Update on scheme of arrangement reforms in Australia – one step closer to a harmonised approach

In our previous article, we discussed the recent developments in case law in 2023 on schemes of arrangement and called for the Federal and State Supreme Courts to adopt a consistent and uniform approach to the evidentiary and procedural requirements. In welcome news, various courts of Australia have now begun to heed the direction of the Harmonisation of Rules Committee, and a unified approach to reform is underway.

In brief

• The Harmonisation of Rules Committee (Harmonisation Committee), an advisory committee made up of judges from various Australian courts and the High Court of New Zealand, has recently issued ‘Practice Note – Harmonisation in schemes of arrangement’ (HRC Practice Notice).
• In welcome news, the Federal Court of Australia, Supreme Court of New South Wales and Supreme Court of Western Australia have each issued new or updated practice notes to implement the HRC Practice Note. It is anticipated that other jurisdictions will do the same over the coming weeks.
• The approach taken by the Harmonisation Committee is a commendable step towards a uniform and harmonised approach to the evidentiary requirements for schemes.

Background

In March of this year, Jackman J introduced major reforms to streamline the evidence required to be produced in connection with schemes of arrangement in the Vita Group scheme. More on the content and implications of those reforms can be found here and here. The Federal Court of Australia (on which Jackman J sits) and the State Supreme Courts are vested with coordinate federal jurisdiction with respect to section 411 of the Corporations Act 2001 (Cth). This coordinate federal jurisdiction has been thrown into stark relief following Jackman J’s reforms – cracks and fault lines have emerged as judges of various Courts have grappled with the out-workings of his Honour’s reforms.

On 19 May 2023, the Supreme Court of New South Wales (which, of course, is the home to many members’ scheme hearings) reissued Practice Note SC Eq 4 for Corporations List matters. That revised Practice Note was not entirely consistent with Jackman J’s reforms – divergence on various issues – exclusivity provisions, dispatch of scheme materials and voter turnout – were apparent.

In the Federal Court, while there was general support and encouragement for the streamlined approach to Court hearings for schemes of arrangement expressed by Jackman J in Vita Group, there was disagreement between the Judges as to the best approach to implementing such reforms. Justice Perram proposed that a unified approach to reforms should be adopted, and a harmonised practice note promulgated.¹ Justice Beach disagreed with this proposal.²

HRC practice note – a step towards a unified approach

Earlier this month, the Federal Court of Australia, Supreme Court of New South Wales and Supreme Court of Western Australia each issued new or updated practice notes to implement the HRC Practice Note. The developments are a commendable step towards a consistent and uniform approach by the Federal and State Supreme Courts. In this next section, we have set out a few key points of divergence between the HRC Practice Notice and Jackman J’s reforms in Vita Group:

• Exclusivity provisions – unlike the reforms proposed by Jackman J, the HRC Practice Note states that the Court expects a scheme proponent to lead evidence at the first Court hearing concerning the general nature and length of any exclusivity provisions. It also notes that “[s]ubmissions as to these matters need not be extensive if the… nature and length of the exclusivity provisions do not raise novel issues”. 
• Member communications – the HRC Practice Note requires the nature of the scheme proponent’s intended communications with securityholders be disclosed at the first Court hearing. The HRC Practice Note also states that the parties “may also wish to continue the existing practice of drawing the Court’s attention to material communications to securityholders after the first Court hearing, at least by a communication to the chambers of the judge hearing the application, to reduce the risk of difficulties arising at the second Court hearing.” The HRC Practice Note goes on to say that the Court’s approach to substantive issues “will necessarily be guided by the existing and developing case law”.
  
  This position is contrary to Jackman J’s reforms where His Honour held that it is unnecessary to seek the Court’s approval for communications between the scheme company and shareholders (and similarly, unless there was a significant issue of legal principle which was raised at the scheme meeting, there is no need for evidence of what was said at the meeting and the questions and answers between the scheme company and scheme shareholders).
• Evidence of dispatch and compliance – Jackman J held in Vita Group that evidence of the proposed procedures for dispatch is unnecessary as the Court orders are self-explanatory. However, under the HRC Practice Note, the Court expects a scheme proponent to lead evidence at the second Court hearing of the dispatch of scheme documents in accordance with the Court’s orders (although, this can be on information and belief and “need not be extensive”).
• Voter turnout – in addition to evidence that the scheme was approved by the requisite statutory majorities, the HRC Practice Note states that the Court expects a scheme proponent to lead evidence at the second Court hearing as to voter turnout at the scheme meeting, being the number or percentage of members who attended the scheme meeting, in person or by proxy, as compared to the total number of members of the scheme company. This is contrary to Jackman J’s position in Vita Group where his Honour held that this was unnecessary.
• Special purpose vehicles (SPV) – Jackman J held in Vita Group that where the bidder is a SPV and there is a bidding consortium standing behind which is providing debt or equity commitments, evidence is not required as to the conditionality of the funding commitments by the bidding consortium and the likelihood of those conditions being satisfied.
  
  Under the HRC Practice Note, the Court’s approach to substantive issues arising in scheme applications “will necessarily be guided by the existing and developing case law”. The HRC Practice Note goes on to say that where a SPV with minimal assets is to acquire securities of substantial value under a scheme, a risk of a scheme not completing is likely to be material to securityholders, irrespective of the fact that their securities are not transferred to that SPV until the consideration is paid. Accordingly, the position under the HRC Practice Note is that evidence should be led at the first Court hearing of the availability of the funding or other financial support on which the SPV will rely to complete the scheme.
• Foreign law advice – this was not considered by Jackman J in Vita Group as the bidder was an Australian company. However, Jackman J did consider this issue in the Blackmores scheme and held that foreign law evidence proving due execution of the deed poll would no longer be necessary, citing a number of reasons including that the risk of improper execution is almost entirely theoretical.³
  
  Under the HRC Practice Note, it is noted that evidence of due execution of a deed poll “should only be necessary if a real uncertainty or issue exists” in respect of its enforceability.

​Where to from here?

It is important to note that a unified approach does not limit the obligation on a scheme proponent to lead evidence to discharge its responsibility to make full and fair disclosure of matters which may be material to the ex parte orders which are sought in respect of a scheme of arrangement.

Following the promulgation and adoption of the HRC Practice Note, a more unified approach to evidential requirements and procedure in scheme hearings will be taken across Australian jurisdictions.

A converged approach to streamline the evidence required to be produced is a most welcome development for practitioners and clients alike and will promote a more efficient market for control in Australia.

Moving forward, we predict that the flurry of filings in the Federal Court of Australia (rather than in State Supreme Courts), which followed on from Jackman J’s reforms in the Federal Court of Australia, will now subside.

1. Re Tesserent Ltd [2023] FCA 696 at [22].
2. Re Newcrest Mining Limited [2023] FCA 1080 at [20]. See our previous article here which discusses developments in the Federal and State Supreme Courts following Vita Group. 
3. See Re Blackmores Ltd [2023] FCA 624 and Re Blackmores Ltd (No 2) [2023] FCA 850.