Re Toll Holdings Limited [2015] VSC 123 (1 April 2015)

1 I have before me by way of an Originating Process dated 18 March 2015 an application under s 411 of the Corporations Act 2001 (the 'Act') for, amongst other things, orders pursuant to s 411(1) of the Act convening a meeting of ordinary shareholders of Toll Holdings Limited ACN 006 592 089 ('Toll') for the purpose of considering a scheme of arrangement ('Scheme') proposed to be made between Toll and its ordinary shareholders ('Scheme Participants').

2 The application involves a two-stage process as provided for in s 411(4) of the Act: First, obtaining an order that Toll 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, the plaintiff intends to seek orders pursuant to s 411(4)(b) of the Act approving the Scheme, and s 411(12) of the Act that Toll be exempted from compliance with s 411(11) of the Act.

3 This application currently before me is at the first stage.

(a) An order pursuant to s 411(1) of the Act that Toll convene a meeting of Scheme Participants for the purpose of considering and, if thought fit, agreeing (with or without modification) to the Scheme;

(b) Directions as to the manner in which the meeting is to be convened and conducted, the time and place at which the meeting is to be held, and the persons authorised to act as Chairman and alternate Chairman at that meeting;

(c) An order pursuant to s 411(1) of the Act that the explanatory statement in relation to the Scheme be approved; and

(d) Such further or other orders as the Court thinks fit.

5 Mr Neil Young, one of Her Majesty's Counsel, appeared for Toll with Mr Chris Archibald. Mr Allan Myers, one of Her Majesty's Counsel, appeared for Japan Post Co. Ltd. ('Japan Post') with Mr Robert Strong.

6 The application is supported by a number of affidavits. These include, relevantly, an affidavit sworn by Bernard Basil McInerney, Company Secretary of Toll, dated 27 March 2015 ('McInerney Affidavit'); an affidavit affirmed by Simon Edward Haddy, solicitor acting for Toll, dated 27 March 2015 ('Haddy Affidavit'); and three affidavits affirmed by Paul Django Wenk, solicitor acting for Toll, dated 18 March 2015 ('First Wenk Affidavit'), 31 March 2015 ('Second Wenk Affidavit') and 1 April 2015 ('Third Wenk Affidavit').

7 The Scheme meeting will be asked to consider, and if thought fit, pass a resolution (with or without modification) agreeing to the Scheme. The Scheme provides for Japan Post to acquire all the issued capital of Toll at $9.04 per share. The full terms of the Scheme are in Annexure B to the Scheme booklet.[1]

8 The significant aspect of the Scheme is that, upon its approval, Toll will be appointed the attorney of the shareholders and will transfer all the shareholders' shares to Japan Post, and Japan Post will deposit in trust the consideration for the shares.

9 The proposal represents an implied market capitalisation of Toll of $6.486 billion, according to the plaintiff. The directors have unanimously recommended that the shareholders agree to the Scheme. The Scheme provides for certain rights which have been issued by Toll to be cashed out at $9.04 and other rights to be cancelled for no consideration. Mr Young, for the plaintiff, informed me that those whose rights are being cancelled are agreeing to that.

10 Grant Samuel, an independent expert valuer, has estimated the underlying value of Toll's shares in the range of $8.22 to $9.10 per share. In Mr Samuel's opinion the proposal is in the best interests of Toll shareholders in the absence of a superior proposal.

11 My power to order that Toll 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.

12 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.

13 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 day's 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.

14 I am satisfied that the evidence presented on this application satisfies the requirements of ss 411(1) and 411(2) of the Act.

15 I now turn to the question of my discretion as to whether I should order that Toll convene the meeting.

In FT Eastman & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd, the New South Wales Court of Appeal considered the approach that the court should adopt when considering an application for meetings. Street CJ said:

The approach taken upon a summons is that the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that if it achieves the statutory majority at the creditors' meeting, the court would be likely to approve it on the hearing of a petition which is unopposed.

Samuels JA agreed with the Chief Justice and Hutley JA also agreed that the orders proposed should be made without expressly commenting on the Chief Justice's reasons. Hutley JA did relevantly add however, about the scheme before them:

It is not so certain the scheme would be unsupportable when before the court for approval that it is appropriate to dispose of it out of hand.

In Australian Securities Commission v Marlborough [Gold Mines] Ltd, the Full High Court of Australia comprising of Mason CJ and Brennan, Dawson, Toohey and Gaudron JJ cited with approval the test adopted by Street CJ. It has been consistently followed since: see for example Re HIH Casualty and General Insurance and Re CSR Ltd.

In Re Sonodyne International Ltd, Hayne J of the Supreme Court (as he then was) said:

It may be that in years past this court has not always applied to the question whether meetings should be ordered precisely the test described by Street CJ [referring to FT Eastman & Sons] but for the purposes of this application I am content to do so.

In the end the question as presented at this stage of the process of a company propounding and implementing a scheme of arrangement is whether the scheme is such that it could reasonably be supposed by sensible business people to be for the benefit of the clients concerned. That is, the test in the present case is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed by the company is of benefit to its members.

By these observations Hayne J added guidance to the applicable test as to whether the court would be likely to approve the scheme.

It is useful also to note Hayne J's observation about the role of the court at the first stage where he said:

The role of the court at this stage of the process of a company propounding and implementing a scheme of arrangement is not to pass finally on whether the scheme should be approved. That decision must await the expression of the will of the members at the meeting and any argument that may be advanced on behalf of dissenting members or other interested parties at the time of the application for approval.

I propose to apply those tests in the exercise of my discretion in the Coles Scheme.[3]

17 Applying those tests, I am satisfied that sensible business people could reasonably suppose that the proposed Scheme is for the benefit of the shareholders.

18 The second limb is whether I am satisfied that the relevant information appropriate for the members to make that decision has been provided to them.

19 Mr Young has submitted that the plaintiff in this case, Toll, has gone beyond what is required. The expert opinion of Mr Samuel has been provided along with the other information. I am satisfied that sufficient and appropriate information has been provided to shareholders to make a decision about whether to approve the Scheme or not.

20 In my judgment in Coles I considered the other factors that must be looked at in the exercise of my discretion. They are dealt with in detail in the plaintiff's written submissions.[4] The relevant factors have been identified under the headings of 'Performance Risk', 'Break Fee', 'Exclusivity Period', 'Deemed Warranty' and 'Purpose of the Scheme'.

21 In Re SFE Corporation Limited,[5] Gyles J suggested that the cash consideration or the cash component of the consideration be paid into a trust fund immediately before the vesting of the shares in the acquiring company.

22 This approach been adopted in the Toll Scheme: see clause 5.1(b) of the Scheme and clauses 4.3 and 5.4(i) of the Scheme Implementation Deed ('SID').[6]

23 Clause 11 of the SID contains certain provisions in relation to a fee of $65 million (the 'Reimbursement Fee') which may be payable by Toll if:[7]

(a) before the Effective Date of the Scheme or the End Date (being 30 June 2015, unless extended) (whichever is first) there is an adverse change to the approval of the Toll directors except where this results from an unfavourable expert's report (not due to a Competing Transaction), an unremedied material breach of the SID or breach of a representation or warranty by Japan Post, or the failure to obtain shareholder, regulatory or Court approval (clause 11.2(a));

(b) a Competing Transaction is announced prior to the second Court hearing and within six months of the announcement, the competing bidder acquires an unconditional (and free of defeating conditions) relevant interest in 30 per cent or more Toll Shares, acquires or holds an economic interest in all or a substantial part of Toll's business, acquires control of Toll, or otherwise acquires or merges with Toll (clause 11.2(b)); or

(c) there is an unremedied material breach of the SID by Toll or failure of specified conditions precedent (clause 11.2(c)).

24 However, under clause 11.5 of the SID the Reimbursement Fee is not payable, notwithstanding those events if:

(a) the Scheme becomes effective (clause 11.5(a)); or

(b) if and to the extent that the obligation to pay is declared by the Takeovers Panel to be unacceptable circumstances or held by a court to be unenforceable or unlawful (clause 11.5(b)).

25 The circumstances in which the Reimbursement Fee was agreed upon are set out in clause 11.1 of the SID. The evidence shows that:

(a) the Reimbursement Fee was requested by Japan Post and the obligation to pay and the amount were the result of ordinary commercial negotiation between Toll and Japan Post in which Toll was assisted by external legal advisers; and

(b) in agreeing to the Reimbursement Fee, the Toll Board:

(i) formed the view that the amount of the Reimbursement Fee represented a genuine and reasonable estimate of cost and loss that would be incurred by Japan Post; and

(ii) formed the view that the implementation of the Scheme would provide significant benefits to the shareholders of Toll which made it reasonable and appropriate to agree to the Reimbursement Fee to secure Japan Post's participation in the transaction.[8]

26 The McInerney Affidavit also shows that the amount of $65 million represents approximately 1 per cent of the value of Toll's shares as valued by the proposal. It is relevant to compare this with the bid premiums shown in the chart on page 6 of the Draft Scheme Booklet.[9]

27 In Re SFE Corporation Ltd,[10] 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.

28 In Re APN News & Media Limited,[11] 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.[12]

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.[13] 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.[14]

29 In its current Guidance Note,[15] 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. [16] The fee here is only very slightly higher than 1 per cent.

30 Courts have not generally regarded the fact that a break fee exceeds the 1 per cent guideline as a reason to refuse an order for meetings.[17] In Re Cytopia Ltd,[18] Davies J ordered a meeting where the fee of $500,000 was approximately 4.57 per cent of the equity value of the target. In doing so her Honour took into account:

(a) the fact that the fee was not made payable merely because the shareholders voted against the proposal;

(b) the fact that the triggers for the break fee were consistent with the guidelines of the Takeovers Panel; and

(c) the fact that the provisions of an Implementation Agreement (in that case) were not unlike the terms of clause 12.1 of the SID.

31 In the present case the fee payable by Toll to Japan Post is equal to approximately 1 per cent of the Scheme Consideration. The fee itself is not unusually large.

32 The break fee is not payable simply because Toll shareholders reject the Toll Scheme. It is submitted that this is the decisive consideration at this first stage of the process because the fee is not capable of influencing shareholders in deciding whether to accept or reject the Toll Scheme unless at some time before the meeting a circumstance arises which may trigger the obligation if the Scheme is not approved. That consideration suggests that the proper time for consideration of the possible influence of the fee on voting should be at the second hearing where, if circumstances have arisen that indicate that the Reimbursement Fee would have been payable if shareholders voted against the Scheme, the matter can be evaluated in the light of the actual facts.

33 Apart from the size of the fee, the Reimbursement Fee provisions are consistent with the guidelines published by the Takeovers Panel.[19] The terms of the Reimbursement Fee are clearly summarised at page 35 of the Draft Scheme Booklet.[20] Accordingly, it is submitted that the provisions for the Reimbursement Fee do not represent a barrier to the convening of a meeting to consider the Toll Scheme.

34 Clause 10 of the SID contains a number of restriction agreements in respect of Toll applicable during the 'Restricted Period', which is defined in the TID as:

the period from and including the time of this deed to the earlier of:

1. the termination of this deed; and

2. the End Date.

The SID is dated 18 February 2015. The End Date is 30 June 2015.[21]

(a) 'No-talk': subject to a fiduciary carve-out, Toll must not continue to participate in any discussions or grant any due diligence access in relation to or which might lead to a Competing Transaction (see clauses 10.1 and 10.3).

(b) 'No-shop': Toll must not solicit or encourage any discussions with a view to obtaining a Competing Transaction (see clause 10.2).

(c) Notification: subject to a fiduciary carve-out, Toll must notify Japan Post of:

(i) any approach or proposal for a Competing Transaction and provide details; and

(ii) information that might relate to a possible Competing Transaction (see clause 10.4).

(d) Matching right: Toll must procure that none of its directors publicly recommend a Competing Transaction unless Toll has provided Japan Post with notification of the material terms of the Competing Transaction and given Japan Post an opportunity to provide a matching or superior proposal (clause 10.5).

36 Such provisions are now ordinarily found in merger implementation deeds. Mr McInerney has deposed that the 'no-talk' and 'no-shop' provisions were the outcome of negotiations between Toll and Japan Post in which Toll was assisted by external legal and financial advisers.[22] The terms of the restriction agreements are clearly summarised at page 34 of the Draft Scheme Booklet.[23]

37 The restriction agreements meet the standards specified by the Takeovers Panel in paragraphs 19-29 of Guidance Note No 7.[24] In particular:

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

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

38 In Re Arthur Yates & Co Ltd,[25] 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.

39 In practice, since 2001 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.[26]

(a) the exclusivity period of 4.5 months is well within the range of reasonable periods for acquisition schemes;[27]

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

(c) the restriction agreements have been given adequate prominence in the Draft Scheme Booklet,

and for these reasons the restriction agreements do not prevent the Court from making an order to convene a meeting of members to vote on the Toll Scheme.

41 Clause 8.2(b) of the Scheme contains a deemed warranty as to title by each shareholder to which they become bound by virtue of the Scheme. 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.[28]

42 Having regard to the disclosure made on page 17 of the Scheme Booklet, I consider that this deemed warranty clause is acceptable.

43 The Court's jurisdiction to approve a scheme is restricted by s 411(17) of the Act. Either the Court must be satisfied there is no proscribed purpose of the scheme in the terms of 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 in terms of s 411(17)(b).[29] This requirement does not present a bar to a meeting being convened, in the absence of any contrary indications, if it seems likely that ASIC will produce a relevant statement.[30]

44 ASIC has indicated that it does not intend to appear at the application for the convening of a meeting,[31] and it is appropriate to proceed on the basis that an application for approval would be unopposed[32] and that ASIC will in due course provide a statement for the purpose of s 411(17)(b).[33]

45 Mr Wenk deposes in the Second Wenk Affidavit that in his experience of numerous applications of this sort, he believes that on a matter of policy - absent other matters - ASIC will provide a letter under s 411(17)(b) if it is satisfied that the Scheme Participants will be given the same information in the Scheme Booklet, as they would if the transaction had proceeded pursuant to Chapter 6 of the Act. Mr Wenk deposes on information and belief that the Scheme Booklet for the Toll Scheme documents contain such information. Further, and in any event, the McInerney Affidavit deposes to the purpose of the Toll Scheme not being to avoid the provisions of Chapter 6 of the Act,[34] and there is no ground for drawing any contrary inference.[35]

46 I said the following in Re Coles Group Limited (No 2):

Many transactions which could be carried out under Ch 6 are carried out by a scheme of arrangement under Ch 5. The legislation provides a choice, and it is neutral as to the choice which is made. Thus, a corporation is entitled to choose a scheme of arrangement over Ch 6 if it wishes.

The availability of this choice is well established by authority: Nicron Resources Ltd v Catto, Re United Energy Ltd, Re MIM Holdings Ltd and Re International Goldfields Ltd. Further, there is no provision in the Act which expressly says that a scheme of arrangement must not be proposed for the purpose of enabling any person to avoid the operation of any provision of Ch 6.

Chapter 6 itself is built upon a multitude of prescriptive and proscriptive requirements, all or any of which can be waived or modified by ASIC. In exercising these powers, ASIC is required to have regard to the purposes of Ch 6 as spelt out in s 602 of the Act. In adding s 411(17)(b), Parliament might be taken to have recognized that the strict rule expressed in s 411(17) as originally enacted (then s 315(21)) should be relaxed in circumstances where ASIC has no objection. In effect, it might be argued that the legislature vested ASIC with the function of deciding on a case by case basis whether the purposes for which a scheme had been proposed mattered or not.[36]

47 Mr Young, in his submissions, referred to certain aspects of the Scheme which give it advantages over a takeover. Under Division 6 of the Act he mentioned speed, certainty and security. I do not think it is appropriate at this stage that I examine those or rule on them. At this stage I note, for the sake of the record, that the plaintiff does maintain that there are distinct advantages of pursuing the Scheme rather than a takeover.

48 I find that at this stage that it does not appear that s 411(17) will present any problem in the Court approving the scheme.

49 I have been taken in detail through the proposed orders. I am satisfied with the draft and therefore I will make the orders sought by the plaintiff in the draft minutes which have been submitted, subject to the amendment that I made in other matters.

[2] [2007] VSC 389; (2007) 25 ACLC 1380 ('Coles').

[3] Ibid 1385-1386 [29]-[36] (citations omitted).

[4] Exhibit MFI P1. I have freely incorporated the submissions into these reasons, which I gratefully acknowledge.

[5] [2006] FCA 670; (2006) 59 ACSR 82, 83 [4].

[7] Capitalised terms below, where not otherwise defined in this judgment, take the meaning given to them in the SID.

[10] [2006] FCA 670; (2006) 59 ACSR 82, 83-4 [7].

[11] [2007] FCA 770; (2007) 62 ACSR 400.

[15] Takeovers Panel, Guidance Note 7: Lock-up Devices, Issue 4 (February 2010), [7].

[17] See Tony Damian and Andrew Rich, Schemes, Takeovers and Himalayan Peaks (Ross Parsons Centre of Commercial, Corporate and Taxation Law and Herbert Smith Freehills, 3rd ed, 2013), 354-7.

[18] [2009] VSC 560, [12]-[18].

[19] Takeovers Panel, Guidance Note 7: Lock-up Devices, Issue 4 (February 2010), [9].

[21] Clause 10 and the definitions of 'Restricted Period' and 'End Date' in the SID: McInerney Affidavit, Exhibit BBM1.

[24] Takeovers Panel, Guidance Note 7: Lock-up Devices, Issue 4 (February 2010).

[25] [2001] NSWSC 40; (2001) 36 ACSR 758, 759-60 [9].

[26] See Re Healthscope Limited [2010] VSC 367, [19]-[22] and the cases collected by Davies J at footnote 12 of that decision.

[27] See, eg, Re Dyno Nobel Ltd [2008] VSC 154 (9 months); Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137 (6 months); Re Sino Gold Mining Ltd [2009] FCA 1277; (2009) 74 ACSR 647 (7 months).

[28] See, eg, Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137; Re Macquarie Private Capital A Ltd [2008] NSWSC 323; (2008) 26 ACLC 366; Re Dyno Nobel Limited [2008] VSC 154.

[29] The history of and relationship between these provisions was discussed by Robson J in Re Coles Group Ltd (No 2) [2007] VSC 523; (2007) 215 FLR 411, 415-416 [16]-[24].

[30] Re Lonsdale Financial Group Ltd [2007] VSC 394, [31]-[40].

[32] Re Lonsdale Financial Group Ltd [2007] VSC 394, [38].

[34] McInerney Affidavit, [45]-[46].

[36] [2007] VSC 523; (2007) 215 FLR 411, 416 [21]-[24] (citations omitted).