Schemes of Arrangement
David Robb and Malcolm Stephens
Allens Arthur Robinson
INTRODUCTION
This afternoon we will discuss a form of corporate reconstruction of remarkable flexibility
known as a scheme of arrangement. We will track some recent developments in the law
and highlight two trends that have and are still occurring – the separation of takeovers
principles and scheme principles and the redefining the role of the Court and the Australian
Securities & Investments Commission.
Our firm acted in two independent schemes proposed by CMPS&F Pty Ltd – a privately
owned engineering company which had the good fortune of taking an initial equity stake in
a highly profitable State Wide Roads – owner of the M5. Our experience in both cases
introduced us to the active approach of the court, principally in the form of Mr Justice
Santow, who brought his commercial solicitor skills into the court room and was keen to
correct defects to scheme documentation and he also sought to refine and even suggest
improvements to the proposals brought to him. The result of the Santow era were a range
of practices and also law which are now undergoing some revision by the current court.
Today we will be talking only about schemes with the members of a company. We will not
explore the rarer class of scheme, being schemes with creditors. The fact of the matter is,
that although the regime was originally designed to facilitate schemes with creditors, these
are relatively rare these days as deeds of accompany arrangement and voluntary
administrations are a more common form of dealing with creditor interests. Accordingly, to
those insolvency practitioners in the audience, we trust that the talk is of some interest in
any event.
Before we talk through some of these trends and developments, first we shall briefly
explain what a scheme of arrangement is.
WHAT IS A SCHEME OF ARRANGEMENT?
As hinted above, a scheme of arrangement is a court approved compromise or
arrangement, it is entered into between a company and its creditors or members or any
class or classes of them in accordance with section 411, Part 5.1 of the Corporations Act
2001. A further category of compromise or arrangement is a reconstruction or
amalgamation, as contemplated in section 413, by which companies can effect transfers of
assets or liabilities (including legal proceedings), through the stroke of the court’s pen in
the form of its court order, along with the disillusion, without winding up, of the transferring
corporation.
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Interestingly, the terms compromise, amalgamation and reconstruction are all undefined
under the Corporations Act and have been given wide meaning by the Courts.
A “compromise” connotes the existence of some antecedent controversy or dispute over
rights where the members or creditors give up certain rights. In this sense, the term
“compromise” is given a somewhat limited meaning, as it does not permit the giving up of
rights unless there is some form of pre-existing dispute (Mercantile Investment – General
Trust Co v International Co of Mexico [1893]1 Ch 484-Lindley LJ).
However, the term “arrangement” is defined in section 9 and in an inclusive way as
“includes a reorganisation of the share capital of a body corporate by the consolidation of
shares of different classes, by the division of shares into different classes, or by both these
methods.” As was said by Mr Justice Santow in Re NRMA Ltd (2000) 33 ACSR 595 at
603:
The word has been given a liberal meaning. Generally speaking, unless the
arrangement is ultra vires the company or seeks to deal with the matter for which a
special procedure is layed down by the Corporations [Act] or to evade a restriction
imposed by the Corporations [Act], almost any arrangement otherwise legal which
touches or concerns the rights and obligations of the company or its members or
creditors, and which is properly proposed, may come under section 411.
Schemes of arrangement can be effected only by Part 5.1 bodies – these are defined as
being a company (that is a company registered under the Corporations Act), or a
registerable body that is registered under Division 1 or 2 of Part 5B.2 – such bodies are
most forms of body corporate, including incorporated associations and foreign bodies
corporate. Australian entities that are not Part 5.1 bodies include statutory corporations
and, until recently for example, Westpac Banking Corporation.
The power of a scheme of arrangement comes as a result of the wide definition of the term
“arrangement”; that it can incorporate compromises as well as offers; that it is effected
merely by the stroke of the Court issuing its order (thereby reducing what would otherwise
be an impossible amount of paperwork with separate agreements being entered into
between the company and the relevant scheme participants); and that it is binding on
dissentients and non-voters, provided that the requisite majorities approved the scheme
and the Court exercises its discretion in favour of the scheme. Furthermore, in the context
of merger or minority buy-out schemes the Gambotto expropriation principles do not apply.
WHAT IS A SCHEME USED FOR?
Members schemes of arrangement are most regularly adopted for the following corporate
re-organisations – top hatting, merger, spin off, demerger and demutualisation.
A “top hatting” scheme involves the parent company of a group being replaced with a new
holding company. Such schemes have been adopted in order to create a holding company
that is separate from its trading subsidiaries where the former holding company had itself
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undertaken such trading activities or to transfer the place of incorporation of the holding
company in order to obtain more favourable listing, capital raising or taxation regulation.
As mentioned in the Santow quote above, a scheme of arrangement can only permit what
is not otherwise prohibited or prescribed by another provision of the Corporations Act
(Australian Securities Commission v Malborough Gold Mines Ltd (1993) 177 CLR 485).
Accordingly, a reduction of capital cannot be effected under a scheme of arrangement and
a separate company convened meeting must be held. This is because the reduction of
capital provisions state that the power of a company to reduce its capital is conferred by
Section 256B and that a company may not reduce its capital unless it does so in
accordance with that section.
Similarly, the only way a public company can give financial benefits to a related party on
other than commercial terms is by following the procedures layed out in Part 2E of the
Corporations Act – a scheme cannot be used to override those disclosure or approval
requirements (Re NRMA Ltd (2000) 33 ACSR 595).
Redeemable preference shares can be redeemed only on the terms on which they are on
issue (section 254J(1)) and, accordingly, cannot be redeemed under a scheme. Similarly,
a conversion of a class of preference shares into redeemable preference shares is not
permitted because a conversion of that kind can only take place if the steps appropriate to
a reduction of capital and a simultaneous increase of capital have been taken (Re St.
James’ Court Estate Ltd [1944] Ch 6).
Finally, the Corporations Act prescribes what sort of conversions of status a company can
undertake – for example a proprietary company limited by shares can convert into an
unlimited proprietary company, an unlimited company or a public company limited by
shares and a company limited by guarantee can convert into a company limited by shares.
However, for example, a company limited by shares cannot convert into a company limited
by guarantee. A scheme of arrangement cannot be used to effect a direct change of
company type (Australian Securities Commission v Malborough Gold Mines Ltd (1993) 177
CLR 485), although there is often another way around this problem, for example by
effecting a top hatting scheme and, rather than converting a scheme company, placing a
new parent company above it.
TAKEOVER Vs SCHEME
In the early days of considering a merger, we often have to advise on the relative merits of
the takeover vs a scheme.
There are certain transactions that are naturally suited to a scheme or takeover, such that
the relative merits do not arise. For example, a top hatting scheme, which is essentially an
internal re-organisation, is most appropriately effected by a scheme, while a cash bid for all
the shares of the company more naturally effected by a takeover. Furthermore, a hostile or
surprise bid can never be effected by a scheme of arrangement because the scheme
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memorandum sent to shareholders is sent by the target company, not the bidder and the
target cannot be compelled to do so while it can be compelled to issue a target statement.
In a friendly merger, it does become relevant to consider the relative merits.
It is inherent in the nature of the scheme that it provides more flexibility of how to structure
a bid – for example, it does allow for compromises to be effected as part of the scheme
and some of the more limiting rules under the takeovers code, for example, of no collateral
benefits or unacceptable circumstances normally will not apply.
This advantage of structuring flexibility may be weighed against a more flexible procedure
in a takeover, especially with respect to intervening events. For example, it is quite
common in a takeover for the bidding company to waive conditions initially set by it, if that
is the commercial dynamic of the takeover. It is easier to increase bid consideration in a
takeover and there is a prescribed regime for permitting this under the Act. While in a
scheme, once the information memorandum is dispatched to shareholders and the meeting
dates set the effect of intervening events may be harder to manage because the
shareholders must be given sufficient time to consider the information relevant to their
decision.
The approval threshold for a bidder seeking 100% of the target is easier to satisfy under a
scheme. The approval required, in addition to Court approval, is that a majority in number
of shareholders attending the meeting, representing 75% of the votes cast must approve
the scheme. In a scheme, silence is effectively the conscription of a yes vote. Whilst in
order to get to compulsory acquisition under a takeover the bidder must obtain
acceptances for 90% of the bid class. In a takeover, silence equates to a no vote.
Furthermore, a scheme is an all or nothing event and once the approvals are obtained the
bidder immediately gets to 100%, without having to go through the compulsory acquisition
process of the Corporations Act which can take a few months to process.
The control of the process is sometimes an issue of consideration for companies. A
takeover is more of the bidder’s process, as it instigates the events with a bidder’s
statement with the target statement issued in response. A scheme is the target’s process,
as it is effected through a meeting of the target’s shareholders to approve the scheme.
RECENT DEVELOPMENTS AND TRENDS
In the introduction we indicated we would talk about recent developments and trends. In
the following sections we will discuss the Court’s approach to certain issues that have
arisen in recent schemes and, in doing so, highlight an apparent shift in the view of the
court about its role and certain other matters.
The Court has a significant role in the approval of schemes and, as such, establishes both
legal principles to be followed and procedural matters that scheme companies must follow.
On the procedural side, Mr Justice Santow established a range of procedures which were
principally designed either to effect an efficient use of a scheme of arrangement, eg by
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enabling a scheme to be amended to deal with past Court order events, or to establish
harmonisation between the takeovers code and the scheme of arrangement provisions
where a merger was being undertaken. Recent decisions of Justice Barrett in New South
Wales and Justice Parker in Western Australia and others are reversing some of the
procedures that have been adopted by Santow J and also questioning the judicial basis
upon which Santow J sought to have harmonisation. This is not to say that the legal
principles enunciated by Mr Justice Santow are being reversed, more that as a result of
analysing the legal principles some of the procedural approaches ordered by the Court are
not being followed as a matter of course. By way of commentary, we seem to be heading
into a more black letter law period, which is likely to provide a diminished role for the Court
in setting down procedural rules and a reduced role for ASIC.
TELEPHONE HELP LINES
The Financial Services Reform Act 2001 amended the Corporations Act by requiring
telephone hotlines that are used in connection with takeovers to be taped. The purpose of
the reform was to ensure that misleading and deceptive or cohesive behaviour does not
occur when shareholders call the company for information when considering whether or not
to accept the bid.
In response to this legislative development, Justice Santow in the James Hardie scheme in
2001 made orders that the company record all calls made to the hotline, under a script
settled by the Court and that evidence of compliance be adduced at the second Court
hearing by having those tapes audited and affidavits lodged.
The background to the legislative change was, we understand, the GIO takeover by AMP
where concerns were raised about what was said in the hotlines. When Justice Santow
was later faced with the controversial scheme of arrangement in NRMA where a factional
board had differing views about the scheme, it was, from a risk perspective, quite
understandable that the Court would want to ensure that statements that shouldn’t be
made on those call lines were not be made.
The position has changed somewhat following Re Hills Motorway (2002) (Unreported)
where Justice Barrett decided that the scheme in issue was not controversial and that, as
the legislature had not made a similar change to the scheme process as it had with respect
to takeovers, he was not prepared to make similar orders.
Justice Barrett also made the point that all the information that a shareholder could require
should be set out in the information memorandum – that is the legal requirement – and,
accordingly, the Court and the shareholders should be focused on the contents of the
information memorandum rather than the script and the script should be entirely vanilla.
We should also note that Justice Barrett made his judgment on the basis that the person
that would be contacted by shareholders was to be the share registrar, who is not an
interested party in the scheme, and that the telephone communications were conducted in
accordance with a script approved by the company’s solicitors (but not the Court).
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Accordingly, the Court was not willing to make the orders, but was satisfied that on the
facts of the case, no such orders were necessary. Notwithstanding these commercial
considerations, the Court did point out that the reforms made to the takeovers law were not
made to the schemes of arrangement and that that was, to his Honour’s mind, a point of
significance.
CLASSES
One of the most difficult issues that arises in schemes is the consideration of class and
whether or not the people with the right to vote on a scheme should do so separately, at
separate class meetings, in order to get a clear and just vote.
Before we discuss a couple of recent decisions in connection with the treatment of
overseas shareholders under schemes which touches upon the issue of classes, we wish
to refer to Re CMPS&F Pty Limited (1997) 24 ACSR 728. This is a sleeping judgment of
Justice Santow which, although its particular facts will not arise in most scheme
circumstances, has established a principle which may have an impact beyond that
originally intended or envisaged.
CMPS&F had two classes of shareholders, the A class being ordinary shareholders and
the B class who had a right to receive dividends out of profits made on the company’s
principal investment in Statewide Roads Limited. The purpose of the scheme was to
establish a mechanism by which the capital profits from the then recent disposal of that
investment was to be paid to the B class shareholders, after which those shares would be
cancelled. It was clear to us, in acting in the scheme, that the B class shareholders had a
right to vote. As originally put to the court, we had not proposed for the A class
shareholders to participate in the scheme meetings. The A class shareholders had no right
to the profits derived from the sale of the investment, as it was clear from the articles that
all of the profits were to be paid to B class shareholders only. Furthermore, the rights
attaching to the shares of A class shareholders were not to be affected by the scheme.
The only shares being cancelled were those of the B class shareholders and the only
monies being dealt with were those attributable to them. The effect of the scheme included
the declaration of two dividends to be paid on the B class shareholders which effectively
prevented the A class shareholders receiving dividends until those dividends were paid.
The Court held that although the rights of the A class shareholders were not affected by the
scheme, their interests, that is, their financial interests, were sufficiently affected so as to
require their separate vote. We should note that the reduction of capital of the B class
shareholders was to be effected under a special resolution of the company in general
meeting, and accordingly, the A class shareholders were to be given the right to vote at
that meeting, but not as a separate class from the B class shareholders, and a separate
class vote operates as a veto right.
The case highlights a potential issue for consideration that when determining who has the
right to vote on a scheme, one should not focus only on the impact of the scheme on the
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legal rights of the parties, but also on their financial interests. This seemed to us at the
time to be an extension of the classes that must give their approval of a scheme.
Moving to a more recent development.
In schemes of arrangements effecting mergers, it is common practice that shareholders in
certain overseas jurisdictions do not receive shares issued by under the scheme, but
instead have their share entitlement cashed out and receive the cash proceeds. The
reason for the different treatment is that the company is not prepared to go to the time or
expense to confirm in every jurisdiction in which its shareholders may reside whether or not
an offer of shares can lawfully be made under the scheme. This common practice had not
raised any issue with the court for several years until Justice Santow in James Hardie
asked us to make submissions about whether those overseas shareholders, being treated
differently under the scheme, should meet as a separate class.
The established definition of class was established in 1892 in Sovereign Life Assurance Co
v Dodd [1892] 2 QB 573 where Bowen LJ held that the term class should be given such a
meaning
as will prevent the section being so worked as to result in confiscation and
injustice, and that it must be confined to those persons whose rights are not so
dissimilar as to make it impossible for them to consult together with a view to their
common interests.
In other words, if the rights of the members are so dissimilar that it would not be possible
for them to consult together in a single class meeting then separate class meeting should
be held. In James Hardie, the Court held that the overseas shareholders are not to be
treated as a separate class as such, however, it ordered the company to tag the votes
exercised by foreign holders, such that if one of them were to come to the Court at the
second hearing and complain and establish a sound argument for objecting to the scheme
and that person’s vote was reflected in a substantial number of the foreign shareholders,
then the Court would take both the vote and the argument into account when considering
whether or not to sanction a scheme.
Moving forward a year later and Justice Barrett in Re Hills Motorway Limited has confirmed
more directly the Court’s view that such overseas shareholders are not to be treated as a
different class:
The test is not one of identical treatment. It is one of community of interest. The
Court must ask itself whether the rights and entitlements of the different groups,
viewed in the totality of the scheme’s context, are so dissimilar as to make it
impossible for them to consult together with a view to their common interest. The
focus is not on the fact of differentiation but on its effects. The extent and nature of
the differentiation must be measured in terms of the effect on the ability to consult
together in a common interest or, in other words, the ability to come together in a
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single meeting and to debate the question of what is good or bad for the
constituency as a whole and where the common good lies.
In this regard, the courts are mindful to the reality that by creating a separate class they run
the risk of creating a veto right in each of the classes. The court is concerned to balance
fairness and differentiation on one side, with minorities overturning the clear will of the
majority on the other.
In Re Hills Motorway Limited, no orders to tag the overseas shareholder vote was made.
Nor was any such order made in Re Sonic Healthcare (2002) by Justice Conti in a case
heard around the same time.
LOCK UP DEVICES
In the negotiation of a merger, a bidder may request preferred treatment, in consideration
of going to the effort of any due diligence or merger discussions and in acknowledgment of
the opportunity costs faced by the proposed bidders in dedicating time and resources to
the task. These can take the form of exclusivity periods, no hawking arrangements and
break fees.
In the takeover context, the Takeovers Panel has established a policy to deal with such
matters and, for example, generally permits the payment of break fees of up to 1% of the
value of the company by the target if a third party bidder is successful in taking over the
company.
The debate has circled over the last several years about whether break fees are consistent
with directors duties and whether they involve an unlawful reduction of capital. There is no
settled judgment that break fees are permitted and critics of them argue that it is not in the
company’s interests for the directors to agree to spend the company’s money in
circumstances that may be regarded as hindering the chances of a competing bidder.
While there is no settled law on the issue, much of the heat of the debate has been taken
away by the Takeovers Panel issuing its guidelines.
Interestingly, the policy developed by the Panel in the takeover context is based on a
scheme of arrangement case Re Arthur Yates & Co Limited (2001) 36 ACSR 758 in a
judgment of Justice Santow.
In that case, exclusivity arrangements were under consideration, but the legal principles
may well be applicable to break fees, noting that there may be a significant difference
between agreeing to exclusivity and spending shareholders money in payment of break
fees. Either way, the Court held that such clauses must satisfy several concerns:
(a)
they should be for no more than a reasonable period capable of precise
ascertainment;
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(b)
while an exclusivity clause may differentiate between actively soliciting an alternate
merger proposal or simply dealing with an unsolicited one, in either case it is
important that such an exclusivity clause be framed so that it is subject to the
overriding obligation not to breach the directors’ fiduciary duties or be otherwise
unlawful; and
(c)
there should be adequate prominence given to that constraint in the explanatory
memorandum sent to shareholders.
The case of Darvall v North Sydney Tile & Brick Co Ltd (1989) 16 NSWLR 260 established
the principle that in most cases the directors of the company do not have a positive duty to
seek to maximise the share price of the company by hawking the company’s shares when
it is in merger discussions, although it is consistent with their duties to seek to maximise
the share price.
Accordingly, an exclusivity clause is not per se illegal. It is the limits of such clauses that
may cause concern.
Accordingly, at present one of the factors in determining whether or not to go through a
scheme or a takeover process may be that at least there is settled or at least well
developed position about such matters in the context of a takeover. The position of the
Court and schemes is a more unclear. In a highly negotiated or finally balanced lock up
device, the parties may prefer to comply with the guidelines of the Takeovers Panel and
proceed with a scheme, rather than risk the Court taking a view that is tougher than the
Takeovers Panel has to date.
Whatever form the merger takes, these issues are always difficult and, it goes without
saying, care must be taken in reaching a sensible and sustainable position.
LATE BREAKING EVENT
One of the principal risks associated with a scheme, is that the information to be
considered by the shareholders must be dispatched with sufficient notice, 28 days for a
public listed company. Accordingly, if significant events occur between the despatch of the
information memorandum and the shareholder or court meetings, the process or the
timetable can be seriously disrupted and create logistical headaches.
This issue arose in the James Hardie scheme. Essentially that scheme sought to take
advantage of a favourable Dutch/US tax treaty to reduce US and Dutch withholding taxes
that were to be paid by the Group when distributing profits out of the US to Australian
shareholders. At 4:00 pm on the eve before the shareholder vote, the Australian Treasurer
announced the Government’s proposal to amend the Australian US double tax treaty with
effect from July 2003. This forced us to consider whether the nature of the announcement
affected or could have affected the scheme disclosure or the decision of the shareholders.
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The company considered that the announcement did not affect the merits of the scheme
because the promised benefits of the scheme would still flow and the chair’s address at the
meeting discussed the matter specifically.
The meeting proceeded to consider the scheme and approved it by an overwhelming
majority.
The Treasurer’s announcement came to the attention of ASIC late in the afternoon after the
shareholder vote and ASIC queried whether the company should have approached the
Court for a delay in proceedings. We sought to allay ASIC’s concerns but did not succeed.
The matter then came before Mr Justice Santow (Re James Hardie Industries Limited
(2001) 39 ACSR 552) who, when provided with the issues of substance raised by ASIC,
the company’s response and also taking into account the potential detriments that a delay
of the scheme approval would cause, ordered that a release by the company to the ASX be
made, outlining in detail the effect of the possible treaty change and providing members
with the right to return to the Court in 3 days time to object to the scheme. Accordingly, the
Court adopted a halfway house approach between the request of ASIC who sought a
second shareholder vote and the arguments put by James Hardie that no such procedure
was needed.
In considering the issue, Justice Santow held that when dealing with the late breaking
events, there may be a need to call a separate meeting if a reasonable shareholder would
alter their decision if the change had been disclosed.
On the facts of the case and given the orders made, it is not clear what the view of the
Court was on the merits of the argument put by James Hardie and ASIC – the fact that no
second meeting was ordered does suggest that the Court was satisfied that on the facts of
the case the shareholders would not have voted any differently but, in the interests of
caution, he gave the shareholders the right to make such a suggestion or otherwise
request the Court to then convene a second meeting.
One could not imagine a finer example of a late breaking event threatening to derail both
the timetable and procedure of the scheme, and one which was almost impossible to
predict.
ACQUISITIONS BY SCHEMES
The role of ASIC in a merger scheme has been quite material. It must approve the
contents of the scheme booklet (or at least be given sufficient time to consider it) and
section 411(17) of the Corporations Act gave it the ability to prevent such a scheme
proceeding.
Section 411(17) provides that a court must not approve a scheme unless:
(a)
it is satisfied that the scheme is not proposed for the purpose of avoiding the
provisions of Chapter 6 of the Corporations Act (regulating takeovers); or
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(b)
ASIC informs the court that it has no objection to the scheme.
In reliance on this section ASIC developed a policy that instead of debating whether or not
paragraph (a) applied, it:
(a)
recognised that there might be legitimate commercial reasons for implementing an
acquisition by way of a scheme rather than under Chapter 6; and
(b)
would provide its certificate as long as it was satisfied that the scheme provided the
same protection to shareholders as a takeover under Chapter 6.
This policy of ASIC gave it a considerable degree of influence over scheme disclosures.
This role is likely to reduce as a result of Re Ranger Minerals (2002) 42 ACSR 582
(Parker J, Supreme Court of Western Australia). The main facts of that case were as
follows.
•
In April 2002 Revesco made a hostile takeover bid for Ranger.
•
In May 2002 Ranger agreed with Perilya to use a scheme of arrangement to effect
a friendly takeover by Perilya. One purpose was to thwart the hostile bid by
Revesco.
•
In June 2002 Revesco and Perilya discussed the possibility of Perilya buying out
Revesco’s current share holding in Ranger – an agreement along these lines was
formalised in July 2002 (ie effecting a commercial resolution of the hostile bid by
Revesco).
•
In August 2002 Ranger approached the court to approve a scheme whereby it
would become a wholly owned subsidiary of Perilya at price less than the price
paid by Perilya for the Ranger shares held by Revesco.
Such unequal treatment between shareholders would offend the takeover provisions of
Chapter 6 if they were to apply. ASIC opposed the scheme on the basis that it did not give
shareholders the same protection as offered by Chapter 6.
The argument of ASIC was not accepted by the court.
•
It was held that section 411(17) requires the court to consider the purpose of the
scheme - not its effect. The scheme was proposed before any deal between
Revesco and Perilya was first discussed. It therefore cannot have been the
purpose of the scheme to avoid the equal treatment provisions of Chapter 6.
•
As the court was satisfied as to the purpose of the scheme, it held that there was
no need for it to receive a letter from ASIC stating that ASIC had no objections to
the scheme (a “411(17)(b) notice”).
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•
Further, the court did not accept the general principle, put forward by ASIC, that an
acquisition effected by a scheme should not be approved unless shareholders
were given the same protection as they would for a takeover under Chapter 6. The
legislature clearly allowed for takeovers to be effected under Chapter 6 or by way
of a scheme. It was held that there is nothing in the Corporations Act, apart from
the purpose test referred to in section 411(17), which requires the court to grant the
same protection to shareholders for an acquisition pursuant to a scheme as they
would receive under a Chapter 6 takeover.
In reaching this decision, Parker J declined to follow the approach taken in earlier cases by
Santow J in the New South Wales Supreme Court where he sought to align both the
processes and the shareholder protections of scheme and Chapter 6 mergers.
More importantly for companies and practitioners, it also marks a potential decline in the
role of ASIC in connection with merger schemes of arrangement.
FAIRNESS
In the Central Pacific Minerals case earlier this year Justice Emmett expressly held that, in
approving a scheme, the court gives consideration as to whether the scheme is "fair”. It
had not always been clear that this was the position, as the court is also mindful that it is
not its job to comment on the commercial merits of the scheme – that being a shareholder
question.
The practical significance of this decision is that it helps ensure the possibility of obtaining
exemptions from certain requirements of United States legislation – in particular under The
Securities Act 1933. Section 3(a)(x) of that Act provides an exemption from compliance
with its provisions, where securities are issued and exchanged for other securities, if:
•
the terms of the issue and exchange have been approved by a court after a
hearing upon the fairness of such terms and conditions, at which every person to
whom securities are to be issued has a right to appear; and
•
the issuer advises the court that it will rely on the court’s approval as a basis for
obtaining an exemption.
Emmett J’s judgment confirmed that a scheme in Australia did indeed involve a hearing
upon the fairness of its terms and conditions. Note also the practical importance of the
second requirement – the court must be informed, before the court approves the scheme,
that its approval will be relied on to obtain an exemption under The Securities Act.
LONG-DATED SCHEMES
When a Court issues an order, the terms of the order will be shaped to ensure that the
matters ordered are going to take place. Accordingly, Courts hesitate from giving
conditional orders such that the Court order may never have effect. Furthermore, the Court
is reluctant to issue an order which requires it to supervise its implementation. For this
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reason, it has largely been considered that when the Court issues its order the scheme will
be effective and implemented in a relatively short time frame with all the events necessary
to occur being a virtual certainty. There is no specific judicial authority supporting this
belief and in a recent case some limits on this concern have been defined.
There may well be commercial reasons for a company or a member to want to defer the
implementation date of a scheme. For example, in the Central Pacific Minerals scheme the
scheme shares were purchased before the introduction of capital gains tax, and the
shareholders wanted to have the ability to defer their sale, thereby deferring a capital gains
tax event.
In that scheme, a structure was proposed whereby members could defer the exchange of
their shares in CPM for shares in the acquiring company (Southern Pacific Petroleum) for
up to 10 years. The right to defer participation was limited to 20% of shares, with a power
to scale back in so far as members holding more than 20% of the shares elected to defer.
The court, after considering the inclusion of this option to defer, approved the scheme. It
did so on the basis that that its order (and therefore the scheme itself) could take effect
immediately, but the members had the ability to defer its practical implementation.
AMENDING A SCHEME AFTER A COURT ORDER
There is no doubt that a court may amend the terms of a scheme after a members have
voted in favour and before the court approves it at the second court hearing. Section
411(6) provides that a court may approve a scheme “subject to such alterations or
conditions as it thinks just”.
It has been far less clear whether a scheme may be amended (by the court or by the
company itself) after the scheme has been approved by the court. A particularly graphic
illustration of this problem arose from the AGL scheme. The scheme, as approved by the
court, was subject to certain conditions precedent being satisfied by 30 June 1994.
Unfortunately, one such condition precedent (involving the granting of an authorisation)
was not satisfied until a few seconds after midnight on 30 June 1994.
For the next seven years the companies involved in the scheme carried on as if the
conditions precedent had been satisfied. Then a third party, carrying out a due diligence
for the purpose of a separate transaction, noticed the failure to comply with one of the
conditions precedent – prima facie invalidating the entire scheme. AGL therefore applied
to the court to make orders confirming the validity of the scheme.
Santow J considered various means by which he might retrospectively grant approval to
the scheme, notwithstanding the failure to comply with that condition precedent. Santow J
did in fact make orders which resulted in the scheme being effective, which was of course
the only commercially sensible solution. It was apparent, however, that there was an
element of fudging of the law to obtain this sensible result. Reading between the lines,
Santow J recognised that this fudging would not have been so easy if there had been a
litigant opposing the company’s proposal.
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As a result of the AGL scheme, a practice developed under Santow J’s guidance whereby
the scheme terms themselves contained a term that the company might subsequently vary
the scheme so long as:
(a)
the variation did not adversely affect the members (and this was confirmed by
senior counsel); and
(b)
the variation to the scheme was lodged with and approved by ASIC.
In a recent scheme (Re Homemaker Retail Management Ltd (2001) 187 ALR 520) Barrett
J considered a clause in a scheme document along these lines. He declined, however, to
follow Justice Santow’s earlier practice of allowing such clauses. He recognised that these
clauses might be effective to overcome merely technical problems such as those in the
AGL case, but he pointed out that the proposed clause should not be so broad as to go
beyond a mere “slip rule” and that the clause improperly sought to invest jurisdiction in
ASIC to approve the variation.
Barrett J supported his conclusion by pointing out that the language of the clause was so
broad that a company might use it to delay paying money in accordance with a scheme,
subject to allowing a generous interest rate until the payment was made. One could
certainly argue that this variation was not adverse to the members (on the contrary, the
generous interest rate might make it quite favourable), but it also gives the company a
much broader power to amend a scheme than merely excusing a breach of a condition
precedent by a few seconds.
Barrett J therefore only approved the Homemaker scheme after the deletion of this clause.
The reasoning of Barrett J in Homemaker appears to accept that a provision designed to
overcome problems such as those experienced with the AGL scheme is valid. However,
the clause will need to be very carefully drafted to ensure that it does not go beyond such
amendments.
December 2002
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