Last minute increase to scheme consideration - a more flexible approach?

In brief

A recent Federal Court decision in Re Billabong International Limited shows a pragmatic approach by the court to the question of whether, in a takeover bid effected by way of scheme of arrangement, the bidder can make a last minute increase in the scheme consideration, without having to adjourn the scheme meeting and provide supplementary disclosure to target shareholders. Partners Guy Alexander and Kim Reid and Associate Samantha Naylor Brown comment.

A situation that commonly arises in a takeover bid effected by way of scheme of arrangement is where the bidder decides to increase the scheme consideration shortly before the scheme meeting, either to top a rival takeover bid that has just been announced; or simply because the bidder believes that without the increase the scheme may be voted down at the meeting.

In this scenario, the bidder may choose to adjourn the scheme meeting and provide supplementary disclosure to target shareholders about the increase, to give shareholders time to change their proxy to a vote in favour of the scheme. However, there will be circumstances where it is desirable for both the bidder and the target to have the scheme meeting and the vote on the scheme proceed as scheduled.

Two questions arise in this situation:

1. Does the target have to adjourn the meeting and return to the court for orders regarding supplementary disclosure or can the scheme meeting proceed as planned? 
2. If the scheme meeting proceeds without an approach to the court, how, technically, should the scheme consideration be varied at the meeting? 

Background

Here, Billabong had announced a scheme under which Boardriders, Inc. would acquire all of the shares in Billabong at $1.00 per share. Billabong had two 19.3 per cent shareholders, Oaktree and Centerbridge, who were also the senior lenders. Because Boardriders was a controlled entity of Oaktree, Oaktree was excluded from voting on the scheme. The scheme meeting was scheduled to be held on 28 March 2018. 

After the announcement, a number of shareholders, including Ryder Capital Limited (which held a 10 per cent relevant interest), had voiced opposition to the proposal. In the days before the scheme meeting, Boardriders had informed Billabong that it was considering whether to increase the scheme consideration to improve the prospects of the scheme being approved. In those discussions, Boardriders had noted that, from a commercial perspective, it was important that the scheme meeting proceed as planned having regard to, among other things, Boardriders' debt financing arrangements for the transaction, and the effect that continued uncertainty might have for the Billabong business if the transaction were to be delayed.

The proxy cut-off time was two days before the meeting. The proxies received before the cut-off indicated that there may be sufficient votes in favour, but this was not certain, as Ryder held a significant number of undirected proxies, and there were a significant number of shares not voted by proxy that could still be voted on the floor of the meeting.

On the morning of the meeting, Boardriders indicated to Billabong that it may be prepared to increase the price at which it was prepared to acquire Billabong shares (from $1.00 to $1.05 per share), but on the basis that the vote on the scheme would proceed at the scheme meeting as planned on that day. Billabong and Ryder then had discussions in relation to a possible increase, following which Boardriders made the decision to increase the consideration to $1.05 per share. This required a short adjournment to the meeting, during which Billabong and Boardriders executed a deed amending the Scheme Implementation Deed, providing for the increase. When the meeting resumed, the chairman advised the meeting that the Scheme Implementation Deed had been amended to provide for the increase, and that Billabong would seek approval from the court at the second court hearing (under section 411(6) of the Corporations Act 2011 (Cth)) to vary the terms of the scheme (if approved by shareholders) to reflect the increase. 

Importantly, when the shareholders voted on the resolution, they voted on the scheme as originally proposed under the orders made at the first court hearing (ie a scheme at $1.00 per share), but the voting took place with knowledge that the Scheme Implementation Deed had been amended, and that the court would be asked at the second court hearing to vary the scheme as approved by shareholders by increasing the scheme consideration.

The historical approach

Historically, where a bidder has increased the scheme consideration after the scheme booklet has been despatched and prior to the scheme meeting, the approach has been for the target company to return to the court for orders adjourning the scheme meeting and approving despatch of supplementary disclosure to target shareholders in relation to the price increase. This accords with ASIC regulatory guidance that target shareholders should be given at least 10 days' notice, through supplementary disclosure, of any material new information in relation to a scheme.

For example, in Re Citect Corporation Ltd (2006) 56 ACSR 663; [2006] NSWSC 143, where a bidder in a contested takeover situation proposed an increase in the offer price, orders were obtained adjourning the scheme meeting and approving the adoption of a supplementary scheme booklet, and then resolutions were passed at the reconvened scheme meeting to approve the amended scheme.

The issue of a late increase in the bid consideration also arose in Re Lend Lease Primelife Ltd [2009] NSWSC 1340. There, the bidder was not responding to a rival bid, but simply increasing the consideration to ensure that the scheme was approved at the meeting after a number of shareholders indicated that they would not vote in favour at the initial offer price. There the court adjourned the meeting, saying that there was 'manifestly not time for disclosure and consideration to occur'.

The Billabong approach

In Billabong, there simply was not time to return to court, and the proposed increase had been put on the basis that the meeting needed to proceed that day as planned. The decision was therefore taken to amend the Scheme Implementation Deed and then have the meeting vote on the original resolution, but indicate to the meeting that Billabong (and Boardriders) would ask the court at the second court hearing to vary the scheme consideration to $1.05 per share.¹ Boardriders had agreed under the amending deed to support that application.

Here, Billabong took the view that, although the proposed increase was material new information which had become available after the proxy cut-off time, there did not need to be any adjournment of the scheme meeting. Billabong's view was that any proxy holders who had voted by proxy in favour of the scheme would be even more in favour at a higher price, while those that had voted by proxy against the scheme, and who would have wished to change their vote to a vote in favour if they had been aware of the increase, would also be happy as the scheme had ultimately been approved by shareholders. 

The other question for Billabong was around the mechanics for effecting the increase. In the Citect decision, the court held that the proper process was for the target company to proceed to the adjourned meeting and then put two resolutions: one to amend the scheme to vary the consideration; and a second resolution to approve the scheme as amended. Part of the reason for that view was that the scheme company could not vote on a different scheme to the one which had been the subject of the court's orders at the first court hearing without going through that formal amendment process. In Billabong, this issue was avoided by voting on the original scheme, but advising the meeting of the intention to approach the court at the second court hearing to vary the scheme.

The decision

Justice Yates was satisfied that the court should exercise its power under s411(6) to modify the scheme in the circumstances. The court noted that the discretion to approve an amendment is conferred in broad terms: Snowside Pty Ltd v Boart Longyear Ltd [2017] NSWCA 215; (2017) 122 ACSR 291. While a change to the scheme consideration was a material matter, the discretion must be assessed in context – and here the increase in consideration was unambiguously advantageous to the members who were to participate in the scheme. The court also noted that further information and time for the members would not have been necessary for shareholders to consider the change.

The court noted the approach taken in Citect and other cases, but pointed to the different circumstances here:

• First, Citect involved a competitive bid scenario, which required the target company to adjourn the meeting and put supplementary disclosure to shareholders.
• Secondly, here the offer of increased consideration had been made on the basis that the scheme meeting proceed that day as planned.
• Thirdly, the scheme put to members at the meeting was the scheme approved by the court at the first court hearing, although those at the meeting knew that the court would be asked to alter the scheme consideration.

The court also gave as another reason for exercising the discretion that, as it subsequently transpired, the directed proxies received before the proxy cut-off date would have been sufficient for the resolution to pass, even if the consideration had not been increased. The decision, however, did not indicate that this was a condition of the court's willingness to exercise its discretion.

The court also took into account ASIC's position on the increase. ASIC's usual position, as expressed in Regulatory Guide 60, is that if a company proposes an amendment to the terms of a scheme, supplementary documentation should be distributed at least 10 days before the scheme meeting. However, in this case, ASIC stated that it did not have any material concerns arising from the 'last minute' increase in the scheme consideration because:

• the resolution would have been approved even without the increase;
• the votes cast at the meeting were not determinative (ie the resolution would have passed in reliance on directed proxies); and
• in excess of 95 per cent of votes cast were in favour of the resolution.

ASIC also highlighted that as the change in this case was an additional amount of cash, it was readily understandable and required no additional information to enable its value to be determined.

Although the court did not make any comment on the issue, it is likely that the position would have been different if the bid had been a scrip bid as the nature of the change would not have been as simple as in this case and supplementary disclosure would have been necessary about the merged entity.

What does this mean for the future of court approved schemes?

Although it remains to be seen how far this renewed flexibility will be taken in future, the Billabong judgment is a helpful precedent for bidders and targets considering how to approach amending a scheme without incurring further delay and cost.