Veda Advantage Limited, in the matter of Veda Advantage Limited [2007] FCA 822

Federal Court of Australia|2007-05-04|Before: Lindgren J

Introduction 1 The plaintiff, Veda Advantage Limited ("Veda"), a public company listed by Australian Stock Exchange Limited ("ASX") and New Zealand Exchange Limited ("NZX"), seeks orders pursuant to s 411 of the Corporations Act 2001 (Cth) ("the Act") in connection with a proposed scheme of arrangement between it and each holder of fully paid ordinary shares in Veda ("the Scheme"). 2 The Scheme concerns the proposed acquisition of all of the shares in Veda by VA Australia Finance Pty Limited ("VA Finance"), a special purpose company formed by a private equity consortium comprising Pacific Equity Partners and Merrill Lynch Global Private Equity. 3 Under the Scheme all shares in Veda would be transferred to VA Finance in exchange for payment of $3.61 (less any special dividend) for each share held by them. Veda currently intends to pay a special dividend of $0.10 for each share if a favourable ruling by the Australian Taxation Office is obtained. 4 It is proposed that following implementation of the Scheme, the shares in Veda will be delisted by ASX and NZX. 5 The orders which Veda sought at the first hearing were orders for the convening of a meeting of Veda's shareholders for the purpose of their considering, and, if thought fit, agreeing to the Scheme, and for the approval of the notice of meeting and Scheme Booklet for distribution to the shareholders of Veda. 6 I made those orders on 4 May 2007 for the reasons that appear below.

(a) There has been proper disclosure to the members of Veda 10 Details of the terms of the Scheme and copies of all the transaction documents will be provided to shareholders within the Scheme Booklet, which is put forward by Veda as the explanatory statement required by ss 411(2) and (3) and 412(1)(a) of the Act. 11 The Scheme Booklet incorporates: (i) an independent expert's report of Lonergan Edwards & Associates Limited; (ii) a tax report from Pricewaterhouse Coopers ("PwC"); (iii) the Merger Implementation Agreement dated 2 April 2007 between Veda and VA Finance ("the MIA"); (iv) a Deed Poll executed by VA Finance in favour of each Veda shareholder; (v) a copy of the proposed Scheme; and (vi) the notice of meeting.

Veda will also dispatch to its shareholders a proxy form in respect of the Scheme Meeting. 12 Disclosure has met the requirements prescribed by s 412(1) of the Act and reg 5.1.01 of, and Pt 3 of Sch 8 to, the Corporations Regulations 2001 (Cth) ("the Regulations"). 13 Veda has included information verified by both Veda and VA Finance in the Scheme Booklet. The information covers all the matters required by the Act and the Regulations other than those in respect of which ASIC has given waivers pursuant to reg 5.1.01(1) (ASIC has waived the requirement for disclosure contained in paras 8302(d) and 8302(h) in Pt 3 of Sch 8 to the Regulations). 14 The Scheme Booklet also sets out reasons both in favour of the Scheme and against it. 15 Although not required by the Regulations, Veda has obtained an independent expert's report from Lonergan Edwards & Associates Limited as to whether the Scheme is in the best interests of Veda shareholders. Veda has also obtained a report from PwC concerning the tax implications of the Scheme.

(b) The proposed Scheme is an "arrangement". 16 The word "arrangement" in s 411 has a wide meaning: see Re ACM Gold Limited (1992) 34 FCR 530 at 533-34 per O'Loughlin J, and "almost any arrangement otherwise legal which touches or concerns the rights and obligations of a company or its members or its creditors, and which is properly proposed, may come under s 411": see NRMA Insurance Ltd at [20]. 17 Clearly the proposed Scheme falls within the concept of an "arrangement".

(c) Veda is a Part 5.1 body 18 The affidavit of Alexandra Swifte of 19 April 2007 exhibits a historical company extract for Veda which shows it is a public company limited by shares. Veda is therefore a Part 5.1 body.

(d) The scheme is bona fide and properly proposed 19 The evidence before the Court and the material to be sent to shareholders demonstrates that there is a commercial basis for the Scheme. The independent expert's report concludes that the "Scheme is in the best interests of Veda Advantage shareholders in the absence of a superior proposal" and recommends that "Veda Advantage shareholders vote in favour of the Scheme in the absence of a superior proposal".

(e) ASIC has had a reasonable opportunity to consider the Scheme and the draft explanatory statement and to make submissions to the Court in relation to the Scheme 20 On 17 April 2007, ASIC was provided with the draft of the Scheme Booklet, which included the MIA, the draft Deed Poll executed by VA Finance for the benefit of the members of Veda, a copy of the proposed Scheme, the Independent Expert's Report and PwC's Tax Report, and on 2 May 2007 ASIC was provided with a further draft of the Scheme Booklet and proposed Scheme. 21 Following amendments made to the draft Scheme Booklet in consultation with ASIC, ASIC confirmed by letter dated 3 May 2007, in accordance with its usual practice, that it does not intend to make submissions to the Court in relation to the Scheme at the first hearing.

Procedural requirements have been met 22 Rule 3.2 of the Federal Court (Corporations) Rules 2000 (Cth) requires Veda to establish certain matters relating to the nomination of the chairperson and alternate chairperson for the Scheme meeting. The affidavits of the proposed chairperson, Glenn Lawrence Lord Barnes, and the proposed alternate chairperson, Gavin Ronald Walker, satisfy these requirements. 23 Under s 411(2), 14 days' notice of the hearing of the application must be given to ASIC. This requirement was met because ASIC was notified on 19 April 2007 of the first court hearing on 3 May 2007.

Exclusivity Period and Break Fee 24 The MIA provides in cl 9 for an Exclusivity Period from 2 April 2007 to the date of termination of the MIA in accordance with its terms or 30 September 2007, whichever is earlier, and in cl 10 for payment by Veda of a break fee of $8 million. 25 I have recently discussed exclusivity periods and break fees in Re APN News & Media Limited [2007] FCA 770 at [25] - [55] ("APN"). I refer to what I said there as to the general principles applicable. 26 In one respect, the exclusivity period provision here is more severe, and in other respects less severe, than that in APN. The period of nearly six months from 2 April 2007 to 30 September 2007 is longer than the period of some three and a half months that was in question in APN. I would have thought a period of six months must lie at the outer limits of what is a reasonable period for present purposes. On the other hand, the exception respecting the fiduciary or statutory obligations of the Board of Directors of Veda is expressed more widely than the comparable exception in APN, and the period that VA Finance is allowed in which to match a competing offer is two business days rather than three business days, as it was in APN. 27 I do not think that the exclusivity period provision is unreasonable. 28 According to cl 10 of the MIA, a break fee of $8 million is payable in the event of: · a competing transaction frustrating VA Finance's offer; · a change of recommendation other than in consequence of a change in the opinion of the independent expert; · a material breach of the MIA by Veda; and · termination of the MIA by Veda. According to cl 10.2, the break fee represents a reasonable pre-estimate of external advisory and financial costs of the Scheme, and all out-of-pocket expenses and internal costs, of VA Finance. 29 The break fee is not payable in certain circumstances, including where payment of it would involve a breach of directors' duties. 30 As noted in APN at [48], para 7.18 of the Takeovers Panel's Guidance Note 7: Lock-up Devices (2nd Issue, 2005) states: It is good practice for anyone who agrees to pay a break fee to negotiate a fixed or capped figure, whether dollar or percentage based. In this regard, the Panel will use a guideline that a fee should not exceed 1% of the equity value of the target. For this purpose, the equity value is the aggregate of the value of all classes of equity securities issued by the target, where relevant having regard to the value of the consideration under the bid, as at the date the bid is announced. The equity value of all classes of equity securities issued by Veda is shown in the following table: Unit value Quantity Value Shares $ 3.61 224,686,646 = $ 811,118,792.06 Awards $ 3.61 632,016 = $ 2,281,577.76 Options (option exercise price) $ 2.75 125,000 = $ 343,750.00 TOTAL $813,744,119.82

The break fee of $8 million is 0.983% of the sum of $813,744,119.82. 31 If the unit value of the options is treated as $0.86 ($3.61 minus the option exercise price of $2.75), the value of all 125,000 options is reduced to $107,500, and the total equity value of securities is reduced to $813,507,869.82, of which $8 million is still 0.983%, which is less than 1% of that equity value figure. 32 If $3.61 is assigned to the options, the total equity value figure increases to $813,851,620.82, of which $8 million is 0.983%. 33 Even calculated as a percentage of the value of the shares alone ($811,118,792.06) the break fee of $8 million is 0.986%. 34 I do not think that in accordance with the approach that has developed in relation to break fees, the break fee provision in the present case is unreasonable.

Conclusion 35 The Scheme is likely to be approved at the final Court hearing. For the above reasons, I ordered Veda to convene a meeting of its shareholders to consider, and if thought fit, agree to, the Scheme, and I approved of the Scheme Booklet as the relevant explanatory statement. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Counsel for the Plaintiff: Mr I M Jackman SC

Solicitor for the Plaintiff: Mallesons Stephen Jaques

Counsel for VA Finance Australia Pty Limited: Mr M B Oakes SC

Solicitor for VA Finance Australia Pty Limited: Baker McKenzie

Date of Hearing: 4 May 2007

Date of Judgment: 4 May 2007

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