Scheme of arrangement reforms in Australia – the current state of play 6 months on

Since the introduction of major reforms to Australia’s scheme of arrangement process 6 months ago in the Vita Group matter there have been a number of developments in both the Federal Court of Australia and the Supreme Court of New South Wales.  

In this article, we examine the current state of play (noting that not all judges have adopted a consistent approach during that 6-month period) and call for a united and consistent approach.

In brief 

• In March 2023, Justice Jackman introduced major reforms to streamline the evidence required to be produced in connection with schemes of arrangement.
• These reforms have precipitated a proliferation of scheme hearings before multiple judges in the Federal Court.
• Whilst there have been indications of general acceptance (and even approval) of Jackman J’s streamlined approach, the multiplicity of judicial opinion has led to emerging areas of uncertainty and inconsistency in approaches.
• In parallel to developments in the Federal Court, the Supreme Court of New South Wales has issued its own practice note on matters of evidence and procedure.
• The divergence of approaches is unhelpful for practitioners and clients alike. It creates confusion and uncertainty which should be avoided in the interests of promoting a more efficient market for control in Australia.
• We strongly encourage the Federal Court and the State Supreme Courts to come together to issue a single practice note delivering a consistent and uniform standard.

Background

In March 2023, in the Vita Group¹ scheme, Justice Jackman introduced major reforms to streamline the evidence required to be produced in connection with schemes of arrangement. We considered these welcome and much overdue reforms in our previous article here.

In the months since, there have been a number of developments in practice and procedure for schemes or arrangement in the Federal Court and the New South Wales Supreme Court. Whilst many of developments have, sensibly, endorsed or are consistent with the reforms introduced by Jackman J in Vita Group, there have also been some emerging areas of uncertainty and inconsistency in approaches by different judges.

Developments in the Federal Court of Australia

Confirmation of Vita Group approach: Blackmores

In the Blackmores Limited / Kirin Holdings scheme of arrangement (Blackmores),² Jackman J followed his streamlined approach to evidence for scheme hearings as outlined in Vita Group.

In addition, Jackman J built upon this streamlined approach by confirming that foreign law evidence proving due execution of a deed poll by a foreign bidder would no longer be required, citing a number of reasons including that the risk to shareholders of improper execution was almost entirely, if not completely, theoretical.

Other case law

The reforms introduced by Jackman J precipitated a proliferation of scheme hearings being brought before the Federal Court, with no less than 10 other Federal Court judges having presided over a scheme hearing since Vita Group.³

Whilst there have been indications of general acceptance (and even approval) of Jackman J’s streamlined approach, the multiplicity of judicial opinion has, in some areas, complicated the clear guidance articulated by his Honour in Vita Group.

Below are four recent cases in which additional commentary has emerged.

1. Tesserent Limited

In the first court hearing for the Tesserent Limited / Thales Australia scheme of arrangement,⁴ Perram J observed that Vita Group had been concerned with a scheme of arrangement providing for the takeover of a relatively small listed company, and indicated that his Honour did not read Vita Group as a more general statement about schemes of arrangements outside the context of takeovers.

In relation to the four substantive matters that came before the Court’s attention:

• (chair and alternate chair) his Honour agreed with Jackman J’s position that direct evidence from the nominated chairperson and alternate chairperson themselves would not be required;
• (disclosure by chair and alternate chair) his Honour considered that Jackman J’s decision in Vita Group to dispense of rule 3.2(b)(ii) of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules) (under which rule the scheme company must produce evidence of the chairperson’s and alternate chairperson’s previous relationship or dealings with the body subject to the scheme or any other person interested in the scheme) did not mean that rule 3.2(b)(ii) was in every case unnecessary and hence should be dispensed with. His Honour indicated that a case-by-case approach should be taken to determine whether rule 3.2(b)(ii) should be dispensed with;
• (dispatch of scheme materials) his Honour accepted there was force in Jackman J’s proposition in Vita Group that evidence regarding the dispatch of scheme materials once they were approved at the first court hearing was otiose because the orders made at the first court hearing were self-explanatory. However, His Honour indicated that such evidence may be required in a case in which the orders were not self-explanatory; and
• (newspaper notice) whilst his Honour agreed with Jackman J that the publication of the notice of the second court hearing via ASX announcement would be a welcome innovation, his Honour differed on the conclusion that the requirement to publish the notice in a newspaper under rule 3.4 of the Corporations Rules should be altogether consigned to history (citing, among other things, the fact that older shareholders do still in fact read newspapers).

Perram J recognised the ‘difficulties of working in an areas in which no one judge can control the approach taken by others’ and expressed that a solution to this conundrum may be for the Harmonisation Committee to amend the Corporations Rules or issue a harmonised practice note.

2. Allianz Australia General Insurance Limited

In Re Allianz Australia General Insurance Limited⁵, Jackman J responded to Perram J’s view in Tesserent that the matter of scheme reform may be best handled by the Harmonisation Committee.

In short, Jackman J differed in opinion to Perram J, indicating that there should be no need to await the ‘inevitably slow’ processes of the Harmonisation Committee to achieve scheme reform.

3. DDH1 Limited

In the first court hearing for the DDH1 Limited / Perenti Limited scheme of arrangement,⁶ Colvin J weighed in on two points regarding the Court’s approach to evidence in schemes:

• (ASIC correspondence) his Honour agreed with Jackman J’s view that no purpose was served by putting into evidence all of the target’s correspondence with ASIC and that any matters arising course of the exchange with ASIC that should be brought to the attention of the Court could be done so via submissions. His Honour added that, in some cases, it may be appropriate for a particular issue to be exposed even though it had already been resolved with ASIC. According to his Honour, this is consistent with the need for the Court to be informed of matters which bear upon the exercise of its overall supervisory jurisdiction in the circumstances of the particular case; and
• (shareholder communications) broadly consistent with Jackman J’s views in Vita Group, Colvin J noted that there was no requirement for all shareholder communications (including scripts) to be approved by the Court at the time of the first court hearing. However, his Honour indicated that the Court should be informed about (i) any plan in relation to communications with members and (ii) any relevant matters that have arisen from the manner in which communications have occurred in the period leading up to the scheme meeting.

​​4. Alloggio Group Limited

In the first court hearing for the Alloggio Group Limited / Next Capital Pty Limited scheme of arrangement,⁷ Kennett J noted that the scheme company had presented evidence in a fashion consistent with the views expressed by Jackman J in Vita Group. Whilst Kennett J found such approach to be appropriate in the current case, his Honour refrained from taking any views about the correctness of Jackman J’s position outside the immediate context.

In the second court hearing,⁸ Kennett J relevantly indicated that:

• (voter turnout) although evidence as to voter turnout was unlikely to be necessary, it did not follow that it is wholly irrelevant to the exercise of judicial discretion (notwithstanding Jackman J’s views in Vita Group that such evidence was irrelevant and unnecessary); and
• (dispatch of scheme materials and conduct of scheme meeting) despite Jackman J’s assertion that evidence as to the dispatch of scheme materials to shareholders and the conduct of meetings was unnecessary, cases may arise where the judge hesitates to infer that relevant steps have been taken in the absence of evidence to that effect.

Possible Federal Court Practice Note

Following Jackman J’s decision in Vita Group, the Federal Court engaged in the process of consulting with various stakeholders, with the intention of publishing a practice note or other communication concerning schemes of arrangement.

In Tesserent, Perram J indicated there may be merit to a harmonised practice note and further commented that it ‘may even be that schemes of arrangement involving takeovers of listed entities warrant their own specific rules’.

However, in the first court hearing for the Newcrest Mining Ltd / Newmont Corporation scheme of arrangement,⁹ Beach J indicated that a practice note would, in his Honour’s view, be unnecessary, stating:

‘For my part, no cookie-cutter procedures practice note is necessary in this niche area of commercial law, where practitioners are highly skilled and where judicial requirements for applications and evidence demand and prize flexibility. Moreover, the need for any variance is efficiently addressed and communicated as between judges and as between the judiciary and the profession. Whatever one might think about the perceived advantages of pleonastic managerial-style yet effete practice notes in other areas, they have little merit in specialised areas of commercial law involving low volume complex cases.’

At present, the Federal Court has not yet issued any revised practice note regarding changes to the court process for schemes of arrangement.

Developments in the Supreme Court of New South Wales

Reissued Practice Note SC Eq 4

In parallel to developments in the Federal Court, on 19 May 2023, the Supreme Court of New South Wales reissued Practice Note SC Eq 4 for Corporations List matters (NSW Practice Note). This expressed an overarching support for “simplification” to the scheme process. 

The NSW Practice Note provides several points of guidance which are broadly consistent with Jackman J’s reforms in Vita Group. However, the NSW Practice Note also indicates the following points of divergence from Jackman J’s reforms:

• (exclusivity provisions) the Court would generally expect to see evidence of the ‘general nature of any exclusivity provisions’ (whereas Jackman J indicated such evidence would generally not be required);
• (dispatch of scheme materials) the Court will generally expect to see evidence at the second court hearing of the dispatch of scheme documents in accordance with the Court’s orders (whereas Jackman J indicated such evidence would not be required except to the extent there was non-compliance with the Court’s orders); and
• (voter turnout) the NSW Practice Note provides that the Court will generally still expect to see evidence as to voter turnout at scheme meetings (whereas Jackman J considered such evidence would generally be irrelevant and unnecessary).

In addition, the NSW Practice Note states that the Court’s approach to substantive issues arising in scheme applications will necessarily be guided by the existing and developing case law, for example as to communications by a scheme proponent to its shareholders or unitholders, proof of due execution of a deed poll by a foreign bidder and proof of financial arrangements supporting bids by special purpose bidding vehicles.

Commentary

The multiplicity of approaches between judges has precipitated growing uncertainty and inconsistencies in the way the Courts and different judges approach matters of evidence and procedure in schemes of arrangement. This is an unfortunate development.

There is a risk of this divergence in approaches increasing, particularly in light of the proliferation of scheme hearings before multiple different judges in the Federal Court and the existence of the NSW Practice Note which diverges in some respects from the approach taken in Vita Group and some of the later Federal Court decisions.

The divergence of approaches is unhelpful for practitioners and clients alike. It creates confusion and uncertainty which should be avoided in the interests of promoting a more efficient market for control in Australia.

We strongly encourage the Federal Court and the State Supreme Courts to come together to issue a single practice note delivering a consistent and uniform standard approach to evidence and process in schemes of arrangement.

1. See Re Vita Group Ltd [2023] FCA 400 and Re Vita Group Ltd (No 2) [2023] FCA 623.
2. See Re Blackmores Ltd [2023] FCA 624 and Re Blackmores Ltd (No 2) [2023 FCA 850.
3. These 10 judges are: Feutrill J in Re A-Cap Energy Ltd [2023] FCA 1142 and Re Chesser Resources Ltd [2023] FCA 1021 Jackson J in Re Essential Metals Ltd [2023] FCA 1101; Yates J in Re United Malt Group Ltd [2023] FCA 1071; Beach J in Re Newcrest Mining Ltd [2023] FCA 1080; Moshinsky J in Re Carbon Revolution Ltd [2023] FCA 1081; Kennett J in Re Alloggio Group Ltd [2023] FCA 799 and Re Alloggio Group Ltd (No 2) [2023] FCA 1053; Colvin J in Re DDH1 Ltd [2023] FCA 982 and Re DDH1 Ltd (No 2) [2023] FCA 1046; Button J in Re Clemenger Group Ltd [2023] FCA 815 and Re Clemenger Group Ltd (No 2) [2023] FCA 974; Perram J in Re Tesserent Ltd [2023] FCA 969; Anderson J in Re Cellnet Group Ltd [2023] FCA 767 and Re Cellnet Group Ltd (No 2) [2023] FCA 973;
4. See Re Tesserent Ltd [2023] FCA 969.
5. [2023] FCA 994.
6. See Re DDH1 Ltd [2023] FCA 982.
7. See Re Alloggio Group Ltd [2023] FCA 799.
8. See Re Alloggio Group Ltd (No 2) [2023] FCA 1053.
9. See Re Newcrest Mining Ltd [2023] FCA 1080.