Reported Decision : (2001) 36 ACSR 758 (2001) 19 ACLC 529 New South Wales Supreme Court CITATION : Arthur Yates & Co Limited (Application of) [2001] NSWSC 40 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 1173/01 HEARING DATE(S) : 06/02/01, 07/02/01 JUDGMENT DATE : 7 February 2001 PARTIES : In the matter of Arthur Yates & Co Limited (ACN 000 004 688) Arthur Yates & Co Limited (ACN 000 004 688) (Applicant)) JUDGMENT OF : Santow J COUNSEL : M B Oakes, SC (Applicant) SOLICITORS : Coudert Brothers (Applicant) CATCHWORDS : CORPORATIONS — Scheme of arrangement effecting a merger — Exclusivity period during which it is sought that no other proposal be canvassed — Legality of such constraint — Need to qualify by reference to directors' duties and lawfulness — Other requirements for acceptability — Comparison of UK under Panel rules. LEGISLATION CITED : Corporations Law s411 DECISION : Orders made approving convening of meeting of shareholders to consider proposed scheme of arrangement. REVISED — 7 February, 2001 IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY SANTOW J No. 1173/01 In the matter of ARTHUR YATES & CO LIMITED (ACN 000 004 688) ARTHUR YATES & CO LIMITED (ACN 000 004 688) Applicant JUDGMENT — ex tempore 7 February 2001 1 What follows are some brief observations relating to a shareholders' scheme of arrangement which introduces the still novel concept of an exclusivity period during which alternative merger arrangements and their solicitation are constrained. 2 The relevant clause in the Implementation Agreement following helpful discussion between Counsel and the Court, is in the following terms: "Exclusivity NCE and Yates: (a) agree that they will co-operate with each other to achieve a merger and during the Exclusivity Period will not have any discussions or dealings with any other person that might relate to or have the result in the merger between NCE and Yates not proceeding; (b) agree that clause 8(a) will only impose obligations on Yates to the extent that to cause Yates to fulfil such obligations would not involve a breach of the duties of the directors of Yates or be unlawful on any other basis; and (c) acknowledge that clause 8(b) will not be used or claimed by Yates to justify the solicitation of possible purchasers of Yates or its business or the initiation of discussions or dealings with any other person in relation to the possible purchase of Yates or its business unless failure to do so would involve a breach of the duties of the directors of Yates confirmed by Senior counsel's advice, it being recorded that no such circumstances are presently envisaged." 3 It will be observed that the clause relates to a defined term, namely "Exclusivity Period". This sets an outside date to the period of exclusivity of some five months. However, in practical terms the scheme, so far as what are called "Third Conditions Precedent", must be fulfilled by 30 April 2001. These embrace the usual conditions concerning shareholder approval and court approval of the scheme. Hence in practice the period of exclusivity is not excessive. 4 The issue of practical constraints upon alternative merger proposals is a difficult one. Such constraints may take a variety of forms. One prevalent form particularly in the United Kingdom and United States involves the payment of what are sometimes termed inducement fees, or break fees. That feature is not present here though has on occasion arisen in other schemes. 5 The present arrangements by way of exclusivity contain no financial disincentive. Rather, there is an obligation not to have any discussions or dealings with any other person that might result in the merger effected by the scheme not proceeding. 6 However, that embargo is subject to a proper overriding qualification. It is that any obligation so imposed must not involve a breach of the duties of the directors of Arthur Yates & Co Limited ("Yates"), the proponent of the scheme, or be unlawful on any other basis. There is then an appropriately qualified acknowledgment that this overriding obligation must not be used as a pretext to permit Yates to justify the solicitation of possible purchasers or the initiation of discussions or dealings in relation to the possible purchase of Yates. That qualification is that the acknowledgment does not operate if failure so to act would involve a breach of the duties of the directors of Yates. 7 These and analogous issues arise in other jurisdictions. Thus the London Takeover Panel has a rule specifically directed at inducement fees and other forms of frustrating action; Rule 21. In July 2000, a new subrule was added, Rule 21.2. That subrule only permits inducement fees in the following circumstances: · any such fee must be de minimis (normally no more than 1% of the offer value); · the offeree board and its financial adviser must confirm to the Panel in writing that, inter alia, they each believe the fee to be in the best interests of shareholders; · any fee arrangements must be fully disclosed in the press release announcing the offer and the offer document, with relevant documentation being put on display; and · the Panel must be consulted at the earliest opportunity. 8 In a commentary on such inducement fees, the point is made that these fees give rise to issues other than under the Takeover Code including in relation to directors' fiduciary duties; see publication by Linklaters and Alliance on the Revised Takeover Code — July 2000 edition. 9 The present clause does not involve any break fee though to a degree there are overlapping issues. It is important that an exclusivity clause satisfy the following concerns: (a) it should be for no more than a reasonable period capable of precise ascertainment, hence the need to ensure that any exclusivity period is properly defined, (b) while an exclusivity clause may differentiate between actively soliciting an alternative merger proposal or simply dealing with an unsolicited one, in either case it is important that such an exclusivity clause be framed so that it is subject to the overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful, and (c) there should be adequate prominence given to that constraint in the explanatory memorandum sent to shareholders. 10 In the present case I am satisfied that each of these concerns have been properly catered for. This is in a situation where, if a merger proposal such as was finally negotiated were not forthcoming, it is probable that Yates would be forced into liquidation. If in some future case the exclusivity clause were accompanied by a break fee, it will need to be looked at carefully in that context and I do not consider it appropriate to say anything further on that. 11 By way of general observation, these constraints recognise the commercial reality that a prospective bidder under scheme or takeover would not wish to spend substantial time and money on a bid proposal only to find that the directors of the target have used that bid as a stalking horse for a better one. On the other hand, even modified shut-out arrangements can be unfair to shareholders, particularly if not qualified by reference to directors' fiduciary duties. For example, the situation could be envisaged where an overly onerous exclusivity arrangement, not so qualified, might prevent directors entertaining an alternative merger arrangement at a time when the current one may fail for reason that a condition precedent is unlikely to be fulfilled. 12 I have set out below the meeting convening orders I have made, noting that order 4 takes into account the current Part 2G.2 of the Corporations Law. ORDERS 13 I make the following orders approving the convening of a meeting of shareholders to consider the proposed scheme of arrangement. 1. There be convened by the Plaintiff a meeting of its shareholders to consider, and if thought fit, agree (with or without modification) to a scheme of arrangement (being the scheme of arrangement set forth in exhibit PX1) (the "Scheme") proposed to be made between the Plaintiff and its shareholders ("Scheme Meeting"). 2. The Scheme Meeting: (a) be held on 19 March 2001; (b) at the Four Points Sheraton Hotel, 161 Sussex Street, Sydney; (c) at 3.00 pm. 3. The meeting referred to in Order 1 be advertised once in each of The Australian and The Sydney Morning Herald newspapers, in the form or to the effect of the annexure hereto, such advertisements to be published not less than 14 days before the date appointed for such meeting. 4. The meeting referred to in Order 1 shall in all respects be convened, held and conducted on accordance with: (a) such provisions of Part 2G.2 of the Corporations Law as apply to and in respect of members; and (b) such provisions of the plaintiff's constitution as apply to and in respect of meetings of members and are not inconsistent with the said provisions of Part 2G.2 of the Corporations Law , to the exclusion of every other provision which, but for this direction, would relate to the convening, holding or conducting of the meeting. 5. Stanley Joseph Howard be appointed Chairman of the Scheme Meeting or, failing him, Norman Keith Brunsdon act as Chairman of the said meeting, unless any meeting shall otherwise resolve. 6. In relation to the Scheme Meeting, no later than 16 February 2001 a document in the form or to the effect of the draft document constituting exhibit PX1, containing: (a) notice of the meeting; (b) the Scheme explanatory memorandum; (c) proxy form be posted by pre-paid post (in the case of any member whose registered address is outside the country, by airmail). 7. At the Scheme Meeting, 5 persons entitled to be present, whether by proxy, attorney or a person representing a body corporate, shall constitute a quorum for each meeting. 8. The explanatory statement for the Scheme, a copy of which forms part of exhibit PX1 be approved. 9. The proceedings be stood over to Monday 26 March 2001 for the hearing of any Interlocutory Application to approve the Scheme. 10. Liberty to apply. Annexure Arthur Yates & Co Limited (ACN 000 004 688) (the "Company") Meeting to Consider Scheme of Arrangement Notice is given that the Supreme Court of New South Wales has ordered that a meeting of shareholders of the Company be held at the Four Points Sheraton Hotel, 161 Sussex Street, Sydney on Monday 19 March 2001. At 3.00 pm. The purpose of the meeting is to consider and if thought fit to agree (with or without modification) to the scheme of arrangement proposed between the Company and its shareholders. Shareholders of the Company may obtain copies of the explanatory statement (which includes the scheme document) with respect to the scheme of arrangement under s412 of the Corporations Law by collecting the same personally at 21A Richmond Road, Homebush between the hours of 9.00 am and 5.00 pm on each week day excluding public holidays until and including 19 March 2001. 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