposed price appears therefore to be the result of a competitive bidding process and to exceed the value Deloitte has placed on Mainstream.

Applicable Principles 4 The power of the Court to order a meeting of members and to approve the relevant explanatory statement to be provided to them is conferred by s 411(1) of the Act. As Halley J has recently explained in Dragontail Systems Limited, in the matter of Dragontail Systems Limited [2021] FCA 834 ('Dragontail') at [8], the authorities concerning the convening of such meetings require, as a precondition to the exercise of that power, satisfaction of seven matters which in this case are that: (a) Mainstream is a Part 5.1 body; (b) the Scheme participants are members of Mainstream; (c) the scheme meeting will be convened between members of the same class; (d) the Scheme is bona fide and properly proposed; (e) ASIC has had a reasonable opportunity to examine the terms of the Scheme and the scheme booklet and make any submissions to the Court; (f) the scheme booklet provides adequate disclosure; and (g) the Scheme can properly be described as an arrangement of compromise. 5 I am satisfied of each of these matters so the power is enlivened. Halley J in Dragontail also usefully distilled the relevant principles and authorities governing how the discretion should be exercised: [10]-[14]. If I may gratefully adopt his Honour's review these principles may be summarised as follows. 6 First, the purpose of the first hearing is to permit the Court to exercise its supervisory jurisdiction to review the scheme and scheme booklet and to raise any queries that it might have with the plaintiff. In practice, the first hearing is where the Court will typically intervene even if it is only at the second hearing that the Court gives its formal imprimatur to the scheme. In adopting that approach, whilst not ruling out the possibility that approval might not be forthcoming at the second hearing, the Court is cognisant of the fact that the market often views the Court's approval for the convening of a scheme meeting as providing some assurance that the scheme, at least in form and substance, has received the Court's preliminary clearance and that trading in the company's securities will thereafter proceed on that basis. 7 Secondly, so far as the question of whether the Court should convene the meeting, the Court will do so where the scheme is not inappropriate and where it is one that sensible business people might consider is of benefit to the members involved. If the scheme has those qualities it is not to the point that a better scheme might be imagined - that is a matter for the members voting at the meeting. Perhaps obviously, the Court will not convene a meeting unless it is likely that it would approve the scheme at the second hearing if the application were unopposed. The Court should, however, satisfy itself at the first hearing that the scheme has no obvious flaws and that an adequate explanation of it has been provided to the company's members.

Proposed Scheme 8 I am satisfied that the meeting should be convened so that the members may consider whether to adopt the proposed Scheme. At the hearing of the application to convene the meeting Mainstream was represented by Dr Austin and Mr May of counsel. Apex was represented by Mr Williams SC. Dr Austin very properly drew to my attention a number of features of the Scheme which might warrant attention. None of these cause me concern but I will briefly mention four. 9 First, Mainstream has an employee share plan under which some employees have unvested rights to the issue of ordinary shares. If the Scheme proceeds the employee share plan is to be brought to an end and the employees issued with ordinary shares prior to the Scheme coming into effect. In practice this means that if the Scheme is approved the relevant employees will participate in its fruits. I see no difficulty with this. One of the employees with rights under the share plan is the Chief Executive Officer, Mr Martin Smith, who also holds or controls a number of ordinary shares. In his capacity as CEO Mr Smith has made a recommendation (along with the whole board) to the members that the proposed Scheme be adopted. Mr Smith's rights under the employee share plan give him an interest in the outcome different from other members. There is a debate as to whether a director with such an interest may make a recommendation which has been outlined by O'Callaghan J in QMS Media Limited, in the matter of QMS Media Limited [2019] FCA 2172 at [85]-[87]. This debate appears to be arid so long as the matter is 'fully and prominently disclosed as a matter for shareholders to take into account': at [86], quoting In the matter of Villa World Limited [2019] NSWSC 1207; 139 ACSR 550 at [31] per Black J. In this case, the letter to members from the Chairman contained in the scheme booklet prominently discloses the fact of Mr Smith's interest in the employee share plan and that it will result in the issue to him of ordinary shares. The value of those shares under the Scheme is also disclosed in the letter. The same matter is disclosed in the body of the scheme booklet in Section 9 entitled 'Additional Information'. In my view, the information provided in the scheme booklet is sufficient to enable members to take this matter into account. Disclosure is therefore adequate. 10 Secondly, if the Scheme does not proceed Mainstream will be liable to pay a break fee to Apex Group unless the Scheme has been voted down by members. I do not see a difficulty with this since the proposed fee appears to represent a genuine pre-estimate of Apex Group's costs: In the matter of Vocus Group Limited [2021] NSWSC 630 at [18] per Black J. 11 Thirdly, Apex has executed a deed poll binding itself to the members of Mainstream in terms that will ensure that Apex observes the Scheme as if it were a party to the Scheme itself. This is necessary since Apex is not a party to the proposed Scheme. There is evidence before the Court that this deed poll is enforceable in Bermuda where Apex Group is domiciled. 12 Fourthly, the meeting is most likely to be held during the continuing government-imposed lockdown in response to the spread of the Delta variant of the SARS-CoV-2 virus. The draft orders provide for a virtual meeting which is acceptable. The scheme booklet will be provided electronically to those who have signalled their consent to that course and by means of link in a hardcopy letter sent to those who have not indicated any preference in that regard. In the small number of cases where members have indicated a preference to receive paper communications, they will be sent the full scheme booklet. I see no difficulty with this.

Conclusion 13 It was for those reasons that I made the orders sought on 4 August 2021. For completeness, I should note the evidence that Mainstream relied upon on the application. The bulk of the material before the Court at the first hearing was collated in the form of a court book. The evidence comprised: (a) seven affidavits read by Mainstream, being the affidavits of Andrew McNee affirmed 29 March 2021, Byram Johnston sworn 30 July 2021 and 2 August 2021 ('Second Johnston Affidavit'), JoAnna Fisher affirmed 30 July 2021, Oliver Bampfield affirmed 30 July 2021, Michele Picciota affirmed 30 July 2021 and Ron Smooker sworn 3 August 2021; (b) two further affidavits read by Mainstream but sworn or affirmed by witnesses in Apex's camp, being the affidavits of Maxwell Johnston affirmed 2 August 2021 and Jonathan Betts sworn 2 August 2021; (c) annexures AM-1, AM-2 and AM-3 to Mr McNee's affidavit; MP-1 and MP-2 to Ms Picciota's affidavit; JDGB-1, JDGB-2 and JDGB-3 to Mr Betts' affidavit; MRWJ-1, MRWJ-2, MRWJ-3, MRWJ-4, MRWJ-5 and MRWJ-6 and MRWJ-7 to Mr Maxwell Johnston's affidavit; BTJ-3 and BTJ-4 to the Second Johnston Affidavit; and (d) exhibits BTJ-1, BTJ-2, RS-1, RS-2, JF-1 and OB-1 tendered on the Plaintiff's case. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Perram.

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