FEDERAL COURT OF AUSTRALIA

SILK Laser Australia Limited, in the matter of SILK Laser Australia Limited [2023] FCA 1191

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 411(1) and s 1319 of the Corporations Act 2001 (Cth) (Act):

(a)    the plaintiff convene and hold a meeting (Scheme Meeting) of the holders of its fully paid ordinary shares (SILK Shareholders), for the purpose of considering and, if thought fit, agreeing (with or without any modifications, alterations or conditions) to a scheme of arrangement (Scheme) proposed to be made between the plaintiff and the Scheme Shareholders (as defined in the Scheme), the terms of which are set out in Annexure B of the document (Scheme Booklet) annexed as LJC14 to the affidavit of Lauren Jade Crosby sworn 4 October 2023 (Fourth Crosby Affidavit);

(b)    the Scheme Meeting be held in person at 10.00 am (Adelaide time)/10.30 am (Sydney time) on Friday, 10 November 2023 at Kain Lawyers, Level 5, 121 King William Street, Adelaide, South Australia;

(c)    the following documents be approved for distribution to SILK Shareholders:

(i)    the Scheme Booklet, substantially in the form of Annexure LJC14 to the Fourth Crosby Affidavit (which Scheme Booklet is hereby approved for the purposes only of s 411(1) of the Act); and

(ii)    the proxy form in respect of the Scheme Meeting, (for Electing Postal Shareholders and Non Electing Postal Shareholders only (as defined in Order 2)), substantially in the form of annexure LJC11 to the affidavit of Lauren Jade Crosby sworn on 3 October 2023 (Third Crosby Affidavit) (Proxy Form).

2.    Pursuant to s 411(1) and s 1319 of the Act, the Scheme Meeting be convened by sending on or before 10 October 2023 (to those SILK Shareholders whose name is recorded in the plaintiff’s register of members as at 7.00 pm (Sydney time) on Friday, 6 October 2023 (Register Time):

(a)    an email to each SILK Shareholder who has elected to receive shareholder communications electronically (Email Shareholders), such email to be substantially in the form of Annexure LJC5 to the affidavit of Lauren Jade Crosby sworn on 29 September 2023 (Second Crosby Affidavit) which includes access by an embedded link to an online portal or website where Email Shareholders may:

(i)    access an electronic copy of the Scheme Booklet; and

(ii)    lodge their proxy for the Scheme Meeting and voting instructions on-line; and

(b)    in the case of SILK Shareholders who have elected to receive hard copy shareholder communications (Electing Postal 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 printed copy of the Scheme Booklet;

(ii)    a personalised Proxy Form; and

(iii)    a reply paid envelope for the return of that SILK Shareholder’s Proxy Form; and

(c)    in the case of SILK Shareholders who have not elected to receive electronic or hard copy shareholder communications (Non Electing Postal 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 letter in respect of the Scheme Meeting, substantially in the form of Annexure LJC12 to the Third Crosby Affidavit which enables Non Electing Postal Shareholders to access a copy of the Scheme Booklet (Non Electing Postal Shareholder Letter);

(ii)    a personalised Proxy Form;

(iii)    a reply paid envelope for the return of that SILK Shareholder’s Proxy Form;

(d)    in the case of Electing Postal Shareholders and Non Electing Postal Shareholders whose registered address is outside Australia, the following documents by pre-paid airmail post addressed to the relevant addresses recorded in the plaintiff’s register:

(i)    for Non Electing Postal Shareholders, a Non-Electing Postal Shareholder Letter;

(ii)    for Electing Postal Shareholders, a printed copy of the Scheme Booklet;

(iii)    a personalised Proxy Form; and

(iv)    a self-addressed envelope for the return of that SILK Shareholder’s Proxy Form.

3.    The plaintiff cause a copy of the Scheme Booklet to be provided as soon as reasonably practicable, to any SILK shareholder if requested by them before the date of the Scheme Meeting, by the method of communication requested by the shareholder.

4.    If SILK (through its share registry services provider, Computershare) receives an automatic electronic “bounce back” notification that the email referred to in Order 2(a) was not able to be delivered to the nominated electronic address of any Email Shareholder (Undelivered Email Recipient), those Email Recipients be sent:

(a)    a letter in the same form as the Non Electing Shareholder Letter;

(b)    a personalised Proxy Form; and

(c)    a reply paid envelope (for those Undelivered Email Recipients whose registered address is in Australia) or a self-addressed envelope (for those Undelivered Email Recipients whose address is outside Australia) for the return of that SILK Shareholder’s Proxy Form.

5.    Subject to these orders, the Scheme Meeting is to be convened, held and conducted in accordance with the provisions of:

(a)    Pt 2G.2 of the Act (save for any applicable replaceable rule) that apply to a meeting of the plaintiff’s members; and

(b)    the plaintiff’s constitution that apply in relation to meetings of members and that are not inconsistent with Pt 2G.2 of the Act.

6.    The SILK Shareholders who are eligible to vote at the Scheme Meeting will be those whose names are recorded in the register of members of the plaintiff at 7.00 pm (Sydney time) on Wednesday, 8 November 2023 (Voting Entitlement Time).

7.    Pursuant to s 411(1) and s 1319 of the Act:

(a)    Boris Paul Bosnich, or failing him, Andrew Glynn Cosh be the chairperson of the Scheme Meeting;

(b)    the chairperson of the Scheme Meeting shall have the power to adjourn the Scheme Meeting in their absolute discretion to such time, date and place as they consider appropriate;

(c)    at the Scheme Meeting, each SILK Shareholder, present and entitled to vote, will be entitled to one vote for each fully paid ordinary share in the capital of the plaintiff that the SILK Shareholder is registered as holding at the Voting Entitlement Time; and

(d)    voting on the resolution at the Scheme Meeting to agree to the Scheme is to be conducted by way of poll.

8.    The time by which proxy forms must be returned or lodged in accordance with the instructions given on the proxy form is at 10.30 am (Sydney time)/10.00 am (Adelaide time) on Wednesday, 8 November 2023.

9.    Pursuant to r 1.13 of the Federal Court (Corporations) Rules 2000 (Cth) (Rules), compliance with the following requirements of the Rules is dispensed with:

(a)    r 2.15; and

(b)    r 3.4 and Form 6.

10.    The plaintiff is to publish an announcement via the ASX Markets Announcements Platform in substantially the form of Annexure A to these Orders by no later than Thursday, 9 November 2023.

11.    The matter be adjourned to 9.15 am (Sydney time) on Wednesday, 15 November 2023 for the hearing of any application to approve the Scheme.

12.    The plaintiff be granted liberty to apply.

13.    These Orders be entered forthwith.

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

Annexure A

REASONS FOR JUDGMENT

HALLEY J:

A.    INTRODUCTION

1    On 4 October 2023, I made orders pursuant to s 411(1) and s 1319 of the Corporations Act 2001 (Cth) (Act) for the plaintiff, SILK Laser Australia Limited (SILK), to convene a meeting (Scheme Meeting) of its members to consider and vote upon a proposed scheme of arrangement (Scheme) between SILK and its shareholders (Scheme Shareholders).

2    These are my reasons for making those orders.

3    The Scheme, if approved and implemented, will result in the acquisition of all the shares in SILK by Australian Pharmaceutical Industries Pty Ltd (API), a wholly owned subsidiary of Wesfarmers Limited (Wesfarmers), for a cash consideration of $3.35 per share (Scheme Consideration).

4    Under the Scheme Implementation Deed dated 26 June 2023, entered into between SILK and API (SID):

(a)    SILK may, in its absolute discretion, declare and pay a dividend of up to $0.10 in aggregate per share (Special Dividend); and

(b)    the Scheme Consideration will be reduced by the aggregate cash amount per “Scheme Share” (as defined in the SID) of any Special Dividend but will not be reduced by the amount of any franking credits attached to any Special Dividend.

5    The application was prepared in an exemplary fashion in conformity with the Court’s scheme of arrangement consultation letter dated 15 May 2023. Consistently with the propositions advanced in that letter:

(a)    the communications with the Australian Securities and Investments Commission (ASIC) regarding the scheme booklet, annexed to the affidavit of Lauren Jade Crosby sworn on 4 October 2023 (Scheme Booklet), following provision of that booklet to ASIC were not in evidence;

(b)    there was no affidavit from the independent expert;

(c)    direct evidence was given about the matters required by r 3.2(b)(ii) and r 3.2(b)(iii) of the Federal Court (Corporations) Rules 2000 (Cth) (Rules);

(d)    it was proposed that an Australian Securities Exchange (ASX) announcement would be made regarding the second court hearing, rather than by placing it in a newspaper advertisement;

(e)    verification evidence was provided regarding the “SILK Information” in the Scheme Booklet and from API regarding the “API Information”;

(f)    the proposed inbound and outbound shareholder communications scripts were in evidence;

(g)    evidence was given about the proposed despatch of the scheme materials, including proposed supplementary despatch (based on information and belief from Computershare) rather than having a detailed affidavit on this matter from Computershare; and

(h)    evidence was given as to the quantum of the break fees, the relevant percentage they represent in the context of the aggregate Scheme Consideration and that the trigger events for the break fees do not include the situation where holders of SILK’s fully paid ordinary shares (SILK Shareholders) do not vote in favour of the Scheme at the Scheme Meeting.

6    Mr G. Ahern of counsel appeared for SILK. He provided comprehensive written and oral submissions which have been of considerable assistance in the preparation of these reasons for judgment. API appeared at the hearing by leave and was represented by its counsel, Mr J. Hutton SC.

B.    EVIDENCE RELIED UPON BY SILK

7    The application was supported by the following affidavits:

(a)    an affidavit of Ms Crosby, a solicitor employed by Kain Lawyers, the solicitors acting for SILK in the Scheme, sworn on 7 September 2023, which annexed a company search of SILK and an ASX announcement of the Scheme, which included a copy of the SID;

(b)    an affidavit of Alyce Ricciardi, a solicitor employed by Kain Lawyers, sworn on 28 September 2023, which addressed the verification process undertaken for SILK and her role in coordinating that process;

(c)    an affidavit of Andrew Glynn Cosh, a non-executive director of SILK and proposed alternative Chair of the Scheme Meeting, affirmed on 28 September 2023, which addressed disclosure under r 3.2 of the Rules;

(d)    an affidavit of Ms Crosby, sworn on 29 September 2023, which addressed the provision of documents to ASIC, evidence relating to the independent expert’s report, the eligibility of SILK Shareholders with share scheme loans to vote at the Scheme Meeting and that the Scheme Consideration to be received by those shareholders would exceed the relevant loans, a matter relating to current litigation, a side deed entered into by SILK and API on 28 September 2023 to substitute the forms of the Scheme and deed poll previously agreed and which annexed both the email and letter to be sent to SILK Shareholders under the proposed orders, the side deed, the proposed scripts for shareholder communications and management sign-offs in relation to the due diligence program outline;

(e)    an affidavit of Boris Paul Bosnich, the Chairman and a non-executive director of SILK, affirmed on 28 September 2023, which, among other matters, addressed SILK’s business and capital structure, the Scheme, the Scheme Consideration, the Special Dividend, the Scheme Booklet, conditions precedent, the exclusivity and break fees provisions, the proposed treatment of performance rights, share scheme loans, incentive payments to certain employees, special exertion fees to be paid to the non-executive directors and the company secretary, SILK’s board recommendation, the foreign resident capital gains tax withholding regime, the independent expert, despatch of the scheme materials, the Scheme Meeting, verification of the Scheme Booklet, shareholder communications, advertising for the second court hearing and disclosure under r 3.2 of the Rules; and

(f)    an affidavit of Emily Jane Amos, Managing Director of Wesfarmers Health, a division of Wesfarmers and a director of API, sworn on 3 October 2023, which addressed the verification of the “API Information” in the Scheme Booklet, the execution of the deed poll and the receipt by API from Wesfarmers of an unconditional and irrevocable undertaking regarding funding of the Scheme Consideration;

(g)    an affidavit of Ms Crosby, sworn on 3 October 2023, which annexed an updated proxy form and a revised version of the proposed letter to be sent to SILK Shareholders;

(h)    an affidavit of Ms Crosby, sworn on 4 October 2023, which annexed marked up pages showing changes to the Scheme Booklet since the version attached to Mr Bosnich’s affidavit, a clean copy of the Scheme Booklet (together with annexures, including a copy of the Scheme), a letter from ASIC dated 3 October 2023 confirming it did not intend to intervene to oppose the Scheme and the proposed ASX announcement regarding the second court hearing.

C.    OVERVIEW OF THE SCHEME

8    The Scheme was announced by SILK to the ASX on 26 June 2023. The announcement included a copy of the SID.

9    SILK’s capital comprises 53,121,177 fully paid ordinary shares (SILK Shares) and 638,348 unvested performance rights (Performance Rights).

10    At the time of entry into the SID, the aggregate amount of the Scheme Consideration payable by API (on the basis that no Special Dividend is declared and paid) depended upon how the Performance Rights were treated by SILK under cl 8 of the SID. Under cl 8, SILK could decide to convert the Performance Rights into SILK Shares before the Scheme Record Date (as defined in the Scheme) or SILK could decide to cancel the Performance Rights. The former would result in holders of those SILK Shares becoming Scheme Shareholders and those holders would be entitled to receive the Scheme Consideration from API. The latter would result in a cash payment by SILK for the Performance Rights, not exceeding the amount of the Scheme Consideration and less any amount that would have been payable by the holder of the relevant Performance Rights had the Performance Rights converted into SILK Shares.

11    On this basis, the aggregate Scheme Consideration (assuming no Special Dividend) was either $180,094,408.80 (based on conversion of the Performance Rights into SILK Shares) or $177,955,943.00 (based on the cancellation of the Performance Rights in exchange for a cash payment by SILK). Mr Bosnich gave evidence that SILK proposes to cancel the Performance Rights in exchange for payment by SILK to the Performance Rights holders of $3.35 per Performance Right.

12    Under cl 5 of the SID, SILK may, in its absolute discretion, declare and pay a Special Dividend. If the SILK Board decides to declare and pay a Special Dividend, it is currently expected that:

(a)    the special dividend record date will be on 21 November 2023 (Special Dividend Record Date) (and being one day before the Scheme Record Date); and

(b)    the Special Dividend payment date will be 28 November 2023 (being the day before the Implementation Date, as defined in the Scheme).

13    Under cl 4.2 of the Scheme, the transfer of the SILK Shares to API is subject to cl 5.2(b) requiring API to pay the Scheme Consideration to a trust account operated by SILK for the purposes of paying the Scheme Consideration to Scheme Shareholders before 12 noon on the business day immediately before the Implementation Date. Having the transfer of the SILK Shares to API subject to the payment of the Scheme Consideration out of the trust account to the Scheme Shareholders effectively removes any performance risk in so far as the transfer of the SILK Shares to API in return for the Scheme Consideration is concerned.

14    Clause 8(d) of the SID also addresses the proposed treatment of Share Scheme Loans (as that term is used in Mr Bosnich’s affidavit) in the context of the Scheme. Under cl 5.2(g) of the Scheme, those loans will be discharged from the Scheme Consideration payable to the relevant Scheme Shareholder with the balance (if any) of the Scheme Consideration being paid to that Scheme Shareholder. Those SILK Shareholders with outstanding Share Scheme Loans are eligible to vote on the Scheme Resolution and the Scheme Consideration to be received by the holders of SILK Shares who have Share Scheme Loans will exceed the amount payable under their relevant Share Scheme Loan, such that the relevant loan will be fully discharged and the balance paid to the relevant SILK shareholder. The proposed treatment of the Share Scheme Loans is addressed in the Scheme Booklet (including in the Chairperson’s letter).

15    SILK is proposing to pay certain employees (including its Managing Director, Martin Perelman), a one-off cash incentive payment in recognition of their significant role in connection with the ongoing operation of SILK’s business, including in recognition of the additional work required by them in connection with the Scheme (2023 Incentive Payments). Payment of these amounts is not conditional on the Scheme being implemented as the additional work would have been done by those employees irrespective of whether the Scheme is implemented. The aggregate amount of the 2023 Incentive Payments is $489,787.50.16.

16    A potential incentive payment may also be made to certain SILK employees (not including Mr Perelman), payable nine months after the Implementation Date, as an incentive to those employees to remain with SILK, which potential payment is subject to the Scheme becoming effective and integration objectives being completed (2024 Incentive Payments). The 2023 and 2024 Incentive Payments were determined after the receipt of remuneration benchmarking advice from Deloitte Tax Services Pty Ltd and their existence and terms are disclosed in the Scheme Booklet (including in the Chairperson’s letter).

17    Special exertion fees (as permitted under SILK’s constitution) are stated to be payable to SILK’s non-executive directors and company secretary in recognition of their increased workload and time commitment associated with the Scheme (Special Exertion Fees). The Special Exertion Fees are not conditional upon the Scheme being implemented (on the basis that the additional work would have been undertaken and the time spent irrespectively of whether the Scheme was approved). The existence and terms of the Special Exertion Fees are referred to in the Scheme Booklet (including in the Chairperson’s letter).

18    The SILK directors have unanimously recommended that SILK Shareholders 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 SILK Shareholders.

19    The draft independent expert report is annexed to the Scheme Booklet. The opinion of the independent expert, Lonergan Edwards & Associates Limited, is that the Scheme is fair and reasonable and in the best interests of SILK Shareholders in the absence of a superior proposal.

D.    CONSIDERATION

D.1.    Formal requirements to exercise power conferred by s 411(1) of the Act

20    Section 411(1) of the Act confers a power on the Court to order a meeting of members to be convened and to approve the relevant explanatory statement.

21    In MOQ Limited, in the matter of MOQ Limited [2022] FCA 1160, I summarised the preconditions that have been considered necessary for the Court to make orders for the convening of a meeting to approve a proposed scheme of arrangement by reference to the statements made and the authorities cited by McKerracher J in Amcom Telecommunications Limited, in the matter of Amcom Telecommunications Limited [2015] FCA 341 at [12].

22    I was satisfied that the evidence upon which SILK relies is sufficient to establish each of the following matters that have been considered necessary preconditions to the Court making orders for the convening of a scheme meeting:

(a)    SILK is a Pt 5.1 body;

(b)    the Scheme Shareholders are members of SILK;

(c)    the Scheme Meeting will be convened between members of the same class;

(d)    the Scheme is bona fide and properly proposed;

(e)    the 14-day notice period to ASIC under s 411(2)(a) of the Act of the first court hearing has been satisfied;

(f)    ASIC has had a reasonable opportunity to examine the terms of the Scheme and the Scheme Booklet and make any submissions to the Court;

(g)    the Scheme Booklet provides adequate disclosure and contains the prescribed information; and

(h)    the Scheme can properly be described as an arrangement or a compromise;

(i)    a company search of SILK from the records of ASIC was conducted on 7 September 2023, being no earlier than 7 days before the Originating Process was filed on 8 September 2023, in compliance with r 2.4(2) of the Rules;

(j)    each of the proposed chair and alternate chair of the Scheme Meetings has made an affidavit containing the matters required by r 3.2 of the Rules;

(k)    each of the proposed chair and alternate chair of the Scheme Meetings has made an affidavit containing the matters required by r 3.2 of the Rules;

(l)    the proposed draft order for the convening of the Scheme Meeting identifies the Scheme as required by r 3.3(1) of the Rules; and

(m)    there is no apparent reason why the Scheme should not, in due course, receive the Court’s approval, if the necessary majority of votes are achieved.

D.2.    Relevant principles for the exercise of discretion

23    Once the preconditions to the Court’s exercise of power under s 411(1) have been satisfied, it is then necessary to consider whether that power ought to be exercised pursuant to the Court’s discretion.

24    In MOQ at [12]-[17], I explained that the following principles guided the exercise of the Court’s discretion:

(a)    The Court will not ordinarily make orders for the convening of a scheme meeting unless the scheme is of such a nature and cast on such terms that if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application that was not opposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 (Street CJ, with whom Hutley and Samuels JJA agreed); approved in Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485; [1993] HCA 15 at 504 (Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ); Re Central Pacific Minerals NL [2002] FCA 239 at [8] (Emmett J); CSR Limited, in the matter of CSR Limited (2010) 183 FCR 358; [2010] FCAFC 34 at [12] (Keane CJ and Jacobson J).

(b)    At the first court hearing, the Court exercises its supervisory jurisdiction in order to review the scheme and to raise any queries that it might have with the plaintiff: Alstom Signalling Solutions Pty Ltd, in the matter of Alstom Signalling Solutions Pty Ltd v Alstom Transport Australia Pty Limited [2016] FCA 838 at [21] (Gleeson J). The Court needs to be satisfied that there are no obvious flaws in the scheme and that there is an adequate explanation provided to persons who have a financial interest in the proposed scheme: In the matter of Coca-Cola Amatil Limited [2021] NSWSC 270 at [13] (Black J).

(c)    The Court should consider at the first court hearing whether the proposed scheme is not inappropriate and whether it is one that sensible business people might consider is of benefit to its members: Australian Leaders Fund Ltd v Equity Trustees Ltd, in the matter of Australian Leaders Fund Ltd [2021] FCA 88 at [15] (Stewart J), citing Re Sonodyne International Ltd (1994) 15 ACSR 494 at 499 (Hayne J); Integra Mining Limited, in the matter of Integra Mining Limited [2012] FCA 1414 at [11] (McKerracher J); and Amcom at [10].

(d)    The Court does not need to be satisfied that no better scheme could have been proposed and ultimately, that is a question for the members themselves to determine at the scheme meeting: Associated Advisory Practices Limited, in the matter of Associated Advisory Practices Limited [2013] FCA 761 at [22] (Farrell J); Coca-Cola Amatil at [13]; and Leaders Fund at [15].

(e)    Although the second court hearing is when the Court makes its final determination, in practice, the first court hearing is where the Court will typically intervene if it has concerns. A reason advanced for this, is that the market views the approval by the Court of the convening of scheme meetings as providing assurance that the scheme, at least in form and substance, has received a preliminary clearance by the Court and that trading in the company’s securities thereafter will proceed on that basis: Re Archaean Gold NL (1997) 23 ACSR 143 at 147 (Santow J); Leaders Fund at [15].

D.3.    Specific considerations

25    Given the ex parte character of an application for orders pursuant to s 411(1) of the Act, the following matters were specifically drawn to my attention by Mr Ahern, in the course of his oral and written submissions. For the reasons outlined below, I am satisfied that none of these matters would cause me to decline to order the convening of a meeting in the present case.

D.3.1.    Break fees and exclusivity provisions

26    The SID included break fees and exclusivity arrangements.

27    The “no-talk” and “no due diligence” exclusivity provisions in cl 9.3 and cl 9.4 of the SID respectively, are subject to the fiduciary and statutory carve-out or exception in cl 9.6 of the SID.

28    The period of exclusivity under the SID is approximately nine months. The exclusivity period was intended to take into account the regulatory approvals condition precedent (both for Australia and New Zealand) in cl 3.1 of the SID. These included any potential public inquiry by the Australian Competition and Consumer Commission (ACCC) in relation to the proposed acquisition of SILK by API. As events have transpired, the ACCC and New Zealand Commerce Commission regulatory conditions in the SID have been satisfied and accordingly, on the current timetable, the proposed implementation date of the Scheme is 29 November 2023.

29    In that context, I was satisfied that the nine-month exclusivity period agreed upon by SILK and API in the SID was reasonable and sufficiently disclosed in the Scheme Booklet.

30    Under cl 10.2 of the SID, a break fee is payable by SILK upon the occurrence of certain events (SILK Break Fee). Those events do not include the situation where SILK Shareholders do not vote in favour of the Scheme at the Scheme Meeting. The amount of the SILK Break Fee is $1,779,559.43, as specified in the definition of “Break Fee” in the SID. This represents exactly 1% of the equity value of SILK as implied by the aggregate Scheme Consideration.

31    Under cl 10.3 of the SID, a reverse break fee (in the same amount as the SILK Break Fee) (SILK Reverse Break Fee) is payable by API to SILK in the termination circumstances referred to in that clause.

32    The existence and terms of the SILK Break Fee and the SILK Reverse Break Fee are disclosed in the Scheme Booklet.

33    I was satisfied that both the SILK Break Fee and the SILK Reverse Break Fee are reasonable and do not represent an impediment to the convening of the Scheme Meeting.

D.3.2.    Deemed warranty

34    Clause 8.2 of the Scheme contains a deemed warranty clause.

35    Deemed warranty clauses are commonly found in schemes of arrangement: see Oz Minerals Limited, in the matter of Oz Minerals Limited [2023] FCA 197 at [18] (Beach J), Dragontail Systems Limited, in the matter of Dragontail Systems Limited [2021] FCA 834 at [37]-[41]; MOQ at [22]. The existence of the deemed warranty clause is disclosed at 3.12 in Part 3 (Summary of the Scheme) of the Scheme Booklet.

D.3.3.    Special Dividend

36    I was satisfied that the Special Dividend, if it were declared and paid, would not constitute financial assistance contrary to s 260A of the Act. A reduction in scheme consideration by the amount of a special dividend that had the effect of diminishing the net assets of the scheme company in circumstances in which the bidder was not a shareholder, does not amount to financial assistance: Legend Corporation Limited, in the matter of Legend Corporation Limited [2019] FCA 1249 at [73]-[75] (O’Bryan J). At the Last Practicable Date (as defined in the Scheme Booklet), neither API nor any member of Wesfarmers or its subsidiaries had any relevant interests or voting power in any SILK Shares.

D.3.4.    Class considerations

37    The relevant test to determine whether shareholders must be placed in separate classes for voting purposes at a scheme meeting is whether the rights of a group of shareholders are so dissimilar from the rights of other shareholders that it makes it impossible for them to consult together with a view to their common interest: Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 683 (Bowen LJ); see also Healthscope Limited, in the matter of Healthscope Limited [2019] FCA 542 at [106] (Beach J).

38    More specifically, it has been said that the holders of performance rights who are also shareholders of the scheme company do not constitute a separate class for the purposes of s 411(1) of the Act: Newcrest Mining Limited, in the matter of Newcrest Mining Limited [2023] FCA 1080 at [60] (Beach J); see also Essential Metals Limited, in the matter of Essential Metals Limited [2023] FCA 240 at [39] (Banks-Smith J) and in Healthscope at [166]-[167]. These judicial observations have usually been made in a context where the relevant performance rights convert to shares and then the holders of those rights receive the scheme consideration. In my view, the same reasoning is also applicable where, as in this case, the performance rights are proposed to be cancelled in exchange for a cash amount equal to the Scheme Consideration.

39    The inclusion of cash payments or incentives in connection with a scheme do not require shareholders who are the recipient of those payments or benefits to meet as a separate class: see Re Foster’s Group Limited (No. 2) [2011] VSC 547 at [42] (Ferguson J); RXP Services Limited, in the matter of RXP Services Limited [2021] FCA 38 at [38]-[45] (Beach J); Oz Minerals at [63]; Kidman Resources Limited, in the matter of Kidman Resources Limited [2019] FCA 1226 at [96] (O’Callaghan J). Judicial observations that the additional cash payment or incentive does not mean that the rights of the recipients of those cash payments are so dissimilar to make it impossible for them to consult together with the other shareholders, at one meeting, with a view to their common interest, are often made in a context where the cash payment or incentive is conditional on the scheme becoming effective: see Foster’s Group and Kidman Resources. The observations apply with even more force to the 2023 and 2024 Incentive Payments and the Special Exertion Fees. Both the 2023 Incentive Payments and the Special Exertion Fees will be paid irrespective of whether the Scheme is implemented. The potential 2024 Incentive Payments are dependent upon a period of service post implementation of the Scheme and the completion of certain integration objectives. In those circumstances, I am satisfied that the 2024 Incentive Payments do not give rise to any concern that the potential recipients of those payments relevantly constitute a separate class.

40    I am satisfied that the repayment of the Share Scheme Loans, in full, from the Scheme Consideration, will not result in those shareholders forming a separate class to shareholders who do not have such loans. Their shares are being acquired for the same Scheme Consideration and are being valued in the same way as the shares of the other members. The repayment of loans made to shareholders from scheme consideration has been said not to require the creation of separate classes: see Straits Resources Limited, in the matter of Straits Resources Limited [2010] FCA 1467 at [16]-[19] (Jacobson J); Seymour Whyte Ltd, in the matter of Seymour Whyte Ltd [2017] FCA 1009 at [12] and [16] (Farrell J); Bulletpoof Group Limited, in the matter of Bulletproof Group Limited [2018] FCA 497 at [17]-[20] (Yates J); Re Terry White Group Limited (No 1) [2018] QSC 254 at 7 (Bond J) and Village Roadshow Limited, in the matter of Village Roadshow Limited [2020] FCA 1669 at [112] (Middleton J); see also Damian T and Rich A, Schemes, Takeovers and Himalayan Peaks: The Use of Scheme of Arrangement (4th ed, Herbert Smith Freehills, 2021) at [6.14.14]. Further, from a collateral benefit perspective, as the proposed arrangements in the present case involve the entirety of the relevant loan being repaid, neither the fact of the loans nor their proposed treatment mean that those shareholders will receive any additional benefit that other shareholders will not receive.

D.3.5.    Mr Perelman and the directors’ unanimous voting recommendation

41    I was satisfied that it is appropriate for Mr Perelman to join with the other directors in making a voting recommendation that SILK Shareholders should vote in favour of the Scheme, notwithstanding the benefit to be received by him through the treatment of his Performance Rights (being $792,857.90) and his 2023 Incentive Payment of $87,412.50. These amounts are disclosed in the Scheme Booklet (including in the Chairperson’s letter). I was also satisfied that it is appropriate for each of the non-executive directors to make a voting recommendation notwithstanding they will be receiving the Special Exertions Fees: see Over the Wire Holdings Limited, in the matter of Over the Wire Holdings Limited [2022] FCA 26 at [40]-[45].

42    In Over the Wire Holdings, after referring to the differing views on this question (as considered by Moshinsky J in Japara Healthcare Limited, in the matter of Japara Healthcare Limited [2021] FCA 1150 and agreeing with his Honour’s view), I observed that:

In my view it is highly desirable that, other than in exceptional cases, every director, in particular a managing director and group chief executive officer, makes a recommendation to shareholders as to whether or not they should vote in favour of a proposed scheme, provided that any substantial benefits to be received by them are fully disclosed to shareholders in the scheme booklet.

43    I did not consider the present application to be an exceptional case and it was, therefore, appropriate that all directors should make a voting recommendation to SILK Shareholders.

D.3.6.    Performance risk

44    As addressed at [13] above, the transfer of the SILK Shares to API is subject to the Scheme Consideration being paid to a trust account operated by SILK for the benefit of the Scheme Shareholders under cl 5.2(b) of the Scheme. This effectively removes any performance risk in so far as the transfer of the SILK Shares to API in return for the Scheme Consideration is concerned.

45    Further, API has entered into a deed poll in favour of the Scheme Shareholders, under which it has, among other things, undertaken to provide or procure the provision of the Scheme Consideration in accordance with the terms of the Scheme. Scheme Shareholders will likely not need to rely on the covenants in the deed poll as far as the receipt of the Scheme Consideration in return for the transfer of their Scheme Shares to API is concerned (as observed by Beach J in Oz Minerals at [39]).

46    Wesfarmers, as the parent company of API, is not a party to the deed poll and the unconditional and irrevocable undertaking provided by Wesfarmers to API regarding funding of the Scheme Consideration is not enforceable by SILK. This was also the position in Oz Minerals where BHP Group Limited, as the parent company, was not a party to the deed poll entered into by its subsidiary, the acquiring entity (Subsidiary), and where BHP Group Limited had entered into an intragroup deed under which it had irrevocably and unconditionally undertaken to pay or procure the scheme consideration (which intragroup deed was not enforceable by Oz Minerals Limited, the scheme company): see Oz Minerals at [32]. Beach J observed in Oz Minerals at [41] that neither of these matters was a reason for him to refrain from making a scheme meeting order. The factors noted by his Honour in this regard included (at [31] and [46]):

(a)    that the aggregate scheme consideration was to be funded using a combination of existing cash reserves of BHP Group Limited and the proceeds of a debt facility (and not from equity commitments from private equity funds);

(b)    that whilst the “BHP Intragroup deed poll” was not enforceable by Oz Minerals Limited, under that deed BHP Group Limited has irrevocably and unconditionally undertaken to make available and pay or procure the payment of such amounts to its Subsidiary that, in aggregate, were equal to the aggregate scheme consideration and all costs associated with the scheme;

(c)    that the Subsidiary’s rights to receive payments under the “BHP Intragroup deed poll” were not subject to any conditions and the funds would be provided by BHP Group Limited to the Subsidiary in whatever form and manner the Subsidiary required; and

(d)    that BHP Group Limited had a market capitalisation of some $226 billion with sufficient cash reserves of its own to fund the acquisition of the Oz Minerals Limited shares through its wholly owned subsidiary.

47    Beach J then observed at [47] that in those circumstances and given that the terms of the scheme effectively removed any performance risk as the transfer of Oz Minerals Limited shares was subject to receipt of the scheme consideration, the proposed funding arrangements provided a suitable commercial basis for the scheme to be considered by shareholders of Oz Mineral Limited.

48    In my view, these factors were equally present here. The Scheme Booklet includes the following information about API:

(a)    Wesfarmers’ revenue from continuing operations was $43.5 billion and its net profit after tax was $2.5 billion for the financial year ended 30 June 2023;

(b)    Wesfarmers, through itself or one or more of its subsidiaries, will provide API with sufficient funds to fund the Scheme Consideration;

(c)    Wesfarmers will repay or assume the existing debt facilities of SILK. The average used facilities of SILK over the course of the financial year ended 30 June 2023 was approximately $26 million and the net debt as at 30 June 2023 was $9.1 million;

(d)    Wesfarmers anticipates that the combination of the Scheme Consideration and an amount broadly equivalent to the average net debt plus any other adjustments due to movements in working capital or other funding items as at the Implementation Date will represent its total funding commitments for the Scheme and will represent the initial funds employed in the Scheme;

(e)    Wesfarmers intends, on behalf of API, to fund, either itself or through one or more of its subsidiaries, the amount of the Scheme Consideration and the SILK debt repayment via existing balance sheet capacity and bank debt facilities;

(f)    that the maximum amount payable by API in connection with the Scheme will be $180,094,409; and

(g)    that on behalf of API, Wesfarmers intends to fund, either itself or through one or more of its subsidiaries, the amount of the Scheme Consideration and the SILK debt repayment via existing balance sheet capacity and bank debt facilities. As at 30 June 2023 (being the last day of the last financial year for which Wesfarmers has audited financial statements), Wesfarmers had available cash at bank and on deposit with an aggregate value of $254 million (excluding $252 million of cash on hand and in transit and $167 million of cash held in joint operation) and unused banking financing facilities available of $2.625 billion.

49    Further, and as noted above, Wesfarmers has executed an unconditional and irrevocable undertaking provided by Wesfarmers to API regarding funding of the Scheme Consideration. The combination of the matters referred to in [48] above and the unconditional and irrevocable undertaking, provide a suitable commercial basis for the Scheme to be considered by SILK Shareholders.

D.3.7.    Foreign capital gains tax withholding regime

50    It is stated in the taxation section of the Scheme Booklet that the withholding regime should not operate to require API to withhold an amount of the Scheme Consideration that is to be paid to Scheme Shareholders who are not tax residents of Australia. It is also said, however, that notwithstanding that statement, SILK Shareholders who are not tax residents of Australia should seek independent professional advice. Clause 18 of the SID provides that if API has withheld (and paid to the Federal Commissioner of Taxation) an amount under this regime then, it will, if requested by the relevant shareholder, provide to that shareholder a receipt of payment of the relevant withholding amount.

D.3.8.    Shareholder communications

51    Both the proposed inbound shareholder and outbound shareholder scripts were in evidence. In In the matter of InvoCare Limited [2023] NSWSC 1180 at [23]-[26], Black J observed that while a practice had developed of having shareholder communications before the Court at the first court hearing, approval of those communications was not strictly required. His Honour noted, however, that that it was not easy to see why scheme companies or their advisers would prefer to leave the review of such communications to the second court hearing, rather than reviewing them at the first court hearing when there was still time to fix any difficulty with them.

52    I was satisfied that the inbound and outbound shareholder scripts in evidence provide for comprehensive and accurate engagements with SILK Shareholders and seek to ensure that, to the extent possible, communications are consistent with and do not trespass beyond the information provided to SILK Shareholders in the Scheme Booklet. Further, I note that in the course of the hearing, Mr Ahern acknowledged that aspects of the “Voting Intentions” section of the outbound shareholder script might give rise to further communications with SILK Shareholders that were not consistent or travelled beyond the information provided in the Scheme Booklet. He submitted, and I agreed, that the preferable course was to delete the “Voting Intentions” section from the outbound shareholder script.

D.3.9.    Notice of Scheme Meeting

53    Consistently with the observations that I made in Absolute Equity Performance Fund Ltd, in the matter of Absolute Equity Performance Fund Ltd [2022] FCA 933 at [12], the words “or without” have been omitted from the scheme resolution in the notice of Scheme Meeting. In my view, the inclusion of the words “or without” in a resolution to the effect that a shareholder agrees to a scheme of arrangement “with or without any modifications, alterations or conditions as required by the Federal Court of Australia” to which scheme proponents agree, or “any modifications, alterations or conditions agreed in writing” by scheme proponents and approved by this Court, gives rise to a potential ambiguity in a scheme resolution. The potential ambiguity arises because the resolution should make clear that shareholders voting in favour of the resolution are doing so on the basis that their approval extends to any modifications, alterations or conditions required by the Court and accepted by the scheme proponents and to any modifications, alterations or conditions agreed by the scheme proponents and approved by the Court.

E.    DISPOSITION

54    On the basis of the material provided to the Court and the considerations outlined above, I was satisfied that the formal requirements contained in s 411 of the Act for the convening of a meeting of members to consider the Scheme and to approve the Scheme Booklet for circulation to SILK Shareholders have been met. I was also satisfied that the discretion of the Court should otherwise be exercised to order the convening of a meeting of the SILK Shareholders and to approve the Scheme Booklet for distribution to SILK Shareholders.

Associate:

Dated:    6 October 2023