Re Simonds Group Limited
[2016] VSC 609
•20 September 2016 (ex tempore)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL DIVISION
S ECI 2016 001200
IN THE MATTER OF AN APPLICATION BY SIMONDS GROUP LIMITED (ACN 143 841 801)
| Paul Anthony McMahon, Silver Street Investments Pty Ltd (ACN 602 023 834), and McMahon Properties Nominees Pty Ltd (ACN 156 275 115) | First Applicant |
| Silver Street Investments Pty Ltd (ACN 602 023 834) | Second Applicant |
| McMahon Properties Nominees Pty Ltd (ACN 156 275 115) | Third Applicant |
| Simonds Group Limited | Plaintiff |
| SR Residential Pty Ltd | Bidder |
---
JUDGE: | Robson J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 20 September 2016 |
DATE OF JUDGMENT: | 20 September 2016 (ex tempore) |
CASE MAY BE CITED AS: | Re Simonds Group Limited |
MEDIUM NEUTRAL CITATION: | [2016] VSC 609 |
---
CORPORATIONS – Scheme of Arrangement – Scheme proposed may constitute oppressive conduct towards a minority shareholder if implemented by a certain date – Application for an injunction to delay implementation of Scheme to avoid loss to minority shareholder – Held, Scheme should be delayed to avoid Court processes being used to enable possible oppressive conduct.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Wood with Mr B Holmes | Herbert Smith Freehills LLP |
| For the Bidder | Mr J Davis QC with Mr T Boson | Clayton Utz |
| For the Applicant | Mr I Waller QC with Mr H Redd | Madgwicks Lawyers |
HIS HONOUR:
I have before me an application for an interlocutory injunction in matter No. 1200 of 2016 that is made by Paul Anthony McMahon (Mr McMahon), Silver Street Investments Pty Ltd (Silver Street), and McMahon Property Nominees Pty Ltd (McMahon Property Nominees) (collectively, the McMahon Entities) under ss 232, 233 and 1324 of the Corporations Act 2001 (Cth) (the Corporations Act) and s37 of the Supreme Court Act 1958 (Vic). The application says:
On the facts stated in supporting affidavits of Paul McMahon sworn on 13 September 2016 and 16 September 2016 the applicants apply for the following relief:
(1) to the extent necessary, pursuant to rule 2.13 of the Supreme Court (Corporations) Rules 2013, the applicants have leave to be heard in this proceeding.
(2) until the hearing and determination of the proceeding, or until further order, the Plaintiff is restrained, whether by itself, its servants or agents, or howsoever otherwise, from taking any step which would result in a disposal of the applicant’s shares in Simonds Group Limited being implemented prior to 21 November 2016.
There being no objection to the first order sought I will grant leave to the applicants to be heard in this proceeding.
The proceeding is an application by the Simonds Group Limited Ltd (Simonds Group) for convening a meeting of its members to consider a Scheme of Arrangement whereby the shareholders, other than excluded shareholders (who are related to Simonds Group, and to the consortium which is making the takeover offer), exchange their shares for $0.40 per share.
Background
The background facts are set out in the McMahon Entities’ outline of submissions — which I adopt as follows.
The first applicant, Mr McMahon is:
(a)the husband of the sole director and shareholder of the second applicant, Silver Street; and
(b)a director and shareholder of the third applicant, McMahon Property Nominees.
Mr McMahon was:
(a)from around 1999 until 2005, and from 1 July 2007 until 22 January 2016, employed by Simonds Personnel Pty Ltd;
(b)from 2010 until 22 January 2016 the managing director and chief executive officer of Simonds Group; and
(c)from 3 October 2014 until 31 March 2016 employed by Simonds Family Office Pty Ltd (SFO).
Mr Vallence Gary Simonds is:
(a)Chairman, and a director, of Simonds Group (being the plaintiff in this proceeding and the entity propounding the Scheme);
(b)sole director and shareholder of each of the indemnifying shareholders;[1]
(c)a director of SFO (the bidder guarantor under the Scheme Implementation Agreement); and
(d)the father of Mr Rhett Simonds and Mr Mark Gary Simonds.
[1]See below n12.
Mr Rhett Simonds is a director of the following companies:
(a)Simonds Group; and
(b)SFO.
Mr Mark Gary Simonds is a director of the following companies:
(a)SR Residential Pty Ltd (SRR) (the bidder under the Scheme Implementation Agreement (SIA));
(b)SFO; and
(c)SFO Operations Pty Ltd (a party to the Joint Bid Agreement).
Mr Piers O’Brien is the company secretary of SRR and was at 31 December 2015 the General Counsel for SFO.
Under the Scheme, SRR can terminate the SIA if the Scheme is not implemented by 17 November 2016 (clauses 3.6(c) and 11.1(a)).
’End date‘ is defined in the SIA to be 17 November 2016 or such other date agreed in writing by the [t]arget [Simonds Group] and the [b]idder [SRR]. Thus, there is a simple contractual mechanism for the Scheme to be implemented on a date shortly after 17 November 2016.
In or around 2014, Simonds Group determined to list on the Australian Securities Exchange by way of an initial public offering of share capital (the IPO).
Prior to 3 October 2014, clause 2.2 and schedule 1 of Mr McMahon’s employment agreement with Simonds Personnel Pty Ltd provided him with the right to receive:
(a)an annual bonus equivalent to 10 per cent of the net after tax profit of Simonds Group; and
(b)a further bonus equivalent to 10 per cent of the sale price for Simonds Group’s business in the event the business was sold
(collectively, the existing bonus entitlement).
Mr McMahon says that it was a requirement of the IPO that he vary the terms of his employment with Simonds Personnel and forgo his existing bonus entitlement.
Mr McMahon says that at the request of Simonds Group, and to assist Simonds Group with the IPO, on or about 3 October 2014 the McMahon Entities entered into, amongst other things, the Umbrella Deed with, amongst others, Simonds Custodians Pty Ltd, Simonds Constructions Pty Ltd, and Madisson Constructions Pty Ltd (the indemnifying shareholders).
Recital G of the Umbrella Deed states that:
In consideration for McMahon agreeing to vary his employment terms and forgo his Existing Bonus Entitlement, Simonds[2] and the shareholders[3] have agreed to procure:
(a) The Company[4] to issue the New Shares[5] to McMahon Trust and McMahon Co;
(b) HSO[6] to lend [Mr] McMahon the funds to acquire the New Shares;
(c) the Shareholders (excluding Madisson Homes Trust) to pay [Mr] McMahon the Commission[7] for his work in assisting the IPO;
(d) Simonds Family Office to pay [Mr] McMahon for his work in advising Simonds Family Office after the IPO,
so that the McMahon Entities would receive the beneficial interest in cash and shares with an after-tax aggregate value (post-IPO) of approximately $9,210,000.
[2]Defined in the Umbrella Deed as Vallence Gary Simonds.
[3]Shareholders means the shareholders of the Company, being: (a) Simonds No 1 Trust (Simonds Custodians Pty Ltd ACN 050 199 365 in its capacity as trustee of the Gary Simonds No. 1 Family Trust ABN 34 056 406 487); (b) Simonds No 2 Trust (Simonds Custodians Pty Ltd ACN 050 199 365 in its capacity as trustee of the Gary Simonds No 2 Family Trust ABN 20 028 940 324); (c) Simonds No 3 trust (Simonds Custodians Pty Ltd ACN 050 199 365 in its capacity as trustee of the Gary Simonds No 3 Family Trust ABN 79 373 389 401); (d) Simonds Homes Trust (Simonds Constructions Pty Ltd ACN 137 871 982 in its capacity as trustee of the Simonds Homes Discretionary Trust ABN 35 361 413 024); and (e) Madisson Homes Trust (Madisson Constructions Pty Ltd ACN 141 838 726 in its capacity as trustee of the Madisson Homes Trust ABN 33 450 260 535) (‘indemnifying shareholders’).
[4]Simonds Group Limited ACN 143 841 801.
[5]Means 4,800,000 ordinary shares in the capital of the Company fully paid to approximately $0.57 per share.
[6]HSO Nominees Pty Ltd ACN 106 027 294.
[7]Means $3,750,000 to be paid to [Mr] McMahon by the Shareholders (defined above) (excluding Madisson Homes Trust), as described in clause 3.4(b) (of the Umbrella Deed).
Clause 2.4(c) of the Umbrella Deed provides that in the event that the IPO proceeds by the Sunset Date (meaning 31 December 2014 or such other date as the parties may agree in writing), each of the indemnifying shareholders (pro rata to their respective shareholding proportions in Simonds Group, at the date of the deed) severally indemnify the McMahon Entities such amount that Simonds Group’s share price is below the IPO share price on the date of disposal[8] of each New Shares from the second anniversary of the IPO until the McMahon Entities have sold the New Shares.
[8]Dispose, disposed of disposal in relation to the New Shares means:
(a) to sell a legal or beneficial interest in the New Shares; (b) to create an interest in or a trust over the New Shares; (c) assign any benefit of or otherwise dispose of or deal with the New Shares (other than as contemplated under this deed); (d) to agree to, or grant, any option which, if exercised, would enable a person to transfer or assign any benefit of or otherwise dispose of or deal with the New Shares; (e) to transfer or to enter into any arrangement to transfer the economic benefit of the New Shares to another person; (f) to alienate, or create any entitlement to, a legal or beneficial interest or right in or in respect of the New Shares whether before, on or after the person obtains any interest in the New Shares; or (g) to agree or offer to do any of the things listed in clauses (a) to (f),
But does not include the creation of an encumbrance over or in respect of a New Shares or over any dividend, right, power, authority, discretion or remedy in respect of a New shares as permitted under a Transaction Document (as defined in the Umbrella Deed).
The IPO occurred in October 2014 and shares in Simonds Group commenced trading on the Australian Securities Exchange on 17 November 2014 at an offer price of $1.78 per share.
By reason of the above, for the purposes of the share price indemnity clause, the second anniversary of the IPO is 17 November 2016.
The Prospectus for the IPO stated that the indemnifying shareholders’ retained holdings would be subject to voluntary escrow arrangements until the earlier of: the release of the preliminary financial report for the year ending 30 June 2016, (approximately 21 months from the proposed listing); or two years from the Prospectus Date (22 October 2014).
On or about 30 August 2016:
(a)SFO and Roche Holdings Pty Limited (Roche) issued a media release titled ‘Family partnership to privatise Simonds Group’ that relevantly stated:
SR Residential Pty Ltd today announced an offer to privatise ASX-listed Simonds Group Limited (ASX:SIO) via a Scheme of Arrangement (‘Scheme’).
SR Residential is jointly owned by Simonds Family Office Pty Ltd (‘SFO’) and Roche Holdings Pty Limited (‘Roche‘). On completion of the Scheme, SIO will be delisted and will be owned by SFO and Roche as to 51% and 49% respectively.
SR Residential is offering $0.40 per SIO share, enabling all other SIO shareholders (apart from SFO and its related entities) to sell their shares for cash consideration at a price which represents a significant premium to recent share prices.
[…]
If approved by shareholders, the Scheme will result in a privatised Simonds Group governed by a joint board of directors, comprising representatives of both the Simonds and Roche Families. […]the Scheme is expected to be implemented on or before mid-November 2016.
(b)Simonds Group issued an ASX Announcement titled ‘Simonds Group Enters Into Scheme Implementation Agreement With SR Residential’ that relevantly stated:
The Scheme was evaluated by an Independent Board Committee (‘IBC’) who determined it was in the interest of shareholders to submit the Scheme for consideration.
The Independent Directors recommend that shareholders approve the Scheme in the absence of a superior proposal and subject to an Independent Expert concluding that the Scheme is in the best interests of shareholders.
[…]Following the Implementation Date, the Company would be delisted and owned by SFO and Roche as to 51% and 49% respectively.
Under the Scheme, shareholders will receive total consideration of $0.40 in cash per Company share.
[…]
Under the [Scheme Implementation Agreement], the Consortium has the right to terminate the agreement if the Scheme is not implemented by 17 November 2016[…]
Subject to the conditions of the Scheme being satisfied, the Scheme is expected to be implemented in mid-November 2016;
(c)Simonds Group announced its annual results for the year ended 30 June 2016.
It is submitted by the McMahon Entities that by reason of paragraph (c) above the escrow has now come to an end and the indemnifying shareholders are at liberty to deal with or dispose of their shares in Simonds Group.
The Scheme provides for the acquisition of all of the shares in Simonds Group (Scheme shares) by SRR, except for those shares currently held by interests associated with the Simonds family (excluded shareholders).[9]
[9]Excluded shareholders hold 39.04% of the share capital in Simonds Group (as at 14 September 2016): Affidavit of Elizabeth Mary Hourigan sworn 15 September 2016 [14]. The excluded shareholders are not entitled to vote at the Scheme Meeting and will not participate in the Scheme if it becomes effective.
SRR is jointly owned by entities associated with the SFO (which represents the Simonds family interests) and Roche (which represents the Roche family interests) (together, the consortium).[10]
[10]Tarquin Australia Pty Ltd (Tarquin) as trustee for the James Francis Roche Family Trust (Roche Trust) owns 80.4% of SRR, and SFO Operations Pty Ltd as trustee for the SFO Operations Trust (SFO Trust) owns 19.6% of SRR. Tarquin is controlled by associates of Roche, some of whom are beneficiaries of the Roche Trust. SFO Operations Pty Ltd is controlled by associates of SFO, some of whom are beneficiaries of the SFO Trust (see Affidavit of Piers O’Brien affirmed 16 September 2016, [8].
The Scheme is provided for by the SIA. The terms of the Scheme (which are set out at Attachment 1 to the SIA) include the following:
(a)implementation of the Scheme is currently expected to occur on Friday, 4 November 2016. On that date Implementation Date), Scheme shareholders will receive the Scheme consideration, immediately following which the Scheme shares held by Scheme shareholders will be transferred to SRR or its nominees;[11]
(b)if the Scheme is approved by Scheme shareholders and ultimately by the Court, it becomes effective on the lodging of an office copy of the Court’s orders with the Australian Securities and Investments Commission (ASIC), which is currently expected to occur on 27 October 2016.[12]
[11]Draft Scheme Booklet, section 3.5(d) and Scheme (at Annexure D to the Scheme Booklet) clauses 4 and 5; SIA clauses 2.3, 4.3(l)(iii), 4.4(h) and 4.4(i).
[12]Scheme, clause 4.1 (Attachment 1 to the SIA). See also s 411(10) of the Act and rule 3.5 of the Supreme Court (Corporations) Rules 2013 (Vic).
Simonds Group has obtained an independent expert report from KPMG Corporate Finance (KPMG). In the draft of its report (Draft KPMG Report),[13] KPMG opines that the Scheme is fair, reasonable and in the best interests of Scheme shareholders.
[13]See Annexure B to the Draft Scheme Booklet.
This view is shared unanimously by Simonds Group Independent Directors (namely, Ms Susan Oliver and Mr Matthew Chun), each of whom recommend that Scheme Shareholders vote in favour of the Scheme.[14]
[14]The other directors, namely Mr Gary Simonds, Mr Rhett Simonds and Mr Leon Gorr, have each declined to make a recommendation given their interests and relationships regarding Simonds Group: see section 3.2 and 3.3 of the Draft Scheme Booklet.
The end date under the Scheme is the date by which, if the Scheme conditions have not been satisfied, the consortium has the right to terminate the SIA (clause 3.6(c) of the SIA). McMahon’s application fastens upon the fact that the end date is the same date as the earliest date upon which he can dispose of its shares in Simonds Group and trigger the relevant indemnity clause in the Umbrella Deed.
On or about 31 August 2016 Tarquin Australia Pty Ltd (Tarquin), Roche and SRR gave notice under s 671B of the Corporations Act to Simonds Group that, as at 30 August 2016, they had become substantial shareholders in Simonds Group.[15]
[15]The Notice of Initial Substantial Holder: ‘The holder became a substantial holder on 30 August 2016’.
The notice states that:
(a)each of Tarquin, Roche and SRR was deemed to have a relevant interest in 56,138,895 shares each, in Simonds Group pursuant to s 608(1) of the Corporations Act;
(b)the indemnifying shareholders are registered as holders of the shares mentioned in sub-paragraph (a) above;
(c)the date of acquisition of the relevant interest in Simonds Group was 30 August 2016;
(d)the acquisition of the relevant interest in Simonds Group from the indemnifying shareholders was for nil consideration.
Section 608(1) of the Corporations Act provides as follows.
Basic rule—relevant interest is holding, or controlling voting or disposal of, securities
(1) A person has a relevant interest in securities if they:
(a) are the holder of the securities; or
(b) have power to exercise, or control the exercise of, a right to vote attached to the securities; or
(c) have power to dispose of, or control the exercise of a power to dispose of, the securities.
It does not matter how remote the relevant interest is or how it arises. If 2 or more people can jointly exercise one of these powers, each of them is taken to have that power.
By letter dated 31 December 2015 the General Counsel for SFO (Mr Piers O’Brien) informed Mr McMahon that SFO queried the validity and enforceability of certain aspects of the documents signed on or around 3 October 2014 (which include the Umbrella Deed).
Clayton Utz, acting for SFO, sent a letter to Mr McMahon, dated 31 March 2016, in relation to the employment agreement dated 3 October 2014 stating that:
(a)there has been a total failure of consideration [on the part of Mr McMahon] under the agreement; and
(b)SFO accepts the repudiation and exercises its right to terminate the agreement under the common law and that no further payments would be made under the agreement.
On or about 14 April 2016:
(a)Mr McMahon’s solicitors, Madgwicks Lawyers, sent a letter to Clayton Utz seeking, amongst other things, an undertaking from SFO pending satisfaction of clause 2.4(c) of the Umbrella Deed, that SFO, and its officers, members, agents, beneficiaries and associated parties would do nothing which could in any way have the effect of undermining compliance by the Indemnifying Shareholders ‘with their obligations under the Umbrella Deed, including among other things not disposing, dispersing or dissipating available net assets’ of the indemnifying shareholders.[16]
(b)Mr McMahon commenced a proceeding against SFO in the Supreme Court of Victoria, with proceeding number SCI 2016 01391, claiming the sum of $2,220,000 owing to McMahon pursuant to the employment agreement between McMahon and SFO dated 3 October 2014.
[16]McMahon Entities’ first request for an undertaking.
By letter dated 21 April 2016 from Clayton Utz to Madgwicks, Clayton Utz advised that its client would provide a response to McMahon’s first request for an undertaking as soon as practicable.
Notwithstanding the contents of the letter referred to above, SFO did not provide a response to McMahon’s first request for an undertaking until 6 September 2016.
Madgwicks, on behalf of the McMahon Entities, sent a letter to Clayton Utz dated 1 September 2016 seeking, inter alia, written confirmation that Tarquin, Roche and SRR would not ‘dispose of, disperse, dissipate or otherwise transfer their shares [in Simonds Group] to anyone without first providing [the McMahon Entities] with three clear business days prior notice.’
By email dated 2 September 2016 Clayton Utz advised Madgwicks that it was seeking instructions and would respond to Madgwicks’ letter of 1 September 2016 as soon as practicable.
The McMahon Entities were concerned that Clayton Utz had filed the notice of initial substantial holder that they say, in accordance with the provisions of s 608(1) of the Act, meant that to the world at large Tarquin, Roche and SRR were:
(a)the holder of the indemnifying shareholders’ securities in Simonds Group as specified in the notice; or
(b)had power to exercise, or control the exercise of, a right to vote attached to those securities; or
(c)had power to dispose of, or control the exercise of a power to dispose of, those securities.
Because of the above, the McMahon Entities sought, and obtained, ex parte interim injunctive relief against Tarquin, Roche and SRR on 2 September 2016.
On 5 September 2016 Clayton Utz advised Madgwicks by email that — notwithstanding the contents of the notice of initial substantial holder and the requirements of s 608(1) of the Corporations Act — the indemnifying shareholders had not transferred any title or ownership of shares held by them in Simonds Group.
By email dated 5 September 2016, the McMahon Entities sought, amongst other things, an undertaking that the indemnifying shareholders whether by themselves, their servants or agents, or howsoever otherwise, undertake not to dispose, transfer or deal with, or diminish in any way whatsoever, any of their relevant interest (whether legal or beneficial) (including, without limitation any transfer to any beneficiary of the Shareholder trust that is the registered holder) in their shares in Simonds Group until the contractual undertaking, pursuant to clause 2.4(c) of the Umbrella Deed dated 3 October 2014, is satisfied.
By email dated 6 September 2016 from Clayton Utz to Madgwicks, the indemnifying shareholders refused both the McMahon Entities’ first request for an undertaking, and the second request, stating, amongst other things that:
(a)the notice of substantial holder did not reflect the disposal of any shares in Simonds Group by the indemnifying shareholders;
(b)none of Tarquin, Roche and SRR hold, nor own, any of the 39.03 per cent of shares in Simonds Group referred to in the notice; and
(c)if the indemnifying shareholders gave the undertaking in the terms sought, it would result in the McMahon Entities having negative control over the indemnifying shareholders’ ability to exercise their power of disposal over those shares in circumstances which are not permitted by ss 606 or 611 of the Corporations Act.
On 7 September 2016 I made orders by consent of the parties vacating the orders made on 2 September 2016.
By email dated 8 September 2016 from Madgwicks to Clayton Utz the McMahon Entities, amongst other things:
(a)expressed their concern about the timing of the proposed Scheme of arrangement in light of the share price indemnity which would be frustrated in its operation if the Scheme was implemented prior to 17 November 2016;
(b)noted that, by reason of the indemnifying shareholders’ refusal to provide an undertaking in response to the McMahon Entities’ second request for an undertaking, they apprehended that the indemnifying shareholders proposed to dispose of or deal with their SIO Shares and/or take steps to frustrate performance of the share price indemnity;
(c)demanded that the indemnifying shareholders provide an undertaking not to dispose of, transfer, deal with (other than by exercising voting power in respect to such shares), or diminish in any way whatsoever, their relevant interest (whether legal or beneficial) in their shares in Simonds Group up to the value of $5,520,000 between them (in accordance with the offer price under the Scheme), until the contractual indemnity pursuant to clause 2.4(c) of the Umbrella Deed dated is satisfied;
(d)explained that the giving of the undertaking would not constitute a breach by the McMahon Entities of s 606 of the Corporations Act because:
(i) the giving of an undertaking does not constitute a transaction within the meaning of s 606(1)(b) of the Corporations Act; and
(ii) the terms of the undertaking would not result in the relevant threshold in s 606(1)(c) of the Corporations Act being met.
By email dated 9 September 2016 from Clayton Utz to Madgwicks the indemnifying shareholders refused the third request for an undertaking.
McMahon Entities’ Submissions
The McMahon Entities submit that by reason of the following facts:
(a)the escrow period has ended;
(b)the Scheme is expected to be implemented by mid-November 2016;
(c)the share price indemnity clause operates from the second anniversary of the IPO (17 November 2016) until the McMahon Entities dispose of their shares in Simonds Group;
(d)under the SIA, the consortium has the right to terminate the agreement if the Scheme is not implemented by 17 November 2016;
(e)the operation of the share price indemnity clause would be frustrated if the Scheme is implemented prior to 17 November 2016;
(f)the filing of the notice of initial substantial holder;
(g)that SFO queried the validity and enforceability of documents signed on or around 3 October 2014 (including the Umbrella Deed); and
(i)the refusals by SFO, and the indemnifying shareholders to provide any undertakings to the McMahon Entities;
it is to be inferred that the indemnifying shareholders intend to breach the share price indemnity clause.
The McMahon Entities submit that Vallence Gary Simonds’ affidavit sworn on 14 September 2016 provided no explanation as to the importance of the Scheme being implemented by 17 November 2016.
The McMahon Entities point to the affidavit of Piers O’Brien, affirmed on 19 September 2016, where he deposes in paragraph 6 that ‘the termination right is a key requirement of SRR’s proposal for a range of commercial reasons.’ Significantly, he acknowledges that ‘[f]rom the point of view of SFO, a further reason for the termination right being a requirement is that the indemnity in clause 2.4 of the Umbrella Deed dated 3 October 2014 … will not apply if the Scheme is implemented by 17 November 2016.’ The McMahon Entities submit that that evidence is consistent with the affidavit of James Roche sworn on 19 September 2016.
The McMahon Entities submit that it is clear from the affidavit of Susan Mary Oliver sworn on 19 September 2016, that the ‘end date’ by which time the Scheme must be implemented, was a flexible concept and during negotiations numerous dates were proposed between 28 October 2016 and 31 December 2016.
The McMahon Entities submit that James Roche reveals that Piers O’Brien had told him that there was a high prospect of defeating Mr McMahon’s claim if the Scheme was implemented before mid-November 2016.
By 30 August 2016 both the bidder (SRR) and the target (Simonds Group) were aware that the McMahon Entities’ interests would be adversely affected if the Scheme was implemented on or before 17 November 2016.[17]
[17]Affidavit of Piers O’Brien affirmed 19 September 2016, [6]; affidavit of Susan Oliver sworn 19 September 2016, [34].
The McMahon Entities submit that the only available inference, on presently admissible material, is that the timing of the Scheme is designed to avoid the indemnifying shareholders complying with the share price indemnity clause, which has a value of $5,520,000.00 to the McMahon Entities.[18]
[18]The difference between the value of 4,000,000 ordinary shares in the capital of Simonds Group at $1.78 per share (being the IPO share price — see page 4 of the Prospectus) and $0.40 per share (being the Scheme offer price).
It is further submitted that by reason of the connection between the Simonds family and the indemnifying shareholders and Simonds Group, the timing of the Scheme and its attempted implementation constitutes:
(a)an attempt by Simonds Group and the indemnifying shareholders to frustrate the operation of the share price indemnity clause, and thus avoid the payment of $5,520,000.00 to the McMahon Entities; and
(b)in such circumstances, conduct by Simonds Group that is oppressive to, unfairly prejudicial to, or unfairly discriminatory against the McMahon Entities as minority shareholders in Simonds Group.
If the Scheme is implemented according to the current timetable (prior to 17 November 2016 (being the second anniversary of the IPO)), the McMahon Entities’ shares will be compulsorily acquired for $0.40 per share, and the benefit of the share price indemnity clause, clause 2.4(c) of the Umbrella Deed, will be lost.
The McMahon Entities submit that if the Scheme is implemented on a date after 17 November 2016 and the McMahon Entities’ shares are compulsorily acquired for $0.40 per share, those will claim from the indemnifying shareholders the sum of $5,520,000.00 (being the value of the share price indemnity clause).
The McMahon Entities submit that in the event the Scheme is not approved, or otherwise implemented, the McMahon Entities intend, as soon as practicable after 17 November 2016, to dispose of their shares on the Australian Securities Exchange. In that case, to the extent that the selling price is otherwise lower than the offer price of $1.78, the McMahon Entities intend to claim the difference pursuant to the share price indemnity clause.[19]
[19]Affidavit of Paul McMahon sworn 16 September 2016.
The SIA contains a simple contractual mechanism by which the target (Simonds Group) and bidder (SRR) can agree in writing to extend the end date (as defined in the SIA). The McMahon Entities submit that no admissible evidence has been offered as to what prejudice will be suffered by Simonds Group, or the Roche family entities,[20] in the event the date for implementation of the Scheme is extended to 21 November 2016.
[20]See the affidavit of James Roche sworn 19 September 2016.
The McMahon Entities submit that in view of the above, the balance of convenience favours the grant of injunction in the terms sought.
Plaintiff’s (Simonds Group Limited) Submissions
The plaintiff, Simonds Group, opposes the application for interlocutory injunctive relief made by the applicants, on the following grounds.
(a)It is submitted by Simonds Group that the McMahon Entities have failed to establish any or any sufficiently strong prima facie case of oppression to justify the Court granting orders restraining the Scheme.
(b)Further it is submitted that the effect of the order sought would be to entitle the bidder (SRR) to end the transaction, in circumstances where an independent expert and independent directors consider that the proposed transaction is fair and reasonable and in the bests interests of all shareholders of Simonds Group, and therefore a relatively strong prima facie case is required for granting the relief sought. Simonds Group submits that on the material provided, McMahon has not demonstrated any prima facie case.
(c)Simonds Group says that the balance of convenience plainly favours Simonds Group, at least insofar as it seeks orders to convene a meeting of its Scheme Shareholders to consider and vote upon the bidder’s proposal. For practical purposes the order sought would amount to final relief.
(d)Further it is submitted that the nature of Mr McMahon’s substantive claim is one for which damages is an adequate remedy. Simonds Group also notes that Mr McMahon failed to proffer the usual undertaking as to damages.
Simonds Group say that there are preliminary difficulties with the order sought by the McMahon Entities.
The interlocutory application seeks an order that Simonds Group be restrained ’from taking any step which would result in the Scheme… being implemented prior to 21 November 2016‘ until ’the hearing and determination of this proceeding or until further order.’
Simonds Group submit that it is unclear what is meant by ’this proceeding.’ If it is meant to refer to the Scheme application proceeding, it is difficult to see how such an order could operate as the Scheme can only be implemented after the hearing and determination of the Scheme application proceeding. If it is meant to refer to some other proceeding yet to be commenced, there is no evidence providing any details of such a proceeding.
Secondly, Simonds Group submits that difficulties with the orders sought arise as the Convening Orders sought by Simonds Group and the holding of a Scheme meeting are not part of the implementation of the Scheme. Implementation in the context of a Scheme under s 411 of the Corporations Act are the steps which follow approval of a Scheme by the Court — namely, the transfer of Scheme shares and the payment of the Scheme consideration.
It is submitted that such difficulties and ambiguities in understanding the relief sought by McMahon are a symptom of the misconceived nature of this application.
Further, it is submitted that the matters noted above highlight the inappropriateness of considering such matters at the convening stage. In this respect, the authorities make it clear that:[21]
(a)at the first Court hearing, the Court should generally confine itself to ensuring that certain procedural and substantive requirements are met;[22] and
(b)the Court should only consider the merits or fairness of a proposed Scheme at the convening hearing if the issue is such as would ’unquestionably‘ lead to a refusal to approve the Scheme at the approval hearing.[23] That is, the Scheme must appear on its face ’so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further.’[24]
[21]And in particular the Full Federal Court’s decision in Re CSR Ltd (2010) 183 FCR 358 (‘Re CSR Ltd’).
[22]In Re CSR Ltd , 378, [75] Finkelstein J notes that this was the approach favoured by Santow J in Re NRMA Ltd (2000) 33 ACSR 595,606-607, [32]–[40].
[23]In Re T & N Ltd [2006] EWHC 1447 (Ch), [19].
[24]Re Foundation Healthcare (2002) 42 ACSR 252, 264.
It is submitted that the facts of the present case fall well short of establishing such blatant unfairness.
Further, it is submitted that in any event, the test of fairness to be applied at the approval stage concerns fairness to the body of members as a whole: the test is not fairness to a particular member in the peculiar circumstances of its case.[25]
[25]Bacnet Limited v Lift Capital Partners Pty Limited (in Liq) [2010] FCAFC 36 (Keane CJ and Jacobson J) [151], and the cases cited therein.
In response to the submissions of the applicant regarding the end date of the Scheme, Simonds Group say that the affidavit of Simonds Group’s Deputy Chairman, Ms Susan Oliver, sworn 19 September 2016 demonstrates that the end date was the outcome of negotiations between Simonds Group and the consortium, during which:
(a)the consortium sought the transaction to be implemented by the end of October 2016, and so originally proposed an End Date of 28 October 2016;[26]
(b)Simonds Group (more particularly, the IBC of Simonds Group which had responsibility to negotiate, agree and implement the Scheme)[27] was concerned that all of the necessary steps could not be completed by that time, and proposed an End Date of 31 December 2016;[28]
(c)the consortium rejected the IBC’s proposed End Date of 31 December 2016, and required that the Scheme be implemented by 14 November 2016 because of Simonds Group’s cash flow needs and an expectation of a slowdown in Simonds Group’s business over the Christmas period;[29]
(d)having considered the matter, the IBC concluded that it was in the interests of Simonds Group shareholders (other than the excluded shareholders) that the IBC accept the proposed $0.40 per share offer with an end date of 14 November 2016;[30] and
(e)the consortium indicated that it would agree to an end date of 17 November 2016.[31]
[26]Affidavit of Ms Susan Oliver, sworn 19 September 2016 [13] and [15].
[27]The IBC comprises Ms Susan Oliver (director and Deputy Chairman), Mr Matthew Chun (CEO and Managing Director) (together, the ’Independent Directors’) and Mr Dimitri Kiriacoulacos (who is not an executive or director of Simonds Group). The Board of Simonds Group established the IBC to negotiate, agree and implement the Scheme. It was considered the three remaining directors of Simonds Group – Mr Gary Simonds, Mr Rhett Simonds and Mr Leon Gorr – should not be involved because of their large shareholdings in Simonds Group (in respect of Mr Gary Simonds, Mr Rhett Simonds) or their long-standing relationship with the Simonds family (in the case of Mr Leon Gorr).
[28]Affidavit of Ms Susan Oliver, sworn 19 September 2016 [30].
[29]Affidavit of Ms Susan Oliver, sworn 19 September 2016 [31].
[30]Affidavit of Ms Susan Oliver, sworn 19 September 2016 [32].
[31]Affidavit of Ms Susan Oliver, sworn 19 September 2016 [33].
Simonds Group submit that the accuracy of the evidence of Ms Oliver in relation to the end date is confirmed by both the second affidavit of the company secretary of SRR, Mr Piers O’Brien, affirmed on 19 September 2016, and the affidavit of James Francis Roche affirmed on 19 September 2016.
As deposed to by Ms Oliver,[32] the IBC agreed to the end date despite being aware of McMahon’s individual interests, as the IBC took the view that it had a duty to act in the interests of Simonds Group shareholders as a whole (other than the excluded shareholders).
[32]Affidavit of Ms Susan Oliver, sworn 19 September 2016 [34[–[35].
In the IBC’s view:
(a)the consortium’s proposed $0.40 per share cash offer was a premium to recent trading prices of Simonds Group shares and was compelling given, among other things, the recent uncertainty associated with the vocational education and training sector; and
(b)had it not put the consortium’s proposal to a shareholder vote out of concern for a potential adverse impact on the commercial interests of McMahon, it would be rightly open to criticism by the remaining Simonds Group shareholders for not giving them the opportunity to consider the proposed offer.
It is submitted by Simonds Group that in these circumstances, the application of the common law business judgment rule tells against the relief sought by McMahon:
Directors in whom are vested the right and duty of deciding where the company’s interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts.[33]
[33]Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483, 493 (‘Harlowe’s Nominees’).
It is submitted that the onus is on Mr McMahon to demonstrate such impropriety,[34] and he has failed to discharge that onus. Further, Simonds Group submits that the evidence Ms Oliver establishes the absence of any such impropriety.
[34]McLean v DID Piling Pty Ltd [2014] SASC 76, [67], citing Harlowe’s Nominees, 492–4.
Simonds Group submits that the fact that these decisions were made without the involvement of interests associated with the Simonds family serves to reinforce the applicability of the business judgment rule to this case.
Simonds Group submits that there is no basis for granting the interlocutory injunction sought; in order to secure an interlocutory injunction, the applicant must show (1) a prima facie case; (2) that he will suffer irreparable injury for which damages will not be an adequate compensation unless an injunction is granted; and (3) that the balance of convenience favours the granting of an injunction.[35]
[35]Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, 153 (adopted by Gleeson CJ in Australian Broadcasting Corporation v Lenah Game MeatsPty Ltd (2001) 208 CLR 199, 217-218 [13] (‘Australian Broadcasting Corporation’).
Before assessing the individual aspects of the test, it is necessary to identify the legal or equitable rights which are to be determined at the trial and in respect of which final relief is sought.[36] In the event that there are no clear legal or equitable rights to be so determined, the Court will not have jurisdiction to grant an interlocutory injunction.[37]
[36]Australian Broadcasting Corporation [10].
[37]Australian Broadcasting Corporation.
In the present case, it is submitted that Mr McMahon has not identified with any clarity, the legal or equitable right in relation to which he seeks protection. At the hearing on 15 September 2016, McMahon submitted that its prospective cause of action is ’a breach of the contractual obligation to indemnify us…we anticipate it will be breached, it hasn’t been breached yet and it hasn’t therefore accrued.’[38] It was later suggested that McMahon had an arguable case to defer implementation of the Scheme.[39] Simonds Group says that ultimately, the interlocutory application pursues neither of these bases, and instead relies upon an entitlement to an oppression remedy pursuant to ss 232 and 233 of the Corporations Act.
[38]Transcript of hearing, Paul Anthony McMahon v Simonds Custodians Pty Ltd, 15 September 2016, T18, L14–18.
[39]Transcript of hearing, Paul Anthony McMahon v Simonds Custodians Pty Ltd, 15 September 2016, T 19.
Simonds Group submits that with regard to the alleged oppression case, that case remains entirely at large without any detail having been provided by McMahon. Simonds Group refers to Shelton v NRMA Ltd and the comments of Tamberlin J that:[40]
The onus of establishing unfairness rests on the applicant asserting the conduct that is contrary to the interests of the members as a whole, or that is oppressive, unfairly prejudicial or discriminatory. An applicant must actually prove oppression before obtaining relief. It is not established simply by showing that the majority are in control of the company, or that the applicant is consistently out-voted, or that the majority have made some questionable decisions from a business point of view. The mere disadvantage of being in a minority does not in itself constitute oppression. It is necessary for each single allegation in an oppression case to be pleaded clearly in order to assess whether the totality may amount to oppression…
[40](2004) 51 ACSR 278, 285, [24].
Simonds Group submits that McMahon’s failure to identify with any clarity the legal rights sought to be preserved justifies dismissal of its application. Further, the causes of action that are articulated are not against Simonds Group (the proponent of the Scheme), but against certain excluded shareholders (indemnifying shareholders).
Simonds Group submits that the difficulty which McMahon has in identifying the legal rights sought to be protected arises from the fact that, rather than asserting an existing legal right and then seeking to preserve the status quo whilst that right is prosecuted, McMahon is seeking to alter the existing status quo so that a contingent contractual right can effectively be made absolute. Simonds Group says that this does not reflect the bargain struck by the parties to the Umbrella Deed, and it is not the function of interlocutory injunctions.
Simonds Group says that this question focuses upon whether the applicant has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the applicant will be held entitled to relief.
Simonds Group submits that the applicant must show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. How strong the probability needs to be depends upon the nature of the rights the applicant asserts and the practical consequences likely to flow from the order he seeks.[41]
[41]Australian Broadcasting Corporation, 81-82, [65].
It is submitted that the applicant asserts a contingent contractual right to recover under an indemnity, and an entitlement to an oppression remedy (which could only follow if the Scheme is implemented before 17 November 2016). The claim is one for payment of an easily quantifiable monetary sum, if he is ultimately found to have a good claim.
Simonds Group submits that, on the other hand, Mr McMahon seeks to prevent Simonds Group from continuing to pursue a proposal for the acquisition of the company by SRR for an objectively fair and reasonable amount (and to prevent Simonds Group shareholders from even considering the proposal). If the injunction is granted in the terms sought, then SRR will be at liberty to terminate the SIA under clause 3.6, which will mean that shareholders are no longer able to take advantage of SRR’s offer of $0.40 per share (noting that Simonds Group shares traded at $0.29 immediately prior to the transaction being announced[42]). The termination right is a key requirement of SRR’s proposal.[43]
[42]Draft KPMG Report, section 3.2.
[43]Affidavit of O’Brien Affidavit affirmed 16 September 2016, [6].
Simonds Group submits that this all suggests that McMahon be required to show a relatively strong probability of success to justify the orders sought and that the issue of prima facie case must be considered together with the balance of convenience; thus where the prima facie case is weak, the applicant must show that the balance of convenience strongly favours the grant of the injunction.[44]
[44]Liquor National Wholesale Pty Ltd v Redrock Co Pty Ltd [2007] NSWSC 392, [32].
Based upon the material relied upon by Mr McMahon, Simonds Group submits that Mr McMahon has not demonstrated even a weak prima facie case, and plainly not one of sufficient strength to justify the order sought.
In particular, Simonds Group submits that there is no evidence that Simonds Group has acted oppressively or in an unfairly prejudicial or discriminatory manner against Mr McMahon. The company has pursued the interests of all shareholders in the company. The fact that Mr McMahon’s individual interests may be affected by this is not sufficient to justify an order under s 232 of the Corporations Act. Mr McMahon must demonstrate a sufficiently strong prima facie case that the actions of Simonds Group are ‘unfairly’ prejudicial. Here, as the evidence of Simonds Group’s Deputy Chair shows, the IBC acted in good faith in order to secure a very good offer for all shareholders.
In order for the oppression claim to have any strength, Simonds Group submits that Mr McMahon must demonstrate that the independent directors should have rejected the offer from the consortium in the terms in which it was made, despite it being a fair and reasonable offer (as confirmed by the independent expert), merely because it would affect Mr McMahon’s interests. Simonds Group submits that to do so would have been in breach of the directors’ duties under s 180 of the Corporations Act.
It is therefore submitted by Simonds Group that the McMahon Entities have failed to establish a prima facie case of sufficient strength to justify the orders sought.
Simonds Group says that the second inquiry is whether the inconvenience or injury which the applicant would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant (and others) would suffer if an injunction were granted. Simonds Group submits that, again, in balancing of the risk of injustice, the Court must take into account the nature and consequences of the particular injunction sought.
Here, in addition to the matters raised above, it is noted by Simonds Group that Simonds Group has already committed significant resources to the proposed Scheme, and the relief sought would entitle the bidder to terminate the transaction in circumstances where no superior proposal (or any other proposal) has or is likely to emerge. Simonds Group says that it is plainly in Simonds Group‘s interests and the interests of Scheme shareholders that the Scheme now becomes unconditional and completes as soon as possible. Simonds Group refers to SRR submission that it is their wish to obtain control of Simonds Group as soon as possible for a range of commercial reasons.[45]
[45]Affidavit of O’Brien Affidavit affirmed 16 September 2016, [6].
Further, Simonds Group submits that where the grant of an interlocutory injunction in effect would dispose of the action finally in favour of the applicant, for the purposes of determining the balance of convenience, the Court should evaluate the strength of the applicant’s case for final relief with greater scrutiny.[46] Based upon the material relied upon by Mr McMahon, it is submitted that the case for final relief is weak, and does not reach the high degree of assurance of success at trial which is required in the circumstances.
[46]Kolback Securities v Epoch Mining NL (1987) 8 NSWLR 533 at 535-536, cited with approval in Australian Broadcasting Corporation, 84, [72].
On the other hand, it is submitted that Mr McMahon’s claim will not be prejudiced if it is heard after implementation of the Scheme; indeed, its entitlement to recover compensation under s 233 of the Corporations Act only arises after the Scheme is implemented and the Court decides that Implementation was unfairly prejudicial to the McMahon Entities.
With regard to the final element of the test for an interlocutory injunction — the inadequacy of damages; it is submitted that it is clear that damages must be inadequate for an applicant to obtain an interlocutory injunction.[47]
[47]Although there has been some debate about whether the inadequacy of damages is a separate requirement of an entitlement to interlocutory relief (including between the different joint judgments in Australian Broadcasting Corporation, the Full Federal Court has resolved these differences by treating the question of the adequacy of damages as one of the matters which would ordinarily need to be addressed in the Court's consideration of the balance of convenience and justice rather than as a distinct and antecedent consideration: Samsung Electronics Co Limited v Apple Inc (2011) 217 FCR 238. See also National Australia Bank Ltd v Joyce [2012] WASC 224 at [40].
Simonds Group says that here, the McMahon Entities’ complaint is that, if the relevant shares are acquired for $0.40 per share under the Scheme prior to 17 November 2016, it will not receive the difference between that figure and $1.78, which it would if the Scheme were implemented after 17 November 2016.
Simonds Group submits that the claim need only be stated to conclude that damages are plainly an adequate (indeed the only) relevant remedy.
As to the issue of undertaking as to damages, Simonds Group says that Mr McMahon has failed to proffer the usual undertaking as to damages, despite a request from Simonds Group in a letter from Simonds Group’s solicitors to McMahon’s solicitors. As appears from that letter, Simonds Group seeks that the undertaking be secured.
Simonds Group submits that according to the Draft Scheme Booklet (section 4.4), there are 143,841,655 shares on issue. Section 8.1 of the Draft Scheme Booklet provides that Gary Simonds and related entities hold 56,138,895 shares and that Rhett Simonds holds 14,044 shares. Further, section 8.4 of the Draft Scheme Booklet provides that 74,098 performance rights and 28,087 service rights[48] are expected to vest and that therefore the public will hold 87,791,711 shares. As noted above, the share price immediately prior to the announcement of the transaction was $0.29 per share.
[48]Affidavit of Elizabeth Mary Hourigan sworn 17 September 2016.
Simonds Group says that therefore if the Scheme does not proceed because an interlocutory injunction is granted but Mr McMahon is ultimately unsuccessful, and Simonds Group shares fall in price to $0.29, the loss would be $9,657,088 (compared to the Scheme consideration of $0.40 per share). It is submitted that this is the amount which Simonds Group shareholders who participate in the Scheme stand to lose.
Bidder’s Submissions (SR Residential)
SRR is the bidder under the Scheme. It is a special purpose entity established to acquire all of the issued ordinary shares of Simonds Group excluding the 39.04 per cent shares held by various shareholders associated with the Simonds family.
SRR opposes the Scheme injunction application on the following three bases, discussed in detail below:
(a)First, the McMahon Entities’ indemnity claim raises no serious question to be tried between the bidder, target and Scheme shareholders on the one part and the McMahon Entities on the other;
(b)Secondly, the balance of convenience favours allowing the Scheme to proceed in its current form and in any event, damages is an adequate remedy;
(c)Thirdly, the discretion to grant the Scheme injunction application should be exercised consistently with the considerations applicable to a convening hearing under s 411 of the Corporations Act. When proper regard is had to these considerations, SRR submits that it is clear that the claims made by the McMahon Entities do not establish a ‘knock-out blow’ of the type required to motivate a Court not to exercise its discretion to order the convening of a Scheme.
SRR submits that in essence, the McMahon Entities are concerned that if the Scheme is implemented prior to 21 November 2016, they will lose the benefit of the share price indemnity under clause 2.4(c) of the Umbrella Deed. As a consequence, it is alleged that the McMahon Entities will suffer a loss of $5.52 million.[49]
[49]Affidavit of Paul Anthony McMahon sworn 16 September 2016, [13].
SRR submits that this does not give rise to a serious question to be tried for the following reasons.
First, the dispute under clause 2.4(c) of the Umbrella Deed concerns the McMahon Entities and various other companies associated with the Simonds family, who are companies who are excluded from participating in the Scheme. The relief that the McMahon Entities could seek under clause 2.4(c) of the Umbrella Deed is against the excluded Simonds Companies.
Further, SRR submits that on its terms, clause 2.4(c) of the Umbrella Deed does not provide relief against:
(a)Simonds Group (the target company under the Scheme);
(b)SRR (the bidder under the Scheme); and
(c)the other shareholders of Simonds Group who hold 95.4 per cent of the Scheme shares (or approximately 83.6 million Scheme shares), which equates to just under 57 per cent of the total shares on issue.
Therefore, SRR submits that there is no serious question to be tried between the McMahon Entities and any Scheme participant.
Secondly, SRR submits that the McMahon Entities’ indemnity claim is very weak at best. The Umbrella Deed did not preclude the McMahon Entities from disposing of their shares prior to the end date of 17 November 2016. Indeed if those entities could have sold their shares at a significant profit on the IPO price (say, for example, $10) they would not have contended that the Umbrella Deed precluded them from doing so. Given that:
(a)the McMahon Entities were entitled to have disposed of the shares prior to the end date; and
(b)compulsory acquisition is one means of disposal,
there is no breach of the indemnity if the Scheme proceeds prior to 17 November 2016. Rather, the indemnity is simply not triggered.
SRR submits that the McMahon Entities' case proceeds on the false premise that compulsory acquisition of shares below the IPO price triggers the indemnity.
Further it is submitted that had the Scheme been implemented twelve or eighteen months ago an allegation that the indemnity had been breached (as opposed to not triggered) would not have sprung to mind. The position should be no different now.
Accordingly, the McMahon Entities seek to enjoin the implementation of the Scheme on its terms, and thereby put it in jeopardy, on the basis that they otherwise may be deprived of a very weak claim.
Thirdly, SRR submits that the indemnity claim does not seem to be the only claim which the McMahon Entities seek to promote. In their Interlocutory Process filed 16 September 2016, the McMahon Entities refer to ss 232 and 233 of the Corporations Act. SRR does not accept that the McMahon Entities have a viable oppression claim; the right which the McMahon Entities claim to be at risk of losing (the right to the indemnity) is one which was never triggered in accordance with the bargain that they struck.
Moreover, it is submitted that the evidence shows that the McMahon Entities’ indemnity claim:
(a)was not the driver for the Scheme.[50] (This is consistent with commercial common sense. Why would the Roche interests contribute approximately $29,000,000 of an approximately $34,000,000 Scheme transaction for the purpose of addressing a claim which is not made against them);
(b)was not a factor in the Roche interests pressing for an Scheme end date as soon as possible.[51] This was driven by unrelated commercial considerations. The Roche interests only agreed to an extension of time to 17 November 2016 reluctantly;[52]
(c)was a matter considered by the Simonds interests in SRR (SFO) in the choice of End Date. But this is not causally relevant because the Roche interests were pressing for implementation as soon as possible in any event. This was a matter on which the Roche interests were entitled to insist.
[50]Affidavit of James Francis Roche sworn 19 September 2016, [18]); second affidavit of Piers O’Brien sworn 19 September 2016, [7] and [8]; affidavit of Susan Mary Oliver sworn 19 September 2016, [28].
[51]Affidavit of James Francis Roche sworn 19 September 2016, [19]-[21] and [32]; second affidavit of Piers O’Brien sworn 19 September 2016, [6]; affidavit of Susan Mary Oliver sworn 19 September 2016, [13], [22], [27], and [29]–[33].
[52]Affidavit of James Francis Roche sworn 19 September 2016, [28].
In any event, SRR says that the Scheme, in its terms, does not differentiate between the rights conferred upon the shares owned by the McMahon Entities and those of any other Scheme shareholders.
SRR says that even if the Court were to find that there was a serious issue to be tried under s 232 of the Corporations Act, it is submitted that damages would be an adequate remedy for the McMahon Entities. After all, their claim is a money claim for the alleged lost value of the indemnity.
The order sought in the Scheme injunction application is a restraint against Simonds Group which prevents it from taking steps to implement the Scheme prior to 21 November 2016.
Under clause 3.6(c) of the SIA, if the Scheme is not implemented by 17 November 2016, then SRR may terminate the SIA without any liability to Simonds Group unless the reason for the Scheme not being implemented by this date arises out of a material breach by SRR.
Therefore, it is submitted that if made, the order sought by the McMahon Entities would put the entire Scheme into jeopardy. SRR says that to that end, the evidence is that if the Scheme is not implemented by the end date, depending on the prevailing circumstances, SRR would be entitled to exercise its right to terminate the Scheme. Should the Scheme proceed as currently propounded, SRR would not be entitled to exercise that right. This has a number of consequences which places the balance of convenience against the granting of the Order.
SRR submits that the respective rights of Mr McMahon and his associated companies are not the only rights relevant to determining where the balance of convenience lies.[53] In Patrick Stevedores Operations[54] the plurality said (adopting the principle in Miller v Jackson[55]) that:
Courts of equity will not ordinarily and without special necessity interfere by injunction where the injunction will have the effect of very materially injuring the rights of third persons not before the court.
[53]Patrick Stevedores Operations No.2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1, 42, [65] (‘Patrick Stevedores Operations’).
[54](1998) 195 CLR 1, 42, [65].
[55][1977] QB 966, 988.
The other shareholders of Simonds Group, who hold 95.4 per cent of the Scheme shares (or approximately 83.6 million Scheme shares) which equates to just under 57 per cent of the total shares on issue, will be deprived of the opportunity to realise a cash premium on their shares:
(a)which have historically been illiquid;
(b)which the Independent Expert (retained for the purposes of the Scheme) considers to be fair and reasonable; and
(c)which the independent directors of Simonds Group consider to be in their best interests.
SRR submits that Simonds Group will have wasted the transaction costs of the Scheme and further will be deprived of the opportunity to pursue commercial strategies for the benefit of Simonds Group as a whole.
And that SRR will have wasted the transaction costs of the Scheme.[56]
[56]Affidavit of O’Brien Affidavit affirmed 16 September 2016, [9].
SRR further submits that for the reasons identified above the acquisition of the McMahon Entities’ shares under a Scheme is not a trigger for the indemnity under the Umbrella Deed; if the shares are acquired prior to 17 November 2016 the indemnity is not breached; it is simply not triggered.
SRR submits that insofar as the McMahon Entities appear to rely upon the oppression provisions under ss 232 and 233 of the Corporations Act, the nature and scope of this claim remains unclear and for that reason alone it is not a credible basis upon which to prevent the Scheme from being implemented as propounded.
If the Court were to form the view that there exists a serious question to be tried under s 232 of the Corporations Act, SRR submits that it is presumable the McMahon Entities will contend that such a cause of action would survive the implementation of the Scheme even if that were to occur before 17 November 2016.
In these circumstances, SRR submits that damages would be an adequate remedy.
SRR says that elevating the status of the McMahon Entities’ currently inchoate and weak potential claims to the superordinate discretionary consideration would put grossly disproportionate weight on them to the detriment of the other shareholders who own 95.4 per cent of the Scheme shares.
SRR says that the Court’s discretion to grant the Scheme injunction application should be exercised consistently with and informed by the considerations a Court would apply in considering whether to order a Scheme meeting under s 411 of Corporations Act.
SRR submits that these considerations are as follows.
First, the over-riding purpose of the convening hearing is:[57]
(a)to decide whether there should be one or more meetings; and
(b)to decide the manner in which that meeting, or those meetings, should be summoned and conducted.
[57]Re CSR Ltd, 379, [72].
Secondly, the purpose of the convening hearing is ‘emphatically not’ to consider the merits or fairness of the proposed Scheme[58] unless there is a ‘knock-out blow’[59] that ‘would unquestionably lead to’ the Court ultimately refusing to approve the Scheme.[60]
[58]Re CSR Ltd, 379, [72].
[59]Re Centro Properties Ltd (2011) 87 ACSR 131,142, [64] (‘Re Centro Properties Ltd’).
[60]Re CSR Ltd, 379, [74].
Thirdly, at the convening hearing the court is not required to give close consideration to the effects of the Scheme upon individual members of the classes of members or creditors affected. So to do would be to ‘introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage.’[61]
[61]Re CSR Ltd , 376, [58].
The above principles recognise that:
(a)schemes involve a two stage hearing process;[62]
(b)the convening hearing ’is ill-suited to … in-depth investigation;’[63] and
(c)the subsequent approval application provides an opportunity for an ‘aggrieved person’ to object to the approval of the Scheme and provides the Court with the proper context to balance out the competing interests.
[62]Re CSR Ltd,379, [76].
[63]Re Centro Properties Ltd, 142, [63].
SRR submits that when regard is had to these matters, the McMahon Entities’ claims do not present a ‘knock-out’ blow that would unquestionably lead to the Court ultimately refusing to approve the Scheme. Accordingly, in those circumstances the Court ought not to prevent the convening of the Scheme meeting.
Alternatively, if contrary to the above submissions the Court is otherwise minded to grant the Scheme injunction application, SRR submits that it should not do so unless the McMahon Entities:
(a)prove that they can satisfy the undertaking as to damages; alternatively
(b)provide security for that undertaking.
Findings
For reasons I explain below, I do not consider it necessary to make the injunction sought at this stage.
I find that the proposed hearing dates for the Scheme have been formulated in such a way to deprive the McMahon Entities of the benefit of the indemnity they have under the Umbrella Deed. The issue arises whether the Court’s processes should be used to facilitate the carrying out of what is said to be oppressive conduct to the McMahon Entities in those circumstances by Simonds Group.
Neither member of the consortium disclosed to me whether they will continue with the Scheme if the Scheme is delayed so that the McMahon Entities’ shares will not be acquired on or before 17 November 2016 (if the Scheme is approved by the shareholders and approved by the Court). I asked Mr Davis about this and he informed me that I would have to decide that matter on the evidence. In those circumstances I must assess the evidence that has been led.
The evidence establishes that the Roche member of the consortium finds the Scheme commercially attractive. There is no reason for the Court to find that Roche would not proceed with the Scheme if the shares in Simonds Group are not acquired by the consortium until on or after 18 November 2016.
As for the SFO, Mr O’Brian has deposed in his affidavit of 19 September 2016:
This termination right is a key requirement of SRR’s proposal for a range of commercial reasons. In short, SSR wishes to obtain control of Simonds Group as soon as possible for commercial reasons. From the point of view of SFO, a further reason for the termination right being a requirement is that the indemnity in clause 2.4 of the Umbrella Deed dated 3 October 2014 (…) will not apply if the Scheme is implemented by 17 November 2016.
From SFO’s point of view, however, the objective of the Scheme, is to implement the transaction contemplated by it. That objective is considerably more significant than the liability under the Indemnity. It would be commercially nonsensical for the liability under the Indemnity to drive a transaction as significant to the Scheme and this is not what has occurred.
I am satisfied that if the Scheme is implemented so that the McMahon Entities’ shares are not acquired on or before 17 November 2016, the bidding company, SRR, will proceed with the Scheme. There is no suggestion that Simonds Group would not proceed with the Scheme in view of the evidence given on the Simonds Group’s behalf.
There is a reasonable case that the conduct of Simonds Group in pursuing the Scheme could constitute oppressive conduct towards the McMahon Entities. In my opinion it is not appropriate for the Court to facilitate or enable what is arguably oppressive conduct by Simonds Group to be engaged in against a minority shareholder (the McMahon Entities), when that conduct can be readily avoided with no real prejudice to Simonds Group, the consortium, or to the shareholders.
In discussion with counsel during the hearing of submissions, I said that Simonds Group was the major, if not the sole, beneficiary of the Umbrella Deed so far as the Simonds family were concerned. The arrangement that was made with Mr McMahon enabled Simonds Group to be floated, and it would be unfair and unjust in those circumstances that the McMahon Entities should be deprived of the benefit of the indemnity, which was agreed upon, by the Scheme proposed by Simonds Group.
I accept that this may not be the formal meaning of the agreement between the McMahon Entities, Simonds Group and the indemnifying shareholders. From the evidence submitted, however, that was obviously the arrangement made between the parties. In considering whether oppressive conduct is being engaged in, the cases establish that one can go to conduct that goes well beyond what has been formally agreed to in binding contracts.
For the reasons outlined above, I propose to adjourn the application for the injunction. As I do not think it is appropriate for the Court to give effect to conduct of Simonds Group in proceeding with their plan, as it presently stands, to deprive Mr McMahon of the benefit of his indemnity, I propose to hear the application to convene the meetings to approve the proposed Scheme and if thought fit, I will convene the meeting of shareholders. If approved by the shareholders, I will ensure that Court approval (if given) will not involve the disposal of the McMahon Entities’ shares before 18 November 2016 so as to avoid the loss by the McMahon Entities of their indemnity.
The orders which I might make would be directions altering the dates in the Scheme booklet for the second hearing. I would leave it up to counsel to draft the appropriate amendments. If necessary, the amendments might be made in the chairman’s letter, but I would prefer for them to be in the Scheme booklet.
I adjourn the further hearing of the matters concerning the Scheme until tomorrow. Otherwise, on the application for the injunction I adjourn this application to a date to be fixed.
I will reserve the costs of the application.
I record my appreciation of the high standard of the submissions made by Mr Wood, Mr Davis and Mr Waller in this matter. I was grateful for their assistance.
0
9
0