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[2013] FCA 1274
plaintiff. Orders made approving the scheme under s 411(4)(b), requiring lodgement with ASIC, exempting compliance with s 411(11) under s 411(12), with the Court making the conventional statements to support...
Simavita, an Australian medical device company, wanted to list on the Canadian stock exchange without a full IPO by merging with a listed Canadian shell company called Gtech. Shareholders would swap their Simavita shares for Gtech shares, and the company would also raise new capital. Because one big shareholder (Dussman) had extra benefits like underwriting fees and loans being repaid, it got its own separate meeting. After shareholders voted strongly in favour and all documents were fixed to explain Canadian tax, director conflicts and the new investors, the Federal Court approved the deal. The judge confirmed the information was clear enough, the deal was fair, and new shareholders from the capital raising would still be bound even though they could not vote at the meetings. The Court also gave the statements needed so US shareholders could rely on a securities law exemption.
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Simavita Holdings Limited, an unlisted Sydney-based company commercialising an instrumented incontinence assessment tool called SIM™, entered into a Scheme Merger Agreement with Gtech International Resources Limited on 29 July 2013 (amended 16 September 2013). Gtech was a Canadian company listed on the NEX Board of the TSXV with minimal assets. The commercial objective was a reverse takeover so that Simavita could achieve a backdoor listing on the TSXV as a Tier 2 issuer after Gtech consolidated its shares 3-for-1 and upgraded its listing.
Under the scheme all ordinary shares in Simavita (after conversion of two classes of preference shares and a 3.543-to-1 consolidation effective on the implementation date) would be transferred to Gtech. Scheme participants would receive one consolidated Gtech share for each consolidated Simavita share. The transaction was conditional on a simultaneous capital raising of $15 million (minimum subscription $10 million) at $0.41 per share, which price matched the high end of the independent expert's valuation range. Subscribers to the capital raising would receive shares after the scheme meetings but before the record date and would therefore participate in the scheme.
Because Dussman Pty Limited (controlled by a Simavita director) held approximately 45% of the equity, was to receive a 3% sub-underwriting commission, and was to be repaid an $800,000 loan plus $80,000 interest from capital raising proceeds, it was placed in a separate class. Evidence from an independent adviser, Hawkesbury Partners, confirmed the commission was within the 1.5%-3% market range for comparable transactions and that the approximately 40% post-merger holding by Dussman entities justified a fee at the higher end. Three option holders separately agreed to cancel their out-of-the-money options for a total cash payment of $10,036.25 (Black-Scholes value $1,143.30); one option holder who also held 7,700 shares was excluded from voting but not treated as a separate class.
The first court hearing on 3 October 2013 resulted in orders under s 411(1) and s 1319 convening two scheme meetings for 6 November 2013. Those dates were later vacated and relisted for 20 November 2013 after TSXV indicated it required additional time. A general meeting immediately preceding the scheme meetings approved the preference share conversion and share consolidation by substantial majorities. At the scheme meetings on 20 November 2013 the Dussman class approved the resolution unanimously. The Non-Dussman meeting approved it by 99% of votes cast and 86% of members present; even after excluding 3.66 million tagged votes associated with director-related entities the resolution passed by 98% of votes cast and 84% of members. Voter turnout was high: 47.05% of shareholders holding 92.09% of shares participated.
At the second court hearing on 26 November 2013 Simavita tendered a certificate confirming all conditions precedent (other than court approval) were satisfied or waived, evidence of Canadian law on the deed poll, the executed circulating resolution of the preference shareholders, and the final scheme booklet (Exhibit 2). No shareholder appeared to oppose the scheme and ASIC provided its no-objection letter under s 411(17)(b). On 27 November 2013 Farrell J made orders approving the scheme under s 411(4)(b), requiring lodgement with ASIC, and exempting Simavita from s 411(11) under s 411(12). The reasons were delivered on 2 December 2013.
Farrell J approached the application in accordance with the well-established checklist drawn from the authorities cited at [51], including the practice statements in Aston Resources Limited, in the matter of Aston Resources Limited (No 2) [2012] FCA 401. The Court was satisfied that Simavita was a Part 5.1 body and that the scheme was an “acquisition” arrangement within the ordinary understanding of that term.
On disclosure, the judge noted that the directors’ recommendation was “key information” and that it was “undesirable” for shareholders to be required to consult the glossary to identify “Abstaining Directors”. The booklet was therefore amended to name Mr Bergman and Ms Lewis expressly. Similar amendments clarified that those directors would abstain from voting undirected proxies. Canadian tax disclosure was expanded at section 3.14 after the first court hearing because the original cross-reference to Australian BDO advice was regarded as unsatisfactory. The judge emphasised at [39] that where foreign scrip is offered a general outline of major differences in dividend and capital gains tax treatment must be given; merely advising shareholders to obtain their own advice was insufficient.
Class composition and voting were examined carefully. The constitution of a separate meeting for the single Dussman shareholder was supported by Re Hastings Deering Pty Ltd (1985) 9 ACLR 755. The arm’s-length character of the 3% sub-underwriting fee was established by independent evidence that such fees in comparable 2013 transactions ranged between 1.5% and 3% and that a 40% shareholder commitment for two months was materially valuable to the bookbuild. Loans from director-related entities were fully disclosed at sections 5.6(d), 5.10 and 11.12, with votes tagged.
The capital raising issue was the most substantive legal question. Counsel had drawn the Court’s attention at the first hearing to the outsider-binding line of authority in Re A & C Constructions Pty Limited and Re Glendale Land Development Ltd (in liq). Farrell J distinguished Re Application of B&S Distributors Pty Limited, noting that the future creditors in that case might not exist or be ascertainable at the meeting date, whereas capital raising participants would be identifiable, would receive prospectus disclosure, and would sign application forms acknowledging they would be bound and authorising Simavita to transfer their shares to Gtech. At [34]-[36] the Court held there is nothing in the text of ss 411(1) or 411(4)(b) that confines the binding effect to persons who were members at the first court hearing or scheme meeting. The economic purpose of the section is to bind non-consenting members efficiently; an informed market (including prospectus disclosure) satisfies the only discretionary proviso.
Performance risk was addressed by a deed poll executed by Gtech on 10 October 2013. Because Gtech was a Yukon company, evidence from a member of the Yukon bar confirming due execution and enforceability under Canadian law was tendered (Exhibit 7). The reimbursement amount cap of $200,000 (50% borne by Simavita) and the mutual no-shop/no-talk provisions with fiduciary carve-outs were regarded as conventional and commercially acceptable given that Simavita shareholders would hold >95% of the merged entity.
No fact or circumstance was drawn to the Court’s attention that would make approval inappropriate. ASIC did not oppose, no shareholder objected, and the independent expert’s valuation midpoint of $0.395 supported fairness. Accordingly the orders were made.
Prior to this judgment the authorities already permitted schemes that altered share capital or effected acquisitions provided the statutory majorities were obtained and the court was satisfied of fairness. Cases such as Re Permanent Trustee Co Ltd, Central Pacific Minerals NL and Re Simeon Wines Ltd had settled the form of statements required to support a s 3(a)(10) exemption under the US Securities Act. The line of authority on “outsiders” (Re A & C Constructions, Re Glendale) stood for the proposition that a scheme cannot bind persons who are neither members, creditors nor the company itself.
This judgment clarified three practical points. First, it confirmed that the statutory language of s 411 does not impose a temporal requirement that a person be a member at the date of the s 411(1) order or the scheme meeting. The distinction from Re Application of B&S Distributors (which concerned creditors who might not exist at the meeting date) is now expressly drawn in the context of post-meeting share issues. Second, it elevated the disclosure obligation concerning foreign tax. The judge’s statement at [39] that a “general outline of major taxation issues” must be provided and that merely directing shareholders to obtain their own advice is insufficient has become the practical benchmark for scrip schemes offering Canadian or other foreign listed securities. Third, it reinforced that directors’ recommendations must be presented clearly; the use of defined terms such as “Abstaining Directors” without immediate identification was deprecated.
After the decision, scheme booklets in comparable backdoor listings routinely include expanded Canadian (or other foreign) tax summaries, name abstaining directors expressly, and contain express acknowledgments in capital raising application forms. The judgment also illustrates that a single-shareholder class is permissible where distinct interests (underwriting, loans) exist and arm’s-length evidence is adduced. The conventional Aston Resources statements at [52] have been repeated in numerous subsequent second hearing reasons.
[34] “There is nothing in s 411(1) or s 411(4)(b) which indicates that for a member to be bound by a scheme of arrangement they must have been a member … at the time an order is made under s 411(1) or the meeting to approve the scheme is held or even on the day an order is made under s 411(4)(b).”
Plain English: The Corporations Act does not say you must already be a shareholder when the first court order is made or when the meeting happens. New investors who buy shares before the record date with their eyes open can be swept into the scheme just like everyone else. Otherwise most listed company acquisition schemes would be invalid because shares trade right up to implementation.
[35] “The purpose of s 411 is to bind members or creditors who may not have consented to the scheme; that is an important economic purpose allowing companies and their assets to be dealt with efficiently. I do not see any difference between those who vote against the scheme and those who acquire shares on the market or by the issue of shares at any time prior to the Record Date.”
Plain English: The whole point of the scheme regime is to let a majority decision bind the minority. There is no logical reason to treat someone who buys shares on the market the day after the meeting any differently from someone who voted no. As long as the market has the prospectus information, the new buyer is fairly bound.
[39] “if shares in a non-Australian company are offered as Scheme Consideration the general outline of major taxation issues for Australian resident shareholders should be provided. Drawing out major differences in treatment of dividends and capital gains tax or other imposts is an important way to bring home to shareholders that they cannot assume a familiar tax treatment. I do not regard it as sufficient disclosure to say simply that shareholders should get their own advice.”
Plain English: If Australians are being asked to accept Canadian shares, the booklet must spell out the big tax differences (for example, no franking credits, different capital gains rules). Simply telling people to “see your own adviser” is not good enough; the booklet itself must flag the issues so shareholders understand they are leaving the Australian tax regime they know.
[51]-[52] The recitation of the Aston Resources statements concerning the Court’s role, the public hearing, notice to shareholders, and the fact that the Court is not a valuer but has independent expert evidence before it.
Plain English: These paragraphs are the “magic words” that allow the parties to rely on the US securities law exemption. The judge is confirming she ran a proper public fairness hearing, looked at independent valuation evidence, and gave everyone a chance to be heard.
The decision is directly engaged whenever an unlisted Australian company proposes an acquisition scheme that delivers foreign listed scrip (particularly Canadian TSXV securities) and is accompanied by a concurrent capital raising. The presence of a related-party shareholder with distinct commercial benefits (underwriting commission, loan repayment) will ordinarily require a separate class meeting and supporting arm’s-length evidence. The need for positive foreign-law evidence on deed poll enforceability arises whenever the acquirer is not an Australian company. The judgment is also relevant to any scheme in which the record date is set after both the meeting and any post-meeting issuance of shares; practitioners now routinely include prospectus acknowledgments that new subscribers will be bound.
Schemes that involve consolidation, preference share conversion, and option cancellation for modest cash consideration are also within its scope, provided those dealings are fully disclosed and do not create additional classes. Finally, the case is cited whenever counsel seeks to include the conventional s 3(a)(10) statements in reasons for judgment.
Although the source judgment itself does not cite later authority, its reasoning has been absorbed into the mainstream of scheme practice. The distinction drawn from Re Application of B&S Distributors at [32]-[36] is now the standard reference point for schemes that issue shares after the meeting. The tax disclosure obligation articulated at [38]-[40] has guided the form of Canadian and other foreign tax summaries in subsequent booklets. The emphasis on naming abstaining directors rather than using a defined term has been followed to avoid any suggestion that material information is buried in the glossary. The acceptance of a single-member class supported by independent arm’s-length evidence at [19]-[21] is routinely relied upon in related-party underwriting cases. The deed poll evidence requirement at [43]-[44] is now standard where the bidder is incorporated outside Australia. The form of the Aston Resources statements at [52] continues to be reproduced verbatim in second hearing reasons across the Federal Court.
The judgment leaves open the precise demographic threshold at which foreign tax disclosure for non-Australian resident shareholders becomes necessary; the judge noted at [39] that the question “would depend on the demographic of the shareholders generally” but gave no bright-line test. It is also unclear how far the “informed market” proviso at [35] extends if the capital raising prospectus is only provided to sophisticated or professional investors rather than all potential subscribers. The interaction between s 411 and the escrow policies of the TSXV (mentioned at 17) was resolved on the facts by additional disclosure but may require further elaboration in schemes where a larger proportion of shareholders are subject to escrow. Finally, the precise limits on “pay aways” or sub-underwriting commissions that still permit a related party to remain in the same class as other members are not exhaustively defined; the Hawkesbury evidence was accepted on the particular facts but the judgment does not set a percentage ceiling. These residual questions continue to be managed on a case-by-case basis at first and second court hearings.
REASONS FOR JUDGMENT 1 These are reasons for making an order under s 411(4)(b) of the Corporations Act 2001 (Cth) (Corporations Act) approving a scheme of arrangement between the plaintiff company, Simavita Holdings Limited ACN 071 409 179 (Simavita) and its members (Scheme) and an order under s 411(12) on 27 November 2013 following a hearing on 26 November 2013 (second court hearing). 2 The Scheme is an "acquisition" scheme and therefore within the concept of an "arrangement" which has often been approved by Australian courts. All ordinary shares in Simavita will be transferred to Gtech International Resources Limited (Gtech) so that Simavita will become a wholly owned subsidiary of Gtech. The Scheme Consideration is 1 consolidated Gtech share for each consolidated Simavita Share: see [10] below. 3 These are also my reasons for making orders on 4 October 2013 under s 411(1) and ancillary directions under s 1319 to convene two meetings of members of Simavita to consider approving the Scheme (Scheme Meetings); those orders were made after a hearing on 3 October 2013 (first court hearing) and were in accordance with usual practice. The orders required the Scheme Meetings to be convened for 6 November 2013. Orders 1-7 were vacated on 14 October 2013 and orders in substantially the same form were made to convene the Scheme Meetings on 20 November 2013. 4 Unless otherwise indicated, in these reasons references to provisions of a statute are references to provisions of the Corporations Act and terms defined in the Glossary of Terms in Section 12 of the Scheme Booklet which is Exhibit 2 (Scheme Booklet) bear the same meaning. 5 The considerations relevant to the Court making orders under s 411(1) are set out in the submissions of Mr Oakes, counsel for Simavita, which are marked MFI 4. The considerations relevant to the Court making orders under s 411(4)(b) and s 411(12) are generally as set out in the submissions of Mr Oakes marked MFI 5. In making these orders, I have had regard to the evidence provided in these proceedings which is generally summarised in the Evidence Structure Roadmap (Roadmap) for the second court hearing which is MFI 6 in these proceedings. All affidavits referred to in the Roadmap were read and exhibits tendered.
Background 6 Simavita and Gtech entered into a Scheme Merger Agreement on 29 July 2013 as amended on 16 September 2013, a copy of which is Annexure C to the Scheme Booklet. 7 Simavita was incorporated in 11 October 1995 as a proprietary company. Its name was changed to Simavita Holdings Limited on 30 April 2009 when it also converted to the status of a public company. Simavita is unlisted and based in Sydney. As at the date of the Scheme Meetings there were 102 shareholders holding 53,542,528 ordinary shares and 2 shareholders holding 24,940,004 preference shares. There were 3 option holders but their options were "out of the money". 8 Simavita developed and is in the process of commercialising a product, SIM™, which is an instrumented and integrated incontinence assessment and management tool designed for use in the residential aged care sector. Simavita has three subsidiaries, a service company incorporated in the US, a trading entity incorporated in Australia and an intellectual property holder incorporated in Australia. In November 2012, Simavita executed an exclusive agreement for distribution of the product in the United States of America with Medline Industries Inc by means of which it will expand Simavita's business in North America. 9 Gtech is incorporated under the laws of the Yukon Territory, Canada. Gtech shares are listed for quotation on the NEX Board of the Toronto Stock Exchange (TSX) Venture Exchange (TSXV) under the symbol GCH.H. It has modest cash assets and immaterial other assets. The NEX Board of the TSXV is designed to maintain the listing of entities formerly listed as Tier 1 or Tier 2 issuers on TSXV but which have low levels of business activity or have ceased to carry on active business. Gtech is also registered in Australia as a foreign company. It appears that Gtech's management and control is in Australia. 10 The commercial substance of the Scheme is that it is a reverse takeover of Gtech designed to achieve a "backdoor" listing of Simavita on TSXV. To achieve this the following associated matters must be completed: (a) Approval from Gtech shareholders for the reverse takeover and to consolidate its shares on a 3 for 1 basis. This approval was obtained on 20 November 2013. (b) Approval from TSX to the merger of Gtech and Simavita and to upgrade Gtech's listing on TSXV as a Tier 2 issuer. It is because of indications from TSX before the Scheme Booklet as approved on 4 October 2013 was despatched that it would need time to be satisfied in relation to the meeting and requirements for listing Gtech on TSXV that the proposed Scheme Meeting dates were delayed from 6 November to 20 November 2013. The Scheme Booklet (in the form of Exhibit 2) addressed changes in the timetable and some issues which had been raised at the first court hearing. Conditional approval was obtained from TSXV on 1 November 2013. (c) The two preference shareholders in Simavita must consent to the conversion of their preference shares to ordinary shares. The Scheme Booklet contains a copy of the circulating resolution at Annexure H. Exhibit 4 is a copy of the circulating resolution executed on 25 November 2013. (d) Simavita ordinary shares (including those which into which the preference shares convert) are consolidated on the basis of 3.543 shares for 1 share, to take effect on the day that the Scheme becomes effective (that is, when an order of the Court under s 411(4)(b) is lodged with the Australian Securities and Investments Commission (ASIC)). The general meeting to approve the conversion of preference shares and consolidation of ordinary shares was held immediately before the Scheme Meetings on 20 November 2013; the notice of meeting was set out in Annexure I to the Scheme Booklet. The resolutions were passed by a substantial majority at the general meeting on 20 November 2013. (e) Simavita undertakes a capital raising for $15 million (within a minimum subscription of $10 million and the right to take oversubscriptions of $5 million) via a prospectus which offers Simavita shares at $0.41 each, on the basis that Simavita's ordinary shares are consolidated before shares are issued under the prospectus (Capital Raising). Applicants for shares in the Capital Raising will participate in the Scheme because their shares will be issued to them before the Scheme Record Date but not in time for them to participate in the Scheme Meetings. As at 25 November 2013, $12,129,346.36 had been raised so that the minimum subscription was satisfied. Counsel advised that in excess of $14 million has now been raised. (f) The Scheme is approved by Simavita shareholders and the Court. The Scheme was approved by the requisite majorities under s 411(4)(a)(ii) on 20 November 2013; see [25]-[26] below. 11 The issues relevant to this transaction which were addressed at the first court hearing and the second court hearing were as follows.
Directors 12 The draft Scheme Booklet considered at the first court hearing disclosed that the directors (other than "Abstaining Directors") recommend that shareholders vote in favour of the Scheme in the absence of a superior proposal and they intended to vote in favour of the Scheme. This formulation was used in many places in the Scheme Booklet including Section 2.3. 13 The directors' recommendation is key information for shareholders. It is undesirable that shareholders have to go to the definition section of the Scheme Booklet to find out who an "Abstaining Director" might be. The Scheme Booklet was amended to refer to Mr Bergman and Ms Lewis instead of "Abstaining Directors". Ms Lewis and Mr Bergman abstain because they will receive Gtech options if the Scheme is implemented. 14 The draft Scheme Booklet contained disclosures that where directors are appointed as proxies without direction as to how to vote, they would vote in favour of the Scheme. These provisions were amended to indicate that if Mr Bergman or Ms Lewis was given an undirected proxy, they would abstain from voting.
Independent Expert 15 Lonergan Edwards & Associates Limited (Independent Expert) provided an Independent Expert's report dated 30 September 2013 which is set out in Annexure B to the Scheme Booklet. The Independent Expert considers the Scheme is fair and reasonable in the interest of Simavita shareholders in the absence of a superior proposal. 16 The Independent Expert values the Scheme Consideration between $0.284 and $0.505 with a midpoint of $0.395. It values 100% of Simavita on a controlling basis between $0.339 and $0.406 with a midpoint at $0.373.
Chairman's letter 17 The Chairman's letter in the draft Scheme Booklet submitted to the first court hearing was amended: (a) To refer shareholders to the disclosure of possible disadvantages of the merger in the Scheme Booklet, as well as the advantages which were enumerated in the letter; (b) To disclose clearly that the Scheme Consideration is shares in a Canadian listed company and that TSXV has escrow policies which would apply to the Gtech shares issued as Scheme Consideration for some shareholders. Those disclosures are at Section 3.16 and Section 3.17 of the Scheme Booklet; (c) To refer to the directors recommendation about voting on the Scheme; and (d) To disclose that if the Capital Raising (which was mentioned in the letter) is not successful in raising $10 million the Scheme will not proceed.
Foreign shareholders 18 Simavita submitted that it had no foreign shareholders ineligible to receive the Scheme Consideration.
Dussman Shareholders 19 There are two scheme meetings: the first for "Non Dussman" shareholders and the second for "Dussman" shareholders. There is only 1 Dussman shareholder, Dussman Pty Limited (Dussman). It is related to Mr Damien Haakman, a director of Simavita. Dussman held 22,672,731 ordinary shares and 12,470,002 preference shares in Simavita for itself and as trustee for three trusts. It has been treated as a separate class because: (a) Dussman will receive commission for its participation in underwriting the Capital Raising. The Dussman entities may be required to subscribe up to $6 million for 14,634,146 ordinary Simavita shares, but the obligation to subscribe is limited by the requirement to comply with the Corporations Act. Dussman must use its best endeavours to get any approvals required to allow it to subscribe for all of these shares, but if it cannot get those approvals, it must subscribe for shares in Gtech, subject to Canadian regulatory requirements. The commission which Dussman will receive as a sub-underwriter is 3%. (b) Dussman lent $800,000 to Simavita on 30 September 2013. This amount, together with a one off interest payment of $80,000, will be paid to Dussman out of the proceeds of the Capital Raising. These interests are disclosed at Section 11.1 and Section 11.5 of the Scheme Booklet. 20 Where only one shareholder comprises a class, it is possible to have a meeting of that class: Re Hastings Deering Pty Ltd (1985) 9 ACLR 755. 21 As Mr Haakman is a director of Simavita, evidence was provided at the second court hearing that the 3% sub-underwriting fee was on arm's-length terms. Mr David Allen, a director of Hawkesbury Partners Pty Limited (Hawkesbury), provided a report; he stated that there were no relationships which affected Hawkesbury's independence. Hawkesbury provides corporate and capital markets advisory services, focused on growth companies which are typically small to mid-sized companies. The report considered comparable capital raisings, of which there were not many. He indicated that "pay aways" or sub-underwriting fees in comparable companies would be in the range of 1.5%-3%. Mr Allen said that the success of capital raisings by comparable companies in 2013 had been mixed, underpinning the need to demonstrate support for the raising by existing shareholders. The Dussman entity was underwriting 40% of the proposed $15 million issue; the commitment would be for two months; and the commitment by an approximately 45% shareholder would be important for marketing the prospectus. Mr Allen also noted that, following the capital raising and implementation of the Scheme, the Dussman entities would hold approximately 40% of the merged entity. On this basis, Hawkesbury concluded that a fee at the higher end of the range is reasonable and would be the market rate that might appropriately be negotiated by parties at arms-length.
Options 22 The 3 options holders agreed with Simavita to cancel their options. The consideration for the agreement is an aggregate amount of $10,036.25 which is to be applied in subscription for Gtech Shares. According to Black-Scholes valuation methodology, the aggregate value of the options would have been $1,143.30. One of the option holders also holders 7,700 Simavita shares. Simavita did not treat that shareholder as a separate class; rather, Section 5.7(c) of the Scheme Booklet indicates that that shareholder would not vote at the Scheme Meeting. I do not consider that this manner of dealing with these option holders is any impediment to orders being made under ss 411(1) or 411(4)(b).
Loans 23 A number of entities related to the directors have provided loans to Simavita which were to be repaid out of the Capital Raising. While the loans were briefly referred to in the draft Scheme Booklet considered at the first court hearing, it was not clear whether some lenders (for instance Sim Finance Pty Limited) are related entities of the directors. Amendments were accordingly made to Section 5.6(d), more extensive disclosure about the loans and unpaid directors' fees was made in Section 5.10 and the fact that votes cast by those entities (other than Mr Bergman and Ms Lewis who will not vote) would be tagged was disclosed at Section 11.12.
Scheme Meetings 24 Mr Maxwell Lloyd-Jones acted as Chairman of the Scheme Meetings held on 20 November 2013 in accordance with orders made on 14 October 2013. 25 The Dussman Meeting passed the resolution to approve the Scheme. 26 At the Non-Dussman Meeting, the resolution to approve the Scheme was passed by a majority of 99% of votes cast and 86% of members present. Of the 26,634,710 votes cast by 43 members voting, 3,661,812 ordinary shares were held by 5 shareholders whose votes were tagged. If the "tagged" votes are excluded, the resolution to approve the Scheme was passed by 84% of the members present and 98% of votes cast. 27 There was significant voter turnout: in all 48 or 47.05% shareholders voted in respect of 92.09% or 49,307,441 ordinary shares.
Conditions of Scheme 28 The Scheme is subject to usual conditions precedent and the conditions set out in clauses 16, 17 and 18 of the Scheme Merger Agreement which reflect substantially the transactions contemplated in [10] above. Exhibit 6 is a copy of a certificate signed by Simavita and Gtech that the conditions have been satisfied or waived as at 8 am on the day of the second court hearing (except for the condition precedent relating to Court approval of the Scheme).
Capital Raising 29 Details of the Capital Raising are set out at Section 5.8 of the Scheme Booklet. The issue price of 41 cents reflects the high point of the valuation of Simavita shares by the Independent Expert. 30 Simavita shares issued under the prospectus for the Capital Raising will be issued after the Scheme Meeting but will be included in the Scheme because they will be issued before the Scheme Record Date. 31 At the first court hearing, Counsel drew to my attention statements made in Re A & C Constructions Pty Limited [1970] SASR 565 at 568 per Bray CJ and at 574 per Wells J, and in Re Glendale Land Development Ltd (in liq) (1982) 7 ACLR 171 at 173 per McLelland J which deal with the incapacity of a scheme of arrangement to bind an "outsider", not someone who is the company, a member or a creditor. Although subscribers to the Capital Raising are presently outsiders, I consider that even though they are not members at the time of the Scheme Meeting, they will be members at the relevant time, the time at which the Scheme is implemented. Section 231(b) of the Corporations Act provides that a person is a member of a company if they "agree to become a member of the company after its registration and their name is entered in the register of members". 32 In Re Application of B&S Distributors Pty Limited (1986) 5 NSWLR 492 at 493 per McLelland J said: It is my opinion that on the true construction of s 315, the Court is not empowered to approve a scheme purporting to bind a future class of creditors, ie a class, members of which might not be in existence or ascertainable as at the date of the meeting at which the scheme is agreed to. However, as a matter of practice I would think it undesirable that the Court should convene a meeting of a class of creditors unless all members of that class are in existence at the date of the Court order because if the class were defined in such a way as to include creditors who might come into existence after the date of the Court order albeit before the date of the meeting, there is a very serious risk that such creditors would not have proper notice of the meeting. It may be that in special circumstances it would be proper to permit the class to be defined in such a way as to include creditors not in existence at the date of the order but in existence at the date of the meeting, but in the ordinary case, of which I think this is one, such a course should not receive any encouragement from the Court. 33 In that case, the class of creditor to be bound was (at 492-3): The scheme creditors are defined in terms which would include any person who becomes a creditor on or before what is referred to in the scheme as the "commencement date", which is defined to mean: "… the date upon which the office copy of the order made by the Court pursuant to s 315(4)(b) of the Code is lodged with the Commission or such earlier date as may be determined by the order and specified in such order." 34 There is nothing in s 411(1) or s 411(4)(b) which indicates that for a member to be bound by a scheme of arrangement they must have been a member (or that the share must have been in existence) at the time an order is made under s 411(1) or the meeting to approve the scheme is held or even on the day an order is made under s 411(4)(b). Indeed, to interpret the provision that way would mean that many of the "acquisition" schemes of arrangement which have been approved by Australian courts in relation to listed companies would have doubtful validity. This is because markets for listed shares generally operate actively until the s 411(4)(b) orders are made and lodged with ASIC, and transfers are generally processed and registered thereafter, which is the reason for a Scheme Record Date some days after a scheme becomes effective. Schemes are typically drafted without specificity as to the number of shares which will be on issue at the Record Date because it is quite common for options or other rights to be capable of exercise up to that date. As here, the number of shares which might be issued in that period is generally known and that is appropriate. 35 The purpose of s 411 is to bind members or creditors who may not have consented to the scheme; that is an important economic purpose allowing companies and their assets to be dealt with efficiently. I do not see any difference between those who vote against the scheme and those who acquire shares on the market or by the issue of shares at any time prior to the Record Date. The only proviso is a discretionary one: that those who become shareholders before the Record Date do so in an informed market, which can include information provided directly to the person, such as in this case by means of a prospectus. 36 In this case, at the first court hearing, the Court was told that the Scheme proposal would be drawn to the attention of subscribers in the prospectus for the Capital Raising. Evidence was provided at the second court hearing of the disclosure about the Scheme in the prospectus for the Capital Raising. In the application form, applicants acknowledged that the Scheme would bind them, consented to become a member of Gtech upon implementation of the Scheme and authorised Simavita as attorney to transfer the shares to Gtech. I do not consider that the circumstances that the subscribers in the Capital Raising do not have a vote at the Scheme Meeting because they are not yet members or that Simavita Shares will be issued under the Capital Raising after the Court makes its order under s 411(4)(b) but before the Scheme Record Date is an impediment to approval of the Scheme.
Preference shareholders 37 Annexure A to the Scheme Booklet contains a report by BDO dated 9 September 2013 in relation to the general tax implications of implementing the Scheme; it also addresses the consolidation of Simavita shares. That advice does not address the conversion of preference shares and Mr Oakes advised the Court that Simavita would provide that advice separately to the two preference shareholders. Evidence that this occurred was provided at the second court hearing.
Canadian issues 38 Section 3.14 of the draft Scheme Booklet contained a cross reference to the Australian taxation advice provided by BDO. It goes on to say that Simavita could not provide Canadian tax advice, for instance, whether franking credits are available on dividends equivalent to the regime in Australia (which is largely irrelevant since no dividends have been paid in the past and none are envisaged in the near future). 39 This is unsatisfactory; if shares in a non-Australian company are offered as Scheme Consideration the general outline of major taxation issues for Australian resident shareholders should be provided. Drawing out major differences in treatment of dividends and capital gains tax or other imposts is an important way to bring home to shareholders that they cannot assume a familiar tax treatment. I do not regard it as sufficient disclosure to say simply that shareholders should get their own advice; such advice is often expensive and difficult to obtain, although it would be necessary for each shareholder to obtain advice specific to the shareholder's own circumstances over and above what is contained in the Scheme Booklet. Whether similar information should be included in a Scheme Booklet for shareholders resident in some place outside Australia would depend on the demographic of the shareholders generally; it is often the case that foreign shareholders will not be eligible to receive shares as Scheme Consideration. In this case, Simavita has indicated that it does not have ineligible foreign shareholders. 40 At the first court hearing, Simavita agreed to provide supplementary general information to shareholders about Canadian tax before the Scheme Meeting. However, as the timetable was extended for other reasons, Section 3.14 of the Scheme Booklet was expanded to provide some general information about Canadian tax implications of acquiring Gtech shares as Scheme Consideration.
Reimbursement Amount 41 Section 4.5 of the Scheme Booklet discloses that Simavita agreed to pay Gtech 50% of the Reimbursement Amount up to $200,000. The Reimbursement Amount is actual third party costs and expenses incurred by Simavita and Gtech in connection with the merger having regard to the estimated regulatory fees, independent expert fees and financial, public relations, legal and accounting advisers. This appropriate because the Scheme is effectively a takeover of Gtech by Simavita, with Gtech having limited resources and Simavita shareholders will hold in excess of 95% of Gtech shares after the Scheme is implemented.
Deal protection measures 42 There are mutual "no shop" and "no talk" and "notification" provisions in clause 9 of the Scheme Merger Agreement. These deal protection measures apply during the Exclusivity Period which ends on 9 December 2013. The "no talk" provision is subject to a carve out which permits pursuit of a superior offer (as advised by financial advisors) and the "notification" requirements are subject to a fiduciary carve out.
Deed Poll 43 Gtech executed a deed poll on 10 October 2013 (Deed Poll), and Simavita provided evidence of its execution in accordance with its constitution. A deed poll operates under Australian law to allow those for whose benefit it is expressed to sue on the promises in the deed poll. This is a common mechanism, especially in acquisition schemes, for binding an "outsider" to a scheme to perform its obligations under the scheme and (as here) any implementation agreement, especially the payment of scheme consideration. This is an important element of managing "performance risk". 44 However, Gtech is a Canadian company and at the first court hearing I indicated that it would be necessary for Simavita to provide evidence that, under relevant Canadian law, Gtech has duly executed the Deed Poll and that Simavita shareholders will be entitled to enforce it according to its terms. This evidence was provided by a lawyer admitted to the Yukon bar and it is Exhibit 7.
ASIC 45 ASIC provided the "usual letters" to the first and second court hearings: Exhibit 5 is the "no objection" letter pursuant to s 411(17)(b). ASIC also considered amendments made to the Scheme Booklet prior to the hearing on 14 October 2013 and indicated that it would not appear at that hearing.
Other formal matters 46 Mr Oakes' submissions to the first court hearing marked MFI 4 flag at [39] the evidence of which the Court must be satisfied at that stage. On the basis of that evidence I am satisfied that Simavita is a Part 5.1 body. 47 The Roadmap sets out (among other things) the affidavit evidence which addresses printing and despatch of Scheme Booklets, lodgement of relevant materials with ASIC, advertising of the second court hearing, receipt and collation of proxies; and voting at the general meeting and the Scheme Meetings. Exhibit 4 is the circular resolution executed by both preference shareholders. 48 No person appeared to object to the Scheme being approved. I note the affidavit sworn on 26 November 2013 of Mr William Addison, a partner at DibbsBarker Lawyers who acted for Simavita in relation to the Scheme. DibbsBarker received no notice of intention to appear at the second court hearing. The matter was also called at the commencement of the second court hearing. 49 No fact or circumstance has been drawn to my attention which would indicate that it is not appropriate to approve the Scheme, it having been approved by the statutory majorities.
US securities Act of 1933 50 Counsel disclosed at the first court hearing that it is intended that the issue of Gtech shares to Simavita shareholders who are US shareholders will be effected in reliance on the exemption from registration requirements of the United States Securities Act of 1933. This exemption is set out in s 3(a)(10) of that Act. Disclosure about this appears on the inside front cover of the Scheme Booklet in the "Important Notices" Section. 51 The Court has been asked to make statements in reasons for making orders under s 411(4)(b) on a number of occasions. Counsel brought a number of cases to my attention including the judgments of Jacobson J in Aston Resources Limited, in the matter of Aston Resources Limited (No 2) [2012] FCA 401. I have also considered the reasons of Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; Emmett J in Central Pacific Minerals NL [2002] FCA 239 and Lander J in Re Simeon Wines Ltd (2002) 42 ACSR 454. 52 Consistent with the practice which has developed I make the following statements which have been requested by Simavita: (a) The Scheme contemplates the receipt of Gtech shares as consideration for the transfer of Simavita shares. (b) The Court has been advised, before commencement of the second court hearing to approve the Scheme, that Simavita and Gtech will rely on the s 3(a)(10) exemption on the basis of the Court's approval of the Scheme. (c) The Court does not act as a valuer. The Court has been informed of the value of Simavita's shares and the value of the shares to be received as consideration for the transfer of Simavita's shares: see [15] and [16] above. The valuation has been prepared by an expert which the Court has been advised is independent of Simavita and Gtech and it is a sworn valuation. The Court has taken this evidence into account in determining whether the scheme is fair and should be approved. (d) The Court held a hearing to consider the fairness and reasonableness of the proposed Scheme. (e) That hearing was open to the public and each Simavita shareholder to whom Gtech shares are to be issued has standing to appear. (f) Notice of the date of the second court hearing has been included in the Scheme Booklet sent to all shareholders of Simavita prior to the proposal being considered by the Scheme Meetings and was advertised in a daily newspaper circulating throughout Australia. (g) There was no appearance by any shareholder.
Conclusion 53 For these reasons, I made the orders sought by the plaintiff. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.
Orders made approving the scheme under s 411(4)(b), requiring lodgement with ASIC, exempting compliance with s 411(11) under s 411(12), with the Court making the conventional statements to support reliance on the s 3(a)(10) exemption under the US Securities Act of 1933.