Australia: What do courts consider when approving a scheme of arrangement meeting of company shareholders?

What you need to know

• A recent decision of the Federal Court of Australia provides a window into the figurative mind of the court when considering whether to approve an application to convene a shareholders meeting to approve a Scheme of Arrangement.
• The decision helpfully outlines the process that courts will typically follow in considering such an application, and also deals with the unusual situation of an expert report finding a scheme to be 'not fair' but 'reasonable'.
• The decision illustrates that the courts will not usually pre-empt the shareholders' meeting, unless a proposed scheme is so blatantly unfair that it should not even be put to shareholders.

Recap on Schemes of Arrangement

A Scheme of Arrangement is a useful structure to effect a takeover of a company where the parties are in agreement about the overall transaction. The advantages of the Scheme of Arrangement approach include:

• allowing some flexibility, such as the ability to handle different classes of shares
• providing a lower threshold for an acquirer to achieve control than the threshold required under a takeover bid (with the respective thresholds being 75% of the votes in a meeting of shareholders to approve a scheme vs achieving ownership of 90% of the shares in the target).

However, an important trade-off is that the Scheme of Arrangement approach involves more extensive scrutiny from ASIC and the court.

Where a company proposes a Scheme of Arrangement to effect a takeover, there are two stages at which the court becomes involved to approve (or not approve) the relevant scheme proceeding:

1. deciding whether to convene a meeting of shareholders to consider the Scheme of Arrangement, and
2. if the shareholders do meet and approve the Scheme of Arrangement, deciding whether it should proceed to implementation.

The Blackgold case

In Blackgold International Holdings Limited, re Blackgold International Holdings Limited [2017] FCA601, the Federal Court of Australia (Court) considered the first stage.

Blackgold, an ASX listed company, had announced a proposed Scheme of Arrangement (Blackgold Scheme) whereby Vibrant Group Limited would acquire all of the shares in Blackgold for 4.5 cents per share. Immediately before announcing the Blackgold Scheme, the shares of Blackgold had traded at about 2 cents a share.

Key matters considered by the Court

In determining whether a meeting should be convened for shareholders to consider the Blackgold Scheme, the Court considered four key questions.

1. Did the scheme in question fall within the statutory concept of an arrangement?

2. Section 411 of the Corporations Act 2001 (Cth) (Corporations Act) sets out the statutory concept of a Scheme of Arrangement. In the case of the Blackgold Scheme, it was clearly a scheme fitting that concept.

2. Had the Corporations Act and Regulations been complied with and was there sufficient disclosure so that shareholders were properly informed about the Scheme?

3. In this matter, the Court noted that there had been considerable engagement between Blackgold and ASIC over the three months leading up to the Court hearing. The discussions had resulted in the revision of the Blackgold Scheme booklet. In documents submitted to Court, directors of both Blackgold and Vibrant provided evidence that the statements in the Blackgold Scheme booklet were true and not misleading and there was also an outline cross referencing the relevant parts of the Corporations Regulations with parts of the booklet. The Court was satisfied that both the Corporations Act and Regulations had been complied with, and that there was sufficient information in the booklet.

3. Did ASIC have a reasonable opportunity to examine the Scheme and had it been given notice of the hearing?

4. The Court noted ASIC's extensive involvement in reviewing the Blackgold Scheme documents as well as confirmation from ASIC that it had received appropriate notice of the hearing.

4. Was there anything obvious about the Blackgold Scheme which would, if the shareholders did approve it, preclude the Court from making final orders at the second hearing?

5. In this context the Court focused on the expert report which stated that the Scheme was 'reasonable' but not 'fair'. The expert who prepared the report concluded that the Blackgold Scheme was not fair because the value offered was lower than the expert's calculated range (between 7.4 and 36.7 cents per share). However the expert still concluded that the Blackgold Scheme was reasonable because:

   • the shares in Blackgold were thinly traded so the Blackgold Scheme provided an opportunity that shareholders would not otherwise have to realise value from their shares
   • Blackgold's activities included mining in China which faced risks of changes in regulation and approvals.

In considering what to do about the expert report, the Court noted that it was ultimately up to the shareholders to decide. The Court looked at previous authority confirming that when considering an application to convene a scheme meeting, this is not a time for the Court to make a detailed analysis of the merits of the scheme. While it is possible that the Court might decide that a scheme was so blatantly unfair or otherwise inappropriate that it should be stopped before going to shareholders, it is not for the Court to satisfy itself that the scheme presented to shareholders was the best possible one that could be offered.

Therefore in the Blackgold case, the Court proceeded to order that the scheme meeting be convened, noting that if any shareholders had particular objections they could appear at the second hearing and place those objections before the Court.

Key takeaways

For any company contemplating a Scheme of Arrangement to effect a takeover, this case provides a useful overview of how the Court will approach an application to convene a meeting of shareholders to approve the scheme in question,particularly where there are questions about whether the value being offered is fair. Where a company proposes to make such an application, it is prudent to consider the key issues in advance to help improve the prospects of the application being approved.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories