MDA National Limited v Medical Defence Australia Limited

GLEESON J: 1 On 24 April 2018, I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) ("Act") after a first hearing in relation to a proposed members' scheme of arrangement. These included an order that the proposed scheme meeting be convened and the scheme booklet, that is the explanatory statement required by s 412(1)(a) to accompany notices of the scheme meeting, be approved. 2 These are my reasons for making those orders.

Background 3 Watpac Limited ("Watpac") is a public company limited by shares traded on the ASX. 4 Watpac Group (comprising Watpac and its wholly-owned subsidiaries) is a national construction, civil infrastructure and mining contracting group with operations across Australia. Nationally, the Watpac Group employs approximately 700 staff across its construction, civil and mining and corporate business units. 5 As at close of business on 18 April 2018, Watpac had: (1) 183,386,244 shares on issue; and (2) 3,829 shareholders, of which 1,860 had elected to receive notices of meetings, explanatory statements and proxy forms by email and have provided email addresses to Computershare Investor Services Pty Ltd. 6 Watpac's cornerstone investor is BESIX Group SA ("BESIX"), a limited liability company incorporated in the Kingdom of Belgium. As at close of business on 18 April 2018, BESIX owned 51,553,318 Watpac shares, or approximately 28.11% of total Watpac shares on issue. 7 In mid-January 2018, Watpac received an initial indicative non-binding proposal from BESIX to purchase 50% of the issued shares in Watpac that it did not already own. Watpac formed an independent board committee ("IBC") to consider the proposal. The IBC comprises the non-executive directors of Watpac apart from those appointed by BESIX. Mr Watson, the non-executive chair of Watpac's board of directors, gave evidence that the IBC engaged BESIX in extensive negotiations over several weeks which resulted in the IBC receiving a materially improved proposal from BESIX. The IBC has met 13 times to evaluate and discuss the merits of the BESIX proposal.

Proposed scheme 8 On 25 February 2018, Watpac and BESIX entered into a scheme implementation agreement, pursuant to which BESIX proposed to acquire 50% of the issued shares in Watpac that it did not already own. The proposed scheme consideration is an all-cash payment of $0.92 per scheme share. 9 The proposal was announced to the ASX on 26 February 2018. 10 The proposed cash consideration represents a premium of 37.3% over Watpac's undisturbed closing price of $0.67 on 23 February 2018, being the last trading day prior to the scheme announcement, as set out in the Chairman's letter in the scheme booklet. 11 The independent expert appointed by the directors, Lonergan Edwards & Associates Limited ("Lonergan Edwards"), has concluded that the acquisition of Watpac shares by BESIX under the scheme is fair and reasonable and in the best interests of Watpac shareholders in the absence of a superior proposal. Lonergan Edwards has assessed the value of Watpac shares on a 100% controlling interest basis at $0.82 to $1.01 per share. Taking into account the proportional nature of the scheme, Lonergan Edwards has calculated a total increase in shareholder value of $0.10 to $0.13 on a per share basis (an increase of 15.2% to 19.7%) and, on the basis of that assessment, expressed the opinion that Watpac shareholders are better off in value terms if the scheme proceeds. 12 If the scheme is approved, BESIX will control Watpac, holding 64.1% of the total issued share capital. BESIX had indicated that, should it obtain control of Watpac pursuant to the scheme, it would look to provide a range of benefits to Watpac, which could potentially add long-term value to Watpac. However, as Lonergan Edwards has noted, the prospects of receiving a control premium in respect of the shareholdings not subject to the scheme are reduced as it is unlikely that an alternative third party will make a takeover offer for Watpac in the short term. Further, there is likely to be a reduced marketability of Watpac shares following completion of the scheme due to the implicit lower free float of Watpac shares post completion of the scheme. 13 The independent directors have unanimously recommended that, in the absence of a superior proposal, shareholders vote in favour of the scheme at the proposed scheme meeting. 14 It is proposed to hold a single scheme meeting on 7 June 2018 at 10.00 am.

Evidence and submissions 15 Watpac relied on the following evidence in support of the application: (1) an affidavit of Peter Watson, non-executive director of Watpac and chair of Watpac's board of directors, and proposed chairperson for scheme meeting, sworn 20 April 2018; (2) an affidavit of Martin Munro, chief executive officer of Watpac, affirmed 20 April 2018; (3) an affidavit of Linda Evans, non-executive director of Watpac and proposed alternative chairperson, sworn 20 April 2018; (4) an affidavit of Craig Edwards, managing director of Lonergan Edwards, sworn 19 April 2018; (5) an affidavit of Cameron Hanson, partner of Herbert Smith Freehills, Watpac's lawyers, affirmed 9 April 2018; (6) two affidavits of Matthew Fitzgerald, partner of Herbert Smith Freehills, sworn 19 and 23 April 2018, together with exhibits marked "MF-1" and "MF-2"; (7) two affidavits of Frédéric de Schrevel, secretary-general - general counsel and company secretary of BESIX, affirmed 16 and 23 April 2018; (8) an affidavit of Christopher Buttery, of Computershare Investor Services Pty Ltd, affirmed 20 April 2018; and (9) the scheme booklet marked exhibit 1.

Issue for decision 16 At the first hearing, the Court's task is to decide whether to approve both the convening of the proposed scheme meeting pursuant to s 411(1) and the scheme booklet, that is, the explanatory statement required by s 412(1)(a) to accompany the notices convening the scheme meeting. 17 The relevant legal framework is set out in written submissions filed by Watpac and dated 23 April 2018. It is also explained in Re Staging Connections Group Limited [2015] FCA 1012, particularly at [18] to [31]. 18 The written submissions also identified the evidence in support of the various matters about which the Court was required to be satisfied. Additionally, senior counsel for Watpac, Kate Morgan SC, made oral submissions and identified important aspects of the evidence.

Part 5.1 body 19 The term "Part 5.1 body" is defined in s 9 of the Act to mean, relevantly, a company. The evidence confirmed that Watpac is a Pt 5.1 body.

Proposed scheme is an "arrangement" 20 Generally, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members, and which is properly proposed, is an "arrangement" within the meaning of s 411: see Re NRMA Insurance Limited (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20] per Santow J. The text of the scheme (attachment D to the scheme booklet) provides prima facie evidence that the proposed scheme is such an "arrangement". Watpac committed itself to propounding the scheme by the scheme implementation agreement, and the IBC has unanimously recommended the scheme. I accepted that these matters provide prima facie evidence that the scheme is bona fide and has been properly proposed.

Scheme booklet will provide proper disclosure to members 21 On 4 April 2018, the IBC resolved to approve the lodgement of the draft scheme booklet with the Australian Securities and Investments Commission ("ASIC") subject to receipt of signed verification certificates which were provided prior to the lodgement with ASIC. 22 A scheme booklet containing a draft explanatory statement was first provided to ASIC on 5 April 2018. ASIC provided comments on the draft explanatory statement, which was subsequently revised. The correspondence shows that, on 16 April 2018, ASIC made detailed comments and, among other things, sought amendments to the Chairman's letter in the scheme booklet to ensure that it provided appropriately balanced disclosure about the advantages or disadvantages of the proposed transaction. 23 On 20 April 2018, the IBC considered a final draft of the explanatory statement and approved the lodgement of that document with ASIC. Mr Watson verified his satisfaction that: (1) the draft scheme booklet and the revised explanatory statement lodged with ASIC contain all the information required to be disclosed to scheme participants in connection with the scheme; and (2) the information contained in those documents other than "BESIX information" (as defined in the draft scheme booklet and the revised explanatory statement): (a) in the case of statements of fact, is true and nothing material has been omitted from it; (b) in the case of statements of opinion and forward looking statements, is fair and based on reasonable grounds; and (c) is not misleading or deceptive. 24 In his 16 April 2018 affidavit, Mr de Schrevel verified the "Bidder information" as defined in the scheme implementation agreement, approved for inclusion in the draft scheme booklet. In his 23 April 2018 affidavit, Mr de Schrevel verified the additional information comprising statements inserted into: (a) the section headed "What are BESIX's intentions for Watpac?" in section 3 of the scheme booklet; (b) section 5.3(a) of the scheme booklet; and (c) section 5.4(c) of the scheme booklet. 25 I accepted that the affidavits of Mr Watson and Mr de Schrevel demonstrate that reasonable steps have been taken to confirm that the statements in the scheme booklet are accurate, not misleading or deceptive and that no material information has been omitted in respect of those statements. 26 The Lonergan Edwards report concludes that there are a number of significant advantages and disadvantages associated with the scheme. The report is included in the scheme booklet. The scheme booklet also refers to the disadvantages identified in the Lonergan Edwards report at section 1.3, under the heading "Why you may wish to vote against the Scheme". The Chairman's letter refers to the IBC's consideration of "possible disadvantages" associated with BESIX's offer, and refers to section 1.3. 27 On the basis of the evidence and submissions set out above, I was satisfied that there is prima facie evidence that the scheme booklet will provide proper disclosure to members.

Other procedural requirements have been met 28 By letter dated 23 April 2018, ASIC confirmed that there had been compliance with s 411(2)(a) in relation to the application. ASIC expressed its view that it has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement in accordance with s 411(2)(b) of the Act. 29 Division 3 of the Federal Court (Corporations) Rules 2000 (Cth) ("Corporations Rules") applies relevantly to an application for approval of an arrangement between a Pt 5.1 body and its members (r 3.1). 30 The affidavits of Mr Watson and Ms Evans met the requirements in r 3.2 of the Corporations Rules (concerning nomination of the chairperson for the scheme meeting). 31 The proposed orders were in a form that met the requirements of r 3.3. 32 Watpac sought an order dispensing with the requirements of r 3.4 of the Corporations Rules, conditional on publishing a notice once in "The Australian" newspaper on or before a specified date (being a date prior to the scheme meeting), in the form of annexure A to the orders. I made that order, which is of a kind commonly sought and made. 33 I dispensed with compliance with the requirements of r 2.15 concerning meetings ordered by the Court, noting that regs 5.6.11 to 5.6.36A of the Corporations Regulations 2001 (Cth) ("Regulations") have been substantially repealed and re-enacted in Division 75 of the Insolvency Practice Rules (Corporations) 2016 (Cth), and that the scheme approved at a scheme meeting will not take effect without a further order of the Court approving the scheme: Re Trustee Company Ltd [2013] NSWSC 1680 at [21]. 34 Ms Morgan SC made oral submissions which demonstrated how the scheme booklet complied with the relevant provisions of Pt 3 of Sch 8 of the Regulations. In particular, I note that by letter dated 23 April 2018, ASIC waived compliance with the requirements of cl 8302(h) of Pt 3 of Sch 8 on the bases set out in the letter.

Proposed electronic notification of shareholders 35 Watpac sought orders for electronic dispatch of the notice of scheme meeting, the scheme booklet and a proxy voting form to those scheme participants who have elected to receive notices of meetings electronically. 36 Sections 249J(3)(c) and (ca) of the Act contemplate sending notices of meetings to members. Rule 3.3(2) of the Corporations Rules requires, in the absence of court orders to the contrary, that a meeting of members ordered under s 411 be convened, held and conducted in accordance with the provisions of Pt 2G.2 of the Act (in which s 249J appears) and Watpac's constitution (to the extent that it is not inconsistent with Pt 2G.2). 37 Clause 18.1 of Watpac's constitution permits the giving of notices to members by electronic means. 38 Mr Buttery's evidence (at paras 9 to 16 of his affidavit) explains the proposed processes in relation to electronic dispatch. The proposed form of covering email, which will contain a link to an online portal at which scheme participants can view and download the scheme documents and lodge their proxy instructions, is also annexed to Mr Buttery's affidavit. 39 The draft order reflects the convention approved in respect of electronic dispatch in other schemes: see Re David Jones Limited [2014] FCA 530 at [34]-[37] per Farrell J; MDA National Limited v Medical Defence Australia Limited [2014] FCA 954 at [87]-[105] per Yates J; Re Goodman Fielder Limited [2014] FCA 1449 at [33] per Yates J; Re Amcom Telecommunications Limited [2015] FCA 341 at [42]-[47] per McKerracher J; Re Veda Group Limited [2015] FCA 1506 at [35]­[37] per Yates J; and Re Drillsearch Energy Limited [2015] FCA 1508.

No reason apparent why the scheme should not receive the Court's approval if the necessary number of votes are achieved 40 I was satisfied that there was no order sought which goes beyond current accepted practice. 41 I was also satisfied that the proposed scheme is of such a nature and is cased in such terms that, if it were to receive the requisite statutory majority, the Court would be likely to approve the scheme on the hearing of an unopposed application. 42 Ms Morgan SC drew the following five matters to the Court's attention, although her submission was that none of these matters should be of concern to the Court. I accepted that submission.

Performance rights 43 The written submissions referred to Watpac's short term and long term incentive plans. No short term incentives were on issue as at 20 April 2018. Performance rights were granted under the long term incentive plan in 2015, 2016 and 2017. 44 Information relating to the treatment of the performance rights is set out at section 8.2 of the scheme booklet. 45 Courts have previously accepted that performance rights do not result in the creation of a separate class in relevantly similar circumstances: see e.g., Re Cashcard Australia Limited [2004] FCA 223; (2004) 48 ACSR 738 at [8]-[9]; Re Fosters Group Limited (No 2) [2011] VSC 547 at [38]-[43] and Re Aston Resources Limited [2012] FCA 229 at [39]. As Jacobson J noted in Re Cashcard at [8], if a scheme is passed only as a result of the vote of the parties who would receive additional benefits from the scheme, a court can take into account in deciding whether to exercise its discretion to approve the scheme.

Deal protection clauses 46 I accepted the following written submissions concerning exclusivity arrangements in cl 10 of the scheme implementation agreement: (a) the exclusivity period is reasonable and is capable of precise ascertainment. The exclusivity restrictions and obligations are restricted to the "Exclusivity Period", which lasts from the date of the SIA, being 25 February 2018, until the earliest of the date of its termination, the "End Date" (i.e. 27 August 2018 or such other date as agreed in writing by the parties) or the effective date of the Scheme. An exclusivity period of six months is within the period of time generally accepted by the Courts and the Takeovers Panel, and it is reasonable having regard to amount of time that is required to gain the necessary approvals for the Scheme to become effective. In the recent case of Re Billabong International Ltd [2018) FCA 106 at [25], Yates J described a six month exclusivity period in respect of comparable exclusivity provisions as "reasonable"; see also Re Little World Beverages Ltd [2012] FCA 1057 at [20] per McKerracher J and the cases cited therein[;] (b) the "no talk" and "no due diligence restrictions" are subject to the overriding obligation not to breach the Watpac directors' fiduciary or statutory duties; (c) although the "no shop" restriction is not included in the fiduciary carve out, this is consistent with authority: see Re Bigair Group Ltd [2016] FCA 1296 at [21] per Yates J; Hostworks Group Limited ACN 008 010 820 (2008) ACLC 137; [2008] FCA 64 at [34] per Mansfield J; Macquarie Private Capital A Limited (2008) 26 ACLC 366; [2008] NSWSC 323 at [19] per Barrett J; Re Healthscope Ltd [2010] VSC 367 at [19]-[22] per Davies J; and Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [29] per Croft J. The notification rights and matching rights provisions are also not included in the fiduciary carve out, which is consistent with the approach of the courts to require a fiduciary carve out only in relation to "no talk" provisions: Re Healthscope Ltd [2010] VSC 367 at [18]-[23] per Davies J; Re Mitchell Communication Group Ltd [2010] VSC 423 at [23] per Davies J; (d) the exclusivity provisions are clearly disclosed in section 7.1(c) of the Scheme Booklet; (e) the SIA was negotiated between commercial parties, represented by experienced legal advisers; and (f) the members of the IBC believe, for the reasons set out in the Chairman's letter and sections 1.2, 2.3, 2.8 and 7.1(d) of the Scheme Booklet, that in the absence of a Superior Proposal emerging, the Scheme is in the best interests of Watpac Shareholders and represents an attractive outcome for them, including as a result of the opportunity to sell 50% of their Watpac shares at a premium over the price immediately prior to the announcement of the Scheme and the opportunity to participate in the future growth of Watpac (albeit on a diluted basis) which may be enhanced by benefits BESIX proposes to contribute as majority owner. 47 No break fee or reimbursement of expenses is payable by either Watpac or BESIX in the event the transaction does not proceed. 48 In Re APN News & Media Limited [2007] FCA 770; (2007) 62 ACSR 400 ("Re APN") at [55], Lindgren J expressed the view that it would be desirable that applications under s 411(1) be supported by affidavit evidence directed to showing relevantly: • that the no-shop … provisions are the result of a normal commercial negotiation, and explaining, at least briefly and in general terms, the factual basis for that statement … • that the directors of the target company, or at least those directors of it who are not affiliated with the offeror, believe that the provisions do not operate against the interests of offeree shareholders, and that in fact it was in the interests of such shareholders that the directors agreed to the inclusion of the provisions in the merger implementation agreement (see … In re Paramount Communications Inc Shareholders' Litigation 637 A2d 34 (Del Supr 1993) for a case in which a target company's directors' commitment to no-shop and break fee provisions was held, in all the circumstances, to constitute a breach of their fiduciary duty) … 49 Mr Watson gave evidence that the exclusivity provisions are the outcome of arm's length commercial negotiations between Watpac and BESIX, in which both parties were separately advised and represented by external legal and financial advisers with extensive experience with transactions of this kind. Mr Watson expressed the belief that the exclusivity provisions are fair and reasonable and have been agreed in order to secure the benefits to scheme participants resulting from the proposed scheme. 50 Having regard to the matters set out above, I was satisfied that the exclusivity arrangements were not an impediment to making the orders sought.

Performance risk 51 Clause 5.2 of the scheme provides for the transfer of the scheme shares after provision of the scheme consideration under cl 6.2. Thus, the scheme consideration must be provided before the transfer of the scheme shares occurs, satisfying concerns that might otherwise exist about performance risk. 52 Section 5.3 of the scheme booklet sets out the arrangements which BESIX has made to fund the scheme consideration.

Deed poll 53 In Re Simavita Holdings Limited [2013] FCA 1274 at [43], Farrell J explained: A deed poll operates under Australian law to allow those for whose benefit it is expressed to sue on the promises in the deed poll. This is a common mechanism, especially in acquisition schemes, for binding an "outsider" to a scheme to perform its obligations under the scheme … especially the payment of scheme consideration. This is an important element of managing "performance risk". 54 Watpac's submissions noted that, by cl 7.6 of the deed poll, BESIZ acknowledged that the deed poll is governed by the law of Queensland and has irrevocably submitted to the non-exclusive jurisdiction of the courts of Queensland. Mr de Schrevel confirmed that the deed poll has been duly executed under Belgian law and that he is not aware of any matter that would render the deed poll invalid or unenforceable under Belgian law. 55 I was satisfied that the deed poll in the present case has been duly executed by BESIX and is prima facie enforceable.

Deemed warranty 56 The scheme includes a deemed warranty by the scheme participants that their shares will be free from encumbrances (at cl 5.6(a) of the scheme) and a deemed warranty that they have the full power and capacity to sell and transfer their scheme shares to BESIX (see cl 5.6(b) of the scheme). 57 I accepted Watpac's submission that clauses to this effect have been approved in other schemes where they are disclosed to the relevant security holders: Re APN at [57]-[63] per Lindgren J; Re Tower Australia Group Limited [2011] FCA 224 at [13]-[15] per Stone J; Re Duet Management Co Limited [2013] NSWSC 817; (2013) 95 ACSR 34 at [23] per Black J; Re Medical Australia Limited [2017] FCA 1304 at [28] per Markovic J. Specific disclosure of, and appropriate prominence is given to, these deemed warranties in section 2.10 of the scheme booklet.

Other matters 58 In addition, I noted the following two matters during my own review of the evidence. They did not cause me to consider that I should not make the orders sought.

1. Conditions precedent 59 The scheme is subject to the conditions precedent set out in cl 3.1 and Sch 2 of the scheme implementation agreement and cl 3.1 of the scheme. Subject to the usual court orders and such orders being lodged with ASIC, these conditions precedent need to be satisfied or waived by 8:00 am on the second court hearing date. If this is done, the scheme will be self-executing upon the making of orders at the second court hearing and registration of those orders with ASIC. 60 Mr Watson gave evidence of BESIX's confirmation that, despite Watpac's 28 March 2018 earnings guidance update which provided that Watpac anticipates an underlying net loss before tax for the year to 30 June 2018 of between $3 million and $5 million, it remains committed to the transaction and has formally waived its rights under the condition precedent in item 8 of Sch 2 of the scheme implementation agreement in respect of the subject matter of the 28 March 2018 update.

2. Takeover provisions 61 Mr Watson verified that, as far as he was aware, the scheme was not proposed for the purpose of enabling any person to avoid the operation of any provision of Ch 6 of the Act.

Conclusion 62 At the hearing, I raised some concerns about the terms of the Chairman's letter, and section 1.3 of the scheme booklet. Consequently, some amendments were made to the scheme booklet. Most saliently, section 1.3 was amended to refer to the observation, made by Lonergan Edwards, that the implied control premium, adjusted for the proportionate nature of the scheme, is lower than premiums generally paid in successful takeovers. Being satisfied with the scheme booklet as amended, I made the orders sought by Watpac. I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.