SFG Australia Limited, in the matter of SFG Australia Limited [2014] FCA 831

REASONS FOR JUDGMENT 1 This is the first court hearing of an application to prove a scheme of arrangement between the plaintiff (SFGA) and its shareholders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act). 2 SFGA is a public company listed on the Australian Stock Exchange. Its total equity value is approximately $632.9 million. SFGA provides wealth management services to high net worth and affluent clients, including strategic financial advice, portfolio administration solutions, portfolio construction and management services, insurance and certain other complementary financial services. The scheme of arrangement which is proposed is an acquisition scheme under which all of the issued shares in SFGA will be acquired by another publicly listed company, IOOF Holdings Ltd (IOOF). The consideration to be provided by way of scheme consideration by IOOF is either: 1. 0.104 shares in IOOF (new IOOF shares) for each SFGA share (the scheme consideration) which is subject to adjustment depending upon the timing of the IOOF dividend for the 2014 financial year; or 2. a cash alternative which may be entirely cash or a combination of cash and new IOOF shares, depending upon the number of scheme shareholders who elect to receive cash consideration (the maximum cash consideration). 3 The adjustment to the number of IOOF shares which forms the scheme consideration is, as I have said, subject to the time at which the IOOF dividend is declared and, in particular, the record date for the receipt of that dividend. At present it is anticipated that the implementation date of the scheme will be 20 August 2014, which will be approximately one month before the anticipated record date for the shareholders to benefit from the dividend payable by IOOF for the financial year ending 30 June 2014. Accordingly, it is expected that there will be no adjustment to the number of shares comprised in the scheme consideration. 4 However, if the implementation date of the scheme occurs after the record date for the payment of the IOOF dividend, there will be an adjustment to the number of shares comprised in the consideration so that the number of shares will be increased accordingly. 5 So far as the maximum cash consideration is concerned, this is explained by the fact that IOOF has agreed to make a maximum of $100 million cash available to pay scheme shareholders who elect to receive that form of consideration. 6 If scheme shareholders elect to receive maximum cash consideration, they will receive the entire scheme consideration in cash unless the total amount of cash required to pay all such scheme shareholders would exceed $100 million in aggregate. 7 In that event, the amount of the scheme consideration received in cash will be scaled back and the balance of the scheme consideration will be paid in new IOOF shares. The scheme booklet and scheme documentation contain a statement of the formula under which the scaling back would occur. It is sufficient to say that the effect of the formula would be to provide cash and shares in the proportion which reflects the underlying consideration that forms the basis of the scheme consideration provided for, as stated above. 8 The independent directors appointed Ernst & Young (EY) as an independent expert to assess the scheme. EY has prepared a report which is Annexure A to the draft explanatory memorandum and I was taken to that report in sufficient detail this morning. EY has concluded that the scheme is fair and reasonable to shareholders and therefore in the best interests of the shareholders. The reasons for this conclusion are explained in EY's report. The assumptions upon which valuations have been made are explained in particular at pages 33 and 35-37 of the report. Using these assumptions, the range of multiples which apply have led EY to form the opinion that the fair market value of a fully paid SFGA share is estimated to be between $0.85 and $0.95. 9 EY has also, upon the same basis and subject to the same assumptions, valued the scheme consideration as between $0.84 and $0.88 per SFGA share. The scheme consideration is therefore thought to be consistent with the range of assessed values of an SFGA share. Accordingly, EY has formed the opinion that the scheme consideration is fair and thus reasonable. 10 The only substantial issue which was the subject of discussion in the course of this morning's application was the question of the payment of a break fee and exclusivity obligations. Under the Scheme Implementation Agreement (Implementation Agreement) SFGA has agreed to pay a break fee of $6 million if the scheme does not proceed in the circumstances contemplated in clause 9 of the Implementation Agreement. 11 The rationale for the payment of the break fee is set out in clause 9.1 of the Implementation Agreement. In particular the clause states that SFGA and the Board believe that the scheme will provide significant benefits to it and the shareholders and that it is reasonable and appropriate that SFGA agrees to the inclusion of clause 9 in order to secure IOOF's execution of the agreement, and IOOF's agreement to implement the scheme subject to the terms and conditions set out in the Implementation Agreement. 12 Clause 9.1(c) goes on to state that the amount payable by SFGA is purely and strictly compensatory in nature and represents a reasonable estimate of the compensation so as to compensate IOOF for the various matters recited in subparagraphs (i) to (v) of clause 9.1(c). 13 The matters include reasonable advisory costs, reasonable out-of-pocket expenses and reasonable opportunity costs incurred by IOOF in pursuing the scheme or in not pursuing other alternative acquisitions which could have been developed but for IOOF's commitment to pursue the present transaction. There are other matters referred to in subparagraph (c) but I need not refer to them any further. 14 The circumstances in which the break fee would become payable are set out in clause 9.2. I will not repeat the content of that clause. Importantly, clause 9.4 provides that clause 9 does not impose an obligation on SFGA to pay the break fee to the extent that the obligation to pay it is declared by the Takeovers Panel to constitute "unacceptable circumstances" within the meaning of the Act, or is determined to be unenforceable or unlawful by a Court. 15 Reference should also be made to clause 9.5, under which the maximum liability of SFGA under or in connection with the agreement, other than clause 9.5(a) which refers to the maximum liability arising in connection with a breach of clause 9, will be $2 million. 16 The break fee and the exclusivity obligations are disclosed in the draft explanatory memorandum at ss 2.3(f) and (g) on page 23 and ss 3.4(b) and (c) on page 28. The independent expert's report of EY also makes reference to the payment of the break fee. It is referred to on page 2 of the draft report which states that a break fee of $6 million is payable in certain circumstances including where a competing proposal is announced before the scheme meeting and completed within 12 months. 17 Importantly, EY observes at section 9.4.2 of its report that SFGA estimates that it will incur total transaction costs of approximately $6.2 million. The majority of the costs would be incurred irrespective of whether or not the proposed scheme was approved and implemented. In addition, if the scheme is not approved and implemented, SFGA may be obliged to pay a $6 million break fee to IOOF as set out in section 3.4(c) of the explanatory memorandum. It is therefore evident that SFGA has taken into account, in forming its opinion that the scheme is fair and reasonable, the fact that the break fee is payable. 18 The issue of the payment of break fees was referred to by Lindgren J in Re APN News & Media Ltd (2007) 62 ACSR 400. His Honour commenced his discussion by raising the question as to whether the liability to pay the break fee in that case would be likely to coerce offeree shareholders into agreeing to the scheme or to deter companies from making a competing offer. 19 His Honour took into account at [54] the guidance provided in the Australian Takeovers Panel statement which has been referred to on numerous occasion in connection with the payment of break fees. His Honour was concerned in Re APN News to be satisfied that the break fee fell within the one per cent guideline which has been stated in the Takeovers Panel paper. 20 In Re APN News (at [55]) his Honour set out a number of matters on which he said it would be desirable that there be evidence supported by affidavit. His Honour said that there should be evidence that the break fee provisions are the result of normal commercial negotiations and went on to briefly explain the factual basis for the statement. 21 Another matter on which his Honour considered it desirable that there be evidence was that the directors of the target company believe that the provisions do not operate against the interests of offeree shareholders, and that in fact it was in the interests of such shareholders that the directors agreed to the inclusion of the provisions in the merger implementation agreement. 22 In the present matter I do not have evidence of the factual basis which supports the proposition that the exclusivity and break free provisions were the result of normal commercial negotiations. However, there does seem to be material which suggests that that occurred. This may be gleaned from the provisions of clause 9 of the Implementation Agreement to which I have referred. Mr Foreman, who appeared for IOOF, informed me that his instructions were that the various matters which had been taken into account in determining the reasonable estimate of the compensation were correct. Notwithstanding the fact that there was no evidence to support them, I am prepared to act in this matter upon Mr Foreman's statement of his instructions. 23 As the terms of clause 9.1 suggest that the directors believe that the provisions do not operate against the interests of the offeree shareholders in the manner to which Lindgren J referred in [55] of Re APN News, it is also relevant to take into account the opinions of the EY expert witness to which I have referred. That approach is consistent with the approach adopted by Lindgren J in Re APN News at [55] where his Honour observed that if the independent expert is in a position to do so, he should state whether the exclusivity and break fee provisions appear to be reasonable and not detrimental to the interests of the shareholders and, if so, the basis for that opinion. 24 It seems to me that in the present case, consistently with the approach which has been taken in other authorities, the Court ought not to intervene because the terms of the exclusivity provisions and the break fee conform with the guidance provided by the Takeovers Panel and are, at least in general terms, consistent with the approach which was adopted by Lindgren J in Re APN News. See also Texon Petroleum Limited, in the matter of Texon Petroleum Limited [2013] FCA 29 at [31] per Farrell J. 25 The only other issue which calls for comment is the question of whether a call option is a class-creating event. The call option is contained in Call Option Deeds dated 20 May 2014. The effect of them is that IOOF has acquired a relevant interest of approximately 15.66% of the SFGA shares as a result of entering into the Call Option Deeds. The Call Option Deeds provide that the shareholders who have granted the option (the Call Option Shareholders) agree to grant IOOF call options to purchase the shares they hold if: (a) there is a competing proposal (as defined in the Implementation Agreement); and (b) a superior proposal (as defined in the scheme Implementation Agreement) has been publicly announced by the SFGA Board. 26 In CCI Holdings Limited [2007] FCA 832, Emmett J dealt with the question of whether a pre-scheme option deed constituted a class-creating event. In that case, the grantor of the options agreed to vote in favour of the scheme at the meeting of shareholders convened to approve the scheme of arrangement. His Honour dealt with the issue at [16]-[19]. He came to the view that the terms of the option deed did not give rise to a class-creating event, but to an issue of fairness which may be necessary to be dealt with at the second Court hearing. It seems to me that following on from this, the same approach should be adopted in the present case. 27 In order to enable the issue to be determined, I have requested that the votes of the Call Option Shareholders be tagged at the scheme meeting and Mr Oakes SC, who appears for SFGA, has obtained instructions to agree to that course. All other matters which are necessary to be considered today have been sufficiently described in Mr Oakes' written submissions which I will mark as "MFI 2". I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

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