FEDERAL COURT OF AUSTRALIA Sinclair Knight Merz Management Pty Limited, in the matter of Sinclair Knight Merz Management Pty Limited [2013] FCA 1211 Citation: Sinclair Knight Merz Management Pty Limited, in the matter of Sinclair Knight Merz Management Pty Limited [2013] FCA 1211 Parties: SINCLAIR KNIGHT MERZ MANAGEMENT PTY LIMITED ACN 087 978 970 and SINCLAIR KNIGHT MERZ HOLDINGS LIMITED ACN 001 024 102 File number: NSD 2193 of 2013 Judge: FARRELL J Date of judgment: 5 November 2013 Catchwords: CORPORATIONS – scheme of arrangement – content of explanatory statement – employee share plan – escrow account – warranty claims regime – whether interests are class creating – impact of contingent value right notes – where scheme consideration used to extinguish loans – former employees – exclusivity arrangements Legislation: Corporations Act 2001 (Cth) ss 411(1), 1319 Corporations Regulations 2001 (Cth) rr 5.6.12, 5.6.13A, 5.6.13B, 5.6.14-5.6.36A Federal Court (Corporations) Rules 2000 (Cth) r 2.15 Cases cited: EBooks Corporation Limited; in the matter of EBooks Corporation Limited [2013] FCA 305 Investa Properties Limited, in the matter of Investa Properties Ltd [2007] FCA 1104 Re APN News & Media Ltd (2007) 62 ACSR 400 Re Cashcard Australia Ltd (2004) 48 ACSR 738 Re Foster's Group Limited (No. 2) [2011] VSC 547 Re WebCentral Group Ltd (No 2) (2006) 58 ACSR 742 RuleBurst Holdings Limited, in the matter of RuleBurst Holdings Limited [2008] FCA 1901 Ruleburst Holdings Ltd, in the matter of Ruleburst Holdings Limited (No 2) [2008] FCA 2010 Sinclair Knight Merz Pty Limited, in the matter of Sinclair Knight Merz Pty Limited [2012] FCA 1391 Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 Date of hearing: 5 November 2013 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 21 Counsel for the First and Second Plaintiffs: Mr R A Dick SC with Mr D J Barnett Solicitor for the First and Second Plaintiffs: Jones Day Counsel for Jacobs Engineering Inc: Mr I M Jackman SC IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2193 of 2013 IN THE MATTER OF SINCLAIR KNIGHT MERZ MANAGEMENT PTY LIMITED SINCLAIR KNIGHT MERZ MANAGEMENT PTY LIMITED ACN 087 978 970 First Plaintiff SINCLAIR KNIGHT MERZ HOLDINGS LIMITED ACN 001 024 102 Second Plaintiff JUDGE: FARRELL J DATE OF ORDER: 5 November 2013 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to section 411(1) of the Corporations Act 2001 (Cth) (Act): a. Sinclair Knight Merz Management Pty Limited (SKMM) convene a meeting of its members who hold Voting Shares issued by it (SKMM Scheme Members) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between SKMM and the SKMM Scheme Members, a copy of which appears at Tab 8 of Exhibit PJC1 in the proceeding; and b. Sinclair Knight Merz Holdings Limited (SKMH) convene a meeting of its members who hold Equity Shares issued by it (SKMH Scheme Members) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between SKMH and the SKMH Scheme Members, a copy of which appears at Tab 3 of Exhibit PJC1 in the proceeding. 2. That the meetings of the SKMM Scheme Members and SKMH Scheme Members (Scheme Meetings) be held at the Northside Conference Centre, Corner Oxley Street and Pole Lane, Crows Nest NSW 2065 and: a. the SKMM Scheme Meeting commence at 10:30 am on 6 December 2013; and b. the SKMH Scheme Meeting commence at 11:00 am on 6 December 2013. 3. Mr Peter Brooke Scott, or failing him, Mr Paul Joseph Casamento, be appointed chairman of the Scheme Meetings. 4. The chairman of the Scheme Meetings have power to adjourn either or both Scheme Meetings in his absolute discretion. 5. The draft explanatory statement that is Tab 3 of Exhibit PJC2 in the proceeding (Scheme Booklet) be approved for distribution to the SKMM Scheme Members and SKMH Scheme Members substantially in the form of Tab 3 of Exhibit PJC2. 6. The Plaintiffs dispatch by pre-paid post or courier to each SKMM Scheme Member and SKMH Scheme Member: a. a document substantially in the form of the Scheme Booklet; b. proxy forms, substantially in the form of Tab 4 of Exhibit PJC2; and c. payment authority forms, substantially in the form of Tab 5 of Exhibit PJC2. 7. The Plaintiffs dispatch the documents referred to in paragraphs (a) to (c) of Order 6 above on or before 11 November 2013 to each SKMM Scheme Member and SKMH Scheme Member. 8. The time by which SKMM Scheme Members and SKMH Scheme Members (or their attorneys) must return their proxy forms for the Scheme Meetings to be 10:00 am on 5 December 2013. 9. Voting at the Scheme Meetings be on a poll, except for procedural motions. 10. Pursuant to rule 2.15 of Federal Court (Corporations) Rules 2000 (Cth): a. regulations 5.6.12, 5.6.13A, 5.6.13B, 5.6.14 to 5.6.19, 5.6.21 and 5.6.23 to 5.6.36A of the Corporations Regulations 2001 (Cth) shall not apply to the Scheme Meetings; and b. regulations 5.6.20 and 5.6.22 of the Corporations Regulations 2001 (Cth) shall apply to the Scheme Meetings as if a poll had been demanded. 11. Notice of the hearing of any application to approve the schemes of arrangement 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 2 December 2013. 12. The proceedings be stood over to 10 December 2013 at 9:30 am before Justice Farrell for the hearing of any application to approve the schemes of arrangement. 13. There be liberty to apply on one day's notice. 14. These Orders be entered forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. Annexure A TO all the Scheme Members of Sinclair Knight Merz Management Pty Limited (ACN 087 978 970) and Sinclair Knight Merz Holdings Limited (ACN 001 024 102) TAKE NOTICE that at 9:30 am on 10 December 2013, the Federal Court at Queen's Square, Sydney, New South Wales, will hear applications by Sinclair Knight Merz Management Pty Limited and Sinclair Knight Merz Holdings Limited seeking the approval of separate schemes of arrangement between the above-named companies and its Scheme Members if agreed to by resolutions to be considered by the meetings of the Scheme Members to be held on 6 December 2013. If you wish to oppose the approval of one or both of the schemes of arrangement, you must file and serve on Sinclair Knight Merz Management Pty Limited and/or Sinclair Knight Merz Holdings Limited (as relevant) a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on Sinclair Knight Merz Management Pty Limited and/or Sinclair Knight Merz Holdings Limited (as relevant) at its address for service below at least one day before the date fixed for the hearing of the applications. The address for service of Sinclair Knight Merz Management Pty Limited and Sinclair Knight Merz Holdings Limited is: Level 10, 100 Christie Street, St Leonards, NSW 2065 (Attention: Mr Paul Casamento). Name of person giving notice or of person's legal practitioner: Matthew Latham, solicitor for Sinclair Knight Merz Management Pty Limited and Sinclair Knight Merz Holdings Limited. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2193 of 2013 IN THE MATTER OF SINCLAIR KNIGHT MERZ MANAGEMENT PTY LIMITED SINCLAIR KNIGHT MERZ MANAGEMENT PTY LIMITED ACN 087 978 970 First Plaintiff SINCLAIR KNIGHT MERZ HOLDINGS LIMITED ACN 001 024 102 Second Plaintiff JUDGE: FARRELL J DATE: 5 November 2013 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an application under s 411(1) of the Corporations Act 2001 (Cth) (Corporations Act) for orders to convene scheme meetings of the holders of redeemable voting preference shares (Voting Shares) in Sinclair Knight Merz Management Pty Limited (ACN 087 978 970) (SKM Management) and the holders of ordinary shares (Equity Shares) in Sinclair Knight Merz Holdings Limited (ACN 001 024 102) (SKM Holdings), an order approving the explanatory memorandum contained in the Scheme Booklet relating to those Scheme Meetings for distribution and ancillary orders under s 1319. 2 SKM Management and SKM Holdings (and its subsidiaries) are referred to as the SKM Group and SKM Management is the ultimate holding company. The SKM Group has conducted the business of providing consulting, engineering and project management services since it commenced business in Sydney in 1964; it now conducts business in many countries. 3 The proposed Schemes are inter-conditional. They are acquisition schemes under which Jacobs Engineering Group Inc (Jacobs), through its subsidiary Jacobs Australia Holdings Company Pty Limited (Bidco) will acquire 100% of the Voting Shares and Equity Shares. Related transactions will result in Jacobs acquiring all of the shares in SKM Group which are not held by SKM Group companies. Jacobs is a public company listed on the New York Stock Exchange; it provides a diverse range of technical, professional and construction services to industrial, commercial and government clients around the world. 4 The details of the Schemes and related transactions are usefully set out in the affidavit of Mr Casamento (a director of SKM Management and SKM Holdings) sworn on 23 October 2013 and the relevant principles and other matters are set out in the written submissions provided to me by Senior Counsel for SKM Group. I have marked the submissions (together with the schedule showing compliance with formal requirements) as MFI-1. I have marked as MFI-2 the index to the Court Book which sets out each of the affidavits which were read and exhibits tendered in these proceedings. The Australian Securities and Investments Commission (ASIC) has provided the "usual letter" in relation to the Schemes indicating that it has had the opportunity to review drafts of the Scheme Booklet within the required timeframe and that it does not intend to attend the first court hearing. ASIC's letter is Exhibit 2. 5 Counsel for SKM Group has taken me through the Scheme Booklet and the evidence supporting the application in some detail. On the basis of these materials, I am satisfied of the formal matters relevant to an application to convene a scheme meeting under the Corporations Act. Before considering matters which Counsel raised in his submissions it is useful to note a few features of the proposed Schemes. Background 6 SKM Management operates an employee share plan under which employees are offered the opportunity to purchase Equity Shares and participating redeemable preference shares (Dividend Shares). They are issued one Voting Share for every 100 Equity Shares. Accordingly SKM Group employees hold all of the Voting Shares and Equity Shares. It is a condition precedent of the Schemes that the Dividend Shares are redeemed. 7 Mr Casamento's affidavit sets out the background to the proposed Schemes: Starting in 2009, the SKM Board commenced the "Vision 2020" process to evaluate SKM Group's medium to long term commercial objectives culminating in the "Vision 2020 Principles Statement". In November 2011, SKM Management Shareholders voted by a majority of 98% to endorse the principles. They endorsed investigation of a transformational merger by over 90%. By February 2012, a working group of advisers and directors had been established which developed criteria for evaluation of suitable candidates for merger: this was endorsed by the SKM Board. They are set out in Section 5.3 of the Scheme Booklet. Greenhill & Co Limited, corporate advisers, were engaged to commence a formal process of identifying and assessing potential merger partners. Several potential merger partners (including Jacobs) were identified and went through due diligence. In March 2013, an exclusivity period commenced for Jacobs to conduct final due diligence and this was extended several times. On 8 September 2013, SKM Management, SKM Holdings, Jacobs and Bidco entered into the Merger Implementation Deed in relation to the Schemes. Escrow Account and Sellers' Representative's Account 8 The Scheme Consideration is in aggregate $1,331,403,000. It will be paid on the Implementation Date as follows: $1 for each Voting Share, which is in aggregate $11,799, and which will be paid to SKM Management in trust for SKM Management Shareholders; Initial Scheme Consideration of $1,209,903 million will be paid to SKM Holdings in trust for the holders of Equity Shares; $120 million will be paid to the Escrow Account with Bank of America, National Association as the escrow agent. The Escrow Account has been established as a fund from which claims made by Jacobs under the Sale Agreement can be paid once they have been assessed on the direction of the Sellers' Representative and Bidco. To the extent that funds are not used for that purpose, they will be paid proportionately to the holding of Equity Shares as to $60 million in December 2014 (plus accrued interest) and as to the balance in 3 years after the Implementation Date; $1.5 million will be paid to an account for costs of the Sellers' Representatives. They are three senior employees of SKM Group who have consented to perform the role of assessing and approving or disputing claims made on the Escrow Account by Bidco. Bidco will also contribute $500,000 to this account. To the extent that there are moneys in this account at the later of 3 years from the Implementation Date or after all disputes have been resolved, it will be paid as to 75% proportionately to the holding of Equity Shares and as to 25% to Bidco. 9 Bidco's recourse to the Escrow Account and the insurance regime which has been adopted to manage risk are summarised at Section 8 of the Scheme Booklet and at [41] of the Lonergan Edwards & Associates Limited report which is Annexure A to the Scheme Booklet. The text of the Sale Agreement forms part of Annexure B, and the Escrow Deed is Annexure G. The effect of the Sale Agreement is to establish Bidco's right to make claims out of the Escrow Account (being claims to which insurance policies which have been put in place do not respond) and to pay for the deductibles on the insurance. One matter which is not covered by insurance is compliance by SKM Group with corruption and anti-bribery laws in connection with an improper payment which SKM Group self-reported to the World Bank. This mechanism has the effect of limiting Bidco's recourse to $120 million in the Escrow Account. The exception to this limitation of liability (and accordingly recourse to the Escrow Account) is for breach of the warranty that the SKM Group shareholders are entitled to transfer their shares free of encumbrances or the fraud or wilful misconduct of the shareholders. This is, in essence, a warranty which it has become customary for scheme shareholders to give following the decisions of Lindgren J in Re APN News & Media Ltd (2007) 62 ACSR 400 at [57]-[63]; Re WebCentral Group Ltd (No 2) (2006) 58 ACSR 742 at [14]-[22] and Investa Properties Limited, in the matter of Investa Properties Ltd [2007] FCA 1104 at [29]-[30], adapted to the circumstances where the vendor shareholders are management of the scheme company. 10 Counsel has drawn attention to EBooks Corporation Limited; in the matter of EBooks Corporation Limited [2013] FCA 305 at [17]; Re Cashcard Australia Ltd (2004) 48 ACSR 738; RuleBurst Holdings Limited, in the matter of RuleBurst Holdings Limited [2008] FCA 1901 and Ruleburst Holdings Ltd, in the matter of Ruleburst Holdings Limited (No 2) [2008] FCA 2010 in which similar arrangements were used but not judicially commented upon. I am satisfied that the arrangements for the creation and operation of the Escrow Account provide a clear and appropriate mechanism for dealing with claims which may be made by Bidco and that they are disclosed in the Scheme Booklet. SKM Holdings and SKM Management are not publicly listed and it would be usual for a purchaser of such companies to have the benefit of a warranty claims regime; it is likely that the Scheme Consideration would have been less if such claims could not be made. The Initial Scheme Consideration will be paid on the Implementation Date and it is the preponderant part of the consideration; the amount "at risk" is limited. The insurance regime adopted may minimise the extent to which claims are paid from the Escrow Account. The Seller's Representatives have resumes which indicate that they would be qualified to deal with the claims mechanism proposed. Classes 11 Counsel has identified three groups of shareholders in relation to whom ASIC raised a query as to whether they should be treated as a separate class during its consideration of the draft Scheme Booklet. ASIC has issued the "usual" letter on the basis that this matter would be raised with the Court. Counsel submits that none of these groups should be treated as a separate class. On the basis of the information I now have before me I agree, although I note that this is an issue which will be finally determined at the second court hearing. 12 The test for when shareholders should be treated as a separate class for voting at scheme meetings is famously set out by Bowen LJ in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583: are the rights so dissimilar as to make it impossible for the shareholders to consult together with a view to their common interest. The fact that aspects of a scheme may be more advantageous to some shareholders does not necessarily mean that shareholders cannot consult together meaningfully: see Re Foster's Group Limited (No. 2) [2011] VSC 547 at [42]. 13 The first group are those SKM Group shareholders who hold Contingent Value Rights Notes (CVR Notes); they are 24 Equity Shareholders out of in excess of 600. The CVR Notes were issued to redress possible age discrimination claims which might be made because of the age based sell down provisions of the SKM employee share plan. This was the subject of a creditors' scheme of arrangement approved in January 2013, the background to which is explained in Sinclair Knight Merz Pty Limited, in the matter of Sinclair Knight Merz Pty Limited [2012] FCA 1391. The CVR Notes oblige SKM Holdings to pay to holders of CVR Notes the excess of the value of the Scheme Consideration over $198.78 per share whilever they are SKM Group employees. It will be paid from SKM Holdings' excess cash and will not affect Scheme Consideration. For this reason, payment under the CVR Notes will not be subject to the deferred payment arrangements out of the Escrow Account and the account established for Sellers' Costs (if any). These rights were granted before the Schemes were proposed and I do not consider that they confer a material benefit such that SKM Group shareholders who hold CVR Notes could not consult with other shareholders appropriately. 14 The second group of shareholders are those Chilean residents to whom a loan was made to fund a tax liability arising in Chile from the reconstruction of employee shareholdings. Those loans were made on terms that they would be repaid out of the sale of the Equity Shares which the Chilean shareholders were issued in the reconstruction. These shareholders receive the same consideration as other shareholders; it is simply applied in part to pay out the loans under a pre-existing contract. I do not see class creating characteristics in this circumstance. 15 The third group are former employees: there are 29. At this stage no reason has been suggested why this group could not appropriately consult with other holders of Equity Shares and Counsel submits it would be inappropriate to give this group a veto. Under the SKM employee share plan, when a person ceases employment, Voting Shares are redeemed and SKM Group is appointed the agent for sale of the Equity Shares. A freeze has been in place on trading in Equity Shares under the SKM employee share plan since November 2011. This is disclosed at Section 12.2 of the Scheme Booklet. I do not consider that the freeze is a class creating factor. Recommendations 16 The Schemes are recommended by the directors of SKM Group in the absence of a superior proposal. 17 The Independent Expert, Lonergan Edwards & Associates Limited has advised that in their opinion, the Schemes are fair and reasonable and in the best interests of SKM Management and SKM Holdings shareholders in the absence of a superior proposal. The Voting Shares are valued at $1 because they can be redeemed at any time at the directors' discretion. The Equity Shares are valued between $966.15 and $1,105.33, with the scheme consideration being valued between $962.26 and $1,058.89; the Independent Expert determined that the consideration should be valued at $1,058.09 taking into account that there will be insurance to mitigate risks, though not all risks will be covered. The Independent Expert goes on to recognise that to the extent to which Bidco makes successful claims out of the Escrow Account, its assessment of the value of the Equity Shares would be similarly reduced to take account of those successful claims irrespective of whether the merger proceeded. Deal Protection Measures 18 Clause 9 of the Merger Implementation Deed contains a full suite of deal protection measures and these are summarised at Section 7.6.3 of the Scheme Booklet. 19 The reimbursement fee is $13,314,000, and the circumstances in which it is payable are set out at Section 7.6.4. This is within the 1% guidance provided by the Takeovers Panel Guidance Note 7 on Lock-up Devices. It is not payable because shareholders vote against approving the Schemes and this is expressly stated in the Scheme Booklet. 20 There are "no shop", "no talk", "notification" and "matching rights" provisions. This is a case in which the potential anti-competitive effect of these provisions is very much mitigated because: The Merger Implementation Deed was agreed after a long process in which SKM Group had actively sought competing bidders and admitted more than one company to due diligence. The period of exclusivity is from the signing of the Merger Implementation Deed until it terminates (its Sunset Date is 31 December 2013) or until the Implementation Date, if that occurs earlier. That period is only what is required in relation to this complex transaction. I note the length of the prior exclusivity arrangement (starting in March 2013) might have been concerning but for the process which had preceded it. The fiduciary carve outs simply require that SKM Group directors act bona fide and after consulting with their legal advisors. There are no elaborate requirements as to the nature of the legal counsel or any requirement to share the advice with Jacobs. The matching rights period of 3 days is short and SKM Group is not required to name the competing bidder if, after using its best efforts, the competing bidder does not agree. 21 In these circumstances I consider that these provisions are not an impediment to the orders being made. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell. Associate: Dated: 18 November 2013