Jurisdiction - Australia
Australia – iSoft Approach To Collateral Benefits And Scheme Meeting Classes Clarified.

31 August, 2012


In brief


  • The Federal Court's decision in Re Aston Resources Limited confirms that arm's length contracts are unlikely to be collateral benefits;
    • a "rights" approach should be used to identify classes for scheme meetings;
    • an undertaking not to vote may be an alternative to choosing to vote separately (as in the iSoft scheme) or tagging votes where ASIC considers there may be a collateral benefit.


      A recent scheme of arrangement has provided valuable guidance on the Federal Court's approach to collateral benefits as well as the correct identification of classes for scheme meetings where there are separate arrangements between the scheme company and its shareholders which are linked to the outcome of the scheme. The case also highlights that giving material benefits to target shareholders is an issue that will continue to be scrutinised by ASIC and will require careful consideration in the planning stages for schemes.




      The Aston Resources Limited scheme involved a merger of equals, that is, a nil premium merger between Whitehaven Coal Limited and Aston. Under the Scheme Aston shareholders received 1.89 Whitehaven shares for each Aston share.


      At the same time Whitehaven also agreed to acquire 100% of an unlisted coal explorer Boardwalk Resources Limited for a consideration which also comprised Whitehaven ordinary shares. The acquisition of Boardwalk was conditional on the Aston/Whitehaven merger proceeding but the Aston/Whitehaven merger was not conditional on the Boardwalk transaction proceeding. So the two transactions were not totally interdependent.


      Boardwalk and Aston had some common shareholders which included Tinkler Group and the Farallon Funds.


      The transaction documents which were entered into on 11 December 2011 included a Call Option Agreement. The Call Option Agreement gave Whitehaven the right to acquire 19.9% of Aston if a third party proposal was recommended or was successful.

      The exercise price was 1.978 Whitehaven shares for each Aston share, a 15% premium to the merger consideration. At the first court hearing the Court was told that the purpose of the option was to deter potential counter bidders.


      Valuation of Boardwalk and scheme consideration


      In its Independent Expert's Report which accompanied the Scheme Booklet PWC concluded that the Scheme was in the best interests of Aston shareholders. However, PWC considered the Boardwalk transaction to be dilutive for Whitehaven shareholders because PWC valued Boardwalk at between $200 million to $330 million which compared to the value of the consideration payable for Boardwalk of $393 million, or $491 million if certain restricted shares were included.


      In its report PWC acknowledged that the valuation of early stage mineral prospects like Boardwalk is highly subjective and that valuations of such assets are highly sensitive to assumed exploration outcomes and assumed economic factors. It recognised that individual purchasers may place a strategic value on such assets.


      Whitehaven, in the explanatory statement which accompanied the notice of meeting for the ASX Listing Rule 7.1 approval, rejected PWC's valuation as being too narrowly focused and contended that the price it was paying for Boardwalk represented fair value. This difference in valuation opinion reflected the pre-production nature of Boardwalk's assets. 


      ASIC concerns


      The difference between PWC's valuation of Boardwalk and the value of the consideration payable by Whitehaven for Boardwalk gave rise to a concern by ASIC that the common shareholders of Aston and Boardwalk were receiving a collateral benefit which other Aston shareholders were not receiving – because Whitehaven was effectively overpaying for Boardwalk.


      ASIC wished to resolve this concern by requiring the common shareholders of Aston and Boardwalk to vote as a separate class from other shareholders on the Scheme.


      It was eventually agreed with ASIC that those common shareholders of Aston and Boardwalk whose percentage shareholding in Boardwalk was greater than their corresponding shareholding in Aston would not vote on the Scheme and that this would be disclosed in the Scheme Booklet. Other common shareholders were free to vote. Addressing ASIC's concerns on these matters is important, because the production of an ASIC "no objection" certificate to the court greatly facilitates the approval process.


      The legal implications of possible collateral benefits issues were fully ventilated before Jacobson J at the first court hearing for the Scheme.


      Where the acquirer enters into a separate arrangement with some shareholders which is connected with the scheme, the court needs to consider whether these shareholders are receiving a benefit which is not provided to the other shareholders. The court may also be asked to consider whether that should result in those shareholders constituting a separate class for the purposes of voting on the scheme. Correct constitution of classes is critical because the failure to correctly identify classes is fatal to a scheme. Further, even if there is no class issue, the existence of a benefit is something which is relevant to the court's discretion whether to approve the scheme at the second court hearing.


      Collateral benefits


      Jacobson J did not consider that the Boardwalk transaction conferred a collateral benefit on the common shareholders of Aston and Boardwalk. In coming to this view His Honour indicated that he was satisfied on the basis of disclosures made in the Scheme Booklet that despite the PWC valuation, the Boardwalk transaction had been negotiated on an arm's length basis and that the price that Whitehaven had agreed to pay reflected the Whitehaven Board's view of the value to Whitehaven of the Boardwalk assets. In other words, His Honour formed the view that there was no collateral benefit to the common shareholders of Aston and Boardwalk.



      The test adopted by the courts on the class issue is whether the legal rights of the shareholders are so dissimilar that they should constitute a separate class for voting purposes. The focus is on the rights of shareholders against the company which are to be affected by the scheme and the new rights which the scheme provides to those shareholders.


      The fact that shareholders may have some commercial or other interest in the scheme which is different to other members is irrelevant (Re NRMA Insurance Ltd (No 1) [2000] 156FLR349; Re Opes Prime Stockbroking Limited [2009] 179FCR20. ). For example, the fact that the after tax consideration received by some members under the scheme may be different from other members because of different personal tax circumstances is irrelevant. It is also generally irrelevant that the shareholders have some other business relationship with the company, for example, where some shareholders are also suppliers of product to a company (Re Golden Circle Limited [2008] QSC298. ). However, the court may take into account the extraneous commercial or other interest of members when exercising its discretion at the second court hearing whether or not to approve the scheme (Re Chevron (Sydney) Ltd [1963] VR249).


      Common shareholders


      At the first court hearing Jacobson J, while noting that the common shareholders of Aston and Boardwalk had different commercial interests because of the Boardwalk transaction, also held that the common shareholders did not represent a separate class. The reason was that their rights in relation to the Scheme were the same – both in terms of their rights against the company and how those rights were affected by the implementation of the Scheme. In coming to this view His Honour referred with approval to the decisions of Santow J in Re NRMA Insurances Limited (No. 1) and Finkelstein J in Re Opes Prime Broking Limited.


      In this context His Honour also noted that the Aston Scheme was not conditional on the Boardwalk transaction proceeding which implied at least that he may have taken a different view if this conditionality had existed.


      His Honour also referred to the iSoft Group Limited (Re iSoft Group Limited [2011] FCA680.) scheme in his decision. In that case one shareholder in the scheme company also held convertible notes and it was proposed that those notes would be acquired at full face value under a separate transaction, the completion of which was a condition of the scheme. The independent expert's report valued the convertible notes at between 75% and 80% of their full face value. In these circumstances the scheme company proposed to the Court that there should be separate meetings of the convertible note holder and the remaining shareholders. Emmett J made orders convening the meetings, but did not need to consider whether the convertible note holder actually constituted a separate class from the other shareholders. Jacobson J therefore said that the approach taken by the scheme company in re iSoft was not authoritative.


      Performance rights and options


      Aston had on issue certain performance rights and options issued under a long term incentive plan for Aston executives and similar terms for non-executive directors. No separate scheme was proposed for the holders of those rights. Instead, Aston was to exercise its discretion under the terms of issue to vest the rights and options following approval of the Scheme. The Aston shares issued as a result were then to be acquired under the Scheme.Jacobson J also noted that the rights and options would have vested in any event, as their terms provided for vesting in the event of a change of control.


      Jacobson J held that these rights and the way in which they were treated did not constitute the creation of a separate class. In deciding this, Jacobson J referred with approval to his decision in Re Cashcard Australia Limited (2004) (a scheme in which Jacobson J disagreed with ASIC's contention that certain executives who would receive separate payments in consequence of the scheme were in a different class to other shareholders) as well as the view taken in Re Fosters Group Limited (No. 2) (2011).


      Call option


      Finally, in the context of the class issue Jacobson J held that the existence of the Call Option Agreement did not place the Tinkler Group in a separate class, but instead viewed it as a form of exclusivity provision. His Honour noted with approval the decision of Mansfield J in Re Hostworks Group Limited (Re Hostworks Group Limited [2008] 26ACLC137) even though in Aston the exercise price under the call option was greater than the Scheme consideration. (In Re Hostworks the call option exercise price was the same as the scheme consideration.)




      Some takeaways from the decision in Aston are:


      • The arm's length test is important in determining whether a collateral benefit exists.
      • An undertaking not to vote may be an appropriate alternative to either choosing to vote separately or tagging votes in circumstances where ASIC considers a collateral benefit may be conferred on certain shareholders.
      • Whether a separate class exists will depend on how shareholders' legal rights are affected under the scheme. The fact that a shareholder may receive a benefit in consequence of a scheme, but not under the scheme, is relevant to the exercise of the court's discretion.
      • The approach taken by the scheme company in iSoft (placing the recipient of an alleged collateral benefit in a separate class) is not authoritative on class issues.
      • The Court re-affirmed that shareholders who also hold performance rights and options may well form part of the same class as other shareholders, provided their interests are sufficiently aligned to be able to vote together.



      For further information, please contact:


      Gary Lawler, Partner, Ashurst

      [email protected]


      Michael Orban, Ashurst 

      [email protected]


      Ashurst Corporate/M&A Practice Profile in Australia


      Homegrown Corporate/M&A Law Firms in Australia



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