FEDERAL COURT OF AUSTRALIA

DuluxGroup Ltd, in the matter of DuluxGroup Ltd [2019] FCA 961

ORDERS

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 ASIC 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.

C.    The Court notes the letter from ASIC to the Directors of DuluxGroup Limited dated 13 June 2019 produced at the hearing.

THE COURT ORDERS THAT:

1.    Pursuant to section 411(1) of the Corporations Act 2001 (Cth) (the Act), the plaintiff, DuluxGroup Limited (ACN 133 404 065) (DuluxGroup) convene and hold a meeting (Scheme Meeting) of holders of fully paid ordinary shares in DuluxGroup (DuluxGroup Shareholders):

(a)    for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement (Scheme) proposed between DuluxGroup and Scheme Shareholders, the terms of which are set out in Annexure B to these orders;

(b)    to be held at The Clarendon Auditorium, Melbourne Exhibition Centre, 2 Clarendon Street, South Wharf, Victoria, Australia on Wednesday, at 2:00pm on Wednesday 31 July 2019 (Melbourne time).

2.    The Scheme Meeting be convened by sending a document substantially in the form of Exhibit 1 (Scheme Booklet) which contains, amongst other things, a Notice of Meeting at Appendix A, along with a proxy form for the Scheme Meeting, such documents to be sent in the following manner:

(a)    in the case of those DuluxGroup Shareholders who have elected to receive communications electronically, by way of email to their nominated email address;

(b)    in the case of those DuluxGroup Shareholders who have not elected to receive communications electronically and whose postal address is shown on the register of members of DuluxGroup as being within Australia by pre-paid ordinary post to that address; and

(c)    in the case of those DuluxGroup Shareholders who have not elected to receive communications electronically and whose postal address is shown on the register of members of DuluxGroup as being outside Australia, by airmail to that address.

3.    Pursuant to section 1319 of the Act:

(a)    DuluxGroup may determine that, for the purposes of the Scheme Meeting, all the shares in DuluxGroup be taken to be held by the person, persons or bodies corporate who held them as at 7:00pm (Melbourne time) on Monday, 29 July 2019, in accordance with the register held and maintained by DuluxGroup;

(b)    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 2:00pm (Melbourne time) on Monday, 29 July 2019;

(c)    the Chairperson of the Scheme Meeting be Graeme Leibelt or in his absence, Andrew Larke;

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

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

4.    Compliance with rule 3.4 and Form 6 of the Federal Court (Corporations) Rules 2000 (Cth) (Rules) be dispensed with.

5.    Subject to the requisite majorities of DuluxGroup Shareholders voting in favour of the Scheme at the Scheme Meeting, DuluxGroup publish a Notice of Hearing in The Australian newspaper, in substantially the form that appears at Annexure ‘A’ hereto not later than 5 days prior to the date fixed for the hearing of any application to approve the Scheme.

6.    Compliance with r 2.15 of the Rules be dispensed with.

7.    The proceedings be stood over to 10:15am on 6 August 2019 before Justice O’Bryan for the hearing of any application to approve the Scheme.

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

Annexure A

Notice of hearing to approve scheme of arrangement

(Form 6, rule 3.4)

TO all the members of DuluxGroup Limited (ACN 133 404 065) (DuluxGroup):

TAKE NOTICE that at 10:15am on 6 August 2019, the Federal Court of Australia at 305 William Street, Melbourne, Victoria will hear an application by DuluxGroup seeking the approval of a scheme of arrangement between the above-named company and its members (the Scheme) if agreed to by a resolution to be considered and, if thought fit, passed by the members of DuluxGroup at the meeting to be held on Wednesday 31 July 2019.

If you wish to oppose the approval of the compromise or arrangement, you must file and serve on DuluxGroup 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 the plaintiff at its address for service at least 1 day before the date fixed for the hearing of the application.

The address for service of DuluxGroup is c/o Gilbert + Tobin, Level 22, 101 Collins Street, Melbourne Victoria, 3000 (Attention: Janet Whiting/Alexandra Whitby).

Annexure B

Scheme

[The Order entered is available on the Commonwealth Courts Portal, which attaches the Scheme.]

REASONS FOR JUDGMENT

O’BRYAN J:

A.    Introduction

1    By originating process filed on 31 May 2019, the plaintiff (DuluxGroup) seeks orders under section 411(1) of the Corporations Act 2001 (Cth) (Act) convening a meeting of DuluxGroup shareholders (Scheme Shareholders) to consider a proposed scheme of arrangement (Scheme). On 14 June 2019, I made orders convening such a meeting. These are my reasons for making those orders.

2    The commercial purpose of the Scheme is to provide for the acquisition of all the shares of DuluxGroup by Nippon Paint Holdings Co., Ltd. (Nippon Paint). DuluxGroup is an Australian public company limited by shares, listed on the Australian Securities Exchange (ASX). It manufactures products primarily focussed on the home improvement market in Australia and New Zealand. Its businesses in Australia and New Zealand comprise Dulux paint and coatings, Selleys sealants and adhesives, Parchem construction chemicals, Yates garden care, B&D garage doors and openers and Lincoln Sentry cabinet and architectural hardware. DuluxGroup also owns Dulux Papua New Guinea and has a presence in other offshore markets.

3    On 17 April 2019, DuluxGroup entered into a Scheme Implementation Deed with Nippon Paint (Implementation Deed). The Implementation Deed was amended in minor respects by the parties by letters dated 4 and 11 June 2019. The Implementation Deed provides that DuluxGroup is to propose and implement the Scheme on and subject to the terms of the Implementation Deed.

4    The Scheme provides for the transfer of all DuluxGroup shares to Nippon Paint, in consideration for a cash payment by Nippon Paint to DuluxGroup shareholders of $9.80 per DuluxGroup share less the amount of the Permitted Dividends, described further below (Scheme Consideration). If the Scheme is implemented, DuluxGroup will become a wholly-owned subsidiary of Nippon Paint and will be delisted from the ASX. Subject to the required Court and shareholder approvals, it is anticipated that the Scheme will be implemented on 21 August 2019, by reference to DuluxGroup shares held by shareholders on the “Record Date” (being 7.00pm on the fifth business day after the Scheme becomes effective, which is anticipated to be the day of the second court hearing) (Scheme Shares).

5    On 15 May 2019, DuluxGroup declared an interim dividend of $0.15 per DuluxGroup share and a special dividend of $0.28 per DuluxGroup share. Those dividends were contemplated by the Implementation Deed and are referred to as the “Permitted Dividends”. Those dividends are not conditional on the Scheme and will be paid on 28 June 2019, prior to the proposed Scheme Meeting on 31 July 2019. However, as noted above, the Scheme Consideration payable for each Scheme Share is calculated as $9.80 less the amount of the Permitted Dividends, being an amount of $9.37.

6    The draft Scheme Booklet (which includes the explanatory statement required by s 412 of the Act) (Scheme Booklet) provides a description of the Scheme and its advantages and disadvantages. It has been reviewed by the Australian Securities and Investments Commission (ASIC). On 13 June 2019, ASIC provided DuluxGroup with a letter in the usual form, known as a “preliminary no objection letter”. The letter stated that, based on ASIC’s examination of the terms of the Scheme and the Scheme Booklet, ASIC does not currently propose to appear to make submissions, or intervene to oppose the Scheme at the first hearing. Consistently with the terms of the letter, ASIC did not appear at the first hearing.

7    The Scheme Booklet records the recommendation of all the DuluxGroup Directors that shareholders vote to approve the Scheme, in the absence of a superior proposal, and that all DuluxGroup Directors intend to vote their shares in favour of the Scheme.

8    An Independent Expert’s Report (IER) has been obtained from Grant Samuel & Associates Pty Limited (Grant Samuel), which will be included as an annexure to the Scheme Booklet. In the opinion of Grant Samuel, the Scheme is fair and reasonable and in the best interests of the DuluxGroup shareholders. This is on the basis that the Scheme Consideration is within the assessed value range of DuluxGroup shares, which Grant Samuel considers is $8.53-9.93 per share.

9    For the reasons set out below, the Scheme, if considered and adopted by the members of DuluxGroup, is of such a nature that it would be likely to be approved by the Court at the second hearing. Accordingly, it is appropriate to make the orders sought convening the meeting: Re Biosceptre International Limited [2013] FCA 1429 at [34].

B.    Scheme mechanism

10    The Scheme is relatively straightforward, being a proposed arrangement by which all shareholders of DuluxGroup will transfer their shares to Nippon Paint in return for the Scheme Consideration, which comprises a cash payment. The Scheme is subject to various conditions precedent which must be either satisfied or waived on the date on which the application for approval comes before the Court (at the second hearing), which is anticipated to be 6 August 2019. If the Scheme is agreed to by shareholders and approved by the Court, it becomes effective upon the lodging of an office copy of the Court’s order with ASIC, which is also anticipated to occur on 6 August 2019. The Scheme Consideration will then be paid to Scheme Shareholders on the implementation date, which is anticipated to be 20 August 2019.

11    The Scheme requires that Nippon Paint provide the Scheme Consideration to Scheme Shareholders. For that purpose, the Scheme requires Nippon Paint to deposit (or procure the deposit) by no later than 12 noon on the date that is two Business Days before the implementation date cleared funds in an amount equal to the aggregate Scheme Consideration to be paid to Scheme Shareholders, and that this payment is to be held in an Australian dollar denominated trust account operated by DuluxGroup as trustee for the Scheme Shareholders. The Scheme Shares will not be transferred to Nippon Paint unless and until the Scheme Consideration has been provided by Nippon Paint and paid to DuluxGroup shareholders.

12    As set out in the Scheme Booklet, Nippon Paint intends to fund the Scheme Consideration by a new unsecured debt facility with Sumitomo Mitsui Banking Corporation (SMBC). On 4 June 2019, Nippon Paint entered into a term facility agreement with SMBC under which SMBC committed to provide Nippon Paint with a loan facility (SMBC Facility) to fund Nippon Paint's payment of the Scheme Consideration. Under the SMBC Facility, Nippon Paint will have access to funds up to an amount in Japanese yen equivalent to $3,756,265,000, which is sufficient to pay the Scheme Consideration.

13    Nippon Paint is not a party to the Scheme and cannot be directly bound by it. The established practice in these circumstances is to require the entity providing the Scheme Consideration to execute a Deed Poll in favour of Scheme Shareholders. That practice has been followed in this case. The Implementation Deed required Nippon Paint to execute a Deed Poll in a prescribed form. Nippon Paint executed the prescribed Deed Poll on 13 June 2019. The Deed Poll binds Nippon Paint in favour of Scheme Shareholders to provide, or procure the provision of, the Scheme Consideration in accordance with the terms of the Scheme, and to undertake all other actions attributed to it under the Scheme. Further, as Nippon Paint is a foreign corporation, an opinion has been obtained from Masaki Noda of the law firm Nishimura Asahi as to the proper execution and enforceability of the Deed Poll in Japan. This course is in accordance with observations made by Farrell J in Re Simavita Holdings Limited [2013] FCA 1274 (at [43]-[44]) concerning the need for such evidence in cases such as the present, to ensure that the Deed Poll is enforceable. This approach has been adopted in a number of subsequent cases in this Court: see for example Re Amcor Ltd [2019] FCA 346 at [18] per Beach J; Re Biosceptre International Limited [2013] FCA 1429 at [21], Re Sirtex Medical Limited [2018] FCA 584 at [54], and in Re Staging Connections Group Limited [2015] FCA 1012 at [44]-[48].

C.    Power to make orders under section 411

14    Part 5.1 of the Act provides a procedure whereby an arrangement between a company and its members (a scheme) can be made binding on all members. Section 411 is the principal provision. The procedure involves three main steps:

(a)    an application to the Court for an order that the company convene a meeting of its members;

(b)    if such an order is made, the holding of such a meeting at which a resolution agreeing to the scheme is considered, and perhaps passed; and

(c)    if the resolution is passed by the required majority (see s 411(4)), an application to the Court for approval of the scheme.

15    In terms of the first step of obtaining orders to convene a scheme meeting, s 411(1) of the Act confers a discretion on the Court to make such an order if the following requirements are satisfied:

(a)    a compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them): see s 411(1);

(b)    an application for the order is made in a summary way by the body: see s 411(1);

(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): see s 411(2)(a); 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: see s 411(2)(b). The explanatory statement referred to is that required by s 412: s 411(3).

16    In addition to these requirements of s 411, the procedure is regulated by s 412 and reg 5.1.01 and Schedule 8 to the Corporations Regulations 2001 (Cth) (the Regulations), and by the Federal Court (Corporations) Rules 2000 (Cth) (Rules). The Regulations and the Rules prescribe certain information which is required to be sent to the members about the Scheme.

17    I am satisfied that these requirements are met and that the Court’s power to make the convening orders is enlivened. In particular:

(a)    DuluxGroup, being a company registered under the Corporations Act, is a “Part 5.1 body” and it is well established that a scheme designed to effect an acquisition by one company of the shares in another may be an “arrangement” for the purposes of s 411(1) of the Act: see Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at 264 [39] per French J. DuluxGroup has made this application to the Court.

(b)    ASIC was given notice of the first Court hearing on 27 May 2019, which satisfied the requirement that 14 days’ notice be given of the hearing of the application. Also on 27 May 2019, ASIC was provided with a draft of the Scheme Booklet and IER. The evidence shows that ASIC has corresponded with DuluxGroup in relation to the Scheme Booklet, suggesting revisions, and that DuluxGroup has provided ASIC with revised versions of the Scheme Booklet. As noted above, on 13 June 2019, ASIC provided DuluxGroup with a “preliminary no objection letter”.

(c)    DuluxGroup filed a number of affidavits to establish compliance with the Regulations and Rules. A search of the records maintained by ASIC in relation to DuluxGroup was conducted on 30 May 2019, which was no earlier than 7 days before the Originating Process was filed on 31 May 2019, as required by r 2.4(2) of the Rules. The chairman and the alternate chairman nominated for the proposed Scheme Meeting have each made an affidavit containing the evidence required by r 3.2 of the Rules. The legal advisers to DuluxGroup have also adduced a detailed checklist of compliance with the disclosure requirements of ss 411 and 412 of the Act, Part 3 of Schedule 8 to the Regulations and ASIC’s Regulatory Guide 60 (RG 60).

D.     Exercise of the Court’s discretion

18    The function of the Court in an application to convene a meeting is supervisory. In Re Amcor Ltd [2019] FCA 346, Beach J described the Court’s role at the first court hearing as follows (at [47]):

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).

19    Before ordering a meeting, the Court needs to be satisfied of two matters:

(a)    first, that 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 majority at the […] meeting the court would be likely to approve it on the hearing of a petition which is unopposed”: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 per Street CJ; ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; Re Coles Group Ltd (2007) 25 ACLC 1380 at [29]-[36] per Robson J; and

(b)    second, that “the members [are to be] properly informed as to the nature of the scheme before the scheme meeting”: Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349 at [30]; 33 ACSR 595; Re Foundation Healthcare (2002) 42 ACSR 252 at [38].

D.1    The Scheme is fit for consideration

20    The question whether or not to accept particular consideration for shares is quintessentially a commercial matter for the members of DuluxGroup to assess: Re Amcor Ltd [2019] FCA 346 at [50]. Members ought not be prevented from having the opportunity to do so provided that the Court can be satisfied that they are “acting on sufficient information and with time to consider what they are voting about”: Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 409 per Lindley LJ, cited with approval in Re ACM Gold Ltd (1992) 34 FCR 530 at 534 per O’Loughlin J.

21    It is relevant in this respect that the Scheme Booklet contains:

(a)    a recommendation from all directors that shareholders vote in favour of the Scheme;

(b)    a statement that all directors intend to vote their DuluxGroup shares in favour of the Scheme; and

(c)    an independent expert report that the Scheme is fair and reasonable and in the best interests of DuluxGroup shareholders.

22    The Court will also scrutinise the terms of a scheme to satisfy itself that there is no element of unfairness in those terms that would be likely to preclude the approval of the scheme if it came before the Court for approval.

23    In this case, DuluxGroup raised the following particular features of the proposed Scheme for the attention of the Court:

(a)    performance risk;

(b)    deemed warranty by DuluxGroup shareholders;

(c)    break fee;

(d)    exclusivity arrangements;

(e)    DuluxGroup employee incentive arrangements;

(f)    financial assistance; and

(g)    whether the purpose of the Scheme was to avoid Chapter 6 of the Act.

24    I am satisfied that, for the reasons set out below, none of these matters provide a reason for the Court to refrain from making an order convening the scheme meeting.

Performance risk

25    As noted above, the entity that will be providing the Scheme Consideration is not party to the Scheme and is not (and cannot be) directly bound by it. As such, its obligations do not depend upon s 411 of the Act, which is confined to the obligations of the plaintiff company and its members: Re Westfield Holdings Ltd (2004) 49 ACSR 734 at 739. In considering whether to approve a scheme involving the participation of a person other than the plaintiff company and its members (here, Nippon Paint), it is important to ensure that that other party is bound to perform the role assigned to it and that its obligations are able to be enforced. In this context, the courts have considered the “performance risk” as regards the obligations to be performed by the non-scheme party: see for example Re Amcor Ltd [2019] FCA 346 at [53]; Re Coles Group Ltd (2007) 25 ACLC 1380 at 1386 [38]; Re Lonsdale Financial Group Ltd [2007] VSC 394 at [42]; Re KAZ Group Ltd [2004] FCA 738 at [4]-[5]; Re Healthscope Ltd [2010] VSC 367 at [31]-[32]; Re Mitchell Communication Group [2010] VSC 423 at [30]-[31]; Re AWB Ltd [2010] VSC 456 at [16]; and Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [21]-[25].

26    DuluxGroup has adopted an accepted means of addressing the performance risk arising from the obligation of Nippon Paint to pay the Scheme Consideration. First, Nippon Paint has executed a Deed Poll by which it is bound to perform the roles assigned to it under the Scheme with respect to the provision of the Scheme Consideration, and its obligations under that Deed Poll are enforceable. Second, the terms of the Scheme are such that the transfer of the Scheme Shares to Nippon Paint is subject to the obligation of Nippon Paint to provide the Scheme Consideration to the Scheme Shareholders.

Deemed warranty

27    The Scheme provides that each Scheme Shareholder is taken to have warranted to Nippon Paint that all of their Scheme Shares that are transferred under the Scheme will, at the date of transfer, be fully paid and free from all security interests, third party interests of any kind and from any restrictions on transfer of any kind, and that it has full power and capacity to sell and transfer those shares together with any rights and entitlements attaching to such shares to Nippon Paint under the Scheme. The warranty given by each Scheme Shareholder is in the usual form, and such clauses have been held to be acceptable, as long as the warranty is sufficiently disclosed in the explanatory statement to shareholders: Re Hostworks Group Ltd (2008) 26 ACLC 137; Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366; Re Dyno Nobel Ltd [2008] VSC 154; Re Biosceptre International Limited [2013] FCA 1429 at [22]. In this case, the deemed warranty is summarised at section 6.9 of the Scheme Booklet.

Break Fee

28    Under the Implementation Deed, a break fee of approximately $38 million is payable by DuluxGroup to Nippon Paint in certain specified circumstances (Break Fee) (and a “reverse break fee” in the same amount is also payable by Nippon Paint to DuluxGroup in certain circumstances). The Break Fee represents approximately 1% of the total equity value of DuluxGroup based on a value of $9.80 per DuluxGroup share. The circumstances in which the Break Fee may be payable by DuluxGroup are as follows:

(a)    a DuluxGroup director changes, withdraws or adversely modifies his or her recommendation that DuluxGroup shareholders vote in favour of the resolution to approve the Scheme or publicly recommends a competing proposal, other than where the independent expert has concluded that the Scheme is not or no longer in the best interests of DuluxGroup shareholders (unless this conclusion is due to a competing proposal);

(b)    Nippon Paint terminates the Implementation Deed for breach by DuluxGroup;

(c)    a competing proposal is announced prior to the second court date which results in the third party who makes the competing proposal acquiring all or a majority of the DuluxGroup shares, or acquiring control of DuluxGroup, within 6 months following such announcement; or

(d)    at any time prior to implementation of the Scheme, DuluxGroup enters into an arrangement, agreement or understanding to implement a competing proposal.

29    However, the Break Fee is not payable by DuluxGroup where the Scheme is voted down by DuluxGroup shareholders at the Scheme Meeting.

30    Evidence was given by the Company Secretary and General Counsel of DuluxGroup, Mr Black, that he participated in the negotiations with Nippon Paint on behalf of DuluxGroup in relation to the Break Fee and the Exclusivity Provisions (which are considered below). Mr Black said that each of DuluxGroup and Nippon Paint requested that provision be made for the respective Break Fees. The reason for this was that each party had incurred and would incur further significant costs in connection with the Scheme and that the Break Fees represented a genuine and reasonable estimate of costs that would be incurred by each party if the Scheme was not implemented and that neither of the parties would have entered into the Implementation Deed had provision for the Break Fees not been made. Mr Black also gave evidence that he attended meetings of the board of DuluxGroup during which the inclusion of the Exclusivity Provisions and Break Fees was discussed and that those provisions were approved by the board because the directors considered them to be (i) reasonable and appropriate in order to secure Nippon Paint’s entry into the Implementation Deed and Nippon Paint’s commitment to implement the proposed Scheme and (ii) in the interests of DuluxGroup Shareholders.

31    Break fees have become a common feature of commercial transactions of this nature. The effect of such fees on the interests of shareholders has been considered by the courts in connection with schemes of arrangement and by the Takeovers Panel in connection with share acquisitions, the control of companies and the purposes of Chapter 6 of the Act. In general terms, the courts and the Takeovers Panel accept that break fees can be justified by reference to the costs incurred by the offeror and the benefit that an offer may confer on the members of the target company by increasing its value. However, such fees may adversely affect the interests of shareholders if the amount of the fee is such that it is likely to coerce shareholders into agreeing to a scheme or to deter the making of a competing offer for the company’s shares: see Re SFE Corporation Ltd (2006) 59 ACSR 82 at [7] per Gyles J; Re APN News & Media Ltd (2007) 62 ACSR 400 at [37]-[55] per Lindgren J; Re Toll Holdings Ltd [2015] VSC 123 at [27]-[30] per Robson J; Takeovers Panel, Guidance Note 7 – Lock Up Devices (Issue 4, 11 February 2010) at [7]. In its current Guidance Note, the Takeovers Panel has stated that, in the absence of other factors, a break fee not exceeding 1% of the equity value of the target is generally not unacceptable. The 1% guideline is not, of course, decisive and courts have ordered a meeting to consider a scheme notwithstanding a break fee that exceeds that level: Re Cytopia Ltd [2009] VSC 560 at [12]-[18] per Davies J (in that case, the fee of $500,000 was approximately 4.57% of the equity value of the target).

32    I am satisfied that the terms of the Break Fee payable to Nippon Paint are not such as to render the Scheme unfair to members. On the evidence, the fee has a commercial basis (to recover costs). Importantly, payment of the Break Fee is not triggered if DuluxGroup shareholders reject the Scheme and therefore the fee should not influence their decision. Further, as the fee is about 1% of the equity value of DuluxGroup, it would not be expected to deter a competing offer being made for the shares.

Exclusivity arrangements

33    The Implementation Deed contains a number of exclusivity provisions which apply during the “Exclusivity Period” which is defined in the Implementation Deed as being 5 months from the date of the Implementation Deed (17 April 2019), unless terminated earlier. The Exclusivity Provisions include:

(a)    an obligation on DuluxGroup to terminate all existing discussions with a third party in relation to, or which could be reasonably expected to lead to, a competing proposal;

(b)    “no-shop”, “no-talk” and “no due diligence” restrictions on DuluxGroup;

(c)    a notification obligation on DuluxGroup to notify Nippon Paint of any written competing proposal; and

(d)    matching rights in favour of Nippon Paint in relation to any competing proposal.

34    The Implementation Deed also provides the DuluxGroup board with a fiduciary carve out to the “no-talk” and “no due diligence” restrictions and certain aspects of the notification obligation.

35    As noted above, Mr Black gave evidence that the exclusivity arrangements were the outcome of commercial negotiations that took place between DuluxGroup and Nippon Paint and were considered and approved by the board of DuluxGroup as being in the interests of members having regard to the benefits generated by the offer from Nippon Paint.

36    As noted by Robson J in Re Toll Holdings [2015] VSC 123 at [36] and in Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525 at [50], such provisions are now ordinarily found in merger implementation agreements. In Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9], Santow J said that an exclusivity clause should meet the following criteria:

(a)    it should be for no more than a reasonable period which is capable of precise ascertainment;

(b)    it must be framed so that it is subject to an overriding obligation not to breach the directors’ fiduciary duties or be otherwise unlawful; and

(c)    the exclusivity clause should be given adequate prominence in the explanatory statement sent to shareholders.

37    It is recognised that a “no-shop” clause need not be subject to a fiduciary “carve-out”: Re Healthscope Ltd [2010] VSC 367 at [19]-[22] per Davies J.

38    I am satisfied that the exclusivity arrangements agreed between DuluxGroup and Nippon Paint are reasonable and have been adequately disclosed in the Scheme Booklet and accordingly do not prevent the Court from making an order to convene a meeting of members to vote on the Scheme.

DuluxGroup employee incentive arrangements

39    DuluxGroup operates a number of incentive schemes pursuant to which DuluxGroup shares can be issued to executives and employees (Incentive Plans). Under the Implementation Deed, DuluxGroup and Nippon Paint have agreed that all outstanding rights to be issued shares in DuluxGroup will be exercised or deemed to be exercised so as to be able to be voted and participate in the Scheme, and the DuluxGroup directors will exercise their discretions under the Incentive Plans such that, subject to the Scheme becoming effective, shares subject to the plans will vest in the holders and be able participate in the Scheme. A question arises whether there is a need for those shareholders who will receive shares and associated benefits under the Incentive Plans to meet separately as a separate class from those shareholders who do not hold such rights, in order to consider and vote on the proposed Scheme in accordance with the requirements of s 411 of the Act.

40    Sub-sections 411(1) and (4) refer to a compromise or arrangement between, relevantly, members or a class of members. The word “class” is not defined in s 411. As observed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583:

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 a common interest.

41    In so far as the executive and employee beneficiaries of the Incentive Plans will see their share entitlements vest to enable them to vote on and participate in the Scheme, in my view s 411 does not require them to be treated as a separate class. The shares to which they are or will become entitled are not of a different type than those of other shareholders and they will receive a common benefit from the Scheme.  While it might be argued that certain of the benefits under the Incentive Plans will be accelerated if the Scheme is approved, in my view this outcome is not of itself sufficient to place the recipients into a different class, when the Incentive Plans pre-dated the Scheme and were part of the agreed executive and employee remuneration by the company: see for example Re Skilled Group Ltd (No 1) (2015) 113 ACSR 525.

42    There is one aspect of the Implementation Deed which requires further consideration. One of the Incentive Plans is the Long Term Executive Incentive Plan (LTEIP). Under the rules of that plan, the directors may invite eligible employees to acquire shares in the company and receive a loan to finance the acquisition. The recipient of such shares must apply dividends towards repayment of the loan. The directors may include performance or service conditions as a term of the loan which, if satisfied, will result in the forgiveness of a proportion of the loan. The directors also have the discretion to alter such conditions. Further, if a transaction is proposed that may result in a change in control of the company, the directors may decide to forgive an amount or percentage of the loan.

43    The number of shares that are currently subject to the LTEIP is approximately 7.5 million, which represents about 1.9% of the company’s shares. Under the Implementation Deed, and exercising its discretion under the rules of the LTEIP, DuluxGroup will forgive 30% of each LTEIP loan, subject to the Scheme becoming effective. The Scheme Booklet discloses that the value of the loan forgiveness is approximately $12.2 million, which represents about $1.60 per LTEIP share. One way of viewing the arrangements is that, if the Scheme becomes effective, the holders of the LTEIP shares will receive the Scheme Consideration ($9.37 per share) plus the loan forgiveness of $1.63 per share. Thus, a question arises whether that additional benefit is such as to constitute the holders of the LTEIP shares a different class to other members.

44    The relevant question is whether the legal rights and obligations of members are so dissimilar as to prevent them consulting together with a view to a common interest. Divergent commercial interests extrinsic to share membership do not warrant separate class meetings: Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349 at [79] per Santow J; 33 ACSR 595; Re Opes Prime Stockbroking Ltd (2009) 179 FCR 20 at [64] per Finkelstein J. Even if members receive different treatment or benefits under or as a result of the Scheme, it does not necessarily follow that separate class meetings are required. It is a question of degree. As observed by Barrett J in Re Hills Motorway Ltd (2002) 43 ACSR 101 at [12]; (2003) 21 ACLC 35:

The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability — the word used by Bowen LJ is “impossible” — does class distinction come to prevail.

45    The courts have also recognised that the “splitting” or “fracturing” of classes into smaller groups can undermine the object of obtaining decision by a large majority, by giving one group an effective veto over the wishes of the majority: Nordic Bank Plc v International Harvester Australia Ltd [1983] 2 VR 298 at 302; Re NRMA Insurance Ltd (No 1) (2000) 156 FLR 349 at [80]; 33 ACSR 595; Re Opes Prime Stockbroking Ltd (2009) 179 FCR 20 at [66].

46    Circumstances not dissimilar to the present were considered by the court in Re Cashcard Australia Ltd (2004) 48 ACSR 738; [2004] FCA 223 and Re Foster’s Group Ltd (No 2) [2011] VSC 547. In each case the court concluded that additional benefits to be received by executives of the scheme company if the scheme was approved were not sufficient to constitute those executives as a separate class. The same conclusion is warranted in the present case. In forming that view, I have taken into account the facts that: the LTEIP pre-dated the Scheme and is an ordinary part of the remuneration arrangements for eligible executives; under the rules of the LTEIP, the directors had a pre-existing discretion to forgive a percentage of the share loans and on a number of previous occasions had forgiven up to 30% of the loans; the rules of the LTEIP also anticipated that the directors may exercise their discretion to forgive loans if there was a change in control of the company; the shares the subject of the loans constitute a relatively small proportion of the company’s issued share capital; while the additional benefit that will accrue to holders of the LTEIP shares is not immaterial, it is a modest amount in comparison to the Scheme Consideration.

47    Although I do not consider it necessary to order separate class meetings, the fact that the holders of LTEIP shares receive an additional benefit (loan forgiveness) if the Scheme is approved can be taken into account in deciding whether to approve the Scheme at the second court hearing: Re Chevron (Sydney) Ltd [1963] VR 249 at 255; Re Cashcard Australia Ltd (2004) 48 ACSR 738 at [8]; [2004] FCA 223. Counsel for DuluxGroup indicated that the company would track the voting by holders of LTEIP shares so that the Court can take this factor into account should it become necessary at the second court hearing. The issue will become irrelevant if the Scheme achieves strong support at the meeting.

Financial assistance

48    A question arises whether financial assistance is being given by DuluxGroup to Nippon Paint to acquire the Scheme Shares because of the payment of the Permitted Dividends by DuluxGroup.

49    Section 260A(1) of the Act provides that a company may financially assist a person to acquire shares in the company only if:

(a)    giving the assistance does not materially prejudice (i) the interests of the company or its shareholders, or (ii) the company's ability to pay its creditors;

(b)    the assistance is approved by shareholders under s 260B; or

(c)    the assistance is exempt under s 260C.

50    It has been held that the words “financial assistance” have no technical meaning. The task is to examine the commercial realities of the transaction to determine whether it can properly be described as the giving of financial assistance by the company: see Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1 at 10 per Hoffmann J; Milburn v Pivot Ltd (1997) 78 FCR 472 at 501-503 per Goldberg J.

51    A number of decisions concerning proposed schemes of arrangement have considered whether the payment of a special dividend by the target company – in addition to the payment of the Scheme Consideration by the bidder – infringes the implied prohibition in s 260A of the Act. These cases have considered the “material prejudice” exception in s 260A(1)(a), without deciding the threshold question as to whether payment of the special dividend amounts to “financial assistance”: see Re Lion Nathan Limited [2009] FCA 870 at [16]-[17] per Emmett J; Re Ventura Investment Management Ltd [2011] FCA 721 at [14]-[15] per Jacobson J; Re ITX Group Pty Ltd [2010] FCA 1241 at [11] and [28] per Emmett J; Re RP Data Ltd [2011] FCA 228 at [30] per Stone J.

52    In my view, the payment by DuluxGroup of the Permitted Dividends does not constitute financial assistance to acquire the Scheme Shares. While the Implementation Deed anticipates the payment of the Permitted Dividends, the payment of the dividends is commercially independent of the Scheme: the Scheme does not require the dividends to be paid and the payment of the dividends is not conditional on the Scheme being implemented (the dividends have been announced and will be paid a month prior to the shareholders voting on the Scheme). The proper characterisation of the arrangements is that the consideration for the acquisition of the Scheme Shares is adjusted in a commercial manner by the payment of the dividends and the resulting reduction in the cash reserves of the company, which was anticipated by the parties.

53    In any event, I accept the submission of DuluxGroup that the payment of the Permitted Dividends will not prejudice DuluxGroup, its shareholders or its ability to pay its creditors for the purposes of s 260A(1)(a) of the Act. Evidence was given by the Chief Financial Officer of DuluxGroup, Mr Boxer, that DuluxGroup’s net asset position is more than sufficient to meet the payment of the Permitted Dividends.

Section 411(17)

54    The Court’s jurisdiction to approve a scheme is restricted by s 411(17) of the Act. This is a matter which affects the discretion ultimately to approve the Scheme, rather than the discretion to order the convening of a meeting: Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 at 370 [27] per Barrett J. At the second approval stage, the Court needs to be satisfied that there is no proscribed purpose as described in s 411(17)(a) or there must be provided to the Court a statement in writing by ASIC that it has no objection to the arrangement as per s 411(17)(b): see Re Coles Group Ltd (No 2) (2007) 65 ACSR 494 at [16]-[24].

55    RG 60 states at [60.104] that ASIC will provide a statement under s 411(17)(b) if:

(a)    all material information relating to the proposed scheme has been disclosed to ASIC;

(b)    the standard of disclosure to all members fulfils the requirements under regulation 5.1.01 and Schedule 8 of the Regulations;

(c)    the standard of disclosure to, and treatment of, all members is equivalent to the standard that would be required by the disclosure requirements and the principles in s 602 of the Act relating to the target securities in a takeover bid; and

(d)    there are no other reasons to oppose the scheme (e.g. public policy grounds) and the other matters referred to in RG 60 have been complied with.

56    If such a statement is provided by ASIC, it will not be provided until the second court hearing: RG 60 at [60.106].

57    Section 411(17) does not present a bar to a meeting being convened if it seems likely that ASIC will produce the relevant statement at the second court hearing. Where (as here) ASIC has indicated that it does not oppose the application for convening the meeting, it is appropriate to proceed on the basis that an application for approval would be unopposed by ASIC and that, in due course, ASIC will provide a statement for the purpose of s 411(17)(b): Re Lonsdale Financial Group Ltd [2007] VSC 394 at [31]-[40] per Robson J.

D.2    Shareholders will be properly informed

58    The second matter relevant to the exercise of the Court’s discretion is the adequacy of the information to be provided to shareholders. There are three aspects to the requirements of s 412(1):

(a)    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: see s 412(1)(a)(i) of the Act.

(b)    Second, the explanatory statement must set out the prescribed information. That prescription is in reg 5.1.01 and Schedule 8 (Part 3) of the Regulations.

(c)    Thirdly, the explanatory statement must set out any other information that is material to the making of a decision whether or not to agree with the compromise or arrangement, being information which is within the knowledge of the directors and has not previously been disclosed: see s 412(1)(a)(ii) of the Act.

59    Mr Black gave evidence summarising the verification procedures implemented by DuluxGroup to ensure that the Scheme Booklet does not contain any misleading or deceptive statements and satisfies the applicable disclosure requirements. Mr Black is a member of the Due Diligence Committee established by the DuluxGroup board in connection with the Scheme. I am satisfied as to the processes and procedures implemented by DuluxGroup with the aim of ensuring that: the Scheme Booklet includes all information material to the making of a decision by a shareholder whether or not to agree to the Scheme; each relevant statement is accurate; no material facts or considerations have been omitted; and the document is not misleading or deceptive in any material respect.

60    DuluxGroup proposes to dispatch a copy of the Scheme Booklet (which includes the notice of meeting) electronically to those shareholders who have nominated an electronic address for the purposes of receiving electronic copies of shareholder communications and in hard copy to all other shareholders.

61    As the Scheme is purely a members’ scheme, it is necessary that the explanatory statement be registered by ASIC before the notice of meeting is sent to DuluxGroup shareholders: see s 412(6) of the Act. 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 is materially misleading in the form and context where it appears: see ss 412(7) and 412(8) of the Act. DuluxGroup has provided the draft Scheme Booklet to ASIC, together with all amendments.

62    Schemes of arrangement are not required to be the subject of a report by an independent expert unless the parties have a common director or the acquiring company controls 30% of the scheme company: see reg 5.1.01 and Sch 8, cl 8303 of the Regulations. Neither is applicable to the DuluxGroup Scheme. Nevertheless, DuluxGroup has obtained a report from Grant Samuel as to whether, in the expert’s opinion, the Scheme is in the best interests of DuluxGroup shareholders. Grant Samuel opines that the Scheme is fair and reasonable and in the best interests of DuluxGroup shareholders.

63    Section 411(1) provides that, if the Court has made an order convening a meeting or meetings of members or creditors, the Court “may approve the explanatory statement.” The practice of courts varies in this respect. Orders approving the explanatory statement have been made in a number of cases: see for example Re Adelaide Bank Ltd [2007] FCA 1582; Re Marengo Mining Ltd [2012] FCA 1220; Re Opus Group Limited [2018] FCA 959; Re Ecosave Holdings Limited [2015] FCA 1121; and Re Biosceptre International Limited [2013] FCA 1429. In other cases the court has declined to make orders approving the explanatory statement: see for example Re IXLA Ltd [2007] VSC 573 at [38]. In declining to approve the explanatory statement in that case, Robson J said (at [38]) that, in view of the requirement for registration by ASIC and the criteria that ASIC must apply, it was more appropriate that the explanatory statement for a members’ scheme be dealt with in that fashion. The same approach was recently taken by this Court in Re Amcor Ltd [2019] FCA 346 at [114]-[115] per Beach J; Re Verdant Minerals Ltd [2019] FCA 556 at [84] per Moshinsky J; and in Re Healthscope Ltd [2019] FCA 542 at [189] per Beach J. I propose to adopt the same approach.

E.    Conclusion

64    In conclusion, I am satisfied that the Scheme is of such a nature and cast in such terms that, if it achieves the statutory majorities at the Scheme Meeting, the Court would be likely to approve it and that it is therefore appropriate to make the orders sought by DuluxGroup.

Associate:

Dated:    21 June 2019