FEDERAL COURT OF AUSTRALIA

IOR Group Limited [2009] FCA 1588

CORPORATIONS – Corporations Act 2001 (Cth) – s 411 – scheme of arrangement – application for order that company convene meeting of members to consider proposed scheme of arrangement

Companies Act 1961 (NSW) s 181

Corporations Act 2001 (Cth) s 411

Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485

F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69

Fraser v NRMA Holdings Ltd (1995) 55 FCR 452

Re Investa Properties Ltd (2007) 25 ACLC 1186

Re Permanent Trustee Company Limited (2002) 43 ASCR 601

WebCentral Group Limited (No 2) (2006) 58 ACSR 742

IOR GROUP LIMITED

NSD 1250 of 2009

STONE J

23 DECEMBER 2009

SYDNEY

THE COURT ORDERS THAT:

1.                  Pursuant to subsection 411(1) of the Corporations Act 2001 (Cth) ( the Act):

(a)        the Plaintiff convene a meeting (Scheme Meeting) of the holders of ordinary shares in the Plaintiff (Shareholders) for the purpose of considering and, if thought fit, agreeing to a scheme of arrangement (with or without modification) between the Plaintiff and its Shareholders (Scheme of Arrangement) the terms of which are set out in Annexure A of the document which is Exhibit 1 in these proceedings (Scheme Booklet);

(b)        the Scheme Meeting be held on 7 January 2010 at Crowne Plaza Norwest, 1 Columbia Court, Baulkham Hills, New South Wales at 10.00 am;

(c)        Margaret Mary Campbell or, failing her, Christopher Leslie Henderson, act as Chairman of the Scheme Meeting;

(d)        the Chairman have the power to adjourn the Scheme Meeting for such time as the Chairman considers appropriate;

(e)        at the Scheme Meeting, a Shareholder will be entitled to one vote for each ordinary share in the Plaintiff they are registered as holding at 7.00 pm on 5 January 2010;

(f)         the Scheme Booklet be, and hereby is, approved for distribution to shareholders.

2.                  Other than Regulation 5.6.13 of the Corporations Regulations 2001, rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) shall not apply to the Scheme Meeting.

3.                  Notice of the hearing of an application pursuant to s 411(4) of the Act for an order approving the Scheme of Arrangement be published once in “The Australian” newspaper by an advertisement substantially in the form of Annexure A to these orders, such advertisement to be published on or before 8 January 2010, and the Plaintiff be otherwise exempted from compliance with rule 3.4 of the Federal Court (Corporations) Rules 2000 (Cth).

4.                  The proceeding be stood over to 10.15 am on 14 January 2010.

5.                  The Plaintiff be granted liberty to apply.

6.                  The orders be entered forthwith.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                     By application made under s 411(1) of the Corporations Act 2001 (Cth) the plaintiff seeks orders to convene a meeting of its shareholders for the purpose of considering a scheme of arrangement (the Scheme).  The Scheme is for the acquisition by Aevum Limited (ACN 087 648 691) of all of shareholders’ shares in the plaintiff.  If the Scheme is approved by the shareholders the Court may approve the Scheme at a second hearing; s 411(4)(b).  The Court’s order takes effect from the date specified in the order but only once a copy of the order is lodged with the Australian Securities and Investments Commission (ASIC); s 411(10).  

2                     At the conclusion of the first hearing on 1 December 2009, I made the orders sought by the plaintiff and undertook to provide reasons at a later date.  These are my reasons.

The Scheme

3                     Documentary evidence established that IOR has corporate existence as a Part 5.1 body and has over 54 million shares held on issue.  If approved, the Scheme will effect a merger in that the IOR shareholders will transfer their shares to Aevum and in return will receive eight Aevum shares for every nine IOR shares.  The Scheme is unanimously recommended by the directors of IOR in the absence of a superior offer. 

4                     The Scheme has been assessed by an independent expert, Deloitte Corporate Finance Pty Limited (Deloitte), which has concluded that the Scheme is fair and reasonable and therefore in the best interests of shareholders.  The equity value of IOR is estimated to be between $66,915,000 and $88,915,000 which yields a share value of $1.23 to $1.64 per share.  The Deloitte report establishes that a fair market value of the Aevum shares (that is the consideration offered for the merger) is between $1.24 and $1.42 per share.

5                     The plaintiff’s submissions summarised the factors on which the Deloitte recommendation was based.  Having reviewed the relevant material I accept the plaintiff’s summary as an accurate list of those factors.  Omitting the reference to pages in the Deloitte report, it as follows:

(a)               The methodology chosen for value of an IOR share is a sum-of-the parts basis with deduction of present value of corporate costs.

(b)               The fair market value of IOR’s retirement village business and development portfolio is estimated using the discounted case flow method.

(c)               The value per IOR share is $1.23 to $1.64.

(d)               The consideration offered per IOR share is $1.24 to $1.42.

(e)               This lies within the range of Deloitte’s estimate of fair market value.

(f)                Accordingly, the Scheme is fair and reasonable and in the best interests of IOR shareholders.

6                     The Scheme Booklet, exhibited to an affidavit made on 30 November 2009 by Margaret Mary Campbell, who is the chairman of IOR, contained the following:

(a)               the statutory explanatory statement;

(b)               the text of the scheme of arrangement;

(c)               the deed poll by which Aevum covenants in favour of each Scheme Participant to carry out its obligations under the Scheme;

(d)               the Deloitte report;

(e)               the Investigating Accountant’s report; and

(f)                 the notice of meeting.

7                     Evidence about the process for verification of the Scheme Booklet was given by Carl Della-Bosca, a partner of Blake Dawson, the solicitors for IOR.  Mr Della-Bosca described the composition of the due diligence committee set up by Blake Dawson and the responsibilities of each person to verify allocated sections of the material.  Each member of the committee provided a signed verification certificate in respect of the material for which each was responsible.  The due diligence committee provided a report to the board of IOR confirming the process and, based on that process, their belief in the accuracy and comprehensiveness of the Scheme Booklet with the exception of the sections of the Scheme Booklet for which Aevum was responsible, the Investigating Accountant’s report and the Deloitte report.  Those three sections of the Scheme Booklet were independently verified, in the case of the Aevum material in an affidavit sworn by Peter Homan on 30 November 2009.  The Investigating Accountant’s Report and the Deloitte Report were each confirmed by separate affidavits. 

8                     IOR is not a listed company.  As a condition precedent to the Scheme, however, a “window” of listing on the Australian Stock Exchange (ASX) will be created.  This will be achieved by listing IOR on 30 December 2009 and is intended to allow shareholders to sell their shares before the time for acquisition by Aevum.  The IOR Board has reserved its right to decide not to proceed with the listing before the proposed meeting.  The explanatory statement explains the consequence of such a decision as follows:

The listing of IOR on the ASX is a condition precedent to the Scheme and if it does not occur, the Scheme will not proceed unless the condition is waived.  If the IOR Board decides not to proceed with the listing of IOR prior to the current scheduled date for the Scheme Meeting then the IOR Board will consult with Aevum in relation to what implications this will have for the Scheme, including whether the Scheme Meeting should be adjourned to a later date.

Relevant Considerations

9                     There are three stages in the promulgation of a scheme of arrangement under Part 5.1 of the Corporations Act: the application to the Court to convene a meeting under s 411; the meeting itself where the scheme is presented for approval; and the application to the Court for approval of the scheme.    In considering a proposed scheme the Court will look to both the explanatory material and to the substantive legal mechanisms of the scheme itself.  The way in which the scheme operates must be presented fairly at the meeting.  This does not require that every possible argument for and against the proposal be canvassed in the material.  In Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 468, the Full Court observed that the need to give a full and fair account of the scheme “must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed”.  Ultimately it is necessary, as Street CJ commented in F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, that the Court also be satisfied that:

[t]he scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the…meeting the court would be likely to approve it on the hearing of a petition [the second Court hearing] which is unopposed.

10                  Although Street CJ was concerned with whether a meeting of creditors to consider a moratorium scheme of arrangement should be convened pursuant to s 181 of the Companies Act 1961 (NSW), the approach of the Chief Justice is applicable here; see Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504.  This necessarily involves looking forward to the second hearing date and considering the legal and commercial operation of the provisions of the scheme.

11                  A consequence of the fact that applications under s 411 are ex parte is that the Court is more than usually reliant on counsel for the plaintiff to bring to the attention of the Court each and every factor that may be relevant to the Court’s exercise of its discretion;
Re Permanent Trustee Company Limited (2002) 43 ASCR 601 at [7].  In the case of the present Scheme the plaintiff has drawn my attention to a number of factors that are considered below.  It submits, however, that no aspect of the Scheme, including these factors, should be of any concern to the Court.

Deemed warranty

12                  Clause 8.3(a) of the Scheme provides that each Scheme Participant is deemed to have warranted “to IOR in its own right and on behalf of Aevum” that on transfer to Aevum under the Scheme, all its shares in IOR will be free of encumbrances and other interests of third parties.  It is in the nature of a scheme that this warranty binds all shareholders in IOR including any who do not consent to the Scheme.  Clause 8.3(b) further provides:

To the extent permitted by law, all IOR Shares (including any rights and entitlements attaching to those shares) which are transferred Aevum under this Scheme will, at the date of the transfer of them to Aevum, vest in Aevum free from all mortagages, charges, liens encumbrances and interests of third parties of any kind, whether legal or otherwise, and free from any restrictions on transfer of any kind not referred to in this Scheme.

[Emphasis added]

13                  A similarly worded clause was considered by Lindgren J in Re Investa Properties Ltd (2007) 25 ACLC 1186.  His Honour referred at [22] of his reasons to a “vesting free of encumbrances” term that he had considered in WebCentral Group Limited (No 2) (2006) 58 ACSR 742 and to his concerns that third parties having interests in the shares might be given the impression that their interests were being adversely affected.  The relevant clause in WebCentral did not contain the qualification emphasised in the above quotation of cl 8.3(b).  This qualification did appear in the “vesting free of encumbrances” term his Honour considered in Investa.  In approving the clause containing the qualification his Honour made the following comments at [28] and [30] of his reasons:

Apparently the purpose of a vesting free of encumbrances term is only to make clear, as is the position under general law principles, that the acquiring company takes the shares free of equitable interests of which it was unaware.

…

I regarded the opening words “To the extent permitted by law” as giving adequate notice that a third party would not suffer the extinguishment of an interest in shares if [the transferee]had had notice of that interest.  I therefore took the view that those words overcame the difficulty referred to in WebCentral 58 ACSR 742, which was that the presence of a vesting free of encumbrances term might give the impression to third parties that their interests had been extinguished by the presence of the term where they would not have been in its absence.

14                  With respect, I agree with Lindgren J and do not regard clause 8.3(b) as misleading or giving rise to any reason to require an alteration to the Scheme.

No liability when acting in good faith

15                  Clause 8.8 of the Scheme provides that neither IOR nor Aevum will be liable under the Scheme for anything done or not done provided that they have acted in good faith.  This clause had appeared in a number of schemes to which Mr Oakes, senior counsel for the plaintiff, drew my attention.  I do not have any concerns about this clause.

Performance risk

16                  Clauses 4.2 and 5.1 of the Scheme together provide that the consideration that shareholders in IOR are to receive for the transfer of their shares to Aevum, that is the issue of Aevum shares, will be received by them before the transfer of the IOR shares takes place.  This is supported by the deed poll referred to in (c) of [6] above.  In my view, together these arrangements give adequate protection to IOR shareholders from any risk of non-performance by Aevum.

Conflicts of interest

17                  The plaintiffs disclosed that: (a) the solicitors now acting for Aevum previously acted for IOR on its demutualisation in 2007; and (b) that the tax adviser to IOR, Tony Cherian Jacob, is also the tax adviser to Aevum.  These matters were addressed respectively, in the affidavits of Mark Lindsay Standen made on 26 November 2009 and Mr Jacob made on 30 November 2009.  Mr Standen testified that apart from acting on the demutualisation of IOR, in the period from 2007 to June 2009 he had acted only for a subsidiary of IOR in the acquisition of a retirement village in Queensland.  In the present matter his only contact with the directors or management of IOR had been in his capacity as legal adviser to Aevum.  I am satisfied that this limited contact does not give rise to any conflict.

18                  Mr Jacob’s evidence was to the effect that he is the appointed tax agent for Aevum (but not IOR) and, since 2001, has provided advice to IOR from time to time in relation to discreet projects.  He has also been instructed by both Aevum and IOR to provide them with specialised tax advice in relation to the Scheme.  This dual role has been fully disclosed to each of Aevum and IOR and each has consented to the arrangement.  It is also disclosed in the Scheme Booklet at 11.17.  Ultimately I am persuaded that there is no conflict of concern here primarily because the taxation implications discussed at 9.2 of the Scheme Booklet are general and not specific.  They do not purport to advise Scheme participants as to their individual circumstances; in fact there is a specific warning to the contrary in 9.1.

The break fee, no shop and no talk provisions

19                  A break fee in the amount of $700,000 is payable and is disclosed in the Scheme Booklet at 1.13 under the heading “Aevum Reimbursement Fee”.  In general terms it is payable if the Scheme does not proceed in certain circumstances.  Importantly the fee is not payable merely because the shareholders vote against the Scheme.  For this reason it does not place any pressure on shareholders to vote in favour of the transaction. 

20                  In her second affidavit sworn in this proceeding on 30 November 2009, the chairman of IOR, Ms Campbell, stated that during the negotiation of the Scheme IOR was represented by external legal and commercial advisers and separately from Aevum.  She stated that in relation to the break fee IOR had regard to the Takeovers Panel Guidance Note 7 – Lock Up Devices.  She pointed out that the break fee amounts to 0.948% of the implied value of scheme consideration and that, using the equity value estimations in the Deloitte Report it amounts to 0.78% of the equity value, using the highest equity value estimated; or 1.046% using the lowest equity value estimated.  

21                  Ms Campbell pointed out that, unusually, the Scheme also provides for Aevum to pay a break fee, also $700,000, if it terminates the Scheme in certain circumstances.  She stated that in all the circumstances she believes that the IOR break fee “is a genuine and reasonable pre-estimate of the costs that Aevum will suffer if the proposed transaction does not proceed”.  

22                  Although the break fee, on one analysis, exceeds the 1% referred to in Guidance Note 7, it is only slightly over 1% even if the highest estimate of equity value is accepted.  I am prepared to accept that in all the circumstances, particularly given that Aevum has accepted a break fee in the same amount, the break fee is fair and reasonable.

23                  The no-shop and no-talk periods are not excessive or unusual.  As with the break fee, they were agreed in an arms length commercial negotiation with the parties being separately advised.   Moreover, there is an important qualification to the no talk provision, namely:

The “no talk” and “no due diligence” provisions will not apply to a Competing Transaction that is not solicited in breach of the [Scheme] and that the IOR Board determines in good faith and acting reasonably after having received written advice from Counsel that the failure to respond to the Competing Transaction would be likely to constitute a breach of the Directors’ fiduciary duties or statutory obligations.

24                  In addition to the above material I am also satisfied from the evidence of Mr Della-Bosca that ASIC has been given notice in accordance with s 411(2)(a) and has had a reasonable opportunity to examine the Scheme pursuant to s 411(2)(b).  In a letter dated 30 November ASIC indicated, in accordance with its usual practice, that it did not intend to appear at the first hearing or to make any submissions or intervene to oppose the Scheme.  The evidence also establishes that Ms Campbell has consented to chair the meeting of shareholders and failing her being able to do so the meeting will be chaired by Christopher Leslie Henderson, director and company secretary of IOR.

25                  On the basis of the above information and for the reasons given I concluded that it was appropriate to make the orders sought by the plaintiffs for the convening of a meeting of IOR shareholders.

Associate:

Dated:         23 December 2009