Introduction
1 My experience in relation to private equity is limited to hearing and determining applications under s 411 of the Corporations Act 2001 (Cth) (the Act). Some of the “offerors” or “bidders” have been newly formed companies (sometimes the word
“Bidco” forms part of their name) created by, so I have been informed, private equity ventures.
2 The focus of this paper will be s 411 but towards the end I will raise what I consider to be some fundamental questions,
including this one: What difference would it have made, if any, if the Delaware Court of Chancery and Supreme Court had had jurisdiction
under a statutory provision such as the Australian s 411, and the mergers the subject of the decisions referred to by Justice Jacobs
had been sought to be effected by a court-approved scheme of arrangement?
3 There is no entirely satisfactory word to identify the acquirer under a s 411 scheme of arrangement (“acquirer”
is not ideal because the scheme may not proceed because of lack of shareholder agreement or court approval). “Offeror”
and “bidder” are terms used in Ch 6 of Act dealing with “Takeovers”. But s 411(17) tells us that the
Court must not approve an arrangement under s 411 unless it is satisfied that the arrangement has not been arranged to enable Ch
6 to be circumvented, or the Australian Securities and Investments Commission (ASIC) has stated in writing it has no objection
to the scheme. Moreover, in the case of a scheme of arrangement, strictly there is no bid or offer at all. Rather, there is an
arrangement between the company and its own members which will provide for the transfer of their shares for a consideration moving
to them. The arrangement will become binding on the target company and all of its members by reason of the s 411 mechanism, including
the Court’s approval.
4 For want of a better word, I will use “bidder”. It is the term used by Justice Austin and Professor
Ramsay in Ford’s Principles of Corporations Law (13th ed, 2007, Ch 24 (“Corporate Reorganisation and Elimination of Minority Holdings”)) and by Tony Damian and Andrew
Rich in Schemes, Takeovers and Himalayan Peaks (Monograph No 1 of the Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2004).
5 The bidder is not a party to the arrangement and the Court’s approval of the scheme does not render it binding
on the bidder. What binds the bidder is the antecedent merger implementation deed or agreement between the bidder and the target
company.
6 In this paper I will not refer to “compromises” or to arrangements with “creditors”. Generally
speaking, for convenience I will also not refer to “classes” of members. Therefore, the scheme of arrangement I have
in mind is simply an acquisition of 100 percent of the target’s shares by a private equity enterprise.
7 Another distinguishing feature of private equity takeovers not addressed here arises from the fact that because the
private equity bidder is not part of the industry, it will wish to retain executives and perhaps directors of the target, at least
in the short term. This factor can give rise to conflicts between the self-interest of the executive or director and his or her
duty to the target’s shareholders: the topic was discussed by Neil Young QC in a paper “Conflicts of Interest in the
Context of Private Equity Transactions”, a paper delivered at the Law Council of Australia Corporations Workshop, Glenelg,
SA 21 July 2007. The issue will arise in the discussion at the conference of the question mentioned earlier.
8 Where the bidder is not a private equity entity, it may well be a competitor of the target and may offer listed shares
as the whole or a part of the consideration. In the case of such “industry bidders” or “strategic bidders”
it will often be claimed that there will be “synergies” or “rationalisation” or “efficiencies”
to be achieved to the advantage of the shareholders in both target and bidder. Not so where the bidder is a private equity creature.
The consideration will be cash alone and the question to be considered by the target’s directors and shareholders is simply
whether the amount is the maximum that could reasonably be extracted for the exit of the shareholders.
9 It should be noted that although the bidder does not have standing under s 411, it may be granted leave to be heard
without becoming a party pursuant to r 2.13(1)(c) of the harmonised Corporations Rules, such as the Federal Court (Corporations) Rules 2000.
Private Equity
10 Much of what follows is equally applicable to schemes of arrangement where the bidder is not a private equity entity.
11 The expression “private equity” is a term of commerce, not of law. Therefore, it means what commercial
people use it to mean. For present purposes, a private equity bidder stands in contrast to an industry bidder that is a publicly
listed corporation subject to the associated accountability and regulatory constraints.
12 According to the press, private equity consortia usually perceive an opportunity to achieve efficiencies in a particular
corporation, will borrow heavily to acquire it, and may well sell within a relatively short period. Needless to say, these things,
or at least the last of them, will not emerge on the hearing of an application under s 411. The likely effect of a private equity
acquisition on the target’s workforce, for example, will not arise. The Court’s role is limited to ensuring, first,
that the requirements of the Act, Regulations and Rules of Court have been complied with, and that the target’s shareholders
are fully informed and will have an adequate opportunity to consider the scheme free from any coercion or other improper pressure.
A Judge may, however, look for evidence that funding is in place: if there is a “performance risk”, the Court will
be unlikely to order that a meeting of the target’s members be convened.
13 More informed definitions of private equity can, of course, be found. It has been said that “private equity
provides a source of capital for enterprises in addition to that available through the public capital markets” and that private
equity activity may encompass anything from investment in poorly managed or undervalued companies, to funding of corporate growth,
to large scale buyouts of listed public companies.
14 Generally speaking, however, “private equity” is used to describe either venture capital investment,
where investors provide funds to small and relatively high-risk companies with strong growth potential, or public-to-private transactions,
where groups of investors acquire a public company and de-list it from the stock exchange. Typically, transactions of this second
type are financed in large part with debt from third party lenders, and have accordingly become associated with leveraged buyouts
(LBOs). Recently, public-to-private transactions involving well-known Australian companies, such as the Coles Group and Qantas,
have raised in Australia the public profile of private equity, and its potential costs and benefits.
The Terms of Section 411
15 The s 411 procedure must strike our American colleagues as somewhat odd. Section 411(1), the first provision in
Pt 5.1 of the Act, provides:
Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or
member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or
class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place
or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve
the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings.
Generally speaking, Pt 5.1 bodies, certainly all those of present interest, are companies incorporated by registration under the Act. Although the targets
with which private equity is concerned are companies limited by shares, companies limited by guarantee registered under the Act
are also Pt 1.5 bodies, and s 411 has been invoked to effect demutualisation schemes in respect of them: cf Re Credit Reference Association of Australia Ltd (unreported, Sup Ct of NSW, Santow J, 4 February 1998); Re Professional Golfers Association of Australia Ltd [2007] FCA 1571; Re Professional Golfers Association Ltd (No 2) [2007] FCA 2072; Re MBF Australia Ltd [2008] FCA 428.
16 The hearing at which the Court is asked to make the order for the convening of the meeting of the members of the
target is called the “first court hearing”. If the members of the target agree to the arrangement, there will be a
“second court hearing” at which the question will be whether the Court should approve the arrangement which, by then,
will have been agreed to by the members at the scheme meeting.
17 It will be noted that s 411(1) allows for the application to the Court to be made by a member or creditor as well
as by the target company itself. I suppose that the Court could order an applicant member or creditor to convene the meeting of
the members, but in my experience only target companies have made applications under s 411, and s 412(1) seems to assume that it
is the Pt 5.1 body that will convene the meeting of its members.
18 Section 411(2) provides:
The Court must not make an order pursuant to an application under subsection (1) or (1A) unless:
(a) 14 days notice of the hearing of the application, or such lesser period of notice as the
Court or ASIC permits, has been given to ASIC; and
(b) the Court is satisfied that ASIC has had a reasonable opportunity:
(i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory
statement relating to the proposed compromise or arrangement; and
(ii) to make submissions to the Court in relation to the proposed compromise or arrangement
and the draft explanatory statement.
The expression “draft explanatory statement” is defined in subs(3) of s 411. It is a statement that explains the effect
of the proposed arrangement and sets out certain information, in each case as specified in subs(3). The explanatory statement
usually takes the form of a quite substantial “scheme booklet”. Sometimes, as a result of communications between the
corporation and ASIC, the form of explanatory statement that comes before the Court on the first hearing will be an amended form
of that which the corporation provided to ASIC initially. Similarly, it is not uncommon for the draft to be amended as a result
of exchanges that occur between Bench and Bar at the first court hearing.
19 It is common practice for ASIC to provide a letter to the effect that it does not wish to be heard at the first
court hearing, and to provide a letter pursuant to s 411(17) for the second court hearing (see [] below).
20 Subsection (4) of s 411 is critical. Until it was amended by the Corporations Amendment (Insolvency) Act 2007 (Cth), it provided:
(4) A compromise or arrangement is binding on the creditors, or on a class of creditors, or on the members, or on a class of
members, as the case may be, of the body and on the body or, if the body is in the course of being wound up, on the liquidator
and contributories of the body, if, and only if:
(a) at a meeting convened in accordance with an order of the Court under subsection (1) or (1A):
(i) …; and
(ii) in the case of a compromise or arrangement between a body and its members or a class of members—a resolution
in favour of the compromise or arrangement is:
(a) passed by a majority in number of the members, or members in that class, present and voting either in person or by proxy);
and
(b) if the body has a share capital—passed by 75% of the votes cast on the resolution;…
(b) it is approved by order of the Court.
It will be noted that 100 percent of the members become bound by the arrangement if two things happen: a resolution in favour of
the arrangement is passed by the required majorities, and the arrangement is approved by the Court.
21 The majorities are of the members present and voting and of the votes cast. It is therefore only members present,
in person or by proxy, and voting, who matter.
22 The 2007 Amending Act has inserted the words “unless the Court orders otherwise” immediately before
the word “passed” in s 411(4)(a)(ii)(A). The effect of the amendment is to empower the Court to relieve from the requirement
of the majority in number (see under “Voting” below).
23 Section 411(6) empowers the Court to approve an arrangement subject to such alterations or conditions as it thinks
just. Subsections (6A), (6B) and (6C), which were introduced by the 2007 Amending Act, empower the Court to make various kinds
of orders, including an order for payment of compensation, where a person has suffered loss or damage as a result of a breach of
any provision to which a Court-imposed alteration relates, or any Court-imposed condition.
24 Section 411(17), referred to earlier, provides:
(17) The Court must not approve a compromise or arrangement under this section unless:
(a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid
the operation of any of the provisions of Chapter 6; or
(b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;
but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection
to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b).
In my experience, plaintiffs applying under s 411 follow the para (b) alternative, perhaps because they well know that the arrangement
has been proposed to avoid the operation of Ch 6, at least in the sense that they prefer the s 411 procedure to that under ch 6.
25 ASIC has published Regulatory Guide 60 Schemes of arrangement – s 411(17) to give guidance as to ASIC’s views on acquisitions under schemes of arrangement. ASIC states (at RG [60.3]) that it and
the Act have no preference for takeover or scheme transactions being conducted under Ch 6 or Ch 5 of the Act. Generally speaking,
ASIC’s concern is to ensure that the target’s shareholders are fairly treated in terms of being supplied with sufficient
information and allowed sufficient time for deliberation, and not being adversely affected by the transaction’s being effected
by a scheme of arrangement.
26 Section 412 sets out certain requirements of the notice convening the meeting and the explanatory statement. The
explanatory statement is, of course, the document of which a draft has been given to ASIC pursuant to s 411(3) of the Act.
27 Finally, s 413 facilitates the implementation of certain arrangements in the case of a scheme of reconstruction
under which the whole or any part of the undertaking of the property of the Pt 5.1 body concerned is to be transferred to a company.
The section empowers the Court to provide by order for the transfer to the transferee company of “the whole or a part of
the undertaking and of the property or liabilities of the transferor body” and for the making of ancillary orders. Section
413(2) provides:
Where an order made under this section for the transfer of property or , then, by virtue of the , that property is transferred
to and vests in, and those are transferred to and become the of, the transferee , free, in the case of any particular if the
so directs, from any that is, by virtue of the compromise or , to cease to effect.
Section 413(4) defines “liabilities” and “property” very widely.
Historical Background
28 Section 411 is usually said to have originated in the Joint Stock Companies Arrangement Act 1870 (UK). But in the law, everything originates in something earlier. The modern scheme of arrangement has its origins in a context
that those who devise the modern scheme might prefer to disown: liquidation.
29 The Companies Act 1962 (UK) provided in s 136 that any arrangement entered into between a company about to be wound up voluntarily, or in the course of
being wound up voluntarily, and its creditors was to be binding on the company if sanctioned by an extraordinary resolution, and
on the creditors “if acceded to by three-fourths in number and value of the creditors subject to [a right of appeal by any
creditor or contributory to the Court, which had power to confirm, amend or vary the arrangement]”. I need not discuss the
distinction between a “special resolution” and an “extraordinary resolution” (see ss 51 and 129 of the Act
of 1862) but note that an extraordinary resolution was one passed by not less than three-fourths of all members entitled to vote.
Today it is the directors of the target company that commit it to the compromise or arrangement. What is of present interest
is the “three fourths in number and value of the creditors” requirement. It was not, it will be noted, merely a three-fourths
majority of the creditors present and voting.
30 Sections 159 and 160 of the 1862 Act addressed the situation where a company was being wound up by the Court or
subject to the supervision of the Court. Those sections empowered liquidators “with the sanction of the court”, or
with the sanction of an extraordinary resolution of the company where the company was being wound up “altogether voluntarily”,
to enter into compromises or other arrangements with creditors.
31 The Act of 1870 was a very short Act. It provided that where a compromise or arrangement was proposed between
a company that was in the course of being wound up either voluntarily or under the supervision of the Court, the Court could order
the convening of a meeting of the company’s creditors, and if a majority in number and three-fourths in value of the creditors
present, either in person or by proxy, agreed to the compromise or arrangement, and it was approved by the Court, the arrangement
or compromise would be binding on all creditors and on the liquidator and contributories of the company. However, companies that
were not in the course of being wound up and that wished to make arrangements or compromises with their creditors had to go into
liquidation in order to take advantage of the 1870 Act.
32 It will be noted that the 1870 Act introduced two requirements that have continued to the present day: the bare
majority in number and three-fourths majority in value requirement, and the requirement of court approval, although forerunners
of sorts of both requirements may be seen in the 1862 Act.
33 The Companies Act 1907 (UK), by s 38, extended the Act of 1870 to compromises or arrangements between companies not in liquidation and their creditors. It provided that the 1870 Act was to apply to a company not being wound up as if references to the liquidator,
winding up and contributories were omitted (and necessary substitutions were made, including a reference to the company in place
of the reference to the contributories).
34 In the following year the Companies (Consolidation) Act 1908 (UK), which consolidated the Companies Act 1862 and the Acts that amended it, extended the 1870 Act further to compromises or arrangements between a company and its members. The
relevant provision was s 120, which had the main features of the modern provision:
- the proposal of a compromise or arrangement between a company and its creditors or any class of them, or between the company and
its members or any class of them;
- the power of the Court to order a meeting on the application of the company or any creditor or member (or, in the case of the company
being wound up, the liquidator);
- the majority in number and three-fourths in value voting provision;
- the approval of the Court; and
- the provision for the compromise or arrangement to bind the creditors or members or class of them and the company (or, in the case
of the company being wound up, the liquidator and contributories).
It was s. 120 of the 1908 Consolidation Act that facilitated the modern use of the scheme of arrangement to effect reconstructions
and amalgamations, and, relevantly, acquisitions by private equity ventures.
35 In order to take advantage of the procedure in ss 161 and 162 of the Act 1862 and their successors in order to effect
a reconstruction or amalgamation, it was necessary for the company to go into voluntary liquidation. However, in 1926 the UK
Company Law Amendment Committee chaired by Sir Wilfred Greene KC recommended that the court should have power to sanction schemes
for the amalgamation of two or more companies without the need for a liquidation (Cmd 2657 para 85). The Committee saw the 1870
Act as amended as providing suitable machinery which could be supplemented by empowering the court to make orders facilitating
the transfers of assets and liabilities from the merging companies to the company in which they were being merged. This development
was the forerunner of s 413 of the Act, noted above.
Schemes of Arrangement in Various Jurisdictions
United Kingdom
36 In the United Kingdom, ss 425-427A of the Companies Act 1985 (UK) provide for court-supervised schemes of arrangement in terms generally similar to those of ss 411-415 of the Act. There are
minor differences. For example, the UK legislation has no equivalent of s 411(17).
37 In 2001, the UK Company Law Review Steering Group recommended reform of the scheme of arrangement process. One
recommendation was that the 50 percent (or head count test) be abolished: “Modern Company Law: For a Competitive Economy
– Final Report”, London, vol 1, June 2001 at 278 [13.10].
38 Commencing on 6 April 2008, ss 425-427A will be repealed and the régime will be found in Pt 26 (ss 895-901)
of the Companies Act 2006 (UK): see Companies Act 2006 (Commencement No 5, Transitional Provisions and Savings) Order 2007 (No 3485 C.150)) (UK) cl 3 and Schedule 2, Pt 1. There are drafting changes arising from the re-arrangement of the provisions,
but in my opinion no changes of substance. In particular, the new provisions do not implement the recommendation of the Company
Law Review Steering Group mentioned above. The majority required under s 899(1) of the new UK Act is “a majority in number
representing 75 percent in value of the ... members ... present and voting either in person or by proxy ...”.
Canada
39 The Canadian provisions to be compared with the Australian ss 411-415 are found in Pt XV (ss 173–192) of the
Canada Business Corporations Act 1985 (Can) which is headed “Fundamental Changes”. Section 192 within that Part defines an “arrangement”, and
provides in subs (3) that where it is not practicable for a corporation that is not insolvent “to effect a fundamental change
in the nature of an arrangement under any other provision of [the] Act, the corporation may apply to a court for an order approving
an arrangement proposed by the corporation”. In addition to the final order of approval, the court may make various interim
orders, including orders relating to the convening of a meeting of shareholders.
40 Amalgamations are dealt with in ss 181–187, reorganisations in s 191, and “Take-over Bids” are
the subject of Pt XVII (ss 194-206) of that Act. The Canadian régime therefore does not contain a s 411 type of provision.
41 There is not a national regulator at the federal level in Canada. Regulation and enforcement are at the Provincial
and Territorial level, although the “Canadian Securities Administrators” is a forum that has developed a harmonised
Canadian Securities Regulatory System.
New Zealand
42 In New Zealand schemes of arrangement and takeovers are governed by separate pieces of legislation. Arrangements
and amalgamations are dealt with in Pts 13 (ss 219-226) (“amalgamations”) and 15 (ss 235-239) (“Approval of arrangements,
amalgamations, and compromises by Court”) of the Companies Act 1993 (NZ). Takeovers, however, are the subject of the Takeovers Act 1993 (NZ). Pursuant to s 28(3) of that Act, the Takeovers Code Approval Order 2000 has been made. By virtue of that instrument, the
Takeovers Code is in force (as amended, as from 1 July 2007). It applies to all companies incorporated under the Companies Act 1993 (NZ) that are a parties to a listing agreement with a registered exchange and has securities that confer voting rights that are
quoted on that exchange’s market (or that satisfied these conditions at any time in the preceding twelve months) and have
fifty or more shareholders. The principles of the Takeovers Code are enforced by the New Zealand Takeovers Panel.
43 Generally speaking, a change of control in New Zealand may be effected by:
1. a takeover bid under the Takeovers Code;
2. an amalgamation under Pt 13 of the Companies Act 1993 (NZ); or
3. a scheme of arrangement under Pt 15 of the Companies Act 1993 (NZ).
Whereas the Australian s 411 allows only for 100 percent of the members (or class of members) to be bound, the New Zealand s 236
empowers the court to order that an arrangement or amalgamation or compromise shall bind the company and “such other persons
or classes of persons as the Court may specify”. In other respects too the New Zealand section is expressed in more general
and liberal terms than the Australian s 411. For example, it is for the court by order to require that notice of the application
be given in such form and in such manner and to such persons or classes of persons as the Court may specify, and for the Court’s
approval to be in such manner as the court may specify.
44 The New Zealand Takeovers Panel has expressed concern that amalgamations and schemes of arrangement under Pts 13
and 15 are used as a mechanism to avoid compliance with the Takeovers Code. In 2006 the Panel proposed amendments to the legislation, under which the Code would not apply to changes of control of Code
companies effected by amalgamations under Pt 13 or schemes of arrangement under Pt 15, but the Court would be required to take into
account the principles of the Code and to receive submissions from the Takeovers Panel when deciding whether to approve schemes
of arrangement under Pt 15. Amalgamations under Pt 13 would require the Panel’s approval. The recommendations have not
yet been implemented.
Earlier provisions in Australia
45 Predecessors of s 411 existed in the earlier State and Territory statutes. The immediate predecessor was s 181
of the “uniform” State and Territory Companies Acts of 1961-62. Before that, the provision was found in NSW 1936, s
133; Vic 1958, ss 89, 90; Qld 1931, s 161; SA 1934, s 171; WA 1943, s 158; Tas 1959, ss 123, 124.
Voting
46 The bare majority in number/75 percent majority in value of those present and voting requirement of s 411(4)(a)(i)
of the Act was set out at [] above. With this may be compared the threshold of the compulsory acquisition régime under
the Takeover provisions found in s 661A(1) of the Act. That threshold is the holding of relevant interests in at least 90 percent
(by number) of the securities in the bid class and 75 percent (by number) of the securities that the bidder offered to acquire
under the bid. If we think of a simple proposal to acquire all of the issued shares in the capital of the target where each share
carries one vote, the bidder would need to have the support of only 75 percent of those votes that are cast at the meeting, but
would need to hold 90 percent of the issued shares under s 661A(1), before being entitled to become the owner of the whole of the
share capital.
47 The current votes cast threshold under s 411(4)(a)(ii) of the Act has a legislative lineage dating back to s 136
of the Companies Act 1862 (UK), as noted earlier.
48 Section 155 of the Companies Act 1929 (UK) introduced a mechanism for the compulsory acquisition of shares where a “transferee” company (equivalent, for
present purposes, to a bidder) had a 90 percent stake in the “transferor” company (equivalent to the target). Australian
law followed suit with State and Territory legislative provisions such as s 135 of the Companies Act 1936 (NSW) which allowed for the compulsory acquisition of shares where a “scheme or contract involving the transfer of shares
[has] been approved by the holders of not less than nine-tenths in value of the shares affected”. Legislation regulating
takeover bids was first enacted in Australia in the uniform Companies Acts of the States and Territories in 1961-1962. The legislation
specifically regulated the making of bids outside the course of ordinary trading on a stock exchange. The form of the modern takeover
threshold was influenced by the 1945 Cohen Report in the United Kingdom.
49 The legislative régimes governing schemes of arrangement and takeovers appear to have developed in parallel,
and neither régime made express reference to the other. The use of schemes of arrangement to effect change of control transactions
is a recent phenomenon, far removed from the original winding up context in which the threshold originated.
50 The question whether a scheme of arrangement could be used to effect a takeover did not arise until 1979, in Re Bank of Adelaide (1979) 22 SASR 481; 4 ACLR 393. The target company applied under s 181 of the Companies Act 1962 (SA). That section was the first in Pt VII headed “Arrangements and reconstructions”. The preceding Pt VIB (ss 180A-180Y)
was headed “Take-overs”. It was held that the scheme provisions and the takeovers provisions contemplated different
types of transactions, regardless of the fact that either mechanism would have given the bidder control over the target: 22 SASR
at 508; 4 ACLR at 421.
51 It was not until 1 July 1982, under the Companies (Acquisition of Shares) Act 1980 (Cth), that Australian legislation specifically attempted to grapple with the interaction between schemes and takeovers: see s
12(ea) of the 1980 Act. Indeed, legislative amendments to the Companies Act 1981 (Cth) that were designed to regulate the relationship between schemes and takeovers did not alter the threshold provision inherited
from earlier legislation. Instead the amendments altered the process for scheme approval and inserted a new provision – equivalent
to the current version of s 411(17) – requiring that there be no objection by the regulator, and that the Court be satisfied as to the purpose of the scheme:
see s 52 of the Companies and Securities Legislation (Miscellaneous Amendments) Act 1981 (Cth), which amended s 315(21) of the Companies Act 1981 (Cth). The current law has not strayed from that path: there is no regulatory preference for either schemes of arrangement or
takeovers to effect change of control transactions under the Corporations Act 2001 (Cth), and the approval thresholds have not changed.
52 Since schemes and takeovers are both available mechanisms for effecting change of control transactions, the question
arises: is there any justification for the discrepancy between the approval thresholds for schemes and takeovers? After all, the
use of schemes as a takeover mechanism by private equity holders presents a very different scenario from that envisaged by the
Joint Stock Companies Arrangement Act 1870 (UK), but the votes cast threshold has not changed at all since then. Logic seems to suggest that equivalent outcomes (binding
dissentient shareholders to sell their shares) would demand equivalent approval thresholds.
53 The Legal Committee of the Companies and Securities Advisory Committee stated in its report in 1996 in relation
to this issue:
Issue: Should the requisite majorities in s 411, namely 75% in value and 50% in number of those present and voting, be altered for
a scheme involving a compulsory acquisition of securities?
Submissions
5.9 The submissions generally opposed any alteration to the 75% in value and 50% in number requirement.
5.10 One respondent was concerned that any change might affect the flexibility of proceedings under
Chapter 5, which is its key benefit. The ASC pointed out that it is implicit that the s 411 proposal should be recommended by the
board of the target company and receive court sanction. It is therefore not necessary to impose the same majorities as those required
in s 701. The Law Council also opposed any alteration.
Legal Committee response
5.11 The Legal Committee considers that given the procedural protections in s 411, it is not necessary
to apply the same compulsory acquisition threshold test as in s 701.
Recommendation 26: There should be no alteration to the current requisite majorities in s 411 for a scheme involving a compulsory
acquisition of securities.
54 The rationale for the different votes cast thresholds rests on the additional safeguards found in the scheme of
arrangement process:
- the target’s board must support the scheme;
- in deciding to support the scheme, the target’s board is subject to controls imposed by fiduciary duties under the general
law and ss 180-183 of the Act;
- the Court’s approval is required; and
- s 411(17), noted earlier, applies.
Share Splitting
55 The requirement of majority in number of members present and voting (the 50 percent test) can be affected by “share
splitting”. While each of 10,000 shares will always carry one vote, if 1,000 shares are transferred to each of ten people,
there will be ten votes on a head count rather than the previous one. The issue arose in Re MIM Holdings Ltd [2003] QSC 181 at [19], but it transpired that any share splitting could not have affected the voting outcome on the scheme (share splitting had created
at most 574 additional parcels).
56 Transferees who are on the register at the date of the scheme meeting are entitled to vote. In Re Direct Acceptances Corporation Ltd [1987] VicRp 41; (1987) 5 ACLC 1,037, McLelland J declined to find in s 411(4) an implied qualification on that position. His Honour did not address the question
of the exercise of the Court’s discretion to withhold approval by reason of share splitting (the Court declined to approve
of the scheme on other grounds).
57 ASIC has stated in Policy Statement 142 (at 142.61 and 142.62):
ASIC has made public statements on its views on share splitting in the context of takeovers. ASIC considers similar devices employed
by proponents or opponents of a scheme would likewise be objectionable.
ASIC would generally advise a Court that it would have no objection to orders sought under, say s 1319 or another provision, which
ensured that a corporate action or decision was not determined by shareholders who lacked even a minimum economic interest, as
shareholders, in the corporate future of the company. ASIC would generally advise the Court that in its view, in a modern listed
company, a reasonable proxy for a minimum economic interest is a marketable parcel of shares.
58 In Re MIM Holdings Ltd,Ambrose J observed that if share splitting made it likely or even possible that the majority in number had been achieved by reason
of share splitting, arguably that might be a reason for withholding approval. However, as long as the 50 percent test applies,
the Court cannot approve a scheme where that test is not passed, including where it is not passed by reason of share splitting.
59 The insertion of the words “unless the Court otherwise orders” at the beginning of s 411(4)(a)(ii)(A)
by the 2007 Amending Act referred to earlier now provides a means of overcoming this problem. Those words enable the Court to
bring the scheme provisions into line with the regulation of takeovers under Pt VIA, in which s 661A(3) provides that the bidder
under a takeover bid may compulsorily acquire securities in the bid class with the approval of the Court.
60 The position of the attainment of the required majority as a result of a splitting of shares remains to be dealt
with, if it can be dealt with at all, as a matter of the Court’s discretion to withhold approval under s 411. There is no
equivalent provision under Pt VIA in the case of a takeover.
Exclusivity Provisions and Break Fees
61 What is the outworking of the duties of directors of a target corporation when a private equity entity consortium
approaches them with a view to an acquisition of the target company? Since what is contemplated is the acquisition of 100 percent
of the shares of the members, precisely what the duty imposed by the general law and by ss 180 and 181 of the Act requires, must
be determined in special circumstances: is it in the best interests that the members accept the bidder’s offer in preference
to the business of the company continuing to be carried on?
62 These questions arise, in particular, when the bidder proposes exclusionary provisions (“no shop” and
“no talk” stipulations) and break fee provisions. Provisions of these kinds will be proposed for inclusion in the
merger implementation deed or agreement between the two companies. Should the directors of the target commit it to such an arrangement?
How hard should they bargain? Should they insist on a reciprocal break fee provision? What about a “naked no vote”
break fee?
63 I have had occasion to consider some of these questions in Re APN News & Media Limited [2007] FCA 770; (2007) 62 ACSR 400; Re Investa Properties Ltd (2007) 25 ACLC 1186; Bolnisi Gold NL [2007] FCA 1668; Bolnisi Gold NL (No 2) [2007] FCA 2078. I will not repeat all that I have said in those judgments. However, I trust I will be pardoned from setting out paras [44]-[55]
from APN as follows:
44 Break fees are justified by reference to:
- the costs incurred by the offeror company;
- the benefit that that company confers on the members of the target company by increasing its value; and
- the desirability, from the viewpoint of those members, that takeover offers be made to them.
45 Clearly, a company making an approach to the board of a target company is entitled to stipulate as a term of its offer that
the target company agree to a provision for a break fee. It is entitled to inform that board that if it does not agree to the
break fee, the offer will not be made to the target company’s shareholders, and it is entitled not to make the offer to the
target’s shareholders, if its board does not agree to the break fee. The question is what is the appropriate response of
the target company’s directors, and later of the Court.
46 Rule 21.2 of the United Kingdom’s City Code on Takeovers and Mergers (8th ed, Panel on Takeovers and Mergers (“UK
Takeover Panel”), 2006) and the UK Takeover Panel’s Practice Statement No 4, Rule 21.2 – Inducement Fees (2004)
recognise and permit break fees provided:
- the fee is de minimis (normally not more than one percent of the value of the diluted equity share capital of the offeree company);
- the board of the target company and its financial adviser, confirm certain matters to the Panel in writing, including that the fee
arrangement was the result of normal commercial negotiation and that they believe the agreement to pay the fee to be in the best
interests of the offeree shareholders;
- any fee arrangement is fully disclosed in the press release announcing the offer and in the offer document, the terms of the actual
fee agreement being made available for public scrutiny; and
- the Panel is consulted at the earliest opportunity in all cases where an inducement fee or similar arrangement is proposed.
47 In the United States of America, it appears that break fees higher than one percent are regarded as unobjectionable by the
courts, although the difference may be explained by the fact that break fees there appear to be usually expressed as a percentage
of the purchase price rather than as a percentage of equity share capital: Kenyon-Slade S, Mergers and Takeovers in the US and UK:
Law and Practice (OUP, 2003) at [5.279] ff. In the work just cited, Dr Kenyon-Slade states (at [5.279]–[5.280]):
If a competing bidder acquires the Target, the cost of the break-up fee is effectively assumed by such bidder as a liability of the
Target corporation. The result is to increase the cost of the acquisition by the amount of the break-up fee. Break-up fees typically
range from 1% to 4% of the purchase price specified in the Merger Agreement with the Acquirer (with 2-3% being most typical).
Such amounts can, of course, be substantial.
Break-up fees are routine and will usually withstand judicial scrutiny. It is important, however, that such fees remain reasonable
and not so high as to represent an unreasonable deterrent to other potential Acquirers.
48 In Australia the Takeovers Panel’s Guidance Note 7: Lock-up Devices (2nd issue, 2005) (“Takeovers Panel’s
Guidance Note 7”) states (at [7.18]):
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.
49 The Takeovers Panel has had occasion to consider break fees in the context of takeovers under Ch 6 of the Act: see the discussion
in Renard IA and Santamaria JG, Takeovers and Reconstruction in Australia (Butterworths, looseleaf service) at [1149], esp at
11,173 ff. Break fees were considered by the Panel in Re Normandy Mining Ltd (No 3) (2002) 20 ACLC 471; Re Ballarat Goldfields NL (2002) 41 ACSR 691; and Re National Can Industries Ltd (No 1) (2003) 48 ACSR 409 (“National Can”). In National Can, the review panel stated (at 434 [33]):
We consider that a 1% fee is usually not materially anti-competitive and does not place unreasonable pressure on shareholders.
This is the basis for the choice of the 1% guideline in GN7. Further, we query whether a sunk cost is anti-competitive if shareholders
reject the scheme and agree with the initial panel’s statement [made earlier at 418 [42]]: “In these circumstances,
we do not entirely reject the notion that a fee should be payable if and when a proposal the directors endorsed was rejected by
shareholders. As GN7 puts it, such a fee may be an appropriate price to secure an opportunity broadly in the nature of an option
[GN7 at para 7.21]”.
50 In the present case, based on the Scheme Consideration of $6.20 per APN Share, the total equity value of all APN Shares,
notes and options is $3,114,100,000 as set out at p 42 of the Scheme Booklet. The break fee of $27.5 million is 0.88308 percent
of that amount. Based on the original offer of $6.10 announced on 12 February 2007, the total equity value would be $3,062,700,000,
of which the break fee of $27.5 million is 0.89790 percent.
51 It is interesting to digress to consider the break fee as a percentage of the Scheme Consideration in conformity with the
United States practice.
(a) The number of APN Shares on issue as at 31 December 2006 was 460,286,596. According to p 164 of the Scheme Booklet, if
all APN Notes are converted and all Options are exercised, there would be 513,145,200 APN Shares on issue.
(b) According to p 164 and p 228 of the Scheme Booklet, the total number of Scheme Shares is 381,604,127. Section 11.8
on p 224 of the Scheme Booklet states that 764,420 notes will be redeemed rather than converted into APN Shares.
(c) Based on $6.20 per share, the total Scheme Consideration for the Scheme Shares is $2,365,945,587, of which the $27.5
million break fee is 1.16 percent (it would be 0.86 percent of the consideration that would be payable if all APN Shares were being
acquired).
(d) Based on $6.10 per share, the total Scheme Consideration for the Scheme Shares would have been $2,327,785,175, of which
the $27.5 million break fee would have been 1.18 percent (it would have been 0.88 percent of the consideration that would have
been payable if all APN Shares were being acquired).
52 Would APN’s liability to pay the break fee of $27.5 million be likely to coerce Offeree Shareholders into agreeing to
the Scheme, or to deter companies from making a competing offer? The two considerations are related. A potential competing offeror
must be prepared to pay $27.5 million plus something more than $6.20 per share if it is to have any chance of success. If the
Offeree Shareholders think that no potential competing offeror would be prepared to go so far, they may feel that they have no alternative
but to agree to the Scheme.
53 Having regard to the percentages mentioned above and to the approach taken to the present question in the takeover context
by the Takeovers Panel as explained above, I answer the question posed in the last paragraph “No”.
54 Clearly, the notion of a reasonable level of break fee will depend on the denominator by reference to which the percentage
break fee is to be calculated. If, as here, the offer is for only part of the issued capital, the amount of the consideration
offered can be expected to be lower than the equity value of the target company, and therefore the break fee expressed as a percentage
can be expected to be higher, than it would be if equity value is the denominator. The one percent level identified by the UK
Takeover Panel and the Australian Takeovers Panel has been fixed by reference to equity value, and the break fee of $27.5 million
is less than one percent of equity value.
55 My consideration of the provisions for the no-shop and break fee provisions in this case has led me to the view that it would
be desirable that applications under s 411(1) be supported by affidavit evidence directed to showing:
- that the no-shop and break fee provisions are the result of a normal commercial negotiation, and explaining, at least briefly and
in general terms, the factual basis for that statement (see [46] above);
- that the directors of the target company, or at least those directors of it who are not affiliated with the offeror, believe that
the provisions do not operate against the interests of offeree shareholders, and that in fact it was in the interests of such shareholders
that the directors agreed to the inclusion of the provisions in the merger implementation agreement (see [46] above and In re Paramount
Communications Inc Shareholders’ Litigation 637 A2d 34 (Del Supr 1993) for a case in which a target company’s directors’ commitment to no-shop and break fee provisions was held,
in all the circumstances, to constitute a breach of their fiduciary duty); and
- in the case of the break fee, explaining, by reference to calculations based on the evidence before the Court, the percentage that
the break fee represents (a) of the “equity value” of the target company, calculated in accordance with para 7.18 of
the Takeovers Panel’s Guidance Note 7, and (b) of the scheme consideration (the explanation might, instead, be conveyed in
a submission, but still by reference to the evidence before the Court).
If the independent expert is in a position to express an opinion on the matter (see s 79 of the Evidence Act 1995 (Cth)), the expert should state whether the no-shop and break fee provisions appear to be reasonable and not detrimental to the
interests of shareholders, and if so, the basis for that opinion. Of course, the independent expert’s opinions that agreement
to the Scheme is in the best interests of the offeree shareholders and that no superior proposal is likely to be made, must not
have been arrived at as a result of the very existence of the no-shop and break fee provisions (see [52] above).
Affidavit evidence conforming to para [55] of APN set out above has now become a feature of applications under s 411 – at least of those that have come before me! In Investa Properties Limited, for example, evidence was placed before the Court to the effect that the break fee provision had been agreed to following ordinary
arm’s length commercial negotiations between target and bidder that were conducted over a period of two months, during which
the parties were separately advised and represented by external legal advisers and, in the case of the target, by external financial
advisers, with extensive experience of transactions of the kind in question. The evidence also showed that the target company’s
directors had received legal advice on the operation of the “no shop” and break fee provisions and had had regard to
the guideline set out in the Takeovers Panel Guidance Note 7: Lock-up Devices when the provisions were negotiated and agreed to.
64 Bolnisi Gold presented a feature that, I think, has not been common in the Australian cases: a naked no vote break fee, that is to say, a break
fee that is payable, even if all that happened is that the target’s shareholders vote down the proposed scheme, and there
is no question of their agreeing to a superior proposal by a competitor. In such a case, the break fee cannot be supported on
the basis that the bidder has, by making its offer, increased the value of the target’s shares and thereby conferred a windfall
on its shareholders and, perhaps, an advantage to a competitor of the bidder.
65 With the assistance of counsel, I examined cases on naked no vote break fees in Australia and overseas. My conclusion
was that it could not be said that an agreement to pay a naked no vote break fee necessarily operated against the interests of
the target’s shareholders or should necessarily stand in the way of court approval of a scheme.
66 In concluding that the particular naked no vote break fee provision in Bolnisi was not objectionable for the purposes of the application under s 411 of the Act, I had particular regard to the facts that on the
evidence:
- the amount would not exceed the amount of the costs and expenses of the bidder that would have been wasted if the scheme was not
agreed to by the Bolnisi shareholders;
- the directors of Bolnisi had believed that they were acting in the best interests of its shareholders in agreeing that the break
fee should be payable in the naked no vote situation;
- the naked no vote break fee was a reciprocal one, in the sense that identical amounts were payable by Bolnisi and the bidder and
they were payable if the Bolnisi shareholders or the bidder’s shareholders respectively should fail to pass a resolution on
which implementation of the scheme depended (the bidder was a Canadian corporation and the scheme was subject to the approval by
its shareholders of a resolution increasing its share capital to enable the issue of scrip consideration to the targets shareholders);
- it was important for Bolnisi to have the benefit of the bidder’s break fee provision and it could do so only if it agreed to
the Bolnisi break fee provision;
- the amount of the break fee was less than the one percent “ceiling guide” referred to by the Takeovers Panel in its Guidance Note 7: Lock-up Devices and could not be regarded as so large as to be likely to coerce shareholders into agreeing to the Scheme; and
- the break fee provisions were agreed following arm’s length commercial negotiations over a period of one month in which target
and bidder were separately advised and represented by external legal advisers and financial advisers with extensive experience
in transactions of the present kind and the target’s directors believed that it was in the interests of its shareholders
that the provisions be included.
67 The test that I applied in Bolnisi was whether the amount was “so large as to be likely to coerce shareholders into agreeing to the scheme, rather than assessing
the offer on its merits” (at [12]). Indeed, I added:
… the court should not readily find that the target company’s directors have committed the company to an arrangement
that will have the impermissible coercive effect on the company’s shareholders, and nor should the court seek to substitute
its view of the best interest of the company for that of the directors.
My judicial colleague, Justice Austin, has suggested non-curially that while the particular break fee in Bolnisi would probably have satisfied a much more demanding test, my formulation by reference to likelihood was “perhaps lenient”:
see Ford’s Principles of Corporations Law at [24.071].
68 No doubt we could debate the choice of words: “so large as likely to coerce”, “so large that
it might possibly coerce”, “so large that there is a significant risk that the company’s obligation to pay the
fee will cloud the shareholders’ judgment and influence their decision”, and so on. I would like to raise for discussion
the more fundamental question of whether the Courts should have power to prevent a target’s shareholders considering a proposed
scheme where there is evidence that the target’s directors believed:
- after receiving independent legal and financial advice that it was in the shareholders’ interests that they agree to the scheme;
and
- that it was necessary to agree to the break fee to enable them to have the opportunity of agreeing to the proposed scheme.
Idameneo (No 123) Pty Ltd v Symbion Health Limited [2007] FCA 1832
69 In Idameneo (No 123) Pty Ltd v Symbion Health Limited [2007] FCA 1832, break fees came before the Court in the context of an allegation of breach by the target’s directors of their fiduciary
and statutory duties. The case concerned a contest between two publicly listed health care providers for the acquisition of a
third. The contestants were Primary Health Care Limited (Primary) and Healthscope Limited (Healthscope). The target was Symbion
Health Limited (Symbion). Primary’s instrument for the purpose was a subsidiary, Idameneo (No 123) Pty Ltd (Idameneo).
Idameneo owned 20 percent of the issued shares in Symbion.
70 Symbion’s business was divided into two classes:
- the pathology, medical centres and diagnostic imaging businesses (Diagnostic Businesses); and
- the consume and pharmacy businesses (C & P Businesses).
In February 2007, Healthscope and a private equity consortium controlled by Ironbridge Capital Pty Limited (Ironbridge) and Archer
Capital Pty Limited (Archer) (the IAC Consortium) approached Symbion with a view to the merger of Symbion’s Diagnostics Businesses
with the businesses of Healthscope, and the IAC Consortium’s purchase of the C & P Businesses. The proposal at that
time was that Healthscope would acquire all of the shares in Symbion pursuant to a scheme of arrangement under Pt 5.1 of the Act
between Symbion and its members, followed by a sale by Symbion (which would, by then, have become a wholly owned subsidiary of Healthscope)
of the C & P Businesses to the IAC Consortium for cash. The consideration moving from Healthscope to the shareholders in Symbion
was to be a mixture of cash and shares in Healthscope.
71 Symbion and Healthscope entered into a Scheme Implementation Deed dated 29 May 2007 (SID). By cl 8.6(a) of the
SID, Symbion agreed to pay Healthscope a “Symbion Break Fee” of $27.86 million (or $20.97 million if a certain “C&P
Break Fee” of $10.4 million as defined in the SID had been paid) in the event that any of the facts, matters and circumstances
described in cl 8.6(a) should occur. Clause 8.7 of the SID also provided for payment by Healthscope of a “Healthscope Break
Fee” of $27.86 million. Clause 8.6(e) provided that neither the Symbion Break Fee nor the C&P Break Fee was payable merely
by reason of the fact that the scheme was not approved by the Symbion shareholders.
72 In fact, the Original Scheme was not approved by them. Less than 75 percent of the votes cast were in favour of
the scheme. Idameneo’s 20 percent of the shares in Symbion were voted against the Original Scheme. If they were left out
of account, 99.2 percent of the shares voted at the meeting were voted in favour of the scheme, and those shares were held by 81.1
percent of the shareholders who voted at the meeting. If the shares held by Idameneo were included, 73.9 percent of the shares
voted were voted in favour of the scheme – a little below the 75 percent threshold required.
73 Since the Original Scheme failed to gain shareholder approval, the Symbion Break Fee was not payable.
74 By the time of the meeting of shareholders, thought had already been given by Symbion and Healthscope to an alternative
proposal. In broad terms, the alternative involved two transactions: a “Diagnostics Transaction” and a “C &
P Scheme” (together, the Transactions). Perhaps I need not discuss them in detail (see [2007] FCA 1832 at [12] ff). What is important for present purposes is that a new Transaction Implementation Deed (TID) between Healthscope and Symbion
provided for reciprocal break fees – a “Symbion Health Break Fee” and a “Healthscope Break Fee”.
Each was an amount of $19.575 million.
75 Idameneo contended that the directors of Symbion were in breach of the duty imposed on them by s 181(1) of the Act
by causing Symbion to enter into the TID in so far as it contained provision for payment of the Symbion Health break fee. Clause
13.8 of the TID provided that the reciprocal break fees of $19.575 million included a reasonable amount of compensation in respect
of costs and expenses incurred by Healthscope and Symbion respectively in respect of the Original Scheme. Idameneo argued that
to the extent that the Symbion Break Fee included compensation in respect of costs and expenses of that kind, the directors of
Symbion were in breach of their duties as directors either under s 181(1) of the Act or under the general law:
(a) to act bona fide in the best interests of Symbion, or, in the alternative,
(b) for a proper purpose.
76 The evidence showed that the Symbion Break Fee was agreed to after a wide range of options regarding the future
development of Symbion’s business had been considered, and that the decision was taken to proceed with the revised transaction
structure on the basis of professional advice. Idameneo did not challenge the Symbion directors’ decision to enter into
the TID: it attacked merely the undertaking to pay the Symbion Break Fee. The evidence showed that Healthscope would not have
proceeded with the transaction in the absence of the inclusion of a provision for a break fee payable by Symbion.
77 I held that Idameneo had not proved that the directors were in breach of their duty.
78 Idameneo’s complaint was not that no reasonable board of directors could have come to the conclusion that
it was in the best interests of Symbion that it enter into the TID: rather the complaint related to one provision of the TID.
But in the circumstances of the case, I thought that severance of that provision was not possible.
79 Idameneo was seeking a declaration that Symbion was not bound by the TID “in so far as it contains clauses
13.8–13.9”, and an injunction restraining Symbion from paying the Symbion Break Fee.
80 The limited nature of Idameneo’s complaint and of the relief it sought, highlighted the difficulty in its
claim. The TID contained many provisions. It might be that the Symbion Break Fee provision was “outweighed” by other
provisions that were to the advantage of Symbion’s shareholders. Considered in isolation, the Symbion Break Fee was disadvantageous
to Symbion, but only in the same sense that, taken alone, a purchaser’s promise to pay a purchase price is to the disadvantage
of the purchaser. Neither the promise to pay the Symbion Break Fee nor the promise to pay a purchase price can be considered
in isolation. The promise to pay the Symbion Break Fee was part of the price that Symbion agreed to pay for the benefits it gained
under the TID.
81 Idameneo’s complaint was that the amount of the Symbion Break Fee had been arrived at on the basis that it
was to compensate Healthscope for, inter alia, costs it had incurred in pursuing the Original Scheme. The argument seemed to be
that Symbion’s directors should have insisted that Healthscope leave those “spent costs” out of account and that,
if they had done so, the amount of the Symbion Break Fee would have been less.
82 It was not known, however, that Healthscope would have been willing to enter into the TID at all if the Symbion
directors had insisted that it not contain the provision for the Symbion Break Fee of $19.575 million, or that it contain only
a break fee of a lesser amount. (Clause 13.8(b) of the TID stated that Healthscope would not have entered into the TID if it had
not contained the Symbion Break Fee provision.) Moreover, I inferred that if the Symbion directors had told Healthscope that it
must exclude from consideration its sunk costs on the Original Scheme, Healthscope would at least have insisted that Symbion do
likewise and therefore negotiate down the amount of the Healthscope Break Fee. Perhaps the two break fees would have been reduced
by and to the same extent. Another possibility was that Healthscope may have been willing to renegotiate the Symbion Break Fee
provision provided other terms of the TID were renegotiated to its advantage and to Symbion’s disadvantage.
83 Would the net result have been better for Symbion? It was impossible to know.
84 The point is that Idameneo had not established that the Symbion directors had breached their duty by causing Symbion
to enter into the TID merely by pointing to the fact that Healthscope had arrived at the amount of the Symbion Break Fee by including
Healthscope’s sunk costs on the Original Scheme.
85 There was supportive documentary evidence showing that the directors of Symbion had considered the question of the
Symbion Break Fee over a long period and had had the benefit of independent external advice concerning it.
86 This case demonstrates the difficulty that can attend a suggestion that by inclusion of a break fee provision, directors
have not been acting in the interests of the shareholders of the target company.
Questions
87 The Court can hardly be expected in the context of applications under s 411 to take on the role of an opponent of
the scheme being proposed. However, a point needs to be made. The material placed before the court is voluminous. It is important
that the application be dealt with expeditiously. While I have never had reason to doubt that counsel appearing for the target
company have sought to discharge their obligation to draw the Court’s attention to any unusual features that might call for
explanation, my fear is that one day somewhere there will be an oversight on the part of both counsel and the court with resulting
embarrassment to everyone.
88 It is true that the court’s order for the convening of a meeting does not preclude an application for an injunction
based on breach of fiduciary or other duty, and even implementation of a scheme following the court’s approval would not
preclude a claim for damages. I wish to raise the question, nonetheless, precisely what purpose is served by the court’s
supervision of schemes under s 411. I do not mean to suggest that no purpose is served, but discussion at this conference of the
rationale for the court’s supervision may make a valuable contribution to the law and practice in this area.
89 To say that “the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast
in such terms that, if it achieves the statutory majority at the creditors’ meeting the court would be likely to approve
it on the hearing of a petition which is unopposed” (FT Eastment Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72), while unexceptionable, does not address possible breaches of fiduciary or statutory duty by the target’s directors.
This is the problematical area. Yet, how can the Court be expected to become aware of such a breach on an ex parte application
under s 411?
90 An interesting way of approaching the matter is to ask the question that I foreshadowed at the outset: What difference
would it have made, if any, if the Delaware Court of Chancery and Supreme Court had had jurisdiction under a statutory provision
such as the Australian s 411, and the mergers the subject of the decisions referred to by Justice Jacobs had been sought to be
effected by a court-approved scheme of arrangement?
91 I will raise this question for discussion at the conference.
Concluding Remarks
92 In exercising its jurisdiction under s 411 the Court must check that all of the specific requirements of the Act,
the Regulations and the rules of court have been met. It is once we get beyond them into more general considerations that difficulty
can arise. Commercial judgments are for the target’s directors, not for the Court to make. The Court must ensure that
the shareholders will be fully informed and, to the extent that it can do so, ensure that they will not be deceived. Inevitably,
the Court must rely heavily on the legal representatives of the target company who appear before it.
Senate Standing Committee on Economics, Private Equity Investment in Australia (Commonwealth Senate, tabled 20 August 2007) at [1.8], [1.15].
See Reserve Bank of Australia, Financial Stability Review – March 2007 (Reserve Bank of Australia, Canberra, 2000) at 59.
See Senate Standing Committee on Economics, Private Equity Investment in Australia at [1.11]-[1.15].
See RP Austin and IM Ramsay, Ford’s Principles of Corporations Law (13th ed, LexisNexis Butterworths, 2007) at [23.080].
See Board of Trade, Report of the Committee on Company Law Amendment (Cmd 6659, HMSO, 1945)(the Cohen Report)at [141]. See also R Levy, Takeovers: Law and Strategy (2nd ed, Thomson Lawbook Co, 2002) at 201 n 1.
Specifically, since the early 1980s. See, generally, T Damian and A Rich, Schemes, Takeovers and Himalayan Peaks: The Use of Schemes of Arrangement to Effect Change of Control Transactions (Ross Parsons Centre for Commercial, Corporate and Taxation Law, Sydney, 2004) at 25-35.
See ASIC Regulatory Guide 60, Schemes of arrangement – s 411(17) (4 August 1999, amended 25 February 2008) (RG 60) at [60.3].
Legal Committee of the Companies and Securities Advisory Committee, Compulsory Acquisitions: Report (Companies and Securities Advisory Committee, 1996) at [5.9]-[5.11].
