Re M2 Group Ltd [2016] VSC 828 (5 February 2016)

1 This proceeding was commenced on 25 November 2015 by way of originating process under the Supreme Court (Corporations) Rules 2013 (Vic) (the Rules) seeking orders inter alia:

(a) that a meeting of the shareholders of the plaintiff, M2 Group Limited (M2), be convened pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) to consider a proposed scheme of arrangement (the scheme);

(b) for approval of the scheme under ss 411(4)(b) and 411(6) of the Act in the event that it was agreed to by the shareholders; and

(c) that M2 be exempted, pursuant to s 411(12) of the Act, from compliance with the requirements of s 411(11) of the Act.

2 The commercial purpose of the scheme is to give effect to the merger of M2 and Vocus Communications Ltd (Vocus) by the acquisition of all the shares in M2 by Vocus in exchange for shares in Vocus.

3 On 11 December 2015, I ordered that a meeting of the shareholders of M2 be convened for the purpose of considering, and if thought fit, approving a scheme, pursuant to s 411(1) of the Act; and that the further hearing of the originating process be adjourned to Randall AsJ on 3 February 2016.

4 M2 now seeks an order, pursuant to s 411(4)(b) of the Act, that the scheme, approved by the requisite majorities at the meeting of its members, on 28 January 2016, be approved by the Court.

5 The scheme meeting was convened and held on 28 January 2016. At the scheme meeting:

(a) 96.3 per cent of shareholders who were present and voting, either in person or by proxy, voted in favour of the scheme; and

(b) 99.69 per cent of the votes cast were in favour of the scheme.

6 On 3 February 2016, Randall AsJ made orders pursuant to r 16.6 of the Rules that:

(a) the scheme was approved by the requisite majority of shareholders; and

(b) the scheme meeting was duly convened and held in accord with the convening orders and the resolution was duly passed.

7 There was only one irregularity with respect to the convening of the meeting, noted in the orders made by Randall AsJ. The convening orders required M2 to send shareholders a proxy form substantially in the form of exhibit MCM-13 to the affidavit of Mr Mark Christopher Malinas, sworn 10 December 2015. The reference to MCM-13 was an error which was contained in the draft submissions provided to the Court. The relevant draft proxy was in fact exhibit MCM-12 to that affidavit. The final proxy form sent to M2 shareholders was substantially in the form of exhibit MCM-12.

8 As required by paragraph 15 of the convening orders, a copy of those orders was lodged with ASIC by 18 December 2015. The explanatory booklet referred to in paragraph 1(a) of the convening orders was registered with ASIC on 11 December 2015, as required by s 412(6) of the Act. On 27 November 2015, a notice advertising the hearing listed for 5 February 2016, was published in the Australian newspaper in accord with paragraph 12 of the convening orders.

9 The explanatory booklet explains that shareholders may oppose the approval of the scheme at the second hearing. Although neither the Act nor the Rules require ASIC to be given notice of the hearing listed for 5 February 2016, ASIC was provided with a copy of the convening orders, which included details of the further hearings of M2's application, including the hearing listed for today, and has been provided with a copy of all court documents filed in this proceeding, including the outline of submissions prepared by counsel.

10 On 4 February 2016, ASIC issued a letter advising that it had no objection to the proposed scheme arrangement, as outlined in the scheme booklet registered with ASIC on 11 December 2015, and approved by members on 28 January 2016.[1]

11 As at the present hearing, M2 had not received notice that any person intended to appear to oppose the scheme, or for any other reason.

12 Condition 3.1 of the scheme, which is appendix 4 of the explanatory booklet, lists several conditions precedent to the scheme. I am satisfied that all conditions precedent have been waived or satisfied, other than the condition precedent that the scheme is approved by the Court in accordance with s 411(4)(b) of the Act, and that at the time of the scheme meeting, there were no excluded shareholders.

13 I have been informed that if the Court grants approval of the scheme as sought, Vocus intends to rely upon the Court's approval for the purpose of an exemption under s 77c(a)(10) (3(a)(10)) of the Securities Act of 1933[2] (Securities Act) in connection with the implementation of the scheme. It is submitted that this has become a relatively common practice in schemes of arrangement, and I was referred to Texon Petroleum Ltd (No 2).[3]

14 M2 submitted that the position is summarised in Damian and Rich, Schemes, Takeovers and Himalayan Peaks as follows:[4]

In the US, mergers in which the consideration to be paid is shares or other securities and which must be approved by a vote of the target's public shareholders are not exempt from the US registration/prospectus requirements. The [US Securities and Exchange Commission] and the US courts... treat the merger vote in the same way as a public offering for the purposes of the US registration/prospectus requirements. However, in the case an Australian scheme of arrangement in which the bidder is proposing to issue securities as consideration, including the target members in, or who are citizens or residents of, the US, the bidder may be able to avoid the need to comply with the US registration/prospectus requirements if the scheme or arrangements satisfies the requirements of the exemption for registration afforded by s 3(a)(10)[5] of the US Securities Act 1933.

If the conditions of the s 3(a)(10)[7] exemption are satisfied, there is no need to file a registration statement with the US Securities and Exchange Commission in respect of the offer and sale of the securities to be issued to target members in, or who are citizens or residents of, the United States pursuant to the scheme of arrangement.

16 Section 77c(a)(10) (3(a)(10)) of the Securities Act is in the following terms:

(a) Exempted securities

Except as hereinafter expressly provided, the provisions of this subchapter shall not apply to any of the following classes of securities:

(10) Except with respect to a security exchanged in a case under Title 11 [of the United States Code], any security which is issued and exchanged for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorised by law to grant such approval.

17 One of the conditions of the exemption is that the Court must be advised before any hearing in which the scheme is approved that the issuer will rely on a s 77c (a)(10) exemption based on the Court's approval, in the event that the scheme is in fact approved. I have been so advised. This was advised to me in the plaintiff's submissions filed for the first court hearing. In addition, the notices section of the explanatory booklet contains a notice to the effect that Vocus intends to rely on an exemption from the registration requirements of the Securities Act provided under s 77c (a)(10) thereof in connection with the scheme.

18 A further condition is this court consider the fairness and reasonableness of the scheme of arrangement. As noted by Farrell J in Texon Petroleum Ltd (No 2):[8]

The authorities ... suggest that it is the practice of the court on applications such as these to note that the court does not act as a valuer. Rather, the court receives assistance from the reports of the independent experts in relation to the Schemes.

19 Grant Samuel & Associates Pty Ltd (Grant Samuel) prepared an independent expert's report in relation to the scheme. The report was not a sworn valuation, but rather a comment on whether the valuation given was fair.

20 The affidavit of Caleena Gay Stilwell of Grant Samuel, sworn 9 December 2015, which was relied upon by M2 at the first court hearing before me, deposed that 'the opinions expressed in the Grant Samuel report are opinions which I hold.'[9]

21 The opinion expressed in the Grant Samuel report is that the scheme is fair and (by reason of the fact that a fair transaction is always reasonable) that it is reasonable as well.[10]

22 It was submitted, referring to the decisions of Farrell J in Simavita Holdings and Texon Petroleum Ltd (No 2), that the Court, by reference to this evidence, can determine that the scheme is fair and should be approved. The draft order provided to me for my consideration for present purposes notes in 'other matters' that Vocus will rely on the Court's order for the purposes of qualifying for exemption from the registration requirements of the Securities Act provided for by s 77c (a)(10) (s 3(a)(10)) of that Securities Act in connection with the implementation of the scheme.

23 A similar note in the context of a scheme of arrangements was contained in the approval orders made by Jacobson J in Aston Resources Ltd (No 2) and by Farrell J in both Texon Petroleum Ltd (No 2) and Simavita Holdings. As with the case in those matters, the parties to the scheme (Vocus and M2) requested that the issue of s 77c (a)(10) (s 3(a)(10)) of the Securities Act be raised in the Court's reasons, which I have done.

24 I am satisfied that the scheme has been approved by the statutory majorities at the meetings ordered to be convened by the convening orders dated 11 December 2015, therefore my discretion to approve the scheme has been enlivened.

25 Reference has been made in the written submissions, on the extent to which I should take into account s 411(17) of the Act.

The court must not approve a compromise or arrangement of this section unless

(a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of chapter 6, or

(b) there is produced to the court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement, but the court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the court as mentioned in paragraph (b).

27 The prohibition in s 411(17) on the court approving a scheme of arrangement is removed by the satisfaction of ether sub-paragraph (a) or (b). As noted above, a 'no objection statement' has been provided by ASIC, the prohibition on me has been removed. However, as the section says, and as I explained in Re Coles Group (No 2),[11] the court retains a discretion not to approve the scheme, determined in accordance with the 'usual considerations'[12] and one of the matters the court may take into account in exercising such a discretion is whether the scheme has been proposed for the purpose of enabling any person to avoid the operation and provisions of chapter 6 of the Act. I am not satisfied there was such a purpose and therefore in my discretion I need not further take into account the provisions of s 411(17).

28 In approving the scheme of arrangement, the Court is required to be satisfied that there has been no oppression and that the compromise or arrangement is one which is capable of being accepted by the Court.

In order to approve the scheme, I have to be satisfied of certain matters. I discussed these in Re Coles Group Ltd (No 2). There I held that the matters I must be satisfied of were set out by Fry LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Company, where he said in relation to the approval of the scheme arranged by the court that:

...the Court is bound to ascertain that all conditions required by the statute have been complied with; it is bound to be satisfied that the proposal was made in good faith; and, further, it must be satisfied that the proposal was at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the Court may take into consideration I will not attempt to forecast.

30 I am satisfied that the requirements of the Act have been complied with and that the plaintiff has brought to the Court's attention all relevant matters. I am also satisfied that the disclosure to shareholders has been full and fair; that the scheme was proposed in good faith; and that the scheme is, so far, fair and reasonable, as that an intelligent and honest person, who is a member of that class of shareholders and acting alone in respect of his or her interest as such a member, might approve it.

31 I said at the initial hearing, this is a basic 'bread and butter' type scheme to effect a merger, and I do not see any objection to it.

32 As stated, the statutory majorities have been satisfied at the meeting of shareholders.

33 Uncontradicted evidence was tendered to the Court, from an expert report, that satisfies me that the consideration for the acquisition of the M2 shares is fair and reasonable.

34 Notice of the date of the second court hearing has been included in the scheme booklet sent to all shareholders of M2 prior to the proposal being considered by the scheme meetings, and was advertised in the daily newspaper circulating throughout Australia. There was no appearance by any shareholder.

35 In the circumstances I find that it is appropriate for the Court to exercise its jurisdiction to approve the scheme of arrangement.

36 M2 also seeks an order pursuant to s 411(12) that it be exempt from compliance with s 411(11) of the Act.

37 Section 411(11) of the Act requires that a copy of the Court's order approving a scheme of arrangement be annexed to every copy of the company's constitution issued after the order is made.

38 Section 411(12) allows the Court to exempt a body from compliance with this provision or to determine the period during which it shall comply.

39 I was referred to the decision of Croft J in Re AXA Asia Pacific Holdings Ltd (No 2),[14] where his honour observed that an order under s 411(12) 'is a usual adjunct to orders approving schemes to affect mergers or acquisitions.'[15]

40 In the circumstances where M2 will become a wholly owned subsidiary of Vocus, current shareholders are fully informed of the scheme, and the scheme will not alter the constitution of M2 or the rights of shareholders, creditors or other persons dealing with the company, I am prepared to make the order under s 411(12) exempting compliance by M2 with s 411(11) of the Act.

41 For the above reasons, I make the orders sought.

[1] That letter is exhibited (Exhibit MCM-22) to the sixth affidavit of Mr Mark Christopher Malinas dated 5 February 2016.

[3] (2013) FCA 147 [19] (wherein Farrell J refers to judgments of Jacobson J in Aston Resources Ltd, Re Aston Resources Ltd (No 2) [2012] FCA 401 ('Aston Resources Ltd (No 2)'); Barrett J in Re Permanent Trustee Co Ltd; Emmett J in Central Pacific Minerals NL [2002] FCA 239; and Lander J in Re Simeon Wines Ltd [2002] SASC 204; (2002) 42 ACSR 454).

[4] Tony Damian and Andrew Rich, Schemes, Takeovers and Himalayan Peaks. The use of schemes of arrangement to effect change of control transactions (Ross Parsons Centre of Commercial, Corporate and Taxation Law 3rd ed, 2013) 650.

[6] Tony Damian and Andrew Rich, Schemes, Takeovers and Himalayan Peaks. The use of schemes of arrangement to effect change of control transactions (Ross Parsons Centre of Commercial, Corporate and Taxation Law 3rd ed, 2013) 654.

[8] (2013) FCA 147 [21]. This is also noted by Farrell J in Simavita Holdings Ltd [2013] FCA 1274 ('Simavita Holdings').

[9] The affidavit of Caleena Gay Stilwell of Grant Samuel sworn 9 December 2015 [9].

'[f]or the purposes of a controlled transaction, "fair" and "reasonable" are treated as two separate concepts. Fairness involves questions of value while reasonableness relates to a variety of other issues that might impact on a shareholder's decision as to whether or not to accept an offer or vote in favour of a change of controlled transaction.

Fairness is a more demanding criteria. A "fair" proposal will always be "reasonable" but a "reasonable" proposal will not necessarily be "fair". ...'

[11] [2007] VSC 523; (2007) 65 ACSR 494, [68]-[78].

[12] Being those set out in the judgment of Fry LJ in Re Alabama, New Orleans, Texas Pacific Junction Railway Company (1981) 1 Ch 213 (see [69]).

[13] [2015] VSC 236, [9] (citations omitted).

[14] [2011] VSC 102.

[15] Re AXA Asia Pacific Holdings Ltd (No 2) [2011] VSC 102 [36].