Recently appointed Federal Court Judge, Justice Jackman, is implementing significant reforms to the Australian scheme of arrangement process.
Justice Jackman is significantly streamlining the evidence that is required to be produced to the Federal Court in connection with schemes of arrangement.
The Court and Justice Jackman’s leadership is to be commended. For too many years, scheme proponents have faced the unnecessary cost and inefficiency of producing materials that did not add substantive value to the process.
There have been repeated calls (including by the authors1) to reduce the amount of evidence and other materials that are required to be prepared and delivered to the Court in connection with members’ schemes of arrangement.
In 2022, the Treasury undertook a public consultation process in which it asked, among other things:
- whether the Takeovers Panel should assume the role of the Court in connection with schemes of arrangement; and
- what changes could be made to make schemes of arrangement more efficient and reduce unnecessary costs.2
Whilst divergent views were expressed in relation to the first question, there was a general acceptance that something should be done to make schemes of arrangement more cost efficient through a reduction in the amount of evidence that was required to be produced to the Court.3 In this regard, in a practice that has snowballed over many years, evidence produced for schemes of arrangement commonly runs into the thousands of pages, with most of that evidence being irrelevant and / or unnecessary.
The Vita Group scheme
On 22 March 2023, at a case management hearing for the scheme of arrangement involving the proposed $22.3 million acquisition of ASX listed Vita Group Limited (Vita Group) by Practice Management Pty Limited, Jackman J stated:
‘I think the time has come to apply the overarching purpose under section 37M of the Federal Court Act with some vigour to schemes, to ensure that they are conducted cheaply, efficiently and quickly’.
Before his Honour’s recent appointment to the Federal Court of Australia, Jackman J was widely considered to be one of the country’s leading barristers on schemes of arrangement, having appeared in numerous schemes of arrangement, including the A$32 billion (EV) acquisition of Sydney Airport in 2022 (the largest takeover in Australian corporate history).
The Vita Group transaction is the first scheme of arrangement to come before his Honour since his appointment to the Federal Court.
At the case management hearing, Jackman J outlined significant changes to:
- the evidence that is required to be produced to the Court; and
- the materials that the Court expected to be asked to approve.
Jackman J explained that he had consulted widely within the Federal Court to ensure that his Honour’s reforms enjoyed the support of the Federal Court as a whole.
His Honour stressed that the reforms were in no way intended to diminish the long-standing obligation on scheme proponents to bring to the Court’s attention all matters that could be considered relevant to the exercise of the Court’s discretion.
Evidence at the first court hearing
Justice Jackman proposed the evidence in the first court hearing should amount to just three affidavits, being:
- the short formal affidavit annexing a company search;
- the main affidavit providing a broad overview of the scheme and associated transactions (and which exhibits ASIC’s usual letter stating whether it intends to appear at the first court hearing, if available in time); and
- an affidavit from the bidder proving the process of verifying the information which was provided by the bidder for inclusion in the draft scheme booklet.
Justice Jackman spelled out the evidence that his Honour regarded as unnecessary as including:
- the practice of collating all communications between the target’s lawyers and ASIC;
- the affidavit by the independent expert verifying its report;
- the affidavits from the proposed chairperson and alternate chairperson as to their ability and willingness to act;
- the newspaper advertisement of the scheme;
- evidence as to the negotiations of any break fee and exclusivity provisions (his Honour did, however, state that he expected a sentence to be included in the main affidavit as to the quantum of the break fee, expressed as a percentage so that the Court could see if it was close to the Takeovers Panel’s 1% guideline);
- evidence of the background of negotiations or belief as to the shareholders best interests;
- unless there is a need for a supplementary scheme booklet, evidence of proposed communications between the scheme company and its shareholders (this includes inbound and outbound call scripts, ASX announcements and roadshow presentations);
- a share registry affidavit or evidence of the plan for dispatch of the booklet and other materials once they have been approved at the first court hearing; and
- evidence of the manner of conducting the scheme meeting.
His Honour also explained that he expected that the written submissions to the Court should not exceed 10 pages except in rare cases, and that the submissions should not contain lengthy citations of uncontroversial propositions of law.
Evidence at the final court hearing
For the final court hearing, Justice Jackman explained that it would only be necessary to provide a short affidavit annexing:
- the poll report from the scheme meeting;
- the ASX announcement advising of the details of the final court hearing;
- the certificate evidencing that all conditions precedent have been satisfied or waived; and
- ASIC’s usual letter stating that it has no objection to the scheme. If ASIC does not give this letter, Jackman J stated that the affidavit should include a single paragraph to the effect that the scheme was not propounded for the purpose of avoiding any of the takeover provisions in Chapter 6 of the Corporations Act 2001 (Cth).
Justice Jackman explained it is unnecessary to provide evidence of:
- dispatch of the scheme booklet;
- whether an intention to appear by a party objecting to approval of the scheme has been received (his Honour noted that Counsel could simply inform Court from the bar table of any such notice);
- shareholder participation at the scheme meeting by way of percentages (number of shares, headcount, etc);
- the process of collating and counting proxy forms;
- what was said at the scheme meeting including questions and answers (unless there is a significant issue of legal principle which was raised at the meeting); and
- conditionality of the funding of the bidder.
The evidence required for a scheme of arrangement process had become extensive and burdensome on the parties and the Court, without equivalent utility. This resulted in a significant waste of time and cost.
Justice Jackman’s reforms are a most welcome development. Whilst Justice Jackman sits in the Federal Court, we expect each of the State Supreme Courts to follow suit and endorse the reforms.
- Tony Damian and Andrew Rich, The Australian Financial Review, “Keep schemes of arrangement in the courts”. See also M&A Dealmakers Launch Pre-Eminent Book and Call for Reforms to Schemes of Arrangement, 29 November 2021.
- The Treasury, Corporate control transactions in Australia: Consultation on options to improve schemes of arrangement, takeover bids, and the role of the Takeovers Panel, April 2022.
- See, for example, Law Council of Australia Business Law Section, Submission to The Treasury, Corporate control transactions in Australia, 6 June 2022, at 30-31.