CTHFCA

Sovereign Life Assurance Company v Dodd

[2013] FCA 504

Federal Court of Australia|2013-05-27|Before: Jacobson J, Farrell J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2013-05-27

Before

Jacobson J, Farrell J

Catchwords

CORPORATIONS - scheme of arrangement - content of explanatory statement - financial distress - not fair but reasonable

Source

Original judgment source is linked above.

Catchwords

CORPORATIONS - scheme of arrangement - content of explanatory statement - financial distress - not fair but reasonable

Judgment (30 paragraphs)

[1]

Notice of hearing to approve compromise or arrangement

[2]

(Rule 3.4) TO all the creditors and members of PR Finance Group Limited ACN 109 299 390 (PRF). TAKE NOTICE that at 10.15 am on 18 June 2013, the Federal Court of Australia at the Law Courts Building, Queen's Square, Sydney will hear an application by PRF seeking the approval of a compromise or arrangement between the above-named company and its members, proposed by a resolution to be considered, and if thought fit, passed (with or without modification) at the meeting of the members of the company to be held on 14 June 2013 at the registered office of the Plaintiff, PRF, at Suite 10, 10 Cloyne Road, Southport, Queensland, commencing at 8.30am. If you wish to oppose the approval of the compromise or arrangement, you must file and serve on the plaintiff, PRF, a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on the plaintiff, PRF, at its address for service at least one day before the date fixed for the hearing of the application. The address for service of the Plaintiff is McCullough Robertson Lawyers, Level 11, Central Plaza Two, 66 Eagle Street, Brisbane, Queensland 4001. Name of person giving notice or of person's legal practitioner: Peter William Stokes, McCullough Robertson Lawyers - 07 3233 8714. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 673 of 2013

Sovereign Life Assurance Company v Dodd - [2013] FCA 504 - FCA 2013 case summary — Zoe

[6]

Background 5 PRF and its subsidiaries (PRF Group) experienced rapid growth in 2005 to 2008, and had a peak debt of $78 million. A proposed listing in 2007 did not proceed. In 2008, in the course of the global financial crisis, the Commonwealth Bank of Australia Limited (CBA), PRF Group's primary lender, required PRF to reduce its debt by entering into a debt reduction arrangement, with a cap of $40 million (Senior Debt Facility). There followed a substantial debt reduction campaign in 2009 and 2010. Keybridge (and others) had also lent money to PRF under a syndicated loan facility agreement dated 29 June 2007 (Keybridge Facility or Mezzanine Debt Facility). Keybridge also required its facility to be repaid, and there was some limited debt reduction in 2011 and 2012. PRF Group's cost of funds also increased. 6 PRF directors engaged Deloitte Corporate Finance Pty Limited (Deloitte) to explore funding options, including the possible sale of assets and equity capital raisings. Deloitte sought interest broadly, approaching 98 parties internationally. PRF received expressions of interest from 13 parties but ultimately there were only 2 offers, and only 1 progressed past the term sheet stage. PRF signed a non-binding heads of agreement with Marubeni Corporation, a Japanese entity (Marubeni), to sell its motor vehicle leasing and finance business on 4 September 2012, but that transaction did not proceed, and a proposed meeting of PRF shareholders in February 2013 to approve the sale to Marubeni was cancelled. 7 At the end of February 2013, CBA notified PRF that it was in breach of its loan to value ratios, which put PRF in breach of the Senior Debt Facility and the Keybridge Facility. On instructions from CBA, PRF failed to make its monthly interest payment under the Keybridge Facility on 1 March 2013. There were some short term extensions of the Keybridge Facility but Keybridge indicated that it would not further extend the termination date of the Keybridge Facility past 7 April 2013. 8 Against this background, Keybridge approached PRF with a proposal to acquire 100% of PRF under a scheme of arrangement. On 30 March 2013 PRF and Keybridge agreed final terms and entered into a scheme implementation agreement (Scheme Implementation Agreement). On 2 April 2013, Keybridge made an announcement to the ASX of the proposed Scheme. It disclosed, in effect, that PRF's net exposure to Keybridge is $12.1 million. The Keybridge Facility will remain in place and be extended if the Scheme is approved. 9 PRF's aggregate debt is in the order of $52 million. If the Scheme does not proceed PRF has no certainty of ongoing funding from either of CBA or Keybridge. If the Scheme Implementation Agreement had not been entered into, the Keybridge Facility would have become due and PRF would have become technically insolvent. PRF's financial report for the 2012 year has not been filed yet with the Australian Securities & Investments Commission (ASIC), although PRF directors have said that it will be filed before the Scheme Meeting. The report has been prepared on a "going concern" basis, but PRF's directors have been advised that it is likely to receive a qualified audit report concerning PRF's ability to continue to operate as a going concern, as this is dependent on PRF's ability to satisfy conditions imposed by its financiers to extend facilitates. Those conditions relate to the successful sale of PRF's motor vehicle leasing and finance division. 10 At the time of the hearing, negotiations with Marubeni had been reopened, and a revised proposal was before Marubeni's investment committee. There is a further proposal from an unnamed party relating to some of the motor vehicle leasing and finance business. Neither of these proposals was capable of acceptance at the time of the hearing. I will refer to these as Alternative Offers.

[7]

Proposed Scheme 11 The Scheme is in the nature of an "acquisition scheme". Keybridge will acquire all of the shares issued by PRF with the result that PRF will become a wholly owned subsidiary of Keybridge. 12 The consideration (Scheme Consideration) for the transfer of PRF shares comprises cash and Keybridge shares. The calculation of the Scheme Consideration is less straightforward. It comprises three elements: 78.40 cents cash (Cash Consideration) for every 100 PRF shares. This would be an aggregate amount of $1.35 million. Keybridge shares (Scrip Consideration). The Scrip Consideration will be calculated by reference to the aggregate value, divided by the aggregate number, of Keybridge shares traded on ASX in the 30 days ending on the Effective Date of the Scheme (being the date the Scheme comes into effect under s 411(10) of the Act). If that value is 20 cents or less, the Scrip Consideration will be 1.452 Keybridge shares for every 100 PRF shares. If the value is greater than 20 cents, the Scrip Consideration will be the number of Keybridge shares that is equal to the amount of 29.04 cents per 100 PRF shares. Keybridge would become liable to issue the lesser of 2.5 million Keybridge shares and Keybridge shares with an initial market value of $500,000. The Scrip Consideration will be rounded up or down to the nearest whole Keybridge share. An uplift payment if, within 12 months after the Implementation Date, there is a Subsequent Control Transaction for an amount greater than $52 million plus the amount of interest which has accrued and remains unpaid under the Keybridge Facility (Subsequent Control Transaction Consideration). A Subsequent Control Transaction would involve PRF or Keybridge entering into an agreement to sell all or substantially all of the shares in PRF or its subsidiaries or their assets. The uplift amount is an aggregate of $1 million dollars in cash or Keybridge shares (at Keybridge's election), and if the consideration is Keybridge shares, they will be rounded up or down to the nearest whole Keybridge share. 13 On the Implementation Date, Keybridge will: (a) pay the Cash Consideration to PRF on trust for PRF shareholders; (b) pay Deloitte's fee of $150,000 to PRF on trust for Deloitte; and (c) issue the Scrip Consideration to PRF shareholders.

[12]

Independent Expert 21 Although not required by Schedule 8 of the Corporations Regulations 2001 (Cth), the Scheme Booklet includes an independent expert's report by BDO Corporate Finance (QLD) Limited (BDO). BDO concludes that the proposed Scheme is "not fair but reasonable" and, in the absence of any other information or a superior proposal, that it is in the best interests of PRF shareholders. Its reasons for this conclusion are: PRF is currently experiencing financial distress. It has breached covenants relating to its Senior Debt Facility and is in default of the Keybridge Facility; Keybridge will be in a position to place PRF into receivership in circumstances where the Scheme is not approved and no superior offer has been received; If PRF is placed into receivership and the receiver is not able to obtain a superior proposal to the offers obtained by the directors of PRF over the previous 12 months period, it is possible that PRF shareholders will realise a value for their investment which is significantly less than the consideration anticipated by the proposed Scheme, or may not receive any value at all; The termination date of the Keybridge Facility, in the absence of a superior proposal having been received by PRF, is the date the Scheme Implementation Agreement is terminated or 30 June 2013 if the Scheme Implementation Agreement is terminated due to a superior proposal being entered into; and PRF and its corporate adviser, Deloitte, have made significant attempts to either recapitalise or sell PRF by presenting the opportunity to a wide range of potential investors and purchasers. Despite these attempts, PRF's directors and their advisers hold the view that the proposed Scheme is the best proposal that has been received and which is capable of acceptance as of the date of the BDO report. 22 BDO attributes no value to the Subsequent Control Transaction Consideration because of the degree of uncertainty attached to whether any such consideration will ever be received, as it is dependent on the willingness of third parties to enter into transactions with PRF in the year after the Implementation Date. 23 BDO assesses the value of each PRF share to be in the range of $0.0248 to $0.0919, which is greater than its assessment of the value of the Scheme Consideration. In accordance with ASIC Regulatory Guide 111, BDO therefore assesses that the Scheme is not "fair". BDO comes to that conclusion without taking into account PRF's distressed circumstances, as required by Regulatory Guide 111. ASIC's Regulatory Guide asserts that it has been "long accepted" that there is a need to break down the term "fair and reasonable" into the elements of "fair" and "reasonable", rather than treating it as a compound phrase along the lines of "the best interests of shareholders". It is true that ASIC has long enforced that policy. 24 In the circumstances of this case, this methodology, including the need to value PRF shares disregarding its distressed state, tends to obscure the commonsense finding to which BDO ultimately comes. Compliance with the Regulatory Guide leads to over complexity in the expression of BDO's opinion and in the length of its report. This undermines its clarity and therefore is utility to PRF shareholders, but BDO's opinion appears to be well founded.

[20]

Lock up devices 35 Notwithstanding the Exclusivity Arrangements, PRF was permitted to continue discussions with a number of specified parties before 10 May 2013. Since that date, PRF is restricted from dealing with third parties unless the directors determine that such a proposal may reasonably be expected to lead to a superior proposal and such action is required to satisfy its fiduciary and statutory duties. 36 In paragraphs [26] to [34] of his affidavit of 10 May 2013, Mr Llewellyn provides an explanation in relation to the deal protection measures included in the Scheme Implementation Agreement. Those measures include "no shop" and "no talk" provisions. 37 Mr Llewellyn deposes that: The deal protection measures are disclosed in Section 10.5 of the Scheme Booklet; There is no break fee payable by either of PRF or Keybridge; The measures were the subject of arms length negotiation with the assistance of legal advice to both parties; PRF had regard to Takeovers Panel Guidance Note 7 on Lock-up Devices; Keybridge required those provisions and Mr Llewellyn considers that they do not operate to the detriment of PRF shareholders; He considers them reasonable because they have a fiduciary and statutory carve out in clauses 10.8 and 31.8 of the Scheme Implementation Agreement if the PRF board determines, in good faith and after having taken legal and financial advice, that action or inaction is required to discharge those duties; and He confirms that he has spoken to the other directors and they share that view. 38 It is notable that the directors and Deloitte have made considerable efforts to find parties interested in some or all of the businesses of PRF without success (the Alternative Offers being not capable of acceptance), and PRF is now in financially distressed circumstances. There is also no break fee. 39 Accordingly, the "no shop", "no talk", "no due diligence" and "matching rights" features of the Scheme Implementation Agreement do not appear to be unduly anti-competitive in accordance with the Takeovers Panel Guidance Note 7 on Lock-up Devices, nor are they coercive of PRF shareholders in expressing their attitude to the proposal.

Sovereign Life Assurance Company v Dodd

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Judgment (30 paragraphs)

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