FEDERAL COURT OF AUSTRALIA

SAI Global Limited; In the Matter of SAI Global Limited [2016] FCA 1312

ORDERS

THE COURT ORDERS THAT:

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

(a)    SAI Global Limited (ACN 050 611 642) (SAI) convene a meeting (Scheme Meeting) of holders of fully paid ordinary shares in SAI (Scheme Shareholders) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement (Scheme), the terms of which are contained in Attachment C of the scheme booklet, a copy of which is at Exhibit 1 to these Orders [not attached hereto] (Scheme Booklet);

(b)    The Scheme Meeting be held on 5 December 2016, commencing at 10.00 am (Sydney time); and

(c)    The Scheme Booklet, substantially in the form that is Exhibit 1, be approved for distribution to Scheme Shareholders (which Scheme Booklet be and is hereby approved for the purposes only of sub-s 411(1) of the Act).

2.    Pursuant to s 1319 of the Act:

(a)    SAI may determine that, for the purposes of the Scheme Meeting, all the shares in SAI be taken to be held by the person, persons or bodies corporate who held them as at 7.00 pm on 3 December 2016 (Sydney time), in accordance with the register held and maintained by SAI;

(b)    SAI may determine that only the proxy forms in relation to the Scheme Meeting received by SAI by no later than 10.00 am on 3 December 2016 (Sydney time) are valid;

(c)    The Chairperson of the Scheme Meeting be Andrew Dutton or, in his absence, David Spence;

(d)    The Chairperson of the Scheme Meeting shall have the power to adjourn the meeting in his or her absolute discretion to such time, date and place as he or she considers appropriate; and

(e)    A poll must be taken to decide the resolutions put to the vote at the Scheme Meeting, except for procedural motions.

3.    SAI publish a Notice of Hearing in The Australian newspaper in substantially the form that appears at Annexure ‘A’ hereto not later than five (5) days prior to the date fixed for the hearing of any application to approve the Scheme and SAI be relieved from compliance with r 3.4 of the Federal Court (Corporations) Rules 2000 (Cth) (Rules) to the extent necessary.

4.    Rule 2.15 of the Rules shall not apply to the Scheme Meeting, except insofar as that rule applies reg 5.6.13 of the Corporations Regulations 2001 (Cth).

5.    The proceeding be stood over to 2.15 pm on 9 December 2016 before Foster J for the hearing of any application to approve the Scheme.

6.    There be liberty to apply on two (2) days’ notice.

7.    The beginning of the period to which s 177(3) of the Evidence Act 1995 (Cth) refers regarding the expert certificate of Lawrence Tan annexed to the affidavit of Milorad Gajic sworn on 31 October 2016 is midnight on 31 October 2016.

8.    These orders be entered forthwith.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ANNEXURE A

Notice of hearing to approve scheme of arrangement

(Form 6, rule 3.4)

TO all the creditors and members of SAI Global Limited (ACN 050 611 642) (SAI)

TAKE NOTICE that at 2.15 pm on 9 December 2016, the Federal Court of Australia at Law Courts Building, Queens Square, Sydney, will hear an application by SAI seeking the approval of a scheme of arrangement between the above-named company and its members (the Scheme) as proposed by a resolution passed by the meeting of the members of SAI held on 5 December 2016.

If you wish to oppose the approval of the compromise or arrangement, you must file and serve on SAI a Notice of Appearance, in the prescribed form, together with any affidavit upon which you wish to rely at the hearing. The Notice of Appearance and affidavit must be served on the plaintiff at its address for service at least one (1) day before the date fixed for the hearing of the application.

The address for service of SAI is c/o Gilbert + Tobin, Level 35, Tower Two, International Towers Sydney, 200 Barangaroo Avenue, BARANGAROO NSW 2000 (Attention: Crispian Lynch/Alexandra Whitby).

Gilbert + Tobin

Level 35, Tower Two

International Towers Sydney

200 Barangaroo Avenue

BARANGAROO NSW 2000

REASONS FOR JUDGMENT

FOSTER J:

1    By its Originating Process filed on 12 October 2016, the plaintiff, SAI Global Limited (SAI) sought an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) convening a meeting of its shareholders for the purpose of considering a proposed scheme of arrangement and, if the scheme is endorsed by the shareholders, the approval of the scheme.

2    SAI is a publicly listed company admitted to the official list of ASX Limited (ASX). It is a Pt 5.1 body under the Act.

3    At the present time, SAI has issued:

(a)    213,432,054 ordinary shares;

(b)    11,514,223 options; and

(c)    2,116,464 performance rights.

4    SAI is a leading global provider of risk management products and services designed to assist its clients proactively to manage risk in order to achieve business excellence, growth and sustainability. SAI has two distinct operating divisions:

(a)    Risk Management Solutions, grouped into four portfolios, being:

(i)    Risk Software;

(ii)    Learning;

(iii)    Assurance; and

(iv)    Knowledge; in addition to

(b)    Property Services, which provides two main services:

(i)    Business Process Outsourcing Services; and

(ii)    Information Broking and Data Services.

5    SAI employs more than 2,000 employees across 29 countries with 51 locations in Australia, Europe, North America, South Africa and Asia.

6    The proposed scheme of arrangement (scheme) involves an acquisition by Casmar (Australia) Pty Ltd (ACN 615 021 479) (Bidco) of all of the ordinary shares in SAI for a cash consideration of $4.75 per share. $4.75 per share represents a premium of 32.3% in respect of the closing price for SAI shares on 23 September 2016 (viz $3.59) being the last trading day prior to the announcement by SAI of its intention to proceed with the scheme.

7    The directors of SAI unanimously recommend that the SAI shareholders vote in favour of the scheme in the absence of a superior proposal. The scheme is also supported by an independent expert’s report provided by Joanne Margaret Lupton and Ian Jedlin of KPMG Financial Advisory Services (Australia) Pty Ltd (KPMG).

8    On 1 November 2016, I made orders for the convening of a meeting of the ordinary shareholders of SAI for the purpose of those shareholders considering and voting on the scheme, such meeting to be held at 10.00 am on 5 December 2016.

9    These are my reasons for making the orders which I made on 1 November 2016.

Relevant Principles

10    In Re CSR Ltd (2010) 183 FCR 358 (CSR), at 362–365 [7]–[12], Keane CJ and Jacobson J, in their joint judgment, discussed s 411 of the Act and explained the relevant principles which guide the Court when considering applications of the present kind. At 362 [7], their Honours said that s 411 of the Act envisages three steps: First, the calling of a meeting of either creditors or members depending on whose rights are to be rearranged; second, a vote by those persons; and third, a further application to the Court for approval of the rearrangement. At 362–363 [8], their Honours said:

It is convenient to note here that s 411(2) contains a statement of the circumstances in which the first meeting must not be ordered. Section 411 contains no statement of the criteria which must be satisfied before a meeting is ordered, but it is clear that the court has a discretion to exercise in relation to whether the first meeting should be ordered: Re Hawk Insurance Company Ltd [2001] 2 BCLC 480 at [21].

(Emphasis in original.)

11    At 363 [9], their Honours noted that the content of the draft explanatory statement which must be provided to the creditors or members (as the case may be) is addressed in s 411(3) of the Act. At 363 [10], their Honours observed that the binding effect of the arrangement proposed to the Court is provided for by s 411(4).

12    At 363–364 [11], their Honours continued:

The discretionary nature of the Court’s powers under s 411(4)(b) is apparent from s 411(6) and (17) which provide respectively:

(6)    The Court may grant its approval to a compromise or arrangement subject to such alterations or conditions as it thinks just.

…

(17)    The Court must not approve a compromise or arrangement under this section unless:

(a)    it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or

(b)    there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;

but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b).

13    At 364–365 [12], their Honours quoted with apparent approval the statements of principle made by Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 at [8]–[11]. In that case, at [8]–[11], Emmett J said:

Those principles require that the Court will not convene a meeting unless the arrangement proposed is of such a nature and is cast in such terms that, if the arrangement receives approval by the statutory majority at the relevant meeting, the Court will be likely to approve the arrangement on the hearing of any application that is unopposed. At the stage of convening a meeting, the Court will give consideration to compliance with such preliminary matters as are relevant to the holding of the meeting. Of paramount importance at that stage is the need to ensure that there will be sufficient disclosure, to those who will be affected by the arrangement, of its details and effect. The Court will also need to be satisfied, at that stage, that there has been reasonable opportunity for the Commission to examine the terms of the arrangement.

In exercising its discretion whether to convene a meeting, the Court will have regard to such matters as the acceptability of the documentation of the proposed arrangement, the commercial viability and morality of the arrangement, the likely acceptability of the arrangement, the bona fides of the proposals, whether the proposals could be achieved by another method and any objections or submissions by the Commission. It is always the practice of the Court, at the first stage, to go through the proposed arrangement, to raise matters as to the drafting of the documentation, to ascertain whether the arrangement complies with the substantive requirements of the law and to ensure that the arrangement, if given effect, will not involve any unfair or oppressive result.

In considering whether to convene a meeting, the Court will take into account questions of public policy as well as commercial morality. The Court will have regard to the interests of parties who will be bound by the arrangement and who might be careless of their own best interests. While security holders of a company may be considered to be better judges than the Court could be of what is to their commercial advantage, that does not extend to the technical or mechanical aspects of an arrangement. Security holders are likely to be influenced largely by their understanding of the broad economic consequences of an arrangement. However, they are entitled to rely on the Court’s approval as a sufficient safeguard against defects at the technical or mechanical level.

Accordingly, for the purposes of protecting the interests of security holders who have not agreed to an arrangement and yet will be bound by it, the Court will ordinarily seek to ensure that the terms of the arrangement would be enforceable by all persons bound by it against those who are seeking to implement it or obtain benefits from it. The Court will also seek to ensure that the arrangement does not, without sufficient reason, include provisions that may create inroads upon or modify the benefits that a security holder bound by it might legitimately expect to obtain under it. The mere fact that the Court has convened a meeting does not, however, necessarily mean that the Court will approve the arrangement, even if the arrangement is unopposed at the third stage.

14    Chief Justice Keane and Jacobson J returned to s 411(1) of the Act at 375–377 [57]–[62] where their Honours said:

Section 411(1) of the Act

In Australian Securities Commission v Marlborough Gold Mines Ltd 177 CLR at 504-505, speaking of s 411 of the Corporations Law which preceded the Act, Mason CJ, Brennan, Dawson, Toohey and Gaurdron JJ said:

It is certainly the case that “the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the … meeting the court would be likely to approve it on the hearing of a petition which is unopposed”. No doubt at the s 411(1) stage, when the Court decides whether it will grant leave to summon a meeting or meetings, the Court should be alive to the difficulties which may arise subsequently when it is called upon to decide whether the arrangement should be approved. But it is going too far to say that the grant of leave to summon meetings under s 411(1) necessarily amounts to a determination that the proposed arrangement is one which falls within the scope of the section. The application for leave to summon meetings is in the nature of an interlocutory proceeding and is a preliminary to the final determination which is to be made when the matter comes back to the Court for approval after the holding of the meetings which have been directed.

(Footnotes omitted.)

See also Re Advance Bank Australia Ltd (1997) 136 FLR 281 at 286-287.

Reference may also be made to the observations of French J (as his Honour then was) in Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36], [44]):

It is however important to bear in mind that, by granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the Court’s approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O’Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to “introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage”: Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J).

The Court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the Court. … That question is to be answered when the scheme returns to the Court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further.

(Emphasis added.)

This reference does not attempt to distil an accurate statement of the content of what is “unfair” or “contrary to public policy” so far as the discretionary considerations which inform the exercise of the power conferred by s 411(1) of the Act are concerned. Adverbs such as “blatantly” to modify “unfair” or “contrary to public policy”, do serve, however, to emphasise that the inquiry under s 411(1) is not intended to resolve difficult questions on which reasonable minds may differ.

The courts have not previously considered it necessary, at the application stage, under s 411(1) of the Act or its analogues, to examine in any great detail a proposed compromise or arrangement. As was noted by Finkelstein J in Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 (Opes Prime) at [17]:

For example, in England the practice note reported in [1934] WN 142 affirmed that it was for the company to decide whether creditors should be divided into classes for voting purposes, taking the risk that the correct decision was made, which would only be discovered at the approval hearing. In UDL Argos Engineering & Heavy Industries Co Ltd v Li Oi Lin [2001] 3 HKLRD 634 Lord Millett, sitting as a non-permanent judge of the Court of Final Appeal in Hong Kong, said this practice was a sound one. It has been applied to other issues relating to jurisdiction.

It may be accepted that these observations cannot be taken to mean that a court would exercise its discretion under s 411(1) of the Act in favour of setting in train a process which is clearly bound to fail: it has long been recognised that a clear want of utility in putting in train the processes of s 411 is a good reason to decline to order the convening of the first meeting. Thus, in Re Hawk Insurance Co Ltd, Chadwick LJ said ([2001] 2 BCLC 480 at [21]):

In my view an applicant is entitled to feel aggrieved if, in the absence of opposition from any creditor, the court holds, at the third stage and on its own motion, that the order which it made at the first stage was pointless. It is, to my mind, no answer to say that that is a risk which the applicant must accept. It may be inevitable that an applicant must accept the risk that a dissentient creditor will persuade the court at the third stage that the order which it made at the first stage (without hearing that creditor) was the wrong order. But that is not to say that the applicant must be required to accept that, when exercising what is plainly a judicial discretion at the first stage, the court will not address the question whether the order which it makes serves any useful purpose; or that, if it has addressed that question at the first stage, it will change its mind, of its own motion, at the third stage.

A new Practice Note, in terms different from that initially referred to by Finkelstein J in Opes Prime, has now been issued for England and Wales. The approach outlined in the new Practice Note was applied by Finkelstein J in Opes Prime at [19]–[20]. His Honour said:

A new practice statement was published in [2002] 1 WLR 1345 […] I adopted this practice in In the Application of United Medical Protection Ltd [2007] FCA 631.

The purpose of the new practice is to avoid the waste of costs and court time which would result if it were not until the approval hearing that it was determined that classes were wrongly constituted. In England it has been said that this underlying purpose means that if other issues which go to the jurisdiction of the court to approve a scheme (as in Re Savoy Hotel Ltd [1981] 1 Ch 351), or issues which would lead the court unquestionably to refuse the scheme, should also be dealt with at the convening application: Re T & N Ltd (No 3) [2007] 1 All ER 851 at 862.

15    Finally, at 377 [64], their Honours made the following remarks:

In our respectful opinion, the discretion to make an order under s 411(1) of the Act may properly be exercised in the negative where the making of the order would be futile because the scheme as proposed is unlikely to be finally approved. The Court should not promote the waste of resources and the raising of false hopes or the creation of unnecessary concern and anxiety by promoting a process which will clearly not proceed to consummation under s 411(4)(b). But that having been said it must be recognised that there are other procedural opportunities which are more appropriate for the resolution of the issues which the learned primary judge held to be fatal to CSR’s attempt to put the s 411 process in train in this case.

16    Justice Finkelstein added some observations of his own in respect of the basis upon which the Court should exercise its discretion to convene a meeting for the purpose of allowing creditors or members to consider a scheme or arrangement. At 379–380 [72]–[78], his Honour said:

The first topic concerns the appropriate practice as regards an application to convene a scheme meeting. The function of the court on the convening application is “emphatically not” to consider the merits or fairness of the proposed scheme: Re Telewest Communications plc [2004] BCC 342 at 348. It is largely to decide whether there should be one or more meetings and to decide the manner in which that meeting, or those meetings, should be summoned and conducted.

Nonetheless, it seems now to be accepted that there are occasions on which the court is justified in considering, on the convening application, whether the scheme is one which, if approved by the requisite majority, would be sanctioned by the court. Necessarily, the occasions on which it will be appropriate to take that course are few. The current practice is to have disputes about classes determined before the meeting. Issues that go to the jurisdiction of the court to approve the scheme may also be raised at the convening hearing. So also might an issue which could lead the court to refuse to sanction the scheme. What is not clear regarding this last category is how immediately apparent the issue must be.

In Re T & N Ltd [2007] 1 All ER 851, David Richards J said at [19] that the issue must be such as would “unquestionably” lead to a refusal. In Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at 265 French J (as he then was) said that “a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further”. In Re Central Pacific Minerals NL [2002] FCA 239 at [8], Emmett J said that the court will not convene a meeting unless the proposal is likely to be approved if it were unopposed. This does not represent a uniform approach. Some reconsideration is appropriate.

In Re NRMA Ltd (No 1) (2000) 156 FLR 349 Santow J drew a distinction between two lines of Australian authority regarding the proper approach of the court at the convening stage (at [32]-[40]). The first approach, which his Honour favoured, suggests the court should generally confine itself to ensuring that certain procedural and substantive requirements are met (for example, that there will be adequate disclosure), with limited consideration of issues of fairness. This was the approach adopted in Re Foundation Healthcare. The alternative approach (similar to that adopted in Re Central Pacific) is to look to the merits of the scheme to determine whether it is likely that the court will approve the arrangement when it comes back for approval.

In my view, the test propounded in Re T & N and, subject to one qualification, in Re Foundation Healthcare, should be applied. Such an approach properly reflects the two stage nature of the scheme hearing process, where convening hearings often take place on limited notice, and where issues and objectors regarding a scheme may only emerge after the scheme meeting. As such, instead of saving costs and court time, hearing the merits at the convening stage may achieve the opposite. Thus an enquiry into the merits at the convening stage will only be warranted if there is a clear indication that the scheme will not be approved. The indication may appear from the terms of the scheme. Or it may arise out of an incontrovertible fact (which is the basis upon which I would qualify what is said in Re Foundation Healthcare).

In Re NRMA, Santow J observed that the two approaches he had identified may not be that different in practice, because “if there were a significant aspect of unfairness it will almost certainly have disclosure implications and may in some cases portend illegality.” The relationship between the court’s enquiries into (i) the adequacy of disclosure and (ii) the fairness of the scheme is potentially problematic. Deficient disclosure should ideally be identified before the scheme meeting rather than after it. On the other hand, an enquiry into adequacy of disclosure should not be used as a “backdoor” method of raising an argument, at the convening stage, about the merits of the scheme as a whole. Accordingly, when considering disclosure regarding a contentious issue which fundamentally concerns the fairness of the scheme, a court should first determine whether the disclosure can be made in a way which does not require a final resolution of the issue at hand. For example, in many cases it will be sufficient for a statement in the scheme booklet to be appropriately qualified or by the addition of a competing view. If that is not possible, it is I think preferable for a court to defer resolution of the contentious issue to the approval hearing (meaning that the applicant effectively bears the risk of the scheme not being approved due to inadequate disclosure).

In the case at hand, for example, there are several reasons why it was not appropriate for the merits of the scheme to be considered at the convening hearing. First, the relevant material consisted almost exclusively of the opinions of expert actuaries. The actuaries were of differing opinions as regards how best to assess the value of the claims on CSR by a select group of creditors, who might compendiously be referred to as asbestos victims. It is obvious that the disputes between the actuaries were of some complexity and would require close analysis to resolve. Second, on one view, resolving the differences might require a judge to form a view on the strength of the competing views put forward. That is the kind of exercise where the judge might be assisted by questioning of the experts. Third, this case was fundamentally concerned with the fairness of the scheme as a whole rather than disclosure per se. ASIC, for example, did not raise any concerns regarding the disclosure, but did raise concerns about the effect of the scheme. Fourth, if the ruling had gone the other way (as it will in this appeal), it is possible that the opponents will seek to reargue their case at the approval hearing if the scheme is passed by the members.

17    Thus, the Court will not ordinarily summon a meeting unless the proposed scheme of arrangement is of such a nature and is cast in such terms that, if it receives the statutory majority at the meeting, the Court will be likely to approve it on the hearing of an application for approval that is unopposed. At the first Court hearing, the Court will generally not be concerned with whether final approval should be given to the scheme but rather will focus upon the question of whether the scheme is one which is adequately explained to those who have a financial interest in it and whether there is any obvious flaw in the scheme such that it would be inappropriate for it to be submitted for consideration (Re Abacus Funds Management Ltd (2006) 24 ACLC 211 at 214 [23]).

18    Importantly, the Court is not required to be satisfied that no better scheme could have been proposed. The question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed to be of benefit to members or creditors (Re Centrebet International Ltd [2011] FCA 870 at [29] per Emmett J). Ultimately, the question is for the members or creditors themselves (FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ).

19    It is now settled that the appropriate occasion upon which the Court is required to address the questions posed by s 411(17) of the Act is at the second or confirmation hearing when the Court’s approval of the scheme is sought (Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 at 370–371 [25]–[27] per Barrett J). This is also the view of the Australian Securities and Investments Commission (ASIC) in respect of its position under s 411(17)(b) of the Act.

The Proposed Transaction and its Implementation

20    On or around 26 September 2016, SAI entered into a Scheme Implementation Deed dated that day (SID) with Casmar Holdings Pte. Limited (Casmar Holdings), a body incorporated in the Republic of Singapore. Casmar Holdings is a subsidiary of the Baring Private Equity Asia Group (Baring) which is also incorporated under the laws of the Republic of Singapore. Pursuant to the terms of the SID, Casmar Holdings proposed to acquire all of the shares in SAI by means of the scheme referred to in the SID. Under the scheme, Casmar Holdings will acquire all of the shares in SAI through its indirect subsidiary, Bidco. Bidco is a wholly owned Australian subsidiary of Casmar Holdings (Australia) Pty Ltd which is an indirect subsidiary of Casmar Holdings.

21    On 26 October 2016, Bidco executed an accession deed poll in favour of SAI pursuant to which Bidco agreed to comply with the obligations of Casmar Holdings under the SID. This deed poll is governed by the law of New South Wales. Under this deed poll, Bidco irrevocably submitted to the non-exclusive jurisdiction of the Courts of New South Wales and Courts competent to hear appeals from those Courts (cl (g)).

22    Under the SID (and the accession deed poll), it is proposed that Bidco will acquire all of the issued capital of SAI by way of a scheme of arrangement between SAI and its shareholders in return for cash consideration of $4.75 per share.

23    On 17 October 2016, SAI’s lawyers provided to ASIC a draft explanatory statement and attachments which together comprise the scheme booklet.

24    Between 17 October 2016 and 31 October 2016, SAI’s lawyers corresponded with ASIC about the scheme booklet and discussed changes that might be made to the scheme booklet. As a result of this discussion, some changes were made to the scheme booklet.

25    On 31 October 2016, ASIC provided to SAI’s lawyers its “usual” letter.

26    In that letter, ASIC said that it:

(a)    Had no objection to the scheme;

(b)    Will not provide a statement under s 411(17)(b) of the Act until the second, or confirmation, court hearing in relation to the scheme;

(c)    Had examined the terms of the scheme and the draft scheme booklet in accordance with its policy in Regulatory Guide 60 Schemes of Arrangement (RG60); and

(d)    Did not propose to appear to make submissions or intervene, to oppose the scheme at the first hearing.

27    On 26 October 2016, Bidco executed a further deed poll, on this occasion in favour of SAI’s shareholders (bidder’s deed poll). By this deed poll, Bidco covenanted to take all necessary steps on its part to give effect to the scheme. In particular, it undertook by cl 3(a) of the bidder’s deed poll to deposit or procure the deposit of the total consideration for the scheme shares in cleared funds into the scheme trust account. The bidder’s deed poll is subject to the same governing law and choice of jurisdiction provisions as are contained in the accession deed poll.

28    At the hearing before me on 1 November 2016, SAI proved to my satisfaction that the scheme booklet, in fact, contains all of the information which it is required to contain under the Act, the Corporations Regulations 2001 (Cth) and ASIC’s policies. (See the checklist which is Tab 5 in the folder of documents which comprises Exhibit JWN-1 to the affidavit of John Christopher Williamson-Noble affirmed on 31 October 2016 and the evidence referred to in that checklist.)

29    The scheme will be implemented in the following manner:

(a)    Satisfaction of all Conditions Precedent as set out in s 3.1 of the scheme booklet including shareholder and Court approval;

(b)    Payment of the scheme consideration by Bidco, as set out in s 3.2(a) of the scheme booklet; and

(c)    Transfer of all SAI shares to Bidco, as set out in s 3.2(b) of the scheme booklet.

30    The final version of the scheme booklet is Exhibit 1 to the Orders which I made on 1 November 2016.

31    The scheme is Attachment C to the scheme booklet.

32    As I have already mentioned, the scheme consideration is to be paid to SAI’s shareholders as a cash payment.

33    Clause 5.2 of the scheme requires that the scheme consideration be deposited in cleared funds in an aggregate amount in respect of all scheme shares into a trust account in the name of SAI by close of business on the business day immediately before the implementation date for the scheme. Those funds are to be held on trust by SAI for SAI’s shareholders. On the implementation date, SAI is required to disburse the scheme consideration to SAI shareholders prior to the acquisition of the scheme shares by Bidco pursuant to cl 4.2 of the scheme.

34    In this way, SAI’s shareholders will not be relegated to the remedy of suing under the bidder’s deed poll. In any event, the bidder’s deed poll not only requires Bidco to deposit the scheme consideration into the relevant trust account but also requires that company to undertake all necessary actions attributed to it under the scheme.

35    Clause 3 of the scheme sets out the conditions precedent which must be satisfied before the scheme becomes effective. It is in the following terms:

3    Conditions

3.1    Conditions precedent

This Scheme is conditional on and will not become Effective until and unless the following conditions precedent are satisfied:

(a)    all the conditions in clause 3.1 of the Implementation Deed (other than the condition in clause 3.1(b) of the Implementation Deed relating to Court approval of this Scheme) are satisfied or waived in accordance with the terms of the Implementation Deed by the Delivery Time;

(b)    neither the Implementation Deed nor the Deed Poll is terminated in accor-dance with its terms by the Delivery Time;

(c)    this Scheme is approved by the Court at the Second Court Hearing under section 411(4)(b) of the Corporations Act, including with any alterations made or required by the Court under section 411(6) of the Corporations Act as are acceptable to Target and Bidder;

(d)    such other conditions made or required by the Court under section 411(6) of the Corporations Act in relation to this Scheme as are acceptable to Target and Bidder are satisfied or waived; and

(e)    the order of the Court made under section 411(4)(b) of the Corporations Act approving this Scheme comes into effect pursuant to section 411(10) of the Corporations Act.

3.2    Certificates

(a)    Each of Target and Bidder will provide a certificate to the Court at the Second Court Hearing confirming (in respect of matters within their respective knowledge) whether or not the conditions precedent in clauses 3.1(a) and 3.1(b) above have been satisfied or waived.

(b)    The certificates given by Target and Bidder constitute conclusive evidence that the conditions precedent in clauses 3.1(a) and 3.1(b) above have been satisfied or waived.

3.3    Termination and End Date

Without limiting any rights under the Implementation Deed, if:

(a)    the Implementation Deed or the Deed Poll is terminated in accordance with its terms before the Scheme becomes Effective; or

(b)    the Effective Date has not occurred on or before the End Date,

then each of Bidder and Target are released from any further obligation to take steps to implement the Scheme.

36    Clause 3.1 of the SID specifies the following conditions precedent, namely, that:

(a)    The shareholders of SAI approve the scheme at the scheme meeting by the requisite majorities under the Act;

(b)    Before the second hearing, Casmar Holdings and, if necessary, Bidco, have received an appropriate clearance under the Foreign Acquisitions and Takeovers Act 1975 (Cth) issued by the Treasurer or his delegate;

(c)    Immediately before the second hearing there are no restraining orders in place and no investigation that might materially adversely impede or impact upon the completion of the scheme;

(d)    No Prescribed Occurrence or Material Advance Change (as defined in the SID) occur before the second Court hearing;

(e)    The representations and warranties given by SAI to Casmar Holdings remain true and correct;

(f)    The independent expert concludes that the scheme is in the best interests of SAI’s shareholders;

(g)    In the period between 26 September 2016 and the second Court hearing, none of SAI’s directors changes, qualifies or withdraws his or her voting intention or his or her recommendations in respect of the scheme; and

(h)    The Court approves the scheme under s 411(4)(b) of the Act.

Independent Expert’s Report

37    It is proposed that the scheme booklet will contain, as Attachment E, an independent expert’s report prepared by Ms Lupton and Mr Jedlin of KPMG. Ms Lupton has informed the Court in her affidavit affirmed on 28 October 2016 and filed in this proceeding that, in her opinion, the scheme is in the best interests of the scheme shareholders in the absence of a superior proposal. She and Mr Jedlin were prepared to sign the current draft of KPMG’s expert’s report and to authorise that report to be provided to SAI’s shareholders as part of the scheme booklet.

38    KPMG assessed the value of SAI shares on a 100% controlling interest basis as being within a range of $4.31 per share to $4.90 per share. KPMG adopted this value range on the basis of a market value valuation approach, being a hypothetical transaction between a knowledgeable, willing, but not anxious buyer and a knowledgeable, willing, but not anxious seller, acting at arms’ length.

39    The scheme consideration of $4.75 per share represents a premium of:

(a)    32.3% on SAI’s closing share price of $3.59 on 23 September 2016 being the last trading day prior to the announcement of the scheme;

(b)    35% on the five day volume weighted average price (VWAP) of $3.52 to 23 September 2016;

(c)    35.5% on the one month VWAP of $3.51 to 23 September 2016;

(d)    34% on the six month VWAP of $3.54 to 23 September 2016; and

(e)    28.7% on the broker consensus target price of $3.69 prior to the announcement of the scheme.

40    In order to put itself in a position where it could express an opinion as to whether or not the scheme is in the best interests of the shareholders of SAI in the absence of a superior proposal, KPMG undertook an assessment of whether the scheme was fair and reasonable to those shareholders. KPMG concluded that the scheme is fair and reasonable to those shareholders. In part, that assessment is based upon KPMG’s opinion that the scheme consideration falls within its assessed valuation range for each SAI share, having regard to the guidelines set out in RG111 (Content of Expert Reports) which provides that a scheme is “fair” if the value of the scheme consideration is equal to or greater than the value of the securities the subject of the scheme. KPMG also considered a range of other factors relevant to assessing the reasonableness of the scheme. Those factors also supported the conclusion reached by KPMG.

41    In summary, KPMG is of the view that the scheme is reasonable because:

(a)    The scheme consideration represents a substantial premium to the trading price of SAI shares before the announcement of the scheme;

(b)    The scheme consideration is in cash and allows scheme shareholders immediately to realise the value of their investment;

(c)    No superior alternative proposal has emerged since the announcement of the scheme; and

(d)    In the absence of the scheme or a superior alternative proposal, the SAI share price is likely to fall to levels which do not reflect a control premium.

42    In my view, the scheme booklet adequately describes the tax implications for scheme shareholders of the implementation of the scheme.

Some Matters of Particular Interest

The Break Fee

43    Under cl 9 of the SID, SAI has bound itself to pay to Casmar Holdings a break fee of $10,785,480 (exclusive of GST) if the scheme does not proceed and if the reason or reasons for that outcome are one of the specified circumstances set out in cl 9.2 of the SID. As submitted on behalf of SAI, the only circumstances in which the break fee may become payable are:

(a)    If any SAI director publicly withdraws or adversely changes his or her recommendation in respect of the scheme or intention to vote, or cause to be voted, all the SAI shares held or controlled by them in favour of the scheme at the scheme meeting, other than as a result of the independent expert concluding that the scheme is not in the best interests of scheme shareholders or in circumstances where SAI is entitled to terminate the SID for a material breach by Bidco;

(b)    Where a proposal to acquire an economic interest in 50% or more by value of the business or property of the SAI Group or gain control of SAI is made or announced by a third party before 26 March 2017 (or the earlier termination of the SID) and such a transaction is completed or implemented within nine months of the date of the announcement;

(c)    If Casmar Holdings terminates the SID because of the occurrence of an SAI Prescribed Occurrence (as that term is defined in the SID);

(d)    If Casmar Holdings terminates the SID due to a material breach by SAI of the exclusivity provisions described in s 3.7 of the scheme booklet;

(e)    If Casmar Holdings terminates the SID due to a material breach by SAI of the SID which is not rectified and the breach either constitutes an SAI Material Adverse Change or is material in the context of the scheme taken as a whole; and

(f)    If Casmar Holdings terminates the SID due to a material breach by SAI of a representation or warranty given by SAI under the SID which is not rectified.

44    The break fee will not become payable if the scheme becomes effective (cl 9.3 of the SID).

45    Clauses 9.4 to 9.6 of the SID contain provisions which set out the parties’ reasons for including the break fee terms in the SID. Those clauses provide as follows:

9.4    Nature of payment

The Target Break Fee is an amount to compensate Bidder for the following costs and expenses:

(a)    external advisory costs (excluding success fees);

(b)    internal costs such as costs of management and directors’ time, risk management costs and capital costs;

(c)    out-of-pocket expenses; and

(d)    opportunity costs incurred in pursuing the Transaction or in not pursuing other alternative acquisitions or strategic initiatives which otherwise could have been developed or pursued.

9.5    Compliance with law

This clause 9 imposes obligations on Target only to the extent that the performance of those obligations:

(a)    does not constitute unacceptable circumstances as declared by the Takeovers Panel;

(b)    does not breach the fiduciary or statutory duties of the Target Directors; and

(c)    is not otherwise unlawful or held to be unenforceable by a court.

If the Target Break Fee is paid to Bidder and clause 9.5(a), 9.5(b) or 9.5(c) applies, Bidder must refund the relevant part of the Target Break Fee (if any) to Target within 10 Business Days after receipt of a written demand from Target.

9.6    Limitation of liability

(a)    Subject to clause 9.6(b), the maximum liability of the Target under or in connection with this deed (including in respect of any breach by Target of the terms of this deed) is an amount equal to the Target Break Fee and in no event will the aggregate liability of the Target under or in connection with this deed (including in respect of any breach by Target of the terms of this deed) exceed an amount equal to the Target Break Fee.

(b)    In the event that Target has been finally found by a court of competent jurisdiction (after the Target has exhausted all rights of judicial appeal) to have knowingly or wilfully committed a material breach of this deed Target must, within 10 Business Days after receipt of a written demand from Bidder, pay Bidder $20,000,000 (without set-off or withholding), in which case the maximum liability of the Target under or in connection with that knowing or wilful, material breach and any fact, matter or circumstance giving rise to the obligation to pay the Target Break Fee is $20,000,000 .

In cl 9 of the SID, the references to the “Target Break Fee” are references to the break fee; references to “the Bidder” are references to Casmar Holdings; and references to “the Target” are references to SAI.

46    SAI led evidence from Peter James Mullins, who is the Chief Executive Officer and Managing Director of SAI, and from Derek Ng, who is an Associate of Baring Private Equity Asia Private Limited which is a subsidiary of Baring. Those witnesses gave evidence as to the reasons why Baring, on the one hand, wished to have a break fee agreed and the reasons why SAI, on the other hand, was prepared to agree to such a fee. They also gave evidence of the negotiations which took place in respect of the break fee.

47    The evidence of Mr Mullins may be summarised as follows:

(a)    The break fee was negotiated between the parties in the course of the negotiations for the transaction generally in which all parties were represented by experienced legal and financial advisers;

(b)    The break fee was negotiated as a result of what Mr Mullins considers are standard commercial negotiations;

(c)    Mr Mullins and his co-directors believed that the shareholders of SAI would derive significant benefits from the implementation of the scheme;

(d)    For this and other reasons, Mr Mullins considered that the break fee was reasonable and appropriate in order to secure Casmar Holdings’ entry into the SID and in order to secure Bidco’s commitment to implement the scheme;

(e)    During the course of the negotiations in relation to the SID, the Board of Directors of SAI determined that it would seek to limit its liability to Baring in the amount of $20,000,000 in the event that SAI was required to pay damages for breach of contract under the SID;

(f)    As part of the negotiations, Baring confirmed to the satisfaction of SAI that the amount of any loss that might be suffered by Baring as a result of SAI’s breach of the SID would be in excess of $20,000,000 (being expenses incurred and expected to be incurred in the course of pursuing the transaction, including for example professional and financial fees) and, in those circumstances, the parties agreed to limit SAI’s liability to Casmar Holdings and Bidco to the amount of $20,000,000 (as to which, see cl 9.6).

48    Mr Ng, on behalf of Baring, confirmed that the negotiations had been conducted at arms’ length and also confirmed that Baring sought the break fee as fair compensation for its likely losses should the scheme not proceed.

49    Clause 9.1 of the SID also sets out in a formal way the circumstances in which the parties acknowledge the break fee was negotiated.

50    As submitted on behalf of Bidco, cl 9.6(b) contains two parts. The first part of the clause provides that, if SAI is finally found by a court of competent jurisdiction (after SAI has exhausted all rights of judicial appeal) to have knowingly or wilfully to have committed a material breach of the SID, SAI must, within ten business days after receipt of a written demand from Casmar Holdings, pay Casmar Holdings $20,000,000. This obligation arises only upon breach of the SID by SAI and, significantly, upon breach of a certain character—a knowing and wilful material breach of the SID.

51    The second part of cl 9.6(b) stipulates that, when demand for payment of $20,000,000 has been met, the maximum liability of SAI under or in connection with its knowing or wilful material breach, and any fact, matter or circumstance giving rise to its obligations to pay the break fee, is $20,000,000.

52    In summary, therefore, SAI has bound itself to:

(a)    Pay the break fee, if the scheme does not proceed, and any of the events specified in cl 9.2 occur; and

(b)    Pay $20,000,000 in respect of a knowing and wilfully committed material breach of the SID

with the limitation of liability in respect of the break fee provided for in cl 9.6(a) of the SID and the cap provided for in cl 9.6(b) of the SID in respect of a knowing or wilful material breach. This second cap subsumes any additional obligation to pay the break fee in respect of such breach.

53    The agreements which the parties reached in respect of the payment of the break fee and the $20,000,000 payment involve the payment of significant sums of money to Casmar Holdings or Bidco by SAI. This fact caused me to have some disquiet about the break fee agreement and the terms of cl 9.6(b). In the end, however, in all of the circumstances of the present case, I decided that these matters were quintessentially matters which are within the province of the shareholders of SAI to consider and determine and were not such as to prevent me from ordering that the scheme meeting be convened.

54    The Court now takes the view that it is appropriate to review break fees at the first Court hearing. This view reflects a concern on the part of the Court that the target’s obligation to pay a break fee might be seen by shareholders as a means by which they are being coerced into voting in favour of the scheme and might also fetter competition involving other potential bidders. Examples of the Court’s approach to the payment of break fees are found in Re APN News & Media Ltd (2007) 62 ACSR 400 at 411 [55] and Idameneo (No 123) Pty Ltd v Symbion Health Limited (2007) 165 FCR 19.

55    As submitted on behalf of SAI, a break fee will be permitted unless the amount of the break fee is such that it can influence voting at the meeting or if there are some other unusual circumstances (see Re SFE Corporation Ltd (2006) 59 ACSR 82 at 83–84 [6]–[7]. A yardstick of 1% of equity value is often used by the Court to determine the reasonableness of the break fee, having regard to the Takeover Panels Guidance Notes 7: Lockup Devices. A fee in excess of that amount may also be reasonable where, inter alia, the fee is not payable if scheme shareholders do not approve the scheme, the fee is negotiated at arms’ length on commercial terms, the fee is a genuine and reasonable pre-estimate of the bidder’s costs and the fee is referred to appropriately in the scheme booklet.

56    Here, the break fee represents 1% of the total market capitalisation of SAI as at the date of the SID, based upon a share price of $4.75 per SAI share. For this reason, SAI submitted that the quantum of the break fee is consistent with the Takeover Panels Guidance Notes 7.

57    The break fee is not triggered by the shareholders of SAI failing to approve the scheme. This factor may be seen as ameliorating the effect of the break fee as a disincentive to shareholders in their consideration of the proposed transaction (see Re Adelaide Bank Ltd [2007] FCA 1582 at [31] per Lander J and Re Bolnisi Gold NL (No 2) (2007) 165 FCR 45 at 48 [12] per Lindgren J).

58    In my judgment, in the present context, the Court ought not to embark upon a final assessment of whether either the break fee or the $20,000,000 payment constitutes a penalty. When due regard is paid to the obligations imposed upon the Court at the first hearing under s 411 of the Act, the question then being whether the Court ought to order the convening of a meeting, it seems to me that it would be inappropriate for the Court to conduct a full-blown assessment of the penalty question. Of course, the Court is obliged to review fees and payments such as those in question in the present case at the first hearing but only for the purpose of deciding whether the meeting ought to be ordered. As I see matters, that is a very different task from determining on a final basis whether or not either of these payments is a penalty.

59    SAI’s obligations in respect of the break fee and the $20,000,000 are adequately disclosed in the scheme booklet.

60    For the reasons which I have explained, the existence of the break fee and the $20,000,000 payment and the terms upon which those payments may become payable do not constitute good reasons for declining to order the convening of the scheme meeting.

Exclusivity

61    Clause 8 of the SID contains exclusivity provisions which include a “no shop”, a “no talk” and a “no due diligence” restriction with notification and matching right obligations. In respect of such provisions, the Court is concerned to ensure that:

(a)    Any exclusivity period should be for no more than a reasonable period capable of precise ascertainment;

(b)    An exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve out; and

(c)    The provision must be clearly disclosed in the explanatory statement to the scheme shareholders.

(See Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at 759–760 [9] per Santow J.)

62    As submitted on behalf of SAI:

(a)    The “no shop” exclusivity clause (cl 8.2 of the SID) is capable of precise ascertainment. It is restricted to the Exclusivity Period which lasts from the date of the SID until the earliest of the date of its termination or the End Date, that is, from 26 September 2016 to on or around 26 March 2017 at the latest. That is a reasonable period for such exclusivity;

(b)    The “no talk” and “no due diligence” restrictions (cl 8.3 and cl 8.4 of the SID respectively) and, in part, the notification obligation (cl 8.5 of the SID) are subject to the fiduciary carve out in cl 8.6 of the SID and the overriding obligation not to breach directors’ fiduciary duty; and

(c)    The exclusivity provisions are all set out in cl 3.7 of the scheme booklet.

63    I was satisfied that the exclusivity provisions in the SID to which I have referred do not offend the principles which govern the question of whether such provisions will be allowed to go forward.

Deemed Warranty

64    Clause 8.2 of the scheme contains a provision to the effect that the shareholders of SAI are deemed to have warranted to Bidco and authorised SAI as its attorney and agent to warrant to Bidco that the shares held by them in SAI are transferred fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind and that they have full power and capacity to sell and transfer those shares to Bidco under the proposed scheme.

65    These provisions are in the usual form.

Options and Performance Rights

66    As I mentioned at [3(b)] above, SAI currently has 11,514,223 options and 2,116,464 performance rights on issue. As part of the scheme, and pursuant to the terms of the SID, all of the options and performance rights (other than Rollover Incentive Securities) will, if the scheme becomes effective, either:

(a)    Vest and become exercisable as Vesting Securities; or

(b)    Lapse

in accordance with, and subject to, certain conditions as set out in cl 4.3(b) of the SID. Under the applicable SAI Executive Incentive Plan Rules, the vesting of performance rights and options may be accelerated at the discretion of the Board of Directors of SAI.

67    In respect of those performance rights that are Vesting Securities, subject to the scheme becoming effective, they will automatically convert into shares in SAI immediately before the Record Date (as defined).

68    In respect of those options that are Vesting Securities, subject to the scheme becoming effective:

(a)    If exercised during the relevant Exercise Period, they will convert into shares immediately before the Record Date; or

(b)    If not exercised during the Exercise Period, they will lapse prior to the Record Date.

69    Shares in SAI which are issued to holders of Vesting Securities as outlined above will be acquired by Bidco together with all other SAI shares held by SAI shareholders at the Record Date and the holders of those SAI shares will be entitled to receive scheme consideration. The shares will not be issued until after the scheme meeting and accordingly will not be voted at the scheme meeting.

70    6,238,401 options and 463,075 performance rights, being those that were issued by SAI on 12 September 2016 (Rollover Incentive Securities) will, subject to:

(a)    The scheme becoming effective;

(b)    The receipt by SAI of any necessary waivers of the relevant ASX Listing Rules; and

(c)    The agreement of the holders of Rollover Incentive Securities

be varied so as to cease to confer any rights to receive SAI shares and will instead confer rights to receive shares in Bidco of equivalent value and which are subject to no more onerous forfeiture, lapsing and vesting conditions than those which apply to the Rollover Incentive Securities as at the date the scheme was announced (26 September 2016).

71    An issue arose at the first hearing before me as to whether or not the treatment of the holders of Vesting Securities and Rollover Incentive Securities creates separate classes. This is because some shareholders (a relatively limited number) who are holders of performance rights or options who also hold ordinary shares in SAI will be entitled to vote the ordinary shares which they hold in SAI at the scheme meeting.

72    SAI made detailed submissions on this question both in writing and orally.

73    SAI submitted (correctly) that the relevant question is not one of identical treatment but whether there is a community of interest such that the rights and entitlements of the different shareholders, viewed in totality, are so dissimilar so as to make it impossible to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the shareholders’ ability to consult together in a common interest or, in other words, their ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability (or makes it impossible) does class distinction come into play (Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104 [12] per Barrett J; Re Aston Resources Ltd [2012] FCA 229 at [32]–[33] per Jacobson J).

74    While some of the holders of the Vesting Securities and the Rollover Incentive Securities also hold SAI shares, the rights of those persons against SAI are the same as any other shareholder insofar as the shares which they hold are concerned (ordinary shares which provide a right to receive $4.75 under the scheme). Insofar as any additional rights or benefits are concerned by reason of the proposed treatment of their performance rights or options, these additional rights do not create the necessary differential position required to justify division into separate classes.

75    The position is very similar to the position that was before the Court in Re Foster’s Group Ltd (No 2) [2011] VSC 547 at [38]–[42]. In that case, Ferguson J found that the differentiation was not class creating.

76    SAI also submitted (correctly) that the “benefit” conferred on Rollover Incentive Securities holders to receive a share in Bidco (or one of its related companies) does not operate as an incentive or inducement to those holders giving rise to a collateral benefit which would be prohibited under Ch 6 of the Act. SAI submitted that this entitlement did not constitute a collateral benefit at all. In any event, it is proposed that shares voted by the holders of Rollover Incentive Securities at the scheme meeting will be tagged so that further consideration can be given to this issue (if necessary) at the second Court hearing.

Conclusions    

77    In all the circumstances, I was satisfied on 1 November 2016 that I ought to convene the proposed scheme meeting and made orders accordingly.

Associate:

Dated:    8 November 2016