FEDERAL COURT OF AUSTRALIA
Kidman Resources Limited, in the matter of Kidman Resources Limited [2019] FCA 1226
ORDERS
Plaintiff | ||
DATE OF ORDER: | 30 July 2019 |
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 Maddocks, the solicitors for the Plaintiff dated 29 July 2019, at Tab 1 to Exhibit “RS-2” to the affidavit of Ron Smooker sworn 30 July 2019 (Third Smooker Affidavit).
THE COURT ORDERS THAT:
1. Pursuant to rule 2.13(1) of the Federal Court (Corporations) Rules 2000 (Cth) (Rules), Wesfarmers Lithium Pty Ltd ACN 633 472 803 has leave to be heard in the proceeding without becoming a party to it.
2. 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 any alterations or conditions) 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 RACV Club, Level 2, Bourke Room 2 & 3, 501 Bourke Street, Melbourne, Victoria on 5 September 2019 commencing at 10.00am (Melbourne time).
3. The Scheme Meeting be convened by sending on or before 6 August 2019:
(a) in the case of Scheme Shareholders who have elected to receive shareholder communications electronically by way of email (Email Shareholders), and whose registered address is in Australia, an email substantially in the form at Tab 22 of Exhibit “GJP-1” to the affidavit of George Pizzey sworn on 26 July 2019 (Pizzey Affidavit) and which contains links to:
(i) an electronic copy of a document substantially in the form of the scheme booklet, a draft of which is at Tab 4 of Exhibit “RS-2” to the Third Smooker Affidavit (Scheme Booklet), which contains, among other things, the Notice of Scheme Meeting at Attachment 4 to the Scheme Booklet and the Notice of General Meeting at Attachment 5 to the Scheme Booklet; and
(ii) an online portal or website that is accessible by the Email Shareholder and which enables the Email Shareholder to lodge their proxy for the Scheme Meeting and the General Meeting and voting instructions online; and
(b) in the case of Email Shareholders, and whose registered address is outside Australia, an email substantially in the form at Annexure “RS-5” to the further affidavit of Ron Smooker sworn on 30 July 2019 (Fourth Smooker Affidavit), and which contains links to:
(i) an electronic copy of a document substantially in the form of the scheme booklet, a draft of which is at Tab 4 of Exhibit “RS-2” to the Third Smooker Affidavit (Scheme Booklet), which contains, among other things, the Notice of Scheme Meeting at Attachment 4 to the Scheme Booklet and the Notice of General Meeting at Attachment 5 to the Scheme Booklet; and
(ii) an online portal or website that is accessible by the Email Shareholder and which enables the Email Shareholder to lodge their proxy for the Scheme Meeting and the General Meeting and voting instructions online; and
(iii) a ‘Foreign Resident capital gains withholding – vendor declaration form’, in the form at Annexure “RS-3” to the Fourth Smooker Affidavit (Foreign Resident Declaration Form); and
(c) in the case of Scheme Shareholders who are not Email Shareholders and whose registered address is in Australia, the following documents by pre-paid post addressed to the relevant addresses recorded in the Plaintiff’s register:
(i) a document substantially in the form of the Scheme Booklet, which contains, among other things, the Notice of Scheme Meeting at Attachment 4 to the Scheme Booklet and the Notice of General Meeting at Attachment 5 to the Scheme Booklet;
(ii) a personalised electronic proxy form for the Scheme Meeting, substantially in the form at Tab 9 of Exhibit “RS-1” to the affidavit of Ron Smooker sworn 26 July 2019 (Second Smooker Affidavit) (Scheme Proxy Form); and
(iii) a personalised electronic proxy form for the General Meeting, substantially in the form at Tab 5 of Exhibit “RS-2” to the Third Smooker Affidavit (General Proxy Form); and
(iv) a reply paid envelope for the return of the Proxy Forms;
(d) in the case of Scheme Shareholders who are not Email Shareholders and whose registered address is outside Australia, the following documents by airmail addressed to the relevant addresses recorded in the Plaintiff’s register:
(i) a document substantially in the form of the Scheme Booklet, which contains, among other things, the Notice of Scheme Meeting at Attachment 4 to the Scheme Booklet and the Notice of General Meeting at Attachment 5 to the Scheme Booklet;
(ii) a personalised Scheme Proxy Form; and
(iii) a personalised General Proxy form; and
(iv) a return envelope for the return of the Proxy Forms; and
(v) a Foreign Resident Declaration Form.
4. 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 member and that are not inconsistent with Part 2G.2 of the Act.
5. Voting on the resolution to approve the Scheme is to be conducted by way of a poll as declared by the Chairperson.
6. 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 10.00am (Melbourne time) on 3 September 2019.
7. Mr George John Pizzey, or failing him, Mr Aaron Mark Colleran, be Chair of the Scheme Meeting.
8. The Chair of the Scheme Meeting shall have the power to adjourn the meeting to such time, date and place as he considers appropriate.
9. Compliance with rule 2.15 of the Rules is dispensed with.
10. Compliance with rule 3.4 and Form 6 of the Rules is dispensed with.
11. The Plaintiff publish in The Australian newspaper once on or before 29 August 2019 an advertisement substantially in the form of Annexure A to these Orders.
12. The further hearing of the Originating Process is adjourned to a hearing before Justice O’Callaghan on 12 September 2019 at 10.15am (Melbourne time).
13. There is liberty to apply.
14. Pursuant to rule 39.34 of the Federal Court Rules 2011 (Cth), these orders be entered forthwith.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ANNEXURE A
Notice of Second Court Hearing
Notice of hearing to approve compromise or arrangement
TO all the members of Kidman Resources Limited (ACN 143 526 096) (Kidman)
TAKE NOTICE that at 10.15am on 12 September 2019 the Federal Court of Australia (Victorian Registry) at 305 William Street Melbourne VIC 3000 will hear an application by Kidman seeking the approval of a compromise or arrangement between Kidman 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 5 September 2019 at RACV Club, Level 2, Bourke Room 2 & 3, 501 Bourke 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 Kidman 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 Kidman at its address for service by 5.00pm on 11 September 2019.
The address for service of Kidman is: c/o Maddocks Lawyers, Collins Square, Tower Two, Level 25, 727 Collins Street, Melbourne, Victoria, 3008 [Ref: Ron Smooker].
ANNEXURE B
O’CALLAGHAN J:
INTRODUCTION
1 After a hearing on 30 July 2019, I made the orders set out above. These are my reasons for making the orders.
2 By originating process filed on 8 July 2019, Kidman Resources Limited (Kidman) sought orders pursuant to section 411(1) of the Corporations Act 2001 (Cth) (Corporations Act) convening a meeting (Scheme Meeting) of the holders of its fully paid ordinary shares (Kidman Shareholders) for the purposes of them considering and, if thought fit, agreeing to a proposed scheme of arrangement (Scheme) between them and Kidman.
3 The Scheme, if implemented, will result in the acquisition of all the ordinary shares in Kidman (Kidman Shares) by Wesfarmers Lithium Pty Ltd (Wesfarmers Lithium), a wholly owned subsidiary of Wesfarmers Limited (Wesfarmers) and the subsequent delisting of Kidman. (Wesfarmers Lithium is a special purpose Australian proprietary company established by Wesfarmers for the purposes of acquiring all of the Kidman Shares under the proposed Scheme.)
4 The Scheme Meeting is proposed to be held at 10.00 am (Australian Eastern Standard Time) on Thursday, 5 September 2019 at the RACV Club, Level 2, Bourke Room 2 & 3, 501 Bourke Street, Melbourne, Victoria. It is proposed that Mr John Pizzey (the Chairman of Kidman), will chair the Scheme Meeting unless he is unable to do so, in which case Mr Aaron Colleran, a non-executive director of Kidman, will chair it.
Overview of the Scheme and related matters
5 Under the terms of the Scheme, Wesfarmers Lithium will acquire on the “Implementation Date” all of the Kidman Shares and Kidman Shareholders will receive (as consideration for the acquisition of their shares) cash consideration payable by Wesfarmers Lithium of $1.90 per Kidman Share. The transfer of the Kidman Shares to Wesfarmers Lithium on the Implementation Date is subject to the cash consideration having been despatched to the Kidman Shareholders (described as “Scheme Participants” in the Scheme).
6 The aggregate amount of the scheme consideration is approximately $776 million. The proposed implementation date for the Scheme is 23 September 2019.
7 Kidman obtained an independent expert report from KPMG Corporate Finance, a division of KPMG Financial Advisory Services (Australia) Pty Ltd) (KPMG), which expresses the opinion that the Scheme is in the best interests of Kidman Shareholders in the absence of a “superior proposal”. The Australian Securities and Investments Commission (ASIC) raised some matters with Kidman’s solicitors in relation to the report. It was amended to accommodate them.
8 The Directors of Kidman have unanimously recommended that Kidman Shareholders vote in favour of the Scheme at the Scheme Meeting in the absence of a “Superior Proposal” (as defined in a draft Scheme Booklet and in the Scheme Implementation Deed).
9 Kidman relied on a number of affidavits. Annexure 1 to these reasons lists the deponents, their relationship with Kidman and the general nature of their evidence.
Notice to ASIC
10 On 8 July 2019, a draft Scheme Booklet (which included the explanatory statement for the Scheme required by section 412(1) of the Corporations Act) was lodged with ASIC. The originating process was also provided.
11 Under section 411(2) of the Corporations Act, the Court must not make a meeting order under section 411(1), unless 14 days’ notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC and the Court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the Scheme and a draft of the explanatory statement and to make submissions to the Court in relation to the Scheme and the draft explanatory statement.
12 The draft Scheme Booklet has been reviewed by ASIC. On 29 July 2019 ASIC provided Kidman’s solicitors with a preliminary “no objection” letter, stating that, based on ASIC’s examination of the terms of the Scheme and the Scheme Booklet, it does not currently propose to appear to make submissions, or intervene to oppose the Scheme at the first hearing.
Kidman
13 Kidman was registered as a public company limited by shares on 7 May 2010. Its shares were admitted to the official list of the ASX on 18 January 2011. Its registered office is at NE Suite, Level 30, 140 William Street, Melbourne.
14 Kidman is an ASX listed lithium developer. Its “main focus” is on developing the Mt Holland Lithium Project in joint venture with SQM Australia Pty Ltd (SQMA), a subsidiary of Sociedad Quimica y Minera de Chile S.A. (SQM).
15 As at 26 July 2019, Kidman had on issue 404,797,403 fully paid ordinary shares and 3,721,171 performance rights. As at that date, it had 7,491 shareholders.
16 Kidman’s market capitalisation on 1 May 2019 (being the last trading day before Wesfarmers’ non-binding indicative proposal was announced to the ASX) was approximately $522.19 million (represented by 404,797,403 shares multiplied by the $1.29 closing share price on that date). Kidman’s market capitalisation as at 25 July 2019 was approximately $767.12 million (based on the closing price of $1.90 per Kidman Share on the ASX on 25 July 2019).
Wesfarmers Lithium
17 Wesfarmers Lithium is a wholly owned subsidiary of Wesfarmers. It was incorporated as a proprietary company limited by shares on 15 May 2019 and was established for the purpose of acquiring all of the shares in Kidman if the Scheme is implemented.
Compromise or arrangement
18 Section 411(1) of the Corporations Act (the meeting convening section for a proposed scheme of arrangement) relevantly refers to a proposed arrangement between a Part 5.1 body and its members.
19 Kidman is a Part 5.1 body for the purposes of section 411 of the Corporations Act. The definition of “Part 5.1 body” in section 9 of the Corporations Act includes a “company” which is in turn defined to mean a company registered under the Corporations Act. Kidman is a company registered under the Corporations Act.
20 The proposed “change of control” transaction is an “arrangement” within the meaning of section 411 of the Corporations Act.
Statutory framework
21 The statutory framework relating to schemes of arrangement involves a three stage process:
(a) the hearing of an application to the court for orders to convene a meeting or meetings (section 411(1));
(b) the holding of the meeting or meetings (section 411(4)(a)); and
(c) the hearing of an application to the court for an order to approve the scheme (sections 411(4)(b) and 411(6)).
Orders to convene meetings – role of the court
22 It is not necessary here to recite in detail the court’s role when considering an application for orders at the first stage. That has been done in countless cases. It suffices for present purposes to say that the provision confers a discretion on the court to make appropriate orders if:
(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 booklet.
23 I am satisfied that these requirements are met in this case and that the court’s discretion to make the orders sought is enlivened.
24 As to the exercise of the court’s discretion whether or not to convene a scheme meeting, the court needs to be satisfied of two matters:
(a) 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; and
(b) that members are to be properly informed as to the nature of the scheme before the scheme meeting.
25 The question whether or not to accept particular consideration for shares is quintessentially a commercial matter for the members (here, of Kidman) to assess. Members are not to be prevented from having the opportunity to do so provided that the court is satisfied that they are acting on sufficient information and with time to consider what they are voting on. See, by way of example only, Re Amcor Ltd [2019] FCA 346 at [50].
26 As Finkelstein J explained in Re CSR Ltd (2010) 183 FCR 358 at 379, [74] and [76], at the first court hearing the court should generally confine itself to ensuring that certain procedural and substantive requirements are met (including that there will be adequate disclosure), with limited consideration of issues of fairness, and the court should only consider the merits or fairness of a proposed scheme at such a hearing if the issue is such as would unquestionably lead to a refusal to approve the scheme at the approval hearing.
Is the Scheme fit for consideration?
27 Kidman’s counsel raised the following features of the Scheme:
(a) the terms of the Scheme;
(b) funding of the Scheme Consideration;
(c) performance risk;
(d) the exclusivity provisions;
(e) the break fee;
(f) the deemed warranty provision;
(g) Section 411(17) of the Corporations Act;
(h) certain performance rights and incentive payments and the associated question of “class” for the purposes of section 411(1);
(i) the voting deeds and the associated question of “class” for the purposes of section 411(1);
(j) the unanimous recommendation of directors and the matter of director benefits; and
(k) the foreign resident capital gains withholding provision set out in clause 5.4 of the Scheme.
28 Taking each in turn:
The Scheme
29 As explained in the Scheme Booklet, a “Scheme Participant” means a Kidman Shareholder (other than an “Excluded Shareholder”) as at the Record Date.
30 The Record Date is defined in the Scheme to mean 7.00pm on the third business day after the date the Scheme becomes effective (the Effective Date) or such other date after the Effective Date as Wesfarmers Lithium and Kidman agree in writing. On the current timetable the Record Date will be 7.00pm on 18 September 2019.
31 The term “Implementation Date” is defined in the Scheme to mean the date which is five business days after the Record Date or such other date as Kidman and Wesfarmers Lithium agree in writing.
32 Under the terms of the Scheme, Kidman Shareholders are to receive cash consideration of $1.90 per Kidman Share, which is the “Scheme Consideration”.
33 The following terms of the Scheme concern the steps to be taken on or before the Implementation Date (proposed to be 23 September 2019) regarding the provision of the Scheme Consideration to the Scheme Participants and the transfer of the Scheme Shares to Wesfarmers Lithium:
(a) Wesfarmers Lithium must, by no later than the Business Day before the Implementation Date, deposit (or procure the deposit) in cleared funds into a trust account operated by Kidman as trustee for the benefit of the Scheme Participants an amount equal to the aggregate amount of the total Scheme Consideration payable to all Scheme Participants, such amount to be held by Kidman on trust for the Scheme Participants (except that any interest on the amounts deposited (less bank fees and other charges) will be credited to Wesfarmers Lithium’s account (clause 5.2.1 of the Scheme);
(b) on the Implementation Date and subject to funds having been deposited in accordance with clause 5.2.1 of the Scheme, Kidman must pay or procure the payment of the Scheme Consideration to each Scheme Participant from the trust account by:
(i) an electronic funds transfer into a bank account nominated by the Scheme Participant; and
(ii) dispatching a cheque in Australian currency to the Scheme Shareholder’s registered address;
(clauses 5.2.2 and 5.2.3 of the Scheme);
(c) on the Implementation Date, subject to payment by Kidman of the Scheme Consideration to each Scheme Shareholder in the manner contemplated by clauses 5.2.2 and 5.2.3 of the Scheme (being the actual dispatch of the Scheme Consideration to the Scheme Participants), the Scheme Shares will be transferred to Wesfarmers Lithium (clause 4.2.1 of the Scheme);
(d) under clause 8.3.2, upon the provision by Kidman of the Scheme Consideration to each Scheme Participant in accordance with clauses 5.2.2 and 5.2.3, Wesfarmers Lithium will be beneficially entitled to the Scheme Shares pending registration by Kidman of Wesfarmers Lithium in the share register as the holder of the Scheme Shares; and
(e) under clause 8.4, upon provision by Kidman of the Scheme Consideration to each Scheme Participant in the manner contemplated by clauses 5.2.2 and 5.2.3 and until Kidman procures the registration of Wesfarmers Lithium as the holder of all Scheme Shares in the register, each Scheme Participant, among other things, is deemed to have irrevocably appointed Wesfarmers Lithium as its attorney and agent to appoint any director, officer, secretary or agent nominated by Wesfarmers Lithium as its sole proxy to attend shareholders’ meetings of Kidman and exercise the votes attaching to the Scheme Shares.
34 Clause 8.2 of the Scheme Implementation Deed provides that on the Implementation Date, but subject to the Scheme Consideration having been dispatched to Scheme Shareholders, Kidman must cause the appointment of the nominees of Wesfarmers Lithium to the Kidman Board (being the nominees of Wesfarmers Lithium appointed to the Kidman Board on the Effective Date as observers (but with no entitlement to speak or vote) under clause 8.1 of the Scheme Implementation Deed).
35 If the Scheme is implemented Wesfarmers Lithium will acquire 100% of the Scheme Shares, following which Kidman will be delisted from the ASX (clause 4.6.1 of the Scheme Booklet).
36 Clause 3.1 of the Scheme provides that the Scheme is conditional on:
(a) all the conditions precedent in clause 3.1 of the Scheme Implementation Deed (other than the condition precedent relating to court approval of the Scheme) having been satisfied or waived in accordance with the terms of the Scheme Implementation Deed by no later than the “Delivery Time” being 8.00am on the Second Court Date (proposed to be 12 September 2019);
(b) neither the Scheme Implementation Deed nor a Deed Poll entered into between Wesfarmers and Wesfarmers Lithium being terminated in accordance with its terms as at the Delivery Time;
(c) the Scheme being approved by the court at the Second Court Date under section 411(4)(b) of the Corporations Act, including with any alterations made or required by the court under section 411(6) of the Corporations Act and agreed or consented to in writing by Kidman and Wesfarmers Lithium;
(d) such other conditions made or required by the court under section 411(6) of the Corporations Act in relation to the Scheme as agreed or consented to in writing by Kidman and Wesfarmers Lithium having been satisfied; and
(e) the orders of the court made under section 411(4)(b) of the Corporations Act (and, if applicable, section 411(6)) approving this Scheme having come into effect, pursuant to section 411(10) of the Corporations Act on or before the End Date (where the term “End Date” is defined to mean 30 November 2019 or such later date as Wesfarmers Lithium and Kidman may agree in writing).
37 Clause 3.3.1 of the Scheme provides that at the hearing on the Second Court Date each of Kidman and Wesfarmers Lithium will provide to the court a certificate confirming whether or not the conditions in clause 3.1 of the Scheme Implementation Deed (other than the condition relating to court approval) have been satisfied or waived as at the Delivery Time. Clause 3.3.2 of the Scheme provides that the certificates given by Kidman and Wesfarmers Lithium constitute conclusive evidence that the conditions precedent in clause 3.1 have been satisfied or waived as at the Delivery Time.
Funding
38 The maximum amount expected to be required to fund the Scheme Consideration is $776 million, based on Kidman’s issued capital of 404,797,403 fully paid shares and on the basis that all performance rights on issue vest prior to the Implementation Date.
39 The proposed funding of the Scheme Consideration by Wesfarmers Lithium is set out in clause 4.5 of the Scheme Booklet. Wesfarmers intends to fund the amount of the Scheme Consideration through existing balance sheet capacity and bank debt facilities.
Performance risk
40 In considering whether to approve a scheme involving the participation of a person other than the company and its members (here, Wesfarmers Lithium), the court is concerned to ensure that the relevant party is bound to perform the role assigned to it and that its obligations are able to be enforced. See, by way of example only, Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734 at 739.
41 The court thus gives consideration to the question of credit risk or performance risk as regards the obligations to be performed by the non-scheme party.
42 Under the terms of the Scheme about the provision of the Scheme Consideration addressed above, if the Scheme is approved and becomes Effective (as defined in the Scheme), then the transfer of the Kidman Shares to Wesfarmers Lithium under the Scheme is subject to the Scheme Consideration having been dispatched by Kidman to the Scheme Participants.
43 As counsel for Kidman submitted, having the transfer of the Kidman Shares to Wesfarmers Lithium subject to the dispatch of the Scheme Consideration out of the trust account to the Scheme Participants effectively removes any performance risk insofar as the transfer of Kidman Shares in return for the Scheme Consideration is concerned.
44 Further, Wesfarmers Lithium and Wesfarmers have also entered into a Deed Poll in favour of the Scheme Participants. Under that Deed Poll:
(a) Wesfarmers Lithium has undertaken in favour of each Scheme Participant that it will duly and punctually observe and perform all obligations and actions attributed to it under the Scheme as if named as a party to the Scheme, including all obligations and actions attributed to it relating to the provision of the Scheme Consideration, in accordance with the terms of the Scheme (clause 3.1);
(b) Wesfarmers has undertaken in favour of each Scheme Participant:
(i) to duly and punctually observe and perform all obligations and actions attributed to it under the Scheme as if named as a party to the Scheme;
(ii) to procure that Wesfarmers Lithium performs all obligations and actions attributed to it under the Scheme; and
(iii) to guarantee the due and punctual performance of Wesfarmers Lithium of all of its obligations and actions attributed to it under the Scheme,
(clause 3.2).
45 As counsel for Kidman submitted, whilst the Deed Poll is in place, by reason of the terms of the Scheme, Scheme Participants will likely not need to rely on any of the covenants in the Deed Poll as far as the receipt of the Scheme Consideration in return for the transfer of their shares to Wesfarmers Lithium is concerned. As was also submitted, in an all cash scheme, involving no post implementation steps, and where the transfer of the scheme shares is subject to the dispatch of the scheme consideration to the scheme shareholders, a deed poll will have a limited role, if any, to play.
Exclusivity provisions
46 Clause 13 of the Scheme Implementation Deed contains exclusivity provisions. These exclusivity provisions are defined under the following headings: “No shop” (clause 13.1); “No talk” (clause 13.2); “No due diligence” (clause 13.3); “Notification of a Competing Proposal” (clause 13.4); “Termination of existing discussions” (clause 13.6); and “Matching Right” (clause 13.7).
47 Exclusivity restrictions of this kind have been accepted in many company schemes of arrangement. As Moshinsky J said in Re Verdant Minerals Ltd [2019] FCA 556 at [50], the following general principles have emerged from the cases:
(a) the exclusivity period should be a reasonable period and capable of precise ascertainment;
(b) there should be fiduciary carve outs in respect of no-talk and no due diligence arrangements;
(c) the exclusivity arrangements and their effect should be adequately disclosed in the scheme booklet; and
(d) it is desirable that the scheme proponents tender evidence directed to showing that the exclusivity provisions are the result of a normal commercial negotiation.
48 The period of exclusivity under the Scheme Implementation Deed is about 6 months, being the period from the date of the Scheme Implementation Deed (23 May 2019) to the earlier of:
(a) the date that the Scheme Implementation Deed is terminated in accordance with its terms, the Implementation Date (scheduled to be Monday, 23 September 2019); or
(b) the “End Date” (being 30 November 2019 or such later date as Wesfarmers Lithium and Kidman agree in writing.)
49 This is a reasonable period, as the cases make clear. See, by way of example only, Re Dyno Nobel Ltd [2008] VSC 154 at [26]; Re Hostworks Group Ltd [2008] FCA 64; 26 ACLC 137 at [37]; Re Sino Gold Ltd [2009] FCA 1277; (2009) 74 ACSR 647 at [20]-[25]; and Re Healthscope Limited [2019] FCA 542 at [154].
50 The authorities also establish that a “no-shop” restriction of the type contained in clause 13.1 is not subject to a fiduciary or statutory duty exception. See Re Healthscope Limited [2010] VSC 367 at [19]-[21]; Re Strategic Energy Resources Ltd [2011] VSC 645 at [15]; Re Toll Holdings Ltd [2015] VSC 123 at [39]; and Re Skilled Group Ltd [2015] VSC 789; (2015) 113 ACSR 525 at [55].
51 The “no talk” provision in clause 13.2, the “no due diligence” provision in clause 13.3 and elements of the “notification of a Competing Proposal” provision in clause 13.4 (being the obligation in clause 13.4.2) are all subject to the fiduciary or statutory obligations carve out in clause 13.5, which provides that such restrictions and obligations do not apply to the extent they restrict Kidman from taking or refusing to take any action with respect to a “Competing Proposal” (in relation to which there has been no contravention of clause 13) if acting in good faith (after having obtained written advice from Kidman’s legal adviser and, if appropriate, financial adviser), and in order to satisfy what the Kidman Board considers to be its fiduciary and statutory duties, it determines that, where there is a Competing Proposal, the Competing Proposal is, or may reasonably be expected to lead to, a “Superior Proposal”.
52 Clause 13.4.1 of the “notification of a Competing Proposal” provision provides in substance that during the Exclusivity Period, Kidman must within 1 business day notify Wesfarmers Lithium if it is approached by any third party requesting or proposing that it take any action of a kind that would breach its obligations under the “no talk” provision and “no due diligence” provision or if it proposes to take any action of a kind that would breach the restrictions in those provisions. Further, clause 13.4.2 of the “notification of a Competing Proposal” provision provides that during the Exclusivity Period, Kidman must, within 1 business day, give Wesfarmers Lithium notice in writing of the existence of any Competing Proposal received and, subject to the fiduciary exception in clause 13.5, the name and identity of the third party, all material terms of the applicable Competing Proposal and a copy of any material confidential information provided to any person associated with the Competing Proposal not previously provided to Wesfarmers Lithium.
53 Clause 13.7.1 of the “Matching Right” provision provides (in broad terms) that during the exclusivity period, Kidman must not enter into any legally binding agreement, arrangement or understanding to give effect to a Competing Proposal and must use its best endeavours to procure that none of its directors publicly recommends a Competing Proposal unless:
(a) the Kidman Board, acting in good faith and in order to satisfy what the directors consider to be their statutory or fiduciary duties, determines that the Competing Proposal would be or would be reasonably likely to be a Superior Proposal;
(b) Kidman has provided Wesfarmers Lithium with the material terms and conditions of the Competing Proposal (including price and the identity of the third party making the Competing Proposal);
(c) Kidman has given Wesfarmers Lithium three business days after the date of the provision of such information to provide a matching or superior proposal to the terms of the Competing Proposal; and
(d) Wesfarmers Lithium has not announced or otherwise formally proposed to Kidman a counterproposal to the Competing Proposal by the expiry of that three business day period.
54 Clause 13.7.2 of the “Matching Right” provision provides that if Wesfarmers Lithium proposes to Kidman a counterproposal within that three business day time period, then:
(a) Kidman must procure that the Kidman Board consider the counterproposal to determine if it would provide an equivalent or superior outcome to Kidman Shareholders and if so, then for a period of three business days after receipt of the counterproposal, Kidman and Wesfarmers Lithium must use their best endeavours to agree the transaction documents necessary to reflect that counterproposal; and
(b) if the determination by Kidman is that the counterproposal would not provide an equivalent or superior outcome for the Kidman Shareholders as a whole compared to the Competing Proposal, then Kidman must allow Wesfarmers Lithium a further period of two business days to provide an amended counter proposal.
55 The matching right is not subject to a fiduciary exception or carve-out. That position is consistent with authority. See Re Healthscope Limited [2019] FCA 542 at [154]-[161]; and Re Spicers Limited [2019] FCA 731 at [34].
56 Wesfarmers and SQM have also entered into a Commitment Deed. That deed agreed amendments to the joint venture agreement that would become binding if Wesfarmers completed the transaction with Kidman. The announcement also provided that as part of the Commitment Deed, and in recognition of the considerable work undertaken by both Wesfarmers and SQM in evaluating their prospective joint venture, SQM had also agreed not to enter into discussions with any party proposing to make an alternative offer for Kidman. A redacted copy of the Deed of Commitment was provided to Kidman (following a request by Kidman) on a confidential basis on 30 May 2019.
57 Following subsequent discussions between Kidman and Wesfarmers, Kidman announced to the ASX on 3 July 2019 that Wesfarmers and SQM had advised Kidman that the terms relating to exclusivity in the Commitment Deed had been amended to align those provisions with the market standard exclusivity provisions between Kidman and Wesfarmers contained in clause 13 of the Scheme Implementation Deed. The announcement provided further that the Deed of Commitment now clearly provides that SQM’s agreement not to enter into discussions with any third party who has provided Kidman with a Competing Proposal (as defined in the Scheme Implementation Deed) does not prevent SQM, if it wishes to do so, from entering into discussions, providing information or entering into an arrangement with that third party, where Kidman has notified SQM that it has formed the view that the Competing Proposal is, or may reasonably be expected to lead to, a Superior Proposal (as defined in the Scheme Implementation Deed) and Kidman has otherwise complied with its obligations under clause 13 of the Scheme Implementation Deed.
58 Accordingly, as counsel for Kidman submitted, if a Competing Proposal arose in circumstances in which Kidman had notified SQM that it had formed the view that the Competing Proposal is, or may reasonably be expected to lead to, a Superior Proposal and where Kidman has otherwise complied with its obligations under clause 13 of the Scheme Implementation Deed, SQM is able, if it wishes, to enter into discussions with, provide information to and enter into an arrangement with that third party.
59 Counsel for Kidman also pointed to the relevance of the following matters:
(a) prior to entering into the Process and Exclusivity Deed with Wesfarmers on 2 May 2019 (which was the precursor to the Scheme Implementation Deed) Kidman had engaged on a confidential basis with a small number of potential acquirers of the business, some of whom conducted due diligence;
(b) the Wesfarmers proposal was announced on 2 May 2019 and all discussions with third parties were terminated at that time;
(c) as at the date of the Scheme Booklet, neither the Kidman Board nor any of Kidman’s advisers has received any Competing Proposal from a third party and there are no third party discussions underway with Kidman (or its advisers) in relation to any Competing Proposal;
(d) the Scheme Consideration of $1.90 per Kidman Share is at the upper end of the Independent Expert’s valuation range for Kidman (being $1.62 to $2.00 per Kidman Share); and
(e) that prior to the Deed of Commitment being entered into between SQM and Wesfarmers, SQM was under no obligation to engage with a third party who had provided a Competing Proposal to Kidman and that it was up to it to determine whether or not it wished to engage with that third party – that remains the position following the amendments made to the Deed of Commitment.
60 In light of those matters counsel for Kidman contended, and I agree, that the exclusivity provisions contained in clause 13 of the Scheme Implementation Deed are reasonable and sufficiently disclosed in the Scheme Booklet.
Break fee
61 The Scheme Implementation Deed contains a break fee of $7.7 million payable by Kidman to Wesfarmers Lithium in the circumstances set out in clause 14.2.
62 Clause 14.1.1 provides in substance that Kidman believes that the Scheme will provide significant benefits to Kidman and its shareholders and that Kidman acknowledges that if the Scheme is not implemented, Wesfarmers Lithium will incur significant costs, including those set out in clause 14.5 (which include advisory costs, costs of management and directors’ time and out-of-pocket expenses). Clause 14.1.2 provides in substance that Wesfarmers Lithium and Kidman have agreed that provision be made for the payment of the break fee in accordance with clause 14.2 without which Wesfarmers Lithium would not have entered into the Scheme Implementation Deed.
63 The circumstances in which the break fee is payable (as set out in clause 14.2) do not include the circumstance where the Scheme does not proceed solely on the basis that Kidman Shareholders do not vote in favour of the Scheme at the proposed Scheme Meeting.
64 Guidance Note No. 7 issued by the Takeovers Panel provides that a break fee should not exceed 1% of the equity value of the target, defined as the aggregate of the value of all classes of equity securities issued by the target having regard to the value of the bid consideration when announced.
65 The break fee of $7.7 million in the present case is 0.99% of the equity value of Kidman based on the aggregate scheme consideration amount of $776,185,291 (at $1.90 per Kidman Share).
66 The Takeovers Panel Guidance Note figure of 1% has been considered and adopted by the courts in considering whether the amount of the break fee in change of control transactions undertaken by way of a scheme of arrangement is reasonable. See, by way of example, Re Healthscope Limited [2019] FCA 542 at [146]-[152] (break fee less than 1%), Re Amcor Ltd [2019] FCA 346 at [66]-[70] (break fee less than 1%) and Re DuluxGroup Ltd [2019] FCA 961 at [28]-[32].
67 In my view, the break fee is reasonable.
Warranties
68 Clause 8.2.2 contains the following warranty by Scheme Participants:
Each Scheme Participant is taken to have warranted to Wesfarmers Lithium, and appointed and authorised Kidman as its attorney and agent to warrant to Wesfarmers Lithium, on the Implementation Date that, as at the Implementation Date:
(a) all their Scheme Shares (including any rights and entitlements attaching to their Scheme Shares) which are transferred under this Scheme will, at the time of transfer of them to Wesfarmers Lithium, be fully paid and free from all:
(i) mortgages, charges, liens, encumbrances, pledges, security interests (including any ‘security interests’ within the meaning of section 12 of the Personal Properties Securities Act 2009 (Cth)) and interests of third parties of any kind, whether legal or otherwise; and
(ii) restrictions on transfer of any kind; and
(b) they have full power and capacity to transfer their Scheme Shares to Wesfarmers Lithium together with any rights attaching to those Scheme Shares;
(c) they have no existing right to be issued any Shares, or any other Kidman securities.
69 There is also a deemed warranty in clause 1.11 of the Scheme Booklet.
70 Deemed warranty clauses are commonly found in schemes of arrangement and are acceptable provided they are sufficiently disclosed. As Lindgren J said in Re APN News and Media Limited [2007] FCA 770; (2007) 62 ACSR 400:
59. In substance, the purpose of the deemed warranty is to prevent a shareholder whose shares are subject to encumbrances from receiving the same Scheme Consideration as that to be received by those whose shares are free from encumbrances, without any obligation, in effect, to refund to [the bidder] the amount required to discharge the encumbrance. It is not practicable for amounts secured by encumbrance to be deducted from the Scheme Consideration payable to the relevant scheme participants on the scheme implementation date.
60. The warranty will be deemed to be given, not only by those Offeree Shareholders who vote to agree to the Scheme, and who, therefore, can be seen to be consenting to give it, but also those who do not vote at all or who vote against the Scheme. However, I do not think this matters. What is important, in my view, is that the deemed warranty is no more than a device directed to ensuring that a Scheme participant whose shares are subject to an encumbrance is not unfairly advantaged. The amount of the damages payable for breach of the warranty is the amount required to discharge the encumbrance.
61. Nor do I think it matters that the time for the clearing of the title by payment by the shareholder to the encumbrancee may not yet have arrived under the terms of the encumbrance and therefore may be being accelerated by the deemed warranty. Any disadvantage a shareholder who has borrowed on advantageous terms on the security, may suffer by being required to discharge the encumbrance early, is, in principle, no different from the disadvantage suffered by any shareholder who becomes bound by a scheme to which the shareholder did not agree.
71 In my view, as counsel for Kidman submitted, the warranty clause in clause 7.4 of the Scheme is acceptable and the warranty clause has been sufficiently disclosed in the Scheme Booklet (see clause 1.11 of the Scheme Booklet).
Will Kidman Shareholders be properly informed?
72 I now turn to the adequacy of information provided to shareholders under the following rubrics:
(a) information for shareholders;
(b) the independent expert’s report;
(c) verification of the draft scheme booklet; and
(d) ASIC’s role.
73 Taking each in turn.
Information for Kidman Shareholders
74 In Re Amcor Ltd [2019] FCA 346, Beach J said (at [91]):
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 of those interests on the compromise or arrangement so far as it is different from the effect of the like interests of other persons. Now these matters are addressed in the draft Scheme Booklet. And the information makes it clear that that the effect of the arrangement on the directors’ interests is the same as on the like interests of others.
(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. Now a helpful table has been provided showing the specific requirements of the Act and the Regulations and the location in the draft Scheme Booklet of the statements by which those requirements are complied with. I am satisfied as to both its accuracy and its comprehensiveness.
(c) 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 …
75 Here, again as counsel for Kidman submitted:
(a) The Scheme Booklet sets out the features and effects of the Scheme and includes the explanatory statement as required by section 412(1)(a) of the Corporations Act. The directors’ unanimous recommendation that Kidman Shareholders vote in favour of the Scheme is set out (among other places) on the front page, in the Chairman’s letter and in clause 2.1.1 of the Scheme Booklet and in Frequently Asked Question 4 in the Scheme Booklet. Insofar as the directors have different interests from the other Kidman Shareholders in connection with the incentive payment to Mr Donohue and the proposed treatment of the performance rights of Mr Donohue and Mr Pizzey are concerned, they are addressed in the Chairman’s letter and in other sections of the Scheme Booklet (including clauses 2.1.1 and 7.1).
(b) As far as the prescribed information is concerned, a schedule 8 compliance statement has been prepared.
(c) As to the information provided to Kidman Shareholders, the Scheme Booklet contains, among other sections, a frequently asked questions section, a section which sets out details of the Scheme and how to vote (clause 1), information on Kidman, including information about the Mr Holland Lithium Project (clause 3), information about Wesfarmers and Wesfarmers Lithium (clause 4), key risk factors (clause 5), Australian tax implications of the Scheme (clause 6) and Additional Information (clause 7).
The amended independent expert’s report
76 KPMG has expressed the opinion in its draft amended report that the Scheme is fair and reasonable to Scheme Shareholders and therefore is in the best interests of the Scheme Shareholders in the absence of a Superior Proposal.
77 The independent expert has assessed the value of a Kidman Share (reflecting 100% ownership of Kidman and incorporating a control premium) to be in the range of $1.62 and $2.00 per Kidman Share.
Verification of the Draft Scheme Booklet
78 The evidence also explains the process undertaken by Kidman to verify the Kidman information and the verification certificates signed in that regard, and by Wesfarmers and Wesfarmers Lithium to verify the process undertaken by Wesfarmers and Wesfarmers Lithium regarding the Wesfarmers Information.
79 I am satisfied that those processes were implemented 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; that each relevant statement is accurate; that no material facts or considerations have been omitted; and that the document is not misleading or deceptive in any material respect.
ASIC’s role
80 As the proposed Scheme is a members’ scheme, it is necessary for the explanatory statement to be registered by ASIC under section 412(6) of the Corporations Act before despatching the explanatory statement to the Kidman Shareholders. Under section 412(8), ASIC must not register the copy of the explanatory statement unless the statement appears to comply with the Corporations Act and ASIC is of the opinion that the statement does not contain any matter that is false in a material particular or materially misleading in the form or context in which it appears. Kidman has, as I have said above, provided the draft Scheme Booklet to ASIC (including with the recent amendments).
Performance Rights
81 Kidman has 3,721,171 unlisted performance rights on issue. Kidman uses the term “performance rights” to refer generally to rights granted to directors and senior management of Kidman pursuant to long term incentive arrangements to have Kidman Shares issued to them subject to the satisfaction of relevant vesting and exercise conditions.
82 There are three categories of performance rights on issue, being:
(a) The following performance rights issued to the following people (being senior management of Kidman) under the “Kidman Omnibus Incentive Plan”:
(i) Mr Martin Donohue (Kidman’s Chief Executive Officer and Managing Director) – 972,954 performance rights;
(ii) Mr Frederick Kotzee (Chief Financial Officer) – 1,152,896 performance rights; and
(iii) Mr Thomas Wilcox (Company Secretary and General Counsel) – 463,198 performance rights;
(b) 60,753 share rights issued to Mr John Pizzey (Kidman’s Chairman) on 2 January 2019 (see paragraph 24 of the Pizzey affidavit and tab 6 of exhibit “GJP-1” to that affidavit). Under Mr Pizzey’s terms of appointment as non-executive Chairman of Kidman, Mr Pizzey was to receive half of his annual remuneration by way of share rights (see paragraphs 22 to 23 of the Pizzey affidavit and tab 5 of exhibit “GJP-1” to that affidavit).
(c) The following performance rights issued to the following senior management of Kidman in accordance with the terms of their employment arrangements with Kidman:
(i) Mr Christopher Williams – 458,937 performance rights;
(ii) Mr Ben Cerlienco – 81,817 performance rights;
(iii) Mr Michael Green – 155,304 performance rights; and
(iv) Mr Jason Eveleigh – 375,312 performance rights.
83 The following performance rights holders also presently hold or control Kidman Shares:
(a) Mr Pizzey – 90,744 Kidman Shares;
(b) Mr Donohue – 3,915,000 Kidman Shares;
(c) Mr Williams – 631,000 Kidman Shares;
(d) Mr Cerlienco – 200,000 Kidman Shares;
(e) Mr Green – 220,000 Kidman Shares; and
(f) Mr Eveleigh – 176,000 Kidman Shares.
84 Counsel for Kidman submitted that the following matters are relevant to the terms of issue of those categories of performance rights and the proposed treatment of them in the context of the Scheme:
(a) The performance rights issued to Mr Donohue, Mr Kotzee and Mr Wilcox are subject to vesting conditions relating to the share price performance of Kidman and continuity of service. While none of these performance rights have vested, under the Plan Rules these performance rights will be deemed to have vested if a “Change of Control” occurs (see paragraphs 20 to 21 of the Pizzey affidavit). At paragraph 21 of his affidavit, Mr Pizzey states the Scheme (if approved by Kidman Shareholders and the court) will constitute a “Change of Control” for the purposes of the Plan Rules.
(b) As to the share rights issued to Mr Pizzey, the only vesting condition was that Mr Pizzey remained a director of Kidman on the anniversary of the issue of the relevant share rights. Further, Mr Pizzey is not entitled to dispose of any Kidman Shares issued on vesting of the relevant share rights for a period of three years following the date of issue without the prior written consent of the Kidman Board. Mr Pizzey’s letter of appointment as Kidman’s non-executive Chairman provides that the share rights will vest (and the three year disposal restriction will not apply) if there is a takeover offer made for Kidman on the date that any such takeover offer becomes unconditional. In paragraph 26 of his affidavit, Mr Pizzey states that he has received advice that the Scheme constitutes a takeover offer for the purposes of the letter of appointment such that the share rights will vest.
(c) The relevant employment arrangements for each of Mr Williams, Mr Cerlienco, Mr Green and Mr Eveleigh do not provide that the relevant performance rights will vest in the circumstances of the Scheme. The Kidman Board has resolved however that it will exercise its discretion to waive the vesting conditions relating to these performance rights (subject to the Scheme becoming Effective) for the following reasons:
(i) to recognise and reward the significant contribution of the relevant employees in the development of the Mt Holland Lithium Project;
(ii) to ensure parity of treatment with other members of the Kidman executive team; and
(iii) because the basis of negotiations with Wesfarmers in relation to the Scheme was that the performance rights would vest and the resulting shares would participate in the Scheme.
85 As was submitted by counsel for Kidman, it is common for arrangements to be put into place in relation to performance rights in a scheme of arrangement involving a change of control transaction, as a bidder does not wish to acquire 100% control of a target company only to find that its holding is subsequently diluted by the issuing of shares in relation to performance rights holders.
86 The result of the proposed treatment of the performance rights is that if the Scheme becomes Effective, the 3,721,171 performance rights will vest and Kidman Shares will be issued in accordance with the terms of the performance rights, allowing the holders of those performance rights to receive the Scheme Consideration for those Kidman Shares.
87 The performance rights and share rights issued to Mr Donohue and Mr Pizzey respectively are referred to in the Chairman’s letter. The performance rights and their proposed treatment in the context of the Scheme are set out in clause 3.3.2 of the Scheme Booklet.
Incentive payments
88 If the Scheme becomes Effective, Kidman’s senior management, being Mr Donohue, Mr Kotzee and Mr Wilcox, will receive an incentive payment by way of a cash bonus. As to these incentive payments, the sworn evidence is that:
(a) The incentive payments are in recognition of the additional personal efforts required by these employees to complete Kidman’s obligations and related activities under the Scheme Implementation Deed and to provide a retention incentive during the period that the Scheme is ongoing.
(b) The Kidman Board considers that these incentive payments are benefits that are not out of the ordinary and in the circumstances commercially reasonable. The amount of the incentive payments are $550,000 (Mr Donohue), $462,000 (Mr Kotzee) and $385,500 (Mr Wilcox) and in each case equate to one year’s fixed annual remuneration. (Neither Mr Kotzee nor Mr Wilcox hold Kidman Shares.)
Voting deeds
89 Wesfarmers has entered into voting deeds with a number of Kidman Shareholders under which those Kidman Shareholders (representing 17.26% of Kidman Shares) have agreed to vote in favour of the Scheme in the absence of a Superior Proposal and subject to the Independent Expert continuing to conclude that the Scheme is in the best interests of Kidman Shareholders. As to those Kidman Shareholders who have entered into voting deeds:
(a) two are controlled by Mr Donohue, being Penstock Advisory Pty Ltd and Olivers Hill Pty Ltd;
(b) one is controlled by Mr Pizzey, being Yalambie Pty Ltd; and
(c) one is controlled by Mr Brad Evans (a non-executive director of Kidman), being B&K Evans Superannuation Pty Ltd.
90 The voting deeds entered into by Kidman directors are referred to in the Chairman’s letter in the Scheme Booklet and are otherwise referred to in clause 4.7.1 of the Scheme Booklet.
Only one class of scheme participant
91 As noted above:
(a) certain of the performance rights holders are also Kidman Shareholders;
(b) Mr Donohue (who is a Kidman Shareholder) is to receive an incentive payment if the Scheme becomes Effective (noting that the other two proposed recipients of an incentive payment are not Kidman Shareholders); and
(c) certain Kidman Shareholders have entered into voting deeds with Wesfarmers.
92 It was submitted by counsel for Kidman, and I agree, that none of these factors requires the relevant Kidman Shareholder who also holds performance rights or who is to receive an incentive payment or who has entered into a voting deed to meet separately (as a separate class for the purposes of section 411(1)) from the other Kidman Shareholders in order to consider and vote on the proposed scheme resolution at the Scheme Meeting.
93 The authorities also make it clear that the holders of performance rights who are also shareholders of the scheme company do not constitute a separate class for the purposes of section 411(1).
94 As Robson J said in Re Skilled Group Ltd (No 1) [2015] VSC 789; (2015) 113 ACSR 525 at [82]:
I am satisfied that the performance rights or options held by some employees do not 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 or 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.
95 That passage was cited with approval by Beach J in Re Healthscope Limited [2019] FCA 542 at [167]. As his Honour also said in Re Amcor Ltd [2019] FCA 346 at [86] in the context of cash and equity awards offered to senior executives under incentive plans:
Accordingly, no separate class meetings are necessary or desirable. The holders of incentives who are also Amcor shareholders will participate in the Scheme on the same basis and receive the same consideration as Amcor shareholders who are not holders of incentives. That is, all shareholders are being treated equally under the Scheme. There is no additional benefit being offered by New Amcor to these shareholders under or in connection with the Scheme.
(Emphasis in original.)
The incentive payment to Mr Donohue
96 Likewise, the proposed incentive payment to Mr Donohue does not require him to be treated as a separate class for the purposes of the Scheme. Under the Scheme, each such Kidman Shareholder will receive the same Scheme Consideration for their Kidman Shares as the other Kidman Shareholders and the proposed incentive payment to Mr Donohue does not mean that the rights of Mr Donohue are so dissimilar as to make it impossible for him to consult together with the other Kidman Shareholders with a view to their common interest, particularly in light of such incentive payment being in recognition of the additional personal efforts by Mr Donohue to complete Kidman’s obligations under the Scheme Implementation Deed and to provide a retention incentive during the period that the Scheme is ongoing. Cf Re DuluxGroup Ltd [2019] FCA 961 at [46].
The voting deeds
97 As noted above, none of those Kidman Shareholders who entered into the voting deeds has received any consideration in return for their agreement to vote in favour of the Scheme.
98 In those circumstances, as counsel for Kidman submitted, the voting deed shareholders do not constitute a separate class from the other Kidman Shareholders for the purposes of considering and voting on the scheme resolution at the Scheme Meeting and this is consistent with the position adopted in this court regarding voting agreements. See by way of example only Re Healthscope Ltd [2019] FCA 542 at [117].
Director benefits and director recommendations
99 Clause 10.1.1 of the Scheme Implementation Deed provides that the “Kidman Public Announcement” (as defined) must state that the Kidman Board unanimously considers the Scheme to be in the best interests of shareholders and recommend that shareholders approve the scheme resolution, in the absence of a superior proposal and provided that the Independent Expert’s Report has concluded that the Scheme is in the best interests of shareholders.
100 Clause 10.1.2 of the Scheme Implementation Deed provides in substance that Kidman must use its reasonable endeavours to procure that the Kidman Board and each of the Kidman Directors:
(a) does not withdraw the statements and recommendations set out in the Kidman Public announcement issued in accordance with clause 10.1.1; and
(b) in the Scheme Booklet state that the Kidman Board unanimously considers the Scheme to be in the best interests of shareholders and recommends that shareholders approve the Scheme resolution, in the absence of a superior proposal and provided that the Independent Expert’s Report has concluded that the Scheme is in the best interests of Shareholders.
101 Mr Donohue has joined with the other directors of Kidman and made a recommendation to shareholders that they vote in favour of the Scheme. The incentive payment to him if the Scheme becomes effective and the proposed treatment of his performance rights are set out in the body of the Chairman’s letter in the Scheme in the following terms:
If the Scheme becomes Effective, members of Kidman’s senior management will receive incentive payments by way of a cash bonus in recognition of the additional personal efforts required by these Kidman employees to complete Kidman’s obligations under the Scheme Implementation Deed and other activities required to implement the Scheme. Mr Donohue (Kidman’s Managing Director and Chief Executive Officer) will receive an incentive payment of $550,000. Further details of the bonus payments are set out in Section 7.1.5. As discussed at Section 7.1.5, no similar bonuses, agreements or arrangements exist with any other Kidman Director.
In addition, Mr Donohue holds or controls 3,915,000 Kidman Shares and holds 972,954 Performance Rights (as described in Section 7.1.6) which, if the Scheme becomes Effective, will convert into that number of Kidman Shares. Therefore, subject to the Scheme becoming Effective, Mr Donohue will on the Record Date (and after conversion of his Performance Rights) hold a total of 4,887,954 Kidman Shares for which he will receive the Scheme Consideration.
102 Information to this effect is also set out throughout the Scheme Booklet in footnotes where reference is made to the directors’ recommendation that shareholders vote in favour of the Scheme, and in sections 7.1.5 and 7.1.6.
103 Counsel for Kidman raised the question of the role that directors should play in making a recommendation to shareholders who are to receive a substantial financial benefit if a scheme is approved.
104 Counsel drew my attention to the decisions of Farrell J in Re Gazal Corporation Limited [2019] FCA 70, in particular at [29]-[32], and Re Ruralco Holdings Ltd [2019] FCA 878 at [26], which stand for the proposition that directors who are to receive a substantial financial benefit if a scheme is approved do and should as a general rule decline to make a recommendation to the shareholders as to how they should vote. The relevant passages from Re Gazal are as follows ([29]-[30] and [32]):
With respect to Robson J, it is possible for a board to put forward reasons why a shareholders might approve a scheme (along with reasons why they might not), without the need for a director who has a clear pecuniary incentive for the scheme to proceed making a recommendation concerning voting. It is, of course, appropriate for each director to say what their own voting intentions might be.
In my view, it would have been better practice for Mr Robinson to adopt the common practice of declining to make a recommendation to shareholders as to how they should vote, and to explain that the reason for that is that he will receive a substantial benefit depending on the outcome of the scheme which other shareholders will not receive. While it is most important that there be prominent disclosure in a scheme booklet of those matters which might, realistically, affect a director’s judgment in making a recommendation about whether shareholders should vote in favour of approving a scheme, directors who are interested in the outcome of the scheme because they stand to receive a bonus or benefit (other than as a shareholder) only if the scheme proceeds should exercise caution in making recommendations and, in my view, generally should not do so. As demonstrated in this case, the disclosure did not carry over in summary statements of the directors’ recommendation. Both the front of the Scheme Booklet and the script used for telephone canvassing of shareholders contained the directors’ recommendation without reference to the fact that Mr Robinson would receive a bonus.
…
In my view, the question of whether it is appropriate for all directors to make a voting recommendation should be considered at the time a scheme implementation agreement is executed and conditions crafted appropriately. While it may be true that it has become a common practice for a bidder to require unanimous and unqualified recommendations from the directors of the target company, that “practice” does not justify the bidder and the directors of the target failing to address the circumstances of each individual case. As I said at the second court hearing, I am satisfied that Gazal, the bidder and Mr Robinson all acted honestly. Nonetheless, the “usual practice” (as it was described by counsel) does not eliminate the director’s individual obligation to consider whether he or she has an interest different from other shareholders which would properly preclude them from making a voting recommendation. Where a director has an interest in the outcome of a scheme which is plainly different from other shareholders, the issue of whether it is appropriate for that director to make a recommendation should be confronted. It is difficult to see how the success of a scheme is prejudiced by a recommendation made only by those directors who are not interested in the outcome otherwise than as a shareholder. It is common and appropriate for the recommendation to be made only by independent directors. It remains open for the scheme implementation agreement to be subject to a condition that an interested director who declines to make a voting recommendation does not decide to make an adverse recommendation.
(Emphasis added)
105 For the reasons set out below, I respectfully disagree with her Honour’s views set out above, and in particular in the highlighted parts of those passages. In my respectful view, the correct position is that explained by Robson J in Re SMS Management & Technology Ltd [2017] VSC 257.
106 Section 412(1)(a) of the Corporations Act provides that the scheme company must send an explanatory statement:
(i) explaining the effect of the compromise or arrangement and, in particular, stating any material interests of the directors, whether as directors, as members or creditors of the body or otherwise, and the effect on those interests of the compromise or arrangement in so far as that effect is different from the effect on the like interests of other persons; and
(ii) setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the creditors or members.
107 Regulation 5.1.01(b) of the Corporations Regulations in turn provides that, for a members’ scheme of arrangement, the explanatory statement must state the matters in Part 3 of Schedule 8. The explanatory statement must state the matters in Part 3 of Schedule 8 (and have attached to it the reports and copies of any documents mentioned in that part of Schedule 8).
108 Regulation 8301(a) of Schedule 8 provides that the explanatory statement must set out:
(i) whether the director recommends the acceptance of the Scheme or recommends against acceptance, and in either case, his or her reasons for so recommending; or
(ii) if the director is not available to consider the Scheme – that the director is not so available and the cause of his or her not being available; or
(iii) in any other case, that the director does not desire to make, or does not consider himself or herself justified in making a recommendation, and if the director so requires, his or her reasons for not wishing to do so …
109 Regulation 8302 further provides that the explanatory statement must set out:
(a) the number, description and amount of marketable securities of the company the subject of the Scheme held by or on behalf of each director of the company or if none are held, a statement to that effect; and
(b) for each director of the company by whom or on whose behalf shares in the company are held, whether:
(i) the director intends to vote in favour of, or against, the Scheme; or
(ii) the director has not decided whether he or she will vote in favour of, or against, the Scheme …
110 It is apparent that of the universe of possibilities contemplated by those regulations as to when a director should make a recommendation to shareholders about a scheme, no reference is made to the circumstance that he or she may receive a substantial financial benefit if a scheme is approved. Given the comprehensive nature of those regulations, if such a fetter on the ability of a director to make a relevant recommendation to shareholders of that nature had been intended, one would expect it to be contained in terms in those regulations.
111 In my view, shareholders, absent an explanation as to why any director is not “available”, does not “desire” or is not “justified” in making a recommendation (reg 8301(a)), or “has not decided” whether he or she will vote in favour of or against the Scheme (reg 8302), would ordinarily expect directors to make such a recommendation, even when they may receive a substantial financial benefit. And in my view, the statutory and regulatory regime applicable ordinarily requires them to make a recommendation, one way or the other, whether they stand to gain if the scheme is approved or not.
112 As Robson J said in Re SMS Management & Technology Ltd [2017] VSC 257 (at [25]-[27]) (with reference to reg 8301(a)), it is appropriate for such a director (in that case, the managing director, one Mr Rostolis) to make such a recommendation:
What is now footnote 3 to the chairman’s letter addresses Mr Rostolis receiving the $600,000. It states:
With respect to Rick Rostolis’ recommendation, SMS shareholders are advised that Mr Rostolis will receive a $600,000 cash incentive conditional upon the Scheme becoming Effective. Despite this fact, Mr Rostolis considers that it is appropriate to make a recommendation on the Scheme. SMS has also agreed to tag the votes of Mr Rostolis at the Scheme Meeting at the request of ASIC. Further details of the incentive payment are set out in Section 8.11, and further details of the vote tagging are set out in Sections 4.1 and 7.10(a). As discussed in Section 13.3(b), no similar incentives, agreements or arrangements exist with any other SMS director.
In my view, it is appropriate for Mr Rostolis to make the recommendation that he proposes. I think it is important that the managing director, who in this case is the main moving force behind the company, give his reasons for putting forward the scheme. In my opinion, the footnote to the chairman’s letter satisfies the concerns raised by ASIC [whether it was appropriate in the circumstances where Mr Rostolis was to be compensated with the payment of $600,000 if the scheme were implemented, to provide a recommendation].
Shareholders are able to discern that one of the benefits of the scheme could be seen to be that Mr Rostolis receives $600,000, but on the other hand, he may no longer be involved in management.
(Emphasis added).
113 It seems to me that in the ordinary case a shareholder would expect each director, whether or not any one or more of them was “the main moving force” behind the company, to make their recommendation. Such an expectation is clearly reflected in the regulations. As I said, reg 8301(a) obliges “each” director make a recommendation, unless they are unavailable to do so, or they do not desire to do so, or they are not justified in doing so (and, if so in any such instance, to explain why). As counsel for Kidman submitted, and I agree, each director is required to engage actively with the proposed scheme that is to be put before the shareholders, so that the shareholders have the benefit and guidance of the knowledge and expertise of the directors – who, after all, are the persons responsible for the operation and management of the scheme company and who, by reason of their position, ought to be best placed to express a view whether or not the scheme is in the shareholders’ best interests. They are, in my view, ordinarily obliged to do so even if they stand to gain personally in the form of some specific benefit if the scheme is approved, provided the benefit is sufficiently explained to shareholders.
114 Although Farrell J in Re Gazal referred (at [30]) to the “common practice” of a director declining to make a recommendation to shareholders as to how they should vote and explaining the reason for so declining by reference to the substantial benefit to be received by that director if the scheme proceeds, I am, with great respect, unaware of any such practice. (See also Re Navitas Ltd (No 2) [2019] WASC 218 (at [38]) per Vaughan J, doubting whether such a common practice exists).
115 As Vaughan J said in Re Nzuri Copper Ltd [2019] WASC 189, the critical consideration for the court in applications of this type is, rather, to ensure that the nature and extent of the relevant benefit(s) that the director(s) stand to receive if the scheme is approved is/are properly disclosed. As his Honour said at [87]-[89]:
I was prepared to make orders convening the scheme meeting, and approve the scheme booklet for distribution, despite the fact that Messrs Arnesen and Smits joined in the directors’ recommendation to shareholders to vote in favour of the scheme proposal. I did so as:
• The additional and different interest held by the executive directors was not out of the ordinary and within the scope of what might be considered commercially not unreasonable, ie one year’s salary.
• The additional and different interest held by the executive directors arose under pre-existing contracts executed well before the SID.
• The additional and different interest held by the executive directors was linked to the possibility that their employment might be terminated immediately after the scheme becomes effective: the executive directors are not entitled to notice of termination or payment in lieu of notice if terminated within six months after the change in control. Accordingly, there is a not unreasonable commercial rationale for the bonus payment.
Most importantly, however, the scheme booklet made fulsome and prominent disclosure of Messrs Arnesen’s and Smits’ additional and different interests …
116 As counsel for Kidman submitted, in this case the sworn evidence discloses the following:
(a) The proposed incentive payment to Mr Donohue equates to one year’s fixed annual remuneration.
(b) The Kidman Board, in the absence of Mr Donohue, specifically considered whether Mr Donohue should make a recommendation to shareholders in relation to the Scheme and the factors the Board took into account included the following:
(i) Mr Donohue was the founder of Kidman, the managing director and a significant shareholder. He had been intimately involved in the consummation of the joint venture with SQMA and the development of the Mt Holland Lithium Project and that in those circumstances Kidman Shareholders would be legitimately expecting Mr Donohue to express his view as to the Scheme and would be surprised and disconcerted if he did not do so.
(ii) If the Scheme became effective, Mr Donohue would receive benefits different from other shareholders (being the vesting of performance rights and the incentive payment).
(iii) The benefits to be received by Mr Donohue were not out of the ordinary and in the circumstances commercially reasonable.
(iv) The total consideration to be received by Mr Donohue in the context of the Scheme Consideration is not excessive nor is it unwarranted given the additional work and attention required by Mr Donohue throughout the Scheme process, where there is no certainty of continued employment and in a situation where the retention of Mr Donohue’s services was seen to be in the best interests of Kidman and its shareholders.
(v) The grant of performance rights had been approved by the Kidman Shareholders at a general meeting held at a time well before the Scheme Implementation Deed was entered into.
(vi) The incentive payment would be disclosed in the Scheme Booklet in some detail, as a consequence allowing a shareholder to understand that there is an issue of what weight should be given to his recommendation.
(c) The Kidman Board resolved (in the absence of Mr Donohue) that given the importance of the Scheme and Mr Donohue’s role in the company, Mr Donohue can, and should, if he wished to, make a recommendation on the Scheme notwithstanding the nature and quantum of the benefits which will be derived by Mr Donohue if the Scheme becomes effective.
(d) The Scheme Booklet makes fulsome and prominent disclosure of both the proposed incentive payment to Mr Donohue and the proposed treatment of his performance rights, including in the body of the Chairman’s letter at the front of the Scheme Booklet.
(e) The Chairman’s letter also refers to the reasons why the Kidman Board (in the absence of Mr Donohue) considers that Mr Donohue can and should (if he wishes to do so) make a recommendation on the Scheme and the reasons why Mr Donohue considers it appropriate to make a recommendation.
117 I am accordingly satisfied that there has been adequate disclosure of the proposed incentive payment to Mr Donohue and the proposed treatment of his performance rights and that there is a reasonable commercial basis for both the proposed payment and the treatment of those performance rights.
Other matters
118 Clause 5.4 of the Scheme contains a mechanism to address the matter of foreign resident capital gains withholding. This matter is addressed in the Chairman’s letter and in section 5.4 of the Scheme Booklet.
Prospects of final approval
119 For the foregoing reasons, 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 that orders be made convening the Scheme Meeting.
I certify that the preceding one hundred and nineteen (119) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Callaghan. |
Associate:
ANNEXURE 1
Deponent | Date | Deponent’s role | Summary of affidavit |
Affidavits relied on by the plaintiff (Kidman) | |||
Mr Ron Smooker (first Smooker affidavit) | Sworn 8 July 2019 | Partner at Maddocks, solicitors for Kidman | • Brief description of Kidman and ASIC company search. • Background to proposed scheme of arrangement. • Description of ASX announcement regarding scheme of arrangement. |
Aaron Colleran | Affirmed 26 July 2019 | Non-executive director of Kidman | • Background to the share rights of Mr Pizzey (Kidman’s chairman) and the Kidman Board’s decision to approve Mr Pizzey making a recommendation to Kidman Shareholders in relation to the Scheme. • Nomination to act as alternate chairman and consent to act as chair of the Scheme Meeting if Mr Pizzey unable to do so. • Disclosure of interests under rule 3.2 of the Federal Court (Corporations) Rules 2000 (Cth): (1) received and continue to receive remuneration in capacity as non-executive director of Kidman; (2) spouse holds 372 shares in Wesfarmers. • Details of share rights issued to Mr Pizzey under his letter of appointment as chairman. |
George John Pizzey | Sworn 26 July 2019 | Non-executive director and chairman of the plaintiff | • Background and capital structure of Kidman. • Background to Kidman Omnibus Incentive Plan and details of performance rights issued to directors and senior management of Kidman under the Omnibus Incentive Plan and/or employment arrangements. • Description of Joint Venture with SQMA for the development of the Mount Holland Lithium Project. • Background to the Scheme and resolution of the Kidman Board on 23 May 2019 to recommend that Kidman Shareholders approve the Scheme resolution to be put to shareholders in the absence of a superior proposal and provided the Independent Expert’s Report (IER) concludes the Scheme is in the best interests of shareholders. • Appointment of Independent Expert and the conclusions of the draft IER. • History of the documents prepared in relation to the Scheme comprising the Scheme Implementation Deed (SID), Scheme Booklet including Notice of General Meeting, Scheme of Arrangement, Deed Poll, Notice of Scheme Meeting and proxy form. • Correspondence with ASIC regarding the Scheme Booklet, the IER and Independent Technical Specialist’s Report (ITSR). • The purpose of calling a General Meeting to approve any termination benefits. • Summary of important features of the Scheme (including Scheme consideration, directors’ and executives’ interests, voting deeds, break fee and the exclusivity provisions of the SID). • Service of the Scheme Booklet, notice of Scheme meeting and proxy form on shareholders. • The verification process in relation to Kidman Information. • Disclosure of interests under rule 3.2 of the Federal Court (Corporations) Rules 2000 (Cth): (1) shareholder of Kidman in own right and through Yalambie; (2) hold share rights. • Confirmation of compliance with takeover provisions. |
Ron Smooker (second affidavit) | Sworn 26 July 2019 | Partner at Maddocks, solicitors for the plaintiff | • Provision of notice of Hearing to ASIC. • Description of correspondence with ASIC regarding the Scheme Booklet, IER and ITRSR. • Potential application of foreign resident capital gains withholding tax regime to the Scheme including identification of Kidman Shareholders who are relevant foreign residents and the provision of Relevant Foreign Declaration Forms. • Confirmation that Kidman’s company secretary will execute the Notice of Scheme Meeting in the event the Court orders the convening of the Scheme Meeting and despatch of the Scheme Booklet. • Annexes ASIC historical company extract for Wesfarmers Lithium Pty Ltd, the Takeover Panel’s Guidance Note 7: Lock Up Devices (GN 7) and proxy form for Scheme Meeting. |
Jason Harvey Hughes | Affirmed 29 July 2019 | Partner of KPMG Financial Advisory Services (Australia) Pty Ltd, independent expert for the plaintiff | • Qualifications and summary curriculum vitae. • Background to the draft IER (attaching the draft ITSR). • Correspondence with ASIC regarding the draft IER and draft ITSR. • Confirmation of personal independence and KPMG’s independence. |
Ron Smooker (third affidavit) | Sworn 30 July 2019 | Partner at Maddocks, solicitors for the plaintiff | • Further correspondence with ASIC regarding the Scheme Booklet, IER and ITSR and letter of intent issued by ASIC under paragraph 411(17)(b) of the Act. • Confirmation that neither Wesfarmers or Wesfarmers Lithium holds Kidman Shares (save for relevant interest in Kidman Shares the subject of the voting deeds in section 4.7 of the Scheme Booklet). • Attaching copy of proxy form for General Meeting which will accompany the Scheme Booklet. • Explanation of the confidential nature of the annexures to George John Pizzey’s affidavit. • Date for issue of performance rights referred to in paragraph 27 of the Pizzey affidavit. |
Ron Smooker (fourth affidavit) | Sworn 30 July 2019 | Partner at Maddocks, solicitors for the plaintiff | • Correspondence with Allens (Wesfarmers’ legal advisors) regarding identification of Kidman Shareholders who are Relevant Foreign Residents, the ‘Relevant Foreign Declaration Form’ and process for distribution, and notification to ASIC regarding the same. • Annexing proposed Scheme of Arrangement in Re SMS Management & Technology [2017] VSC 257. |
Affidavit relied on by Wesfarmers | |||
Timothy James Blunt | Affirmed 25 July 2019 | Project Director, Coles Demerger & Director, Associate Businesses of Wesfarmers Limited | • Explanation and confirmation of the verification process undertaken for information in the Scheme Booklet attributable to Wesfarmers. • Explanation of exclusivity and break fee provisions of Scheme Implementation Deed. • Execution of Deed Poll. |
