Milton Corporation Limited, in the matter of Milton Corporation Limited (First Scheme Hearing) [2021] FCA 992

A introduction and background 1 By its originating process filed on 19 July 2021, the plaintiff, Milton Corporation Limited (Milton), seeks orders pursuant to ss 411 and 1319 of the Corporations Act 2001 (Cth) (Act) convening a meeting of Milton's shareholders for the purpose of considering a scheme of arrangement between Milton and some of its shareholders (Scheme). 2 Milton, the target, was established as a private investment company in 1938. It is now a listed investment company that invests its own funds in a diversified portfolio managed by its directors and executives. Washington H. Soul Pattinson and Company Limited (WHSP), the bidder, was founded in 1872 and listed in 1903. It was originally an owner/operator of Australian chemists, however now invests across multiple industries including building materials, telecommunications, natural resources, pharmaceuticals and financial services. 3 WHSP signed a scheme implementation agreement under which it was proposed that WHSP would acquire all Milton shares not already owned by WHSP by way of the Scheme. If the Scheme is approved by a requisite majority of Milton shareholders and the Court, and all other Scheme conditions are satisfied or waived (as applicable), Milton will become a wholly-owned subsidiary of WHSP and will apply to be delisted from the Australian Securities Exchange (ASX).

B SCHEME CONSIDERATION 4 Under the Scheme, each Milton shareholder participating in the Scheme will be issued WHSP shares in exchange for their Milton shares (Scheme Consideration). The number of new WHSP shares to be issued to each Milton shareholder will be calculated by reference to what is described as the Exchange Ratio, which is in the following terms: 5 The Exchange Ratio reflects: (1) Milton's Adjusted NTA, being Milton's aggregate net tangible asset backing before providing for tax on unrealised capital gains of Milton, adjusted for the Milton Final Dividend and a Special Dividend (defined at [7] below); multiplied by (2) a 10 per cent premium; divided by (3) the volume weighted average price of WHSP shares for the one month ending on 2 September 2021 (capped at $31) (WHPS Reference Price); multiplied by (4) the Milton shares on issue as at 2 September 2021 (Milton Shares on Issue at Calculation Date). 6 The Exchange Ratio will be fixed seven days prior to the Scheme Meeting (defined at [10] below), and Milton shareholders will be notified of the Exchange Ratio via an announcement to the ASX on 3 September 2021. 7 In addition to the Scheme Consideration, Milton shareholders are expected to receive three dividends: (a) a fully franked special dividend of approximately $0.37 per Milton share (Special Dividend); (b) a fully franked Milton final dividend of $0.08 per Milton share (as has been announced to the ASX on 23 July 2021) (Milton Final Dividend); and (c) a fully franked WHSP final dividend which is estimated to be $0.36 per WHSP share (which, based on the current Exchange Ratio, is equivalent to $0.06 per Milton share) (WHSP Final Dividend). 8 The directors of Milton have established a committee of independent directors (which in fact consists of all Milton directors save for Mr Robert D Millner, due to his chairmanship and relevant interest in WHSP), to evaluate the terms of the Scheme, to reach an independent conclusion on whether the Scheme is in the best interests of Milton shareholders, and make a recommendation to Milton shareholders as to how to vote. It suffices to say for present purposes that each of the independent Milton directors considers the Scheme to be in the best interests of Milton shareholders and recommends that Milton shareholders vote in favour of the Scheme. 9 Further, an independent expert has concluded that the Scheme is fair and reasonable and, in the absence of a superior proposal, that it is in the best interests of Milton shareholders. In summary, the independent expert has assessed the value of Milton shares as between $5.07 and $5.69 per share, and has assessed the value of the total consideration (which comprises the Scheme Consideration, the Milton Final Dividend and the Special Dividend) as between $5.83 and $6.36 per Milton share. For reasons explained by the independent expert, but which are unnecessary to detail, the WHSP Final Dividend is not included in the calculation of the value of the total consideration (although it would contribute an additional $0.06 of value to the total consideration).

C section 411 application 10 It is against this background that, pursuant to s 411(1) of the Act, Milton seeks orders for the holding of a meeting of its shareholders for the purposes of considering and, if thought appropriate, agreeing (with or without modification) to, the Scheme (Scheme Meeting). It is proposed that the Scheme Meeting be held at 10am on 13 September 2021 and, given the current public health circumstances, it be held electronically through an online platform (however there will also be an in-person meeting if, although regrettably seeming increasingly unlikely, the relevant public health position allows such an in-person meeting to occur). It is proposed the Scheme Meeting be convened by emailing (or, where a shareholder has not designated an email address, by mailing) each shareholder the relevant notices and materials, on or before 13 August 2021. 11 I have had the benefit of detailed submissions concerning the application, including its compliance with the relevant jurisdictional and procedural requirements. For the reasons detailed in those submissions and the affidavit material referred to therein, I am satisfied of the following: (1) Milton is a company registered with the Australian Securities and Investments Commission (ASIC) and listed on the ASX. It follows that Milton is a Pt 5.1 body for the purposes of s 411 of the Act and the Scheme is an "arrangement" between Milton and a class of its shareholders within the meaning of s 9 of the Act. (2) ASIC has been notified of the hearing today. Indeed, the plaintiff tendered a letter dated 4 August 2021 addressed to the directors of Milton from a delegate of ASIC, which was marked as Exhibit A on the application. The letter provides the following: (a) ASIC did not propose to appear or make submissions to intervene to oppose the Scheme at the current hearing; (b) Milton had applied to ASIC pursuant to s 411(17)(b) of the Act for a written statement stating that ASIC has no objection to the Scheme, however, it is ASIC's policy that it will not provide a statement under s 411(17)(b) until the second court hearing in relation to the Scheme; (c) ASIC was provided with a notice of the hearing of the application on 23 July 2021, despite the requirement in s 411(1) that ASIC be given at least 14 days' notice of the hearing of an application; however, ASIC determined to permit a shorter period of notice pursuant to s 411(2)(a); (d) it is ASIC's view that it has had a reasonable opportunity to examine the terms of the Scheme and draft explanatory statement and to form a view as to whether it was appropriate to make submissions in relation to the Scheme and the draft explanatory statement (which it has determined not to do). (3) The Scheme is not for any purpose other than one that is proper and bona fide. (4) There has been compliance with the relevant procedural requirements of s 412 of the Act, the Corporations Regulations 2011 (Cth) and the Federal Court (Corporation) Rules 2000 (Cth).

D The Relevant Principles 12 As French J (as his Honour was then) explained in Re Foundation Healthcare Limited [2002] FCA 742; (2002) 42 ACSR 252 (at 263 [36] and 265 [44]): 36. It is however important to bear in mind that, by granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then leave should be given - Re ACM Gold Ltd (1992) 10 ACLC 573 (O'Loughlin J). The Court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage" - Re Jax Marine Pty Ltd (1967) 1 NSWR 145 at 148 (Street J). … 44. The Court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the Court - Re NRMA Ltd at 605. That question is to be answered when the scheme returns to the Court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. 13 In Re Associated Advisory Practices Limited [2013] FCA 761 (at [22]), Farrell J summarised the matters relevant to the Court's discretion to convene a scheme meeting as follows: The Court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the Court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Limited at 504-505. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The Court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. 14 Having regard to the matters to which I have already referred, I am comfortably satisfied that the Scheme is of such a nature that if it receives a statutory majority at the Scheme Meeting, the Court is likely to approve the Scheme on the hearing of an unopposed application. In this regard, the position of the independent directors of Milton is obviously of importance, as is the independent expert's report to which I have already made mention. 15 Of course, consistent with what was said by French J, this does not amount to an imprimatur (or even a nihil obstat) but it is sufficient to remark for present purposes that this is not a situation where it could be considered that the Scheme appears on its face to exhibit characteristics that make it inappropriate to proceed.

E CONCLUSION AND ORDERS 16 In all the circumstances, it is appropriate to make the orders proposed in the short minutes of order provided to the Court on the hearing of this application, subject to a minor amendment relating to the arrangements for an in-person meeting, which I will make prior to entering those orders in Chambers. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Lee.