FEDERAL COURT OF AUSTRALIA Sinclair Knight Merz Pty Limited, in the matter of Sinclair Knight Merz Pty Limited [2012] FCA 1391 Citation: Sinclair Knight Merz Pty Limited, in the matter of Sinclair Knight Merz Pty Limited [2012] FCA 1391 Parties: SINCLAIR KNIGHT MERZ PTY LIMITED (ACN 001 024 095) File number: NSD 1836 of 2012 Judge: YATES J Date of judgment: 29 November 2012 Catchwords: CORPORATIONS – scheme of arrangement – application for order that company convene meetings of creditors Legislation: Corporations Act 2001 (Cth) Corporations Regulations 2001 (Cth) Federal Court (Corporations) Rules 2000 Cases cited: Fowler v Lindholm (2009) 178 FCR 563 Re MIA Group Ltd (2004) 50 ACSR 29 Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 Re Sino Gold Mining Ltd (2009) 74 ACSR 647 Date of hearing: 29 November 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 41 Counsel for the Plaintiff: Mr F Gleeson SC and Mr A d'Arville Solicitor for the Plaintiff: Jones Day IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1836 of 2012 IN THE MATTER OF SINCLAIR KNIGHT MERZ PTY LIMITED (ACN 001 024 095) SINCLAIR KNIGHT MERZ PTY LIMITED (ACN 001 024 095) Plaintiff JUDGE: YATES J DATE OF ORDER: 29 NOVEMBER 2012 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to section 411(1) of the Corporations Act 2001 (Cth) (Act), the Plaintiff convene a meeting of each of the following classes of its creditors: (a) Employee Scheme Creditors of the Plaintiff; and (b) Former Employee Scheme Creditors of the Plaintiff (as those terms are respectively defined in Schedule 1 of the Originating Process) (collectively, the Scheme Creditors), for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between the Plaintiff and the Scheme Creditors, a copy of which appears at Part 1 of Appendix A of Exhibit 1 in the proceeding. 2. The meeting of the Employee Scheme Creditors and the meeting of the Former Employee Scheme Creditors (Scheme Meetings) be held at Level 10, 100 Christie Street, St Leonards, NSW 2065 commencing at 11:00 am on 21 December 2012 in the following manner: (a) the Scheme Meetings be held concurrently for the purposes of the Chairman providing an introduction to and overview of the Scheme and for the purposes of a joint question and answer session; and (b) the Scheme Meetings be held separately for all purposes other than as set out in paragraph 8(a) of this Order provided nothing in this Order prevents persons other than those persons entitled to vote at the Scheme Meeting to be present at that Scheme Meeting. 3. Mr Paul Joseph Casamento, or failing him, Mr David Holmes Mathlin, be appointed chairman of the Scheme Meetings. 4. The chairman of the Scheme Meetings have power to adjourn the Scheme Meetings in his absolute discretion. 5. The draft explanatory statement that is substantially in the form of Exhibit 1 in the proceeding (Explanatory Statement) be approved for distribution to the Scheme Creditors. 6. The Plaintiff dispatch by pre-paid post to each Scheme Creditor: (a) a document substantially in the form of the Explanatory Statement; (b) a proxy form, substantially in the form that appears behind Part A of Appendix H of the Explanatory Statement; and (c) an address verification form, substantially in the form that appears behind Appendix J of the Explanatory Statement. 7. The Plaintiff dispatch the documents referred to in paragraphs (a) to (c) of Order 6 above on or before 3 December 2012 to each Scheme Creditor. 8. The time by which Scheme Creditors (or their attorneys) must return their proxy forms for the Scheme Meetings to be 11:00 am on 19 December 2012. 9. Voting at the Scheme Meetings be on a poll, except for procedural motions. 10. Regulations 5.6.12 to 5.6.36A of the Corporations Regulations 2001 shall not apply to the Scheme Meetings, with the exception of regulations 5.6.13, 5.6.16 (other than 5.6.16(1)(a) and (b), (6) and (7)), 5.6.20(1), 5.6.27(1)-(6), 5.6.28, 5.6.30, 5.6.31 and 5.6.31A. 11. Regulation 5.6.27(7) of the Corporations Regulations 2001 shall apply to the Scheme Meetings as modified to read: "For sub-regulations (1) and (3), the specified period is 10 business days after the end of the meeting". 12. Regulation 5.6.29 of the Corporations Regulations 2001 shall apply to the Scheme Meetings as modified to read all references to "Form 532" as a reference to "a proxy form, substantially in the form that appears behind Part A of Appendix H of the Explanatory Statement". 13. Notice of the Scheme Meetings be published once in the The Australian newspaper, by a notice substantially in the form of Annexure A to these orders, such notice to be published no later than 3 December 2012. 14. The contents of the Confidential Fifth Affidavit of Paul Joseph Casamento sworn 23 November 2012 be treated as confidential and may only be used for the purposes of this proceeding. Access to this affidavit be limited to the following persons: (a) any legal representatives for the Plaintiff; (b) any Judge, employee or other personnel of this Court; and (c) any person associated with the recording of transcript at any hearing of this proceeding. 15. The proceeding be stood over to 30 January 2013 at 9:00 am before Justice Yates for the hearing of any application to approve the scheme of arrangement. 16. There be liberty to apply on one day's notice. 17. These Orders be entered forthwith. Note: Settlement and entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. Annexure A NOTICE OF COURT ORDERED MEETINGS TO CONSIDER PROPOSED SCHEME OF ARRANGEMENT TO the Scheme Creditors of Sinclair Knight Merz Pty Limited (ACN 001 024 095) the Scheme Company. WHEREAS pursuant to subsection 411(1) of the Corporations Act 2001 (Cth), the Federal Court of Australia (the Court) has ordered that the Scheme Company convene separate meetings of its Employee Scheme Creditors and Former Employee Scheme Creditors of the purpose of considering a scheme of arrangement between the Scheme Company and its Employee Scheme Creditors and Former Employee Scheme Creditors (the Scheme of Arrangement). NOTICE IS HEREBY GIVEN that meetings of the Employee Scheme Creditors and Former Employee Scheme Creditors respectively of the Scheme Company (collectively, the Scheme Meetings) will be held at Level 10, 100 Christie Street, St Leonards NSW on 21 December 2012 commencing at 11.00 am (Sydney time). The Court has ordered that the Scheme Company convene a meeting of its Employee Scheme Creditors and a meeting of its Former Employee Scheme Creditors for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed to be made between the Scheme Company and those creditors. For further information, Employee Scheme Creditors and Former Employee Scheme Creditors should refer to the Explanatory Statement for the Scheme of Arrangement. If you wish to vote at a Scheme Meeting for the Scheme Company, you may attend the Scheme Meeting at which you are entitled to vote in person or by attorney or send a completed Proxy Form appointing a proxy to attend in your place. Any attorney or corporate representative should bring to the Scheme Meetings evidence of his or her appointment including any authority under which the appointment was made. Proxy Forms must be lodged with the Chairperson by 11.00 am on 19 December 2012. The Proxy Form is set out behind Part A of Appendix H to the Explanatory Statement. You are not required to submit a proof of debt or claims in respect of the debt owed to you by the Scheme Company. This information is set out in Part A of Schedule 1 to the proposed scheme of arrangement, which is Appendix A to the Explanatory Statement. CREDITORS SHOULD READ AND CAREFULLY CONSIDER THE EXPLANATORY STATEMENT FOR THE SCHEME OF ARRANGEMENT BEFORE DECIDING WHETHER OR NOT TO VOTE IN FAVOUR OF THE SCHEME OF ARRANGEMENT. The Explanatory Statement for the scheme of arrangement with Employee Scheme Creditors and Former Employee Scheme Creditors respectively is available from the Scheme Company on request. Capitalised terms used in this Notice have the same meaning as in the Explanatory Statement for the Scheme of Arrangement unless otherwise defined above. [ ] Company Secretary Sinclair Knight Merz Pty Limited IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1836 of 2012 IN THE MATTER OF SINCLAIR KNIGHT MERZ PTY LIMITED (ACN 001 024 095) SINCLAIR KNIGHT MERZ PTY LIMITED (ACN 001 024 095) Plaintiff JUDGE: YATES J DATE: 29 NOVEMBER 2012 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 29 November 2012 I made orders pursuant to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (the Act) providing for the convening of separate meetings of creditors for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement between the plaintiff, Sinclair Knight Merz Pty Limited (SKM), and its scheme creditors, the terms of which are set out in the explanatory statement required by s 412(1)(a) of the Act. 2 These are my reasons for making those orders. Background 3 SKM is part of the SKM Group, which is employee-owned and has been providing consulting, engineering and project delivery services since 1964. The ultimate holding company in the SKM Group is Sinclair Knight Merz Management Pty Limited (SKMM). 4 SKMM operates a shareholding plan under which senior employees of the SKM Group are offered the opportunity to purchase shares in the Group (the SKM Group Shareholding Plan). Under that plan, participating employees in Australia are offered the opportunity to purchase ordinary shares (Equity Shares) and participating redeemable preference shares (Dividend Shares) in Sinclair Knight Merz Holdings Limited (SKMH), SKM's immediate parent company. Participating employees are also issued with one redeemable voting preference share in SKMM for each 100 Equity Shares held by that employee (Voting Shares). 5 Prior to 6 December 2010 the SKM Group Shareholding Plan contained a provision which required a progressive disposal by employee shareholders between the ages of 60 and 65 of their Equity Shares, Dividend Shares and Voting Shares. The SKM Group Shareholding Plan also contained a provision which prohibited employee shareholders who had turned 60 from receiving further annual increments of Equity Shares, Dividend Shares and Voting Shares. These provisions have been referred to in the evidence as the Age Based Provisions. 6 The view was formed that the Age Based Provisions may contravene anti-discrimination legislation in certain countries where the SKM Group Shareholding Plan operated. In Australia the relevant legislation is the Age Discrimination Act 2004 (Cth) (the Age Discrimination Act). The provisions of the SKM Group Shareholding Plan were amended on 6 December 2010 to overcome this perceived problem. 7 The directors of SKM have formed the view that persons who were (or are) employed by SKM and were affected by the application of the Age Based Provisions have a cause of action arising under the Age Discrimination Act against SKM (as the entity that employed them at the relevant time), and potentially against SKMM (the company that operated the SKM Group Shareholding Plan) and SKMH (the company in which Equity Shares and Dividend Shares were held). The directors of SKM have also formed the view that those employees or former employees in Australia who were affected by the Age Based Provisions would likely be entitled to monetary compensation from SKM for any losses they have suffered as a result of the application to them of the Age Based Provisions, should an appropriate claim be made. Thus SKM has treated those persons as contingent creditors. These present and former employees are the scheme creditors for the purposes of the proposed scheme of arrangement. 8 I note that the SKM Group also intends to deal with similar claims by present and former employees in the United Kingdom and New Zealand. A similar scheme of arrangement has been proposed between present and former employees of Sinclair Knight Merz Limited in New Zealand (SKM NZ). A different regime has been proposed for employees and former employees in the United Kingdom because of the particular requirements of United Kingdom law. The scheme 9 The objective of the proposed scheme – the terms of which are included in the draft explanatory statement marked as Ex 1 – is to ask scheme creditors to consider a proposal to release any rights they may have to bring a claim against SKM or any other company in the SKM Group in respect of any losses they may have suffered as a result of the application to them of the Age Based Provisions (claim rights). The consideration proposed for the release of these claim rights will be: (a) the payment by SKM of a total cash consideration of $29,783,652 (the total cash amount) to be allocated between the scheme creditors on a particular basis; and (b) the issue by SKMH, on behalf of SKM, of an unsecured contingent value loan note instrument (a CVR Note) to each scheme creditor who is still employed by SKM and who has worked sufficient contract hours (ie 400 or more hours in the 12 months preceding the date of completion of a Transformational Merger) to qualify for participation in the SKM Group Shareholding Plan. 10 SKM advances the scheme of arrangement on the basis that the contingent liability to which I have referred represents a material liability on its balance sheet. Given the number of scheme creditors (35), its board has formed the view that the scheme provides a mechanism for SKM to discharge that liability whilst at the same time providing the scheme creditors with a credible commercial alternative to potentially lengthy individual negotiations with SKM to release their claim rights in return for financial compensation or litigation against SKM in respect of those rights. I should add that the scheme of arrangement is not interdependent with either the scheme of arrangement proposed for New Zealand employees and former employees or the compromise arrangements proposed with respect to United Kingdom employees and former employees. 11 It is desirable that I say something more about the consideration that is proposed. 12 The cash component represents SKM's estimate of the monetary compensation likely to be paid for losses suffered if claims were to be pursued against it under the Age Discrimination Act. 13 The CVR Notes will be issued to employee scheme creditors on terms which are provided in a trust deed to be entered into between SKM and Australian Executor Trustees Limited as trustee under the provisions of Chapter 2L of the Act. The trust deed is included in the explanatory statement. Each holder of a CVR Note will be entitled to receive a cash payment calculated by reference to a formula if all the Equity Shares in SKMH are purchased by a third party (a Transformational Merger) within the period beginning from the date on which the CVR Notes are issued and ending on the date on which the CVR Note holder ceases to be an employee of an SKM Group company (the Trigger Period). There is evidence before me that the SKM Group is currently in discussions with potential purchasers regarding a Transformational Merger. 14 The rationale for providing consideration in the form of CVR Notes is based on the different circumstances affecting, on the one hand, employee scheme creditors and, on the other, former employee scheme creditors affected by the Age Based Provisions. As I have noted, those provisions include the requirement that shareholders who ceased to be employees of an SKM Group company must sell their shares on the cessation of their employment. As a result, former employee scheme creditors would have been required to dispose of their shares – including shares they would have had but for the application of the Age Based Provisions (Notional Shares) – if they had not already done so as a result of the Age Based Provisions. Accordingly, they would not be able to sell any Notional Shares under a Transformational Merger. On the other hand, employee scheme creditors, but for the application of the Age Based Provisions, would have had Notional Shares and would have been entitled to sell those shares to a third party under a Transformational Merger as well as receive dividends paid on Notional Dividend Shares. 15 The CVR Notes seek to compensate employee scheme creditors for any losses they would have suffered in relation to Notional Shares and Notional Dividend Shares if a Transformational Merger were to complete at a price in excess of the current net asset value per Equity Share. The formula for calculating the cash payment under a CVR Note multiplies the number of Notional Equity Shares by the difference between the price per Equity Share under a Transformational Merger and $198.78 (being the net asset value per Equity Share as at 30 June 2012). The CVR Note will also entitle the holder to any dividends paid during the Trigger Period in connection with, or as part of, a Transformational Merger, calculated by reference to the holder's Notional Shares. 16 The obligations of SKMH, as the issuer of the CVR Notes, will be backed up by a Deed Poll that has now been entered into in favour of employee scheme creditors. Amongst other things, SKMH undertakes in the Deed Poll to issue a CVR Note on the terms of the trust deed to each employee scheme creditor on the Release Date in accordance with the scheme. 17 The likely losses suffered by scheme creditors as a result of the Age Based Provisions have been assessed by an external actuary, Professional Financial Solutions Pty Ltd. A copy of the external actuary's report is included in the explanatory statement. The likely loss in respect of each scheme creditor has been assessed as at 30 June 2012. The amount required to put each such creditor into the position he or she would have been in had the Aged Based Provisions not applied has been assessed by a methodology similar to that used for the rectification of unit pricing errors in the financial services industry. This amount is referred to in the external actuary's report as the Rectification Amount. The number of shares each scheme creditor would have held at 30 June 2012 had the Age Based Provisions not applied has also been calculated. The Rectification Amount for each scheme creditor includes the value of the additional shares he or she would have held at 30 June 2012. The Rectification Amount is based on the employment status of the particular scheme creditor as at 30 June 2012 and does not reflect any subsequent change. 18 The external actuary's report notes that scheme creditors who were not affected by the Age Based Provisions in any year enjoyed windfall gains as a result of the application of the provisions to their older colleagues. Many of those affected by the Age Based Provisions actually enjoyed windfall gains for a number of years, before he or she reached the age where he or she was first affected and suffered loss. Those gains were offset by the external actuary against the losses, with appropriate interest allowances. In some cases the particular scheme creditor enjoyed more windfall gains than he or she suffered losses. Thus, for some scheme creditors, the external actuary considered that no compensation was required. There are five scheme creditors who are in this position – two former employee scheme creditors and three employee scheme creditors. It is proposed that these scheme creditors each be offered $100 as nominal consideration for the release of their respective claim rights. 19 SKM has engaged an independent expert, Deloitte Corporate Finance Pty Limited, to provide an independent expert's report to assist scheme creditors in their consideration of the scheme of arrangement. The independent expert was requested to advise whether the scheme was in the best interests of scheme creditors by considering: (a) the external actuary's report and whether or not the methodology and assumptions in calculating the Rectification Amounts represent a fair and reasonable basis upon which those amounts should be calculated; and (b) the other advantages and disadvantages of the scheme of arrangement and the likely consequences if the scheme does not proceed. 20 A copy of the independent expert's report is included in the explanatory statement. 21 The independent expert has expressed the opinion that the methodology and assumptions adopted by the external actuary in calculating the Rectification Amounts represent a fair and reasonable basis on which that liability should be calculated and has drawn upon source data which appears to be appropriate in the circumstances. 22 The independent expert has expressed the opinion that the scheme of arrangement is in the best interests of former employee scheme creditors as a whole, and in the best interests of employee scheme creditors as a whole. In arriving at that opinion the independent expert has expressed the view that the advantages of the scheme of arrangement, in each case, are likely to outweigh the disadvantages. In particular, it has expressed the opinion that the compensation offered and the ability to avoid litigating claims on an individual basis outweigh the potential disadvantages, including the possibility of achieving a greater overall return. 23 The independent directors of SKM have unanimously recommended that the scheme creditors vote in favour of the scheme of arrangement at the proposed meetings. The independent directors believe that the scheme of arrangement will not materially prejudice SKM's ability to pay its creditors. The financial statements in evidence support that position. Particular matters 24 It is appropriate that I briefly refer to a number of additional matters pertaining to the scheme of arrangement and the meetings that are proposed. 25 First, it is proposed by SKM that there be two classes of creditors in relation to the holding of scheme meetings, namely: (a) former employee scheme creditors; and (b) employee scheme creditors. 26 In support of this position SKM points to the fact that former employee scheme creditors are no longer employed by an SKM Group company and, hence, will not receive a CVR Note, whereas employee scheme creditors are currently employed by SKM and will receive a CVR Note under the scheme of arrangement, in addition to the cash consideration calculated by the external actuary. 27 I am satisfied, at least provisionally, that those classes are appropriate. My attention has been drawn to the position of the five scheme creditors who may be considered to have nominal claims. SKM submits that, having regard to the valuation methodology used by the external actuary, the characteristics of the claims of these scheme creditors are not such as to destroy the community of interest which each has with others in the particular class to which he or she ostensibly belongs. Thus, SKM submits, the two classes it proposes should not be divided into further sub-classes. In other words, the nominal consideration to be paid to these scheme creditors is not of itself class-creating. My provisional view is that that submission should be accepted. In respect of each class, the external actuary has appeared to consistently and indiscriminately apply the same valuation methodology for calculating the likely loss suffered by each scheme creditor by reason of the application of the Age Based Provisions, albeit based on differing periods of time: Re MIA Group Ltd (2004) 50 ACSR 29 at [14]; Re Sino Gold Mining Ltd (2009) 74 ACSR 647 at [50]-[58]. 28 Secondly, it is not proposed that scheme creditors be required to lodge a proof of debt in respect of their claim rights for voting purposes. Rather, for the purposes of voting, each scheme creditor's claim rights will be valued by reference to the cash component of the scheme consideration which has been calculated by the external actuary. My provisional view is that that is appropriate. Any objection by a scheme creditor to the valuation of his or her claim for voting purposes can be dealt with as part of the fairness question at the second court hearing, similar to any objection to the valuation of options for voting purposes in relation to an options scheme: Re Sino Gold at [58]. 29 Thirdly, the scheme of arrangement confers certain releases on persons and entities who are not parties to the scheme, namely each other SKM Group company and their respective officers, employees and agents, past or present. The benefit of the release is held by SKM for itself and on trust for the third parties. Third party releases are permissible provided there is a sufficient nexus between the releases and the relationship between the creditor and the scheme company: Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 at [55]; Fowler v Lindholm (2009) 178 FCR 563 at [68]-[72]. 30 In the present case SKM submits that there is a sufficient nexus given that: (a) the scheme creditors' claims against SKM and the other SKM entities and individuals either completely or largely overlap; (b) the scheme of arrangement is in settlement of interlocking claims; and (c) in the absence of the release, none of the claims would be compromised. 31 In my view the releases proposed in the scheme of arrangement are prima facie permissible and their inclusion as part of the scheme of arrangement should not stand in the way of the Court ordering that the scheme meetings be convened. 32 Fourthly, as the scheme of arrangement is a creditors' scheme, r 3.3(2) of the Federal Court (Corporations) Rules 2000 does not apply. Rather, r 2.15 governs the scheme meetings, subject to any direction of the Court to the contrary. Rule 2.15 applies regs 5.6.11 to 5.6.36A of the Corporations Regulations 2001 (Cth) (the Regulations) to the convening and conduct of meetings order by the Court. Those regulations are ordinarily directed to meetings of creditors in a winding up, and not to meetings of creditors to consider a proposed scheme of arrangement under Part 5.1. SKM thus seeks modification or dispensation with a number of these regulations. It is not necessary for me to detail those matters save to say that I am satisfied that the modifications and dispensations that are sought in the draft orders provided by SKM are appropriate in the circumstances of the present matter. Consideration 33 I am satisfied that SKM is a Part 5.1 body and that the scheme of arrangement is "a compromise or arrangement" for the purposes of s 411(1) of the Act. 34 I am satisfied that, subject to any further submission that might be made at a later time, the explanatory statement sufficiently and adequately describes that scheme of arrangement. In particular, the explanatory statement makes clear the advantages and disadvantages to scheme creditors in either approving or not approving the scheme. 35 I note that the Australian Securities and Investments Commission (ASIC) has confirmed that it has had 14 days notice of the hearing of this application to the Court, in accordance with s 411(2)(a) of the Act. It has confirmed that it has had a reasonable opportunity to examine the terms of the proposed scheme. It has not sought to appear to make submissions or intervene to oppose the making of orders for the convening of the meetings of scheme creditors. 36 I also note that, under reg 5.1.01(1) of the Regulations, ASIC has allowed SKM to send the explanatory statement in a modified form. 37 Furthermore, there is evidence before me of the verification of factual information contained in the explanatory statement. 38 I have referred to the fact that the explanatory statement includes copies of the external actuary's report and the independent expert's report, amongst other documents (including the various transactional documents). The opinions expressed in the external actuary's report and the independent expert's report have been verified. 39 I note that Paul Joseph Casamento, a Director of SKM, has consented to act as chairman of the scheme meetings and that David Holmes Mathlin, another Director of SKM, has consented to act as chairman as an alternate to Mr Casamento. 40 I have been assisted in my consideration of this matter by the provision of a written outline of submissions prepared by counsel appearing for SKM on this application. A copy of the outline of submissions has been marked for identification: MFI 1. 41 In all the circumstances I am of the view that it is appropriate for the Court to order the convening of the meetings that are proposed, in terms of the draft orders that have been submitted by SKM. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate: Dated: 7 December 2012