Re Webcentral Group Ltd

[2020] NSWSC 1279

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Webcentral Group Limited [2020] NSWSC 1279

Hearing dates:

21 August 2020

Date of orders:

21 August 2020

Decision date:

18 September 2020

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Orders made convening scheme meeting.

Catchwords:

CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application under s 411 of the Corporations Act 2001 (Cth) for orders convening meeting of members to consider and, if thought fit, approve a proposed scheme of arrangement – Whether requirements to order scheme meeting are satisfied – Length of exclusivity period – Whether appropriate to consider break fee as percentage of enterprise value rather than equity value.

Legislation Cited:

- Corporations Act 2001 (Cth), ss 191, 195, 249S, 250B, 411, 1362A

- Corporations (Coronavirus Economic Response) Determination (No 1) 2020 (Cth), cl 5(1)

Cases Cited:

- Hostworks Group Limited ACN 008 010 820 (2008) 26 ACLC 137

- Re Adelaide Bank Ltd [2007] FCA 1582

- Re Andean Resources Ltd [2010] FCA 1190

- Re CSG Ltd [2019] NSWSC 1905

- Re Cytopia Ltd [2009] VSC 560

- Re DUET Finance Limited [2017] NSWSC 415

- ReEllerston Global Investments Ltd [2020] NSWSC 879

- Re ERM Power Ltd [2019] NSWSC 1502

- ReFolkestone Ltd [2018] FCA 1412

- Re Gazal Corporation Ltd [2019] FCA 701

- Re GBST Holdings Ltd [2019] NSWSC 1280

- Re Macquarie Private Capital A Ltd [2008] NSWSC 323

- Re Prime Media Group Ltd [2019] NSWSC 1805

- Re Pulse Health Ltd [2017] NSWSC 140

- Re Simavita Holdings Ltd [2013] FCA 1274

- Re Sirtex Medical Ltd [2018] FCA 1315

- Re Staging Connections Group Ltd [2015] FCA 1012

- Re Talent2 International Ltd [2012] FCA 771

- Re Tawana Resources NL [2018] FCA 1456

- Re TPG Telecom Limited [2020] NSWSC 772

- Re Villa World Limited [2019] NSWSC 1207

- Re Windlab Ltd [2020] NSWSC 571

Category:

Principal judgment

Parties:

Webcentral Group Limited (Plaintiff)

Representation:

Counsel:
I Jackman (Plaintiff)
D Sulan (Acquirer)

Solicitors:
Herbert Smith Freehills (Plaintiff)

File Number(s):

2020/206145

Judgment

Nature of the application and background

1. By Originating Process filed on 13 July 2020, the Plaintiff, Webcentral Group Limited (“Webcentral”) applies for an order under s 411 of the Corporations Act 2001 (Cth) that it convene a meeting of its members to consider a scheme of arrangement between it and its members.

2. By way of background, Webcentral is a company limited by shares, which operates a software and services business and is listed on the Australian Securities Exchange (“ASX”). Webcentral only has fully paid ordinary shares and does not have any outstanding performance rights or options on issue. Webcentral is relatively highly geared, and the total amount drawn under the existing debt facilities is approximately $47.6 million. The total amount drawn matures on 2 July 2021 (other than $2.5 million, which matures on 30 November 2020). Webcentral requires the support of its existing financiers to continue as a going concern.

3. On 24 September 2019, Webcentral announced a strategic review to ASX, after issues arose in respect of the level of its earnings and debt. On 11 February 2020, Webcentral announced that it had entered into a binding agreement to sell one of its divisions, its “Enterprise division” to an entity owned by a consortium comprising a private equity firm and certain members of the Enterprise leadership team and that sale completed on 2 March 2020. Non-binding indicative offers were also received for its “SMB division”, some of which were on terms that were not acceptable to Webcentral’s financiers, or did not have committed financing to enable Webcentral’s existing debt facilities to be repaid in full.

4. On 13 July 2020, Webcentral announced to ASX that it had entered into a Scheme Implementation Deed with Web.com Group Inc (“Web.com”), by which Web.com would acquire all of the outstanding shares in Webcentral. If the proposed scheme is agreed to by Webcentral’s shareholders and approved by the Court, all the shares in Webcentral will be transferred to a subsidiary of Web.com for the scheme consideration and Webcentral will become a wholly owned subsidiary of Web.com and apply to be delisted from the ASX. The directors of Webcentral unanimously recommend that scheme participants vote in favour of the proposed scheme conditional on no Superior Proposal emerging, as defined in the Scheme Implementation Deed, and an independent expert concluding (as that expert has concluded) that the scheme is in the best interests of scheme participants.

Affidavit evidence

5. Webcentral relies on affidavit dated 13 July 2020 of its solicitor, Mr Andrew Eastwood, which refers to the background of the application, some of which I have noted above.

6. By an affidavit dated 18 August 2020 , Mr Reitzer, the chair of Webcentral’s board of directors, referred to the nature of Webcentral’s business and to the composition of its board and noted that two of Webcentral’s four directors held significant personal interests in Webcentral’s shares. He outlined the circumstances of the proposed acquisition of all of the shares in Webcentral by Web.com, referred to existing debt facilities of Webcentral, and noted that Webcentral had undertaken a strategic review process, with the support of its existing financiers, to explore solutions to a decline in performance, a high net leverage ratio and the pending maturity of its debt facilities. He noted that Webcentral’s existing financiers had also extended the date for repayment of an amount that was originally due for payment on 31 March 2020 and had waived actual and anticipated financial covenant breaches for several financial quarters since 30 September 2019. Mr Reitzer also noted that, on implementation of the scheme, Web.com would refinance Webcentral’s existing debt facilities and ensure the repayment of all amounts payable to existing financiers under those facilities, and he also noted that there could be no assurance that existing financiers would remain supportive of Webcentral if the scheme did not proceed. Mr Reitzer also referred to the independent expert’s report prepared by BDO Corporate Finance (WA) Pty Ltd (“BDO”) which concluded that the scheme was fair and reasonable and in the best interest of Webcentral’s shareholders in the absence of a superior proposal.

7. Mr Reitzer also noted that two entities had acquired significant interests in Webcentral, since the announcement of the scheme on 13 July 2020, but neither had presented Webcentral with a competing proposal to the scheme. Mr Reitzer also referred to two competing proposals which Webcentral had received from two companies in the digital services sector, which it did not consider to be superior proposals to the scheme. Mr Reitzer also addressed conditions precedent set out in the Scheme Implementation Deed and the reimbursement fees and exclusivity provisions contained in that Deed. He also referred to the steps taken by Webcentral to verify the scheme booklet, which were consistent with common scheme practice. Mr Reitzer fairly recognised that the reimbursement fee of $500,000, excluding GST, which may be payable by Webcentral to Web.com under the Scheme Implementation Deed amounted to approximately 4.09% of Webcentral’s equity value, although it was between 1.1% and 1.4% of Webcentral’s enterprise value using the methodology adopted by the independent expert. This reflects the fact that Webcentral’s equity value is reduced by the extent of its debt.

8. By his second affidavit also dated 18 August 2020, Mr Reitzer consented to act as chair of a virtual scheme meeting which is expected to be held on 29 September 2020. By an affidavit dated 12 August 2020, Mr Macpherson, a non-executive director of Webcentral, consented to act in place of Mr Reitzer if he was unable to act as chair of the virtual scheme meeting.

9. Webcentral also relies on the affidavit dated 18 August 2020 of Sachin Tokhi, who is a client relationship manager of Link Market Services Limited (“LMS”) and refers to the arrangements that have been made for the despatch of scheme materials, both by electronic despatch to shareholders that have elected to receive communications electronically, and by hard copy despatch; to a proposed reminder to vote email, to be sent approximately seven days before the scheme meeting; and to the services to be provided by LMS in respect of the conduct of a virtual scheme meeting and the tallying of votes at that meeting.

10. By his affidavit dated 18 August 2020, Mr Myers, who is a partner of BDO confirmed that he holds the opinions expressed in BDO’s report; that he has made the inquiries that he believes are desirable and appropriate to prepare that report; and that he has not become aware of any facts or circumstances which would cause him to change the opinions expressed in that report. In that report, BDO has concluded that the scheme is fair and reasonable and, therefore, is in the best interests of Webcentral’s shareholders and assessed the fair market value of a Webcentral share, on a controlling basis, to be in the range of $0.083 to $0.126 per Webcentral share. The scheme consideration is within BDO’s assessed valuation range for Webcentral’s shares.

11. By an affidavit dated 18 August 2020, Mr Sipprelle, who is a non-executive director of Web.com, refers to Web.com’s entry into the Scheme Implementation Deed and to the verification and due diligence process undertaken by Web.com in respect of the information concerning it contained in the scheme booklet. He also refers to the negotiation of the reimbursement fee contained in the Scheme Implementation Deed and to the undertaking given by Web.com under a Deed Poll contemplated by the Scheme Implementation Deed to deposit, or procure the deposit of, the aggregate scheme consideration into a trust account operated by Webcentral.

12. By an affidavit dated 18 August 2020 of Mr Thomas, who is a legal practitioner in a firm practising in Delaware in the United States of America, confirms, on the basis of specified assumptions, that the Deed Poll will be duly authorised, executed and delivered by Web.com under the Delaware General Corporations Act.

13. By an affidavit dated 18 August 2020, Mr Andrew Rich, who is a solicitor acting for Webcentral in respect of the scheme, refers to the notice of the hearing given to the Australian Securities and Investments Commission (“ASIC”) and to correspondence with ASIC in respect of the scheme booklet and to Webcentral’s approval of that booklet and an amendment to it. A further affidavit dated 20 August 2020 of Mr Rich refers to further amendments to the scheme booklet, to further correspondence with ASIC and ASX in respect of the scheme, and to the draft advertisement for the second scheme hearing. By letter dated 20 August 2020, ASIC confirmed, in common form, that it did not currently propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing.

The applicable principles

14. Mr Jackman refers to my summary of the applicable principles in respect of the first Court hearing in a scheme of arrangement in ReEllerston Global Investments Ltd [2020] NSWSC 879 at [25]-[27], as follows:

“It is, of course, well-established that the Court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days’ notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court’s approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]- [20]; Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554 at [30]; Re Duet Finance Ltd [2017] NSWSC 415 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [15].

The Court will not ordinarily summon a meeting at the first court hearing unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. In Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44] (cited with apparent approval in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [58]), French J observed that:

“... by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court’s approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O’Loughlin J). 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”: Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). ...

The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court ... That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further.”

At the first hearing, the Court is not concerned with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: Re Abacus Funds Management Ltd [2005] NSWSC 1309; (2006) 24 ACLC 211 at [23]; Re Villa World above at [18]. The Court is also not required to be satisfied that no better scheme could have been proposed, but with whether sensible business people might consider the arrangement proposed is of benefit to members: Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re BIS Finance Pty Ltd Finance Pty Ltd [2017] NSWSC 1713 at [22].”

15. Mr Jackman submits, and I accept, that the scheme is a straightforward “acquisition” scheme and therefore involves an “arrangement” within the meaning of the Corporations Act and that the Scheme Implementation Deed provides prima facie evidence that Webcentral has committed itself to propounding the scheme and that the Scheme is bona fide and has been properly proposed: Re Simavita Holdings Ltd [2013] FCA 1274 at [2]; Re Staging Connections Group Ltd [2015] FCA 1012 at [61]. Mr Jackman also submits, and I accept, that the evidence establishes that ASIC was notified of the hearing and provided with a draft of the scheme booklet and the scheme more than 14 days prior to the first court hearing, so that s 411(2)(a) of the Corporations Act has been satisfied and the Court is not prevented from proceeding with the application.

16. I am satisfied that, subject to the particular issues that I address below, the proposed scheme is of such a nature and cast in such terms that, if it receives the statutory majorities at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application. Relevant factors include the nature of the scheme, involving an acquisition of shares in Webcentral for cash, and the provision of funding to allow it to meet its debt to its existing financiers; the disclosure of the terms of the scheme in the scheme booklet and the verification process set out in the affidavit evidence; and the conclusion reached by the independent expert that the scheme is fair and reasonable and in the best interests of Webcentral’s shareholders.

Particular aspects of the scheme

17. In accordance with common practice in the first Court hearing in respect of a scheme of arrangement, Mr Jackman has drawn several aspects of the scheme to the Court’s attention. Mr Jackman submits, and I accept, that none of these matters prevent the making of an order convening the scheme meeting.

Two directors’ shareholding interests

18. Mr Jackman points out that, at the time of announcement of the scheme, two of Webcentral’s then four non-executive directors held, and as far as the Webcentral Directors are aware, continue to hold, significant personal interests in Webcentral’s shares. One of those directors has since resigned as a director of Webcentral effective 16 August 2020. The nature and extent of those interests are set out in section 9.1 of the Scheme Booklet. Mr Jackman points out that each of those directors disclosed their respective personal interests on the basis that they could potentially constitute a “material personal interest” for the purpose of s 191(1) of the Corporations Act at meetings of the Webcentral Board on 12 July 2020 and 30 July 2020, in which matters relating to the scheme were discussed and then withdrew from the board meetings. The two remaining directors of Webcentral resolved that they were satisfied that those personal interests should not disqualify the directors with such interests from voting or being present at the meeting, pursuant to s 195(2) of the Corporations Act. Those two directors then participated in each of the meetings, including in the voting on resolutions in relation to the Scheme, pursuant to s 195(2) of the Act. This matter provides no reason not to convene the scheme meeting.

19. Mr Jackman points out that, as I noted above, Webcentral has no performance rights or options on issue, and issues do not arise of the kind which have arisen where directors stood to receive benefits that were not available to other shareholders: see, for example, Re Gazal Corporation Ltd [2019] FCA 701 and the subsequent cases expressing differing views in that regard.

Conduct of virtual scheme meeting

20. Mr Jackman points out that it is proposed that the scheme meeting will be conducted on an online platform hosted by Webcentral’s registry services provider, LMS, in order to comply with government guidelines and address ongoing health risks arising from the COVID-19 pandemic. I have had regard to the evidence as to the process for that meeting. Mr Jackman submits, and I accept, that the proposed arrangements for the scheme meeting to be held are consistent with cl 5(1) of the Corporations (Coronavirus Economic Response) Determination (No 1) 2020 (Cth) made by the Commonwealth Treasurer on 5 May 2020 under s 1362A of the Corporations Act and with the requirements of s 249S of the Corporations Act. Scheme meetings conducted in that manner have now been accepted in several cases: Re Windlab Ltd [2020] NSWSC 571 at [26]; Re TPG Telecom Limited [2020] NSWSC 772 at [19]-[20]; Re Ellerston Global Investments Limited above at [28].

Performance risk regarding payment of the scheme consideration

21. Mr Jackman points out that a practice has developed to address performance risk, by which the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders, and there are numerous cases which have endorsed that practice. By cl 5.1(a) of the Scheme, an amount equal to the aggregate amount of the scheme consideration will be paid, or procured to be paid, by Web.com into an Australian denominated trust account with an authorised deposit taking institution in Australia operated by Webcentral as trustee for the scheme shareholders by no later than the business day before the implementation date for the scheme. Under clause 5.1(b) of the Scheme, on the implementation date, Webcentral will pay, or procure to pay, each scheme shareholder their scheme consideration. The obligations of Web.com and the acquiring subsidiary under the Scheme are supported by a Deed Poll given by Web.com and its subsidiary in favour of the scheme shareholders and I have referred above to the evidence of its legal efficacy under Delaware corporate law. I am satisfied this issue has been adequately addressed.

Exclusivity provisions

22. Mr Jackman points out that cl 10 of the Scheme Implementation Deed provides for exclusivity provisions which include a “no shop” restriction, a “no talk” restriction (subject to a fiduciary carve out), a notification right for Web.com if Webcentral is approached with a Competing Proposal (as defined) (also subject to a fiduciary carve out), and matching rights for Web.com. Mr Jackman refers to my summary of the applicable principles relating to provisions were recently of this kind in Re TPG Telecom Ltd above at [22]:

“the Court will be concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve out; and the provisions must be clearly disclosed in the explanatory statement sent to shareholders.”

23. Mr Jackman submits that the Exclusivity Period is here defined in the Scheme Implementation Deed and capable of precise ascertainment, and continues from the date of the Scheme Implementation Deed until the earlier of (i) the termination of the Scheme Implementation Deed, (ii) the End Date (being 7 months after the date of the Scheme Implementation Deed, unless otherwise agreed between the parties) and (iii) the date the Scheme becomes Effective, which is expected to be 1 October 2020. Mr Jackman recognises that this Exclusivity Period may be up to 7 months, between the date of the Scheme Implementation Deed and the “End Date”, and submits that is a reasonable period and comparable with exclusivity periods in other schemes that have previously been accepted by the Court: Re Sirtex Medical Ltd [2018] FCA 1315 at [37]; Re Tawana Resources NL [2018] FCA 1456 at [33]; Re GBST Holdings Ltd [2019] NSWSC 1280; Re ERM Power Ltd [2019] NSWSC 1502; Re Prime Media Group Ltd [2019] NSWSC 1805 at [23].

24. As Mr Jackman recognised, if the Scheme Implementation Deed was not terminated, and the scheme was not approved at the second Court hearing on 1 October 2020, the “Exclusivity Period” in this case had the capacity to operate until mid-February 2021. Notwithstanding the case law to which Mr Jackman had referred in submissions, I requested further submissions after the making of orders convening the first scheme meeting, as to the extent to which the orders made in earlier cases had approved exclusivity arrangements that continued for a significant period beyond the second Court hearing. By helpful further submissions provided on 28 August 2020, Webcentral’s solicitors reviewed the length of the exclusivity periods in a sample of members’ schemes, by reference to the time that had passed between the proposed second Court date (as set out in the relevant scheme booklet) and the “End Date” or similar date as defined in the Scheme Implementation Deed. They rightly noted that the “End Date” in an exclusivity period would generally only become relevant where the scheme of arrangement would neither be implemented nor terminated, for example, if it was not approved at a scheme meeting or not approved by the Court at the second Court hearing, and no right to terminate the scheme under the Scheme Implementation Deed had arisen, or the parties did not wish to exercise a termination right. They also submitted that there may be reason to adopt a later “End Date” to ensure that date falls within the Court term, in case a further application needs to be made to the Court in respect of the scheme. I am not persuaded by that last submission, where a duty judge will be available throughout the Court vacation.

25. That review indicated significant variations in the length of time that exclusivity periods had extended beyond the date of the scheme meeting and second Court hearing, with some schemes involving a relatively short further period; several schemes involving periods of three, four or six months, and that period in one scheme extending for a period of more than nine months after the second Court date. The survey suggests that the exclusivity period adopted in this case is one of the longer periods beyond the date of the second Court hearing that have been accepted by a Court. It seems to me that, where the parties have bargained for that exclusivity period in circumstances where Webcentral needs to address a position of some financial stress, the length of that period does not give rise to any reason not to convene the scheme meeting and would likely not give rise to any reason not to approve the scheme at the second Court hearing.

26. Mr Jackman also points out that the “no talk” restriction and the notification right for Web.com, which apply if Webcentral is approached with a Competing Proposal (as defined) do not apply if they would breach the directors’ fiduciary duties or otherwise be unlawful (by reason of cl 10.4 of the Scheme Implementation Deed). Mr Jackman also submits, and I accept, that the fact that that carve out does not apply to the “no shop” provision is consistent with the Takeovers Panel’s Guidance Note 7 which recognises that a simple “no shop” restriction does not require a “fiduciary out”, and with the case law: Hostworks Group Limited ACN 008 010 820 (2008) 26 ACLC 137 at [34]; ReFolkestone Ltd [2018] FCA 1412 at [31]; Re Villa World Limited [2019] NSWSC 1207 at [23]; Re Windlab Ltd above at [18].

27. Mr Jackman also recognises that the “matching right” under cl 10.5 of the Scheme Implementation Deed is not subject to fiduciary carve-out, but submits that matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive because the terms of a competing proposal would likely need to be disclosed by Webcentral pursuant to its continuous disclosure obligations. Mr Jackman recognises that cl 10.5(a)(4) of the Scheme Implementation Deed requires Webcentral to communicate the material details of a Competing Proposal (as defined) to Web.com. He submits, and I accept, that it is unlikely that cl 10.5 would deter competing bids that might otherwise be made, since the process under this clause corresponds to the course that a prospective bidder would expect Webcentral to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Limited [2017] NSWSC 415. I recognised that the exclusivity provisions are clearly disclosed in the ‘Frequently Asked Questions’ and section 9.4(i) of the Scheme Booklet and it does not seem to me that they provide any reason not to convene the scheme meeting.

Competing proposals

28. Mr Jackman points out that, as the affidavit evidence to which I referred above indicated, Webcentral has observed substantial purchasing activity in its shares by two entities since the announcement of the scheme on 13 July 2020, but neither of those entities had presented a competing proposal at the date of the first Court hearing. As the evidence to which I referred indicated, Webcentral had also received Competing Proposals (as defined) from two companies in the digital services sector, and Webcentral had followed the procedure under the Scheme Implementation Deed in respect of those proposals. The evidence indicates that Webcentral’s directors concluded that neither proposal, as presented, constituted a superior proposal to the present scheme. These matters are disclosed in the scheme booklet, which indicates that Webcentral will make an announcement to the ASX if a Superior Proposal (as defined) is received before the scheme meeting.

Break Fee

29. Mr Jackman points out that cl 11 of the Scheme Implementation Deed provides that a reimbursement fee of $500,000 (“Reimbursement Fee”) is payable by Webcentral to Web.com in specified circumstances. That Reimbursement Fee is not triggered by Webcentral shareholders failing to approve the scheme and is not a disincentive to Webcentral shareholders in their consideration of the proposed scheme in the sense noted in Re Adelaide Bank Ltd [2007] FCA 1582 at [31], and is also not triggered by the termination of the Scheme Implementation Deed by the Webcentral directors if the independent expert concludes that the scheme is not or is no longer in the best interests of Webcentral shareholders, except where that conclusion is due to a Competing Proposal (as defined). That Reimbursement Fee is disclosed in the scheme booklet.

30. Mr Jackman recognises, and the evidence indicates, that the Reimbursement Fee represents approximately 4.09% of the equity value of Webcentral implied by the scheme consideration of approximately $12.2 million, but that it is within an acceptable range when judged by reference to Webcentral’s enterprise value, as Takeovers Panel’s Guidance Note 7: Lock-up devices recognised may be appropriate where a company is (as Webcentral is) highly geared. As Mr Jackman points out, a break fee of a similar character was accepted in similar circumstances in Re Cytopia Ltd [2009] VSC 560 where (as here) that break fee was a genuine pre-estimate of the internal and external costs that would be incurred and was not payable if the shareholders did not vote in favour of the scheme and was unlikely to be a matter which could influence voting at the scheme meeting.

31. I am satisfied that the Reimbursement Fee is lower than the actual transaction costs that Web.com has already incurred in relation to the scheme; that this in an appropriate case for the Court to compare the Reimbursement Fee with Webcentral’s enterprise value, rather than its equity value, when determining whether or not the quantum of the Reimbursement Fee is acceptable; that the Reimbursement Fee represents approximately 0.86% of Webcentral’s enterprise value calculated using the implied equity value and the anticipated net debt of Webcentral on the Implementation Date and between 1.1% and 1.4% of Webcentral’s enterprise value calculated using the methodology adopted by the independent expert. Mr Jackman submits and I accept that the Reimbursement Fee as a percentage of enterprise value is reasonably close to the range of the 1% guideline that is recommended by the Takeovers Panel. This matter is not a reason not to convene the scheme meeting.

Deemed warranties

32. By cl 8.2(b) of the Scheme, each scheme shareholder is taken to have given various warranties to Webcentral and the acquiring subsidiary, including that all their Webcentral shares are free from encumbrances and interests of third parties of any kind on the Implementation Date. The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged, provided the attention of security holders is drawn to the relevant warranties: Re Villa World Limited above at [25], Re Windlab Ltd above at [21]. This matter is sufficiently disclosed in the scheme booklet and is not a reason not to convene the scheme meeting.

Subsection 411(17) of the Corporations Act

33. Mr Jackman submits, and I accept, that the Court will address the question raised by s 411(17) at the second court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [23]-[31]; Re TPG Telecom Ltd above at [31]; Re Ellerston Global Investments Ltd above at [35]. As I noted above, a letter from ASIC confirming that it does not intend to appear was tendered at the first Court hearing.

Anticipated supplementary disclosure

34. Mr Jackman drew attention to the fact that Webcentral’s reviewed financial statements for the half year ended 30 June 2020 were expected to be released on or around 31 August 2020, prior to the proposed date for the scheme meeting; that Webcentral would then obtain the independent expert’s indication whether the financial results change his opinion that the scheme is fair and reasonable and, therefore, in the best interests of Webcentral shareholders, in the absence of a superior proposal; that indication would be announced to the ASX in advance of the scheme meeting; and, if the independent expert’s opinion has changed, Webcentral will relist the matter before the Court prior to the scheme meeting. These matters are sufficiently disclosed in the scheme booklet. I accept that similar arrangements have accepted in previous schemes: Re Pulse Health Ltd [2017] NSWSC 140 at [28]; Re Andean Resources Ltd [2010] FCA 1190 at [26]; Re Talent2 International Ltd [2012] FCA 771 at [30]-[31]. This matter is also not a reason not to convene the scheme meeting.

Electronic notification of scheme meeting to some Webcentral shareholders

35. Mr Jackman points out that Webcentral shareholders who have elected to receive communications electronically will be notified by email of the scheme meeting, with URL links to the scheme booklet and a personalised proxy form. Webcentral’s constitution permits notice of meetings to be given electronically if the Webcentral shareholder has nominated an email address for that purpose. Mr Jackman submits, and I accept, that it is commonplace for electronic mail-out orders to be made by the Courts in relation to notices of scheme meetings: Re TPG Telecom Ltd above at [32].

36. Scheme documents will be provided to Webcentral shareholders by post if the Webcentral shareholder has not elected to receive communications by email, or if attempts to provide them with notice by email have been unsuccessful Mr Jackman also notes that steps have been taken to mitigate the risks of postal delays as to hard copy scheme documents, particularly for overseas shareholders, arising from the COVID-19 pandemic. It is proposed that scheme shareholders who have not previously elected to receive shareholder communications electronically will be able to request a copy of the scheme booklet and other scheme materials via email, in addition to hard-copy despatch, by calling a dedicated offer information line. A similar procedure was adopted in Re TPG Telecom Ltd above at [30].

Proxy deadline

37. Mr Jackman notes that the proposed deadline for receipt of proxy forms (including proxy forms lodged online) or powers of attorney by Webcentral’s share registry for the scheme meeting be 9:00am (Sydney time) on a Sunday, 27 September 2020, as disclosed in the Notice of Scheme Meeting and in the ‘Key Dates’ section of the scheme booklet. Mr Jackman points out that the proposed time and date is consistent with Webcentral’s constitution and s 250B(1) of the Corporations Act, which require proxy forms to be received at least 48 hours before the Scheme Meeting. Webcentral’s position is that no practical difficulties arise as a result of the 48 hour requirement and the proposed proxy deadline, despite this falling on a weekend, although a somewhat different approach was taken by the scheme proponent in Re CSG Ltd [2019] NSWSC 1905. Mr Jackman notes that ASX has not raised any such concerns as to this approach in approving the proposed timetable. This is also not reason not to convene the scheme meeting, and any difficulties which arise in the (perhaps unlikely) event that a shareholder seeks to and is unable to hand deliver a proxy form on the weekend, and does not submit its proxy forms online or by fax, can be addressed at the second hearing.

Orders

38. For these reasons, I was satisfied that order should properly be made convening the scheme meeting and made orders in the form proposed by Webcentral at the conclusion of the first Court hearing.

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Decision last updated: 21 September 2020