Re Mitchell Communication Group [2010] VSC 423 (17 September 2010)

2 On 29 July 2010, Mitchell and Aegis entered into a Merger Implementation Agreement ("MIA"), providing for Aegis to acquire all of Mitchell's issued shares through a scheme of arrangement between Mitchell and its shareholders ("the proposed scheme"). The proposed scheme is subject to certain conditions precedent, including the approval of Mitchell shareholders at a meeting called for the purpose of voting on the scheme, and Court approval under s 411 of the Act.

3 Under the proposed scheme, holders of ordinary shares in Mitchell ("Scheme Participants"), apart from "Ineligible Foreign Shareholders", will be entitled to elect one of the following forms of scheme consideration:

(a) the payment by Aegis of $1.20 per Mitchell Share held by a Scheme Participant ("Cash Consideration"); or

(b) the transfer to Scheme Participants of new shares in Aegis issued at the rate of 40 Aegis shares for 67 Mitchell Shares. This will be subject to a cap on the overall number of new Aegis shares to be issued as share consideration, of approximately 9.99% of the share capital of Aegis. If the cap is exceeded, Scheme Participants will have their entitlements to new Aegis shares scaled back on a pro rata basis and the Scheme Participant will be entitled to Cash Consideration in the alternative; or

(c) 75% Cash Consideration and 25% Share Consideration; or

(d) 50% Cash Consideration and 50% Share Consideration; or

(e) 25% Cash Consideration and 75% Share Consideration.

4 Ineligible foreign shareholders will be deemed to have elected to receive cash consideration.

5 If the Mitchell Scheme is implemented, Mitchell will become a wholly owned subsidiary of Aegis. The implementation date is expected to be 17 November 2010.

6 The Mitchell Scheme is unanimously recommended by the Mitchell directors, in the absence of a superior proposal, and has been independently reviewed by an independent expert, Ernst & Young Transaction Advisory Services Limited. The independent expert is of the view that the Scheme Consideration is fair and reasonable and that the Mitchell Scheme is in the best interests of Mitchell shareholders.

7 An explanatory booklet has been prepared to send to Mitchell 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 the independent expert on the proposal, as well as other information that the directors consider material to Mitchell shareholders in order to make a decision on how to vote on the proposed scheme, including potential reasons for voting against the proposed scheme.

8 The role of the Court is to consider whether there are issues about the scheme which could lead the Court to refuse to approve the scheme, whether there is adequate disclosure of the scheme in the explanatory booklet ad whether the requirements for calling a meeting will be met.[1]

C. Particular aspects of the Scheme Arrangement

9 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 Mitchell's shareholders. The particular provisions are:

10 Clause 4.5 of the Mitchell Scheme provides that each Scheme Participant warrants to Aegis that their Scheme 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 the deemed warranty clause is simply to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged.[2]

11 Lindgren J in Re APN News & Media Ltd[3] explained how a deemed warranty achieves this effect:

the purpose of the deemed warranty is to prevent a shareholder whose shares are subject to encumbrances from receiving the same scheme consideration as that to be received by those whose shares are free from encumbrances, without any obligation, in effect, to refund to [the acquirer] the amount required to discharge the encumbrance...The amount of the damages payable for breach of the warranty is the amount required to discharge the encumbrance.[4]

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.

12 I am also satisfied that there is adequate disclosure of this provision in the explanatory booklet.

13 "Ineligible Foreign Shareholders" will be deemed to have made a valid election to receive 100% cash consideration in respect of all Scheme Shares held by those shareholders, unless they give a warranty to Mitchell in relation to compliance with legal and regulatory requirements of the relevant jurisdiction and Mitchell and Aegis are satisfied that the issue of Aegis shares is lawful and not unduly onerous or impracticable in that place. In my view the requirement that foreign shareholders give such a warranty is not unfair or unreasonable.

14 I am also satisfied that there is adequate disclosure of this warranty in the explanatory booklet.

15 Mitchell has agreed to certain restrictions on its ability to solicit or accept alternate proposals for a certain period. Such exclusivity provisions recognize 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 were using that bid to solicit superior offers.[5] However, the Courts may examine whether the content and disclosure of these provisions may operate against the interests of the shareholders.

16 Clause 9.1 of the MIA is headed "No-talk" and it contains provisions to the effect that Mitchell must not participate in negotiations with, or provide information to, or enter into any agreement with any third party in relation to a competing proposal to the proposed scheme. The "no-talk" restrictions do not apply in respect of a bona fide competing proposal which was not solicited or invited, provided that the Mitchell Board in good faith and on legal advice determines that failing to respond to the competing proposal would be reasonably likely to involve a breach of their fiduciary or statutory duties or obligations or would otherwise be unlawful.

17 Clause 9.2 of the MIA is headed "No-shop" and it contains provisions for restricting Mitchell from solicitation of or entering into discussions which may lead to a competing proposal (as defined in the MIA).

18 Clause 9.4 of the MIA is headed "Notification of approaches and opportunity to match" and requires Mitchell to notify Aegis of any competing proposal during the exclusivity period and give Aegis the opportunity to put a proposal to Mitchell which is more favourable.

19 Santow J in Arthur Yates & Co Limited[6] 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 director's 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.[7]

20 I am satisfied that none of these provisions are an obstacle to an order being made to convene the meeting.

21 First, the exclusivity period is for a specified period of just less than 5 months.[8] Such a period is within the period of restriction that the courts have accepted as reasonable.[9]

22 Secondly, the "no-talk" provision is subject to an exception recognising the director's statutory and fiduciary duties

23 Thirdly, the "no-shop" and "notification of approaches and opportunity to match" provisions, although not subject to the same exception, are not unfairly prejudicial to the interests of the shareholders and I accept the evidence that the directors of Mitchell agreed to the inclusion of these provisions in the MIA in the interests of the Mitchell shareholders.

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

25 Clause 10.2 and 10.3 of the MIA contain certain provisions in relation to a reciprocal break fee of $2.7 million payable if the merger does not proceed for certain reasons specified in those clauses.[10] The purpose of these clauses, as recorded in cl 10.6 of the MIA, is to compensate the payee for advisory and other costs and expenses payable or incurred in relation to the merger.

26 The Courts have recognised that break fees may be justified by reference to the costs incurred by the parties, the benefit conferred on the members of the target company by the offer in terms of increasing the value of the target, and the desirability from the point of view of those members that takeover offers be made.[11] In order to assess the appropriateness of a break fee, it is relevant to consider whether it was the product of ordinary commercial negotiation, the attitude of the directors to it, and its proportionate value.[12] The Takeovers Panel's Guidance Note 7: Lock-up Devices states that:

It is good practice for anyone who agrees to pay a break fee to negotiate a fixed or capped figure, whether dollar or percentage based. In this regard, the Panel will use a guideline that a fee should not exceed 1% of the equity value of the target. For this purpose, the equity value is the aggregate of the value of all classes of equity securities issued by the target, where relevant having regard to the value of the consideration under the bid, as at the date the bid is announced.

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 to assess the offer on its merits.[13]

27 The break fee in this case is in accordance with those guidelines. In particular, the evidence shows that:

(a) the break fee was the result of ordinary commercial negotiation between Mitchell and Aegis;

(b) the directors of Mitchell believe that the break fee provisions are reasonable to protect Mitchell against the costs incurred if the Mitchell Scheme is not implemented and that the break fee is appropriate to secure each parties' participation in the Mitchell Scheme, and that it was in the interests of Mitchell shareholders that the directors of Mitchell agreed to the inclusion of those provisions in the MIA;[14]

(c) the break fee of $2,700,000 in comparison to the transaction's equity value of $363,000,000 million is 0.75%. This calculation results in the break fee comprising less that the 1% of equity value guideline on break fees set down by the Takeovers Panel; and

(d) there is, in any event, a carve-out from the obligation to pay to the extent that such payment would constitute "unacceptable circumstances" or would be unlawful for any other reason (as determined by a Court, arbitral tribunal or Takeovers Panel).

28 Furthermore, the circumstances in which the break fee must be paid do not include the circumstance that Mitchell shareholders reject the Mitchell Scheme.

29 Accordingly, I am satisfied that the fee is unlikely to coerce shareholders into agreeing to the scheme.

30 In a number of recent decisions, Courts considering applications under s 411(1) for orders convening a meeting have directed attention to what has been called the "performance risk". As Gyles J in the Federal Court put it in Re SFE Corporation Ltd (ABN 74 000 299 392)(No 1):[15]

It seems to me, however, that schemes of this kind would be more acceptable if a procedure be devised whereby a mechanism were built in by which a third party such as a trustee company would have the role of suing on behalf of former shareholders in the target company. An alternative safeguard in relation to the cash portion of the payment would be to set aside a trust fund immediately before the vesting of the shares in the acquiring company. I do not see why shareholders whose shares are divested should run any performance risk so far as the quid pro quo is concerned.[16]

31 I am satisfied that the provisions of cl 5 of the Scheme satisfy these requirements:

(a) as to the Cash Consideration, cl 5.3 provides for Aegis to deposit the Cash Consideration into a trust account operated by Mitchell for the benefit of those Scheme Participants who have elected to receive cash consideration no later than two business days before the implementation date;

(b) as to the Share Consideration, cl 4.2 provides that the transfer of the Scheme Shares to Aegis on the implementation date is subject to cl 5.5 (amongst other clauses), which provides that Aegis must issue the New Aegis Shares on the implementation date and enter the name of each Scheme Participant in the Aegis share register in respect of the New Aegis Shares which that Scheme Participant is entitled to receive.[17]

32 In addition, Aegis has signed a deed poll, enforceable by any Scheme Participant, through which Aegis covenants to undertake the relevant steps required under the scheme.

33 In the circumstances I am satisfied that the scheme participants will not be unduly exposed to risk.

34 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.

35 On 29 June 2010 Aegis entered into a option deed with Harold Mitchell under which Aegis holds an option to purchase a portion of his shareholding equating to approximately 19.9% of the issued share capital in Mitchell.

36 The Court's attention was drawn to the option deed in case there may be an issue that the deed may give rise to separate classes of shareholders for the purposes of the proposed meeting. I am presently satisfied that there is no issue.

37 The test for whether the option deed causes a separate class is not one of identical treatment but of community of interest. The relevant question is whether the rights of particular persons are so dissimilar that they cannot sensibly consult together with a view to their common interest but must be given separate meetings. Persons whose rights are sufficiently similar that they can consult together with a view to their common interest should be summoned to a single meeting. [18]

38 I note that the price to be paid by Aegis, if it exercises its option, will be equivalent to the share consideration under the Mitchell Scheme and that the option lapses on 29 April 2011, whether or not the Mitchell Scheme is approved. For the purposes of convening the meeting it is reasonable to assume that the option deed does not give rise to different interests.[19]

39 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.

40 In light of these matters, I am satisfied that the meeting should be convened.

[1] Re Healthscope Limited [2010] VSC 367 (Unreported, Davies J, 3 September 2010).

[2] Re Healthscope Limited [2010] VSC 367 (Unreported, Davies J, 3 September 2010); 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.

[3] [2007] FCA 770; 62 ACSR 400.

[5] Re Healthscope Limited [2010] VSC 367, [14] (Unreported, Davies J, 3 September 2010).

[6] [2001] NSWSC 40; (2001) 36 ACSR 758.

[7] Re Healthscope Limited [2010] VSC 367, [14] (Unreported, Davies J, 3 September 2010); 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.

[8] From 29 July 2010, the date of signing of the MIA, to 12 December 2010.

[9] Re Healthscope Limited [2010] VSC 367, [20] (Unreported, Davies J, 3 September 2010); 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).

[10] Draft Scheme Booklet, sections 43(c) and 15; Littlefield Affidavit, [43]-[47].

[11] Re APN News & Media Ltd (2007) 62 ASCR 400 [44].

[13] Re Healthscope Limited [2010] VSC 367, [26] (Unreported, Davies J, 3 September 2010).

[14] Affidavit of Luke Littlefield affirmed 2 September 2010, 12 [46]- [47].

[15] (2006) 59 ASCR 82.

[17] Re WebCentral Group Ltd [2006] FCA 937 (Unreported, Lindgren J, 24 July 2006)

[18] Re Opes Prime Stockbroking Ltd (recs and mgrs apptd)(in liq)(ACN 086 294 028) and Others [2009] FCA 813; (2009) 258 ALR 362, 380, [65], Finkelstein J quoting Lord Millett sitting in the Court of Final Appeal in Hong Kong, in UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] HKCFA 54; [2001] 3 HKLRD 634, [27]. See also Re Wattyl Ltd [2010] FCA 854, [15]-[16] (Unreported, Stone J, 10 August 2010), applying Re Hills Motorway Management Ltd [2002] NSWSC 897; (2002) 43 ACSR 101, 104 (Barrett J).

[19] Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137, [43]-[45]; Tony Damian, Andrew Rich, Schemes, takeovers and Himalayan Peaks (2nd ed, 2009) 209.