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Re Foundation Healthcare Ltd (No 2)

Re Foundation Healthcare Ltd (No 2)

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FEDERAL COURT OF AUSTRALIA
In the Matter of Foundation Healthcare Limited
ACN 002 611 501 (No 2) [2002] FCA 973
CORPORATIONS – arrangements – application for approval of Schemes of Arrangement involving Shareholders and Optionholders – Schemes involving transfer of shares, options and property to another company – effective merger – criteria for approval – function of Court – compliance with requirements of Act – requirements of fairness – Schemes approved.
Corporations Act 2001 (Cth) s 411, s 413
Application of NRMA Ltd (2000) 18 ACLC 533; [2000] NSWSC 408
Re ACM Gold Ltd (1992) 10 ACLC 573 cited
IN THE MATTER OF FOUNDATION HEALTHCARE LIMITED
ACN: 002 611 501
W3008 OF 2002
FRENCH J
5 AUGUST 2002
PERTH

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

W3008 OF 2002

IN THE MATTER OF FOUNDATION HEALTHCARE LIMITED ACN: 002 611 501
APPLICANT

JUDGE:

FRENCH J

DATE OF ORDER:

5 August 2002

WHERE MADE:

PERTH

THE COURT ORDERS THAT:
1.The Schemes of Arrangement between:
(a)the Applicant and its members;

(b)the Applicant and its optionholders,

being Appendix 2 to the Schemes Booklet (which incorporates the Explanatory Statement) (Schemes) which is included in Annexure “PJM-7” to the affidavit of Phillip James MacLeod sworn 31 May 2002 and agreed to by resolutions of the members and optionholders of the Applicant at meetings of its members and optionholders on 16 July 2002, be approved.
2.Subject to s 1336 of the Corporations Act 2001 and any laws relating to stamp duty (if any):
(a)the whole of the Property (as defined in the Schemes) be transferred from the Applicant to and vested in LifeCare Health Limited (LifeCare) pursuant to s 413(1)(a) of the Corporations Act 2001 (Cth) (Act) and without any further act or deed with effect from the Effective Date (as defined in the Schemes); and

(b)all liabilities, obligations and duties of the Applicant (if any) in respect of the Property also be transferred to and become the liabilities, obligations and duties of LifeCare pursuant to s 413(1)(a) of the Act and without any further act or deed with effect from the Effective Date.

3.The Applicant have liberty, upon notice to the Australian Securities and Investments Commission, to apply at any time to the Court for orders in relation to any of the matters set out and envisaged in s 413(1)(a)-(f) of the Act in connection with the merger between the Applicant and LifeCare, including (without limitation), orders for the continuation by or against LifeCare of any legal proceedings pending by or against the Applicant, and/or for such incidental, consequential and supplemental matters as are necessary to ensure that the merger is fully and effectively carried out.
4.That, in accordance with s 411(12) of the Act, the Applicant is exempt from compliance with s 411(11) of the Act.
5.An office copy of this Order be lodged with the Australian Securities and Investments Commission within fourteen (14) days.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2002] FCA 973
Decision Date: 5 August 2002

CaseChat Overview and Summary

In the matter of Foundation Healthcare Limited and LifeCare Health Limited, the Court was tasked with approving the proposed merger of the two companies through Schemes of Arrangement. Foundation Healthcare Limited, a provider of premises, equipment, and practice management services to general medical practitioners, and LifeCare Health Limited, a company providing physiotherapy services, proposed a merger that would enable the creation of a broader community-based health care service entity. The proposed merger involved the exchange of shares and options under the Schemes. The Court was required to determine whether the Schemes met the statutory requirements for approval under sections 411 and 413 of the Corporations Act 2001 (Cth), including whether the arrangements were fair and reasonable, and if the requisite majorities of shareholders and optionholders had voted in good faith.

The Court examined the procedural requirements and found that they were satisfied, with ASIC having no objection to the Schemes. The Court further considered the fairness of the Schemes and concluded that an intelligent and honest shareholder or optionholder might approve them, as they represented a genuine merger and not a means to circumvent takeover provisions. The Court was satisfied that the majority of shareholders and optionholders who voted in favour of the Schemes did so in good faith and not for an illegitimate purpose. Consequently, the Court approved the Schemes, ordering the transfer of property and liabilities from Foundation to LifeCare, and granted ancillary powers to the Court to address any issues arising from the merger.

Orders

Orders of the court

1. The Schemes of Arrangement between:

(a) the Applicant and its members;

(b) the Applicant and its optionholders,

being Appendix 2 to the Schemes Booklet (which incorporates the Explanatory Statement) (Schemes) which is included in Annexure “PJM-7” to the affidavit of Phillip James MacLeod sworn 31 May 2002 and agreed to by resolutions of the members and optionholders of the Applicant at meetings of its members and optionholders on 16 July 2002, be approved.

2. Subject to s 1336 of the Corporations Act 2001 and any laws relating to stamp duty (if any):

(a) the whole of the Property (as defined in the Schemes) be transferred from the Applicant to and vested in LifeCare Health Limited (LifeCare) pursuant to s 413(1)(a) of the Corporations Act 2001 (Cth) (Act) and without any further act or deed with effect from the Effective Date (as defined in the Schemes); and

(b) all liabilities, obligations and duties of the Applicant (if any) in respect of the Property also be transferred to and become the liabilities, obligations and duties of LifeCare pursuant to s 413(1)(a) of the Act and without any further act or deed with effect from the Effective Date.

3. The Applicant have liberty, upon notice to the Australian Securities and Investments Commission, to apply at any time to the Court for orders in relation to any of the matters set out and envisaged in s 413(1)(a)-(f) of the Act in connection with the merger between the Applicant and LifeCare, including (without limitation), orders for the continuation by or against LifeCare of any legal proceedings pending by or against the Applicant, and/or for such incidental, consequential and supplemental matters as are necessary to ensure that the merger is fully and effectively carried out.

4. That, in accordance with s 411(12) of the Act, the Applicant is exempt from compliance with s 411(11) of the Act.

5. An office copy of this Order be lodged with the Australian Securities and Investments Commission within fourteen (14) days.

Background

Background to the litigation

On 10 May 2002, Foundation Healthcare Limited (Foundation) and LifeCare Health Ltd (LifeCare) announced a proposed merger for the stated purpose of creating an entity capable of delivering a broad range of community based health care services under one management. They proposed to effect the merger through Schemes of Arrangement under which: (a)Foundation Shareholders would be entitled to receive 3.8 new shares in LifeCare for each Foundation share held (Share Scheme); and (b)Foundation Optionholders with an exercise price of fifty cents on or before 31 December 2003, would be entitled to receive 3.8 new options in LifeCare for each Foundation option held (Option Scheme). Foundation applied to the Court under ss 411 and 413 of the Corporations Act 2001 (Cth) for leave to convene meetings of its Shareholders and Optionholders to consider the proposed Schemes of Arrangement. That leave was granted by orders made on 11 June 2002. The proposed schemes have been approved by the requisite majorities. Foundation now applies to the Court under ss 411 and 413 of the Corporations Act seeking the Court’s approval of the Schemes. The application is unopposed. The Australian Securities and Investments Commission (ASIC) has stated that it has no objection to the Schemes on the basis that it is satisfied that they have not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Ch 6 of the Act relating to takeovers. Background to the Schemes Foundation provides premises, equipment and comprehensive practice management services to more than 750 general medical practitioners in Australia. It charges a fee to practitioners who conduct their practices at medical centres which it operates. Its fees are generally calculated as a percentage of revenue received by the practitioners. It manages ninety-nine medical centres throughout Australia and two public hospitals in Melbourne. It is presently operating at a loss. LifeCare provides physiotherapy services throughout Australia. It conducts sixty practices under its name. It owns twenty-three of these, the remaining thirty-seven are conducted under franchise arrangements. It also undertakes other business activities relating to the provision of dental, occupational health, sports medicine and hospital services. It conducts swimming classes for babies and Pilates studios in Queensland, New South Wales and Western Australia. Foundation is a publicly listed company. It was incorporated on 27 May 1983 under the Companies Act 1981 (NSW). It has an issued share capital represented by 161,408,271 fully paid ordinary shares. There is only one class of shares. The twenty largest shareholders represent approximately 69.3% of the issued fully paid ordinary shares in the company. It also has the following options on issue: Number of Exercise Price Expiry Date Scheme StatusOptions Cents8,000,000 50 31/12/03 Scheme Options3,000,000 50 07/10/05 Non Scheme Options8,459,173 WAMP 23/08/10 Non Scheme Options 410,000 200 03/05/05 Non Scheme Options 100,000 145 15/06/05 Non Scheme Options 150,000 50 15/07/03 Non Scheme Options 250,000 50 15/07/03 Non Scheme Options3,000,000 40 31/12/03 Non Scheme OptionsThe 8 million options which are the subject of the proposed Schemes are held by four Optionholders. They are: Michael Boyd 2,500,000 Cryspur Pty Ltd 4,500,000 Genteel Nominees Pty Ltd 500,000 Jacqueline Hogan 500,000

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Also relevant for present purposes is s 413, which provides for the Court to make ancillary orders in cases in which a compromise or arrangement in which the whole or any part of the undertaking or property of a body concerned in the scheme is to be transferred to a company called the transferee company. Approval Considerations In determining whether to approve the proposed Schemes it is necessary that the Court be satisfied that: 1.The requirements of s 411 have been met.2.The majority of Shareholders and Optionholders voting in favour of the Schemes were acting in good faith and not in pursuit of some illegitimate purpose.3.The proposal was sufficiently fair and reasonable that an intelligent and honest Shareholder or Optionholder, acting alone, might approve it – see Application of NRMA Ltd (2000) 18 ACLC 533; [2000] NSWSC 408 Santow J. As to the first matter, I am satisfied that the requirements of s 411 have been met. These were canvassed in some detail in relation to the scheme documentation in the reasons for the orders made on 11 June 2002. It is not necessary to canvass those reasons again at this stage. It is a requirement of s 411(17) that the Court not approve an arrangement unless it is satisfied that the arrangement has not been proposed for the purpose of enabling any person to avoid the operation of the takeover provisions of Ch 6 or there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement. Such a statement by ASIC has been produced in this case. That is sufficient to discharge the alternative necessary conditions precedent to the Court’s approval imposed by s 411(17). The proviso that the Court need not approve a compromise or arrangement merely because of the production of a statement by ASIC under s 411(17)(b) has two consequences. The first is that the production of the ASIC statement does not mandate approval generally. Nor does it mean that the Court is precluded from considering, notwithstanding the views of ASIC, whether the arrangement has been proposed for the purpose of enabling avoidance of the operation of any of the provisions of Ch 6. As indicated in the reasons given on 11 June 2002, the materials before the Court offer no indication that the proposed arrangement would serve such a purpose. As O’Loughlin J said in Re ACM Gold Ltd (1992) 10 ACLC 573:“Chapter 6 does not…dominate and take automatic precedence over the provisions of Chapter 5 and, in particular, s 411.”His Honour rejected the proposition that an arrangement must be struck down if it or any part of it could have been implemented as a takeover scheme or by means of a takeover announcement. This he regarded as “far too rigid” saying: “The mixture of strong control and Chapter 6 on the one hand… coupled with the legislature’s willingness to make exceptions and grant exemptions from the provisions of Chapter 6 call for a liberal and practical interpretation of subs 411(7).”In any event, as submitted on behalf of Foundation, the substance of what is proposed under the Schemes the subject of the present application is a merger.

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	W3008 OF 2002

IN THE MATTER OF FOUNDATION HEALTHCARE LIMITED ACN: 002 611 501 APPLICANT
JUDGE:	FRENCH J
DATE OF ORDER:	5 August 2002
WHERE MADE:	PERTH