Protecting Commercial Viability Not Necessarily Anti-Competitive

18 March, 2015

What is a scheme of arrangement?

A scheme of arrangement is a statutory arrangement or compromise between a company and its shareholders in which the terms and conditions of the scheme become binding on all shareholders by operation of Part 5.1 of Corporations Act 2001 (Cth).[1] It is frequently used in friendly acquisitions of a company, allowing it to reconstruct its capital, assets or liabilities with the approval of both its shareholders and the Court and is often preferred to a takeover bid structure.

Process of scheme of arrangement

  1. Planning and due diligence

A scheme of arrangement is commenced by the bidder making an indicative offer to the target to propose scheme under which the bidder would acquire the target. The bidder and target will undertake due diligence on each other, to confirm the bidder’s interest in the target and consideration to be offered in exchange for the proposed acquisition. Due diligence may be undertaken on an exclusive or non-exclusive basis. While the scheme is being developed, the target company’s directors remain in control.

  1. Disclosures

The bidder and target will then negotiate a Scheme Implementation Agreement. The Scheme Implementation Agreement sets out the terms of the scheme, obliges the target to propose the scheme to target shareholders and to ensure that the target directors recommend that target shareholders vote in favour of the scheme in the absence of a superior proposal, and sets out how the bidder and target will work together in the scheme process. Signing this agreement triggers an obligation on ASX-listed targets to make a public market announcement regarding the scheme.

After obtaining support statements from any major shareholders, the bidder and target will draft a transaction announcement and a Scheme Booklet, or explanatory memorandum, which will be reviewed by ASIC and all shareholders.[2] The Scheme Booklet must contain information about the scheme, the target directors’ recommendation and any other necessary disclosures which are material to a target shareholder’s decision as to how to vote on the proposed scheme.

The target will then engage an expert to draft an Independent Expert Report valuing the target shares and opining on whether the scheme is in the best interests of target shareholders.[3] The parties will apply for ASIC relief and necessary ASX waivers.

  1. Court and shareholder approvals

The target will lodge the Scheme Booklet and Independent Expert Report with ASIC for review which will take a minimum of 14 days. At the first court hearing, the target will also seek court approval to despatch the Scheme Booklet to the target shareholders and court orders to convene a Shareholder’s meeting to vote on the scheme.

Upon receipt of approval, the target will despatch the Scheme Booklet and hold a meeting of target shareholders to approve the scheme.[4] The target shareholders must be given at least 28 days’ notice of the scheme meeting being held. A resolution in favour of the scheme must be passed at this meeting by each class of shareholders by both:

  • 75% of the votes case on the resolution
  • More than 50% in number of the target shareholders voting on the resolution.

The target will seek confirmation that ASIC does not object to the scheme by requesting a statement be provided to the court. If the resolution passes at the shareholder’s meeting, the target will then seek court approval to implement the scheme at the second court hearing. The Court will typically recognise that the shareholders are in the best position to determine the commercial interests of the target.[5]

  1. Implementation of the scheme

Once all necessary approvals have been obtained, the target will lodge the Court’s binding orders with ASIC and liaise with the share registries. The target shares and control of the target will be transferred to the bidder upon payment of the scheme consideration to the shareholders,[6] and the target company will register the bidder as the holder of the shares.[7] Finally, the target will be delisted from the ASX. The scheme of arrangement will not be effective extraterritorially without an application being made to the relevant courts of other jurisdictions in which the company operates.

Case considerations

In the recent decision of the Supreme Court of New South Wales, In the matter of ELMO Software Ltd (No 2) [2023] NSWSC 81, Justice Black reiterated the Court’s discretion to approve the scheme at the second hearing provided it is satisfied whether:

  1. There was compliance with the orders of the Court convening the scheme meeting(s);
  2. The resolution to approve the scheme was passed by the requisite majority;
  3. Other statutory requirements have been satisfied; and
  4. All conditions to which the scheme is subject (other than Court approval and lodgement of the Court’s orders with ASIC) have been met or waived.[8]

Black J also recognised that the Court’s discretion may involve consideration of whether:

  1. The scheme is fair and reasonable so that an intelligent and honest member of the relevant class, proper informed and acting alone, might approve it;
  2. There was full and fair disclosure to members of all information material to the decision whether to vote for or against the scheme; and
  3. The Plaintiff has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court’s discretion.[9]

Advantages and disadvantages

Schemes of arrangement are more flexible and have less prescriptive rules than takeover bid structures operating under Part 6.5 of Corporations Act 2001 (Cth).[10] They must result in the company being solvent, and therefore avoids the necessity of the company commencing insolvency proceedings. Schemes of arrangement typically only take a matter of months to implement, but this is dependent on how quickly due diligence progresses.

However, schemes of arrangements can be a relatively complex and expensive process. The scheme binds to the company’s creditors/shareholders in classes, and each class must agree to the scheme by the statutory majority. Additionally, if the scheme needs to be amended or terminated, this can only be done by proposing a new scheme and re-imposing the whole process.

[1] Corporations Act 2001 (Cth) s 411(1).

[2] Corporations Act 2001 (Cth) s 411(3).

[3] Corporations Act 2001 (Cth) s 415(2).

[4] Corporations Act 2001 (Cth) s 412.

[5] In the matter of ELMO Software Ltd (No 2) [2023] NSWSC 81 [12] (Black J).

[6] Corporations Act 2001 (Cth) s 414(12).

[7] Corporations Act 2001 (Cth) s 414(13).

[8] In the matter of ELMO Software Ltd (No 2) [2023] NSWSC 81 [7] (Black J); Re Sierra Mining Ltd [2014] FCA 694 [31].

[9] In the matter of ELMO Software Ltd (No 2) [2023] NSWSC 81 [8] (Black J).

[10] Corporations Act 2001 (Cth) Part 6.5.

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Litigation and Dispute Resolution

Canadian Court elevates thumbs-up emoji to signature status

In June 2023, a Canadian Court in South-West Terminal Ltd v Achter Land and Cattle Ltd, 2023 SKKB 116, held that the "thumbs-up" emoji carried enough weight to constitute acceptance of contractual terms, analogous to that of a "signature", to establish a legally binding contract.   Facts This case involved a contractual dispute between two parties namely South-West Terminal ("SWT"), a grain and crop inputs company; and Achter Land & Cattle Ltd ("ALC"), a farming corporation. SWT sought to purchase several tonnes of flax at a price of $17 per bushel, and in March 2021, Mr Mickleborough, SWT's Farm Marketing Representative, sent a "blast" text message to several sellers indicating this intention. Following this text message, Mr Mickleborough spoke with Mr Achter, owner of ALC, whereby both parties verbally agreed by phone that ALC would supply 86 metric tonnes of flax to SWT at a price of $17 per bushel, in November 2021. After the phone call, Mr Mickleborough applied his ink signature to the contract, took a photo of it on his mobile phone and texted it to Mr Archter with the text message, "please confirm flax contract". Mr Archter responded by texting back a "thumbs-up" emoji, but ultimately did not deliver the 87 metric tonnes of flax as agreed.   Issues The parties did not dispute the facts, but rather, "disagreed as to whether there was a formal meeting of the minds" and intention to enter into a legally binding agreement. The primary issue that the Court was tasked with deciding was whether Mr Achter's use of the thumbs-up emoji carried the same weight as a signature to signify acceptance of the terms of the alleged contract. Mr Mickleborough put forward the argument that the emoji sent by Mr Achter conveyed acceptance of the terms of the agreement, however Mr Achter disagreed arguing that his use of the emoji was his way of confirming receipt of the text message. By way of affidavit, Mr Achter stated "I deny that he accepted the thumbs-up emoji as a digital signature of the incomplete contract"; and "I did not have time to review the Flax agreement and merely wanted to indicate that I did receive his text message." Consensus Ad Idem In deciding this issue, the Court needed to determine whether there had been a "formal meeting of the minds". At paragraph [18], Justice Keene considered the reasonable bystander test: " The court is to look at “how each party’s conduct would appear to a reasonable person in the position of the other party” (Aga at para 35). The test for agreement to a contract for legal purposes is whether the parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract (Aga at para 36). The question is not what the parties subjectively had in mind, but rather whether their conduct was such that a reasonable person would conclude that they had intended to be bound (Aga at para 37)."   Justice Keene considered several factors including: The nature of the business relationship, notably that Mr Achter had a long-standing business relationship with SWT going back to at least 2015 when Mr Mickleborough started with SWT; and   The consistency in the manner by which the parties conducted their business by way of verbal conversation either in person or over the phone to come to an agreement on price and volume of grain, which would be followed by Mr Mickleborough drafting a contract and sending it to Mr Achter. Mr Mickleborough stated, "I have done approximately fifteen to twenty contracts with Achter"; and   The fact that the parties had both clearly understood responses by Mr Achter such as "looks good", "ok" or "yup" to mean confirmation of the contract and "not a mere acknowledgment of the receipt of the contract" by Mr Achter.   Judgment At paragraph [36], Keene J said: "I am satisfied on the balance of probabilities that Chris okayed or approved the contract just like he had done before except this time he used a thumbs-up emoji. In my opinion, when considering all of the circumstances that meant approval of the flax contract and not simply that he had received the contract and was going to think about it. In my view a reasonable bystander knowing all of the background would come to the objective understanding that the parties had reached consensus ad item – a meeting of the minds – just like they had done on numerous other occasions." The court satisfied that the use of the thumbs-up emoji paralleled the prior abbreviated texts that the parties had used to confirm agreement ("looks good", "yup" and "ok"). This approach had become the established way the parties conducted their business relationship.   Significance of the Thumbs-Up Emoji Justice Keene acknowledged the significance of a thumbs-up emoji as something analogous to a signature at paragraph [63]: "This court readily acknowledges that a thumbs-up emoji is a non-traditional means to "sign" a document but nevertheless under these circumstances this was a valid way to convey the two purposes of a "signature" – to identify the signator… and… to convey Achter's acceptance of the flax contract." In support of this, Justice Keene cited the definition of the thumbs-up emoji: "used to express assent, approval or encouragement in digital communications, especially in western cultures", confirming that the thumbs-up emoji is an "action in an electronic form" that can be used to allow express acceptance as contemplated under the Canadian Electronic Information and Documents Act 2000. Justice Keene dismissed the concerns raised by the defence that accepting the thumbs up emoji as a sign of agreement would "open the flood gates" to new interpretations of other emojis, such as the 'fist bump' and 'handshake'. Significantly, the Court held, "I agree this case is novel (at least in Skatchewan), but nevertheless this Court cannot (nor should it) attempt to stem the tide of technology and common usage." Ultimately the Court found in favour of SWT, holding that there was a valid contract between the parties and that the defendant breached by failing to deliver the flax. Keene J made a judgment against ALC for damages in the amount of $82,200.21 payable to SWT plus interest.   What does this mean for Australia? This is a Canadian decision meaning that it is not precedent in Australia. However, an Australian court is well within its rights to consider this judgment when dealing with matters that come before it with similar circumstances. This judgment is a reminder that the common law of contract has and will continue to evolve to meet the everchanging realities and challenges of our day-to-day lives. As time has progressed, we have seen the courts transition from sole acceptance of the traditional "wet ink" signature, to electronic signatures. Electronic signatures are legally recognised in Australia and are provided for by the Electronic Transactions Act 1999 and the Electronic Transactions Regulations 2020. Companies are also now able to execute certain documents via electronic means under s 127 of the Corporations Act. We have also seen the rise of electronic platforms such as "DocuSign" used in commercial relationships to facilitate the efficient signing of contracts. Furthermore, this case highlights how courts will interpret the element of "intention" when determining whether a valid contract has been formed, confirming the long-standing principle that it is to be assessed objectively from the perspective of a reasonable and objective bystander who is aware of all the relevant facts. Overall, this is an interesting development for parties engaging in commerce via electronic means and an important reminder to all to be conscious of the fact that contracts have the potential to be agreed to by use of an emoji in today's digital age.

Published by Foez Dewan
29 August, 2023

Venues NSW ats Kerri Kane: Venues NSW successful in overturning a District Court decision

The McCabes Government team are pleased to have assisted Venues NSW in successfully overturning a District Court decision holding it liable in negligence for injuries sustained by a patron who slipped and fell down a set of steps at a sports stadium; Venues NSW v Kane [2023] NSWCA 192 Principles The NSW Court of Appeal has reaffirmed the principles regarding the interpretation of the matters to be considered under sections5B of the Civil Liability Act 2002 (NSW). There is no obligation in negligence for an occupier to ensure that handrails are applied to all sets of steps in its premises. An occupier will not automatically be liable in negligence if its premises are not compliant with the Building Code of Australia (BCA). Background The plaintiff commenced proceedings in the District Court of NSW against Venues NSW (VNSW) alleging she suffered injuries when she fell down a set of steps at McDonald Jones Stadium in Newcastle on 6 July 2019. The plaintiff attended the Stadium with her husband and friend to watch an NRL rugby league match. It was raining heavily on the day. The plaintiff alleged she slipped and fell while descending a stepped aisle which comprised of concrete steps between rows of seating. The plaintiff sued VNSW in negligence alleging the stepped aisle constituted a "stairwell" under the BCA and therefore ought to have had a handrail. The plaintiff also alleged that the chamfered edge of the steps exceeded the allowed tolerance of 5mm. The Decision at Trial In finding in favour of the plaintiff, Norton DCJ found that: the steps constituted a "stairwell" and therefore were in breach of the BCA due to the absence of a handrail and the presence of a chamfered edge exceeding 5mm in length. even if handrails were not required, the use of them would have been good and reasonable practice given the stadium was open during periods of darkness, inclement weather, and used by a persons of varying levels of physical agility. VNSW ought to have arranged a risk assessment of the entire stadium, particularly the areas which provided access along stepped surfaces. installation of a handrail (or building stairs with the required chamfered edge) would not impose a serious burden on VNSW, even if required on other similar steps. Issues on Appeal VNSW appealed the decision of Norton DCJ. The primary challenge was to the trial judge's finding that VNSW was in breach of its duty of care in failing to install a handrail. In addition, VNSW challenged the findings that the steps met the definition of a 'stairwell' under the BCA as well as the trial judge's assessment of damages. Decision on Appeal The Court of Appeal found that primary judge's finding of breach of duty on the part of VNSW could not stand for multiple reasons, including that it proceeded on an erroneous construction of s5B of the Civil Liability Act 2002 and the obvious nature of the danger presented by the steps. As to the determination of breach of duty, the Court stressed that the trial judge was wrong to proceed on the basis that the Court simply has regard to each of the seven matters raised in ss 5B and 5C of the CLA and then express a conclusion as to breach. Instead, the Court emphasised that s 5B(1)(c) is a gateway, such that a plaintiff who fails to satisfy that provision cannot succeed, with the matters raised in s 5B(2) being mandatory considerations to be borne in mind when determining s 5B(1)(c). Ultimately, regarding the primary question of breach of duty, the Court found that: The stadium contained hazards which were utterly familiar and obvious to any spectator, namely, steps which needed to be navigated to get to and to leave from the tiered seating. While the trial judge considered the mandatory requirements required by s5B(2) of the CLA, those matters are not exhaustive and the trial judge failed to pay proper to attention to the fact that: the stadium had been certified as BCA compliant eight years before the incident; there was no evidence of previous falls resulting in injury despite the stairs being used by millions of spectators over the previous eight years; and the horizontal surfaces of the steps were highly slip resistant when wet. In light of the above, the Court of Appeal did not accept a reasonable person in the position of VNSW would not have installed a handrail along the stepped aisle. The burden of taking the complained of precautions includes to address similar risks of harm throughout the stadium, i.e. installing handrails on the other stepped aisles. This was a mandatory consideration under s5C(a) which was not properly taken into account. As to the question of BCA compliance, the Court of Appeal did not consider it necessary to make a firm conclusion of this issue given it did not find a breach of duty.  The Court did however indicated it did not consider the stepped aisle would constitute a "stairway" under the BCA. The Court of Appeal also found that there was nothing in the trial judge's reasons explicitly connecting the risk assessment she considered VNSW ought to have carried out, with the installation of handrails on any of the aisles in the stadium and therefore could not lead to any findings regarding breach or causation. As to quantum, the Court of Appeal accepted that the trial judge erred in awarding the plaintiff a "buffer" of $10,000 for past economic loss in circumstances where there was no evidence of any loss of income. The Court of Appeal set aside the orders of the District Court and entered judgment for VNSW with costs. Why this case is important? The case confirms there is no obligation in negligence for owners and operators of public or private venues in NSW to have a handrail on every set of steps. It is also a welcome affirmation of the principles surrounding the assessment of breach of duty under s 5B and s 5C of the CLA, particularly in assessing whether precautions are required to be taken in response to hazards which are familiar and obvious to a reasonable person.

Published by Leighton Hawkes
18 August, 2023
Litigation and Dispute Resolution

Expert evidence – The letter of instruction and involvement of lawyers

The recent decision in New Aim Pty Ltd v Leung [2023] FCAFC 67 (New Aim) has provided some useful guidance in relation to briefing experts in litigation.

Published by Justin Pennay
10 August, 2023