MDA National Ltd v Medical Defence Australia Ltd

The application 1 This is an application to the Court under s 411 of the Corporations Act 2001 (Cth) (Act) to approve the convening of a scheme meeting and the explanatory statement to be sent to members concerning the scheme. Assuming the scheme meeting is held and the shareholders vote in favour of it, there must then be a further application to the Court to approve the proposed scheme. 2 On 20 July 2018 I made orders approving the convening of the meeting and other ancillary orders. These are my reasons.

Proposed scheme 3 The applicant, SRG Limited (SRG), and Global Construction Services Limited (GCS) have signed a scheme implementation deed (SID) under which the two entities will in effect merge via a scheme of arrangement. 4 If the scheme is approved and implemented, SRG shareholders will receive 2.479 fully paid ordinary GCS shares for each SRG share held. GCS shareholders will in aggregate own approximately 51.2% of the merged group and SRG shareholders will own the remaining 48.8%. SRG will become a wholly owned subsidiary of GCS and will be delisted from the Australian Stock Exchange (ASX). The merged group will continue trading as GCS initially, and then as SRG Global Limited (subject to shareholders approving a change of name). 5 GCS holds no current shareholding in SRG.

The companies 6 SRG is a global company with specific expertise in complex engineering construction, particularly in the areas of post-tensioning and dam strengthening. It also provides asset management and drill and blast services to the mining industry. Of historic interest is the fact that it supplied and installed rock anchors for the Snowy Mountains Scheme. Whilst its headquarters are in Perth, it operates in many overseas countries including North America and the Middle East. 7 GCS is an Australian construction and maintenance services group that provides products and services to a range of industries, including commercial, residential, industrial and oil and gas. It operates out of Western Australia but has operations in the eastern states, and has provided services to most of Australia's largest property development companies.

Material relied upon 8 SRG relies upon the following affidavits: (a) affidavit of Paul Branston annexing the SID, ASX announcement and various company searches; (b) affidavit of Michael Atkins as to the position of the SRG directors with respect to the scheme and agreeing to act as alternative meeting chairperson; (c) affidavit of Peter McMorrow agreeing to act as meeting chairperson and providing background to issues relating to exclusivity clauses and the treatment of other security and foreign shareholders; (d) affidavit of Roger Lee, the company secretary of SRG, referring to the drafting and verification process undertaken by SRG with respect to the scheme booklet; (e) affidavit of Paul Hegarty, the GCS company secretary, and deposing to the verification process undertaken by GCS with respect to the scheme booklet; (f) affidavit of Philip Holt verifying the independent expert's report; (g) a further affidavit of Roger Lee deposing to completion of the verification process; (h) affidavit of Sevan Gore, a member of SRG's legal adviser team, deposing to communications with ASIC; and (i) a further affidavit of Sevan Gore attaching the requisite correspondence from ASIC indicating that it did not intend to appear at the hearing and that it provided certain relief with respect to paragraph 8302(h) of Pt 3 of Schedule 8 to the Corporations Regulations 2001 (Cth).

Principles 9 Section 411(1) of the Act relevantly provides that, where an arrangement is proposed between a Pt 5.1 body and its members, the Court may, on the application of the body in a summary way, order a meeting of the members to be convened in such manner and to be held in such place as the Court directs. Where the Court makes such an order, the Court may approve the explanatory statement required by s 412(1)(a) to accompany the notice of such a meeting. 10 Section 412(1)(a) of the Act relevantly provides that, where a meeting is convened under s 411, the Pt 5.1 body must, with every notice convening the meeting, send a statement explaining the effect of the arrangement. That statement must state any material interests of the directors and the effect of the proposed arrangement on those interests insofar as they may differ from the effect on the like interests of other persons. The statement must also set out such information as is prescribed and any other information that is material to a member's decision to agree or not agree to the arrangement. 11 The authorities refer generally to six matters to be proved at the first stage: (1) the applicant is a Pt 5.1 body; (2) the proposed scheme is an 'arrangement' within the meaning of s 411 of the Act; (3) the explanatory statement will provide proper disclosure to members; (4) the scheme is bona fide and properly proposed; (5) the Australian Securities and Investments Commission (ASIC) has had a reasonable opportunity to examine the proposed scheme and the explanatory statement, has had a reasonable opportunity to make submissions and has had 14 days notice of the hearing date of the first Court hearing; and (6) any other procedural requirements have been met. See, for example, Amcom Telecommunications Ltd, in the matter of Amcom Telecommunications Ltd [2015] FCA 341 at [8] per McKerracher J; EcoBiotics Limited, in the matter of EcoBiotics Limited [2017] FCA 643 at [19] per Gleeson J. 12 The principles as to the nature of the review at the first Court hearing are summarised elsewhere: for recent examples, see Programmed Maintenance Services Ltd, in the matter of Programmed Maintenance Services Ltd [2017] FCA 1265 at [11]-[14] per McKerracher J; Signature Gold Ltd, in the matter of Signature Gold Ltd [2017] FCA 1481 at [22]-[23] per Markovic J. In summary, the standard of review is whether the proposed scheme is not inappropriate and is one that sensible business people might consider is of benefit to its members. If the proposed arrangement is one that seems fit for consideration by a meeting of members and is a commercial proposition likely to gain the Court's approval if passed by the necessary majority, then leave should be given to convene the meeting.

Part 5.1 body 13 A review of the historical records of SRG as evidenced by copies of extracts from the ASIC registry indicate that SRG is a Part 5.1 body within the meaning of the Act.

Arrangement 14 I am satisfied on the basis of the SID and scheme booklet contents that the scheme is an arrangement between SRG and its members. The term 'arrangement' is of wide import: Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20] per Santow J.

Verification of scheme booklet 15 In general, each of GCS and SRG were separately responsible for verifying statements in the scheme booklet that pertained to each of them respectively, but were jointly responsible for statements that pertained to the merged group. 16 Mr Hegarty gave evidence that GCS undertook appropriate verification processes in relation to all information for which it was responsible with assistance from its lawyers, Ashurst Australia. He deposed to the fact that a person he considered had the most direct and personal knowledge verified the particular statements in the scheme booklet. He obtained verification certificates from each person involved and also procured completed questionnaires from each director (and certain others). Amendments were dealt with in a similar manner. He said that based on that information, to the best of his knowledge and belief, all the material statements in the scheme booklet which required verification by GCS are correct and not misleading or deceptive, and there were no material omissions. 17 As to SRG's verification process, Mr Lee deposed to the establishment by SRG of a due diligence committee to consider and deal with all disclosure issues in respect of the information for which SRG was separately and jointly responsible. The committee included members from SRG's financial advisers and its legal advisers, Herbert Smith Freehills. The verification process involved allocation of responsibility for particular items to a reporting person with direct knowledge of the identified information. Mr Lee required and received verification certificates from all reporting persons. A similar regime applied to amendments. Prior to lodgement of the draft verified scheme booklet with ASIC, the directors approved its release by resolution. Mr Lee said that based on the verification process, he is satisfied that all the material statements in the scheme booklet so far as they relate to SRG (and the relevant information for which SRG was jointly responsible) have been verified and are true and correct and not misleading or deceptive, and that there are no material omissions.

A single class 18 There is a single class of shareholders and all members have the same rights under the scheme. For reasons set out below, I do not consider that the existence of performance rights, options or foreign shareholders creates any separate class in the circumstances of the proposed scheme.

Independent report 19 It is a condition precedent to the scheme that an independent expert issues a report that concludes that the scheme is in the best interests of SRG shareholders. The Board appointed Lonergan Edwards & Associates as the independent expert to assess the scheme. Lonergan Edwards provided a report (verified by the affidavit of Mr Holt). 20 In particular, Lonergan Edwards identifies that SRG shareholders will receive 2.479 GCS shares for each SRG share held. It states that in a merger scenario, a key consideration is whether the value contributed by each of the merger partners is consistent with the merger terms. Lonergan Edwards valued the shares in the merged group by aggregating the stand-alone values of each entity and the value of expected benefits from the merger. 21 The valuation methodology and the analysis of the relative value to be contributed by each of SRG and GCS is set out in detail in the Lonergan Edwards report. 22 Lonergan Edwards concludes that the collective interest that will be acquired by SRG shareholders in the merged group will be some 48.8%, which is broadly consistent with the relative value to be contributed by the SRG shareholders to the merged group. It also concludes that the assessed value of the scheme consideration to be received by SRG shareholders exceeds its assessment of the underlying values of a minority interest in SRG shares. Accordingly, Lonergan Edwards is of the view that from a value perspective, SRG shareholders are likely to be better off if the merger proceeds. It summarises and concludes that the proposed scheme is in the best interest of SRG shareholders, absent a superior proposal, and is fair and reasonable.

Particular matters 23 In oral and written submissions, counsel for SRG drew the Court's attention to the following particular matters: (a) ASIC inquiries answered; (b) the position of foreign shareholders; (c) performance rights and options; (d) exclusivity periods; and (e) the reimbursement fee.

ASIC inquiries answered 24 Mr Gore deposed to and annexed a chain of emails between ASIC and Herbert Smith Freehills in which ASIC asked a range of questions about the scheme, in particular as to anticipated transaction costs, the timing of employee redundancy expenses, outstanding costs of a prior acquisition by SRG, the final dividend status for each of SRG and GCS for the 2018 financial year, information about an entity with a substantial holdings in GCS, and assumptions for market capitalisation. Having reviewed those emails, I note that Herbert Smith Freehills suggested revisions to the scheme booklet and answered each query and ASIC confirmed in writing that its concerns had been addressed. I do not consider anything arises out of those matters that suggests the scheme ought not be considered in its current proposed form by the shareholders, in light of the responses provided to ASIC.

The position of foreign shareholders 25 The evidence suggests that there are relatively few foreign shareholders (2.13% of the shareholders, owning 1.05% of shares). 26 Mr Morrow provided details as to the proposed treatment of SRG shareholders who have overseas addresses on the SRG share register. With respect to shareholders residing in New Zealand, Hong Kong or the Philippines, it is proposed that they receive shares in GCS by way of consideration in the same manner as local shareholders. SRG has made enquiries concerning the securities laws of those jurisdictions and is reasonably satisfied that their laws permit the issuing of shares to those shareholders (subject to certain conditions which are not of significant relevance). 27 However, with respect to other overseas domiciled SRG shareholders (referred to as 'ineligible foreign shareholders'), it is proposed that they receive an amount equivalent to the average price per GCS share to which they would otherwise have been entitled, obtained by all such GCS shares being issued to an agent and sold by the agent in accordance with the process prescribed by the SID. Each ineligible foreign shareholder will receive the same price per share based on a pro-rata contribution of the pooled proceeds of the sales of such shares. 28 I accept SRG's submission that the treatment of foreign shareholders does not create a new class of shareholders, based on the authorities of Hills Motorway Limited [2002] NSWSC 897 (2002) 43 ASCR 101 at [9]-[13]; Aston Resources Ltd, in the matter of Aston Resources Ltd [2012] FCA 229 at [32]-[33].

Performance rights and options 29 Some SRG shareholders also hold performance rights or options. Some 4,950,000 performance rights and 965,000 options are on issue. 30 There is no special or additional benefit to be received under the scheme by SRG shareholders who hold performance rights or options. 31 The performance rights were issued to eligible employees as part of SRG's employee incentive initiatives. They were on issue prior to execution of the SID. If the scheme is approved, all performance rights will vest and be converted into shares before the scheme record date and the holders will be able to participate in the scheme with respect to those shares. 32 The position with respect to the options is effectively the same. They were issued to eligible employees and directors as part of SRG's employee incentive initiatives. The holders of the options have agreed that they will exercise their options prior to the scheme date and participate in the scheme with respect to the shares then received. 33 The performance rights and options were received by the respective employees and directors in that capacity (not as shareholders) and pursuant to entitlements under their employment arrangements. I do not consider there is any evidence of a collateral benefit so as to constitute a separate class or otherwise give rise to any reason the scheme ought not be considered by the members. I note that the independent expert took those rights and options into account in its report.

Deal protection devices - exclusivity periods 34 The SID contained exclusivity or lockup provisions by way of no shop, no talk and matching agreements. 35 In general, and as discussed in Re APN News and Media Limited [2007] FCA 770; (2007) 62 ACSR 400 at [29], exclusivity provisions should: (a) exist for no more than a reasonable period which is properly defined; (b) be subject to the directors' fiduciary and other duties; and (c) be given adequate prominence when disclosed in the scheme booklet. 36 In this case, the exclusivity period is stated to be the period from the date of the SID until the earlier of it termination date, 30 November 2018 or such other later date as agreed in writing by SRG and GCS or the date the scheme becomes effective. It is therefore capable of precise ascertainment and I consider such period is reasonable in the circumstances. 37 The 'no talk' restriction is subject to a fiduciary duties carve out in relatively standard terms and is clearly disclosed in the scheme booklet.

Reimbursement or break fee 38 The SID provides that a reimbursement fee of $1.5 million is payable by either GCS or SRG in limited circumstances. The circumstances in which the reimbursement fee is payable are where there is, put in general terms, a competing transaction, a change of recommendation or a material breach in circumstances prescribed in the SID. 39 In certain circumstances a reimbursement or break fee may be considered excessive or otherwise coercive in nature: see generally Rusina Mining NL, in the matter of Rusina Mining [2010] FCA 517 at [52] per Barker J; APN News Media Limited at [55] per Lindgren J; Amcom Telecommunications at [35] per McKerracher J. 40 SRG submitted that the reimbursement fee in this case was not excessive because: (a) it represents approximately 0.976% of the equity value of SRG and 0.983% of the enterprise value of SRG, being figures below the 1% guideline provided by the Takeovers Panels Guidance Note 7: Lock-up Devices; (b) the fee was negotiated on the basis that both GCS and SRG believe that the scheme provides significant benefits to GCS, SRG and the SRG shareholders; (c) SRG and GCS each acknowledge that if the scheme is not implemented, the other entity will incur significant costs; (d) the fee is broadly reciprocal and was negotiated at arms' length; and (e) the board of SRG took legal and commercial advice on the reimbursement fee. 41 I note these matters are addressed in the affidavit of Mr McMorrow. 42 I accept SRG's submissions as to the break fee.

Other procedural matters 43 The requisite consents to act as chairperson and alternative chairperson were provided by way of the affidavits of Mr McMorrow and Mr Atkins. I am otherwise satisfied that the procedural requirements for making the orders sought were met.

Distribution of scheme booklet 44 SRG has retained Computershare Investor Services Pty Ltd (Computershare) to manage notification processes with members. 45 SRG seeks an order pursuant to s 1319 of the Act for the dispatch of the scheme booklet and proxy form by electronic means to those members who have nominated an electronic address for the purpose of receiving notices of meetings from SRG. 46 SRG (via Computershare) proposed to send an email to each nominated electronic address, to inform the member concerned of the convening of the scheme meeting. The email would include a link to the scheme booklet. The email would also include instructions on voting procedure, including on how to appoint a proxy. 47 In this regard, I expressed some concern during the hearing that the draft Computershare proxy form to be accessed via the link was arguably ambiguous as to whether a shareholder was able to vote electronically or appoint a proxy via the link. The latter course was intended. SRG agreed to arrange for specified changes to be made to the proxy form to clarify the ambiguity. 48 The Court may make orders that provide for the electronic dispatch of a scheme booklet: MDA National Ltd v Medical Defence Australia Ltd [2014] FCA 954 at [105] per Yates J; Amcom at [45]. 49 Members who did not elect to receive notices of meetings by electronic means were to be sent a copy of the scheme booklet, notice of meeting and a proxy form by pre-paid or ordinary post or courier to their addresses recorded in the register of members. 50 I am satisfied that it is an appropriate matter where electronic dispatch should be authorised as requested.

ASIC 51 Section 411(2) requires that the Court be satisfied that ASIC has been given notice of the hearing and that it has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement, and has had the opportunity to make submissions to the Court. 52 I am satisfied on the basis of Mr Gore's affidavit evidence that there has been proper notice provided. It is also apparent from the correspondence referred to above that ASIC has actively engaged in consultation with SRG's solicitors with respect to the scheme. ASIC indicated that it did not wish to make submissions to the Court.

Interested party 53 I note for completion that counsel appeared for GCS as an interested party (as counterparty to the SID) and supported the application.

Conclusion 54 For the reasons set out above, I was satisfied that each of the matters relevant to an order convening a scheme meeting under s 411 was addressed and that it was appropriate to make the orders sought by SRG, including those relating to the convening of the meeting, approving the scheme booklet for distribution and the conduct of the scheme meeting. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.