Summary

  • The recent PR Finance scheme was stopped by the Federal Court due to deficient disclosure to shareholders.
  • Scheme proponents and their solicitors must conduct careful and thorough diligence to ensure the accuracy of information provided to shareholders and to the courts.
  • The case is also an important reminder that court approval is not simply a ‘rubber stamp’ exercise.

The Federal Court (Court)recently declined to approve the scheme of arrangement proposed by PR Finance Group Limited (PRF)1.

The case is an important reminder that court approval in a scheme process is not a ‘rubber stamp’ exercise and that, while it rarely happens, courts are prepared to reject a scheme if the relevant grounds exist, even after the scheme has achieved the requisite statutory majorities.

In this case, the Court stopped the PRF scheme because it found that there had been deficient disclosure to shareholders.

Additionally, the Court emphasised the importance of careful and thorough due diligence by the scheme proponent and its solicitors to ensure the accuracy of information provided to shareholders and to the courts. The Court also cautioned against scheme proponents adopting ‘pro forma procedures’ in schemes.

The facts

The deficient disclosure at the heart of this case was the absence of PRF’s audited accounts for the financial year ending 30 June 2012 (Audited Accounts), which PRF had indicated in its scheme booklet would be lodged with the Australian Securities and Investments Commission (ASIC)not less than 10 days before the scheme meeting.

The Audited Accounts were not available and therefore not provided to ASIC nor shareholders prior to the scheme meeting.

Two days prior to the scheme meeting, ASIC wrote to PRF indicating that it would withhold its usual ‘no objection’ statement under s411(17)(b) of the Corporations Act 2001 (Cth) on the basis that ASIC considered PRF had failed to disclose material information to shareholders, being the Audited Accounts.

Despite this and the fact that the Audited Accounts were not completed, the scheme meeting proceeded on 14 June 2013.

The scheme was approved by a large majority of shareholders.

ASIC objected to the scheme at the second court hearing.

Key findings

In reaching his Honour’s decision, Jacobson J focussed on the following matters.

Failure to conduct due diligence

Jacobson J found that PRF failed to conduct any due diligence in relation to its scheme booklet statement regarding the Audited Accounts, and that this failure was compounded by the procedures adopted in relation to the scheme booklet. His Honour stated:

The difficulties were compounded by the fact that PRF’s solicitors failed, due to an omission in their own due diligence, to include in their checklist the requirement that the audited accounts be lodged by 4 June 2013. Their omission is unfortunate but it does not detract from my finding that PRF was aware well before the meeting that the accounts would not be produced. Mr Wise was aware of the importance of audited accounts. The directors must also have been aware of that fact.

Relevantly, Jacobson J found that despite having known from at least the end of May that the Audited Accounts would not be prepared before the meeting, PRF did not make any timely disclosure of this fact to its shareholders or to the Court.

PRF only took steps to notify shareholders after it had received ASIC’s letter.

Jacobson J described this late shareholder disclosure as a ‘last minute attempt’ to ‘rescue the position’ but that it did not ultimately change his Honour’s view because:

  • the Audited Accounts were not actually provided to shareholders for their consideration, and
  • the late notice merely informed shareholders of ASIC’s position, and did not actually provide shareholders with the information that would have been material to their consideration

PRF also did not take any steps to notify the Court before the scheme meeting was held. This was despite Farrell J acknowledging the importance of those accounts in the first court hearing. Indeed, the Court was only alerted to the absence of the Audited Accounts on the afternoon before the second court hearing via written submissions from ASIC and PRF.

Materiality of Audited Accounts

PRF submitted that the Audited Accounts were not ‘material’ to the decision of the shareholders to vote on the scheme.

Jacobson J rejected this submission. In particular, his Honour noted:

  • that the value of PRF (as would be evident from the Audited Accounts) was relevant to shareholders’ consideration of the scheme because the consideration offered was part cash and part shares in the bidder. As PRF would become a wholly owned subsidiary of the bidder, its value would affect the value of the bidder’s shares
  • that the importance of the statutory accounts was recognised by Farrell J in the first court hearing, and
  • the possibility that shareholders would possibly receive nothing if PRF is placed into receivership (as raised by the independent expert). His Honour ultimately stated that it is for the shareholders to consider that question in light of the Audited Accounts

Decision

The Court declined to approve the scheme and instead adjourned the hearing to a later date. In coming to this decision, Jacobson J noted:

The Court is not a rubber stamp to approve a scheme even in the present circumstances which might, on one view, leave the shareholders in a situation where they will be worse off

The decision reflects the fundamental place that full disclosure holds in the scheme framework.

His Honour also noted:

The exercise of careful and thorough due diligence is fundamental to the accuracy of the information provided to the shareholders and to the Court.

Jacobson J indicated that his Honour would be prepared to provide conditional approval of the scheme at that adjourned meeting, and that absent other additional material facts occurring before the adjourned hearing, the conditional approval would be contingent on a number of requirements including that:

  • a new meeting be convened, no later than 15 August 2013, to ratify the previous shareholder approval of the scheme, and
  • Audited Accounts be lodged with ASIC not less than 10 days before that new meeting

Jacobson J also indicated that his Honour would be prepared to approve the scheme with effect from the original record date specified in the scheme booklet, ie 30 June 2013 (it appears that there may be some tax advantages for the bidder in consolidating the accounts as at 30 June 2013).

Conditional approval of the scheme was not provided at the second court hearing because it was opposed by PRF and the bidder. The judgment does not detail why conditional approval was opposed.

Key takeaways

The key takeaways from this case are:

  • court is not rubber stamp: while it is extremely rare for Australian courts to stop a scheme after it has been approved by the requisite statutory majorities, courts nevertheless have the power to do so and will exercise that power if necessary
  • schemes are not pro-forma: ‘pro forma procedures’ should not be adopted in approaching issues in a scheme. In particular, tailored solutions and procedures are important to prevent, as in this case, deficient disclosure as a result of adopting a pro forma approach to diligence
  • conditional approval possible: where a court has found that circumstances exist which prevent it from approving the scheme, the court may provide conditional approval of the scheme. This is useful for a scheme company as it permits the company to remedy the circumstances as ordered without having to restart the scheme process, or appealing the court’s decision.
  • disclosure to court: the decision provides a reminder, to the extent one was required, that full, accurate and timely disclosure of relevant matters to court is critical.