FEDERAL COURT OF AUSTRALIA
In the matter of Symbion Health Limited; Idameneo (No 123) Pty Ltd v Symbion Health Limited [2007] FCA 1832
NSD 2119 of 2007
SUMMARY
In this proceeding Primary Health Care Limited, through its wholly owned subsidiary Idameneo (No 123) Pty Ltd (Idameneo), seeks relief in respect of a meeting of the shareholders of the first defendant, Symbion Health Limited (Symbion Health), to be held next Friday 30 November 2007. The second to sixth defendants are the directors of Symbion Health (the Directors).
The proceeding was given an early hearing on Thursday 15 November 2007. Following the hearing, by consent a further document referred to below was admitted into evidence and the parties made submissions in relation to it, the last submission having been dated and received on Tuesday 20 November 2007. In the circumstances, the time constraints have not permitted proof-read Reasons for Judgment to be produced. However, for the assistance of the parties, I have decided to give the following summary of my reasons and to make orders today. The proof-read Reasons for Judgment will be delivered next Wednesday 28 November at 4.30 pm. They, and not the following summary, will constitute the reasons of the Court.
Idameneo holds an approximately 20 percent shareholding in Symbion Health. In February 2007, Healthscope Limited (Healthscope) and a private equity consortium advised by Ironbridge Capital Pty Limited (Ironbridge) and Archer Capital Pty Limited (Archer) (the IAC Consortium) approached Symbion Health with a view to:
· a merger of Symbion Health’s pathology, medical centres and diagnostic imaging businesses (Diagnostics Businesses) with the businesses of Healthscope; and
· the acquisition by Ironbridge and Archer of Symbion Health’s pharmacy distribution and consumer businesses (P&C Businesses).
It was proposed that pursuant to a scheme of arrangement under Pt 5.1 of the Corporations Act 2001 (Cth) (the Act), Healthscope would acquire all the shares in Symbion Health, the consideration being partly cash and partly Healthscope shares (the Original Scheme). Subsequently, the P&C Businesses were to be sold off to Ironbridge and Archer or their nominee.
On 29 May 2007, Symbion Health and Healthscope entered into a Scheme Implementation Deed (SID), but the majorities required by s 411 of the Act in favour of the Original Scheme were not obtained at the meeting of Symbion Health shareholders, which was held on 11 September 2007. It was reported that excluding the shares held by Idameneo, 99.2 percent of the shares voted at the meeting were voted in favour of the Original Scheme and those shares were held by 81.1 percent of the shareholders who voted. Including the shares owned by Idameneo, 73.9 percent of the shares voted were voted in favour of the Original Scheme. This percentage was, however, just below the 75 percent threshold required by s 411(4)(a)(ii)(B) of the Act.
The SID provided reciprocally for the payment of break fees by Symbion Health and Healthscope. The “Healthscope Break Fee” was $27.86 million and the “Symbion Break Fee” was either $27.86 million, or $20.97 million if a “C&P Break Fee” of $10.4 million provided for in the SID had been paid. When the Original Scheme failed to gain approval, the break fees provided for in the SID ceased to be payable.
An alternative structuring of the transaction had previously been considered and it is this alternative proposal that is the subject of the present proceeding. Symbion Health and Healthscope entered into a Transaction Implementation Deed dated 8 October 2007 (TID) to give effect to this alternative proposal. Under the TID, Symbion Health is to sell its Diagnostics Businesses to Healthscope (more precisely, since the Diagnostics Businesses are owned by Symbion Healthcare Holdings Pty Ltd (SH Holdings) a wholly owned subsidiary of Symbion Health, the sale is actually of the shares in SH Holdings) in exchange for shares in Healthscope (the Consideration Shares). The share capital of Symbion Health is reduced, and the reduction is implemented by Symbion Health’s distributing to its shareholders the Consideration Shares that Healthscope has issued to Symbion Health. The sale by Symbion Health to Healthscope, the issue by Healthscope of the Consideration Shares to Symbion Health, the reduction of Symbion Health’s capital, and the implementation of that reduction by Symbion Health’s distributing the Consideration Shares to its shareholders together constitute the “Diagnostics Transaction”.
Symbion Health would be left owning its C&P Businesses. The shares in Symbion Health would be acquired by a nominee of the IAC Consortium pursuant to a scheme of arrangement under Pt 5.1 of the Act.
The TID also provides for reciprocal break fees payable by Symbion Health and Healthscope in the circumstances set out in the TID. The Symbion Health Break Fee payable by Symbion Health to Healthscope is $19.575 million and the Healthscope Break Fee payable by Healthscope to Symbion Health is also $19.575 million.
In this proceeding, Idameneo contends that by committing Symbion Health to the Symbion Health Break Fee in the TID, the Directors breached their duty under s 181(1) of the Act to act bona fide in the best interests of Symbion Health, or in the alternative, for a proper purpose. The basis of Idameneo’s contention is that, as the TID makes clear, the amount of the Symbion Health Break Fee (and, for that matter, the amount of the Healthscope Break Fee) was arrived at as an amount of compensation, not only for costs incurred in connection with the Diagnostics Transaction, but also for costs incurred in connection with the failed Original Scheme. Idameneo submits that the latter constitute “sunk costs” and that the Directors could not, consistently with the performance of their duties, have committed Symbion Health to pay a break fee that included an amount of compensation of that kind.
The other basis of Idameneo’s claim is its contention that the proposed capital reduction is not an equal reduction of capital within s 256B of the Act, but is a “selective reduction” within that section, with the consequence that it is not able to be approved by an ordinary resolution passed at a general meeting, but must be approved by a resolution agreed to by all ordinary shareholders. Since Idameneo itself will vote against the resolution, if its contention is correct the capital reduction will not be approved.
This second contention by Idameneo turns on the treatment of “Ineligible Overseas Shareholders” as defined in the TID. In general terms, these are overseas shareholders the laws of whose country of residence will not permit the proposed distribution in specie of Healthscope shares to them. The TID contains a provision of a familiar kind to the effect that in the case of Ineligible Overseas Shareholders, the Healthscope shares which would otherwise be distributed by Symbion Health to them in specie are to be transferred by Symbion Health to a nominee appointed by Symbion Health, who will sell them and remit the proceeds of sale to Symbion Health, which, in turn, will distribute proceeds to the Ineligible Overseas Shareholders.
Two further issues arose in the proceeding. The first was Symbion Health’s contention that the proceeding was defective for Idameneo’s having failed to join Healthscope as a necessary party. The second further issue concerned something which arose late in the hearing. This was a discrepancy between the form of the Capital Reduction Resolution for which the TID provided, and the form of it as stated in the proposed notice of general meeting. The latter appeared as Annexure E (page 390) of the Explanatory Memorandum. The difference between the two forms of the Capital Reduction Resolution was that the form of it for which the TID provided made the passing of the Capital Reduction Resolution subject to and conditional upon completion of the Diagnostics Sale and Purchase Agreement (DSPA Completion), whereas the form of it in the notice of meeting made it subject to and conditional upon the completion of the Diagnostics Transaction (Completion). Since the Capital Reduction was part of the Diagnostics Transaction, the latter form of the resolution was circular and ineffective.
Following the hearing, Symbion Health wrote to its members asserting that an error had been identified on page 390 of the Explanatory Memorandum, and enclosed a substituted page 390. This document is the document that was admitted with the consent of the parties after the hearing and on which they made further submissions, to which I referred earlier.
In my opinion:
1. The proceeding is defective for Idameneo’s failure to join Healthscope as a party. Healthscope’s rights and interests are affected by the relief sought. It is no answer to say, as Idameneo submits, that Healthscope is aware of the proceeding and could itself apply to be joined as a party. The onus was upon Idameneo to join it.
2. The Capital Reduction Resolution provides for an equal reduction of capital. The capital reduction is something distinct from the procedure that is provided for catering for the special provision of shareholders resident in overseas countries whose laws do not permit an in specie distribution of shares in Healthscope to its residents. Even if the Overseas Shareholders Resolution were not to be distinct from the Capital Reduction Resolution, I would not regard the special provision for Ineligible Overseas Shareholders as characterising the reduction as a selective reduction of capital, rather than equal reduction of capital. Finally, since it is not known whether there will be any persons satisfying the definition of “Ineligible Overseas Shareholders” on the relevant date (that is, the Record Date, which is 7 December 2007), it would be premature to grant the relief sought at this time.
3. The onus of proving the alleged breach of directors’ duties rests on Idameneo. Directors, not the court, are charged with the responsibility of deciding where a company’s business interests lie. Idameneo has not discharged the onus resting upon it of establishing that the Directors breached their duty by causing Symbion Health to enter into the TID to the extent that it imposes the obligation on Symbion Health to pay the Symbion Health Break Fee. Symbion Health’s agreement to pay that fee was one of many rights and obligations for which the TID provided. So far as is known, the Diagnostics Transaction would not have proceeded, or would not have proceeded on terms as beneficial to Symbion Health, if Symbion Health had not agreed to pay the Symbion Health Break Fee. Moreover, the evidence shows that over a long period and with the benefit of external professional advice, the Directors discussed the questions of the Symbion Health Break Fee and the Healthscope Break Fee. Idameneo has not established that the Directors did not give due consideration to the question whether they should commit Symbion Health to the Symbion Health Break Fee provision in order to obtain the benefits that the TID offered.
4. I do not accept Idameneo’s submission that the form of Capital Reduction Resolution contained in the notice of meeting was correct after all and reflected provisions in the TID, whereas the form of the Capital Reduction Resolution for which the TID itself provided did not do so. The Diagnostics Transaction included various transactions and steps. One of those transactions was that provided for in the Diagnostics Sale and Purchase Agreement which came to an end on DSPA Completion. The Capital Reduction Resolution and its implementation by the distribution to the Participating Shareholders (or the nominee), while it formed part of the Diagnostics Transaction, was distinct from and subsequent to the DSPA Completion. The passing of the Capital Reduction Resolution was intended to be subject to and conditional upon DSPA Completion, not Completion which was defined in the TID to mean completion of the Diagnostics Transaction.
For the reasons that will be published, of which the above is a summary, Idameneo’s application is dismissed with costs.
(ACN 004 973 410) AND ORS
NSD 2119 OF 2007
LINDGREN J
23 NOVEMBER 2007
SYDNEY
