Re Skilled Group Limited (No 1) [2015] VSC 789 | Case summary

Supreme Court of Victoria|2015-08-21|Before: Robson J

CORPORATIONS - Scheme of arrangement - Scheme to effect a merger - Application for order to convene meeting to approve scheme - Consideration of test for constituting different classes - Consideration of interests of employees who are also members - Consideration of matters to be addressed by Court in convening meeting of shareholders to consider a scheme - Consideration whether dividend payable by company being acquired as part of the scheme is financial assistance to the acquiring company - Corporations Act 2001 (Cth) ss 260A, 411.

1. I have before me by way of an originating process dated 29 July 2015 an application by the plaintiff, Skilled Group Limited (Skilled), for orders under s 411(1) of the Corporations Act 2001 (Cth) (Act) for a meeting of its members to be convened for consideration of a scheme of arrangement (the scheme) proposed to be made between Skilled and its members, involving the acquisition of all of the shares in Skilled by Programmed Maintenance Services Limited (Programmed), and for associated orders and directions.

2. The application involves a two-stage process as provided for in s 411(4) of the Act: first, obtaining an order that Skilled convene a meeting of the scheme participants; and second, if the meeting approves the scheme, an application for the approval by the Court of the scheme. At the second stage, Skilled intends to seek orders pursuant to ss 411(4)(b) and 411(6) of the Act approving the scheme, and s 411(12) of the Act that Skilled be exempted from compliance with s 411(11) of the Act.

3. The application currently before me is at the first stage. Skilled seeks the following orders:

(a) pursuant to s 411(1) of the Act, Skilled convene and hold a meeting of its shareholders (scheme meeting) to consider and, if thought fit, to approve (with or without modification) the scheme proposed to be made between Skilled and its shareholders, the terms of which are set out in the explanatory memorandum; and

(b) various other orders providing directions as to the manner in which the meeting is to be convened and conducted, and the distribution of relevant documents, in particular, the explanatory memorandum and notice of the meeting.

4. The application is supported by a number of affidavits. These include, relevantly, the affidavit of Peter Gage Sise affirmed 29 July 2015 and the exhibits thereto; the affidavit of Sharyn Anne Page dated 18 August 2015 and the exhibits thereto (including a draft explanatory memorandum and a copy of the scheme implementation agreement (Page affidavit); the affidavit of Jarrod Rubin Blusztein dated 18 August 2015 and the exhibits thereto; the affidavit of Caleena Gai Stilwell dated 19 August 2015 and the exhibit thereto; the affidavit of Stephen Michael Leach dated 17 August 2015 and the exhibits thereto (Leach affidavit); the affidavit of Gary William Kent dated 19 August 2015; and second affidavit of Peter Gage Sise dated 20 August 2015 and the exhibits thereto.

5. The scheme meeting will be asked to consider and, if thought fit, pass a resolution (with or without modification) agreeing to the scheme.

6. The scheme provides for the acquisition of all of the shares in Skilled (Skilled shares) by Programmed. It is provided for by a scheme implementation agreement (SIA). Skilled shareholders will be provided with information regarding the scheme by an Explanatory Memorandum (draft explanatory memorandum). The scheme of Arrangement is Annexure D to the explanatory memorandum (scheme terms). Details of the scheme terms are summarised in the Page affidavit. The mechanism for the scheme is set out further below.

7. If the scheme is to proceed, all conditions precedent (other than Court approval) will be either satisfied or waived by the date on which the application for approval comes before the Court

8. If the scheme is approved by shareholders and ultimately by the Court, it becomes effective on the lodging of an office copy of the Court's order with the Australian Securities and Investments Commission (ASIC), which is currently expected to occur on 1 October 2015.

9. The SIA provides for the scheme to be effected for the following consideration, and by way of the following mechanisms, which were summarised in the plaintiff's submissions.

(a) Skilled will apply to the Australian Securities Exchange (ASX) for suspension of trading of Skilled shares with effect from the close of business on the day the scheme becomes effective, which is expected to be 1 October 2015;

(b) holders of Skilled shares will receive the following consideration (scheme consideration):

(i) a special dividend of $0.155 (Skilled special dividend) for each Skilled Share that they hold on the record date for receipt of the special dividend, which is currently expected to be 7.00 pm (Melbourne time) on 7 October 2015 (dividend record date). The Skilled special dividend will be paid on 15 October 2015; and

(ii) 0.55 newly-issued ordinary shares in Programmed (new Programmed shares) for each Skilled share that they hold on the record date for participation in the scheme, which is currently expected to be 7.00 pm on 9 October 2015 (scheme record date). The new Programmed shares will be issued on the day the scheme is implemented, which is currently expected to be 16 October 2015;

(c) in addition, holders of Skilled shares will receive a 'Skilled FY15 Final Dividend' of $0.095 per Skilled share held on the dividend record date. The Skilled FY15 final dividend will be paid to shareholders on 15 October 2015, whether or not the scheme becomes effective and has been declared by the Skilled board;

(d) on 15 October 2015, Programmed must deposit an amount equal to the 'Cash Consideration' for the scheme into a trust account operated by Skilled for the benefit of Skilled shareholders. 'Cash Consideration' is defined in the SIA and in the scheme terms as $0.25, less the amount of any Skilled FY15 Final Dividend and any Skilled special dividend. It was explained by Skilled that it is expected that the Skilled FY15 Final Dividend and the Skilled special dividend will be paid by Skilled and hence no deposit (and no cash consideration) will be required from Programmed. If either or both dividends are not paid or are only partly paid, Programmed will be required to pay the holders of Skilled shares an amount up to $0.25 by way of deposit into the Skilled trust account;

(i) Skilled must pay any cash deposited by Programmed in the trust account to holders of Skilled shares on the scheme record date (scheme shareholder) (see further paragraphs 32 to 37 below under the heading 'Performance Risk');

(ii) Programmed must issue to each eligible scheme shareholder the number of new Programed shares that they are entitled to;

(iii) all Skilled shares must be transferred to Programmed, but only after Programmed has deposited an amount equal to any 'Cash Consideration' payable by it into the Skilled trust account as set out above, Skilled has paid those amounts from the trust account to each Skilled shareholder, and Programmed has issued the requisite new Programmed shares to each eligible scheme shareholder.

(f) Skilled will apply to the ASX for termination of the official quotation of Skilled Shares on the ASX and to have itself removed from the official list of the ASX with effect from the business day immediately following the implementation of the scheme.

11. If implemented, the scheme will result in all Skilled shares being transferred to Programmed, Skilled becoming a wholly-owned subsidiary of Programmed, and holders of Skilled shares owning approximately 52.4 per cent of Programmed.

12. Programmed's obligations in respect of the scheme are secured by its entry into a Deed Poll.

13. An independent expert valuer has provided an opinion that the proposed scheme is in the best interests of Skilled shareholders, and considers that the scheme is fair and reasonable.

Court's discretion under s 411 of the Act

14. My power to order that Skilled convene a meeting of shareholders to consider and vote on the scheme is discretionary. The discretion is only enlivened if the requirements provided for in ss 411(1) and 411(2) of the Act are met.

15. Section 411(1) of the Act provides:

Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings.

16. Section 411(2) of the Act provides:

The Court must not make an order pursuant to an application under subsection (1) or (1A) unless:

(a) 14 days' notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and

(b) the Court is satisfied that ASIC has had a reasonable opportunity:

(i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and

(ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.

17. In summary, s 411(1) of the Act confers a discretion on the Court to make an order if:

(a) a compromise or arrangement is proposed between a Pt 5.1 body and its members (or any class of them);[1]

(b) application for the order is made in a summary way by the body;[2]

(c) 14 days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits);[3] and

(d) the Court is satisfied that ASIC has had a reasonable opportunity:

(i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and

(ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.[4]

18. ASIC was provided with the requisite period of notice and advised Skilled that it did not intend to appear to make any submissions to the Court in relation to the scheme.

19. I am satisfied that the evidence presented satisfies each of the requirements in ss 411(1) and 411(2) and that, accordingly, the Court's power is enlivened.

20. The Court's power to exercise its discretion to order that Skilled should convene a meeting is enlivened. What is the role of the Court in exercising that discretion?

21. The function of the Court on an application to convene a meeting for a proposed scheme of arrangement is supervisory. The Court must determine whether the procedural and substantive requirements for the calling and conduct of a meeting are met.

22. Skilled submitted that the Court must be satisfied that:

(a) the scheme is one which is fit for consideration by the proposed meeting;[5] and

(b) members will be properly informed of the nature of the scheme before the scheme meeting.[6]

23. Hayne J stated in Re Sonodyne International Ltd that the question for the Court at this stage of the process is:[7]

... whether the scheme is such that it could reasonably be supposed by sensible business people to be for the benefit of the class concerned. That is, the test in the present case is whether it is reasonable to suppose that sensible business people might consider that the arrangement proposed by the company is of benefit to its members.[8]

24. In Re Orica Limited,[9] Davies J stated (at [7]) that the function of the Court on an application to convene a meeting is:[10]

(a) to consider whether the scheme booklet that will be provided to the shareholders sufficiently discloses the detail and effect of the scheme to enable shareholders to make an informed decision on how to vote;

(b) to consider procedural matters about the calling and conduct of the meeting;

(c) to ascertain whether the Australian Securities and Investments Commission ("ASIC") has had reasonable opportunity to examine the proposed scheme;

(d) to consider whether there may be matters that may make it unlikely that the scheme would be capable of a grant of approval by the Court if, in due course, its approval is sought and so make it futile to put the scheme to the shareholders for their vote.

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, as that is a matter for the shareholders nor is it the Court's role to express a view on whether the proposed scheme should be approved, if the requisite majority of votes is obtained. An order of the Court that the meeting be convened is not an indication that the Court has a view as to the merits of the scheme or as to how shareholders should vote.[11]

26. The Court may therefore consider whether:[12]

... there is any presently discernible reason as to why the proposed scheme of arrangement should not be put to the meeting of the members to vote on. Ordinarily, the Court will not order the convening of a meeting "unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the ... meeting the court would be likely to approve it on the hearing of a petition which is unopposed".

27. I propose to consider the matter in two parts:

(a) First, whether the scheme is fit for consideration, having regard to the test espoused in Re Sonodyne and the other authorities above; namely, that it is reasonable to suppose that a sensible businessperson might consider the arrangement proposed by the company is of benefit to members. This may involve consideration of whether there are any matters which may make it unlikely that the Court would approve the scheme, if approval is ultimately sought. However, it is not the role of the Court to consider the 'business or commercial efficacy' of the proposed scheme; and

(b) Second, whether members will be properly informed of the detail and effect of the scheme, to enable them to make an informed decision on how to vote.

28. Skilled submitted that the scheme is one which is fit for consideration by the proposed meeting of shareholders of Skilled. In this regard, Skilled submitted that the question whether or not to accept particular consideration for shares is quintessentially a commercial matter for the members of Skilled to assess. They ought not be prevented from having the opportunity to do so provided that the Court can be satisfied that they are 'acting on sufficient information and with time to consider what they are about, and are acting honestly.'[13]

29. It is relevant in this respect, Skilled submitted, that the draft explanatory memorandum contains:

(a) a recommendation from all directors who have made a recommendation[14] that shareholders vote in favour of the scheme;

(b) a statement that all directors intend to vote their Skilled shares in favour of the scheme; and

(c) an expert report that the scheme is fair and reasonable and in the best interests of Skilled shareholders.

30. Having regard to my earlier decisions in Re Toll Holdings Limited[15] and Re Coles Group Ltd,[16] Skilled provided comprehensive submissions on various aspects of the scheme which the Court should consider in the exercise of its discretion.[17] Those are as follows:

(g) purpose of the scheme (ie, not to avoid Chapter 6 of the Act).

32. In considering whether to approve a scheme involving the participation of a person other than the company and its members (in this case, Programmed), it is appropriate to ensure that the other party is bound to perform the role assigned to it and that its obligations are able to be enforced. This is because Programmed's obligations do not depend upon s 411 of the Act, which is confined to the obligations of Skilled and its members.[18]

33. The courts, in some recent cases, have discussed the question of 'performance risk' as regards the obligations to be performed by the non-scheme party.[19]

(a) under clause 4.3(a)(i) of the scheme terms, Programmed is required by no later than the business day before the implementation of the scheme to deposit the aggregate amount of the cash consideration (to the extent any is payable by Programmed) into a trust account operated by Skilled, such amount to be held on trust by Skilled for the scheme shareholders;[20]

(b) under clause 4.3(a)(ii) of the scheme terms, subject to the cash consideration being deposited into the Skilled trust account, Skilled must pay on the day of the implementation of the scheme, or procure the payment of, the cash consideration to each scheme shareholder;

(c) under clause 4.3(b) of the scheme terms, Programmed is required on the day of the implementation of the scheme to issue the requisite new Programmed shares to each eligible scheme shareholder; and

(d) clause 4.2(a) of the scheme terms provides that the proposed transfer of Skilled shares to Programmed is subject to the scheme consideration being provided to the scheme shareholders as set out above.

35. Further, Programmed has entered into a Deed Poll dated 14 August 2015 in favour of the scheme shareholders. Under clause 3 of the Deed Poll, Programmed undertakes in favour of the scheme shareholders to perform the actions attributed to it under the scheme in relation to the payment of the scheme consideration, and otherwise to perform all other obligations attributed to it under the scheme as if named as a party to the scheme.

36. It was noted by Skilled that while the Deed Poll contains undertakings in favour of the scheme shareholders to pay the scheme consideration, the proposed transfer of Skilled shares to Programmed is in any event subject to provision of the scheme consideration to the scheme shareholders.

37. In addition, as noted above, Skilled intends that the cash component of the scheme consideration is to be paid by way of fully franked dividends by Skilled to shareholders. The Skilled FY15 final dividend was declared by the Skilled board on 5 August 2015. The Skilled special dividend is expected to be declared on 25 September 2015 if the requisite majorities vote in favour of the scheme. Accordingly, once both dividends are declared, the relevant members have rights against Skilled in relation to payment of those dividends. It is only in the unlikely event that those dividends are not declared and paid that shareholders will have to rely on their rights against Programmed in respect of the cash consideration.

38. Clause 10 of the SIA contains certain provisions in relation to a fee of $3.5 million (reimbursement fee) which may be payable by Skilled if, at any time after the date of the SIA (24 June 2015), the scheme does not become effective because:

(a) (Competing proposal) a 'Competing Proposal' (as defined in clause 1.1 of the SIA) is announced during the Exclusivity Period[21] and, within 12 months of the announcement, the competing bidder:

(i) acquires an economic interest in all or a substantial part of the business, assets or undertakings of Skilled, acquires control of Skilled, acquires a Relevant Interest (as defined in the Act) in 20 per cent or more of Skilled shares, or otherwise acquires Skilled; or

(ii) enters into an agreement or understanding with Skilled requiring the abandonment or otherwise the failure to proceed with the acquisition by Programmed of Skilled shares (clause 10.2(a), SIA);

(b) (Change of recommendation) a majority of Skilled directors fail to recommend the scheme or publicly change, withdraw or in any way qualify their recommendation or voting intention or publicly recommend a competing proposal, except if the change in recommendation follows the receipt of an independent expert report which states that the Skilled scheme is not in the best interests of Skilled shareholders (clause 10.2(b), SIA); or

(c) (Termination) Programmed becomes entitled to terminate the SIA because there is a material breach by Skilled of the SIA or a breach of certain provisions in clause 7 relating to the Skilled directors' recommendations (clause 10.2(c), SIA).

39. However, the reimbursement fee is not payable, notwithstanding those events, if the scheme becomes effective.

40. The circumstances in which the reimbursement fee was agreed upon are set out in clause 10.1 of the SIA. It was submitted that the evidence shows that:

(a) the fee was requested by Programmed, and the obligation to pay and the amount of the payment were the result of ordinary commercial negotiation between Skilled and Programmed in which Skilled was assisted by external legal advisers; and

(i) formed the view that the amount of the fee represented a reasonable estimate of costs that would be incurred by Programmed; and

(ii) formed the view that the implementation of the scheme would provide significant benefits to the shareholders of Skilled which made it reasonable and appropriate to agree to the fee to secure Programmed's participation in the transaction.

41. The Page affidavit also stated that the amount of $3.5 million represents approximately 0.83 per cent of the total equity value of Skilled having regard to the value of the bid consideration.

In Re SFE Corporation Ltd[23] Gyles J said that he would only be inclined to refrain from ordering a meeting by reason of a break fee if the amount of the fee was such that it could influence voting at the meeting.

In Re APN News & Media Limited,[24] Lindgren J said that:

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.

His Honour went on to discuss at some length aspects of the practice in the United States and the United Kingdom, and the views of the Takeovers Panel as expressed in its Guidance Note on the subject. He said that the relevant questions, which he thought were related, were whether the fee was likely to coerce shareholders into agreeing to the scheme, or deter companies from mounting a competing offer.

In its current Guidance Note,[25] the Takeovers Panel has indicated that in considering whether lock-up devices (including break fees) give rise to unacceptable circumstances, it will have regard to the likely effect of the device on (i) competition involving current or potential bidders; and (ii) shareholders and whether they may be substantially coerced into accepting the bid (by reason of the diminution in the value of their company if they do not). Referring to break fees in particular, the Takeovers Panel said that in the absence of other factors they regarded a break fee of 1 per cent of the target company as generally not unacceptable. ...[26]

43. The fee here is approximately 0.83 per cent of the total equity value of Skilled having regard to the value of the scheme consideration when the proposed transaction was announced.

44. As in Toll, the reimbursement fee in this case is not payable simply because Skilled shareholders reject the scheme. It was submitted that this is the decisive consideration at this first stage of the process. This is because the fee is not capable of influencing shareholders in deciding whether to accept or reject the scheme unless at some time before the meeting a circumstance arises which may trigger Skilled's obligation to pay the reimbursement fee if the scheme is not approved.

45. Apart from the size of the fee, it was submitted that the relevant provisions of the SIA are consistent with the guidelines published by the Takeovers Panel,[27] namely, that in the absence of other factors, reasonable triggers for the payment of the fee might include:

(b) a competing transaction that successfully completes; and

(c) a material breach within the target's control.

46. The terms of the reimbursement fee are clearly summarised in the draft explanatory memorandum. Based on the considerations above, I agree that the provisions for the reimbursement fee do not represent a barrier to the convening of a meeting to consider the scheme.

47. Clause 9 of the SIA contains a number of restrictions in respect of Skilled applicable during the 'Exclusivity Period', which is defined as the period 24 June 2015 to the earliest of the Implementation Date (which is expected to be 16 October 2015), 23 December 2015 or the termination of the SIA.

(a) ('no shop'): Skilled must not solicit or encourage any discussions with a view to obtaining a competing proposal (see clause 9.1, SIA).

(b) ('no talk' and 'no due diligence'): subject to a fiduciary carve-out, Skilled must not enter into or continue or participate in any discussions or grant any due diligence access in relation to or which might lead to a competing proposal (see clauses 9.2 and 9.3, SIA).

**(c) (notification of approaches): subject to a fiduciary carve-out, Skilled must - **

(i) notify Programmed of any approach or proposal for a competing proposal and provide details of such; and

(ii) notify Programmed of the provision by Skilled of any information to any person in connection with a competing proposal (see clause 9.4, SIA).

(d) (matching right): Skilled must procure that none of its directors publicly recommend a competing proposal unless Skilled has provided Programmed with notification of the material terms of the competing proposal and given Programmed an opportunity to provide a matching or superior proposal (see clause 9.5, SIA).

(e) (fiduciary carve-out): the 'no talk' and 'no due diligence' provisions are subject to a 'fiduciary carve-out' provision contained in clause 9.3 of the SIA. This provision allows Skilled to undertake actions that would otherwise be prohibited by the 'no talk' and 'no due diligence' provisions if:

(i) the Skilled board determines that a competing proposal may reasonably be expected to lead to a proposal that is superior to that being offered by Programmed and not undertaking the actions would be likely to involve a breach of fiduciary or statutory duties, after having considered written advice from Skilled board's external legal advisors; or

(ii) it would otherwise be unlawful not to undertake the actions.

49. The 'notification of approaches' provision in the SIA is subject to a similar fiduciary carve-out (see clause 9.4(b), SIA).

50. As I noted in Toll,[28] such provisions are now ordinarily found in merger implementation agreements.

51. Ms Page has deposed at paragraph 44 of her affidavit that the 'no-talk' and 'no-shop' provisions were the outcome of negotiations between Skilled and Programmed in which Skilled was assisted by external legal and financial advisers.

52. The terms of the exclusivity arrangements are clearly summarised at page 89 of the draft explanatory memorandum.

53. The exclusivity arrangements meet the standards specified by the Takeovers Panel in paragraphs 19 to 29 of Guidance Note 7. In particular:

(a) the 'no-talk' and 'notification of approaches' provisions are subject to a fiduciary carve-out;

(b) in view of the fiduciary carve-out for the 'notification of approaches' provision, the 'no-shop' provision does not require a fiduciary carve-out.

54. In Re Arthur Yates & Co Ltd,[29] Santow J said that an exclusivity clause should meet the following criteria:

(a) it should be for no more than a reasonable period which is capable of precise ascertainment;

(b) it must be framed so that it is subject to an overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful; and

(c) the exclusivity clause should be given adequate prominence in the explanatory statement sent to shareholders.

55. As I noted in Toll,[30] it has been recognised that a 'no-shop' clause need not be subject to a fiduciary 'carve-out' of the kind contemplated in paragraph (b) of his Honour's comments.[31]

(a) the exclusivity period of less than six months is within the range of reasonable periods for acquisition schemes;[32]

(b) there are appropriate fiduciary carve-outs; and

(c) the exclusivity provisions have been given adequate prominence in the draft explanatory memorandum.

57. Clause 7.5 of the scheme terms provides that each scheme shareholder is deemed to have warranted to Programmed that all of its Skilled shares will, at the date of transfer to Programmed, be fully paid and free from all security interests and interests of third parties of any kind and from any restrictions on transfer of any kind, and that the scheme shareholder has full power and capacity to sell and to transfer those shares together with any rights and entitlements attaching to such shares to Programmed under the scheme.

58. The warranty is in the usual form and such clauses have been held to be acceptable as long as the warranty is sufficiently disclosed in the explanatory statement to shareholders.[33]

59. Having regard to the disclosure of the deemed warranty made on pages 20 and 23 of the draft explanatory memorandum, I consider that this deemed warranty clause is acceptable.

60. Paragraphs 33 to 41 of the Page affidavit address the executive share plan operated by Skilled and the performance rights and options granted pursuant to that plan. Those arrangements were also described by Mr Crutchfield QC on behalf of Skilled during the hearing. Those arrangements can be summarised as follows:

(a) As at the date of the hearing in this matter, there were approximately 2.9 million performance rights on issue and approximately 1.84 million options on issue under the relevant long-term incentive plan (Skilled LTI plan). The performance rights and options entitle the holder, subject to performance criteria, to an allocation of Skilled shares (option holders must pay an exercise fee);

(b) In addition, a further 1.6 million (approximately) performance rights may be issued under the current Skilled LTI plan;

(c) Under clause 8 of the SIA, Skilled has agreed to put in place arrangements, whereby the performance rights and options will either vest or lapse on the scheme record date (anticipated to be 9 October 2015, as noted above) and the total number of Skilled shares on issue pursuant to performance rights and options does not exceed $1.2 million. The relevant employees have not agreed to the change, but it has been agreed between Skilled and Programmed;

(d) The Skilled board has determined that the proposed scheme constitutes a change of control event under the rules of the Skilled LTI plan. Accordingly, the Skilled board will, at a date to be determined but prior to the record date, arrange current performance rights and options to be prorated having regard to the length of time elapsed in the performance period. Where the performance criteria are met, the relevant performance rights and options will vest prior to the scheme's implementation. They will otherwise lapse upon the scheme becoming effective. As noted above, the performance rights and options are subject to the cap (that is, a maximum of 1.2 million shares are on issue pursuant to performance rights or options); this cap also includes any new performance rights issued (as set out below);

(e) The Skilled board also proposes to offer further performance rights to selected Skilled executives and senior managers who it is expected will be integral to the successful integration of the merged business. If the scheme becomes effective, these new performance rights will vest and Skilled shares will be issued after the date of the scheme's approval but before its implementation;

(f) The shares offered pursuant to vested performance rights and options will entitle the employees to scheme consideration.

61. It was submitted that the arrangements referred to in those paragraphs do not require those shareholders who hold or will hold performance rights to meet separately (as a separate class) from those shareholders who do not hold performance rights or options in order to consider and vote on the proposed scheme.

62. The critical issue for consideration in relation to performance rights is whether those executives with existing performance rights or options who are also current shareholders in Skilled (that is, as at the date of the meeting the subject of this application) should form a separate class of shareholders because they will receive a benefit from the scheme - namely, the early vesting of their performance rights or options, which would provide them additional shares in Skilled in advance of the scheme's implementation (if approved). The issue is confined to those employees who currently have performance rights or issues who are also current shareholders and not those who would become shareholders by virtue of the vesting of their rights prior to the scheme's implementation. These employees are not entitled to vote on the scheme.

63. The question of classes (and separate class meetings) arises because of the reference in s 411(1) to an arrangement proposed between a company and its members 'or any class of them'.

64. The well-established test for identifying a class for the purposes of a scheme of arrangement is that of Bowen LJ in Sovereign Life Assurance Company v Dodd.[34] Bowen LJ expressed the class test in the following terms:[35]

The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest.

65. In Re NRMA,[36] Santow J, after referring to Bowen LJ in Sovereign Life Assurance, stated at 617 that:

The interests to be assessed with a view to establishing whether the interests of persons represented at a meeting of the class are not so dissimilar as to prevent those persons meeting and voting in one class, are interests arising from the legal character of the rights and obligations of the members or creditors against the company and also interests in how those rights and obligations will be affected by the implementation of the scheme. Divergent commercial interests extrinsic to the share membership are ordinarily not a factor which should differentiate classes.

66. In Re Hills Motorway Ltd,[37] Barrett J stated as follows in relation to the 'not so dissimilar':

The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail.

67. In Re International Harvester,[38] Lush J referred in the following terms to the veto power that a class has in respect of a (creditors) scheme:

It is appropriate that creditors who share an interest visàvis the company which places them in a position distinct from that of other creditors and so dissimilar as to make it impossible to consult together with a view to their common interest should be allowed to make a separate decision. To break creditors up into classes, however, will give each class an opportunity to veto the scheme, a process which undermines the basic approach of decision by a large majority, and one which should only be permitted if there are dissimilar interests related to the company and its scheme to be protected. The fact that two views may be expressed at a meeting because one group may for extraneous reasons prefer one course, while another group prefers another, is not a reason for calling two separate meetings.

68. In Re Orica Limited,[39] a proposed demerger scheme sought to grant members shares in the demerged subsidiary company. However, for a small number of overseas members who were prevented by foreign laws from receiving shares in this manner, their shares in the demerged entity were to be transferred to a sale agent in Australia for sale on their behalf. As a result, the overseas shareholders would receive the proceeds of sale of the shares, rather than the shares in specie. Citing Re Hills Motorway Ltd, Davies J noted that the focus was not on the fact of differentiation, but its effects. Despite the differential treatment under the scheme, it was held that the requisite community of interest was present such that division into further classes was unnecessary.

69. In Re Cashcard Australia Ltd,[40] ASIC contended that two shareholders were being treated differently such that those two shareholders were a separate class. In addition to being shareholders, those two shareholders held performance rights which, if the scheme was approved, could be converted into shares in the scheme company, thereby entitling them to payment of the scheme consideration as provided for in the scheme. There was also a possibility that those two shareholders might receive, in addition to the scheme consideration for their shares, monetary payments to compensate them for the possible loss of benefits which may have arisen if an initial public offering had gone ahead rather than the proposed scheme. Jacobson J considered that no class issue arose on the basis that each shareholder would get the same benefit for his or her shares under the scheme, and that the possibility for the two shareholders to receive additional payments did not mean that their rights were so dissimilar that they could not consult together with the other members of the company. His Honour made the following observations at [5]-[6]:

The test for what constitutes a separate class of shareholders ... is whether the interests of the persons in question are so different as to make it impossible for them to consult together with the other shareholders. ... courts ought to be cautious in fractioning the membership into separate classes so as to give one group of members an effective right of veto over the scheme.

70. ASIC has not made any submission in this case that the employees with performance rights or options should form a separate class of members for the purposes of the meeting under s 411.

71. In Re Opes Prime Stockbroking Ltd,[41] Finkelstein J, in relation to the potential veto power, observed at [66] that when 'creditors are broken up into classes, each class is given power to veto the scheme and that is a process that undermines the basic approach of decision by majority'. Accordingly, his Honour stated that:

If a judge is too assiduous in identifying classes, it is possible to end up with any number of classes. In the end, schemes of arrangement are propounded in a business context. The judge should adopt a practical business-like approach to the issue, as would the creditors if they were to decide the matter.

72. In Re Foster's Group Limited[42] (concerning the demerger of Treasury Wines Estates from the Foster's Group), Ferguson J (as she then was) stated at [15] that:

In more recent times, the courts have observed that the test laid down is not one of identical treatment but rather one of community of interest. As Santow J has noted, "divergent commercial interests extrinsic to share membership are ordinarily not a factor which should differentiate classes." The courts are also mindful that if there is more than one class, each will have a power of veto.

73. In Re Cellestis Limited[43] (a change of control scheme of arrangement), Justice Davies observed as follows at [15]:

Thus the question for the Court is whether the rights of the option holders are so dissimilar to the rights of the shareholders that they cannot sensibly consult together with a view to their common interest. If their rights are significantly similar, there should be a single meeting.

74. In Re Foster's Group Limited (No 2)[44] (change of control scheme through which SABMiller acquired Foster's), Ferguson J (as her Honour then was) addressed the issue of class in the context of whether the holders of partly paid shares formed a separate class to the fully paid shareholders, and whether the performance rights arrangements and cash benefits in that matter gave rise to a class issue. Her Honour found that no separate class issue arose. Her Honour then made the following observations about divergent commercial interests extrinsic to share membership and that if there is more than one class, each class will have a power of veto:[45]

That test [Sovereign Life Assurance] has been adopted ever since in members' schemes. In more recent times, the courts have observed that the test laid down is not one of identical treatment but rather one of community of interest. As Santow J noted, "[d]ivergent commercial interests extrinsic to share membership are ordinarily not a factor which should differentiate classes." The courts are also mindful that if there is more than one class, each class will have a power of veto. As Lush J stated in Re International Harvester this:

... undermines the basic approach of decision of a large majority, and ... should only be permitted if there are dissimilar interests related to the company and its scheme to be protected. The fact that two views may be expressed at a meeting because one group ... prefer[s] one course, while another group prefers another, is not a reason for calling two separate meetings.

75. Justice Ferguson then observed (at [42]) that the position of performance rights had been considered by Jacobson J in Re Cashcard (see above) and that his Honour considered that no class issue arose on the basis that each shareholder would get the same benefit for his or her shares under the scheme and that the possibility of two shareholders receiving additional payments did not mean that their rights were so dissimilar that they could not consult together with the other shareholders.

76. Justice Ferguson agreed with the view of Jacobson J observing that:[46]

There may be a number of benefits to shareholders that are peculiar to them because of some personal arrangements that they have. In this regard, the scheme may be more commercially advantageous for them than for other shareholders. However, that does not mean that they cannot consult with other shareholders who are in a different position. Information about the performance rights is contained in the explanatory memorandum.

77. It was submitted that, having regard to the questions on class, and in particular the observations made in Re Cashcard, Re Cellestis Limited, and Re Foster's Group Limited (No 2), the proposed treatment of the performance rights of Skilled does not give rise to a class issue.

78. That was said to be so because the holders of performance rights will participate in the scheme on the same basis and receive the same scheme consideration as Skilled shareholders who are not holders of performance rights. Hence, all shareholders are being treated equally under the scheme. If the performance rights of a holder vest and they are issued Skilled shares, those shares will be dealt with by the scheme in the same way as any other Skilled share.

79. In any event, it was submitted, the existence of the performance rights does not mean that the rights or interests of the holders of those performance rights, who also hold Skilled shares, are so dissimilar as to make it impossible for them to consult in one meeting with other Skilled shareholders.

80. Even if the existence of performance rights does not give rise to a separate class, the Court may take into account the fact that particular members have extraneous commercial interests when deciding whether to exercise its discretion to approve the scheme at the second court hearing (see Re Chevron (Sydney) Ltd[47]). As Jacobson J stated in Re Cashcard:[48]

Of course if the scheme is passed only as a result of the votes of Mr Baker and Mr Monaghan that is a matter which I may take into account in deciding whether to exercise my discretion to approve the scheme.

81. In light of these statements, Skilled proposes to 'tag' the votes of those executives who hold performance rights and also hold Skilled shares so that the manner in which they vote at the scheme meeting is known.

82. I am satisfied that the performance rights or options held by some employees do not give rise to a separate class of members. It is worth noting at the outset that the rights will not vest until after the meeting to approve the scheme is held. Accordingly, the issue of additional shares will not influence the voting at the meeting directly. The question is whether the rights and options themselves (and the prospect of additional shares upon their vesting) gives rise to a divergence of interests with other shareholders. I do not consider that it does. The shares to be issued if the rights or options vest are not of a different type than those of other shareholders. Moreover, it appears to me that the employees with performance rights or options are in no different position from any other employee of the company who would be impacted by the scheme's implementation in different ways on the basis of various interests extraneous to their status as members.

83. From an employee point of view employees who are shareholders may have differing views about the merger. Employees who may have shares who do not have performance contracts may have similar reservations or views about the merger or they may support the merger. Some may be concerned about their employment. Others might be looking forward to enhanced positions. One could speculate at length about the different views of different employees.

84. Mr Crutchfield QC raised with me that there had been a concern by ASIC in the past that it might be said that some employees who are shareholders may be seen as getting a different advantage or benefit from the takeover or merger than the other shareholders, and the issue was raised in Re Cashcard and it was held that they did not constitute, or satisfy the need to constitute, a separate group for voting purposes.

85. When one is considering the interests of the shareholders and whether they should form a different group, one should normally take into account their interests as shareholders. If one took into account employees' extraneous interests as employees on a takeover, the number of classes may be expanded to nearly every individual employee. Member approval of schemes would be very difficult, if not impossible, to manage.

86. As the authorities discussed above indicate, the fact that some employees who are members of the company may have differing views about the scheme as it affects them as employees is not a reason for constituting them as separate classes. They should all have a sufficient common interest as shareholders to be able to meet together to consider whether it is to the benefit of shareholders' interests to accept the scheme.

87. It was brought to the attention of the Court that there may arise a question of whether financial assistance was provided to Programmed for the purposes of the scheme because part of the scheme consideration is a dividend to be paid by Skilled to its shareholders.

88. At the hearing, counsel for Skilled, Mr Crutchfield, submitted that, although the matter was being raised for the benefit of the Court, Skilled does not consider that financial assistance will be offered to Programmed, as that company does not (on the scheme as outlined) acquire shares for a lower consideration as a result of Skilled paying part of the consideration by way of dividend. As I observed at the hearing of the matter in relation to the contribution of the dividend to the value attributed to Skilled for the purposes of the scheme, it is reasonable to treat the dividends payable by Skilled to its shareholders as part of the scheme consideration as Programmed is acquiring Skilled with less money in Skilled's bank account.

89. In any event, it was submitted that the requirements of s 260A of the Act would be satisfied. That section provides that a company may financially assist a person to acquire shares in the company only if:

(a) giving the assistance does not materially prejudice (i) the interests of the company or its shareholders, or (ii) the company's ability to pay its creditors;

(b) the assistance is approved by shareholders under s 260B; or

(c) the assistance is exempt under s 260C.

90. It has been held that the words 'financial assistance' have no technical meaning. The task is to examine the commercial realities of the transaction to determine whether it can properly be described as the giving of financial assistance by the company.[49]

91. A number of decisions concerning proposed schemes of arrangement have considered whether the payment of a special dividend by the target company - in addition to the payment of the scheme consideration by the bidder - will prejudice the target company, its shareholders or its ability to pay its creditors for the purposes of s 260A(1)(a)(i) to (ii) of the Act. These cases have considered the issue without considering or deciding the threshold question as to whether the payment of the special dividend amounts to 'financial assistance'.[50] In none of these cases was it held that the payment of the dividend would prejudice the target company, its shareholders or its ability to pay its creditors for the purposes of s 260A(1)(a)(i) to (ii) of the Act.

92. For the reasons outlined above, I do not consider that the paying of the Skilled special dividend or Skilled FY15 final dividend would amount to Skilled financially assisting Programmed to acquire Skilled shares under the Act. In any event if, contrary to my view, the matter did amount to financial assistance, such assistance will not materially prejudice the interests of Skilled or its shareholders or Skilled's ability to pay its creditors for the reasons put forward by Skilled as follows:

(a) the independent expert has opined that the scheme is fair and reasonable and, therefore, in the best interests of Skilled shareholders, in the absence of a superior proposal;

(b) the directors of Skilled have recommended that shareholders vote in favour of the scheme, save for Mr Findlay, as noted above;

(c) the matters referred to in section 4 of the draft explanatory memorandum indicate that the transaction contemplated by the scheme is in the interests of Skilled and its shareholders (pages 12-13). As stated in the Page affidavit, these matters have been verified as being fair and based on reasonable grounds, in the case of opinions, and being true and correct, in the case of statements of fact;

(d) the Chief Financial Officer, Gary Kent, has deposed that based on his knowledge of the financial position and financial records of Skilled, he does not believe that the implementation of the scheme, the payment of the Skilled special dividend or the payment of the Skilled FY15 final dividend will in any way prejudice the interests of Skilled or its shareholders; and

(e) section 254T(1)(b) of the Act forbids a company from paying a dividend unless it is fair and reasonable to the company's shareholders as a whole. The Skilled board declared the Skilled FY15 final dividend on 5 August 2015 with knowledge of this requirement. If the scheme is passed by the requisite majorities at the scheme meeting, the Skilled board will declare the Skilled special dividend with knowledge of this requirement.

93. It is submitted that the following matters establish that the transaction contemplated by the scheme will not materially prejudice Skilled's ability to pay its creditors:

(a) paragraphs 27 to 31 of the Leach affidavit refer to a commitment letter and term sheet according to which Westpac will provide to Programmed a A$600 million syndicated facility and a NZ$10 million multioption facility. The exhibits to that affidavit contain the term sheet for the A$600 million facility. It indicates that the purposes of the A$600 million facility include refinancing existing debt facilities and bank guarantee facilities of the 'Borrower Group' and the 'Target Group'. 'Target Group' is defined on page 506 as Skilled and its subsidiaries;

(b) section 14.5 of the draft explanatory memorandum (page 97) states that the scheme will not affect the interests of creditors of Skilled. Ms Page has deposed that this statement has been verified as true and correct;

(c) Mr Kent has deposed that based on his knowledge of the financial position and financial records of Skilled, he does not believe that the implementation of the scheme, the payment of the Skilled special dividend or the payment of the Skilled FY15 final dividend will in any way prejudice the ability of Skilled to pay its creditors; and

(d) section 254T(1)(c) of the Act forbids a company from paying a dividend if it will materially prejudice the company's ability to pay its creditors. The Skilled board declared the Skilled FY15 final dividend on 5 August 2015 with knowledge of this requirement. If the scheme is passed by the requisite majorities at the scheme meeting, the Skilled board will declare the Skilled special dividend with knowledge of this requirement.

94. The Court's jurisdiction to approve a scheme is restricted by s 411(17) of the Act. The Court must be satisfied that there is no proscribed purpose as described in s 411(17)(a) or there must be provided to the Court a statement in writing by ASIC that it has no objection to the arrangement (see s 411(17)(b)).[51] If such a statement is provided by ASIC, it will not be provided until the second court hearing.[52] Section 411(17) does not present a bar to a meeting being convened if it seems likely that ASIC will produce the relevant statement at the second court hearing.[53]

95. ASIC has indicated that it does not intend to appear at the application for the convening of a meeting, and it is appropriate to proceed on the basis that an application for approval would be unopposed[54] and that ASIC will in due course provide a statement for the purpose of s 411(17)(b).

96. ASIC RG60 states at paragraph 104 that ASIC will provide a statement under s 411(17)(b) if:

(a) all material information relating to the proposed scheme has been disclosed to ASIC;

(b) the standard of disclosure to all members fulfils the requirements under reg 5.1.01 and sch 8 of the Regulations;

(c) the standard of disclosure to, and treatment of, all members is equivalent to the standard that would be required by the disclosure requirements and the principles in s 602 of the Act relating to the target securities in a takeover bid; and

(d) there are no other reasons to oppose the scheme (eg public policy grounds) and the other matters referred to in ASIC RG60 have been complied with.

97. All material information relating to the scheme has been disclosed to ASIC. The Blusztein affidavit exhibited a table indicating that the standards of disclosure prescribed by the Regulations, ch 6 of the Act and ASIC RG60 have been complied with where applicable. As at the date of the hearing of this matter, ASIC has not indicated that it intends to oppose the scheme on any grounds. For these reasons, I find that s 411(17) is unlikely to present any problem for the Court approving the scheme.

98. Having regard to the issues and authorities canvassed above, I do not consider that any of the issues put before the Court provide a reason that the Court should refrain from ordering that a meeting should be convened for the purpose of considering the scheme.

99. The second principal aspect relevant to the exercise of the Court's discretion is the adequacy of the information to be provided to shareholders. It was submitted that s 412 of the Act and sch 8 to the Regulations provide guidance to the Court in assessing this matter, bearing in mind that this application is made in a summary way.[55]

100. There are three aspects to the requirements of s 412(1):

(a) first, the explanatory statement must explain the effect of the compromise or arrangement, and in particular state any material interest of the directors, and the effect on those interests of the compromise or arrangement so far as it is different from the effect on the like interests of other persons.[56] These matters are addressed in section 14 of the draft explanatory memorandum. The information there makes it clear that the effect of the arrangement on the directors' interests is the same as on the like interests of others;

(b) secondly, the explanatory statement must set out the prescribed information. That prescription is in reg 5.1.01 and sch 8 (pt 3) of the Regulations. ASIC has been provided with a table showing the specific requirements of the Act and the Regulations and (except to the extent that Skilled has applied to ASIC for and obtained relief) the location in the draft explanatory memorandum of the statements by which those requirements are complied with; and

(c) thirdly, the explanatory statement must set out any other information that is material to the making of a decision whether or not to agree with the compromise or arrangement, being information which is within the knowledge of the directors and has not previously been disclosed.[57]

101. The draft explanatory memorandum is comprehensive. In addition, the Independent Expert's Report contains a detailed evaluation of the proposal, presented in a way that enables a shareholder to form his or her own view of the merits of the proposal. Ms Page deposed that the draft explanatory memorandum contains all information required to be disclosed to Skilled shareholders in connection with the scheme.

102. In light of these matters, I consider that this requirement of s 412(1) has been fulfilled.

Re Skilled Group Limited (No 1) [2015] VSC 789 (21 August 2015)

At a glance

Court

Decision date

Before

Source

Judgment (269 paragraphs)

Cases Cited (5)