FEDERAL COURT OF AUSTRALIA

Professional Investment Holdings Limited, in the matter of Professional Investment Holdings Limited (No 2) [2010] FCA 1336

IN THE MATTER OF PROFESSIONAL INVESTMENT HOLDINGS LIMITED (ACN 074 949 429)

THE COURT ORDERS THAT:

1.    Pursuant to subsections 411(4)(b) and (6) of the Corporations Act 2001 (Cth) ("the Act"), each of the schemes of arrangement set out below between the Plaintiff and certain of its members, having been duly agreed to in accordance with subsection 411(4)(a)(ii) of the Act at the relevant meetings of members of the Plaintiff, be approved, subject to the following alteration, namely the deletion from the definition of "Scheme Consideration" in clause 1.1 of each scheme of arrangement of the word "[insert]" and the insertion in its place of the figures "1.4921", so that each scheme of arrangement is in the form annexed hereto:

(a)    The scheme of arrangement between the Plaintiff and its Ordinary Share members, in the form of Attachment A to these orders on the Court file;

(b)    The scheme of arrangement between the Plaintiff and its A Class Share members, in the form of Attachment B to these orders on the Court file;

(c)    The scheme of arrangement between the Plaintiff and its Redeemable Preference Share members in the form of Attachment C to these orders on the Court file; and

(d)    The scheme of arrangement between the Plaintiff and its Z Class Share member, in the form of Attachment D to these orders on the Court file.

2.    Pursuant to section 411(12) of the Act, the Plaintiff be exempted from compliance with section 411(11) in relation Order 1.

3.    These 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 Federal Law Search on the Court's website.

IN THE MATTER OF PROFESSIONAL INVESTMENT HOLDINGS LIMITED (ACN 074 949 429)

REASONS FOR JUDGMENT

Introduction

1    This is the second court hearing of an application to approve four schemes of arrangement between Professional Investment Holdings Limited ("PIH") and its members ("Schemes") pursuant to s 411(4) of the Corporations Act 2001 (Cth) ("the Act").

2    I described the Schemes in my judgment, Professional Investment Holdings Limited, in the matter of Professional Investment Holdings [2010] FCA 1193 and it is unnecessary to repeat what I said in that judgment.

Scheme Approval

3    The Scheme meetings have been held and the statutory majorities were obtained in overwhelming numbers.

4    The results of the meeting were set out in paragraph 2 of the written submissions of Mr Oakes SC dated 26 November 2010. For convenience I will set out the results:

5    A table recording the results and providing details of the votes participating and the shareholders participating in the voting was conveniently set out in the affidavit of Lisa Maree Sawyer sworn 25 November 2010 at paragraph 26. And I will reproduce the table as follows:

6    The figures appearing in the abovementioned table do not suggest that the meeting was "unrepresentative" in the sense referred to in Re BTR plc [2000] BCLC 740 at 747; see also Re Seven Network Limited (No 3) (2010) 77 ACSR 701 ("Re Seven Network") at [34].

7    Whilst the number of shareholders participating in the meeting of holders of Redeemable Preference Shares is only barely in excess of 30%, there is nothing in the material to which Mr Oakes has taken me today to suggest that there is any defect in the procedures for dispatch to shareholders of the Scheme documents. I, therefore, proceed on the basis that I cannot assume that shareholders who did not participate either in person or by proxy did not have notice of the meeting. Nor do I proceed on the basis that their silence is to be taken as opposition to the Schemes.

8    The Scheme meeting for the Z class shareholder was, of course, a meeting of only one such shareholder, that company being the only shareholder in that class. The fact that there was only one such shareholder is not a barrier to the approval of a scheme. The authority for this is the decision of Kearney J in Re Hastings Deering Pty Ltd (1985) 9 ACLR 755 to which I referred in SGIC Insurance Ltd v Insurance Australia Ltd (2004) 51 ASCR 470 at [12].

Legal principles relevant to the second court hearing

9    I endeavoured in Re Seven Network Limited (2010) 77 ACSR 701 at [31] – [45] to set out the principles which govern the exercise of the court's discretion to approve a scheme at the second court hearing.

10    I referred in my reasons to the decision of Santow J in Re NRMA (No 2) (2000) 34 ACSR 261 at [23]. His Honour there said that the approach which he has taken is exemplified in the words "[a]fter all, it is their [the members'] money which is at stake." That is to say, the court will usually approach the task upon the basis that the members are better judges of what is in their commercial interests than the court.

11    I also referred to five propositions drawn from a report of the Corporations and Markets Advisory Committee ("CAMAC") in its December 2009 Report. I will not repeat what I set out in relation to the CAMAC Report in my judgment in Re Seven Network. It is sufficient to say that I am satisfied in accordance with those principles that it is appropriate to make orders approving the Schemes.

consideration

12    The principal matters which I take into account are as follows.

13    First, I have an independent expert's report in which Deloitte Corporate Finance Limited verifies its view that the acquisition is fair and reasonable and in the best interests of each of the classes of PIH shareholders and there was no contrary evidence at all and nothing in the report which, on its face, suggests that the opinion expressed lacks validity.

14    The reasonableness of the Schemes is established at least prima facie in accordance with the principles stated in F.T. Eastment & Sons Pty Limited v Metal Roof Decking Supplies Pty Limited (1977) 3 ACLR 69 at 72, namely that:

…the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the creditors' meeting the court would be likely to approve it on the hearing of a petition which is unopposed.

15    That is, of course, not to say that the court is bound to approve a scheme simply because it made orders for the scheme meeting to be convened or because the statutory majorities were obtained. That principle has been stated in Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 505.

16    However, this does not seem to me to be a case where I ought to withhold approval.

17    In applications such as this which are made ex parte, the court relies heavily upon counsel to bring to its attention the features of the scheme that require attention and I am satisfied that counsel for PIH, Mr Oakes, has done so.

18    Moreover, there has been no criticism of the disclosure by any shareholder or by the Australian Securities and Investments Commission (ASIC).

19    Accordingly, there is no basis for me to infer anything other than that there has been adequate disclosure. Nor is there anything to suggest that the members voted other than in good faith or that they cast their votes for an improper purpose. Also, it is important to note that there is nothing which casts doubt on the procedural integrity of the meeting process.

20    Finally, I have taken into account the fact that ASIC has provided a statement under s 411(17)(b) of the Act in the usual form. It is well established that the court relies on the role of ASIC in making that statement.

Convertible Note Subscription Agreement

21    The only issue which I referred to at the first court hearing which needs to be mentioned today relates to the Convertible Note Subscription Agreement. I dealt with that in my earlier judgment at [12] – [22].

22    I am satisfied upon the basis of the evidence of Mr Grahame David Evans, sworn 24 November 2010, that this issue is not one which ought to go against the approval of the Schemes.

23    In particular, neither Mr Evans nor PIH's legal advisers considered the early repayment fee for the Convertible Notes to have constituted a break fee.

24    It is of significance, in my view, that the terms of the Convertible Note were negotiated by the various solicitors involved, acting apparently at an arm's length basis.

25    Even if the early repayment fee is notionally treated as a break fee and added to the actual break fee provided for under the Merger Implementation Deed, then the combined figure of the payments would be $825,000. This represents approximately 0.94% to 1.11% of the enterprise value of PIH. It is true that this is at the upper end of the 1% figure referred to in the Takeover Panel's Guidance Note 7 – Lock-Up Devices.

26    Nevertheless, it would fall sufficiently within the Takeover Panel's Guidance Note that I ought not to treat it as a discretionary matter which should impede the making of the orders.

27    I should also observe that the evidence satisfies me that the early repayment fee takes into account the loss of opportunity for Centrepoint Alliance Limited ("CAF") to convert into equity the shares or to continue the loan arrangements.

Other matters

28    The other matters referred to in Mr Oakes' opening submissions do not call for any further comment today.

29    I turn then to two further issues which were dealt with in Mr Oakes' supplementary opening submissions. I will mark the opening submissions and the supplementary opening submissions together as MFI 2.

Section 411(6) alteration

30    The first issue which arises is that PIH seeks an order pursuant to s 411(6) of the Act which provides that the court may grant approval to a compromise or arrangement subject to such alterations or conditions as it thinks just.

31    The authorities to which Mr Oakes referred as to the source of power for the approval of the scheme indicate that the approval power is exercised under s 411(4)(b) and that s 411(6) addresses the ability to approve the scheme with alterations, or to the conditions to be attached to the order approving the scheme.

32    I do not propose to record the list of authorities which Mr Oakes cited. It is sufficient to say that the proposition is supported by the decision in Re Homemaker Retail Management Limited (2001) 40 ACSR 116 at [4] and [11] (Barrett J) and by the decision of Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 ("Re Central Pacific") at [4] and [31].

33    The reason why the question of the exercise of the power under s 411(6) arises is that through what appears to be an oversight, the Scheme Booklet which was dispatched to shareholders of PIH stated the definition of "Scheme Consideration" as follows:

Scheme Consideration means [insert] Bidder Ordinary Shares.

34    Notwithstanding this fairly obvious oversight, I am satisfied that it is clear upon a consideration of the whole of the Scheme Booklet that the figure of 1.4921 was to be inserted in the definition of "Scheme Consideration" where the provision was made for that to occur.

35    There are numerous references to this figure at other places in the Scheme Booklet. I do not need to repeat them but it is sufficient, as I have already said, to record that these references make it clear that this was the intention of the terms of the definition of "Scheme Consideration" and that it ought to have been patently clear to members of PIH.

36    The power to make an order under s 411(6) was referred to by Gyles J in Re Investorinfo Limited (2006) 24 ACLC 44 ("Re Investorinfo") at [6] and [7]. His Honour's observations were recorded with apparent approval by Barrett J in Re HIH Casualty and General Insurance Limited (2006) 58 ACSR 1 ("Re HIH") at [10]. I do not need to repeat what was said by Gyles J but it is to be noted that his Honour distilled five propositions from the cases which have dealt with s 411(6) and its predecessors and he recorded those five propositions and the authorities which support them at [7] of his judgment.

37    Mr Oakes has endeavoured to update and add a number of further propositions to those stated by Gyles J.

38    Two of the additional propositions seem to me to have some significance in the present application. The first of them is drawn from Barrett J's decision in Re HIH, in particular at [12]. That case was concerned with a creditors' scheme of some complexity. Nevertheless, it seems to me that Mr Oakes is correct in drawing from his Honour's observations the proposition that the discretion under the section may be exercised where, although the alteration changes creditors' rights (and presumably also the rights of members), it would have the effect of putting the scheme into a form that is consistent not only with the procedures with respect to the meetings and voting that was in fact adopted, and the resultant expressions of will, but also the regime which was described in the Explanatory Statement.

39    The second supplementary proposition is one that was drawn from the decision of Santow J in Re Matine Limited (1998) 28 ACSR 268 at 284 and adopted by Mansfield J in Re Kalgoorlie Lake View Pty Limited (2005) 56 ACSR 144 at [7] – [8]. The proposition is that under s 411(6) the court is empowered to approve a compromise or arrangement of the scheme as put forward to the members with such alterations and additions as it thinks just. The discretion of the court is at large but the court has regard to whether the proposed variation was so novel or substantial as to take the varied scheme beyond the reasonable contemplation of shareholders at the time they agreed to it.

40    In my opinion, four of the propositions drawn from the authorities which I have mentioned are applicable to the present case. These are the first two propositions stated by Gyles J in Re Investorinfo and the two supplementary propositions drawn from Re HIH and Re Matine.

41    In particular in the present case the omission of the relevant figure from the definition of "Scheme Consideration" is one which seems to me to be, as I have said, patently obvious and it is one upon which the shareholders must have acted in voting to approve the Scheme. That, I think, is plain from the various references to the figure of 1.4921 in the Scheme Booklet.

42    In summary, therefore, the exercise of the power under s 411(6) seems to me to give effect to the relevant expressions of will at the meetings and also with the regime that was described in the Explanatory Statement.

43    Moreover, to adopt what Santow J said in Re Matine, it is not a variation which is so novel or substantial as to take the varied Schemes beyond the reasonable contemplation of the shareholders at the time they agreed to them. Indeed, it seems to me that it expresses the actual contemplation of the shareholders as to what would comprise the Scheme Consideration. I am, therefore, satisfied that I ought to make an order under s 411(6) in addition to the usual order that is made under s 411(4)(b).

US Securities Act 1933 exemption

44    The final issue which arises this morning is that CAF intends to issue the Scheme Consideration securities in the United States of America and to rely upon the exemption from registration requirements stated in the Securities Act 1933 of the United States of America ("Securities Act"). This is because some of the Scheme shareholders are resident in the USA.

45    I was taken this morning to the terms of the relevant United States legislation and it is unnecessary to set it out in my reasons. As Mr Oakes observes in his written submissions there is a well trodden path in relation to this issue which is conveniently set out in three authorities.

46    The first is that of Emmett J in Re Central Pacific at [28] – [34]. The second is the decision of Lander J sitting in the Supreme Court of South Australia in Re Simeon Wines Limited (2002) 42 ACSR 454 ("Re Simeon"). The third is the decision of Barrett J in Re Permanent Trustee Co Limited (2002) 43 ACSR 601 ("Re Permanent Trustee").

47    I endeavoured to set out the salient passages from each of those judgments in my reasons for judgment in Re Solution 6 Holdings Limited (2004) 50 ACSR 113 ("Re Solution 6") at [38] – [41].

48    As Emmett J said in Re Central Pacific at [31], it is not for the court to express any view as to whether the processes of this court are sufficient to satisfy the requirements of the exemption in section 3(a)(10) of the Securities Act.

49    However, his Honour observed that it is clear that on the hearing of an application for an order approving an arrangement under s 411(4)(b) of the Act, any security holder is entitled to be heard and the application for approval takes place in open court after formal notification and advertisement in newspapers circulating in Australia.

50    In Re Simeon, Lander J listed each of the matters which would meet the requirements of the Securities Act and then noted his observations in relation to the matters in a way which appeared to deal with the requirements of the Securities Act. One of his Honour's observations was in relation to item 4 in which he observed that it is an obligation in an application for approval of a scheme, for the court to consider the fairness and reasonableness of the proposed scheme of arrangement.

51    Lander J's observations were qualified by Barrett J in Re Permanent Trustee at [14]. His Honour pointed out that in making the statement to which I have referred Lander J did not in any sense suggest that the court in some way actively enters into matters of valuation or embarks upon an examination of the question of whether a particular price or consideration is or is not fair and reasonable quid pro quo. His Honour said:

The court does not act as a valuer.

52    In Re Solution 6 at [42] I adopted the remarks of Emmett and Lander JJ with the qualification to Lander J's comments made in Re Permanent Trustee.

53    It seems to me to be appropriate in the light of what was said in the above authorities, including the qualification stated by Barrett J, to note five matters relevant to the question going to s 3(a)(10) of the Securities Act in the present case.

54    First, the Schemes contemplate the issue of CAF securities in exchange for PIH securities.

55    Second, the Court was advised before the commencement of today's approval hearing that CAF would rely on the section 3(a)(10) exemption in the United States on the basis of the Court's approval of the schemes.

56    Third, the Court has been fully informed of the value of the securities to be surrendered and the value of the securities to be offered in consideration of the surrender. The valuation was prepared by an expert who is independent of both the Scheme company and the acquirer and the valuation is a sworn valuation. I have taken that evidence into account in determining whether the Scheme is fair and thus should be approved.

57    As I said in Solution 6 at [43], I have not acted as a valuer in this process, but I have received the assistance of an unaligned expert.

58    Moreover, no notice of appearance was received at today's hearing and no one appeared to argue that the merger is not fair and reasonable.

59    Fourth, the court is statutorily required to hold a hearing to consider the fairness and reasonableness of the scheme that is proposed. I have done that but in saying this, it is to be borne in mind that the process is not one in which the court considers the intrinsic value of the scheme. Rather, the court's role is supervisory in the sense to which I referred in Re Seven Network, in particular at [42] – [44].

60    Fifth, the hearing has been open to the public and any person to whom securities are to be issued has standing to appear. Notice of the date of the hearing was included in the Scheme Booklet sent to all security holders of PIH prior to the proposal being considered by the meetings of those security holders and was advertised in a daily newspaper circulating throughout Australia. There was no appearance by any security holder.

conclusion

61    For these reasons I will make the orders in accordance with the orders handed to me this morning by Mr Oakes.

Associate:

Dated:    3 December 2010