Spicers Limited, in the matter of Spicers Limited [2019] FCA 731

ANDERSON J: 1 The plaintiff (Spicers) has applied for orders under s 411(1) of the Corporations Act 2001 (Cth) (Act) for the convening of a meeting of Spicers' shareholders to consider a proposed scheme of arrangement (Scheme). On Friday, 17 March 2019, I granted such orders and these are my reasons for doing so. 2 Spicers is an Australian public company, registered and headquartered in Victoria. Spicers is primarily engaged in offering products and services in the commercial print, graphics, signage, visual display and architectural industries to customers in Australia and New Zealand. The majority of Spicers' revenue is generated through: (a) the sale of "Print & Packaging" products, including paper, cardboard and other industrial packaging products; and (b) the sale of "Sign & Display" products in the signage, films and wide format printing industry, which encompasses consumables, hardware, inks, software, accessories, training and support. 3 Kokusai Pulp & Paper Co Limited (KPP) is a Japanese company specialising in printing, publishing and packaging. KPP currently does not hold any of the issued shares in Spicers. 4 I granted leave for KPP to be heard, without becoming a party to the proceeding, as an interested person under r 2.13(1) of the Federal Court (Corporations) Rules 2000 (Cth). KPP supported the position of Spicers. 5 On 17 January 2019, Spicers entered into a Scheme Implementation Deed (SID) with KPP, and announced the transaction to the Australian Securities Exchange (ASX) under which Spicers agreed to propose: (a) the Scheme by which KPP will acquire all of the issued share capital of Spicers; and (b) an inter-conditional return of capital to "Scheme Shareholders", as defined in the SID (Capital Return). 6 The terms of the Scheme proposed by the SID are set out in the draft explanatory booklet at Annexure B to exhibit MGC-2 to the affidavit of Michael Gerard Clark affirmed on 16 May 2019 (Explanatory Booklet). 7 If the Scheme is approved and all conditions precedent are satisfied or waived, the directors of Spicers currently expect that the aggregate consideration to be paid to Scheme Shareholders and the Capital Return (Transaction Consideration) will be an amount equal to 7 cents per "Scheme Share" (as defined in the SID), comprising: (a) the "Base Scheme Consideration" (as defined in the SID) to be paid by KPP - equal to $90 million (4.3 cents per Scheme Share); plus (b) the "Deferred Consideration" (as defined in the SID), if any; plus (c) the amount of the Capital Return, currently expected to be approximately $57.6 million (2.7 cents per Scheme Share) (Capital Return Consideration). 8 The following key steps are contemplated in order to implement the Scheme: (a) a meeting of Scheme Shareholders (Scheme Meeting) is scheduled to be convened on 26 June 2019 to consider and vote on the resolution approving the Scheme. The "Notice of Meeting" is Annexure D of the Explanatory Booklet; (b) a meeting of Scheme Shareholders (Capital Reduction Meeting) is scheduled to be convened immediately following the Scheme Meeting to consider and vote on the resolution for an equal capital reduction pursuant to s 256C(1) of the Act. The "Notice of Special General Meeting" is Annexure E of the Explanatory Booklet; (c) an application will be made to suspend trading of Spicers shares on the ASX; (d) KPP will pay the Base Scheme Consideration to a trust account operated on behalf of Spicers as trustee for the Scheme Shareholders (Trust Account) to be paid by Spicers to Scheme Shareholders in accordance with the Scheme; (e) Spicers will transfer the Capital Return Consideration to the Trust Account to be paid to Scheme Shareholders in accordance with the SID; (f) KPP will acquire all of the Scheme Shares by way of the Scheme; and (g) if there is any Deferred Consideration following the Scheme implementation, KPP will procure the payment of the Deferred Consideration to the Scheme Shareholders in accordance with the KPP Deed Poll. 9 A proposed timetable is set out at page 3 of the Explanatory Booklet. 10 There are a number of conditions precedent to the Scheme set out in clause 3.1 of the SID as follows: (a) (Independent Expert's Report) the Independent Expert provides the Independent Expert's Report to Spicers, stating that in its opinion the Scheme is in the best interests of Spicers Shareholders, and the Independent Expert does not change its conclusion or withdraw the Independent Expert's Report by notice in writing to Spicers prior to 8am on the Second Court Date; (b) (Spicers Shareholder approval Scheme) the Scheme Resolution is approved by the requisite majorities of Spicers Shareholders under s 411(4)(a)(ii) of the Act; (c) (Spicers Shareholder approval of Capital Returns) Spicers Shareholders, to the extent they have not already done so, approve the Capital Return Resolutions by the requisite majority under section 256C(1) of the Act at the Special General Meeting; (d) (Scheme Consideration and Capital Returns) as at 8am on the Second Court Date, the aggregate of: (i) the Base Scheme Consideration; (ii) the Deferred Consideration; and (iii) the amounts to be returned to Scheme Shareholders by way of Capital Returns, is equal to or greater than 6.6 cents per Scheme Share; (e) (Court approval of Scheme) the Scheme is approved by the Court in accordance with section 411(4)(b) of the Act; and (f) (no restraints) no judgment, order, decree, statute, law, ordinance, rule or regulation, or other temporary restraining order, preliminary or permanent injunction, restraint or prohibition, entered, enacted, promulgated, enforced or issued by any court or other Governmental Agency of competent jurisdiction, remains in effect as at 8am on the Second Court Date that prohibits, materially restricts, makes illegal or restrains the completion of the Transactions or any Transaction Document. 11 Section 411(1) of the Act confers a discretionary power on the Court to order a meeting of members to be convened, and to approve the applicable Explanatory Statement, as required by s 412(1)(a) of the Act, to accompany notices of the meeting or meetings where, broadly, the following matters are satisfied: (a) a compromise or arrangement is proposed between a "Part 5.1 body", as defined by s 9 of the Act, and its members or any class of them; (b) the application for the order is made in a summary way by the body or by a creditor or member of the body; (c) 14 days' notice of the hearing of the application, or such lesser period of notice as the Court or the Australian Securities & Investment Commission (ASIC) permits, has been given to ASIC; (d) the proposed explanatory statement provides proper disclosure to shareholders; and (e) the Court is satisfied that ASIC has had a reasonable opportunity to: (i) examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement; and (ii) make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement. 12 I am satisfied that each of the requirements of s 411(1) of the Act have been satisfied with respect to the Scheme as: (a) Spicers is a Part 5.1 body as defined; (b) the Scheme is designed to effect an acquisition by one company of shares in another and falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act; (c) Spicers has applied by way of originating process, for an order pursuant to s 411(1) of the Act; and (d) on 14 May 2019 the originating process was sent to ASIC and on 24 April 2019 a copy of the draft Explanatory Booklet including annexures was provided to ASIC, which is more than 14 days before the first hearing date as required by s 411(2)(a) of the Corporations Act. Moreover, paragraph 5 of the affidavit of Thomas George Richmond Story sworn on 16 May 2019 deposes to the fact that Spicers has received a letter from ASIC dated 16 May 2019 stating that ASIC does not currently propose to appear to make submissions or intervene to oppose the Scheme at the first hearing under s 411(1) of the Act. The letter also acknowledges that the requirements under s 411(2)(a) of the Act - that ASIC be given at least 14 days' notice of the hearing of an application under s 411(1) - and s 411(2)(b) of the Act - that ASIC has a reasonable opportunity to examine the terms of the Scheme and the draft explanatory statement - have also been satisfied. 13 As the requirements of s 411(1) of the Act have been satisfied, my power to convene a meeting of members for the purpose of considering the Scheme has been enlivened subject to the exercise of the Court's discretion. 14 Mr C M Archibald QC, who appeared on behalf of Spicers, submitted that my function on an application for an order convening a meeting is supervisory. He submitted that at the first hearing I should confine myself to ensuring that certain procedural and substantive requirements have been met including whether there has been adequate disclosure to shareholders. 15 I am also required at this first hearing to consider in a limited way the merits or fairness of the proposed scheme to determine whether any issue exists that would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing. In Re Foundation Healthcare Ltd (2002) 42 ACSR 252, French J (as he then was) described at [44] that, although the Court ordinarily will not go far into whether the proposed scheme warrants approval, it should consider whether the proposed Scheme is "on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further". 16 In my view, in the present case, there is no issue arising from the proposed Scheme which would unquestionably lead to a refusal to approve the Scheme at the approval hearing. The proposed Scheme cannot be said on its face to be blatantly unfair or otherwise inappropriate such that it should not proceed any further. 17 The manner in which the Court's discretion will be exercised is conveniently summarised by Associated Advisory Practices Limited, in the matter of Associated Advisory Practices Limited [2013] FCA 761 at [22] per Farrell J: The Court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the Court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Limited at 504-505. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In re Alabama, New Orleans, Texas and Pacific Junction Railway company [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The Court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. 18 Having considered the affidavits relied upon by Spicers, in particular the matters deposed to by Mr Clark in his affidavit of 16 May 2019, and having considered the independent expert report dated 17 May 2019 exhibited to the affidavit of Piera Murone sworn 15 May 2019 expressing the opinion that the Scheme is in the best interest of the shareholders, I am satisfied that the Scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court would be likely to approve the Scheme on the hearing of an unopposed application. 19 In my view, the Scheme is fit for consideration by a meeting of members for the following reasons. 20 First, the Scheme has received the unanimous support of the board of Spicers in the absence of a superior proposal. 21 Second, the Scheme is straightforward in its operation and involves an all cash bid for 100% of the shares in Spicers. 22 Third, the Transaction Consideration represents the highest cash proposal currently made for 100% of the shares in the company; no superior proposal has been made or seems likely to merge since the announcement of the transaction on 17 January 2019. The current expected amount of $0.070 per share represents a premium of 32.1% to the closing price on 17 January 2019 of $0.053, before the announcement of the transaction was made on that same day. 23 Fourth, the independent expert retained by Spicers, Piera Murone, has deposed that in her opinion the Scheme is fair and reasonable and therefore in the best interest of shareholders. 24 Fifth, the Explanatory Booklet provides sufficient disclosure of the terms of the Scheme, including the key features of the Scheme and the Scheme's advantages and disadvantages. 25 Sixth, there does not appear to be any material performance risk that KPP will not comply with its primary obligation to pay the Base Scheme Consideration to the relevant members: see Re SFE Corporation Ltd (ABN 74 000 299 392) (No 1) (2006) 59 ACSR 82 at [4]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [43]; Re Simavita Holdings Limited [2013] FCA 1274 at [43]-[44]. Clause 5.1(a) of the Scheme requires that the Base Scheme Consideration be paid by KPP into the Trust Account, such payment to be effected by no later than 12 p.m. on the business day before the "Implementation Date", as defined in the SID. Clause 5.1(b) of the Scheme requires Spicers to then make or procure the payment of the relevant funds into the Trust Account to the Scheme Shareholders. The transfer of the Scheme Shares will not occur until the funds have been received by Spicers as trustee for the Scheme Shareholders. As a consequence, the Scheme Shareholders will not be relegated to suing on the Deed Poll executed by KPP in respect of the Base Scheme Consideration. 26 Seventh, proper disclosure has been made regarding the imminent completion of the sale by Spicers of a property in Singapore (Singapore Property). On 14 May 2019, Spicers updated the Market by making an announcement in relation to the sale of the Singapore Property, completion of which is expected to take place as planned in early June 2009. According to the update, a post-sale value of SGD10.1 million is agreed between the parties, of which SGD0.3 million will be held in escrow until the finalisation of the environmental "baseline" soil survey. The "Singapore Property Sale Proceeds" (as defined in the Explanatory Booklet) is expected to be received before the Scheme is implemented and all Transaction Consideration is to be paid to Spicers Shareholders on the Implementation Date. Any Singapore Property Sale Proceeds (net of any cost, fees or expenses payable by KPP to its legal or other professional advisers in connection with such distribution) not received prior to implementation are to be paid as "Capital Deferred Consideration" to Spicers Shareholders after the implementation of the Scheme. To ensure performance of the payment of any Deferred Consideration, KPP has validly executed a Deed Poll in favour of each Scheme Shareholder undertaking to procure the observance of the relevant payment obligations. 27 Eighth, there is evidence that the Deed Poll executed by KPP in favour of each Scheme Shareholder is valid and legally binding on KPP and enforceable against KPP in accordance with its terms. In an affidavit of Yutaka Kuroda affirmed 13 May 2019, Mr Kuroda deposes to being admitted to practice law in Tokyo, Japan. He has some 16 years' experience advising both public and private companies in corporate transactions. Mr Kuroda, having considered the Deed Poll dated 25 April 2019 executed by KPP in favour of Spicers Shareholders, is of the opinion that: (a) KPP is a stock corporation validly existing under the laws of Japan; (b) KPP has all corporate power and authority to execute and deliver, and to perform its obligations, under the Deed Poll; (c) the execution, delivery and performance by KPP of the Deed Poll had been duly authorised by KPP; (d) KPP has duly executed and delivered the Deed Poll; (e) the person designated as signatory has been duly authorised to execute and deliver the Deed Poll on behalf of KPP; (f) the execution, delivery and performance by KPP of the Deed Poll do not conflict with: (i) any provision of Japanese law applicable to KPP; or (ii) its articles of incorporation and board regulations; (g) the Deed Poll constitutes valid and legally binding obligations of KPP enforceable against KPP in accordance with its terms; (h) KPP has all requisite licences, approvals, registrations and consents necessary to execute, deliver and perform its obligations under the Deed Poll; and (i) the choice of law provision in the Deed Poll would be upheld as a valid choice of law by Japanese courts. 28 On the basis of this evidence, KPP has validly executed the Deed Poll in favour of each Scheme Shareholder and the Deed Poll is enforceable against KPP in Japan under Japanese law in accordance with its terms. 29 Ninth, the risk that KPP will not perform its obligations under the Deed Poll is addressed by the terms of the Scheme. Clause 8.3 of the Scheme appoints Spicers as the Scheme Shareholders' agent and attorney for the purposes of doing all things necessary to give full effect to the terms of the Scheme and the transactions contemplated by it and also for enforcing the Deed Poll against KPP. Clause 8.9 of the Scheme further provides that Spicers undertakes in favour of each Scheme Shareholder that it will enforce the Deed Poll against KPP on behalf of, and as agent and attorney for, the Scheme Shareholders. I am satisfied that the risk of non-performance by KPP has been adequately addressed at least such that the Scheme is fit for consideration by a meeting of members. 30 Tenth, there has been proper disclosure to Scheme Shareholders of the payment of a reimbursement fee. Clause 13.2 of the SID provides for the payment of a reimbursement fee - otherwise known as a "Break Fee" - in certain prescribed circumstances. The Break Fee is payable in the circumstances identified in section 8.10(c) of the Explanatory Booklet to be provided to Scheme Shareholders. Spicers has agreed to pay KPP a Break Fee of $1.1 million in specified circumstances including where directors of Spicers publicly change their recommendation that the Scheme Shareholders vote in favour of the Scheme; a competing proposal is announced by a third party; or where KPP terminates the SID due to material breach by Spicers. 31 The following should be noted in respect of the Break Fee: (a) The Break Fee is not payable if the meeting of the Scheme Shareholders does not approve the Scheme. The existence of the fee can therefore have no influence on voting at the meeting. As Lander J observed in Adelaide Bank Limited, in the matter of Adelaide Bank Limited ACN 061 461 550 [2007] FCA 1582 at [31]: The Break Fee is not payable in circumstances where the Members vote not to implement the Scheme. In those circumstances, the Break Fee is not a disincentive to the Shareholders in their consideration of the proposed merger. (b) The quantum of the fee is consistent with the Takeover Panel's guideline of no greater than 1% of the equity value: Takeovers Panel, 'Guidance Note 7: Lock-up Devices', 4th issue (4 February 2010) at [9] (Guidance Note 7). The 1% yard stick was referred to apparent approval by Lindgren J in Re APN News & Media Ltd (2007) 62 ACSR 400 at [43]-[50]. 32 In my view, the terms of the Break Fee do not represent a barrier to convening a meeting of the Scheme Shareholders to consider the Scheme. 33 Eleventh, the exclusivity restrictions are for a reasonable period and have been clearly disclosed in the Explanatory Booklet. Clause 12.2 of the SID contains "no shop", "no talk" and "no due diligent" restrictions on Spicers. Clauses 12.4 and 12.5 of the SID oblige Spicers to notify KPP of third party competing proposals and give KPP a "matching right". The "no talk" and "no due diligence" restrictions in cl 12.2 are subject to a "fiduciary carve out" in circumstances where not taking certain action would likely be inconsistent with the duties of Spicer's directors under applicable law. 34 Exclusivity restrictions in the form I have referred to above are now commonplace in schemes under s 411 of the Act. The restrictions are consistent with the terms of Guidance Note 7. Neither the Guidance Note nor prior authority requires a fiduciary carve-out with respect to "no shop" provisions: In the matter of Coles Group Limited (2007) 25 ACLC 1380 at [62]-[63]; In the matter of Hostworks Group Ltd ACN 008 010 820 (2008) 26 ACLC 137 at [34]-[37]; Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [18]-[19]; Guidance Note 7 at [21]. As Santow J observed in Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9], the Court is concerned to ensure that such exclusivity restrictions are in effect for no more than a reasonable period, capable of precise ascertainment and that they be clearly disclosed in the explanatory statement sent to shareholders. Both those concerns are satisfied in the present case in that: (a) the "Exclusivity Period" is clearly defined in clause 1 of the SID and, at most, lasts for seven months from the date of the SID (unless a later date is agreed by the parties); and (b) the exclusivity provisions are given considerable prominence in the Explanatory Booklet. In particular, they are described in section 8.10(b) of the Explanatory Booklet. 35 Finally, a number of Spicers directors and executives hold "Spicers Performance Rights", as defined in the SID. The board of Spicers intends to consider the vesting of the Spicers Performance Rights in accordance with the terms of "Spicers Performance Rights Plan Rules" prior to the Scheme Meeting and Capital Reduction Meeting. If Spicers Performance Rights vest, then prior to the record date (scheduled for 8 July 2019), the holders of Spicers Performance Rights will receive one Spicers share for each Spicers Performance Right held, which KPP will acquire in return for the Transaction Consideration. These arrangements are explained in section 8.11 of the Explanatory Booklet and do not give rise to the holders of Spicers Performance Rights constituting a different class of shareholder to those shareholders who do not hold such incentive rights: Re Skilled Group Ltd (ACN 005 585 811) (No 1) (2015) 113 ACSR 525 at [82] per Robson J; Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 at [83]-[84] per Beach J.

Conclusion 36 In my view, the Scheme is of such a nature and cast in such terms that, if it achieves the requisite statutory majorities at the Scheme Meeting to be held on Wednesday, 26 June 2019, it is likely that the Court would approve the Scheme. I will therefore make the orders sought by Spicers convening the meeting. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Anderson.