FEDERAL COURT OF AUSTRALIA
Healthscope Limited, in the matter of Healthscope Limited [2019] FCA 542
ORDERS
DATE OF ORDER: |
OTHER MATTERS:
A. The Court notes that the Australian Securities and Investments Commission (ASIC) was provided with at least 14 days’ notice of the hearing of this application.
B. The Court is satisfied that AISC has had a reasonable opportunity to:
(a) examine the terms of the proposed scheme of arrangement to which the application relates and a draft explanatory statement relating to that arrangement; and
(b) make submissions to the court in relation to the proposed scheme of arrangement and the draft explanatory statement.
THE COURT ORDERS THAT:
1. Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act), the Plaintiff convene and hold a meeting (Scheme Meeting) of the holders of ordinary shares in the Plaintiff (Scheme Shareholders):
(a) to consider, and, if thought fit, to approve (with or without modification) the scheme of arrangement (Scheme) proposed to be made between the Plaintiff and its shareholders, the terms of which are as set out in Annexure B to these orders; and
(b) to be held at Mayfair Ballroom, Grand Hyatt Melbourne, 123 Collins Street, Melbourne, Victoria on Wednesday, 22 May 2019 commencing at 10.00 am (Melbourne time).
2. The Scheme Meeting be convened by sending on or before 23 April 2019:
(a) in the case of Scheme Shareholders who have nominated an electronic address for the purposes of receiving electronic copies of shareholder communications (including notices of meetings and proxy forms but excluding annual reports and shareholder statements) (Email Shareholders), an email substantially in the form of one of the two emails at Annexure IAP4 to the affidavit Ingrid Anne Player dated 11 April 2019 and which contains links to:
(i) an electronic copy of a document substantially in the form of the transaction booklet, a draft of which is at Annexure RAL11 to the affidavit of Rodd Ashton Levy dated 15 April 2019 (Transaction Booklet), in a form that allows text within the copy to be searched by a computer, and which contains, among other things, the Notice of Scheme Meeting at Annexure E; and
(ii) an online portal or website that is accessible by the shareholder and which enables the shareholder to lodge their proxy and voting instructions online;
(b) in the case of Scheme Shareholders whose registered address is in Australia (excluding any Email Shareholders), the following documents by ordinary post addressed to the relevant addresses recorded in the Plaintiff’s register:
(i) a document substantially in the form of the Transaction Booklet (which contains, among other things, the Notice of Scheme Meeting at Annexure E);
(ii) a personalised proxy form for the Scheme Meeting, substantially in the form of Annexure RAL8 to the affidavit of Rodd Ashton Levy dated 12 April 2019 (Proxy Form); and
(iii) a reply paid envelope for the return of the Proxy Form; and
(c) in the case of Scheme Shareholders with registered addresses outside Australia (excluding any Email Shareholders), the following documents by airmail or international courier service addressed to the relevant addresses recorded in the Plaintiff’s register:
(i) a document substantially in the form of the Transaction Booklet (which contains, among other things, the Notice of Scheme Meeting at Annexure E);
(ii) a personalised Proxy Form; and
(iii) a return envelope for the return of the Proxy Form.
3. Subject to these Orders, the Scheme Meeting be convened, held and conducted in accordance with the provisions of:
(a) Part 2G.2 of the Act (save for any applicable replaceable rule) that apply to a meeting of the Plaintiff’s members; and
(b) the Plaintiff’s constitution that apply in relation to meetings of members and that are not inconsistent with Part 2G.2 of the Act.
4. Voting on the resolution to approve the Scheme is to be conducted by way of a poll.
5. A Proxy Form in respect of the Scheme Meeting will be valid and effective if, and only if, it is completed and delivered in accordance with its terms by 4.00 pm (Melbourne time) on 20 May 2019.
6. Ms Paula Dwyer, or failing her, Mr Antoni Cipa, be Chair of the Scheme Meeting.
7. The Chair of the Scheme Meeting shall have the power to adjourn the meeting to such time, date and place as she or he considers appropriate.
8. Compliance with rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) (Rules), except insofar as it operates to apply rule 75-15(2) of the Insolvency Practice Rules (Corporations) 2016 (Cth) to the Scheme Meeting, is dispensed with.
9. Compliance with rule 3.4 and Form 6 of the Rules is dispensed with.
10. The Plaintiff publish in The Australian newspaper once on or before 15 May 2019 an advertisement substantially in the form of Annexure A to these Orders.
11. The further hearing of the Originating Process is adjourned to a hearing before the Honourable Justice Beach on 24 May 2019 at 9.30 am (Melbourne time) or as soon thereafter as the business of the Court allows.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ANNEXURE A
Notice of Second Court Hearing
_________________________________________________
Notice of hearing to approve compromise or arrangement
TO all the members of Healthscope Limited (ACN 144 840 639) (Healthscope)
TAKE NOTICE that at 9:30 am on 24 May 2019 the Federal Court of Australia (Victorian Registry) at 305 William Street Melbourne VIC 3000 will hear an application by Healthscope seeking the approval of a compromise or arrangement between Healthscope and its members if agreed to by a resolution to be considered, and, if thought fit, passed at a meeting of such members to be held on 22 May 2019 at Mayfair Ballroom, Grand Hyatt Melbourne, 123 Collins Street, Melbourne, Victoria, commencing at 10:00am (Melbourne time).
If you wish to oppose the approval of the compromise or arrangement, you must file and serve on Healthscope a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on Healthscope at its address for service by 5.00 pm on 23 May 2019.
The address for service of Healthscope is: c/o Herbert Smith Freehills, Level 43, 101 Collins
Street, Melbourne VIC 3000 (Ref: Ruth Overington).
ANNEXURE B
Scheme
_________________________________________________
[The order entered is available on the Commonwealth Courts Portal, which attaches the Scheme]
BEACH J:
1 Healthscope Limited is a healthcare provider that operates private hospitals in Australia and pathology services across New Zealand. Its shares are listed on the ASX.
2 Healthscope has applied for orders under s 411 of the Corporations Act 2001 (Cth) (Act) that, inter-alia, there be convened a meeting of Healthscope’s shareholders for the purpose of considering, and if thought fit, agreeing to a scheme of arrangement (the Scheme) proposed to be made between Healthscope and its shareholders at the relevant record date (Scheme shareholders). ASIC has been given the required notice of the present application and has appeared to make submissions concerning the need for separate classes and separate meetings. In that respect it has opposed the order sought by Healthscope for the convening of only one meeting.
3 The Scheme, if implemented, will result in all shares in Healthscope held by Scheme shareholders being transferred to ANZ Hospitals Pty Ltd (Brookfield BidCo). Brookfield BidCo is indirectly owned as to 99% by BCP VIG Holdings L.P. (Brookfield LP) and as to 1% by Brookfield Capital Partners V (CDN II) GP LP.
4 In case the Scheme is not agreed to by the Healthscope shareholders, Brookfield LP is also making a simultaneous off-market takeover offer to acquire all of the issued Healthscope shares for cash payments totalling $2.365 per share (takeover bid). The takeover bid is conditional on Brookfield LP achieving acceptances from Healthscope shareholders representing at least 50.1% of Healthscope’s total issued share capital, and the Scheme not being successful.
5 For the following reasons, earlier this week I made the orders sought by Healthscope.
BACKGROUND
6 Let me explain some of the background.
7 On 1 February 2019, Healthscope entered into an implementation deed with Brookfield BidCo, which at the time had the name VIG Bidco Pty Ltd, and Brookfield LP (the implementation deed). In accordance with the implementation deed, Brookfield BidCo proposed to acquire all of the ordinary shares in Healthscope by way of the proposed Scheme, and Brookfield LP concurrently proposed to offer to acquire all of the ordinary shares in Healthscope by way of the takeover bid (the transaction).
8 Brookfield Bidco is an unlisted Australian proprietary company. It is a special purpose company that was incorporated for the purpose of holding 100% of the shares in Healthscope post implementation of the Scheme. Brookfield BidCo has not commenced trading or conducted business, and does not own any assets or have any liabilities, other than in connection with its incorporation, the entry into of transaction documents in connection with the transaction and the taking of such other actions as are necessary to facilitate the transaction.
9 ANZ Hospitals Senior Holdco Pty Ltd (Brookfield Senior HoldCo) and ANZ Hospitals Midco Pty Ltd (Brookfield MidCo) are also special purpose companies incorporated for the purpose of indirectly holding all of the shares in Healthscope. Brookfield Senior HoldCo and Brookfield MidCo are unlisted, Australian proprietary companies that have not commenced trading or conducted business and do not own any assets or have any liabilities other than in connection with their incorporation and the taking of such other actions as are necessary to facilitate the implementation of the transaction.
10 ANZ Hospitals Topco Limited (Brookfield HoldCo) is a special purpose company that was incorporated for the purposes of indirectly holding all of the shares in Brookfield BidCo and issuing Brookfield HoldCo class B shares to Healthscope shareholders who make an election to receive consideration in the form of Brookfield HoldCo class B shares as part of the Scheme. Brookfield HoldCo is an unlisted, Australian public company that has not commenced trading or conducted business, and does not own any assets or have any liabilities, other than in connection with its incorporation, the entry into of the transaction documents in connection with the Scheme and the taking of such other actions as are necessary to facilitate the Scheme, and actions in connection with issuing Brookfield HoldCo class B shares to Healthscope shareholders who make a scrip election. Brookfield HoldCo indirectly wholly owns Brookfield BidCo through Brookfield Senior HoldCo and Brookfield MidCo.
11 Brookfield Capital Partners V (CDN II) GP LP, a limited partnership formed in Canada, directly owns 1% of Brookfield HoldCo and Brookfield LP, a limited partnership formed in the Cayman Islands, directly owns 99% of Brookfield Holdco.
12 Brookfield LP is indirectly owned by “Brookfield Funds”, being a series of foreign limited partnerships which are managed and controlled by subsidiaries of Brookfield Asset Management Inc. That company is an alternative asset management company with approximately US$350 billion of assets under management listed on the New York Stock Exchange, the Euronext and the Toronto Stock Exchange.
13 Brookfield Capital Partners V (CDN II) GP LP is indirectly owned by Brookfield Asset Management Inc.
14 If the Scheme is approved and implemented:
(a) Brookfield HoldCo’s principal asset will be its shares in its wholly owned subsidiary, Brookfield MidCo;
(b) Brookfield Midco’s principal asset will be its shares in its wholly owned subsidiary, Brookfield Senior HoldCo;
(c) Brookfield Senior HoldCo’s principal asset will be its shares in its wholly owned subsidiary, Brookfield BidCo;
(d) Brookfield BidCo’s principal asset will be its shares in its wholly owned subsidiary, Healthscope;
(e) Brookfield HoldCo will also issue class B shares to Healthscope shareholders who make a scrip election provided certain conditions are satisfied;
(f) all other Healthscope shareholders will receive cash consideration; and
(g) Brookfield LP and/or Brookfield Capital Partners V (CDN II) GP LP will retain at least 55% of the shares in Brookfield HoldCo as class A shares.
15 So if the Scheme is implemented:
(a) Healthscope will be a direct, wholly-owned subsidiary of Brookfield BidCo;
(b) Brookfield BidCo will be an indirect wholly-owned subsidiary of the unlisted public company, Brookfield HoldCo; and
(c) the Scheme shareholders will receive for each Scheme share held (the Scheme consideration) either:
(i) cash consideration of $2.465 (Scheme cash consideration); or
(ii) if they validly elect, and subject to a minimum threshold of Healthscope shares being subject to an election, and the potential scale back of the shares issued as described later, 2.465 Brookfield HoldCo class B shares (Scheme scrip consideration).
16 Unless a Scheme shareholder submits a valid election to receive the Scheme scrip consideration, a Scheme shareholder will receive their Scheme consideration in the form of the Scheme cash consideration. The Healthscope directors have recommended that Scheme shareholders do not make an election for the Scheme scrip consideration, so that they receive the Scheme cash consideration.
17 An ineligible foreign shareholder will be unable to receive the Scheme scrip consideration and accordingly will receive the Scheme cash consideration for their Scheme shares.
18 Scheme shareholders who are not ineligible foreign shareholders will be able to elect to receive the Scheme scrip consideration, so long as valid elections are made by Healthscope shareholders holding, in aggregate, at least 10% of the issued Healthscope shares. As I have said, the Scheme scrip consideration comprises class B ordinary shares in Brookfield HoldCo, an unlisted public company that is incorporated in Australia and which indirectly holds all of the issued shares in Brookfield BidCo.
19 In order to elect to receive the Scheme scrip consideration a Scheme shareholder must have submitted a validly completed election form to Computershare Investor Services Pty Ltd (Computershare), the entity that manages Healthscope’s share registry, by 5pm (Melbourne time) on the day that is eight clear business days before the Scheme meeting, or such other time as Healthscope and Brookfield BidCo may agree in writing.
20 The ability of Scheme shareholders to receive the Scheme scrip consideration is subject to the scaleback arrangements set out in the Scheme. The scaleback arrangements have the effect such that certain parties determined by Brookfield LP will own at least 55% of Brookfield HoldCo upon implementation of the Scheme.
21 There will be 700 million Brookfield HoldCo class B shares, equivalent to 45% of the issued capital of Brookfield HoldCo as at the implementation of the Scheme, made available for the purposes of the Scheme scrip consideration. If there are valid elections that would result in the need to issue more than 700 million Brookfield HoldCo class B shares in aggregate to Scheme shareholders, the scaleback arrangement will apply so that scheme shareholders who have made a valid election will receive a pro-rated number of Brookfield HoldCo class B shares relative to the aggregate number of Scheme shares that have been elected to be exchanged for the Scheme scrip consideration.
22 Any Scheme shareholder who receives less than the full Scheme scrip consideration due to the operation of the scaleback arrangements will receive a cash payment equal to the amount of the shortfall between 2.465 Brookfield HoldCo class B shares per Scheme share and the amount of Brookfield HoldCo class B shares received per Scheme share.
23 Once the extent to which the scaleback arrangement will apply is known, Healthscope intends to make an announcement to the ASX explaining the application of the scaleback arrangement. This announcement will be made in the time period between the last time to validly submit an election to receive the Scheme scrip consideration (5pm on the day that is eight business days before the Scheme meeting) and the Scheme meeting. Accordingly, Healthscope shareholders will be able to know the amount of the Scheme scrip consideration that they will be eligible to receive for any Scheme shares held prior to voting at the Scheme meeting.
24 In the absence of any Scheme shareholder who has received a shareholder approval by the holders of at least 50% of the Brookfield HoldCo class A shares to hold the Brookfield HoldCo class B shares directly, a nominee appointed by Brookfield BidCo will hold the legal title to all Brookfield HoldCo class B shares issued to Scheme shareholders receiving the Scheme scrip consideration. This holding by the nominee will occur by way of the nominee holding the shares as a bare trustee for the benefit of each relevant Scheme shareholder. Accordingly, while a Scheme shareholder will not be the registered holder of the Brookfield HoldCo class B shares, they will receive the beneficial title to such shares.
25 The proposed transaction booklet summarises the nature of the Scheme scrip consideration and contains detailed information on the Brookfield HoldCo class B shares including in relation to the rights and liabilities attaching to those shares.
26 But as I have said, the Healthscope directors have not recommended that Scheme shareholders make an election to receive the Scheme scrip consideration. This is due to the significant risks associated with holding Brookfield HoldCo class B shares, which are set out in the proposed transaction booklet.
27 The Scheme is being proposed to Healthscope shareholders concurrently with a takeover bid by Brookfield LP to acquire up to 100% of the issued Healthscope shares for cash payments totalling $2.365 per share. This $2.365 amount is in addition to the 3.5 cents per share interim dividend paid to Healthscope shareholders on 26 March 2019 and is comprised of:
(a) $1.037 per share paid by Brookfield LP;
(b) a partly franked special dividend of $0.637 per share paid by Healthscope; and
(c) a capital return, which is subject to Healthscope shareholder approval, of $0.691 per share paid by Healthscope (capital return),
subject to the relevant Healthscope shareholder holding Healthscope shares at the relevant record date and the conditions to payment of the special dividend and capital return having been satisfied or waived.
28 The takeover bid is open for acceptance by Healthscope shareholders from the date that the takeover offer is made, which is anticipated to be 23 April 2019, until 19 June 2019 unless otherwise extended by Brookfield LP in accordance with the Act.
29 The takeover bid is conditional on, inter-alia:
(a) the Scheme either not being approved by the requisite majority of shares voted under s 411(4)(a) or, if that majority is achieved, the Scheme not being approved by the Court under s 411(4)(b); and
(b) Brookfield LP holding a relevant interest in at least 50.1% of the Healthscope shares on issue on a fully diluted basis at the end of the offer period.
30 Accordingly, the takeover bid enables Healthscope shareholders to receive consideration for the acquisition of their Healthscope shares in circumstances where the Scheme does not proceed. In other words, if the Scheme is not approved or implemented and the takeover offer becomes unconditional, Brookfield LP will hold 50.1% to 100% of the shares in Healthscope and non-accepting Healthscope shareholders will hold 0% to 49.9% of the shares in Healthscope.
31 Details of the takeover bid are set out in the implementation deed and in the proposed transaction booklet.
32 Let me deal with another matter that is central to an issue that I will need to discuss later and forms the basis of ASIC’s concerns.
33 Healthscope has entered into agreements to sell 22 freehold hospital assets for approximately $2.5 billion (in aggregate) and lease them back. The purchasers of the 22 freehold hospital assets are:
(a) NWH Australia AssetCo Pty Ltd as trustee of the NWH Australia Asset Trust (NWH AssetCo); and
(b) MPT Operating Partnership, L.P.
34 The sale of the properties is conditional on the Scheme becoming effective or the takeover bid becoming unconditional.
35 On 1 February 2019, Northwest Healthcare Properties Real Estate Investment Trust (NWH REIT), a controlling associate of NWH AssetCo, disclosed to the ASX that NWH AssetCo had a right to acquire up to 13.41% of the Healthscope shares on issue under a forward derivative contract entered into on 8 May 2018 with Deutsche Bank. Following this announcement, Brookfield BidCo disclosed to the ASX on 4 February 2019 that it had entered into a process, voting commitment and exclusivity deed with NWH REIT under which NWH REIT agreed to procure votes representing approximately 13.41% of the Healthscope shares on issue to vote in favour of the Scheme, to vote in favour of the resolution to approve the capital return, to vote against any competing proposal, and for those Healthscope shares to be tendered into the takeover bid by no later than one business day before the Scheme meeting. But despite such arrangements, Deutsche Bank may still be the registered holder of such shares at the time of the Scheme meeting although subject to a direction.
36 Such a voting and acceptance commitment is described in the proposed transaction booklet and is subject to a number of conditions, including the Healthscope directors continuing to recommend the transaction and the implementation deed not being terminated.
37 The independent expert has been asked to opine on certain aspects of the sale and leaseback arrangements with NWH AssetCo. The independent expert has concluded that these arrangements do not confer a ‘net benefit’ on NWH REIT or its controlled affiliates for the purposes of Takeovers Panel Guidance Note 21: Collateral Benefits. The reasons for the independent expert’s conclusion are summarised in the proposed transaction booklet.
38 Healthscope proposes to tag the votes of NWH REIT and its associates at the Scheme meeting, and provide a voting report to me for the purposes of the second court hearing which will detail how NWH REIT and its associates voted their Healthscope shares in respect of the Scheme.
39 Information in relation to the sale and leaseback is contained in the transaction booklet.
40 More generally in relation to the transaction booklet, due to the interrelated nature of the transactions proposed under the implementation deed to acquire control of Healthscope, Healthscope has proposed to send a single integrated transaction booklet to its shareholders, a step with which I agree, which comprises:
(a) the explanatory statement in relation to the Scheme required by s 412(1);
(b) the bidder’s statement for the takeover bid under Pt 6.5, Div 2;
(c) the target’s statement for the takeover bid under Pt 6.5, Div 3; and
(d) the explanatory statement for the capital return required by s 256C(4).
41 Let me finally note by way of background that at the close of the CHESS system on 8 April 2019:
(a) Healthscope had 1,741,161,795 fully paid ordinary shares on issue; and
(b) Healthscope had 24,011 shareholders, of whom:
(i) the 10 largest held 1,443,259,730 Healthscope shares, being 82.89% of the shares on issue;
(ii) 667 had a registered address outside of Australia, with those shareholders holding a total of 13,809,827 Healthscope shares;
(iii) 23,981 held 1,000,000 or fewer Healthscope shares; and
(iv) 18,459 held 10,000 or fewer Healthscope shares.
42 Further, as at the close of business on 8 April 2019, Healthscope’s market capitalisation was $4,248,434,780 being 1,741,161,795 shares on issue multiplied by $2.44, which was the closing share price of Healthscope shares on the ASX on 8 April 2019.
POWER AND DISCRETION
43 Section 411(1) confers a discretion on the Court to make an order to convene the necessary meeting(s) if certain requirements are satisfied, namely:
(a) a compromise or arrangement is proposed between a Part 5.1 body and its members or any class of them;
(b) application for the order is made in a summary way by the body;
(c) 14 days’ notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits); and
(d) the Court is satisfied that ASIC has had a reasonable opportunity to:
(i) examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and
(ii) make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.
44 Subject to my discussion concerning the separate meetings question, these requirements have been satisfied in the present case and accordingly my power has been enlivened. I am also satisfied that relevant provisions of the Corporations Regulations 2001 (Cth) (the Regulations) and the Federal Court (Corporations) Rules 2000 (Cth) have been satisfied. Let me turn then to the exercise of discretion.
45 My function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is, the proposed scheme appears now to be on its face “so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further” (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J). But in the present case, in my view there is no issue arising from the Scheme which would unquestionably lead to a refusal to approve the Scheme at the approval hearing. It cannot be said that the Scheme on its face is “so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further”. Put another way, the Scheme is not of such a nature and cast in such terms that if it receives the support of the statutory majorities at the meeting, nevertheless I would not be likely to approve it at the second court hearing.
46 I will elaborate on this question later as to whether the Scheme is fit for consideration by the proposed meeting, in the sense that it is of such a nature and cast in such terms that, if it achieves the statutory majorities at the Scheme meeting, I would be likely to approve it, and then I will say something on the question as to whether the members are to be properly informed as to the nature of the Scheme before the meeting. But for the moment I need to deal in some detail with an issue that ASIC has raised.
SEPARATE MEETINGS?
47 Healthscope seeks an order under s 411(1) that a single meeting of its shareholders be convened for the purposes of considering the Scheme. But ASIC contends that the proposed Scheme should in reality be viewed as between Healthscope and two separate classes of its shareholders, with NWH AssetCo, NWH REIT or their affiliates being one class and all other Healthscope shareholders being the other class. Accordingly, ASIC contends that a separate meeting of each class is required to be convened.
48 Now I accept that the question of classes and separate class meetings for the purposes of a scheme of arrangement falls to be considered by reference to the text and context of s 411(1), which relevantly refers to an arrangement proposed between a company and its members or any class of them. And where separate classes arise, each class will only be bound by the scheme resolution if they have each approved the scheme by the requisite statutory majorities at their separate class meetings with subsequent Court approval.
49 In summary, ASIC says that because of the various sale and leaseback arrangements with Healthscope to which NWH AssetCo is a party, which I have touched upon earlier, NWH AssetCo (and its affiliates) must vote in a separate class to all other Healthscope shareholders.
50 In order to address ASIC’s concerns it is necessary to delve further into the factual background. The class question arises in the context of the following matters leading up to Healthscope’s announcement on 1 February 2019 of Brookfield BidCo’s transaction to acquire 100% of the shares in Healthscope by way of a scheme of arrangement and a simultaneous takeover offer, which transaction included a proposed sale and leaseback by Healthscope of 11 properties to NWH AssetCo and a sale and leaseback by Healthscope of a further 11 properties to MPT Operating Partnership, L.P. (MPT). For the purposes of this section of my reasons I will refer to either or both of Brookfield BidCo and Brookfield LP as simply “Brookfield”.
51 On 26 April 2018, Healthscope announced receipt of an indication of interest from BGH Capital I, together with AustralianSuper Pty Ltd, Carob Investment Private Limited (a subsidiary of GIC (Ventures) Private Limited), Ontario Teachers’ Pension Plan Board and Canada Pension Plan Investment Board (collectively the “BGH – AustralianSuper Consortium”) to acquire all of the shares in Healthscope for $2.36 per share. The BGH – AustralianSuper Consortium held voting power in 20% of the shares in Healthscope and was subject to exclusivity arrangements which provided that this 20% parcel of shares could not be voted in favour of a competing proposal or accepted into any competing proposal.
52 On 8 May 2018, NWH REIT lodged an initial substantial shareholder notice in which is stated that it had acquired a 10% relevant interest in Healthscope by way of a forward derivative contract with Deutsche Bank AG, which acquisition was described in the notice as a “Strategic Investment”. The accompanying announcement to that notice included the following statements by NWH REIT:
Healthscope is one of Australia’s leading private hospital operators with a portfolio of 45 hospitals concentrated in large metropolitan centres throughout Australia.
An acquisition of Healthscope’s underlying hospital related real estate is of interest to NWH and Vital Healthcare Property Trust (Vital) in line with their long term strategy to invest in healthcare real estate assets in the Australasian market. NWH and Vital currently intend to pursue any potential Healthscope real estate acquisition jointly, with scope to introduce other capital partners as appropriate.
(Emphasis added.)
53 In this regard, I also note that in the draft independent expert report provided to me, Grant Samuel noted that “NorthWest acquired its interest in Healthscope in May 2018 shortly after announcement of the initial approach by the BGH-AustralianSuper Consortium. NorthWest acquired the interest to “give it a seat at the table” and some degree of leverage to pursue the acquisition of Healthscope’s underlying property portfolio”.
54 Now in fact the relevant forward derivative contract entered into on 8 May 2018 was between NWH AssetCo and Deutsche Bank, and described as a “Share Option Transaction – Collar (Cash Settlement)”. NWH AssetCo is a subsidiary of NWH REIT. So the transaction entered into by NWH AssetCo with Deutsche Bank gave rise to NWH REIT’s relevant interest in shares in Healthscope.
55 On 14 May 2018, Healthscope announced that it had received an indicative proposal from Brookfield to acquire all of the shares in Healthscope by way of a scheme of arrangement at an indicative price of $2.50 per share.
56 On 22 May 2018, Healthscope announced that it had decided not to provide due diligence to either Brookfield or the BGH – AustralianSuper Consortium and announced that it would undertake a strategic review of its hospital property portfolio.
57 On 21 August 2018, Healthscope announced that it had completed its strategic review of its freehold hospital property assets and that it was proposing to establish an unlisted property trust to hold the majority of those assets which would be leased back to Healthscope. It was proposed that Healthscope would hold a majority interest in the hospital property trust and a new co-investor would be introduced to hold up to 49% in the trust.
58 On 23 October 2018, Healthscope announced that it had received an unsolicited proposal from the BGH – AustralianSuper Consortium to acquire all of the shares in Healthscope by way of a scheme of arrangement at an indicative price of $2.36 per share being the same price per share as its 26 April 2018 proposal. The proposal was subject to a significant number of conditions including a condition that the proposed sale of an interest in Healthscope’s property assets not proceed and no other material assets be divested.
59 On 12 November 2018, Healthscope announced that it had received a proposal from Brookfield to acquire 100% of Healthscope by way of an off-market takeover representing $2.455 per share and a simultaneous scheme of arrangement representing $2.585 per share which contained a condition that Healthscope not enter into a binding agreement to give effect to its proposed property transaction announced on 21 August 2018 or divest other material assets, but which permitted Healthscope to continue to conduct the process already underway in respect of its proposed property transaction.
60 During discussions between Brookfield and Healthscope, Brookfield indicated to Healthscope that a 100% sale and leaseback of the relevant properties would form part of Brookfield’s binding proposal. But Healthscope continued to progress its own property proposal in parallel during November and December 2018 in case the Brookfield transaction did not proceed to a definitive agreement.
61 On 20 November 2018, NWH REIT announced that it had acquired on-market 1% of voting shares in Healthscope which together with the forward derivative contract with Deutsche Bank increased its interest in voting shares in Healthscope to up to 11.1%. NWH REIT reiterated the comments made in its 8 May 2018 proposal about pursuing a potential Healthscope real estate acquisition. Again, the relevant transaction seems to have been entered into by NWH AssetCo.
62 On 4 December 2018, NWH REIT made an announcement in which it referred to its 8 May 2018 announcement and said further that on 30 November 2018 it had amended the forward derivative contract with Deustche Bank to increase its interest in voting shares in Healthscope to 13.41%. In that announcement, NWH REIT again reiterated the comments made in its 8 May 2018 proposal about pursuing a potential Healthscope real estate acquisition. Again, the relevant dealings were between NWH AssetCo and Deutsche Bank.
63 On 1 February 2019, a series of interlocking agreements were entered into between Brookfield and NWH REIT, Healthscope and NWH REIT and Brookfield and Healthscope regarding the scheme of arrangement, the simultaneous takeover and the sale and leaseback of properties by Healthscope to NWH AssetCo. The transaction value of the properties to be sold by Healthscope to NWH AssetCo under the sale and leaseback arrangements was approximately $1.3 billion.
64 ASIC has contended that the class question is to be considered through the prism of the rights and associated obligations on the part of NWH REIT, NWH AssetCo and their affiliates as created by these interlocking agreements and the impact of those rights and associated obligations on the ability of NWH REIT, NWH AssetCo and their affiliates on the one hand, and the other Healthscope shareholders on the other hand, to consult together with a view to their common interest. Let me say something concerning these interlocking agreements.
65 The first agreement is the Process, Voting Commitment and Exclusivity Deed (Process Deed) dated 1 February 2019 between Brookfield and NWH REIT.
66 Under the Process Deed as correctly summarised by ASIC:
(a) Brookfield agreed that it would not enter into an implementation deed with Healthscope in respect of the proposed scheme of arrangement and concurrent takeover unless Healthscope had entered into the commitment deed with NWH REIT providing for the sale of certain Healthscope hospital properties to NWH REIT/NWH AssetCo and the leaseback of those properties to Healthscope or only enter into an implementation deed if that implementation deed is conditional on (or otherwise requires) Healthscope’s entry into the commitment deed (and such condition is for Brookfield’s benefit and must not be waived without NWH REIT’s prior written consent) (clause 3.2(a));
(b) Brookfield undertook to NWH REIT that it would take all reasonable steps within its control to procure that Healthscope entered into the commitment deed and that Healthscope complied with its obligations under that deed (clause 3.2(b));
(c) Brookfield undertook to NWH REIT not to waive or amend certain specified conditions or rights in the implementation deed or waive the takeover condition in certain circumstances where such waiver or amendment would be materially prejudicial to NWH REIT without NWH REIT’s prior written consent (clause 3.3(a));
(d) Brookfield undertook to NWH REIT that if directed in writing to do so by NWH REIT, Brookfield would exercise any right it had to terminate the implementation deed or reserve its right to terminate the implementation deed to permit Brookfield and Healthscope to agree an extension to the timetable for the Scheme and/or takeover if Healthscope or its affiliates prior to the scheme meeting breached their obligations under the sale contracts (under which Healthscope was to agree to sell certain properties to NWH REIT/NWH AssetCo) or any step up contract in certain circumstances (clause 3.3(b));
(e) NWH REIT undertook in favour of Brookfield that during the exclusivity period it would procure that all of the shares the subject of the forward derivative contract with Deutsche Bank (defined in the Process Deed as the “Forward”) and any other Healthscope shares in which NWH REIT or NWH AssetCo had a relevant interest were:
(i) voted at the scheme meeting in favour of the Scheme in return for cash consideration;
(ii) voted at any general meeting of Healthscope to be held prior to the end date in favour of a capital reduction resolution in relation to the concurrent takeover;
(iii) tendered into the takeover no later than 1 business day prior to the scheme meeting;
(iv) voted against any competing proposal,
(clause 4(a)).
(f) these voting and tendering undertakings of NWH REIT ceased to apply if 2 business days before the scheme meeting, there was a settlement delay in any property or properties proposed to be sold by Healthscope to NWH REIT/NWH AssetCo under a sale contract (where the aggregate sale price exceeds $250 million) and where NWH REIT/NWH AssetCo had notified both Brookfield and Healthscope that it would not be acquiring any of those settlement delayed properties (clauses 4(b) and 10.2);
(g) NWH REIT agreed that during the exclusivity period it would not and would not procure that its affiliates and associates enter into any arrangement or agreement in relation to any competing proposal and would not propose or encourage any enquiries, negotiations or discussions with a view to obtaining from anyone any competing proposal or participate in negotiations or discussions with any person regarding any competing proposal (where the term “competing proposal” was defined to include any proposal where a third party could acquire 20% or more of the shares in any member of the Healthscope Group) (clause 7);
(h) NWH REIT must 2 business days before the scheme meeting either pay a certain amount into an escrow account or deliver to Brookfield a letter of credit for that amount, which amount was to be loaned to Brookfield under a loan called the “PropCo Bridge Loan” and where such amount could be applied by Brookfield towards the payment of the scheme cash consideration to Healthscope shareholders under the proposed scheme of arrangement (see clause 10);
(i) if NWH REIT failed to either pay the relevant amount into escrow or deliver the letter of credit then Brookfield could terminate the Process Deed and could request that Healthscope exercise any applicable right to terminate the commitment deed and any sale contract which had not been completed (clause 10.6);
(j) if NWH REIT failed to execute the PropCo Bridge Loan documentation, then Brookfield could request that Healthscope exercise any applicable right to terminate the commitment deed and any sale contract which had not been completed (clause 11.4);
(k) in the event that a sale of a particular Healthscope property to MPT did not proceed, NWH REIT/NWH AssetCo had the right to elect to acquire that property (clause 12 and the definition of “Step Up Event”); and
(l) in the event that the implementation deed was terminated, then Brookfield could by notice in writing to NWH REIT terminate the Process Deed (clause 13.3).
67 The second of these interlocking agreements is the commitment deed dated 1 February 2019 between Healthscope, NWH AssetCo and NWH REIT (as guarantor). Under the commitment deed as ASIC has correctly summarised:
(a) by the date that the bidder’s statement was to be dispatched, Healthscope had to procure that the Healthscope entity which was the proposed seller of the property to be sold to NWH AssetCo entered into a lease with Healthscope in respect of that property on certain terms (clause 6.1);
(b) by 1 business day before the scheme meeting, Healthscope was required to procure that the relevant Healthscope selling entity enter into a sale contract and the umbrella deed for each Healthscope property to be sold to NWH AssetCo (clauses 6.2 and 7.5);
(c) the settlement date for the contracts of sale was the next day after the implementation date of the Scheme;
(d) under the pro forma umbrella deed, if the implementation deed was terminated prior to the date of the scheme meeting then all of the sale contracts terminated on the same day as the implementation deed was terminated (clause 8.1).
68 ASIC has also made reference to the third and final interlocking agreement being the implementation deed which I have referred to earlier. Under this deed by way of summary:
(a) the Scheme will not be effective until each of the conditions in clause 3.1 are satisfied or waived. These conditions include FIRB approval for the NWH AssetCo sale and leaseback transaction. It is noted that under clause 3.3 of the Process Deed, Brookfield has undertaken to NWH REIT that it will not without NWH REIT’s consent waive or amend the condition in the implementation deed regarding the FIRB approval; I would note that this FIRB approval has now been obtained;
(b) Healthscope must:
(i) comply with its obligations under the property transaction documents, being those documents relating to the sale and leaseback of the relevant properties;
(ii) promptly provide to Brookfield any material notice or other material communication under or in connection with the property transaction documents and any replacement property transaction documents;
(iii) comply with any reasonable direction from Brookfield to exercise rights under the property transaction documents including a notice to complete or terminate the property transaction documents;
(iv) not exercise, amend, vary or waive any rights of the relevant Healthscope group member under the property transaction documents without the prior written consent of Brookfield,
(clause 8.4(a));
(c) Healthscope is not obliged to take any action in respect of a sale arranged or proposed by Brookfield of some or all of the real estate assets of the Healthscope group, a refinancing arranged or proposed by Brookfield of the Healthscope group or the use of proceeds of such sale or refinancing if in the opinion of the Healthscope board (after taking legal and financial advice) such action would be a breach of the law or otherwise breach the fiduciary or statutory duties of the Healthscope board or would require the implementation of a transaction or change to the capital structure before the takeover bid or the scheme is unconditional (clause 8.4(i));
(d) Healthscope may terminate the implementation deed prior to the close of the offer period for the takeover offer if a majority of the Healthscope board change or withdraw their recommendation to Healthscope shareholders to vote in favour of the scheme or the capital reduction resolution, accept the offer or recommend a superior proposal. Were the implementation deed to be terminated by reason of a superior proposal (which superior proposal would presumably be to the potential benefit of Healthscope shareholders including NWH AssetCo assuming it had settled the forward derivative contract) then under the pro forma umbrella deed, the sale contracts under which the Healthscope properties were to be sold to NWH AssetCo would be terminated and NWH AssetCo would lose the benefit of the $1.3 billion property sale transaction.
69 Following Healthscope’s announcement on 1 February 2019 of the proposed Scheme, concurrent takeover and the sale and leaseback transactions, the following announcements and notices were made or lodged by Brookfield and NWH REIT.
70 On 1 February 2019, NWH REIT issued an announcement saying, inter-alia, that:
(a) NWH AssetCo was not the registered holder of Healthscope shares but that it had a right to acquire up to 13.41% of Healthscope shares under a forward derivative contract entered into with Deutsche Bank;
(b) NWH AssetCo had a relevant interest in 8.74% of Healthscope shares being the number of shares in which Deutsche Bank then had a relevant interest.
71 On 4 February 2019, Brookfield lodged a notice of initial substantial holder which stated, inter-alia, that:
(a) the total number of votes attached to all of the voting shares in Healthscope or voting interests in the Scheme that the substantial holder or an associate had a relevant interest in on the date the substantial holder became a substantial holder was 8.74%;
(b) Brookfield did not consider that it had a relevant interest in any Healthscope shares, however, it had entered into an agreement with NWH REIT which may mean that it is taken to have an agreement or be acting in concert with NWH REIT in relation to the conduct of Healthscope’s affairs; I have emphasised aspects of this proposition given that ASIC has sought to attach greater significance to this notice than is warranted; and
(c) as far as Brookfield was aware, NWH REIT was not the owner of shares in Healthscope but that it controlled NWH AssetCo and NWH AssetCo was taken to have a relevant interest under it arrangements with Deutsche Bank.
72 On 19 March 2019, NWH AssetCo/NWH REIT lodged a notice of change of interests of substantial holder which stated that it now had a relevant interest in 10.13% of Healthscope shares under the forward derivative contract with Deutsche Bank.
73 On 25 March 2019, NWH AssetCo/NWH REIT lodged a further notice of change of interests of substantial holder which stated that it now had a relevant interest in 11.55% of Healthscope shares under the forward derivative contract with Deutsche Bank.
74 Let me now refer to statements made in the draft transaction booklet and the independent expert’s report which appear to be of relevance.
75 As to relevant interests held by BGH – AustralianSuper Consortium and NWH AssetCo/NWH REIT, it is noted that:
(a) on 9 November 2018, the BGH – AustralianSuper consortium disclosed to ASX that it had a relevant interest in shares representing voting power of 19.13% in Healthscope; and
(b) on 12 April 2019 Deutsche Bank had disclosed to ASX that it had a relevant interest in Healthscope shares. This represented voting power of 13.41% in Healthscope; correspondingly, as at 15 April 2019 NWH AssetCo/NWH REIT (and Brookfield) had an equivalent relevant interest in Healthscope shares.
76 As to the shares held by the BGH – AustralianSuper Consortium, the draft transaction booklet stated the following:
The Scheme can only proceed if, among other conditions, the requisite majorities of Healthscope Shareholders (being more than 50% in number present and voting and at least 75% of votes cast) vote in favour of the Scheme.
As at the date of the Implementation Deed, the BGH-AustralianSuper Consortium had agreed to vote its Healthscope Shares against any competing offer. The BGH-AustralianSuper Consortium held 19.13% of the total Healthscope Shares on issue as at the date of its substantial holder notice on 9 November 2018. This resulted in a risk that the Scheme may not be approved, and thus Healthscope Shareholders would be unable to benefit from Brookfield’s higher offer. Whilst the agreement between the BGH-AustralianSuper Consortium was terminated on 31 March 2019, the voting intentions of the former consortium members are not known.
The simultaneous Takeover Offer can proceed with a lower threshold of acceptances from Healthscope Shareholders holding at least 50.1% of the shares (and the satisfaction or waiver of other conditions).
The Takeover Offer enhances the possibility of delivering value to Healthscope Shareholders by increasing the prospects of a successful Brookfield transaction should the Scheme not be approved by the requisite majorities of Healthscope Shareholders.
77 As to the BGH – AustralianSuper Consortium, it is noted further that on 2 April 2019, AustralianSuper Pty Ltd lodged a notice of change of interests of substantial holder which stated in effect that AustralianSuper Pty Ltd now had a relevant interest in 15.86% of Healthscope shares and that it ceased to have a relevant interest in other Healthscope shares by reason of the expiry on 31 March 2019 of the co-operation agreement between AustralianSuper Pty Ltd, BGH and other consortium entities.
78 Further, as to the relevant interest that NWH AssetCo has under its forward derivative contract with Deutsche Bank and the voting of shares dealt with under that contract in favour of the proposed Scheme, the independent expert’s report states:
…NorthWest has a relevant interest in 13.41% of Healthscope shares as a result of a forward derivative contract entered into with Deutsche Bank AG, Sydney Branch (“Deutsche”) on 8 May 2018, and, under a Process, Voting Commitment and Exclusivity Deed entered into with Brookfield BidCo, has an obligation to procure the vote of approximately 13.41% of Healthscope shares in favour of the Scheme and capital return and to procure the tendering of approximately 13.41% of Healthscope shares into the Takeover Offer.
79 Let me now turn to ASIC’s arguments. ASIC submits that the rights of NWH AssetCo/NWH REIT are so dissimilar from the rights of other Healthscope shareholders that it is impossible for them to consult together with a view to their common interest at the one Scheme meeting. Accordingly, it says that there should be two separate classes and correspondingly separate meetings.
80 It has particularly emphasised the following matters.
81 First, NWH REIT/NWH AssetCo on or about 8 May 2018 acquired what it described as a strategic investment in Healthscope shortly after the 26 April 2018 BGH – AustralianSuper Consortium proposal to acquire Healthscope. In its 8 May 2018 announcement, NWH REIT expressly stated that an acquisition of Healthscope’s underlying related real estate was of interest to it (and the entity Vital) in line with their long-term strategy to invest in healthcare real estate assets in the Australian market. In its 8 May 2018 announcement, it stated that it (and Vital) currently intend to pursue any potential Healthscope real estate acquisition jointly.
82 Second, following the announcement by Healthscope on 12 November 2018 of Brookfield’s scheme of arrangement and takeover offer proposal, NWH REIT reiterated in announcements or notices issued on each of 20 November 2018 and 4 December 2018 the comments made in its 8 May 2018 announcement about pursuing any potential Healthscope real estate acquisition.
83 Third, under the Process Deed:
(a) NWH REIT has confirmed that its board has acknowledged that it believes that Brookfield facilitating entry into of the commitment deed and any “Step Up Commitment Deed” (if applicable) will provide significant benefits to NWH REIT and its stakeholders;
(b) NWH REIT has the right to direct Brookfield to exercise any right Brookfield has to terminate the implementation deed or reserve any right to terminate the implementation deed if Healthscope prior to the scheme meeting breached its obligations under the sale contracts (under which Healthscope was to agree to sell certain properties to NWH AssetCo/NWH REIT) in certain circumstances, which termination would bring an end to the Scheme and any benefits under it to the other Healthscope shareholders;
(c) NWH AssetCo/NWH REIT is obliged to vote the Healthscope shares the subject of the forward derivative contract in favour of the Scheme;
(d) NWH AssetCo/NWH REIT is obliged to vote the Healthscope shares the subject of the forward derivative contract against any competing proposal, where such a competing proposal may be a superior proposal and provide greater benefits to the other Healthscope shareholders;
(e) these voting undertakings of NWH AssetCo/NWH REIT cease to apply if 2 business days before the scheme meeting there is a relevant settlement delay in any property or properties proposed to be sold by Healthscope to NWH AssetCo under a sale contract and where NWH AssetCo would then have the right or ability to vote those shares against the Scheme, which given the percentage of votes able to be cast by NWH AssetCo could well, so ASIC submitted, be determinative of whether the Scheme is approved at the scheme meeting. ASIC says that this ability to vote otherwise if these circumstances occur 2 business days prior to the scheme meeting provides leverage in respect of Healthscope’s obligations to deliver the relevant properties to NHW AssetCo and demonstrates, so ASIC says, the primacy of the sale and leaseback transaction to NWH AssetCo over the scheme consideration offered under the Scheme;
(f) NWH REIT/NWH AssetCo is obliged during the exclusivity period not to enter into any arrangement or agreement in relation to any competing proposal or participate in negotiations or discussions with any person regarding any competing proposal, where any such competing proposal may be a superior proposal and provide greater benefits to the other Healthscope shareholders;
(g) NWH AssetCo is obliged to make a loan to Brookfield which is to be applied towards payment of the scheme cash consideration to Healthscope shareholders under the Scheme and where if NWH AssetCo defaults in that obligation, Brookfield may request that Healthscope exercise any applicable right to terminate the commitment deed and any sale contract which has not been completed. ASIC says that this all demonstrates the primacy of the sale and leaseback transaction to NWH AssetCo and the extent to which NWH AssetCo is embedded in the Scheme and takeover transaction and is, to use ASIC’s description, an “inside participant” in the Scheme and takeover transaction.
84 Fourth, the commitment deed contains the terms referred to above. And under that deed Healthscope is required by 1 business day prior to the scheme meeting to enter into the sale contracts for the sale of the relevant properties to NWH AssetCo, which obligation NWH AssetCo has the right to enforce.
85 Fifth, the implementation deed contains the terms referred to above. And under that deed FIRB approval for the NWH AssetCo sale and leaseback transaction is a condition precedent for the Scheme to become effective. Further, under the Process Deed, Brookfield has undertaken to NWH REIT/NWH AssetCo that it will not without their consent waive or amend the condition in the implementation deed regarding the FIRB approval. As I have said, that FIRB approval has already been obtained.
86 Sixth, Healthscope may terminate the implementation deed prior to the close of the offer period for the takeover offer if a majority of the Healthscope board change or withdraw their recommendation to Healthscope shareholders to vote in favour of the Scheme or the capital reduction resolution, accept the offer or recommend a superior proposal. It is said that this would result in the sale contracts with NWH AssetCo being terminated and whereby NWH AssetCo would lose the benefit of the $1.3 billion property sale transaction.
87 Seventh, Brookfield on 4 February 2019 lodged an initial substantial shareholder notice indicating it had entered into an agreement with NWH REIT which may mean that it is taken to have an agreement or be acting in concert with NWH REIT in relation to the conduct of Healthscope’s affairs. As I have said, I consider that ASIC has exaggerated the significance of this notice.
88 Generally, ASIC submits that the differences in rights between NWH AssetCo (or its affiliates) and the other Healthscope shareholders mean that any community of interest between them has been displaced for the purposes of them considering and voting upon the proposed Scheme, where such consideration would include the merits of the Scheme itself in the absence of the broader transaction, whether there are any other potential proposals which might be more advantageous to shareholders, and the prospects of Healthscope delivering greater benefits to shareholders in the longer term by staying a listed company and pursuing its own sale and leaseback proposal. And it submits that the bundle of rights, benefits and associated obligations on the part of NWH AssetCo under the interlocking and interconnected agreements described above demonstrate the following matters.
89 First, NWH AssetCo is an inside participant in the proposed Scheme and is wedded to the proposed Scheme as a means of obtaining the benefits to be afforded to it under the sale and leaseback transaction. As such, ASIC says that it should not be attending at, and participating in, the same scheme meeting as the general body of Healthscope shareholders who are “outsiders” to the said interlocking and interconnected transaction documents and the transactions proposed thereunder. ASIC says that in this regard, the usual practice observed when a bidder holds shares in a target is for the bidder to be either excluded from the scheme meeting or for the bidder not to vote at the scheme meeting on the basis that the bidder, as an insider to the transaction and a proponent of the transaction, does not have a community of interest with the general body of shareholders. In this regard ASIC again makes reference to the notice of initial substantial holder lodged by Brookfield on 4 February 2019 and the subsequent revised notice on 1 March 2019 which refers to a potential “associate” relationship between Brookfield and NWH AssetCo. Again, I consider ASIC’s position to be overstated.
90 Second, ASIC says that the primary focus of NWH AssetCo is the sale and leaseback transaction and not the amount it will receive for any shares under either the Scheme or the takeover offer; it is noted that it is not presently the holder of the shares under the forward derivative contract.
91 Third, ASIC says that the acquisition of NWH AssetCo’s strategic investment in Healthscope seems to have been a means to an end, with the end being the sale and leaseback transaction and not any amount to be paid for the Healthscope shares under any change of control proposal.
92 Fourth, ASIC says that NWH AssetCo has in effect a closed mind to any competing and perhaps superior proposal or to any long term benefits that may flow to shareholders from Healthscope remaining a stand-alone listed company. Accordingly, ASIC submits that NWH AssetCo does not have a community of interest with the other Healthscope shareholders to whom these are relevant and material matters in considering the proposed Scheme. It says that NWH AssetCo (including affiliates such as NWH REIT) should not attend the same scheme meeting as the other Healthscope shareholders and participate in discussions with the other Healthscope shareholders given the primacy of NWH AssetCo’s focus on the sale and leaseback transaction; it says that its participation in any discussions on the merits of the proposed Scheme will be through that prism.
93 Fifth, ASIC says that given the parcel of votes to be cast in favour of the Scheme by NWH AssetCo, and the fact that shareholders are not required to attend or vote at the Scheme meeting, if NWH AssetCo or its affiliates are able to attend the same Scheme meeting as the other shareholders, its voting parcel as a percentage of votes actually cast on the Scheme resolution may very well be instrumental in determining whether or not the Scheme is passed.
94 Now before turning to some legal themes there are a number of difficulties for ASIC’s position arising out of the relevant documents and transactions, even accepting as I do that a single shareholder can constitute a separate class if it has differing interests from the general body of shareholders such as to make it impossible for them all to consult together with a view to their common interest.
95 First, NWH AssetCo is not presently a member of Healthscope and may not become one by the Scheme meeting, although ASIC said that this was most unlikely not to occur. Presently NWH AssetCo only has a right to acquire Healthscope shares from Deutsche Bank. The terms of the share forward transaction arrangements nominate a date for settlement on 8 May 2020 or any earlier date. It is trite to observe that voting rights are only exercisable by the person listed in Healthscope’s share register as the holder (see s 250E and the definition of member (s 231(b))).
96 Further, in terms of the position vis-à-vis Deutsche Bank, as pointed out by Healthscope, even though NWH REIT has agreed with Brookfield BidCo to procure NWH AssetCo to vote the relevant shares in favour of the Scheme, it is unclear how enforceable that is against Deutsche Bank, if at all. Moreover, even if it is so enforceable, that does not deny that Deutsche Bank may still be the registered holder at the time of the Scheme meeting.
97 In summary, if NWH AssetCo is not now a member and may not be at the time of the Scheme meeting, and the position as to the enforcement of rights against Deutsche Bank is unclear, then to separate a class now or at the Scheme meeting in the terms suggested by ASIC is problematic.
98 Second, the sale and leaseback arrangements are not a condition precedent to the Scheme. But the obligation to complete arises if the Scheme becomes effective or if the takeover bid becomes unconditional. ASIC has emphasised in the present context the significance of whether a side deal is a condition precedent to the Scheme. If it is, so ASIC submits, this may support stipulating a separate class for the member with the side deal. But as Healthscope points out, strictly the sale and leaseback arrangements are not a condition precedent to the Scheme. Further, theoretically the Scheme could be implemented even if the sale and leaseback arrangements did not complete. Now it may be accepted that the relevant FIRB approval concerning such arrangements is a condition precedent, but two points. First, that condition has now been satisfied. Second, the nature of that condition precedent is qualitatively quite different from the sale and leaseback arrangements themselves being conditions precedent in terms of ASIC’s point and context. But in any event, even if the sale and leaseback arrangements were conditions precedent, that is only one matter to consider and does not dictate that there needs to be separate meetings.
99 Third, ASIC has submitted that NWH REIT can “call for the Implementation Deed to be terminated”. But NWH REIT has no such unqualified right. Under clause 3.3 of the Process Deed, NWH REIT may only direct Brookfield to exercise a right of termination which Brookfield BidCo has under the implementation deed. But Brookfield BidCo’s termination rights are circumscribed, and require it to establish a material breach by Healthscope of the implementation deed, or that a member of the Healthscope board has engaged in conduct which effectively withdraws support for the Scheme or the takeover bid, or a repudiation by Healthscope of the sale and leaseback agreements. Further, NWH REIT’s ability to direct Brookfield to exercise such a right only arises where Healthscope has breached an obligation under the sale and leaseback agreements and where such breach has a material impact. So considered, I do not think that ASIC’s point has much force.
100 Fourth, NWH AssetCo’s rights and interests under the sale and leaseback arrangements do not depend upon it becoming a Healthscope shareholder.
101 Fifth, ASIC has made the point that NWH REIT and NWH AssetCo are wedded to the Scheme and will vote for it come what may to obtain the benefits under the sale and leaseback arrangements. But of course this ignores the fact that NWH REIT and NWH AssetCo can still get such benefits if the Scheme fails but the takeover bid becomes unconditional (assuming acceptances at or above 50.1%).
102 Sixth, one of the usual concerns in considering whether to separate shareholders into separate classes is that it might give a minority group of shareholders an effective and unwarranted veto over the Scheme. But that is not a concern in the present case. NWH REIT/NWH AssetCo is to procure Deutsche Bank to vote in favour of the Scheme. But another potential veto problem could arise given the prospect that the BGH – AustralianSuper Consortium with voting power of approximately 19% of the share capital of Healthscope could vote against the Scheme. If NWH AssetCo is placed in a separate class, that would considerably and inappropriately enhance BGH – AustralianSuper Consortium’s veto power who would be left in the main class of shareholders. Now strictly this may not be directly relevant to whether I order the class separation of NWH AssetCo, but it makes me cautious in separating out NWH AssetCo unless I strictly need to, particularly as, after all, I can address any relevant concerns at the approval hearing once I know the outcome of the vote and voting patterns, and whether the votes of NWH AssetCo/Deutsche Bank made any relevant difference.
103 Seventh, ASIC has also attached significance to NWH AssetCo’s/NWH REIT’s undertaking to vote against a competing proposal. But for there to exist a competing proposal capable of being voted on, the voting commitment itself that has been given is likely to have terminated. This is because the voting commitment only applies during the exclusivity period, which ends if the directors of Healthscope cease to recommend the Scheme and/or Brookfield ceases to pursue it. As Healthscope points out, for a competing proposal to get to the stage of being voted on despite the exclusivity provisions in the implementation deed, the stage will have been reached where the directors of Healthscope cease to recommend the Scheme and/or Brookfield ceases to pursue it, and the voting commitment will have expired. So analysed, ASIC’s point becomes hollow.
104 Eighth, ASIC has made some other points that I should briefly touch on. I reject its suggestion that NWH AssetCo is not interested in the Scheme consideration but rather only the sale and leaseback transactions such that it would lack commonality with other shareholders. Rather it seems to me that the latter is an add on rather than a substitution, and that the overlap of interest fortifies rather than denies commonality. Further, as to ASIC’s point that there would be a tension in interests concerning competing proposals, I have disposed of this point in the preceding paragraph. Finally, as to tension in interests concerning Healthscope staying listed and pursuing its own sale and leaseback arrangements, the fact that there might be diversity of views and competing collateral motivations does not of itself destroy commonality such as to make it impossible to consult together. Indeed, consultation is only worthwhile where diverse views are expressed and vigorously debated with the best decision then reached through this competitive tension.
105 Let me now turn to some of the relevant legal principles.
106 The well-established test for identifying a class for the purposes of a scheme of arrangement is that expressed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. Sovereign Life Assurance concerned a creditors’ scheme of arrangement, but the test enunciated by Bowen LJ has been adopted ever since in members’ schemes (Re Foster’s Group Limited [2011] VSC 93 at [15] per Ferguson J). Bowen LJ expressed the class test in the following terms:
…The word “class” is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term “class” as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest…
107 Accordingly, the question for present purposes is whether the rights of NWH AssetCo (or its affiliates) are so dissimilar from the rights of the other Healthscope shareholders as to make it impossible for them to consult together with a view to their common interest. Or put another way, do the differences in rights between NWH AssetCo (or its affiliates) and the other Healthscope shareholders mean that any community of interest between them has been displaced for the purposes of them considering and voting upon the proposed Scheme, where such consideration would include the merits of the Scheme, whether there are any other potential proposals which might be more advantageous to shareholders and whether there are prospects of Healthscope delivering greater benefits to shareholders in the longer term by staying a listed company and pursuing its own proposed sale and leaseback proposal?
108 Now Mr Philip Crutchfield QC for Healthscope contends that doctrinal purity demands that at the first court hearing I should only decide issues of class on the strict basis of considering the legal rights of shareholders qua shareholders against Healthscope and any alteration to those rights as a shareholder under the Scheme. And to the extent that ASIC has stepped outside the relevant teaching, its position is heretical. Mr Crutchfield QC has prayed in aid the three pronged approach of Bathurst CJ in First Pacific Advisors LLC v Boart Longyear Ltd (2017) 320 FLR 78 at [80]. But there is a danger in taking such a short form exposition in a judge’s reasons, decontextualizing it and then divining its meaning only by reference to a textual analysis of the words used.
109 Healthscope has also referred to other authorities endeavouring to make good the point that the existence of separate commercial or other interests is not relevant to the class issue, including rights not derived from legal rights against the scheme company. More generally it points out that the question of class definition does not involve a general inquiry into the commercial motivations of members for voting in favour of or against a scheme, a proposition which I accept.
110 Healthscope says that applying Bathurst CJ’s approach, if NWH AssetCo was a Healthscope shareholder, its rights against Healthscope would be the same as all other shareholders’ rights against Healthscope, and those rights would not be differently affected by the Scheme. The implementation of the Scheme would extinguish all of those rights in return for the Scheme consideration.
111 It says that any potential benefit that NWH AssetCo might obtain under the sale and leaseback agreements does not impact class composition, but rather is a matter for me to consider at the approval hearing as part of my general fairness discretion. And to facilitate my consideration of this at the second court hearing, Healthscope has undertaken to tag any votes of NWH AssetCo and its associates cast at the Scheme meeting, and provide a voting report to me for the purposes of the second court hearing which will detail how NWH AssetCo and its associates voted.
112 For my part, I consider that Healthscope’s approach to class definition is too narrow. I prefer a more flexible and commercial approach.
113 First, even accepting that there may be no differential treatment of different classes of shareholders under the Scheme itself, as is the present case, that does not preclude separate classes being stipulated. The text of s 411(1) refers to “members or any class of them”. The text leaves open how class delineation or characteristics may be stipulated. The inquiry is not confined to whether there are separate classes stipulated under the scheme company’s constitution or whether a class can only be stipulated by reference to differing treatment or outcomes arising under the terms of the scheme of arrangement instrument itself concerning shareholders rights qua shareholder.
114 Second, I do not doubt that a shareholder who has entered into or has the benefit of a pre-scheme agreement with the scheme company which confers upon the shareholder a benefit which is more than de minimis, and particularly where the entry into of that agreement is a condition precedent to the scheme, may potentially justify that shareholder being placed in a separate class. Equally, if the vote of that shareholder has been purchased as part of the pre-scheme agreement that may warrant considering whether it should be put into a separate class.
115 Third, and indeed as Mr Greg Ahern for ASIC pointed out, not even a pre-scheme agreement with the scheme company may be necessary. If a takeover is being achieved through a scheme of arrangement with the bidder having purchased say 19.9% of the target’s shares (the target being the scheme company), the bidder may be considered to be in a separate class.
116 Fourth, and more generally as to side deals, there is no general rule or approach to side deal cases. Each case, from the perspective of determining class composition, depends upon its own facts.
117 Fifth, for completeness, I should say that I do not consider that what I have said is significantly inconsistent with Black J’s approach to applications of this type. First, I agree with what he said in In the matter of Pulse Health Limited [2017] NSWSC 651 at [13] that the fact that there is a pre-scheme agreement by a shareholder to vote shares in favour of a scheme is not sufficient of itself to warrant a separate class (see also In the matter of Westfield Corporation Limited [2018] NSWSC 584 at [39]). Second, in his discussion in Re Boart Longyear Ltd (2017) 121 ACSR 328 at [58], his Honour rejected the narrowness of the submission put to him that relevant rights were not class creating merely because they were not created by the relevant schemes. He readily accepted that pre-scheme agreements that were conditions precedent to a scheme and closely connected with an entity’s participation in a scheme could be relevant to class delineation although he ultimately accepted that no separate delineation was necessary. That is consistent with what I have said above. Bathurst CJ on appeal did not need to engage on this question. Third, Black J at [69] said that no separate meeting was required if a participant was to receive a collateral benefit. Again, I have no difficulty with that conclusion either if that is all that is involved.
118 Ultimately one has to be careful of stipulating rigid categories or hard and fast rules, although some cases may be clear one way or the other in terms of the necessity for separate delineation. This is because the “impossible…to consult together with a view to their common interest” criterion requires a commercial evaluative judgment to be made of the transactions, circumstances and consequences said to justify the delineation, in the context of the particular scheme and its effect overall. Moreover, if the asserted discriminating feature can be dealt with at the second court hearing, there is less of a need to be definitive at the first court hearing in terms of class definition except in a clear class. Moreover one should be cautious about stipulating separate classes. It can easily and wrongly empower a minority view; I can of course easily deal with excessive or oppressive majority influences at the second stage as Finkelstein J has pointed out relating to the Opes Prime creditors scheme. If the minority view against a scheme has been put into a separate class, you may have unnecessarily created a power of veto if for the particular scheme all classes need to achieve the requisite statutory majorities for the thing to work. Further, if the minority view against a scheme has been left with the general body but you have put in a separate class a shareholder who would have voted in favour, then you have relatively increased the voting power of the minority in the general body making it easier to defeat the scheme. As I say, all of this suggests that one should be cautious in separating classes except in a clear case. And as Finkelstein J rightly said in effect in Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 at [66] one should not be too enthusiastic in taking a salamied approach. A “practical business-like approach” must be adopted. Otherwise you are locking in unnecessary downside, particularly when you do not need to given the second stage approval scrutiny that can take place.
119 Sixth, my attention has been drawn to Tronex Limited, in the matter of Tronex Limited [2019] FCA 312 upon which ASIC heavily relied. But a number of matters should be noted. First, the matter was unopposed with the scheme company serving up the separate classes. Second, the separation of the classes was justified given the fact that there were separate Class A and Class B shareholders differently affected by the scheme propounded such that O’Callaghan J rightly concluded at [35] “that a reasonable view could be taken that the rights of the Class B Shareholder will be altered by the Schemes in a material sense and in a manner which will not apply to Class A Shareholders”. Accordingly, separation was justified without the need to consider the pre-scheme agreement that his Honour went on to deal with at [36] and formed part of his conclusion at [38]. Third, it was not drawn to his Honour’s attention that what was submitted to him and recorded at [29] was not fully consistent with the authorities in terms of the conclusion that “they must vote in a separate class” (my emphasis). Indeed, I note that in Damien T and Rich A, Schemes, Takeovers and Himalayan Peaks (3rd ed, Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2013) at 367 it was said:
If the relevant member who entered into either a pre-scheme option or voting agreement were to receive, as consideration for entering into the agreement, a benefit which is neither de minimis or plainly immaterial and which is not available to other members, that member should, depending on the nature of the benefits, either be placed in a separate class or have their votes discounted or disregarded on the grounds of an extraneous interest.
120 So, the nature of the benefits have to be considered. Moreover, one option is not to order separate meetings but to leave the matter to the second court hearing approval stage. Moreover I note that the authors at this point did not deal with whether the pre-scheme agreement was a condition precedent to the scheme.
121 I need say nothing further on the legal principles. I accept ASIC’s submissions that the points that it has advanced are relevant to class definition. But where I part company from ASIC is that I do not consider that the points that it has made require separate classes. Accepting, as it has submitted, that there is flexibility in the matters that can be considered, equally there is flexibility in Bowen LJ’s test which after all has to be practically and commercially applied, and also with an eye to the considerable powers that I have at the second court hearing. Indeed, the flexibility of Bowen LJ’s test implicitly requires the flexibility that ASIC has contended for in relation to the matters that can be considered.
122 In my view even if the sale and leaseback agreements are considered for class purposes, they do not have the consequence that it would be impossible for NWH AssetCo and Healthscope shareholders to consult together with a view to their common interests in relation to the Scheme. In particular, the different legal rights and obligations which NWH AssetCo has by reason of the sale and leaseback agreements do not displace the community of interest which would otherwise exist between it and all other Healthscope shareholders in considering the merits of the proposed Scheme. Their areas of difference do not outweigh their areas of common interest such as to make it impossible for them to consult together. Moreover NWH AssetCo’s additional commercial motivation and interest has been made fully transparent in the transaction booklet.
123 Further, the matters set out at [94] to [104] further inform my view that it is not appropriate to order separate meetings.
124 In my view it is appropriate to leave these matters for further consideration at the approval stage.
125 Indeed on any view, if ASIC’s point is good, I can at the second court hearing discount or discard the votes of NWH AssetCo and its affiliates. I can take the view at the second court hearing that these entities in fact voted for the Scheme not because it benefits them as members of the class generally but because it benefits them in some other capacity. As such I could take the view that their votes did not reflect the view of the class as such although they may have been strictly counted for the purposes of achieving the relevant statutory majorities. I could, accordingly, discount or discard such votes for the purposes of determining whether I should approve the Scheme. Healthscope has agreed to provide me with a report at the second court hearing which will set out the relevant voting patterns and enable me to consider the effect of any voting by NWH AssetCo or its affiliates. Moreover, to do so at that time may in any event demonstrate that these votes did not make a difference to the otherwise outcome in any event. In other words, the Scheme vote by other members may carry the day in any event.
126 In summary I will not order separate meetings.
IS THE SCHEME FIT FOR CONSIDERATION?
127 In my view, the Scheme is fit for consideration by the proposed meeting.
128 Now the question whether to accept particular consideration for shares is a commercial matter for the members of Healthscope to assess. And they ought not be prevented from having the opportunity to do so provided that I can be satisfied that they are acting on sufficient information and with time to consider what they are voting on. But of course, I am required to scrutinise the terms of the Scheme to satisfy myself that there is no element of unfairness in or other undesirable feature of those terms that would be likely to preclude the approval of the Scheme if it came before me for approval. And this is so notwithstanding the unanimous favourable recommendation and voting intention statements from all directors of Healthscope and the favourable expression of opinion in the independent expert’s report.
129 In the present case relevant to this question of fitness, Healthscope has drawn my attention to the following particular features of the Scheme which warrant discussion.
(a) Performance risk.
(b) Break fee and reverse break fee.
(c) Exclusivity arrangements.
(d) Employee incentive arrangements.
(e) Section 411(17).
130 Let me discuss each in turn.
(a) Performance risk
131 Clause 4.2(a) of the Scheme provides that the obligation of Scheme shareholders to transfer the Scheme shares to Brookfield BidCo on the implementation date is subject to the obligations of Brookfield BidCo to provide the Scheme consideration to the Scheme shareholders on the implementation date in accordance with cl 5 of the Scheme.
132 Furthermore, the implementation deed requires that Brookfield HoldCo and Brookfield BidCo execute a deed poll under which they covenant in favour of Scheme shareholders to perform the obligations attributed to them under the implementation deed and the Scheme. The implementation deed required that the executed deed poll be in the form of attachment B to the implementation deed, or such other form as agreed in writing between Healthscope, Brookfield HoldCo and Brookfield BidCo. Such a deed poll has now been executed, but the deed poll has been amended in some minor respects since the version attached to the implementation deed. These modifications have been agreed between the parties to the implementation deed.
133 In the event that the Scheme becomes effective, each of Brookfield HoldCo and Brookfield BidCo undertake in cl 3.1 of the deed poll to, subject to and in accordance with the provisions of the Scheme, deposit or procure the deposit of the aggregate Scheme cash consideration into a trust account nominated by Healthscope for the purposes of receiving the aggregate Scheme cash consideration by no later than one business day before the implementation date, issue or procure the issuing of the Scheme scrip consideration (following the application of the scaleback arrangements) to each Scheme shareholder or custodian entitled to receive the Scheme scrip consideration on the implementation date, and undertake or procure the undertaking of all other actions attributed to any of them under the Scheme.
134 This is consistent with cl 2(a) of the Scheme which sets out that the following must occur if the Scheme becomes effective. Brookfield HoldCo and Brookfield BidCo must provide or procure the provision of the Scheme consideration to the Scheme shareholders in accordance with the terms of the Scheme and the deed poll. And all the Scheme shares, and all the rights and entitlements attaching to them as at the implementation date, must be transferred to Brookfield BidCo and Healthscope will enter the name of Brookfield BidCo in the Healthscope share register in respect of the Scheme shares on the implementation date.
135 Moreover, each of Brookfield HoldCo and Brookfield BidCo have given the representations and warranties concerning corporate power and authority to enter into the deed poll under cl 4 of the deed poll.
136 In my view, with the relevant deed poll now having been executed, there is no material performance risk which would justify me not ordering the convening of the Scheme meeting.
(b) Break fee and reverse break fee
137 Clauses 15 and 16 of the implementation deed set out the terms as to when the parties will be liable under those provisions to pay a break fee. The provisions are summarised in the proposed transaction booklet.
138 Clause 15 provides that the amount of the break fee that Healthscope can become liable to pay Brookfield LP under the implementation deed is $43 million (excluding GST) and that this is the maximum amount that Healthscope can be obligated to pay under the implementation deed unless a claim made relates to a breach of the no-shop restriction. The break fee is payable in the circumstances below:
(a) Material un-remedied breach by Healthscope: Brookfield BidCo terminates the implementation deed under cl 18.1(c)(1) by reason of a material breach by Healthscope that has been notified to Healthscope in accordance with the implementation deed and not been remedied within 15 business days or by the second court hearing (whichever is shorter).
(b) Adverse change to recommendation: Any member of the Healthscope board of directors fails to recommend or withdraws or adversely modifies his or her recommendation that Healthscope shareholders vote in favour of the Scheme, vote in favour of the capital return resolution or accept the takeover bid, or makes a public statement indicating that they no longer support the Scheme, the takeover bid or the capital return or any of them, or that they recommend or support a competing proposal, other than:
(i) in the case of the Scheme, where the independent expert opines in the independent expert’s report that the Scheme is not or is no longer in the best interests of Scheme shareholders (other than where the reason for that opinion is a competing proposal);
(ii) in the case of the capital return resolution and the takeover bid, where the independent expert opines in the independent expert’s report that the takeover bid is not or is no longer fair and reasonable (other than where the reason for that opinion is a competing proposal);
(iii) where there is any matter or thing giving Healthscope the right to terminate the implementation deed under cl 18.1(a)(1) (regarding a material breach by Brookfield BidCo that has not been remedied in accordance with the implementation deed) or under cl 18.1(e) (regarding termination due to the effective date not occurring before the end date and Brookfield BidCo withdrawing the takeover bid); or
(iv) as a result of a failure of a Scheme condition or a takeover bid condition that is not waived in accordance with cls 3.3, other than as a result of a breach by Healthscope of cl 3.2.
(c) Completion of a competing proposal: A competing proposal is announced prior to the second court hearing or the end of the offer period and, within 9 months of the date of such announcement, the person announcing or making the competing proposal or any affiliate or associate of that person:
(i) completes a competing proposal of the kind referred to in any of the paragraphs 2, 3 or 4 of the definition of “competing proposal” being, inter-alia, an acquisition of control of any member of the Healthscope group, a direct or indirect acquisition of all or substantially all of the business or assets of a member of the Healthscope group, or otherwise acquiring or merging with Healthscope;
(ii) acquires a relevant interest in, or becomes the holder of, or otherwise acquires, directly or indirectly, 50% or more of Healthscope shares and that acquisition is unconditional;
(iii) acquires or becomes the holder of or otherwise acquires an economic interest in all or a substantial part of the business of Healthscope and its subsidiaries;
(iv) acquires control (as determined in accordance with section 50AA of the Act, disregarding sub-section 50AA(4)) of Healthscope or any Healthscope group member that controls, directly or indirectly, all or a substantial part of the business of Healthscope and its subsidiaries; or
(v) otherwise acquires or merges with Healthscope.
139 The break fee is not payable by Healthscope solely by reason that the Healthscope shareholders do not vote in favour of the Scheme by the requisite majorities.
140 The amount of the break fee and reverse break fee (referred to below) and the obligations to pay those amounts were the subject of commercial negotiation between the parties to the implementation deed. Clause 15.1 of the implementation deed sets out that Healthscope has confirmed and the Healthscope board has acknowledged that it has received legal advice in relation to the operation of clause 15 regarding the break fee, it believes that the implementation of either of the transactions will provide significant benefits to Healthscope and Healthscope shareholders such that it is reasonable and appropriate for Healthscope to agree to the break fee in order to secure Brookfield BidCo’s participation in the transactions, and the break fee represents a genuine and reasonable estimate of cost and loss that would be suffered by Brookfield BidCo and Brookfield LP if the implementation deed was entered into and neither of the transactions was subsequently implemented.
141 Clause 15.1(b) of the implementation deed records that Brookfield BidCo and Brookfield LP would not have otherwise agreed to implement the Scheme or make the takeover bid due to the significant costs involved if they did not have the benefit of the provisions providing for the payment of a break fee by Healthscope in accordance with the terms of the implementation deed.
142 The equity value of Healthscope as valued by the proposed Scheme as at 1 February 2019 is $4.292 billion on an undiluted basis. This figure is calculated by multiplying 1,741,161,795 Healthscope shares (being the number of Healthscope shares on issue when entry into the implementation deed was announced) by $2.465 (being the Scheme cash consideration). The fully diluted equity value of Healthscope as at 1 February 2019 includes 8,990,841 unlisted performance rights which each equate to one Healthscope share, bringing the total diluted equity value of Healthscope to $4.314 billion. The break fee totalling $43 million (excluding GST) therefore represents less than 1% of that equity value on a diluted basis (and just over 1% on an undiluted basis).
143 There are also qualifications in cl 15.5 of the implementation deed which provide that Healthscope will not need to pay the break fee (or will receive a refund of the break fee) if the Scheme becomes effective or Brookfield BidCo becomes the holder of not less than 50.1% of the Healthscope shares (on a fully diluted basis) and the offer has been declared or becomes unconditional, or where the obligation to pay all or part of the break fee is determined to constitute unacceptable circumstances as declared by the Takeovers Panel or is held to be unenforceable by a court. In such case, where a lower amount of break fee is determined not to constitute unacceptable circumstances or is not unenforceable (as applicable), Healthscope will be required to pay that lower amount.
144 Brookfield BidCo is obligated to pay Healthscope the reverse break fee in the circumstances set out in cl 16 of the implementation deed. The only potentially applicable reverse break fee amount is $129 million (excluding GST), given that the relevant FIRB approval has been obtained.
145 Now the evidence before me shows that the amount of the break fee and the obligation(s) to pay this amount was the subject of commercial negotiation between the parties. Further, the evidence demonstrates that Healthscope has considered that the break fee is fair and reasonable, and that it was appropriate to agree to its terms in order to secure the significant benefits to Healthscope and its shareholders resulting from the Scheme.
146 In my view the break fee does not represent a barrier to the convening of a meeting to consider the Scheme.
147 First, the amount of the fee is not such that it would likely influence voting at the meeting.
148 Second, the break fee is justified for the reasons given by Lindgren J in Re APN News & Media Ltd (2007) 62 ACSR 400 at [44].
149 Third, there is no question that the fee is likely to coerce shareholders into agreeing to the Scheme or deter companies from mounting a competing offer.
150 Fourth, the break fee that I am considering is less than 1% of the total equity value of Healthscope on a diluted basis, having regard to the value of the Scheme consideration when the proposed transaction was announced.
151 Fifth, apart from the size of the break fee, the relevant provisions of the implementation deed are consistent with the guidelines published by the Takeovers Panel, namely, that in the absence of other factors, reasonable triggers for the payment of such a fee might include:
(a) a change of directors’ recommendation;
(b) a competing transaction that successfully completes.
152 In summary, and also for the reasons that I elaborated on in Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 at [58] to [70], in my view the provisions for the break fee do not represent a barrier to the convening of a meeting to consider the Scheme.
153 I do not need to discuss the reverse break fee which is of undoubted benefit to Healthscope.
(c) Exclusivity arrangements
154 Clause 14 of the implementation deed contains a number of provisions which place obligations and restrictions on Healthscope which apply during the restricted period, being the period between 1 February 2019 and the earlier of the date the implementation deed is terminated, and the end date, being 31 October 2019.
155 In summary, these provisions apply during the restricted period to:
(a) prevent Healthscope from, and require Healthscope to prevent its representatives (being its related bodies corporate and each director, officer, employee, advisor, agent or representative of Healthscope and its related bodies corporate) from, directly or indirectly soliciting, inviting, encouraging or initiating any enquiries, expressions of interest, offers, proposals, negotiations or discussions (or communicating any intention to do any of these things) with any person with a view to (or that may be reasonably be expected to lead to) obtaining any offer, proposal or expression of interest in relation to a competing proposal to the Scheme (no-shop restriction);
(b) prevent Healthscope from, and require Healthscope to prevent its representatives from:
(i) negotiating or entering into; or
(ii) participating in negotiations or discussions regarding,
a competing proposal or any agreement, understanding or arrangement that may be reasonably expected to lead to a competing proposal, even if that person’s competing proposal was not directly or indirectly solicited, invited, encouraged or initiated by Healthscope or any of its representatives or the person has publicly announced the competing proposal (no-talk restriction);
(c) in relation to a competing proposal, prevent Healthscope from, and require Healthscope to prevent its representatives from:
(i) enabling any person other than Brookfield BidCo or its nominee to undertake due diligence on the Healthscope group or of its operations or assets;
(ii) making available, or permitting access to, non-public information of the Healthscope group or of its operations or assets, to any person other than Brookfield BidCo or its nominee;
(iii) making available, or permitting access to, any premises used, leased, licenced or owned by the Healthscope group to any person other than Brookfield BidCo or its nominee; and
(iv) making available, or permitting access to, any officers or employees of the Healthscope group to any person other than Brookfield BidCo or its nominee,
(no-due diligence restriction).
156 Each of the no-talk restriction and no-due diligence restriction are subject to the “fiduciary carve-out” set out in cl 14.6 of the implementation deed. The substance of this provision is that Healthscope is not restricted from taking or refusing to take any action with respect to a genuine competing proposal provided that the Healthscope board has determined, in good faith, that:
(a) after consultation with its financial advisers, such a genuine competing proposal is, or could reasonably be considered to become, a superior proposal; and
(b) after receiving written legal advice from its external legal advisers (who must be reputable advisers experienced in transactions of this nature) failing to respond to such a genuine competing proposal would be reasonably likely to constitute a breach of the Healthscope board’s fiduciary or statutory obligations.
157 Clause 14.6 also notes that, notwithstanding anything in the implementation deed to the contrary, if the Healthscope board determines, in good faith, that cl 14.5 (which contains the no due-diligence restrictions) does not apply, Healthscope must enter into an acceptable confidentiality deed with the relevant person before taking any action set out in cl 14.5.
158 Clauses 14.7 to 14.9 contain provisions regarding providing non-public information to Brookfield BidCo where that information has been provided to another person in connection with a competing proposal, as well as other provisions regarding notification and matching rights of Brookfield BidCo in circumstances where there is or may be a competing proposal. Accordingly, during the restricted period, Brookfield BidCo is given a chance to match a competing proposal, which may otherwise be a superior proposal, before:
(a) a Healthscope group member is entitled under the implementation deed to enter into any legally binding agreement to give effect to the competing proposal; and
(b) a Healthscope director is entitled under the implementation deed to change their recommendation in favour of the Scheme and the takeover bid to publicly recommend a competing proposal or a proposed or potential competing proposal.
159 The exclusivity arrangements in cl 14 of the implementation deed were the outcome of commercial negotiations that took place between Healthscope and Brookfield BidCo. Healthscope was assisted in its negotiations by external legal and financial advisers.
160 The operation of the exclusivity arrangements is also disclosed in the proposed transaction booklet.
161 Now generally speaking, such provisions are ordinarily found in merger implementation agreements. Further, the provisions in the present case are subject to the necessary fiduciary carve outs. I have no difficulty with them.
(d) Employee incentive arrangements
162 Healthscope operates an incentive plan pursuant to which performance rights have been granted to senior management as an incentive and reward on short-term and long term bases by reference to performance and service conditions.
163 Pursuant to cl 8.11 of the implementation deed, Healthscope and Brookfield BidCo have agreed as to how the performance rights are to be dealt with for the purposes of the Scheme to ensure that all performance rights will have vested, lapsed or been cancelled before implementation of the Scheme.
164 Details of how Healthscope’s performance rights will be impacted by the Scheme are set out in the proposed transaction booklet. In summary, all deferred short-term incentive performance rights which have been granted following satisfaction of certain performance conditions and which are subject to certain service conditions will vest on the effective date for the Scheme or when the takeover bid becomes unconditional (as applicable). Further, with the exception of the long-term performance rights granted for the financial year ended 30 June 2017 (which will lapse), all other performance rights which are subject to certain service (and in some cases, performance) conditions will vest on the effective date for the Scheme or when the takeover bid becomes unconditional (as applicable).
165 The result of the above is that, as at 11 April 2019, if the Scheme is approved for implementation, 7,532,699 performance rights will vest in exchange for Healthscope shares. This will allow the holders of those performance rights to receive the Scheme consideration for those Healthscope shares.
166 In my view these arrangements do not require any of those shareholders who hold such incentives to meet separately as a separate class from those shareholders who do not hold such incentives in order to consider and vote on the proposed Scheme.
167 I agree with what Robson J said in Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525 at [82], which observations apply with equal force before me:
I am satisfied that the performance rights or options held by some employees do not give rise to a separate class of members. It is worth noting at the outset that the rights will not vest until after the meeting to approve the scheme is held. Accordingly, the issue of additional shares will not influence the voting at the meeting directly. The question is whether the rights and options themselves (and the prospect of additional shares upon their vesting) gives rise to a divergence of interests with other shareholders. I do not consider that it does. The shares to be issued if the rights or options vest are not of a different type than those of other shareholders. Moreover, it appears to me that the employees with performance rights or options are in no different position from any other employee of the company who would be impacted by the scheme’s implementation in different ways on the basis of various interests extraneous to their status as members.
(e) Section 411(17)
168 My power to approve a scheme is restricted by s 411(17). At the approval stage, I must be satisfied that there is no proscribed purpose as described in s 411(17)(a) or there must be provided to me a statement in writing by ASIC that it has no objection to the arrangement (s 411(17)(b)).
169 In my view, s 411(17) does not present a bar to a meeting now being ordered to be convened. Given that ASIC does not oppose the application for convening the meeting, subject to the separate meetings point that I have now ruled on, it is appropriate for me to proceed at this stage on the basis that an application for approval would be unopposed by ASIC, and that ASIC may in due course provide a statement in the form contemplated by s 411(17)(b) notwithstanding its statement of present intention not to do so as set out in its letter to the directors of Healthscope on 15 April 2019.
170 But in any event there are presently no matters supporting an inference that there is any proscribed purpose. Moreover, the takeover bid has been made by reference to Chapter 6 of the Act and is conditional on the Scheme not becoming effective. It would appear that the transaction as presently structured was not proposed for the purpose of enabling any person to avoid the operation of any provision of Chapter 6 of the Act. And ASIC has not suggested otherwise. Accordingly, the requirements of s 411(17) do not present a bar to me ordering that a Scheme meeting be now convened.
INFORMATION DISCLOSURE
171 There are three aspects to the requirements of s 412(1).
172 First, the explanatory statement must explain the effect of the compromise or arrangement, and in particular state any material interest of the directors and the effect on those interests of the compromise or arrangement so far as it is different from the effect on the like interests of other persons. Now these matters are addressed in the proposed transaction booklet. And the information in it makes it clear that the effect of the arrangement on the directors’ interests is the same as on the like interests of others.
173 Second, the explanatory statement must set out the prescribed information. That prescription is in reg 5.1.01 and Sch 8 (Pt 3) of the Regulations. Now a helpful table has been provided to me showing the specific requirements of the Act and the Regulations and the location in the proposed transaction booklet of the statements by which those requirements are complied with. I am satisfied as to both its accuracy and its comprehensiveness.
174 Third, the explanatory statement must set out any other information that is material to the making of a decision whether to agree with the compromise or arrangement, being information which is within the knowledge of the directors and has not previously been disclosed. In my view the proposed transaction booklet on its face seems to satisfy that requirement.
175 Now the Healthscope board established a due diligence committee in connection with the Scheme. The responsibilities of the due diligence committee included overseeing preparation of the transaction booklet and supervising and assisting in a process of verification of the Healthscope information by persons with relevant knowledge and experience; the expression “Healthscope information” includes all of the information contained in the proposed transaction booklet other than the “Brookfield Information” (as defined in the proposed transaction booklet), the independent expert’s report and any other report or opinion prepared by an external adviser to Healthscope.
176 As part of this process of verification, in relation to the proposed transaction booklet:
(a) each material statement in the Healthscope information was identified and allocated to persons at Healthscope (or its advisers) with direct personal knowledge of the information contained in the relevant statement, or with access to such persons or to reliable source documents relating to the information;
(b) such persons were instructed to review each of the statements allocated to them and to collect supporting evidence for such statements (where possible) or the basis for such statements; and
(c) in relation to certain statements in the Healthscope information, certain persons at Healthscope (or its advisers) were instructed to provide a signed certificate to Healthscope, its directors and the due diligence committee:
(i) confirming that he or she was the appropriate person to verify the statements allocated to him or her; and
(ii) confirming (where appropriate by reference to source documents) that each such statement, in the form or context in which it appears in the proposed transaction booklet, if one of fact, is true and nothing material has been omitted from it, alternatively if it is a statement of opinion or forward looking, it is fair and based on reasonable grounds, as well as confirming that each such statement is not misleading or deceptive and, having regard to the person’s area of responsibility, does not omit information that may be material to Healthscope’s shareholders.
177 I am satisfied as to the adequacy of the verification procedures. Moreover, there was also evidence before me concerning the verification of the Brookfield information which I am content with.
178 Let me now deal with the dispatch of the transaction booklet, which is to be undertaken in the following fashion and in a manner that I consider satisfactory.
179 Computershare manages communications from Healthscope to its shareholders, including through its online ‘Investor Centre’ service.
180 Healthscope shareholders can elect to receive shareholder communications (such as notices of meetings and proxy forms) electronically by way of an email. The types of information that Healthscope shareholders can nominate to Computershare to receive electronically by email are:
(a) Company information: Which includes announcements, financial reports, security holder benefits, results announcements and newsletters (company information election).
(b) Statements: Which includes online shareholder/security holder statements.
(c) Notice of meeting and proxy: Notification of proposed shareholder meetings electronic appointment/voting (notice of meeting and proxy election).
181 Healthscope shareholders can also elect the format as to which they would like to receive the company’s annual report (online copy, no copy, full printed annual report).
182 As at 8 April 2019, 10,552 Healthscope shareholders (being 43.95% of Healthscope shareholders) had made both a company information election and a notice of meeting and proxy election (email shareholders). Further, as at 8 April 2019, 376 Healthscope shareholders (being 1.57% of Healthscope shareholders) had made a notice of meeting and proxy election but had not also made a company information election.
183 Further, in respect of the dispatch to Healthscope shareholders for the proposed Scheme, if an email is sent to a shareholder and Computershare receives an email ‘bounce back’ indicating that the email has not been successfully delivered to the shareholder’s email address, it is intended that a hard copy of the transaction booklet and accompanying forms (including a proxy form) be sent by post or airmail to that shareholder’s registered postal address.
184 Healthscope proposes to send an email containing links to an electronic copy of the transaction booklet (which includes as annexure E of the transaction booklet the notice of meetings, there being one for the Scheme and one for the capital reduction) and an online portal or website that is accessible by the shareholder and which enables the shareholder to lodge their proxy and voting instructions for the scheme meeting online to each email shareholder’s nominated email address. The email that is proposed to be sent to the relevant email shareholder will depend on whether the shareholder is in the first category i.e. the shareholder has a registered address outside of Australia, or has an address inside Australia but is a tax resident in an overseas jurisdiction, or the shareholder is in the second category i.e. all other shareholders. The only difference between the two proposed emails is a link to the relevant foreign resident declaration form and instructions relating to that form being included in the proposed email for the first category of shareholders.
185 It is proposed that, excluding email shareholders, all other Healthscope shareholders will be notified of the Scheme meeting by sending the transaction booklet on or before 23 April 2019 so that in the case of Healthscope shareholders whose registered address is within Australia, it will be sent by ordinary prepaid post addressed to the relevant addresses recorded in Healthscope’s register, and in the case of Healthscope shareholders whose registered address is outside Australia, it will be sent by airmail or international courier service addressed to the relevant addresses recorded in Healthscope’s register.
186 ASIC has granted Healthscope relief from the requirement to send to email shareholders separate hardcopies of the documents required to be dispatched to the Healthscope shareholders pursuant to the takeover bid on the condition that I make an order permitting electronic dispatch of the transaction booklet to the email shareholders. I am prepared to do so.
187 Finally, as the Scheme is a members’ scheme only, it is necessary that the explanatory statement be registered by ASIC before the notice of meeting is sent to Healthscope shareholders. Before registering the statement, ASIC must conclude that it appears to comply with the requirements of the Act, and must form the opinion that the statement does not contain any matter that is false in a material particular or materially misleading in the form and context where it appears.
188 Healthscope has provided the proposed transaction booklet to ASIC, together with all amendments. There does not appear to be any unresolved matter of disagreement between ASIC and Healthscope such as to impede registration. I do not see any difficulty concerning registration.
189 Section 411(1) provides that if I have made an order convening a meeting of members, I may approve the explanatory statement. But I do not propose to formally do so. In view of the requirement for registration by ASIC and the criteria that ASIC must apply, it is more appropriate that the explanatory statement for a members’ scheme be dealt with in that fashion.
190 But I should stress that not to so formally approve should not be seen as casting any doubt on the accuracy or adequacy of the proposed transaction booklet which comprises the explanatory statement or that it is not suitable for registration by ASIC.
191 In summary, the Scheme is of such a nature and cast in such terms that if it achieves the requisite statutory majorities at the Scheme meeting, I would be likely to approve it. There is no reason why the Scheme, if considered and adopted by the members, is not of such a nature as would be likely to be approved by me at the second court hearing. It cannot be said that the Scheme appears on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. Further, the Healthscope shareholders are to be presented with a detailed analysis by the independent expert of the Scheme and associated transactions and its advantages and disadvantages, and have the recommendation of the Healthscope directors. Finally, the proposed transaction booklet meets the statutory requirements, has been properly prepared and verified by Healthscope, and has been examined by ASIC.
192 For the foregoing reasons, I made the orders sought by Healthscope convening the meeting save for the approval order just discussed.
I certify that the preceding one hundred and ninety-two (192) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach. |
Associate:
