FEDERAL COURT OF AUSTRALIA Signature Capital Investments Limited, in the matter of Signature Capital Investments Limited [2016] FCA 258 File number: NSD 235 of 2016 Judge: FARRELL J Date of judgment: 15 March 2016 Catchwords: CORPORATIONS – scheme of arrangement – acquisition scheme – application under s 411(1) of the Corporations Act 2001 (Cth) to convene scheme meeting – content of scheme booklet and scheme implementation deed – formula for calculation of share consideration set out in scheme booklet – amount of share consideration not known at first court hearing – supplementary scheme booklet to be despatched before scheme meeting – exclusivity provisions Legislation: Corporations Act 2001 (Cth) ss 411, 1319 Corporations Regulations 2001 (Cth) Pt 5.1 Cases cited: Centro Retail Limited and Centro MCS Manager Limited in its capacity as Responsible Entity of Centro Retail Trust [2011] NSWSC 1321 Coates Hire Limited No 2, in the matter of Coates Hire Limited [2007] FCA 2105 Premium Investors Limited, in the matter of Premium Investors Limited [2012] FCA 1211 Date of hearing: 9 March 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 28 Counsel for the Plaintiff: Mr I Jackman SC Solicitor for the Plaintiff: Gilbert + Tobin Counsel for SGIH Pty Limited: Mr I Ahmed Table of Corrections 15 April 2016 The date of the Orders was changed from 15 March 2016 to 9 March 2016. ORDERS NSD 235 of 2016 IN THE MATTER OF SIGNATURE CAPITAL INVESTMENTS LIMITED (ACN 110 247 393) SIGNATURE CAPITAL INVESTMENTS LIMITED (ACN 110 247 393) Plaintiff JUDGE: FARRELL J DATE OF ORDER: 9 MARCH 2016 THE COURT ORDERS THAT: 1. Pursuant to section 411(1) of the Corporations Act 2001 (Cth) (the Act): (a) Signature Capital Investments Limited ACN 110 247 393 ("Signature") convene a meeting ("Scheme Meeting") of all holders of shares in Signature ("Scheme Shareholders") for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement ("Scheme"), the terms of which are contained in Attachment C of the scheme booklet, a copy of which is at Exhibit 1 ("Scheme Booklet"); (b) The Scheme Meeting be held at 10am on 12 April 2016 at RF Capital, Level 43, Governor Phillip Tower, 1 Farrer Place, Sydney NSW 2000; and (c) The Scheme Booklet, substantially in the form that is Exhibit 1, is approved for distribution to Scheme Shareholders (which Scheme Booklet be and is hereby approved for the purposes only of sub-section 411(1) of the Act). 2. Pursuant to section 1319 of the Act: (a) Signature may determine that, for the purposes of the Scheme Meeting, all the shares in Signature be taken to be held by the person, persons or bodies corporate who held them as at 7pm on 10 April 2016, in accordance with the register held and maintained by Signature; (b) Signature may determine that only the proxy forms in relation to the Scheme Meeting received by Signature by no later than 10am on 10 April 2016 are valid; (c) The Chairman of the Scheme Meeting be John Andrew Morrison, or in his absence Paul Joseph Manka; (d) The Chairperson of the Scheme Meeting shall have the power to adjourn the meeting in his absolute discretion to such time, date and place as he considers appropriate; and (e) A poll must be taken to decide the resolutions put to the vote at the Scheme Meeting, except for procedural motions. 3. Signature publish a Notice of Hearing in The Australian newspaper, in substantially the form that appears at Annexure 'A' hereto not later than 5 days prior to the date fixed for the hearing of any application to approve the Scheme and Signature be relieved from compliance with Rule 3.4 of the Federal Court (Corporations) Rules 2000 (Cth) ("Rules") to the extent necessary. 4. Rule 2.15 of the Rules shall not apply to the Scheme Meeting, except in so far as that Rule applies regulation 5.6.13 of the Corporations Regulations 2001 (Cth). 5. The proceedings be stood over to 10:15am on 15 April 2016 before Justice Farrell for the hearing of any application to approve the Scheme. 6. There be liberty to apply on 2 days' notice. 7. These orders be entered forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT 1 These are reasons for making orders on 9 March 2016 under ss 411(1) and 1319 of the Corporations Act 2001 (Cth). The Court ordered that a meeting of the shareholders of Signature Capital Investments Limited ("Signature") be convened on 12 April 2016 to vote on a proposed scheme of arrangement pursuant to which all of Signature's issued shares will be acquired by SGIH Pty Limited ("Bidco") for cash ("Scheme"). 2 The Scheme is proposed pursuant to a scheme implementation deed entered into on 16 December 2015 between Signature, Bidco and RF Capital Pty Limited as trustee for the RF Capital Trust ("RF Capital") ("Implementation Deed"). The primary issues for consideration relate to the fact that the amount to be paid by Bidco for each Signature share ("Scheme Consideration") will not be known until around 22 March 2016. The Scheme Consideration will be calculated on the basis of a formula set out at clause 4.3 of the Implementation Deed with a "Pricing Date" of 29 February 2016; the formula is summarised at [21] below. Dramatis personae 3 Signature is an unlisted public company registered on 28 July 2004. Its issued capital comprises 46,989,745 shares. Signature shares had been listed for quotation on markets operated by the Australian Securities Exchange on 5 December 2005; they were delisted voluntarily on 10 July 2013. Signature has 594 shareholders of which 5 reside overseas. 4 Signature primarily invests in "absolute return" funds (both Australian and international) which aim to deliver positive returns in rising markets as well as seeking to preserve capital in falling markets; there is no guarantee that that will be the outcome. It also invests in cash and cash equivalent securities, foreign exchange contracts and options. Given the nature of its investments, Signature's value is largely determined by reference to its net tangible assets ("NTA") which is calculated monthly. 5 Bidco was registered on 26 November 2015. Its sole purpose is the acquisition of Signature shares and it undertakes no other activities. Bidco is an associate of RF Capital. RF Capital and Bidco are owned by different trust companies. The trust companies are owned by Mr Andrew Roberts. RF Capital receives management fees for investment advisory services it provides to Signature. RF Capital holds 28,662,082 Signature shares, approximately 61% of Signature's issued capital. 6 The directors of Signature and the shares they hold in Signature are: (1) John Morrison (Chairman) 1,346,771 shares (2) Paul Manka 112,399 shares (3) John Shin 105,000 shares 7 Messrs Morrison and Manka are described as independent directors. They recommend that shareholders vote in favour of the Scheme in the absence of a superior offer and they state that they intend to do so. This recommendation was made after they considered a number of alternatives to the Scheme, details of which are set out at section 2.4 of the Scheme Booklet. They have each consented to act as chairman of the Scheme Meeting. 8 Mr Shin is a nominee of RF Capital and each of them has indicated that they will abstain from voting on the resolution to approve the Scheme. Mr Shin has refrained from making any recommendation to shareholders. 9 BDO Corporate Finance (WA) Pty Ltd ("BDO") has provided an Independent Expert's Report stating that in its opinion, in the absence of a superior offer, the terms of the Scheme are fair and reasonable and in the interests of shareholders not associated with RF Capital. BDO performed an assessment of the value of Signature shares as at 31 December 2015 on three bases: net realisable value, discounted net tangible asset value and dividend yield. BDO adopted a value range of $0.372 to $0.404. Using the formula for calculating Share Consideration set out in the Implementation Deed and on the basis of Signature's NTA as at 31 December 2015, BDO estimated the Share Consideration to be $0.398 per share. As this was at the higher end of the value range, BDO determined that the offer was "fair". BDO also determined that the Scheme was "reasonable", taking into account that: there is no alternative proposal; RF Capital's practical level of control of Signature; Signature would continue to bear the costs of the proposed rights issue in 2014 if the Scheme does not proceed; the pricing formula takes into account the value of Signature's franking credits which may be more difficult for individual shareholders to realise if the Scheme does not proceed; Signature's shares are not readily traded since Signature was delisted; and no brokerage is payable pursuant to the Scheme. 10 In reaching its conclusion BDO also took into account disadvantages which would accrue to Signature shareholders as a result of the Scheme proceeding being: they would lose the benefit of potential future increases in the value of Signature's shares; they would no longer be entitled to dividends; and they may be exposed to potential tax consequences resulting from disposing of their shares. Approach at first court hearing 11 As set out in Mr Jackman SC's submissions dated 7 March 2016 (marked MFI-1), the Court will not ordinarily convene a scheme meeting unless the scheme is of such a nature and cast in such terms that the Court would be likely to approve it at the second court hearing if the scheme receives the statutory majority of votes at the scheme meeting and the application is not opposed. 12 The matters of which the Court must be satisfied at this stage are: (1) whether the applicant is a Pt 5.1 body; (2) whether the scheme can properly be described as an arrangement or as a compromise; (3) whether the scheme is properly proposed for the purposes of s 411; (4) whether there has been proper disclosure; and (5) whether the Australian Securities & Investments Commission ("ASIC") has had a reasonable opportunity to examine the terms of the scheme and make any submissions to the Court. 13 Signature is a Pt 5.1 body. A member's scheme of the kind proposed is a form of arrangement which has been approved many times. By letter dated 8 March 2016, ASIC indicated that it received a draft of the Scheme Booklet on 15 February 2016 and revised versions on 1 March 2016 and 8 March 2016. In its letter, ASIC indicated that it did not intend to appear at the first court hearing. I am therefore satisfied that the requirements of ss 411(2)(a) and (b) have been fulfilled. 14 Signature's proposed Scheme Booklet is in a format which has become typical for member schemes designed to effect a takeover. The Scheme Booklet comprises a letter from the independent directors and other explanatory material including information required by the Corporations Act and general taxation advice. Attached to the Scheme Booklet is a notice of Scheme Meeting, a copy of the Implementation Deed, the terms of the Scheme, a deed poll by Bidco, BDO's Independent Expert's Report and a sample proxy form. 15 Other substantive aspects of the Scheme, including performance risk and the deemed warranty from shareholders that their shares are free from encumbrances, have been drawn to my attention and they are in a form commonly accepted by the Courts. RF Capital has already provided Bidco with funds sufficient to meet the estimated Share Consideration (calculated on the basis of the NTA as at 31 December 2015) payable to the other shareholders. It has also undertaken to procure that Bidco has cash equal to the aggregate of the Share Consideration and any other amounts payable to Signature under the Implementation Deed before the date of the court hearing at which the Court will consider whether to approve the Scheme ("second court hearing"): see section 5.5 of the Scheme Booklet. There are "no shop" and "no talk" exclusivity provisions in what has become common form but without provision for a break fee to be paid by Signature. Termination rights are also generally in common form save that Bidco may terminate the Implementation Deed (and therefore the Scheme) if, before 8 am on the day of the second court hearing, the HFRX Global Hedge Fund Index published daily by Bloomberg ("HFRX Index") is 5% or more lower than the HRFX Index on the Pricing Date. Signature may also terminate if RF Capital does not capitalise Bidco as set out above. 16 I am satisfied that the Scheme Booklet (with amendments discussed at the hearing and incorporated in Exhibit 1) contains proper disclosure and that the Scheme is properly proposed generally for the reasons set out in the written submissions. 17 There are some matters which require comment. Amount of Share Consideration not stated 18 The fact that the amount of the Share Consideration will only be determined on or around 22 March 2016 is prominently and frequently disclosed in the Scheme Booklet. In similar circumstances, Jagot J approved a scheme booklet for despatch to shareholders at a first court hearing in Premium Investors Limited, in the matter of Premium Investors Limited [2012] FCA 1211. 19 Since the amount of the consideration to be paid for shares is information fundamentally material to a shareholder's decision whether to vote for or against a scheme, the current proposal is appropriately rare and requires justification. 20 The suggested justification in this case is that it is necessary to provide Signature shareholders with a price which is based on the most contemporary valuation of their shares. I accept that reasoning. It normally takes two to three weeks to calculate the NTA. As explained at section 3.3(b) of the Scheme Booklet, to calculate the NTA, Signature aggregates information about the value of its investments derived from its fund managers. The majority of fund managers issue reports on the value of the funds they manage as at the last day of each month. One fund manager reports on the value of its fund as at the last day of each quarter, and it provides interim estimates as at the end of the intervening months. Signature's unaudited NTA as at the end of each month is typically published on its website within 20 days of that date. Signature submitted that Scheme Shareholders are accustomed to their shares being valued in this way. 21 The Share Consideration calculated in accordance with the formula will reflect: the value of Signature's NTA as at 29 February 2016 calculated consistently with Signature's current practices; plus the value (on a dollar for dollar basis) of Signature's undistributed franking credits as at 29 February 2016; plus the value (on a 50 cents per dollar basis) of Signature's share of accrued but undistributed franking credits held by Signature Quantitative Fund as at 29 February 2016; plus the agreed value of certain costs incurred by Signature relating to advice on a proposed equity raising and sale facility in 2014 which did not proceed; minus: Signature's costs in respect of the Scheme which have not been expensed as at 29 February 2016. 22 It is intended that a Pricing Supplementary Scheme Booklet ("Supplementary Booklet") advising the Scheme Consideration and an update to the Independent Expert's Report will be despatched around 22 March 2016. In the "Key Dates" section of the Scheme Booklet, Signature advises that, if the Supplementary Booklet is to be despatched less than 10 days before the proposed date for the Scheme Meeting (12 April 2016), the date of the Scheme Meeting will be deferred. This meets a requirement imposed by ASIC. 23 A draft of the Supplementary Booklet has been provided to the Court, unsurprisingly without the draft Independent Expert's supplementary material. Signature submitted that the Court should, at this hearing, make an order approving the despatch of a Supplementary Booklet. Signature proposed that a final draft of the Supplementary Booklet be provided to chambers around 22 March 2016 and unless the Court ordered otherwise, that it would be despatched a few days later. The Court declined to make that order. 24 Courts have emphasised the importance of maintaining the integrity of the "message" in the Scheme Booklet approved at the first court hearing: see Centro Retail Limited and Centro MCS Manager Limited in its capacity as Responsible Entity of Centro Retail Trust [2011] NSWSC 1321 at [10]-[11] per Barrett J; Coates Hire Limited No 2, in the matter of Coates Hire Limited [2007] FCA 2105 at [6] per Emmett J. It is true that it is likely that the draft Supplementary Booklet will be able to be completed with uncontroversial amendments for which provision has been made, those amendments being the amount of the Share Consideration and the date of the document. The content of the updated Independent Expert's Report to be annexed to the Supplementary Booklet should also be predictable because section 3.3(b) of the Scheme Booklet indicates that Signature's NTA has been relatively stable over the past twelve months. However, that is not a certain outcome and other language may be required to achieve appropriate disclosure to shareholders. 25 It is not appropriate that the Court make an order now when it is not possible to know the precise contents of the information to be included in the Supplementary Booklet and annexed updated Independent Expert's Report. Efficiency does not demand that that course be taken. Orders under s 1319 can be made in chambers at the time the Supplementary Booklet is available in its final form. That course involves no greater inconvenience to Signature than the course it suggests, but it safeguards the integrity of the process envisaged by s 411. It will also accommodate any need to consider an application for directions under s 1319 to defer the date of the Scheme Meeting should that become necessary. Form of Scheme Booklet 26 The Scheme Booklet has been prepared in accordance with current practice which has evolved taking into account judicial comments made from time to time, ASIC guidance and the outdated provisions of Part 5.1 of the Corporations Regulations 2001 (Cth). 27 The practice which has developed results in scheme booklets which are repetitious and unnecessarily long. Such documents are unapproachable to people who do not commonly read them and their prolixity makes material information difficult to discern. Repetition obscures the message because elements are added or subtracted at each repetition and a reader can be led to believe that he or she has already considered the information being repeated without appreciating those elements which have been added or lost. Further, where a scheme implementation deed has been summarised in a scheme booklet there should be no need to include the deed or its attachments. In the case of listed entities, compliance with continuous disclosure obligations means that the scheme implementation deed will have been available to the market for some time before the scheme booklet is released. Other companies will be in a position to make the document available on their websites. This might also be said for the deed poll; its existence has relevance to the Court but it is difficult to see why it needs to be incorporated in the scheme booklet in its entirety. 28 Without any criticism of the lawyers who prepared the Scheme Booklet in accordance with current practice, it would be useful if these matters were addressed by practitioners and by ASIC. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell. Associate: Dated: 15 March 2016