For nearly two decades, schemes of arrangement have been the preferred method for privatising Australian listed companies where the proposed transaction has the public support and recommendation of the board of the target company – a so-called 'friendly' proposal. A scheme has a number of advantages for 'friendly' acquisitions compared to a conventional takeover bid, including a 75% voting approval threshold to acquire all of the company's shares (compared to a 90% compulsory acquisition threshold for a takeover bid), and a binary, 'all or nothing' outcome according to a relatively set timetable, which provides certainty of timing and can make debt financing easier to obtain.
A scheme is a statutory process overseen by the Australian Securities and Investments Commission (ASIC) and that requires Court approval at two stages – at a first hearing to obtain orders convening the scheme meeting and approving the despatch of the scheme booklet to the target company's shareholders; and (assuming shareholders approve the scheme at that meeting by the requisite majorities) at a second hearing approximately one week after the shareholder meeting to obtain orders approving the scheme. However, until recently, the two court hearings for the scheme process have become increasingly protracted and cumbersome, requiring large volumes of evidence from an increasing number of parties, supported by lengthy written submissions. This has caused the court approval process to become encumbered with increasing complexity, preparation time and expense. Until now!
In the landmark decisions in Re Vita Group Ltd [2023] FCA 400 and Re Vita Group Ltd (No 2) [2023] FCA 623 (together, Re Vita Group), the Federal Court of Australia has made significant reforms to streamline the practice and procedure for court applications in schemes of arrangement. The reforms are to be lauded for improving efficiency and removing the increasing (and largely unnecessary) time and costs that have found their way over the years into the scheme process. No doubt emboldened by the first decision in Re Vita Group, the NSW Supreme Court has announced similar reforms.
MinterEllison acted for Vita Group Limited, the first scheme proponent under the new approach of the Federal Court. Vita propounded a scheme under which it would be acquired by another listed industry participant for all cash consideration. Vita shareholders overwhelmingly approved the scheme earlier this month. The Vita scheme has recently been approved by the Federal Court of Australia and will be implemented before 30 June 2023. In this article, we outline the key developments from the judgments of the Federal Court in Re Vita Group and recent parallel developments in the NSW Supreme Court. Market participants and their advisers need to take these developments into account when undertaking schemes of arrangement in Australia.
What is the new practice in the Federal Court in schemes?
In Re Vita Group, Jackman J delivered the Federal Court's reasons for making orders at a first hearing to convene the scheme meeting and for approving the scheme at the second hearing. In doing so, the Federal Court propounded a new approach to scheme applications initially canvassed with the parties' advisers at a case management hearing that preceded the first hearing.
The Federal Court decided that the "overarching purpose" under s 37M of the Federal Court of Australia Act 1976 (Cth) in relation to the resolution of disputes applies equally to scheme applications, which means that scheme applications must be resolved according to law as quickly, inexpensively and efficiently as possible.
The Federal Court shortly intends to publish a practice note or other communication concerning schemes matters and is in the process of consulting with various stakeholders. In the meantime, Jackman J indicated at the case management hearing that the Federal Court's reformed approach set out in Re Vita Group has been approved by the other Judges of that court.
Importantly, in Re Vita Group, the Court reiterated the ex parte responsibility of the scheme company to bring to the Court's attention all matters that are material to the exercise of its discretion. The new streamlined approach does not diminish that obligation.
First court hearing
The 'commencement' affidavit filed with the originating process for the application need only annex a current company search of the scheme company. The Federal Court is prepared to dispense with the previous practice where the commencement affidavit otherwise states the facts in support of the application, on the basis that a further affidavit filed before the first hearing will contain the relevant facts.
The Federal Court propounded the following approach for the first court hearing documents:
- The draft scheme booklet (including the independent expert report and all other appendices) is to be delivered to the Judge's chambers as it stands at least 48 hours before the first hearing. At the hearing the Court can be shown any subsequent amendments since that time.
- The primary purpose of the 'main' affidavit will be to address the verification process adopted in relation to the disclosure in the scheme booklet to ensure its accuracy. Further evidence of the proposed scheme and disclosure is no longer required in the main affidavit as the Judge will have already received the draft scheme booklet which makes any summary unnecessary.
- Evidence as to how the scheme meeting documents will be dispatched to scheme participants and the means by which the scheme meeting will be held is no longer required.
- Separate affidavits of consent from the proposed chair and alternate chair of the scheme meeting are no longer required and the declaration of any conflicts of interest and duty can be deposed on information and belief in the main affidavit.
- Evidence as to the negotiation of the break fee and other deal protection clauses (such as exclusivity) is no longer as these provisions have now become so conventional over time that it is unlikely that they are heavily negotiated. However, the Court will require evidence as to whether any target break fee in the implementation agreement is within the Takeovers Panel's guidance of 1% of the target equity value implied by the scheme consideration.
- An affidavit from the independent expert to introduce the independent expert's report, including binding them to the Court's expert witness code of conduct, is no longer required, noting that the independent expert's report is already part of the draft scheme booklet (which is covered by the main affidavit).
- Evidence as to correspondence with ASIC on the proposed scheme and on the draft scheme booklet is no longer required, apart from ASIC's usual form of preliminary no objection letter that is typically delivered shortly before the first hearing,. If there is a substantive issue raised by ASIC which has not been addressed in the draft scheme booklet, then there may be a need to draw the Court's attention to this.
- The Court will dispense with the legislative requirement to publish a newspaper advertisement with the details of the second hearing on the condition that the company makes an appropriate public announcement via the ASX or its website with details of the second hearing and how to object.
- Written submissions in support of the Court making orders convening the scheme meeting and related matters should be no more than 10 pages and should highlight any unusual features that require attention in accordance with the applicant's ex parte duties. Written submissions should not include lengthy expositions of settled principles in schemes jurisprudence.
Second court hearing
The Federal Court noted the following in relation to the second hearing:
- The Court will no longer approve proposed ancillary communications by the scheme company between the first hearing and the second hearing, including engagement campaign scripts and scheme meeting presentation materials, other than any supplementary disclosure which may be required subsequent to the public release of the scheme booklet. This is on the basis that the scheme company is to be at its own risk concerning such ancillary communications with shareholders, including as to whether they are misleading or deceptive, and whether they may potentially jeopardise court approval at the second court hearing.
- Evidence as to the dispatch process of the scheme meeting documents is no longer required as the court is entitled to assume that its orders have been complied with unless otherwise informed by the scheme company. Lengthy evidence about receiving and processing proxies is also no longer required unless there is a significant issue which must be brought to the Court’s attention.
- The Court will require the scheme meeting chair’s affidavit to produce the poll report from the scheme meeting and the public announcement advertising details of the second hearing. Evidence proving what was said at the meeting, including questions put and answers given, is generally no longer required.
- Evidence of the voter turnout at scheme meetings is both irrelevant and unnecessary on the basis that the Court is not troubled by any degree of apathy or indifference by shareholders, unless there are highly exceptional circumstances where evidence of voter turnout may rationally affect a fact in issue for the approval of the scheme. Further, any such circumstances would have to be disclosed to the Court in any event under the scheme company's ex parte responsibility.
- The conditions precedent certificates under the implementation agreement can be annexed to the chair's affidavit or otherwise tendered separately together with ASIC's final "no objection" letter. If ASIC does not issue that letter (which sometimes occurs if ASIC has an unresolved concern with the scheme), the Court will require the affidavit to confirm that the scheme was not proposed to avoid the operation of the takeovers provisions under Chapter 6 of the Corporations Act.
- Evidence of any intention by any party to object to approval of the scheme is not required because the Court can be informed by counsel appearing for the scheme company of that matter.
- Written submissions in support of the Court making orders approving the scheme should (as with the written submissions for the first hearing) be no more than 10 pages and should highlight any unusual features that require attention in accordance with the applicant's ex parte duties. Again, the second hearing submissions should not include lengthy expositions of settled principles in schemes jurisprudence.
Issues yet to be determined
There are some established practices in the evidence presented in scheme applications that may now, by extension, be considered to also no longer be required but were not considered in Re Vita Group because they were not relevant to that scheme. The continuing requirement for these practices will therefore need to be addressed in another case. These practices are:
- Foreign legal expert evidence as to the due execution of a deed poll by a foreign incorporated acquirer.
- Evidence relating to the conditionality of financial arrangements supporting bids by special purpose bidding vehicles.
We anticipate that the Federal Court will dispense with the need for these current practices in other appropriate cases in due course. Indeed, on the first issue, Jackman J confirmed in a subsequent decision in Re Blackmores Limited [2023] FCA 624, that where a deed poll is executed by a foreign incorporated acquirer, there is no longer a need for an affidavit from an appropriately qualified lawyer in the foreign jurisdiction of incorporation proving the due execution of the deed poll.
The Federal Court has confirmed that the approach outlined in Re Vita Group should be followed in trust schemes where the trustee of a managed investment scheme proposes an amendment to the constitution of the trust by way of a two-stage process closely modelled on s 411 scheme procedure.
What is the NSW Supreme Court guidance and how does it differ to the Federal Court reforms?
Following the first judgment in Re Vita Group, on 19 May 2023 the NSW Supreme Court reissued Practice Note SC EQ 4 – Corporations List effective on 22 May 2023 (NSW Practice Note). The NSW Practice Note relevantly provides that the process for approval of schemes of arrangement is intended to be as simple as possible, and the NSW Supreme Court is generally supportive of simplification so far as it is consistent with the court’s statutory responsibilities and binding authority.
In summary, under the NSW Practice Note, the NSW Supreme Court approach to schemes is broadly consistent with the reformed approach approved by the Federal Court in Re Vita Group. However, the NSW Supreme Court's guidance diverges from the Federal Court approach regarding the following evidence which the NSW Supreme Court will generally continue to expect:
- The nature and scope of any exclusivity provisions in the implementation agreement at the first hearing.
- The dispatch of scheme documents in accordance with the Court’s orders at the second hearing.
- Voter turnout at scheme meetings at the second hearing.
The NSW Practice Note also notes that existing and developing case law should guide practitioners for substantive issues regarding:
- Communications by a scheme proponent to the participants.
- Proof of due execution of a deed poll by a foreign bidder.
- Proof of financial arrangements supporting bids by special purpose bidding vehicles.
Where to from here?
The recent reforms by the Federal Court and NSW Supreme Court to the practice and procedure for scheme applications are to be welcomed with alacrity. They will streamline the increasingly voluminous documents generally expected to be placed before the court at the first and second hearings. As noted above, in making these reforms the courts have emphasised the ex parte responsibility of the scheme company to bring to the court's attention all matters that are material to the exercise of its discretion. Those duties are not diminished by these reforms – indeed, they are arguably heightened, meaning that scheme companies and their advisers will need to carefully identify and bring any such matters to the court's attention. The courts, practitioners and market participants will continue to be guided by the case law developing in scheme matters after Re Vita Group and the commencement of the NSW Practice Note.
If you would like to learn more about the recent reforms by the Federal Court and NSW Supreme Court for scheme applications, including the new practice across first and second court hearings, contact us.