Ensuring schemes are conducted as quickly, inexpensively and efficiently as possible 6 min read
While there can be significant advantages in implementing a control transaction via a scheme of arrangement rather than a takeover bid, one criticism which has been levied at schemes in the past is the cost involved in the court process itself. This includes the costs associated with preparing detailed affidavit evidence, and in seeking court approval for communications with target shareholders.
In this Insight, we look at the key changes to the Federal Court process on a scheme application and what it means for target companies.
A growing need for change
Over the past two decades, the weight of evidence put before courts in approving schemes has continued to grow. In an effort to address various issues that have arisen at first and second court hearings across a range of Australian courts, a practice of including certain affidavit evidence has formed. This has included, for example, affidavits from the independent expert verifying their report, from the chair, or alternate chair of the scheme meeting proving their ability and willingness to act, to adducing evidence regarding the process of negotiations for break fees and exclusivity provisions, the publication of newspaper advertisements, the plan for despatching scheme materials or how a virtual shareholder meeting will be conducted.
In response to this, the Federal Court of Australia, in a recent case management hearing in the Vita Group scheme (Re Vita Group Ltd (NSD252/2023)), has sought to wind back the evidentiary and monitoring requirements in order to ensure that schemes are conducted as quickly, inexpensively and efficiently as possible. At this case management hearing, Justice Jackman emphasised that this approach of the Federal Court does not extinguish or diminish the obligation of counsel to discharge the target company’s ex parte obligations, namely to bring to the court's attention any subject matter or information that is material to the court's determination of the scheme application. However, in the absence of there being a material issue which counsel needs to bring to the court's attention, the court made it plain that it considers that there is no need to provide various 'routine' affidavits.
Key changes to the Federal Court process on a scheme application
1. Approval by the court of shareholder communications during the scheme
Justice Jackman has clarified that it is no longer necessary to seek approval from the Federal Court for every shareholder communication, including ASX announcements, inbound or outbound call scripts, or roadshow presentations, save for the explanatory statement (commonly referred to as the scheme booklet) itself and any supplementary explanatory statement. The key message from the Federal Court was that if the relevant disclosure is already included in the explanatory statement or is not material enough to warrant a supplementary explanatory statement, court review and approval is not required.
2. Reduction in the affidavit material is required at the first court hearing
The Federal Court will now require only three key affidavits for the first court hearing:
- the affidavit filed by the target in support of the originating process, together with a company search required by the rules;
- the 'main affidavit', being, the affidavit of an executive or officer of the target company, which will provide an overview of: (i) the scheme and associated transactions; and (ii) the process of verifying the information provided by the target company contained in the explanatory statement; and (iii) other limited factual confirmations; and
- the bidder affidavit, proving the process of verifying the information which was provided by the bidder for the draft explanatory statement.
While counsel for the target will continue to have an obligation to bring any material matter to the Federal Court's attention, the target will no longer have to:
- tender an affidavit from the proposed chair, or alternate chair of the scheme meeting proving their ability and willingness to act or disclosing (if any) their previous relationship or dealing with the body or any other person interested in the proposed compromise or arrangement;
- tender an affidavit from the independent expert verifying their report. The latest draft of the independent expert report only needs to be annexed to the main affidavit;
- put on detailed evidence as to the process of negotiations for break fees and exclusivity provisions. However, the court will still require the disclosure of the quantum of a break fee to be expressed as a percentage of the equity value of the target company (as implied by the scheme consideration). In this regard, Justice Jackman stated: '[B]reak fee and exclusivity provisions have become so convention that there is, in my view, no need for evidence of the process of negotiations, no need for evidence as to the director’s belief that the provisions don’t operate against the interests of shareholders';
3. No need to file all correspondence with ASIC where ASIC has provided its no objection letter
It will no longer be necessary in the Federal Court to file all correspondence between ASIC and the target company in connection with explanatory statement or proposed scheme. Rather, the new approach will see a single sentence in the main affidavit stating the date on which the explanatory statement was first provided to ASIC for review and noting that was more than 14 days before the first court hearing. His Honour has indicated that if there is a point which ASIC has raised, and which has not been dealt with in the draft scheme booklet, then there will be a question for counsel as to whether they are duty bound to raise it with the court. We consider that the same issue applies to ASIC – if it has an issue it needs to bring to the attention of the court, it is appropriate that those matters be raised in its 'usual' letter, or otherwise directly at the hearing.
4. Reduction in the affidavit material required at the second court hearing
The second court hearing process has also been simplified. Under the Federal Court’s new approach, the target company is only required to tender one affidavit that annexes the poll report from the scheme meeting proving scheme resolution was passed by the requisite statutory majorities of shareholders, the ASX announcement containing details of the second court hearing; and if available, the condition precedent certificates and ASIC's no objection letter.
Gone are any requirements for evidence relating to the satisfaction of debt funding conditions, evidence of questions posed and answered at the scheme meeting and shareholder participation. His Honour also flagged that the question of the requirement to obtain foreign law opinions on the enforceability deed polls executed by foreign bidders would need to be dealt with where appropriate.
Conclusion
The further streamlining of the Federal Court process associated with schemes of arrangement is consistent with the submissions which we and others made to Treasury in 2022 in response to its consultation paper on improving the efficiency of takeovers and schemes of arrangement.
These changes can be expected to reduce the costs associated with the court approval process, but are not intended as a substitute for the obligation of counsel to bring to the court's attention any subject matter or information that is material to the court's determination of the scheme application.