FEDERAL COURT OF AUSTRALIA
APN News & Media Limited, in the matter of APN News &
Media Limited [2007] FCA 770
Corporations Act 2001 (Cth) s 411(1)
In re Paramount Communications Inc Shareholders’ Litigation 637 A2d 34 (Del Supr 1993) referred to
Re Arthur Yates & Co Ltd (2001) 36 ACSR 758discussed
Re Ballarat Goldfields NL (2002) 41 ACSR 691 cited
Re Brambles Industries Ltd (2006) 59 ACSR 501 cited
Re KAZ Group Ltd [2004] FCA 738 cited
Re Mincom Ltd (2007) 25 ACLC 163 discussed
Re National Can Industries Ltd (No 1) (2003) 48 ACSR 409discussed
Re Normandy Mining Ltd (No 3) (2002) 20 ACLC 471cited
Re SFE Corporation Ltd [2006] FCA 670 discussed
Re Stork ICM Australia Pty Ltd (2006) 25 ACLC 208 cited
Re Tempo Services Ltd (2005) 53 ACSR 523 cited
Re WebCentral Group Ltd (No 2) (2006) 58 ACSR 742 distinguished
IN THE MATTER OF APN NEWS & MEDIA LIMITED (ABN 95 008 637 643)
NSD 303OF 2007
LINDGREN J
20 April 2007
SYDNEY
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IN THE FEDERAL COURT OF AUSTRALIA |
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NEW SOUTH WALES DISTRICT REGISTRY |
NSD 303 OF 2007 |
IN THE MATTER OF APN NEWS & MEDIA LIMITED (ABN 95 008 637 643)
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APN NEWS & MEDIA LIMITED (ABN 95 008 637 643) Plaintiff
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LINDGREN J |
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DATE OF ORDER: |
20 APRIL 2007 |
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WHERE MADE: |
SYDNEY |
THE COURT ORDERS THAT:
1. Pursuant to subsection 411(1) of the Corporations Act 2001 (Cth) (the Act):
(a) The Plaintiff, APN News & Media Limited ABN 95 008 637 643 (APN), convene a meeting (Scheme Meeting) of the holders of ordinary shares in APN other than Independent News & Media (Australia) Limited (APNShareholders) for the purpose of considering and, if thought fit, agreeing to a scheme of arrangement (with or without modification) proposed to be made between APN and the APN Shareholders (Scheme), the terms of which are contained in the Explanatory Statement which comprises the scheme booklet, which is Exhibit YL1 in this proceeding (Scheme Booklet);
(b) The Scheme Meeting be held on 25 May 2007 at the Intercontinental Hotel, Corner of Bridge & Philip Streets, Sydney, New South Wales at 11.00 am (Sydney time).
(c) Albert Edward Harris AC or, failing him, Kevin John Luscombe AM, or failing both, any other non-executive director of APN, act as Chairman of the Scheme Meeting;
(d) The Chairman have the power to adjourn the Scheme Meeting for such time that the Chairman considers appropriate;
(e) At the Scheme Meeting, a person will be entitled to one vote for each APN share they are registered as holding at 7 pm on 23 May 2007;
(f) The Explanatory Statement comprising the Scheme Booklet be approved;
(g) On or before Tuesday 24 April 2007, there be:
(1) in the case of each APN Shareholder who has a registered address in Australia, dispatched by prepaid post addressed to the relevant address set out in the APN register of members (Register) as at 20 April 2007; and
(2) in the case of each APN Shareholder who has a registered address outside of Australia, dispatched by prepaid airmail or air courier addressed to the relevant address as recorded in the Register as at 20 April 2007; or
(3) in either case, personally served:
(i) A document substantially in the form of the Scheme Booklet (which includes the Explanatory Statement);
(ii) A proxy form for the Scheme Meeting; and
(iii) An envelope addressed to Computershare Investor Services Pty Ltd, and
(h) The time by which the APN Shareholders must return their proxy forms for the Scheme Meeting be 11 am (Sydney time) on 23 May 2007.
2. Rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) shall not apply to the Scheme Meeting except insofar as that rule applies Regulation 5.6.13 of the Corporations Regulations 2001 (Cth).
3. Notice of the hearing of the application for an order approving the proposed Scheme to be published once in The Australian newspaper by advertisement substantially in the form of Annexure A to these Orders, such advertisement to be published on or before 26 May 2007.
4. The proceedings be stood over to 9am on 28 May 2007.
5. Liberty to apply.
6. These orders be entered forthwith.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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NEW SOUTH WALES DISTRICT REGISTRY |
NSD 303 OF 2007 |
IN THE MATTER OF APN NEWS & MEDIA LIMITED (ABN 95 008 637 643)
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APN NEWS & MEDIA LIMITED (ABN 95 008 637 643) Plaintiff
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JUDGE: |
LINDGREN J |
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DATE: |
22 May 2007 |
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PLACE: |
SYDNEY |
REASONS FOR JUDGMENT
(First Court Hearing)
Introduction
1 On 20 April 2007 I made an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (“the Act”) that the plaintiff (“APN”) convene a meeting (“Scheme Meeting”) of the holders of ordinary shares in APN (“APN Shareholders”) other than Independent News & Media (Australia) Limited (“Offeree Shareholders”) for the purpose of considering, and if thought fit agreeing to, a scheme of arrangement (with or without modification) proposed to be made between APN and them (“the Scheme”). The terms of the Scheme are contained in a document that is Annexure B to a “Scheme Booklet”. The Scheme Booklet, including its annexures, is put forward as the “explanatory statement” satisfying s 411(3) and s 412(1) of the Act.
2 The following are the reasons why I made the order for the convening of the Scheme Meeting.
Outline of the Scheme
3 APN is a media company with operations across Australia, New Zealand and Asia, comprising newspaper publishing, radio broadcasting, outdoor advertising, and online and printing services. APN has been listed on the Australian Stock Exchange Limited (“ASX”) since 1992 and on the New Zealand Stock Exchange (“NZSE”) since June 2004.
4 According to the Scheme, Independent News & Media (Australia) Limited (“INMAL”), a public unlisted company incorporated in Australia, which is a wholly owned subsidiary of Independent News & Media plc (“INM”), will acquire all of the ordinary shares in APN, except those shares it already owns (“the INMAL Shares”). The INMAL shares constitute 27.5 percent of the ordinary shares of APN. All of the shares in APN (“APN Shares”) are ordinary shares. I will use the expression “Scheme Shares” to refer to those APN Shares that are held by the Offeree Shareholders.
5 The consideration payable by INMAL (“the Scheme Consideration”) is $6.20 per Scheme Share, less the amount of any dividend to be paid by APN in respect of the year ended 31 December 2006 (“APN Dividend”). The maximum amount that INMAL will be required to pay for the acquisition under the Scheme is $2.4 billion.
6 INMAL intends to fund the Scheme Consideration using a combination of equity funding obtained from a consortium of investors (“the Consortium”) and debt funding obtained from a syndicate of banks. Particulars of the “Equity funding” and “Debt finance” are set out in section 6.7 of the Scheme Booklet, headed “Funding Arrangements”.
7 The Consortium has three members:
(i) INM, a leading international media and communications group with interests in newspaper and magazine publishing, commercial printing, outdoor advertising, broadcasting, and the internet operating in 21 countries. The shares of INM are listed on the Irish and London Stock Exchanges. INM holds, through two wholly owned subsidiaries (INMAL and News & Media NZ Limited (“NMNZ”)), approximately 40 percent of APN Shares. As noted earlier, the INMAL Shares constitute 27.5 percent of the APN Shares. The remaining 12.5 percent is therefore held by NMNZ. This 12.5 percent is included in the Scheme Shares but will not count for voting purposes at the Scheme Meeting.
(ii) P6 Normandy Lux 1 S.à.r.l. (“Providence”), a company incorporated in Luxembourg and formed by Providence Equity Partners for the purpose of investment in the Consortium. Providence Equity Partners is a private investment firm specialising in investments in communications and media companies around the world. It manages approximately US$21 billion in equity commitments. Providence Equity Partners holds no shares in APN.
(iii) CA Normandy Lux 1 S.à.r.l. (“Carlyle”), also a company incorporated in Luxembourg and formed by The Carlyle Group for the purpose of investing in the Consortium. The Carlyle Group is one of the largest private equity firms in the world. As at 31 January 2007, it had in excess of US$51.8 billion under management. The Carlyle Group also holds no shares in APN.
The Scheme is Conditional on the Sale of Shares in Independent News & Media Holdings Pty Limited to Consortium Purchasers
8 The Scheme is conditional on the APN Shareholders approving, by ordinary resolution at a general meeting to be held on the same day as the Scheme Meeting, the sale of all the shares in Independent News & Media Holdings Pty Limited (“INMH” and “INMH Shares”) to the “Consortium Purchasers” (“INMH Sale”). The Consortium Purchasers are wholly owned subsidiaries of the Consortium. They are five newly incorporated Australian proprietary companies, none of which has carried on business or incurred any liabilities other than in connection with incorporation and the matters contemplated in the Scheme Booklet.
9 The INMH Sale is conditional upon the Scheme becoming effective.
10 Like INMAL, INMH is an indirect wholly owned subsidiary of INM. The holder of the INMH Shares is Independent News & Media Belgium SA (“INMH Seller”), a company incorporated in Belgium, and itself an indirect wholly owned subsidiary of INM. INMH Seller will sell the INMH Shares to the Consortium Purchasers. The only business of INMH is to act as an investment company, and its only material asset is its shareholding (all the shares) in INMAL.
11 At present, none of the Consortium Purchasers holds any APN Shares or INMH Shares, but they and their associates have a relevant interest in 40 percent of the APN Shares. This is because one member of the Consortium, INM, has a relevant interest, through INMAL and NMNZ, in 40 percent of the APN Shares. If the Scheme and the INMH Sale are implemented, APN, INMAL and INMH will become indirect wholly owned subsidiaries of the Consortium.
12 The INMH Sale will result in the Consortium acquiring a relevant interest of greater than 20 percent in APN, in contravention of s 606 of the Act. As INMH holds all of the issued shares in INMAL, and INMAL currently holds 27.5 percent of the APN Shares, under s 608(3) of the Act INMH is deemed to have a relevant interest in that shareholding. If the INMH Shares are sold to the Consortium Purchasers, they and their associates will acquire a relevant interest in that 27.5 percent of the APN Shares.
13 Item 7 of s 611 of the Act, however, excepts from the s 606 prohibition an acquisition of a relevant interest that has been approved by a resolution previously passed at a general meeting of the company in which the acquisition is made. In order for that exemption to apply, no votes are to be cast in favour of the resolution by any of the proposed acquirers or sellers or associates of theirs.
14 The proposed approval by the APN Shareholders in general meeting of the INMH Sale will be relied on in order to attract the exemption contained in item 7 of s 611.
The Scheme is Conditional on Certain Parties not Voting at the Scheme Meeting
15 It is a condition of the Scheme that none of INMAL, NMNZ, any member of the Consortium, or any of their respective associates that holds a relevant interest in APN Shares will vote at the Scheme Meeting. Therefore, no votes will be cast at the Scheme Meeting in respect of the 40 percent holding mentioned at [7](i) above.
The Scheme Implementation Agreement
16 On 11 February 2007, APN and INMAL entered into a Scheme Implementation Agreement (“SIA”). A copy of the SIA is Annexure A to the Scheme Booklet. As noted at [1] above, the Scheme document itself is Annexure B to the Scheme Booklet. Taken together, the Scheme document and the SIA provide as follows:
(a) each of APN and INMAL must take the necessary steps to implement and perform the Scheme;
(b) INMAL undertakes and warrants to APN (in APN’s own right and separately as nominee for each Scheme Shareholder) to provide the Scheme Consideration, in return for the transfer to INMAL of the Scheme Shares;
(c) the Scheme Consideration is $6.20 less any APN Dividend declared (none has been declared);
(d) before 8.00 a.m. on the Scheme implementation date, INMAL must deposit an amount sufficient to pay the Scheme Consideration to each Offeree Shareholder (Scheme participant) into an account in APN’s name, to be held on trust by APN for distribution to the Scheme participants on the implementation date;
(e) INMAL must execute a deed poll under which it promises the Scheme participants to perform its obligations under the Scheme;
(f) the obligations of APN and of INMAL are subject to specified conditions precedent, including regulatory approvals;
(g) during a “no-shop” period, APN will not solicit, invite, or encourage competing offers and will, in certain specified circumstances, pay to INMAL a “break fee” of $27.5 million (discussed at [25] ff below);
(h) the Scheme Shares will be transferred to INMAL in consideration of payment of the Scheme Consideration;
(i) the Scheme participants are deemed to warrant to APN and INMAL that their Shares will, upon transfer, be fully paid and free from encumbrances, and that they have full power and capacity to sell and transfer their shares to INMAL (discussed at [57] ff below); and
(j) each Scheme participant irrevocably appoints and authorises APN and its directors and officers, jointly and severally, as agent and attorney of the Scheme participant to do any act necessary or desirable to give full effect to the Scheme.
INMAL’s Undertakings by Deed Poll in Favour of Scheme Participants
17 In accordance with a common practice, INMAL has executed a Deed Poll intended to benefit the Scheme participants. A copy of the Deed Poll is Annexure C to the Scheme Booklet. INMAL acknowledges that the Deed Poll may be relied on and enforced by Scheme participants in accordance with its terms, even though they are not party to it. By the Deed Poll INMAL undertakes to comply with its obligations under the SIA and to do all things necessary or expedient on its part to implement the Scheme, including to pay the Scheme Consideration to APN by 8.00am on the implementation date.
The Scheme is Recommended by the APN Independent Committee
18 When the Consortium, including INM, approached APN in October 2006 with a view to acquiring the Scheme Shares, the directors of APN formed a committee consisting of those directors not affiliated with INM (numbering six) to assess the proposal (“APN Independent Committee”). The APN Independent Committee unanimously recommends that the Offeree Shareholders agree to the Scheme in the absence of a superior proposal, and the members of that Committee intend to vote in favour of the Scheme in respect of APN shares held by them or on their behalf, in the absence of a superior proposal. The other seven directors of APN, being directors affiliated with INM, support the Scheme, but do not consider it appropriate to make any recommendation in relation to it in view of their relationship with INM.
19 According to the APN Independent Committee, no superior proposal has been advanced and none is likely to emerge.
An Independent Expert Report Concludes that the Scheme is in the Best Interests of the APN Shareholders
20 The APN Independent Committee appointed Deloitte Corporate Finance Pty Ltd (“Deloitte”) as an independent expert to assess the Scheme. Deloitte has prepared a report that is contained in section 8 of the Scheme Booklet (“Independent Expert’s Report”). Deloitte has concluded that the Scheme is in the best interests of Offeree Shareholders in the absence of a superior proposal.
21 Specifically, the Independent Export Report:
(a) assesses whether the proposed Scheme is in the best interests of the Offeree Shareholders by estimating the fair market value of an APN Share and comparing that value with the value of the Scheme Consideration. In accordance with policy guidelines of the Australian Securities and Investments Commission (“ASIC”), this valuation assumes that a 100 percent ownership interest of APN is available to be sold even though that is not the case here, given INM’s intention to retain its own significant interest in APN;
(b) estimates the value of APN Shares by using a “sum of the parts” valuation together with a capitalisation of maintainable earnings method to determine the fair market values of the operating divisions of APN, adding a premium for control of 20 percent;
(c) estimates the fair market value of APN on a control basis as lying between $6.18 and $6.53 per share;
(d) concludes that the Scheme Consideration of $6.20 per APN share is fair;
(e) assesses the reasonableness of the Scheme by considering its advantages and disadvantages, and concludes that it is reasonable;
(f) concludes that the proposed INMH Sale is also fair and reasonable.
The Scheme Consideration is at the lower end of the range of $6.18 to $6.53 per share but, as noted above, that range was arrived at on the basis that 100 percent of the APN Shares was available to be sold.
Particular Matters Brought to the Court’s Attention
22 APN has brought the following matters to the Court’s attention.
Performance Risk
23 A concern raised in previous scheme of arrangement applications in this Court is that shareholders may be left in a position, once a scheme has become effective, where their shares have been transferred but where there is a delay in the provision of the Scheme Consideration and where their only remedy is to sue on the deed poll (see Re KAZ Group Ltd [2004] FCA 738 at [4]-[5]; Re Tempo Services Ltd (2005) 53 ACSR 523 at [5]-[6]; Re SFE Corporation Ltd [2006] FCA 670 at [4]; and Re Brambles Industries Ltd (2006) 59 ACSR 501 at [9]). Such “performance risk” has been addressed here by requiring that the Scheme Consideration be paid to APN before 8.00 am on the implementation date to be held by it in trust for the purpose of being paid, free of deductions, to the Scheme participants before they are divested of their shares in APN later on the implementation date. This is provided for in the Deed Poll.
Disadvantages and Risks
24 Disadvantages and risks associated with the Scheme are disclosed and discussed in section 2.3 of the Scheme Booklet, and in the Independent Expert’s Report at section 7.1.3 (“Disadvantages of the Proposed Scheme”).
“No-Shop Restriction” and “Break Fee”
25 Clause 11 of the SIA provides for a “no-shop” or “Exclusivity Period” provision, and cl 12 for payment of a “Liquidated Amount”, otherwise known as a “break fee”, “inducement fee” or “termination fee”.
26 The Exclusivity Period is the period from the date of the SIA to the date when the Scheme becomes effective pursuant to the Court’s approval of it. By cl 11.1, APN undertakes to ensure that during that period, neither it nor any of its representatives will directly or indirectly solicit, invite, encourage, or communicate any intention to solicit, invite or encourage, with a view to obtaining any offer or proposal from any person in relation to a competing transaction. By cl 11.2, APN promises INMAL that during the Exclusivity Period, it will not, without INMAL’s prior written consent, solicit, invite or encourage any party to undertake due diligence investigations on APN or on any of its related bodies corporate, in connection with or for the purposes of a competing transaction. By cl 11.3, APN promises INMAL that during the Exclusivity Period it will advise INMAL promptly of any competing approach that APN receives. By cl 11.4, if APN receives a superior competing proposal during the Exclusivity Period, INMAL must be allowed a period of three business days in which to match it by a counterproposal.
27 Clause 11.5 and cl 11.6 qualify the no-shop obligations just described. Clause 11.5 provides, inter alia, that nothing in cl 11 prevents APN from undertaking, or requires APN to undertake, any act the doing of which would be inconsistent with the proper exercise of the fiduciary duties of the APN Independent Committee.
28 Clause 11.6 provides that if a court, arbitral tribunal or the Takeovers Panel determines that APN’s agreement under cl 11 or any part of it constitutes:
(a) a breach of the fiduciary duty or statutory duties of any member of the APN Independent Committee to APN, or;
(b) “unacceptable circumstances” within the meaning of the Act, or
(c) unlawful conduct for any other reason,
then to that extent APN is not obliged to comply with that provision of cl 11. However, APN promises INMAL, that “to the extent reasonably possible”, it will submit in any relevant proceedings that no such determination should be made, or that if one is to be made, it should apply only to the extent that the obligation constitutes any of the three matters mentioned.
29 In Re Arthur Yates & Co Ltd (2001) 36 ACSR 758, Santow J gave attention to no-shop provisions. His Honour expressed the opinion (at [9]) that such a provision should satisfy the following concerns:
(a) it should be for no more than a reasonable period capable of precise ascertainment;
(b) while it may differentiate between actively soliciting an alternative merger proposal and simply dealing with an unsolicited one, in either case the provision should 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 the provision in the explanatory memorandum sent to shareholders.
30 Are these three requirements satisfied in the present case?
31 (a) As noted, the Exclusivity Period in this case runs from the date of the SIA to the date when the Scheme becomes effective pursuant to the Court’s approval of it. The date of the SIA is 11 February 2007. If we assume that all conditions precedent will be satisfied, apparently the last to be satisfied will be the Court’s approving the Scheme under s 411(4)(b) of the Act, which, ex hypothesi, would be likely to take place at the second court hearing, presently fixed for 28 May 2007. I do not regard the period of some three and a half months as unreasonably long.
32 (b) I do not find cl 11.6 comforting. It operates only if and when the matter comes before a court, arbitral tribunal or the Takeovers Panel – something that may never happen.
33 Clause 11.5(b) provides:
Nothing in clauses 11.3 or 11.4 prevents APN from undertaking, or requires APN to undertake, any act, if doing so would be inconsistent with the proper exercise of the fiduciary duties of the APN Independent Committee.
(My emphasis.)
This provision may suggest that cl 11.3 and cl 11.4 may properly require APN to act in a manner inconsistent with the proper exercise of the fiduciary duties of its other seven directors. No doubt the provision was framed as it is to recognise the fact that those other directors may be seen to owe duties to INMAL, an indirect wholly owned subsidiary of INM, a member of the Consortium. However, those directors also have fiduciary duties as directors of APN.
34 I do not think, however, that what I regard as a deficiency in the form of expression of cl 11.5(b) should stand in the way of the convening of the Scheme Meeting or of the approval of the Scheme.
35 (c) Is adequate prominence given the no-shop provision in the Scheme Booklet? I think so. First, a copy of the SIA is Annexure A to the Scheme Booklet. In addition, within the text of the Scheme Booklet, at section 10.3 (“Key Terms of the Scheme Implementation Agreement”), the no-shop provision is referred to under the heading “No-Shop and No Due Diligence” and “Right to Respond to Competing Transactions”.
36 I turn now to the question of the break fee.
37 Clause 12 makes a “liquidated amount” of $27.5 million payable by APN to INMAL if the Scheme does not proceed for various specified reasons, for example, because of the emergence of a competing transaction. This break fee provision is disclosed in the “Scheme Highlights” section of the Scheme Booklet, in section 10.3 of the Scheme Booklet under the heading “Payment of Liquidated Amount”, and, of course, in the SIA itself.
38 The expression “liquidated amount” may suggest the idea of “liquidated damages” but the amount does not represent a pre-agreed amount of the damages that would be payable by APN for a breach by it of the SIA. The genesis and nature of the provision is explained in cl 12.1 of the SIA:
12.1 Rationale
APN acknowledges and agrees, for the purposes of this clause 12, as follows.
(a) INMAL has required the inclusion of this clause 12, in the absence of which it would not have entered into this Agreement or otherwise agreed to implement the Scheme.
(b) APN and the APN Independent Committee believe that the Scheme may provide significant benefits to APN and the Scheme Participants and that it agrees to the inclusion of this clause 12 in order to secure INMAL’s execution of this Agreement and its agreement to implement the Scheme.
39 I need not set out all the circumstances in which the break fee is payable. They are described in cl 12.2 of the SIA. In the “Scheme Highlights” section of the Scheme Booklet, the break fee provision is summarised as follows:
APN has agreed to pay INMAL a liquidated amount of $27.5 million if (amongst other things) a Competing Transaction is announced before the End Date and the person proposing the transaction:
• acquires a relevant interest in at least 50% of the APN Shares and the Competing Transaction becomes unconditional; or
• acquires an interest in all or a substantial part of APN’s business or assets.
The words “amongst other things” refer to five other sets of circumstances that are set out in paras (b)–(f) of cl 12.2. Perhaps the most important of these is that the APN Independent Committee fails unanimously to continue to support and recommend the Scheme, other than as a result of the Independent Expert giving an opinion that the Scheme is not in the best interests of Scheme participants. The break fee is not, however, payable if the Offeree Shareholders simply do not agree to the Scheme.
40 Clause 12.3 and cl 12.4 of the SIA provide:
12.3 Compliance with law
If a court, arbitral tribunal or the Takeovers Panel determines that the agreement by APN to make the Payment, or the making of any Payment, to INMAL pursuant to clause 12.2:
(a) constituted, or constitutes, or would constitute, a breach of the fiduciary or statutory duties of any member of the APN Independent Committee to APN; or
(b) constituted, or constitutes, or would constitute, unacceptable circumstances within the meaning of the Corporations Act; or
(c) was, or is, or would be, unlawful for any other reason,
then, to that extent (and only to that extent) APN will not be obliged to make that payment and INMAL must refund to APN that payment if already made. To the extent reasonably possible, APN must submit in any relevant proceedings that no such determination should be made or that if any such determination is to be made, it should apply only to the extent that the Payment is made or to be made in excess of the amount of the actual costs incurred, directly or indirectly, by INMAL, the Consortium and their Related Bodies Corporate as a result of the Scheme not being implemented in accordance with this Agreement.
12.4 Acknowledgement
INMAL acknowledges and agrees on its own behalf and on behalf of the Consortium, to the extent permitted by law, its sole remedy against APN for any breach of this Agreement (including any breach of a warranty or representation), will be to terminate this Agreement under clause 14 and seek and enforce the payment of the Payment.
41 There are similarities between cl 12.3 and cl 11.6 noted at [28] ff above. For the reasons I gave at [32] in relation to cl 11.6, cl 12.3 does not assist me for present purposes. It is enlivened only if and when a court, arbitral tribunal or the Takeovers Panel makes a determination, but none of those things may ever happen.
42 Clause 12.4 may benefit APN: whether it does so depends on whether a breach of the SIA by APN would render APN liable to INMAL in an amount of damages exceeding $27.5 million. I have no means of knowing the answer to this question.
43 Provisions for the payment of break fees are not uncommon in agreements for schemes of arrangements and in merger and takeover agreements, both in Australia and overseas. Such provisions have not been an obstacle to the making of orders under s 411(1) of the Act for the convening of meetings. In Re SFE Corporation Ltd [2006] FCA 670 at [6]-[7], Gyles J said that he would be dissuaded from making an order by a break fee only if the amount was of such magnitude that it could influence voting or if there were some other unusual circumstances.
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 Acquiror (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 Acquirors.
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).
Convertible Notes and Options
56 The Scheme Booklet discloses, at sections 11.8 and 11.9, the existence of convertible notes in APN and of options under an “APN Option Plan”. Although the proposed Scheme is between APN and Offeree Shareholders (not option holders), INMAL is making an offer to all option holders to acquire their options at a price per option of $6.20 less the option exercise price. The acquisition by INMAL of the options is, naturally, conditional on the Scheme becoming effective.
Deemed Warranty
57 As noted at [16](i) above, the Scheme provides for a deemed warranty by the APN Scheme participants of freedom from encumbrances. The deemed warranty is found in cl 3.4 of the Scheme document which provides:
3.4 Warranties by Scheme Participants
Each Scheme Participant is deemed to have warranted to APN and appointed and authorised APN as its attorney and agent to warrant to INMAL, that all its APN Scheme Shares (including any rights and entitlements attaching to those shares) which are transferred to INMAL under the Scheme will, at the date of the transfer of the APN Scheme Shares to INMAL, be fully paid and free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise, and any restrictions on their transfer and that it has the full power and capacity to sell and transfer its APN Scheme Shares (including any rights and entitlements) to INMAL under the Scheme.
58 Clause 3.4 is not a “no encumbrances” provision of the kind considered in Re WebCentral Group Ltd (No 2) (2006) 58 ACSR 742 at [14]-[22] because it cannot give the impression to encumbrancees that their security over the shares is being adversely affected by the transfer. Indeed, it assumes that the shares may be transferred subject to encumbrances, to the detriment of INMAL.
59 In substance, the purpose of the deemed warranty is to prevent a shareholder whose shares are subject to encumbrances from receiving the same Scheme Consideration as that to be received by those whose shares are free from encumbrances, without any obligation, in effect, to refund to INMAL the amount required to discharge the encumbrance. It is not practicable for amounts secured by encumbrance to be deducted from the Scheme Consideration payable to the relevant Scheme participants on the implementation date.
60 The warranty will be deemed to have been given, not only by those Offeree Shareholders who vote to agree to the Scheme, and who, therefore, can be seen to be consenting to give it, but also those who do not vote at all or who vote against the Scheme. However, I do not think that this matters. What is important, in my view, is that the deemed warranty is no more than a device directed to ensuring that a Scheme participant whose shares are subject to an encumbrance is not unfairly advantaged. The amount of the damages payable for breach of the warranty is the amount required to discharge the encumbrance.
61 Nor do I think it matters that the time for the clearing of the title by payment by the shareholder to the encumbrancee may not have yet arrived under the terms of the encumbrance and therefore may be being accelerated by the deemed warranty. Any disadvantage a shareholder who has borrowed on advantageous terms on the security of the shares, may suffer by being required to discharge the encumbrance early, is, in principle, no different from the disadvantage suffered by any shareholder who becomes bound by a scheme to which that shareholder did not agree.
62 In Re Mincom Ltd (2007) 25 ACLC 163, Fryberg J described (at [39]) a deemed warranty clause almost identical to the present one as:
onerous, unreasonable and calculated to catapult unsuspecting shareholders who have not read the small print of the arrangement in the schedule to the explanatory statement into a state of breach of warranty.
As will be clear from what I have said above, I respectfully disagree. At first blush the deemed warranty may appear to attract criticism along these lines, but I think the criticism disappears once it is appreciated that its purpose and effect are as I have described them. Perhaps a better way of framing the provision would have been to avoid the language of warranty, and, instead, to provide simply that if shares continue to be subject to encumbrances after transfer, the shareholder would, upon demand by INMAL, pay the amount required to discharge the encumbrance to the encumbrancee if the encumbrance remains outstanding, or to INMAL if INMAL had already discharged it.
63 On the hearing I indicated that I would require the attention of Scheme participants to be drawn to the existence of the deemed warranty in the Scheme by a specific mention of it in section 2.4 (“Assessment of the Scheme” – “Other Relevant Considerations”) of the Scheme Booklet. Accordingly, a new cl 2.4(c) will state:
Deemed warranty
Shareholders’ attention is drawn to the warranties that Scheme Participants will be deemed to have given, if the Scheme takes effect, in clause 3.4 of the Scheme (see page 283).
Creditors
64 Senior counsel for the plaintiff raised the question whether I should take into account at the first hearing stage the position of creditors of APN. In the absence of unusual circumstances (none are obvious here), I do not think I should. Senior counsel acknowledged that it would remain open to the Court to consider the position of creditors as relevant to the Court’s discretion to approve the Scheme at the second court hearing, as happened in Re Stork ICM Australia Pty Ltd (2006) 25 ACLC 208.
General Matters
65 The Australian Securities and Investments Commission has provided the “usual letter” that it provides in relation to schemes of arrangement of the present kind, to the effect that it has had the opportunity to review the Scheme Booklet and does not propose to appear at the first court hearing. As is its practice in such cases, ASIC does not issue a “no objection” statement under s 411(17) of the Act until the second court hearing.
66 Helpfully, APN’s legal advisers have provided a “checklist” that identifies the requirements of the Act and the Corporations Regulations 2001 (Cth) (“the Regulations”) with respect to information required to be included in the explanatory statement. The checklist refers to those parts of the Scheme Booklet that constitute the information required by s 411(3) and s 412(1)(a) of the Act, and by the Regulations, Sch 8, Pt 3 (“Prescribed information relating to proposed compromise or arrangement with members or a class of members”).
Conclusion
67 On the evidence to which I was taken, the Court is likely to approve the Scheme. The Offeree Shareholders should have the opportunity of considering the Scheme, and APN should be ordered to convene a meeting of them to that end.
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I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren. |
Associate:
Dated: 22 May 2007
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Counsel for the Plaintiff: |
Mr J T Gleeson SC and Mr R A Dick |
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Solicitors for the Plaintiff: |
Blake Dawson Waldron |
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Counsel for Independent News & Media (Australia) Limited, Independent News & Media plc, P6 Normandy Lux 1 S.à.r.l., and CA Normandy Lux 1 S.à.r.l. |
Mr M B Oakes SC |
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Solicitors for Independent News & Media (Australia) Limited, Independent News & Media plc, P6 Normandy Lux 1 S.à.r.l., and CA Normandy Lux 1 S.à.r.l: |
Allens Arthur Robinson |
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Date of Hearing: |
20 April 2007 |
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Date of Judgment: |
20 April 2007 |
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Date of Publication of Reasons: |
22 May 2007
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