Re Healthscope Limited [2010] VSC 367 (3 September 2010)

2 The proposed scheme is the acquisition of the ordinary shares in Healthscope by Asia Pacific Healthcare Group Pty Ltd ("Asia Pacific Healthcare") in consideration for the payment to Healthscope shareholders of the amount of $6.26 per share less the amount of any dividend paid by Healthscope prior to the implementation date of the scheme ("the scheme consideration"). If the proposed scheme is implemented, Healthscope will become a wholly owned subsidiary of Asia Pacific Healthcare and will be de-listed from the ASX. The proposed implementation date is expected to be 12 October 2010.

3 Asia Pacific Healthcare was established for the purpose of the bid. That company is indirectly owned by funds advised and managed by two American private equity firms, the Carlyle Group and TPG Capital (collectively the "Consortium members"). The proposal from the Consortium members followed a competitive bidding process for Healthscope.

4 On 19 July 2010 Healthscope announced that it had signed a Scheme Implementation Agreement with Asia Pacific Healthcare and the Consortium members for Asia Pacific Healthcare to acquire all Healthscope's issued shares through a scheme of arrangement between Healthscope and its shareholders. The proposed scheme is subject to certain conditions precedent, including the approval of Healthscope shareholders at a meeting called for that purpose, and Court approval under s 411 of the Act.

5 The proposed scheme is unanimously recommended by the Healthscope directors, in the absence of a superior proposal and has been independently reviewed by an independent expert, Grant Samuel & Associates Pty Limited. The independent expert is of the view that the scheme consideration is fair and reasonable, that the prospects of a superior proposal are remote and that the proposed scheme is in the best interests of the Healthscope shareholders.

6 An explanatory booklet has been prepared to send to Healthscope's shareholders for the purpose of the shareholders voting on the proposed scheme. The booklet contains information about the proposed acquisition, the reasons for the directors' unanimous recommendation, the report from Grant Samuel & Associates on the proposal, as well as other information that the directors consider material to Healthscope shareholders making a decision on how to vote on the proposed scheme, including potential reasons for voting against the proposed scheme.

7 An order for convening a meeting for shareholders to vote on the scheme is the first step in the procedure for adoption and approval of the proposed scheme under s 411 of the Act.[1]

8 The function of the Court on an application to convene a meeting for a proposed scheme of arrangement[2] is well established by authority. The Court exercises a supervisory jurisdiction. Essentially the Court is concerned with whether the procedural and substantive requirements for the calling and conduct of a meeting will be met. The Court will consider:

(a) whether the scheme booklet that will be provided to the shareholders sufficiently discloses the detail and effect of the scheme and other matters that are material for shareholders to know about to be able to make an informed decision on how to vote;

(b) whether the contemplated procedure complies with the procedural requirements for the calling and the conduct of the meeting; and

(c) whether the Australian Securities and Investment Commission ("ASIC") has been given proper notice of the application and had reasonable opportunity to examine the proposed scheme.[3]

9 It is not the function of the Court on an application for an order convening a meeting to consider the business or commercial efficacy of the proposed scheme. That is a matter for the shareholders. Nor is it the Court's role at this stage of the process to express a view on whether the scheme should be approved by the Court, if the requisite majority of votes is obtained.[4] An order of the Court that the meeting be convened is not an indication that the Court has a view about whether the scheme will be approved or as to how shareholders should vote at the meeting.[5] The Court, at the stage of convening the meeting, will not ordinarily express its view on whether the arrangement should be approved by the Court, except if the Court was of the view that the scheme was incapable of approval so that it would be futile for any meeting to proceed.[6]

10 The application is made ex parte and thus the applicant has "the responsibility of bringing to the Court's attention all matters that could be considered relevant" to the exercise of power by the Court.[7]

B. Particular Aspects of the Scheme Arrangements

11 The Court's attention was drawn to the inclusion of certain provisions in the scheme documentation. These types of provisions have been judicially considered in several cases. None of those provisions are exceptional or, in my view, provide a reason for the Court to refrain from making an order for the convening of the meeting of Healthscope shareholders. The particular provisions are:

12 The proposed scheme provides for a deemed warranty from the Healthscope shareholders that their shares are free from encumbrances. The view consistently taken by Courts in recent times is that a deemed warranty clause is unobjectionable as the purpose and effect of a deemed warranty clause is simply to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged.[8] In the circumstances, and consistently with the preponderance of authority, I do not regard the warranty clause as posing any issue in relation to the Court exercising its power to convene the meeting.

13 I am also satisfied that there is adequate disclosure of this provision in the explanatory booklet.[9]

14 Healthscope has agreed to certain restrictions on its ability to solicit or accept alternative proposals for a certain period. Exclusivity provisions of the kind agreed to by Healthscope are a regular feature in Scheme Implementation Agreements. As Santow J observed in Re Arthur Yates & Co Ltd[10] these constraints recognise the commercial reality that a prospective bidder under a scheme would not wish to spend substantial time and money on a bid proposal only to find that the directors of the target company are using that bid to solicit superior offers. However such provisions can be unfair to shareholders, particularly if not qualified by reference to directors' fiduciary duties. Thus the Courts, at this first stage, have routinely examined whether these provisions may operate against the interests of the shareholders.

15 The Scheme Implementation Agreement contains a "No shop" clause, a "No Talk and no due diligence" clause and a "Notice of Competing Proposal" clause.

16 The "No shop" clause contains the agreement on the part of Healthscope not to solicit, invite or encourage, for a confined and prescribed period ("the exclusivity period"), any competing proposal to the Asia Pacific Healthcare acquisition proposal.

17 The "No Talk and no due diligence" clause provides that during the exclusivity period, Healthscope must not engage in negotiations with, or provide information to, any third party in relation to a competing proposal. This restriction is subject to a fiduciary carve out for the board of Healthscope if the board, in good faith and on legal advice, determines that a failure to respond to a superior proposal may constitute a breach of the directors' fiduciary and statutory duties.

18 The "Notice of Competing Proposal" clause requires Healthscope to notify Asia Pacific Healthcare of any competing proposal during the exclusivity period and give Asia Pacific Healthcare the opportunity to put a proposal to Healthscope that is more favourable.

19 Santow J in Re Arthur Yates & Co Ltd[11] said that an exclusivity provision should be for no more than a reasonable period that is capable of precise ascertainment, must be subject to an overriding obligation not to breach directors' fiduciary duties and should be given adequate prominence in the materials sent to members. The consistent approach of Courts in later cases has been to require a fiduciary carve out only in relation to "no talk" provisions.[12]

20 It is sufficient for present purposes to note that the exclusivity period is for five months which is within the period of restriction that the Courts have accepted as reasonable.[13]

21 I also note that the "no talk" provisions are subject to an exception recognising the directors' statutory and fiduciary duties.

22 The "No shop" and "Notice of Competing Proposal" provisions are not subject to the same exception. However, I am satisfied that these provisions are not inappropriate. The evidence was that the offer from Asia Pacific Healthcare followed a competitive bidding process and that the Healthscope directors considered that the likelihood of receiving a superior proposal after the public announcement of the proposal was therefore low. Ms Nicholls, the Chairman of Healthscope, also gave evidence to the effect that the board of Healthscope had concluded that these provisions were necessary to secure the benefit of Asia Pacific Healthcare's proposal whose overall terms and conditions, the board believed, would deliver significant benefits to Healthscope shareholders and did not operate against the interests of Healthscope shareholders.

23 In the circumstances, I do not consider on the material available to me that these exclusivity provisions are an obstacle to an order being made to convene a meeting.

24 I am also satisfied that the exclusivity clauses and how they operate are adequately disclosed in the explanatory booklet.

25 Healthscope is liable to a pay break fee of $19.9 million (exclusive of GST) to Asia Pacific Healthcare, if the proposed scheme is not implemented, to reimburse Asia Pacific Healthcare for its costs incurred in having entered into the transaction. Ms Nicholls deposed that the Healthscope board believed that it was appropriate for Healthscope to agree to the Healthscope break fee in order to secure Asia Pacific Healthcare's participation in the proposed transaction. This belief is reflected in cl 12.3 of the Scheme Implementation Agreement.

26 Break fees are also a commonplace feature in proposed arrangements. In Re APN News & Media Ltd[14] Lindgren J said:

• the costs incurred by the offeror company;
• the benefit that that company confers on the members of the target company by increasing its value; and
• the desirability from the viewpoint of those members that takeover offers be made to them.[15]

However the authorities recognise that it may be appropriate for the Court to decline to order that a scheme meeting be convened, if the Court is satisfied that the break fee is so large as to be likely to coerce the shareholders into agreeing to the scheme, rather than assessing the offer on its merits.[16]

27 The evidence is that the amount of the break fee is a genuine estimate of the costs reasonably incurred by Asia Pacific Healthcare as a result of entering into the scheme arrangement.[17] The amount of the fee is around the limit of the level of fees that the Takeovers Panel generally regards as not anti-competitive.[18] There is, in any event, a carve out from the obligation to pay all or part of the break fee if it is unlawful or involves a breach of directors' duties.[19] Furthermore, the break fee is not payable if the shareholders do not vote in favour of the scheme.[20] There is, in the circumstance, a proper basis for the Court to be satisfied that the fee is unlikely to coerce shareholders into agreeing to the scheme.

28 Asia Pacific Healthcare is also liable to Healthscope for a reverse break fee of US$30 million (exclusive of GST)[21] if Healthscope terminates the scheme implementation agreement due to a material breach by Asia Pacific Healthcare. A material breach is a breach of any of its obligations or where Asia Pacific Healthcare fails to pay the scheme consideration. The evidence was that Healthscope considers the fee an important compensatory mechanism for Healthscope if Asia Pacific Healthcare repudiates its contractual obligations. The evidence showed that the fee was the product of substantial arm's length negotiations and is favourable to Healthscope and its shareholders.

29 In the circumstances I do not consider on the material available to me that the fee provisions provide any reason for the Court declining to make an order to convene a meeting.

30 In my view the explanatory booklet adequately discloses the break fee and the reverse fee.

31 I do not consider that Healthscope shareholders will be unduly exposed to risk.

32 The contractual arrangements require the scheme consideration to be paid into an account in the name of Healthscope, to be held on trust for scheme shareholders ,before the Healthscope shares will be transferred to Asia Pacific Healthcare. Further, the obligations of Asia Pacific Healthcare are secured by deed poll in favour of the scheme shareholders.

33 I am satisfied that the explanatory booklet, on the face of it, contains the information required by the shareholders in order to make an informed decision on how to vote.

34 The proposed procedure for the calling and conduct of the meeting appears to be in accordance with the relevant requirements under the Act and the Constitution of Healthscope.

35 I am satisfied that ASIC was given proper notice of the application and had reasonable opportunity to examine the proposed scheme. ASIC provided a letter to the Court indicating that it did not intend to appear to make any submissions on whether the Court should make orders approving the convening of the meeting.

36 In light of these matters, I am satisfied that the meeting should be convened. The orders are:

1. Pursuant to s 411(1) of the Corporations Act 2001 (Cth) ("the Act"), the Plaintiff convene and hold a meeting ("the Scheme Meeting") of its shareholders to consider and, if thought fit, resolve to approve (with or without modification) the scheme of arrangement ("the Scheme") proposed to be made between the Plaintiff and its 'Scheme Shareholders', as defined in the scheme of arrangement in appendix 2 of the explanatory booklet which is exhibit "AC-3" to the affidavit of Alberto Colla sworn 19 August 2010 and filed herein ("the Explanatory Booklet") on the terms set out therein.

2. The Scheme Meeting be held at The Westin Melbourne, 205 Collins Street, Melbourne VIC 3000, commencing at 10:00am Melbourne time on 22 September 2010.

3. The Scheme Meeting be convened by sending on or before 23 August 2010 by ordinary pre-paid post to holders of shares in the Plaintiff:

• (a) a document substantially in the form of the Explanatory Booklet, which contains among other things:

(i) an explanatory statement for the Scheme in accordance with Part 5.1 of the Act; and

(ii) a notice of meeting in relation to the Scheme Meeting, contained in appendix 3 of the Explanatory Booklet;

(b) a proxy form in respect of the Scheme Meeting substantially in the form of the document which is part of exhibit "LBN-5" to the affidavit of Linda Bardo Nicholls sworn 13 August 2010 and filed herein; and

(c) a pre-addressed envelope for return of the proxy form.

For the purposes of voting at the Scheme Meeting, shares in the plaintiff will be taken to be held by the persons who are registered as holding them at 7:00pm Melbourne time on 20 September 2010.

Ms Linda Bardo Nicholls, A.O., or failing her, Mr Richard England, shall chair the Scheme Meeting.

Rule 2.15 of the Supreme Court (Corporations) Rules 2003 ("the Rules") shall not apply to the Scheme Meeting except in so far as that Rule applies regulation 5.6.13 of the Corporations Regulations 2001 (Cth).

Compliance with Rule 3.4 and Form 6 of the Rules is dispensed with.

The Plaintiff publish once in "The Australian" newspaper an advertisement substantially in the form of Annexure A to these Orders, such advertisement to be published on or before 15 September 2010.

The further hearing of the Originating Process be adjourned:

• (a) to Associate Justice Efthim on 23 September 2010 at 10:00am for the hearing of an application for orders and declarations pursuant to Rule 16.6 of the Rules as to the convening and conduct of the Scheme Meeting; and

• (b) to a Judge in the Commercial Court at 10:00 am on 24 September 2010.

[1] Corporations Act 2001 (Cth) s 411.

[2] The proposed share acquisition for cash so that the company becomes a wholly owned subsidiary of an acquiring entity is clearly an "arrangement" for the purposes of Corporations Act 2001 (Cth) s 411; Re APN News and Media Limited [2007] FCA 770; (2007) 62 ACSR 400; Re Hostworks Group Limited [2008] FCA 64; (2008) 26 ACLC 137.

[3] Corporations Act 2001 (Cth) s 411; F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 72 (Street CJ); Australian Securities Commission v Malborough Gold Mines Limited [1993] HCA 15; (1993) 177 CLR 485, 504 (Mason CJ, Brennan, Dawson, Toohey, Gaudron JJ); Re Opes Prime Stockbroking Ltd (Administrators Appointed)(Receivers and Managers Appointed) [2008] FCA 1425; (2008) 171 FCR 473, [102] (Finklestein J); Re CSR Ltd (ACN 000 001 276) [2010] FCAFC 34; (2010) 77 ACSR 592, 610 (Keane CJ, Jacobson J), 612 (Finklestein J); Re Foundation Healthcare Limited [2002] FCA 742; (2002) 42 ACSR 252 [36], [44] (French J); Re HIH Casualty and General Insurance Limited & Ors [2005] NSWSC 240; (2005) 215 ALR 562, 569 (Barrett J).

[4] Re Sonodyne International Limited (1994) 15 ACSR 494, 497 (Hayne J).

[5] Re CSR Ltd (ACN 000 001 276) [2010] FCAFC 34; (2010) 77 ACSR 592.

[7] Re Gas2grid Ltd [2010] FCA 10 (Unreported, Stone J, 20 January 2010).

[8] Re Hostworks Group Limited [2008] FCA 64; (2008) 26 ACLC 137; Re Macquarie Private Capital [2008] NSWSC 323; (2008) 26 ACLC 366; Re Dyno Nobel Limited [2008] VSC 154 (Unreported, Robson J, 16 May 2008); Re Coles Group Limited (2007) 25 ACLC 1380; Re Adelaide Bank Limited [2007] FCA 1582 (Unreported, Lander J, 5 October 2007); Re Orion Telecommunications Limited [2007] FCA 1389 (Unreported, Giles J, 4 September 2007). Cf Mincom Limited v EAM Software Finance Pty Ltd [2007] QSC 37; (2007) 61 ACSR 266.

[9] Re APN News &Media Ltd [2007] FCA 770; (2007) 62 ACSR 400, 413 (Lindgren J).

[10] [2001] NSWSC 40; (2001) 36 ACSR 758.

[12] Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400; Re Coles Group Ltd (2007) 25 ACLC 1380; Re Hostworks Group Limited [2008] FCA 64; (2008) 26 ACLC 137; Re Macquarie Private Capital A Ltd [2008] NSWSC 323; (2008) 26 ACLC 366.

[13] Eg Re Dyno Noble Ltd [2008] VSC 154 (Unreported, Robson J, 16 May 2008) (9 months); Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137 (6 months); Re Sino Gold Ltd [2009] FCA 1277; (2009) 74 ACSR 647 (7 months).

[14] [2007] FCA 770; (2007) 62 ACSR 400.

[16] Re Bolnisi Gold NL (ABN 14 008 587 086) (No 2) [2007] FCA 2078; (2007) 243 ALR 545.

[17] Scheme Implementation Agreement cl 12.2(a).

[18] Guidance Note 7: Lock-up devices [9]; Re People Telecom Ltd [2009] FCA 180 (Unreported, Jacobson J, 25 February 2009).

[19] Scheme Implementation Agreement cl 12.4.

[20] Scheme Implementation Agreement cl 12.3(ii)(c).

[21] Scheme Implementation Agreement cl 13.1.