Heres to the ones who scheme

Recent improvements to the schemes process at the Federal Court

Key Points

• Last week, Jackman J of the Federal Court outlined improvements to the court process in applications filed in that Court seeking approval of a scheme of arrangement.
• The traditional evidence relied on in the Court process in schemes will be reduced to: (1) three affidavits at the First Court Hearing - one attaching an ASIC company search, one providing the substantive details regarding the scheme, and one confirming the bidder's verification of its information; and (2) one brief affidavit at the Second Court Hearing - confirming receipt of all approvals (including ASIC's no-objection letter) and the satisfaction of conditions precedent.
• The pros and cons of a scheme process (eg, the fact that a scheme requires two Court hearings plus a shareholder meeting with relatively high voting thresholds) will still need to be considered in determining the optimal transaction structure. 
• It remains to be seen whether the State Supreme Courts will adopt a similar streamlined process, making the Federal Court an attractive forum for seeking scheme approval.

Background

On 22 March 2023, the Federal Court of Australia signalled significant reforms to the practice and procedure requirements for court approval of schemes of arrangement (Re Vita Group Limited NSD252/2023).

The outcome of Jackman J's reforms is that the previously burdensome and costly evidentiary requirements of the scheme approval process in the two court hearings should be reduced to the following:

First Court Hearing

• A short affidavit from the scheme company annexing a recent ASIC company search;
• The main scheme affidavit providing a broad overview of the scheme and associated transactions, the quantum of break fee as a percentage of the implied equity value of the target, verification of information in the scheme booklet, provision of the draft booklet to ASIC, the position of the proposed Chairs of the scheme meeting and attaching the scheme implementation deed and the draft scheme booklet; and
• An affidavit from the buyer regarding verification of its information in the draft scheme booklet.

Second Court Hearing

• A short affidavit annexing the results of the scheme meeting, the ASX announcement with the details of the Second Court Hearing and how to oppose the scheme, conditions precedent certificates, and ASIC's usual letter stating that it has no objection to the scheme.

Types of evidence no longer required

Other evidence traditionally relied on when seeking scheme approval will not ordinarily be required, including: 

• communications between a scheme company and its shareholders including call scripts, ASX announcements and roadshow presentations (other than a supplementary explanatory statement);
• communications between the scheme company and ASIC (where ASIC has issued its no objection letter);
• an affidavit from the independent expert verifying their report;
• affidavits from the proposed Chairs of the scheme meeting (provided their willingness to act and the absence of any relevant conflict of duty is addressed in the main scheme affidavit);
• a newspaper advertisement of the date of the Second Court Hearing and the process for opposing approval of a scheme (provided those details are instead the subject of an ASX announcement prior to the Second Court Hearing);
• evidence regarding scheme booklet dispatch;
• evidence of negotiations for break fees and exclusivity provisions; 
• evidence of satisfaction of debt funding conditions; 
• evidence of any intervener's intention to appear at the Second Court Hearing;
• evidence of the rate of shareholder participation at the scheme meeting compared to other recent shareholder meetings; and
• evidence of questions posed and answered at the scheme meeting, shareholder participation and voting technology. 

The Court indicated that, in an appropriate future case involving a foreign bidder, it would consider the need for a foreign law opinion on the proper execution and enforceability of a deed poll overseas.

The streamlined evidentiary process for obtaining court approval was the result of wide consultation within, and support from, the Federal Court as a whole.  As Jackman J described – "[A]ll of that should fit comfortably in one lever arch folder with double-sided copying".  

While the changes will be introduced in the Federal Court, it remains to be seen whether similar improvements will also be introduced by the State Supreme Courts, making the Federal Court an attractive forum for seeking scheme approval.

Scheme proponents should be aware that, as scheme approvals are ex parte applications, they are obliged to bring to the Court's attention all matters that could be considered relevant to the Court's consideration of whether to approve the scheme. As such, more evidence beyond that listed above may be required in certain circumstances.

While the modified process is a welcome development to the typically time consuming and costly process to obtain court approval of schemes of arrangement, the pros and cons of a scheme process still need to be assessed in determining the optimal transaction structure – eg, the typically longer timeline with two Court hearings plus a shareholder meeting, and the relatively high voting thresholds required to approve a scheme, compared to other transaction structures, will obviously remain key issues in determining whether to undertake a transaction by scheme of arrangement.

Please contact the authors for further information. See contact details below.