Proposed alteration to the scheme as approved by members
9 After the announcement of the proposed scheme, a number of members (including Ryder Capital Limited (Ryder)) made statements to Billabong and to the media that the scheme consideration was too low. In the days prior to the scheme meeting, Boardriders, Inc. (Boardriders) informed Billabong that it was considering whether an increase in the scheme consideration would improve the prospects of the scheme being approved by the members. In discussions dealing with that matter, Boardriders noted that, from a commercial perspective, it was important that the scheme meeting proceed as convened having regard to, amongst other things, Boardriders' debt financing arrangements for the transaction, and the effect that continued uncertainty might have for the Billabong business if the transaction envisaged by the scheme were to be delayed.
10 The proxy cut-off for the scheme meeting was 10.00 am (Queensland time) on Monday, 26 March 2018. The proxies received by that time indicated that there may be sufficient votes in favour of the scheme to result in it being approved by the requisite majorities. However, this was not certain, particularly as Ryder held a significant number of undirected proxies. Also, the voting intentions of a significant number of members whose shares had not been the subject of proxies, were not known; nor was it known whether those shares would be voted at the meeting. Therefore, despite the information that could be gleaned from the proxies received, it remained possible that the scheme would not be approved at the scheme meeting.
11 On the morning of the scheme meeting, the solicitors for Boardriders informed the solicitors for Billabong that Boardriders was considering an increase in the scheme consideration on the basis that the increase would be made prior to the scheme meeting but that the meeting would proceed as planned on that day. After that information was communicated, there were non-binding discussions between Billabong and Ryder regarding Ryder's voting intentions in relation to undirected proxies it held, should the scheme consideration be increased as indicated by Boardriders. In the event, Boardriders did increase the scheme consideration to $1.05 per share. This required a short adjournment of the scheme meeting while a deed amending the Scheme Implementation Deed was executed, providing for that increase. At 10.30 am on 28 March 2018, the scheme meeting resumed. The chairman of the meeting, Mr Pollard, addressed the meeting on the scheme as proposed under the orders made on 13 February 2018, but also advised members that, shortly prior to the resumed meeting, the Scheme Implementation Deed had been amended to provide for the increased consideration and that the plaintiff would seek approval from the Court to amend the terms of the scheme (if approved by the members) to reflect that fact. The important thing to note is that the approval resolution put to members was in respect of the scheme as proposed under the orders made on 13 February 2018. When the members voted on that resolution, they did not vote to modify the scheme as proposed. Nevertheless, save in the case of the directed proxies that had been lodged within time, the voting took place in the knowledge that the Scheme Implementation Deed had been amended and that the Court, on an approval application, would be asked to modify the scheme as approved by the members to provide for the increased scheme consideration.
12 I am persuaded that the scheme should be approved by the Court under s 411(6) of the Act with the modification to increase the scheme consideration from $1.00 to $1.05 per scheme share, for the following reasons.
13 Section 411(6) confers power to grant approval to a compromise or arrangement subject to such alterations or conditions as the Court thinks just. The circumstances in which the Court might be asked to approve a scheme subject to alterations or conditions will vary. Further, in the case of alterations, the alterations might be of a minor, technical or peripheral nature or they might be more substantive. In this connection, Black J in Re Boart Longyear Ltd (No 2) [2017] NSWSC 1105; (2017) 122 ACSR 437 said (at [92]):
… it must first be recognised that the section confers a discretion on the Court, to be exercised judicially, having regard to its statutory purpose in the light of the whole of the circumstances surrounding the matter, but unconfined by any particular statutory criteria as to its exercise. I should not approach that discretion on the basis of any assumption that it may only be exercised in a manner that it has previously been exercised, particularly if an analogous situation has not arisen in previous cases. Many of the cases in which this power has been exercised relate to alterations that are of a technical or minor character. However, it does not seem to me that that has the consequence that the alteration power cannot be used in a case where the amendment is of a substantive character, those who are most directly affected by it consent to it, and it is otherwise just to make that alteration. That, obviously, will be a relatively rare case and that may readily explain the lack of earlier examples of alterations of that nature in the case law.
14 His Honour also noted (at [103]) that, while an alteration might be fundamental in one sense, in the context of the given case it might not possess that character. For example, in Re Independent Practitioner Network Ltd (No 2) [2008] FCA 1593; (2008) 26 ACLC 1249, which involved a change in the identity of the acquiring entity, Lindgren J observed that while such a change could be said to be fundamental, it did not have that character from the perspective of the parties to the scheme where the scheme consideration was cash and not shares in the acquiring entity itself.
15 In Snowside Pty Ltd v Boart Longyear Ltd [2017] NSWCA 215; (2017) 122 ACSR 291, the New South Wales Court of Appeal agreed with Black J's analysis of the character of the discretion to be exercised under s 411(6), saying at [22]:
… In our view, the primary judge was correct to conclude that the power conferred by s 411(6) was not confined in the way in which the applicants contend. There is no reason in the text, or context, or purpose of the section to confine the power to approve of "such alterations or conditions as it thinks just" to alterations or conditions which fall short of being material. The power to approve is conferred in broad terms. It is conferred upon a superior court of record. Ordinary principles of construction would suggest the power is not to be confined in a way which has not been articulated by Parliament…
16 At [26], the Court of Appeal continued:
Subsection 411(6) is not without limitation. But the power is not circumscribed by the limitations favoured by the appellants, namely, to alterations which are not "material" or "substantial" or "significant". Instead, it is circumscribed by the requirement that the Court thinks the alteration is one that is just.
17 In the abstract, one would think that a change in the scheme consideration would be a most material consideration. However, the materiality of that change - indeed, its true character from the perspective of the Court assessing whether to exercise the discretion under s 411(6) to alter the scheme as approved by the members - must be seen in the context that it is unambiguously advantageous to the members who will participate in the scheme as scheme shareholders. It is difficult to think that, as recipients of the scheme consideration, these members would have any cause for concern or complaint about being paid a greater price for their shares than provided by the scheme proposed by the orders made on 13 February 2018.
18 Where a material change to a proposed scheme is in prospect, it is, generally speaking, important that those who will be asked to vote on the scheme be given sufficient information and time to consider and evaluate that change. The importance of this was stressed by Barrett J in Re Citect Corporation Ltd [2006] NSWSC 143; (2006) 56 ACSR 663 (Citect) where, at [16], his Honour said:
The correct approach to a situation of the kind that arose in this case is, it seems to me, for the meeting to have before it the scheme as originally formulated and referred to in the s 411(1) orders, together with information about the updated position that will enable the meeting to make an informed decision on several questions, namely, acceptance or rejection of that original formulation, alteration of the original formulation (provided of course that any alteration is one that the company itself supports and accepts so as to accommodate the fundamental principle recognised in Re Savoy Hotel Ltd [1981] Ch 351) and, if some alteration is favoured, approval or rejection of the compromise or arrangement in the altered form the meeting itself has seen fit to debate.
19 Earlier, at [13], his Honour said:
…a meeting convened, pursuant to an order under s 411(1), to consider a particular compromise or arrangement cannot, simply at the behest of the company, consider some different compromise or arrangement. It is not open to the company simply to invite members or creditors to vote at such a meeting on some different compromise or arrangement. The meeting must have before it the compromise or arrangement that the court has directed should be submitted for consideration of members or creditors. Nor can the court, except upon a renewed application for orders under s 411(1), order that a different compromise or arrangement be placed before a meeting of members or creditors. But once the compromise or arrangement identified in an order under s 411(1) comes before the meeting that the court has required be convened, the meeting itself may address the question of modification of the compromise or arrangement. This is particularly so where, as here, the notice convening the meeting states the meeting's purpose as being "to consider and, if thought fit, to agree (with or without modification) to" the proposed compromise or arrangement.
20 I accept, with respect, the wisdom and appropriateness of that approach. There are, however, significant differences between the circumstances in Citect and the circumstances of the present case, even though both involve a proposed increase in the scheme consideration enuring for the benefit of the scheme shareholders.
21 First, in Citect a competitive takeover bid was launched after the scheme meetings had been convened. A bidding war ensued. This required the plaintiff in that case (Citect) to place before members and option holders updated information by way of a supplementary scheme booklet containing, among other things, recommendations and advice of the directors, a further report of the expert whose favourable report had been circulated with the original scheme documents, and a summary of the amendments to the contracts between Citect and the acquirer under the schemes which committed the acquirer to the increased consideration: see at [6]. In the present case, it is difficult to see what further information or what greater time would have been needed for the members to understand the significance of the increased consideration offered.
22 Secondly, in the present case, the offer of increased consideration was made in contemplation of the scheme meeting proceeding as ordered. It is understandable that, in the circumstances in which it found itself, and not wishing to jeopardise the prospect of the scheme shareholders receiving the undoubted benefit of the increased consideration, Billabong would proceed with the meeting.
23 Thirdly and relatedly, in the present case, the scheme put before the members at the scheme meeting was in fact the scheme proposed in accordance with the orders made on 13 February 2018, although those attending and voting at the meeting knew that the Court would be asked to alter the scheme consideration if the scheme was then approved by the members.
24 Another reason in favour of exercising the discretion to alter the scheme is that 78.8% of the votes cast in favour of the scheme at the meeting were directed proxy votes that had been lodged before Boardriders' preparedness to increase the scheme consideration had been decided and announced. It is now known that the directed proxy votes in favour of the scheme would, alone, have secured approval of the scheme regardless of the fact that, on the morning of the scheme meeting, Boardriders decided to offer the increased scheme consideration.
25 In coming to this conclusion, I have also taken into account the views expressed by the Australian Securities and Investments Commission (ASIC). By letter dated 5 April 2018, ASIC expressed its position as follows:
Principles in section 602 of the Corporations Act
Inter alia, section 602 of the Corporations Act, in enunciating the principles underlying Chapter 6 of the Corporations Act, provides that holders of shares in a listed company should have a reasonable time to consider a proposal under which a person will acquire a substantial interest in company (s602(b)(ii)). ASIC considers that this principle is relevant in determining whether shareholders are adequately informed and protected in a scheme of arrangement that effects a control transaction: see ASIC Regulatory Guide 60.9.
ASIC considers that a change in consideration immediately prior to a Scheme meeting, which may deny members a reasonable time to carefully and properly assess that change and how it impacts upon them, may in some circumstances be inconsistent with the principle in s602(b)(ii) and furthermore may have a coercive effect on undecided voters at the meeting. However, for the reasons set out below we do not have any material concerns arising from the 'last minute' increase in the consideration in this scheme.
The submissions and affidavit material provided by Billabong to ASIC on 3 April 2018 establish that:
· the resolution to approve the Scheme would have been approved even if the Scheme consideration was not increased;
· the votes cast by Billabong members at the Scheme meeting were not determinative of the outcome (i.e. the resolution would have passed in reliance on non-discretionary proxies); and
· in excess of 95% of votes cast on the resolution were in favour of the resolution.
We also note the change in consideration in this case is an additional amount of cash. This kind of change is readily understandable and requires no additional information to enable its value to be determined. These factors help mitigate (but do not completely alleviate) concerns which may arise from the short amount of time that members who cast their votes at the meeting were afforded to consider the change in consideration. In any event, and as previously noted, votes cast at the Scheme meeting were not determinative of the outcome of the resolution. Generally, we consider that the question of whether such circumstances infringe on the principles in Chapter 6 will largely turn on the facts in each particular case.
After taking into account our policy in RG60, the matters described above, the observation that an increase in Scheme consideration is advantageous to Billabong members and the fact that to ASIC's knowledge no Billabong shareholder has objected or intends to object, ASIC confirms that it does not object to the scheme.
26 ASIC noted that it had has the benefit of considering the plaintiff's written submissions in the present application and stated that it did not disagree that the prevailing authorities on s 411(6) of the Act suggest that it is open to the Court to exercise its discretion in favour of the alteration that is now sought.
27 Finally, ASIC advised that, under s 411(17)(b) of the Act, it has no objection to the scheme.