Re AWB Ltd [2010] VSC 456 (7 October 2010)

2 The acquisition is to be achieved by way of a scheme of arrangement between AWB and its members under s 411 of the Corporations Act 2001 (Cth). If the scheme is approved and implemented, for each share that they hold in AWB, shareholders will receive a cash payment of $1.50 (less the cash amount of any special dividend paid by AWB before the scheme is implemented). Under the proposed scheme, AWB shares will be transferred to a wholly owned subsidiary of Agrium. The effect will be that AWB will also become a wholly owned subsidiary of Agrium. AWB will then be de-listed from the ASX.

3 There is a Scheme Implementation Deed between AWB and Agrium. One of Agrium's obligations under the deed is to arrange the money to pay the AWB shareholders for their shares under the proposed scheme.

4 Schemes similar to that proposed by AWB have been approved on many occasions and the proposed scheme is clearly an "arrangement" within the meaning of s 411 of the Corporations Act.[1] The proposed scheme is subject to a number of pre-conditions including AWB shareholders voting in favour of the proposed scheme under the Corporations Act and court approval under s 411 of the Act.

5 The AWB directors unanimously recommend, in the absence of a superior proposal, that the shareholders vote in favour of the scheme and they intend to vote in favour of the scheme resolution for all shares they hold or control. The directors have unanimously formed the view that the scheme is in the best interests of AWB shareholders. An independent expert, Lonergan Edwards and Associates Limited, is of the opinion that the acquisition of AWB shares by Agrium under the proposed scheme is fair and reasonable and is in the best interests of AWB shareholders in the absence of a superior proposal.

6 The scheme booklet prepared for AWB's shareholders contains information about the proposed scheme, why the directors unanimously recommend the proposed scheme, a summary of the scheme, the independent expert report of Lonergan Edwards and Associates Limited, the proposed scheme document together with all information which the directors have formed the view is required to be disclosed to AWB shareholders in connection with the proposed scheme.

7 It is intended that the scheme be implemented on 3 December 2010 on which date AWB shareholders will be paid for their shares under the proposed scheme.

When will a court make orders to convene the first meeting?

8 Under section 411 of the Corporations Act there are three parts to the process for a members' scheme of arrangement. The first is for the Court to order the convening of a meeting of shareholders.[2] The second is the holding of that meeting.[3] The last is for the Court to approve the scheme.[4]

9 In relation to the first stage, of the Court ordering the convening of a meeting, the Court's role is supervisory. The Court considers whether the scheme booklet that will be provided to shareholders explains the effect of the arrangement and includes other information about matters that are material for shareholders to know so that they can make an informed decision on how to vote and whether other prescribed information is contained in the scheme booklet. The Court must be satisfied that the Australian Securities and Investments Commission has been given proper notice of the application and had a reasonable opportunity to examine the terms of the proposed scheme and the draft explanatory statement.[5]

10 If it is unlikely that the proposed scheme will be finally approved by the Court, then the Court will not order the convening of a meeting of shareholders because it would be pointless to do so. However, unless it is obvious that the scheme will not be approved, the Court's concern is only to ensure that the procedural and substantive requirements of s 411 have been satisfied.[6] The Court does not form any views as to the merits of the proposed scheme nor as to how shareholders should vote. This is a matter for the shareholders. Similarly, the Court does not have any role in, nor is it responsible for, the content of the explanatory statement. It is now a requirement in this Court that a notice to this effect be displayed prominently in the scheme booklet or other material sent with the booklet to shareholders in relation to the scheme.[7]

11 Counsel has drawn my attention to a number of features of the scheme. Each of those features is now commonplace in schemes of the type proposed by AWB.

12 There is to be a deemed warranty provision by which each shareholder effectively warrants that their shares can be transferred to Agrium free of any mortgage or the like over them. There is now nothing unusual in such a provision, provided that, as here, the deemed warranty provision is drawn to the attention of shareholders in the scheme booklet.[8]

13 The proposed scheme also contains some exclusivity provisions. The exclusivity period will expire at the latest on 31 March 2011. Again, such provisions are of a kind commonly found in schemes of the type proposed. Colloquially they are referred to as "no-talk" and "no-shop" provisions.

(a) exclusivity provisions are for a reasonable period that can be ascertained precisely;

(b) there is a carve out permitting the scheme company's directors to entertain an alternative acquisition proposal in circumstances where their failure to do so would otherwise involve them in a breach of their fiduciary duties or would otherwise be unlawful; and

(c) the exclusivity provisions are given adequate prominence in the explanatory statement sent to shareholders,

then such provisions will not prevent the Court from making an order to convene a meeting of shareholders to vote on the scheme.[9] All of those prerequisites are satisfied in this case.[10]

15 The Scheme Implementation Deed between AWB and Agrium requires a "break fee" of $12.26m (exclusive of GST) to be paid by AWB if the scheme is not implemented in certain circumstances. Where, as here, the break fee is not more than 1% of the equity value of the scheme company, the courts have been willing to make orders for the convening of the first meeting of shareholders. The relevant issue is whether the liability to pay the break fee would be likely to coerce the scheme company's shareholders into agreeing to the scheme or to deter other companies from making a competing offer.[11] Here, the break fee is not likely to coerce AWB shareholders into agreeing to the proposed scheme. The break fee is not payable if the shareholders do not vote in favour of the proposed scheme. Further, the potential break fee is not so large that it is likely to deter other companies from making a competing offer. The break fee provision has been sufficiently disclosed in the scheme booklet.

16 Where, as here, proposed schemes involve a third party that is to provide the money to be paid to shareholders, the courts consider the level of risk that the paying party will not perform its obligations. Here, the money to be paid to shareholders must be deposited into an AWB account before the shares are transferred to Agrium's subsidiary. The moneys in that account are to be held on trust for the AWB shareholders. In addition, Agrium has executed a deed poll in favour of the AWB shareholders. In these circumstances, AWB shareholders will not be unduly exposed to risk if Agrium does not perform its obligations.

17 The Court must not approve a scheme of arrangement unless:

(a) it is satisfied that the scheme has not been proposed for the purpose of avoiding the operation of the takeover provisions; or

(b) ASIC has confirmed in writing that it has no objection to the compromise or arrangement.

18 AWB's company secretary and general counsel, Mr Peter Robert Patterson, has deposed that the transaction as presently structured is not proposed for the purpose of avoiding the takeover provisions. Further, ASIC has provided the form of letter of intent that it has become accustomed to give where it does not intend to appear to make submissions to oppose a scheme at hearings such as this.

19 I am satisfied that the scheme has not been proposed for the purposes of avoidance of the takeover provisions.

20 I am also satisfied that the necessary notice of the hearing has been given to ASIC and that it has had a reasonable opportunity to examine the terms of the proposed scheme and to make submissions to the Court.

21 The scheme booklet sufficiently explains the effect of the proposed scheme of arrangement and the other information required so that shareholders can make an informed decision on how to vote.

22 Computershare Investor Services Pty Limited is responsible for maintaining AWB's share register and oversees the distribution to AWB shareholders of correspondence, notices, reports and the like from AWB. Computershare keeps a record where correspondence sent to a shareholder is returned. As at 1 October 2010, approximately 5% of the total shareholders (who held approximately 1% of AWB's shares) had been listed by Computershare as having had mail returned. AWB proposes that, in relation to these shareholders, a letter (rather than the scheme booklet) will be sent to them informing them of the time, date and venue of the proposed scheme meeting and informing them that they can contact Computershare to update their registered address. The proposed scheme booklet will be accessible from AWB's website, the ASX website and free of charge from Computershare and AWB on request. There is also an AWB Information telephone line that shareholders can use. In those circumstances, the process proposed is adequate.

23 The other proposed procedures for the convening and conduct of the meeting appear to be in order and to satisfy the legislative requirements and the requirements of AWB's Constitution.

24 I am satisfied that the scheme should be put to the shareholders for their consideration at the proposed meeting and will order that it be convened.

[1] See for example Re Cytopia Limited (No. 2) [2010] VSC 4; Re Healthscope Limited [2010] VSC 367; Re Mitchell Communications Group [2010] VSC 423.

[2] Section 411(1) Corporations Act.

[3] Section 411(4)(a) Corporations Act.

[4] Section 411(4)(b) and (6) Corporations Act.

[5] Section 411(2) Corporations Act 2001 (Cth); Re Healthscope Limited [2010] VSC 367; Re CSR Limited [2010] FCAFC 34; (2010) 183 FCR 358.

[6] Re Healthscope Limited [2010] VSC 367; Re CSR Limited [2010] FCAFC 34; (2010) 183 FCR 358.

[7] Rule 3.3(4) Supreme Court (Corporations) Rules 2003.

[8] Re APN News and Media Limited [2007] FCA 770; (2007) 62 ACSR 400; Re Coles Group [2007] VSC 389; Re Healthscope Limited [2010] VSC 367.

[9] Re Arthur Yeates and Co Limited [2001] NSWSC 40; (2001) 36 ACSR 758; Re Healthscope Limited [2010] VSC 367.

[10] As to the length of exclusivity period that is reasonable see: Re Healthscope Limited [2010] VSC 367 and the cases cited in that decision.

[11] Re APN News and Media Ltd [2007] FCA 770; (2007) 62 ACSR 400; Re Coles Group Limited [2007] VSC 389; Re Healthscope Limited [2010] VSC 367.