As we know, schemes of arrangement are commonly used to implement change of control transactions involving widely held ASX listed targets. Gilbert + Tobin’s most recent review of takeover bids and scheme of arrangement transactions revealed that 55% of public market transactions with a value of over $50 million announced in 2012 were conducted by scheme of arrangement.
The key advantages of schemes of arrangement when compared to takeover bids are widely recognised and include:
- the “all or nothing” outcome of the scheme process – that is, at the scheme meeting, shareholders will either approve the scheme or reject it; and
- a(n arguably) lower approval threshold, being at least 75% of the votes cast at the scheme meeting as well as a majority in number of members present and voting. Generally in a takeover, the acquisition of 90% of the target company’s securities is required before the bidder can proceed with compulsory acquisition; and
- their inherent structural flexibility, which allows for a greater variety of transactions.
Once a decision to proceed by scheme of arrangement is made, the target and bidder will be faced with the procedural steps required to implement a scheme. Implementing these steps requires compliance with strict notice period requirements and involves multiple attendances at Court.
Given these procedural requirements, it should come as no surprise that bidders and targets occasionally find that they have failed to comply with one (or more) of them during the scheme process. In such circumstances, targets and bidders have relied on the Court’s powers under the Corporations Act 2001 (Cth) (the Act) to cure the non-compliance.
Section 1322(2) of the Act gives the Court the power to excuse any “procedural irregularities”, including the absence of a quorum or defect, irregularity or deficiency of notice or time.
In addition to section 1322(2), targets and bidders may also have recourse to section 1322(4) of the Act, which gives the Court a wider power to, amongst other things, make an order:
- declaring that any act, matter or thing purporting to have been done is not invalid by reason of a contravention of a provision of the Act or a provision of the constitution of a company (refer to section 1322(4)(a)); or
- extending the period for doing any act, matter or thing (refer to section 1322(4)(d)).
The following examples illustrate the Court’s reliance on these sections to overcome technical defects in the context of schemes of arrangement.
In Re Metals Exploration Ltd  FCA 84, the target company breached the Act when it gave members only 27 days’ notice of the scheme meeting rather than the 28 days’ notice required. The Court, satisfied that the shorter notice had not caused substantial injustice, relied on section 1322(2) of the Act to cure the defect.
In Mincom Ltd v EAM Software Finance Pty Ltd (No 3) (2007) 64 ACSR 387, the Court relied upon section 1322(2) of the Act to address a breach of section 412(6) of the Act which occurred when a target company distributed the scheme document before ASIC had registered the explanatory statement.
In Re Uranium King Ltd (No 3) (2008) 67 ACSR 513, the Court relied upon section 1322(4)(a) of the Act to address notices advertising the date of the final court hearing which were inconsistent with Form 6 of the Federal Court (Corporations) Rules 2000 and breached rule 3.4(b) of the Federal Court (Corporations) Rules 2000, which required at least 5 days’ notice of the final court hearing. The Court noted that the company had acted in good faith and that there was no prejudice in granting the relief.
The recent decision of Weinstock v Beck  HCA 14 (Weinstock), (a decision outside the context of a scheme of arrangement) emphasised and confirmed the broad powers of the Court to make an order under section 1322(4)(a). The High Court found that section 1322(4)(a) should not be construed “by making implications or imposing limitations which are not found in express words”. The High Court unanimously agreed that it is not relevant whether the act purporting to have been validly done under the Act and the company’s constitution could possibly have been done in accordance with the Act and that constitution – there is no implied limitation to the remedial function of section 1322(4)(a).
Section 1322(2) and 1322(4) and the Court’s interpretation of these sections, as illustrated above and most recently in the case of Weinstock, reflect the legislature’s acknowledgment that mistakes will happen in the context of schemes of arrangement and corporate governance more generally and provided that there has been no substantial injustice caused to third parties, the Court has the power to intervene and provide a solution.