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[2010] FCA 1388
plaintiff. The Court ordered that, pursuant to s 411(1) Corporations Act 2001 (Cth), Provet convene a scheme meeting to consider the proposed scheme, approved the Scheme Booklet for distribution, appointed...
The Federal Court ordered Provet to convene a meeting of shareholders to vote on a takeover scheme by Pelican/Henry Schein. The Court found that Provet had met the disclosure and evidentiary requirements for a first hearing under s 411(1), including a supporting independent expert report, verification affidavits, clear funding and a guarantee from Henry Schein, disclosure of a modest break fee and exclusivity clauses with a fiduciary exception, and that ASIC would not oppose the first hearing. The Court therefore approved distribution of the Scheme Booklet and directed how the meeting should be conducted (paras 1-18).
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Provet Holdings Limited (PVT), an ASX-listed provider of veterinary products and practice-management services, proposed a scheme of arrangement under s 411 of the Corporations Act 2001 (Cth) for acquisition by Pelican Acquisition Company Pty Ltd, a wholly owned subsidiary of Henry Schein Inc (HSI). The proposal offered A$2.14 per share and, if implemented, would make PVT a subsidiary of Pelican/HSI and result in delisting from ASX (paras 2–4).
PVT applied under s 411(1) for orders to convene a meeting of members to consider the proposed scheme and for directions as to how that meeting should be conducted. At the first hearing on 4 November 2010, Stone J made the orders sought. These Reasons explain the basis on which the Court granted those procedural orders (paras 1, 18). The Court reviewed the Scheme Booklet, an independent expert report prepared by KPMG, the Merger Implementation Deed (including a $925,000 break fee and no-shop/no-talk provisions), evidence as to funding by HSI (including a guarantee), verification affidavits from relevant corporate officers, and a letter from ASIC indicating it would not appear or oppose at the first hearing (paras 6–8, 10–12, 16–17).
The Court concluded that PVT had discharged the obligations necessary for a first court hearing under s 411(1) and that the scheme was bona fide and properly proposed, warranting the making of orders to convene the meeting and approve the Scheme Booklet for distribution (paras 15–18).
The decision turned on two principal considerations: procedural/evidentiary sufficiency for a first hearing under s 411(1), and whether contractual features of the transaction undermined the fairness of the proposed scheme.
Duty of disclosure and evidentiary sufficiency. Stone J emphasised the elevated duty of disclosure incumbent on a plaintiff in a s 411(1) application, comparing it to the duty of an ex parte applicant to bring to the court's attention all matters relevant to the exercise of judicial discretion (para 9). PVT satisified the Court by providing the Scheme Booklet, an independent expert's report, affidavits verifying the factual statements relating both to PVT and to Pelican/HSI, and by showing ASIC had been given notice and did not intend to oppose at the first hearing (paras 6, 16–17). On that basis the judge concluded the necessary requirements for a first court hearing were met (paras 15–16).
Transactional features. Stone J examined the Merger Implementation Deed provisions that commonly attract scrutiny. The break fee (A$925,000) was assessed against guidance from the Takeover Panel (Guidance Note 7) and the approach adopted in Re APN News & Media. Because the break fee represented less than 1% of equity value, the judge held it was not coercive or anti-competitive and therefore not a basis to draw an adverse inference against the proposed scheme (para 11). The judge also noted the presence of no-shop and no-talk restrictions, but observed they included a fiduciary-duty exception and had been disclosed in the Scheme Booklet; disclosure and the fiduciary exception mitigated concern about those provisions (para 12). The Court accepted that shareholders were protected against performance risk because clause 5 of the Scheme required Pelican to deposit the aggregate scheme consideration into a trust account in cleared funds prior to the implementation date (para 13). Finally, common deeming warranties by scheme shareholders that transferred shares would be fully paid and unencumbered were noted as standard and not problematic (para 14).
Weighing these matters together, and satisfied of the bona fides of the proposal, the Court made the procedural orders that PVT sought (paras 15–18).
Before this decision the Court already proceeded on established principles regarding schemes: the need for sufficient disclosure at first hearings, judicial scrutiny of lock-up devices and break fees, the usual acceptability of warranties and procedural protections against payment default (see the authorities the judge cited and adopted, e.g. Re Permanent Trustee, Re APN and Investa references relied on by Stone J) (paras 9–11, 14). Stone J expressly adopted Lindgren J's approach in Re APN in relation to break fees (para 10).
After this decision, the immediate legal effect is procedural rather than doctrinal. Stone J applied existing authorities to conclude that modest break fees, disclosed exclusivity provisions with fiduciary exceptions, demonstrable funding arrangements and an independent expert's favourable report together sufficed for the Court to order convening of the scheme meeting at the first hearing. The decision confirms the Court's practical approach to first hearings: factual verification, independent expert opinion, transparency about contractual features and reassurance on funding are decisive (paras 6–8, 13, 15–17).
This judgment does not establish novel principles. It illustrates application of prior authority and regulatory guidance to the facts of a particular acquisition scheme.
Duty of disclosure (para 9):
Break fee assessment (para 11):
Protection against non-payment (para 13):
Threshold satisfaction (para 16):
This decision is relevant where:
When these elements are present at a first hearing, Stone J indicates the Court is likely to accede to convening orders, subject to any other compelling contrary material (paras 15–18).
The Reasons themselves do not record subsequent judicial consideration of this particular decision. Stone J explicitly relied upon and adopted reasoning from prior authorities (Re Permanent Trustee, Re APN and Investa) rather than announcing novel law (paras 9–11, 14). To determine how later courts have treated this judgment (e.g. whether it has been cited, followed, distinguished or criticized) requires further case-law research beyond these Reasons. The present judgment functions principally as an application of established principles to the facts rather than a locus classicus that seeks to alter the jurisprudence.
Depth of scrutiny for modest lock-up devices. Stone J concluded the break fee of less than 1% was not coercive (para 11), but the Reasons do not articulate a precise quantitative threshold applicable across contexts. How courts should analyse break fees that sit near such percentages, or where market conditions or deal structure make a smaller fee arguably coercive, remains a contextual question. The judgment does not attempt to prescribe a universal bright-line rule.
Extent of acceptable valuation conservatism. KPMG's valuation expressly excluded synergies unique to Henry Schein (para 6). The judge accepted the independent expert's methodology as appropriate in the circumstances, but did not explore further when exclusion of acquirer-specific synergies might undermine the fairness of a control premium. The interplay between independent expert methodology and unique acquirer synergies remains a fact-sensitive issue.
Limits of first-hearing scrutiny. The Court's approach reflects a pragmatic threshold test at first hearing: adequate disclosure, verification and protection of payment suffice to convene a meeting (paras 15–17). The boundary between sufficient and insufficient proof at the first hearing is inherently flexible. The judgment leaves open how much additional evidence might be required in more contentious or opaque transactions.
The weight to be given to ASIC's non-appearance. ASIC's letter that it would not appear at the first hearing was noted and relied upon (para 16). The judgment does not discuss the scenarios in which ASIC's engagement or opposition would change the outcome at the first hearing.
Post-implementation enforcement of warranties. While deeming warranties as to shares being fully paid and unencumbered were accepted as common (para 14), the judgment does not explore practical enforcement issues where encumbrances are discovered. The remedies and thresholds for refusing implementation in such cases remain governed by scheme terms and general law but are not analysed here.
Conclusion: Provet demonstrates the Federal Court's pragmatic, documentary-based approach to first hearings in scheme applications: comprehensive disclosure, an independent expert's favourable assessment, verified information, clear funding and ordinary contractual protections will generally suffice to obtain orders to convene the scheme meeting. The decision applies established authorities to the facts without extending legal doctrine.
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1358 of 2010
IN THE MATTER OF PROVET HOLDINGS LIMITED (ACN 092 593 774) PROVET HOLDINGS LIMITED (ACN 092 593 774)
JUDGE: STONE J DATE: 15 DECEMBER 2010 PLACE: SYDNEY
REASONS FOR JUDGMENT 1 This is an application under s 411(1) of the Corporations Act 2001 (Cth). The plaintiff, Provet Holdings Limited, seeks an order that the plaintiff convene a meeting of its shareholders for the purpose of considering, and if thought fit, agreeing (with or without modification) to approve the Scheme of Arrangement (Scheme). The plaintiff also seeks directions as to the conduct of the meeting. At the conclusion of the first Court hearing on 4 November 2010 I made the orders sought by the plaintiff. These are my reasons for making those orders. 2 The plaintiff, Provet Holdings Limited (PVT), is a public company listed on the Australian Stock Exchange (ASX) and provides a range of veterinary products as well as a range of products and services relevant to the management of veterinary practices. They include the provision of software, online ordering systems, website design and support and staff training. 3 The Scheme proposed between PVT and its shareholders is for the acquisition of PVT by Pelican Acquisition Company Pty Ltd (Pelican) which is a wholly owned subsidiary of Henry Schein Inc (HSI), a public company listed on the NASDAQ. After the acquisition PVT will be a subsidiary of Pelican and HSI and will no longer be listed on the ASX. 4 PVT has 43,546,212 ordinary fully paid shares on issue. In relation to the proposed Scheme the options open to shareholders are simple. They may (a) sell or transfer their shares to someone other than Pelican; (b) decide that the share price of $2.14 per share offered under the Scheme is adequate and vote in favour of the Scheme; (c) decide that the proposal is unattractive and vote against the Scheme; or (d) do nothing. 5 The Scheme Booklet describes the Scheme in detail and outlines why the directors of PVT have recommended that shareholders vote in favour of the proposed Scheme. The Booklet also lists reasons why shareholders may disagree with the director's recommendation. The Scheme Booklet also lists answers to "key questions" and includes information regarding the options open to shareholders.
Independent Expert's Report 6 The directors of PVT appointed KPMG Corporate Finance (Aust) Pty Limited (KPMG) as an independent expert to assess the Scheme. A copy of KPMG's report is annexed to the Scheme Booklet. The report concludes that the Scheme is fair and reasonable and in the best interests of PVT shareholders in the absence of a superior proposal. KPMG assessed the underlying value of PVT as in the range of $91.9 million to $98 million equating to per share value of between $2.05 to $2.19 ex-dividend using a capitalisation of earning methodology. The Report states that this methodology was thought appropriate given that the value of Provet lies in the ongoing operations of the Company and not the underlying assets. KPMG's assessment of the value of PVT incorporates a premium for 100% control of PVT. The Independent Expert Report states: When assessing the value of 100 percent of Provet, we have considered those synergies and benefits which would generally be available to a broad pool of hypothetical purchasers. We have not included the value of synergies and benefits that may be unique to Henry Schein. Accordingly, our valuation of a share in Provet has been determined regardless of the acquirer… Our assessed range for Provet, which includes a premium for control, exceeds the price at which, based on current market conditions, we would expect Provet shares to trade on the ASX, in absence of the Proposal or of any superior offer. 7 As the amount offered for each share (A$2.14) is within the range of value referred to above, KPMG concluded that the proposal was fair to shareholders. Equally important as the share price to shareholders are the funding arrangements for the funding of the Scheme Consideration. It is estimated in the Scheme Booklet that the amount required to be paid by Pelican if the Scheme becomes effective is approximately A$93.2 million. The arrangements have been accurately summarised in the Scheme Booklet as follows: HSI will provide [Pelican] with the funds required to pay the Scheme Consideration and associated transaction costs. HSI has undertaken to provide these funds to [Pelican] by a combination of equity and debt funding, … There are no provisions precedent to the provision of such funding by HSI, other than the Scheme becoming Effective. HSI has also agreed to guarantee the obligations of [Pelican] to pay the Scheme Consideration to PVT Shareholders. 8 The Scheme Booklet also gives a detailed explanation of the source of the funds to be provided by HSI and the amount of HSI's cash reserves and credit facilities.
Duty of Disclosure 9 In an application under s 411, the plaintiff has a duty of disclosure as described by Barrett J in Re Permanent Trustee Co Ltd (2003) 43 ACSR 601 at [7]: The fact that the application is ex parte is not without some significance. The absence of any defendant or contradictor sharpens the duty of the [Plaintiff]. While a case such as the present is distinguishable from one where an interlocutory injunction is sought in the absence of the defendant (in that there is here no defendant as such) I think it is fair to say that a [Plaintiff] in this kind of situation, like [a Plaintiff] ex parte for an injunction, carries the responsibility of bringing to the court's attention all matters that could be considered relevant to the exercise of discretion. In accordance with this duty the plaintiff brought a number of aspects of the proposed Scheme to the attention of the Court.
Break fee 10 In particular the Merger Implementation Deed between Provet, HSI and Pelican provides for a break fee of $925,000 to be paid if the Scheme does not proceed in certain circumstances. Those circumstances do not include a majority of the Provet shareholders voting against the Scheme. In relation to the question of break fee provisions I respectfully adopt the views expressed by Lindgren J in Re APN News & Media Limited [2007] FCA 770, (2007) 62 ACSR 400 at [43]-[55].. 11 As a percentage of equity value, the amount of the break fee is less than 1% which in the light of the Takeover Panel's Guidance Note 7: Lock-up Devices is not coercive or anti-competitive. As such it is not a basis for any adverse inference to be drawn in relation to the Scheme.
'No shop' and 'no talk' provisions 12 The Deed also contains common 'no-shop' and 'no-talk' provisions. That is during a defined exclusivity period Provet must ensure that "neither it nor any of its Subsidiaries" does anything to invite, encourage or bring about a Competing Proposal as defined in the Deed; cl 12.1. Provet must also ensure that "neither it nor any of its Subsidiaries" participates in negotiations or discussions concerning a Competing Proposal; cl 12.2. There is an exception to these provisions where conformity with them would involve breach of a fiduciary duty; cl 12.4. These obligations are disclosed in the Scheme Booklet (cl 6.5).
Performance risk 13 Protection of shareholders from the risk of not receiving the consideration in exchange for the transfer of their shares is provided in the Scheme itself. Clause 5 of the Scheme provides that before 10.00am on the Implementation Date, Pelican will deposit an amount equal to the aggregate Scheme Consideration in cleared funds into a trust account to be held by Provet in trust for all the Scheme Shareholders. Subject to that consideration having been paid in accordance with cl 5, on the Implementation Date the shares will vest in Pelican on Provet delivering to Pelican a duly completed Scheme Share Transfer executed on behalf of the Scheme Shareholders, Pelican duly executing the Transfer and delivering it to Provet for registration.
Warranty by Scheme Shareholders 14 The Scheme provides that each Scheme Shareholder is deemed to have warranted that on the date of the transfer, all their shares will be "fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and other interests of third parties of any kind, whether legal or otherwise". Provisions of that kind are common and have not been seen to constitute a problem: APN News & Media Limited at [57]-[63]; Investa Properties Ltd [2007] FCA 1104 at [21].
Evidence necessary for a first court hearing 15 I am satisfied from the evidence before me that the requirements necessary to be proved at a first court hearing in relation to an application under s 411(1) of the Corporations Act 2001 (Cth) have been met. In particular I am satisfied that the plaintiff is a Part 5.1 body, that the proposed Scheme is an "arrangement" within the meaning of s 411, that Mr Garth McGilvray, the Chairman of Provet has consented to act as chairman of the meeting and Mr Nigel Nichols, Director and Chief Executive Officer of Provet has consented to act in his absence. 16 I am satisfied that the Scheme is bona fide and properly proposed and that ASIC has been given an opportunity to examine the proposal and adequate notice of the first Court hearing date. The plaintiff has tendered a letter dated 2 November 2010 from ASIC stating that it does not propose to appear at the first Court hearing or to oppose the Scheme at that time. 17 The factual information in the Scheme Booklet has been verified on behalf of Pelican, in the affidavit of Mark Elchonen Mlotek affirmed on 27 October 2010. Mr Mlotek is Executive Vice President, Corporate Business Development of HSI. He deposes that Pelican and HSI in conjunction with their solicitors, Baker & McKenzie have undertaken a process of verification of the Pelican/HSI information which is described in detail. Similar evidence of verification was given by Nigel Nichols, Director and Chief Executive Officer of Provet in relation to the information concerning Provet. On the basis of that evidence I am satisfied that the process of verification in each case was careful and thorough and provides an adequate basis for the deponents' respective assertions that the information in the Scheme Booklet is correct. 18 On the basis of the evidence tendered at the hearing on 4 November 2010 and for the reasons given above, I made the orders sought by the plaintiff. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.
The Court ordered that, pursuant to s 411(1) Corporations Act 2001 (Cth), Provet convene a scheme meeting to consider the proposed scheme, approved the Scheme Booklet for distribution, appointed chairpersons, directed voting by poll, permitted discretionary adjournment by the chair, disapplied specified Corporations Regulations for the meeting, required publication of a notice of hearing, and stood the proceeding over to 15 December 2010 for the hearing to approve the scheme (Orders 1-10; Reasons paras 1, 15-18).