FEDERAL COURT OF AUSTRALIA

Medical Australia Ltd, in the matter of Medical Australia Ltd [2017] FCA 1304

ORDERS

THE COURT ORDERS THAT:

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

(a)    the plaintiff (MLA) convene a meeting (Scheme Meeting) of the holders of ordinary shares in the plaintiff (Scheme Shareholders), for the purpose of considering and if thought fit, agreeing (with or without modification) to the proposed scheme of arrangement (Scheme) between the plaintiff and the Scheme Shareholders, the terms of which scheme of arrangement are set out in Annexure C of the document which has been tendered and marked Exhibit IBM-2 (Scheme Booklet);

(b)    the Scheme Meeting be held on Wednesday 15 November 2017 at the offices of Nexia Australia, Level 16, 1 Market Street, Sydney in the State of New South Wales commencing at 10.00 am;

(c)    the chairperson of the Scheme Meeting be Bruce Hancox, or failing him, Ian Burnham Mitchell;

(d)    the chairperson appointed to the Scheme Meeting has the power to adjourn or postpone the Scheme Meeting in his absolute discretion for such time and to such date as he considers appropriate;

(e)    at the Scheme Meeting, the resolution to approve the Scheme be decided by way of a poll;

(f)    the explanatory statement substantially in the form of the Scheme Booklet be approved for distribution to Scheme Shareholders.

2.    Pursuant to s 1319 of the Act, there be dispatched to each Scheme Shareholder:

(a)    by hand at, or by ordinary pre-paid post or courier to, the address of that Scheme Shareholder set out in the register of members of MLA; or

(b)    in the case of a Scheme Shareholder whose registered address is outside Australia, by airmail or facsimile to the address of that Scheme Shareholder as set out in the register of members of MLA,

a copy of the Scheme Booklet, a proxy form and a reply envelope addressed to Medical Australia Limited c/- NextRegistries Limited, PO Box H195 Australia Square, Sydney NSW 1215.

3.    The plaintiff be exempted from compliance with r 3.4(3) of the Federal Court (Corporations) Rules 2000 (Cth).

4.    The proceeding be stood over to 17 November 2017 at 10.15 am before Markovic J for the hearing of any application to approve the Scheme.

5.    There be liberty to apply.

THE COURT NOTES THAT:

6.    The proceeding has been listed for a second hearing on 17 November 2017.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    Medical Australia Limited (Medical Australia), the plaintiff, applied for orders under ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (Corporations Act) to convene a meeting of the holders of ordinary shares in Medical Australia for the purpose of considering whether and, if thought fit, to agree to, with or without modification, a scheme of arrangement between Medical Australia and those shareholders (Scheme). The Scheme is set out in a proposed scheme booklet which will stand as the explanatory statement required by s 412(1) of the Corporations Act. A notice of meeting is included in the scheme booklet.

2    After hearing submissions, I made the orders sought by Medical Australia. These are my reasons for making those orders.

background

3    Medical Australia is a public company listed on the Australian Securities Exchange (ASX). It was incorporated in February 2001 and listed in December 2004. It provides customised, low-cost, quality medical devices to healthcare professionals.

4    Medical Australia has 136,776,031 ordinary fully paid shares on issue and 520 shareholders, of whom 295 hold less than a marketable parcel of 9,260 shares. There are six substantial shareholders who between them hold 85.5% of the shares, none of whom are related parties of Medical Australia. Medical Australia’s managing director, Darryl Ellis, holds 2,500,000 performance rights shares. There are no options on issue.

5    After preliminary discussions with the directors of Medical Australia, ICU Medical, Inc. (ICU) made a formal cash offer for all of the issued shares of Medical Australia at $0.086 per share at the scheme implementation date, projected to be 29 November 2017. A scheme implementation agreement was executed by Medical Australia and ICU on 9 August 2017 (Implementation Agreement).

6    ICU is a company incorporated in the Netherlands, with its business headquarters in San Clemente, California, USA, and has been listed on the NASDAQ Exchange since 1992. The bidder nominee, ICU BV, is a wholly owned subsidiary of ICU. ICU develops, manufactures and sells innovative medical devices. A number of its products are similar in type to those of Medical Australia.

proposed scheme

7    The proposal is that ICU, or its wholly owned subsidiary, ICU BV, will acquire all of the shares in Medical Australia for a consideration of $0.086 cents per share.

8    After the Scheme is implemented Medical Australia’s shareholders will cease to hold shares in Medical Australia and Medical Australia will no longer be listed on the ASX. ICU BV is not a party to the Scheme but both it and ICU are bound by a deed poll in favour of each scheme shareholder by which, among other things, ICU BV is required to provide the scheme consideration.

9    Section 8.3 of the proposed scheme booklet provides that ICU and/or ICU BV will deposit the scheme consideration payable to all scheme shareholders in cleared funds to an account nominated by Medical Australia to be held in trust by Medical Australia for scheme shareholders no later than one business day before the implementation date. It provides that Medical Australia shares will only be transferred to ICU BV by Medical Australia upon payment of the scheme consideration. That is, the scheme consideration must be provided before the transfer of shares occurs.

10    The Scheme is also subject to certain conditions precedent set out in section 7.2 of the proposed scheme booklet. With the exception of the Court making orders approving the Scheme under s 411(4)(b) of the Corporations Act on the second court date and the lodgement of such orders with the Australian Securities and Investments Commission (ASIC), those conditions need to be satisfied by 8.00 am on the second court date such that the Scheme will be self-executing upon the making of orders on the second court date and the lodgement of those orders with ASIC.

recommendations

The directors

11    The Medical Australia directors have unanimously recommended that Medical Australia shareholders vote in favour of the Scheme at the scheme meeting in the absence of a superior proposal and subject to the independent expert continuing to determine that the Scheme is in the best interests of shareholders.

12    The reasons for the directors making that recommendation are set out at section 11.2 of the proposed scheme booklet. In summary, the directors have recommended that shareholders vote in favour of the Scheme because:

(1)    the cash payment of $0.086 per share is within the valuation range determined by the independent expert and represents a premium on a number of bases, including by reference to the closing price of Medical Australia shares on 9 August 2017, being the last trading day before the announcement of the entry into the Implementation Agreement;

(2)    it allows shareholders to receive certain value for their shares; and

(3)    since the announcement of the entry into of the Implementation Agreement to the ASX no superior proposal has emerged.

Independent expert

13    The Medical Australia board appointed William Buck Corporate Advisory Services (NSW) Pty Limited (William Buck), chartered accountants and advisors, to provide an independent opinion on whether the Scheme is fair and reasonable and in the best interests of Medical Australia’s shareholders in the absence of a superior proposal. A copy of William Buck’s report is annexed to the proposed scheme booklet. William Buck is of the opinion that, having considered the terms of the Scheme, it is fair and reasonable and in the best interests of Medical Australia’s shareholders in the absence of a superior proposal.

14    William Buck has assessed the fair market value of Medical Australia’s ordinary shares as between $0.051 and $0.052. In their report they express the view that, as the fair market value of the scheme consideration is greater than their assessed fair market value of Medical Australia, the Scheme is fair to Medical Australia’s shareholders. Manda Trautwein, who is a director of William Buck and the author of the independent expert’s report, has confirmed that both she and William Buck adhere to each of the conclusions set out in the report.

chairPERSON of the scheme meeting

15    It is proposed that the scheme meeting be held on 15 November 2017 at 10.00 am. Bruce Hancox, the non-executive chairperson and an independent director of Medical Australia, has agreed to chair the meeting and Ian Burnham Mitchell, a non-executive director and the company secretary of Medical Australia, has agreed to act as chairperson of the meeting in the event that Mr Hancox is unable to do so. I am satisfied that the evidence required by r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth) (Rules) has been provided by each of Messrs Hancox and Mitchell.

legal framework

16    The Court will order the convening of a scheme meeting and approve the scheme booklet pursuant to s 411 of the Corporations Act if it is satisfied of the following matters:

(1)    the plaintiff is a Pt 5.1 body;

(2)    the proposed scheme is an “arrangement” within the meaning of s 411 of the Corporations Act;

(3)    the scheme booklet will provide proper disclosure to members;

(4)    the scheme is bona fide and properly proposed;

(5)    ASIC has had a reasonable opportunity to examine the proposed scheme and explanatory statement, to make submissions and has had 14 days’ notice of the first court hearing; and

(6)    any other procedural requirements have been met, such as r 3.2 of the Rules as to the nomination of a chairperson for the scheme meeting,

see Staging Connections Group Limited, in the matter of Staging Connections Group Limited [2015] FCA 1012 (Staging Connections) at [19] (per Gleeson J).

17    In Staging Connections Gleeson J said at [21]:

The approach of the Court at the first court hearing is 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 receives the statutory majority at the...meeting the court would be likely to approve it on the hearing of a petition which is unopposed”: per Street CJ (with whom Hutley and Samuels JJA agreed) in FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. The High Court approved this observation in Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. The FT Eastment approach has been consistently followed.

18    Because the application was made ex parte, there was a duty of disclosure that fell upon the plaintiff. It was required to bring to the Court’s attention all matters that could be considered relevant to the exercise of the discretion to convene the scheme meeting: Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; [2002] NSWSC 1177 at [7] (per Barrett J).

consideration

19    I was satisfied that Medical Australia is a Pt 5.1 body as that term is defined in s 9 of the Corporations Act. I was also satisfied that the text of the Scheme, which is at annexure C to the proposed scheme booklet, provided prima facie evidence that the Scheme is an arrangement within the meaning of s 411(1) of the Corporations Act. The Scheme is an “acquisition” scheme and is within the concept of an “arrangement” that has often been approved by Australian courts: see Simavita Holdings Limited, in the matter of Simavita Holdings Limited [2013] FCA 1274 (Simavita) at [2] (per Farrell J).

20    Medical Australia had entered into the Implementation Agreement, thus committing itself to propounding the Scheme. This provides prima facie evidence that the Scheme is bona fide and has been properly proposed.

21    There was evidence that ASIC had been notified of the hearing in accordance with the requirements of s 411(2)(a) of the Corporations Act and had had a reasonable opportunity to examine the terms of the proposed scheme.

22    The proposed scheme booklet sets out a summary of the advantages and disadvantages of the Scheme and the directors’ recommendations (section 11); includes a set of frequently asked questions and answers (section 5); summarises the Scheme (section 7); provides detailed information on Medical Australia and ICU, including the latter’s board (sections 9 and 10); provides information on the taxation implications of the Scheme (section 12); and includes additional information which, among other things, sets out the interests of Medical Australia directors and the effect of the Scheme on the directors. I was satisfied that the proposed scheme booklet explained the effect of the Scheme and included prescribed information and other information that is material to a member’s decision as to whether to agree to the Scheme as required by ss 411(3) and 412(1) of the Corporations Act.

Other particular matters

23    Medical Australia identified three particular matters that it considered appropriate to bring to the Court’s attention, although it submitted that none of those matters should be of concern to the Court.

Performance risk

24    The Scheme is subject to the conditions precedent set out in cl 3.1 of the Scheme. As set out at [10] above, the Scheme is, in effect, self-executing. As described at [9] above and as required by cll 4.2 and 4.5 of the Scheme, the obligation to transfer the scheme shares is subject to the provision of the scheme consideration, which is a cash payment of $0.086 per Medical Australia share held on the scheme implementation date.

25    Medical Australia submitted, and I accepted, that the procedure required by the Scheme, ensures that the Scheme consideration is provided prior to the transfer of any shares and mitigates any performance risk.

26    Medical Australia also noted that ICU and ICU BV, both of which have executed the deed poll, are foreign entities. Where that is the case, the Court has indicated that the company should provide evidence that the deed poll has been duly executed and is enforceable: Simavita at [43]-[44]. In Veda Group Limited, in the matter of Veda Group Limited [2015] FCA 1506 Yates J observed at [30]-[33] that, where the parties have agreed to submit to the exclusive jurisdiction of an Australian court and have agreed that domestic law will apply as the proper law of the contract in proceedings arising out of, or in connection with, the deed poll, it is not necessary to provide an opinion on the question of whether proceedings arising out of, or in connection with, the deed poll can be brought in another forum.

27    Here, the deed poll is governed by the laws of New South Wales. ICU and ICU BV have submitted to the non-exclusive jurisdiction of the courts exercising jurisdiction in New South Wales and courts of appeal from them in relation to any proceeding arising out of, or in connection with, the Scheme and have waived any right to object to the venue of any legal process in these courts based on absence of jurisdiction or inconvenient forum. In those circumstances, Medical Australia submitted that it will provide evidence from a lawyer in the jurisdiction of incorporation of each of ICU and ICU BV opining on the due execution of the deed poll at the second court hearing: see Ecosave Holdings Limited, in the matter of Ecosave Holdings Limited [2015] FCA 1121 at [16] (per Yates J).

Deemed warranties

28    Clause 7.4 of the Scheme provides for a deemed warranty by each scheme shareholder that their shares are fully paid and free of encumbrances. Medical Australia submitted that the inclusion of a clause of this kind will not prevent the Court from making orders under s 411(1) of the Corporations Act. I accepted that to be so: see Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 (APN News) at [59]-[62] (per Lindgren J).

Deal protection clauses

29    Clause 13.3 of the Implementation Agreement requires Medical Australia to pay a break fee of $135,000 if the Scheme does not proceed in the circumstances contemplated by that clause. In addition, cl 12 of the Implementation Agreement includes “no-shop”, “no-talk”, “no due diligence”, “notification” and “matching rights” obligations. These provisions are all disclosed in the scheme booklet in sections 8.8 and 8.9.

30    In APN News at [55] Lindgren J said in relation to no-shop and break-fee provisions that it would be desirable if applications under s 411(1) of the Corporations Act were supported by affidavit evidence directed to showing:

•    that the no-shop and break fee provisions are the result of a normal commercial negotiation, and explaining, at least briefly and in general terms, the factual basis for that statement (see [46] above);

•    that the directors of the target company, or at least those directors of it who are not affiliated with the offeror, believe that the provisions do not operate against the interests of offeree shareholders, and that in fact it was in the interests of such shareholders that the directors agreed to the inclusion of the provisions in the merger implementation agreement (see [46] above and Re Paramount Communications Inc Shareholders’ Litigation 637 A2d 34 (Del Supr 1993) for a case in which a target company’s directors’ commitment to no-shop and break-fee provisions was held, in all the circumstances, to constitute a breach of their fiduciary duty); and

•    in the case of the break fee, explaining, by reference to calculations based on the evidence before the Court, the percentage that the break fee represents (a) of the “equity value” of the target company, calculated in accordance with para 7.18 of the Takeovers Panel’s guidance note 7, and (b) of the scheme consideration (the explanation might, instead, be conveyed in a submission, but still by reference to the evidence before the court).

31    In that regard, Medical Australia referred to the evidence of Mr Mitchell in which he explains that the break fee is a genuine pre-estimate of ICU’s costs and that the sum was the subject of negotiation between the directors of Medical Australia and ICU and was agreed accordingly.

32    Medical Australia acknowledged that the break fee represents 1.1% of the equity value of Medical Australia based on the scheme consideration of $11,761,878.66, which is higher than the 1% referred to in Guidance Note 7: Lock-up devices issued by the Takeover Panel. It submitted that the break fee was not unacceptable because it is neither anti-competitive nor coercive because:

(1)    it is not payable if the Scheme does not proceed because Medical Australia shareholders do not approve it by the requisite majorities at the scheme meeting; and

(2)    although the break fee is payable by Medical Australia in respect of a competing proposal, in those circumstances Medical Australia’s obligation to pay the break fee would be funded by the proponent of the superior proposal.

33    I accepted that the break fee was not excessive in those circumstances.

conclusion

34    For the above reasons I made the orders sought by Medical Australia.

Associate:

Dated:    9 November 2017