Should members' schemes of arrangement stay with the courts? 9 min read
In the federal budget, the Treasurer announced funding for a public consultation process to consider broadening the jurisdiction of the Takeovers Panel to include members' schemes of arrangement. The idea of transferring jurisdiction over schemes from the courts to the Panel is not a new one. This issue has been raised and dismissed a number of times since the Panel was established in its current form in 2000. Our position on this hasn’t changed. We continue to think it is unnecessary to transfer jurisdiction over schemes to the Panel, and in fact would result in a worse outcome for the market for corporate control in Australia.1
Here are a few reasons why schemes should stay with the courts:
- At present, before a scheme booklet is sent to target shareholders, it goes through a two-week ASIC review process, and it is then reviewed by the court at the first court hearing. At the first hearing, the court reviews the disclosure in the booklet, and considers 'class issues' (whether particular shareholders should be precluded from voting with the main body of shareholders on the scheme, because they are receiving a collateral benefit, or have different rights under or interests in the outcome of the scheme). Counsel for the scheme company is required to bring to the attention of the court any issues in relation to the scheme, before it is put to shareholders, and there are material consequences if they do not. While this process isn't perfect, it is an important discipline imposed on the proponents of the scheme to get it right, so that there is appropriate disclosure in relation to, and class voting on, the scheme.
- If jurisdiction over schemes is transferred to the Panel, our understanding of what is proposed is that the scheme company will simply send the scheme booklet to target shareholders, and it will then be up to target shareholders or ASIC to apply to the Panel for a declaration of unacceptable circumstances if they have an issue. It is not clear whether proponents of the change would keep the ASIC 14 day pre-review, but in any event, the court's role in pre-vetting the voting and disclosure in relation to the scheme would be removed. It is not a great outcome for target shareholders if they are forced to take action through the Panel, or to rely on ASIC taking action, as the only means of addressing voting or disclosure issues. It is also worse from a market integrity perspective if action has to be taken to correct inadequate or misleading disclosure, once it is already in the market. If, contrary to our understanding, the Panel would have some pre-vetting role, it is not clear who is going to do this. It won't be the Panel members (no Panel member is going to want to spend weeks every year reviewing scheme booklets, and, in any event, it usually takes a week or more just to find a sitting Panel to sit on a matter). That leaves the Panel executive. With the greatest respect to the Panel executive, they do not have the resources to undertake the task, and will not bring the same degree of discipline to the process as the court.
- Taking schemes out of the courts also removes the protections for target shareholders at the second court hearing. At the second hearing, after the scheme meeting, the court reviews the voting and disclosure on the scheme. The court also has a wide-ranging discretion to consider the fairness of the process. Shareholders have notice of that hearing, and have the right to appear and object to the scheme. It is not clear how all of this would occur, or who would do it, if the process is taken out of the courts.
- It is also important to remember that, while the ultimate result of a scheme and a takeover bid may be the same, the processes are quite different. A scheme is effectively a compulsory acquisition process, with a lower compulsory acquisition threshold than a takeover (75% of votes cast at the meeting and 50% of shareholders voting at the meeting vs relevant interests in 90% of total target shares under a takeover bid), but with the adherent protection of court supervision of the process. If, based on some 'comity' argument, jurisdiction for takeovers is transferred out of the courts and into the Panel, does this mean that the compulsory acquisition threshold on a scheme should be increased to 90%? That would clearly be a bad outcome for the market for corporate control in Australia.
- It also needs to be remembered that the Takeovers Panel is an administrative body, not a court. That means that there are things that a court can do which the Panel cannot. For example, while the principles guiding the Panel in section 602 of the Corporations Act are broad, the Panel would not have the same broad-ranging fairness discretion of the court. If the Government did seek to amend the legislation to give the Panel the same powers as the court in relation to schemes, there is a real risk that those changes would be unconstitutional. The Panel has previously survived a series of High Court challenges to its jurisdiction on the basis that it is only an administrative body, and is not purporting to exercise the judicial power of the Commonwealth, but that issue is very likely to come up again if the Panel is given more court-like powers in relation to schemes.
- This limitation on the Panel's powers has real consequences. For example:
- in almost all schemes that involve scrip consideration, the bidder will be relying on provisions of the United States Securities Act that exempt foreign schemes from prospectus registration requirements in the US, provided the scheme has been approved by a foreign court exercising a fairness discretion. This exemption would not be available if the Panel has jurisdiction over schemes, as the Panel is not (and can't be) a court. That will make most scrip bids by way of scheme unworkable.
- Also, if the Panel only has jurisdiction over members' schemes, it wouldn't be able to deal with a scheme to acquire shares and options, as the options scheme involves a creditors' scheme of arrangement. The Panel also would likely not be able to deal with more complex transactions, such as a restructure scheme, as it would not have the necessary jurisdiction in relation to creditors' schemes. Similarly, the Panel could not provide judicial advice for a trust scheme, meaning that acquisitions of stapled securities or trust units (ie most acquisitions of REITs and infrastructure entities) would still require court involvement.
Why then is the Government considering moving schemes from the courts into the Panel?2 Proponents of the change put the argument on four grounds: a need to achieve comity of treatment with takeover bids; a need for greater consistency; achieving a faster outcome; and reducing costs. Let's look at each of these in a bit more detail:
- To us, the 'comity of treatment' argument doesn’t carry much weight. Schemes and takeovers are very different processes, and there are provisions of Chapter 6 dealing with takeovers that don't necessarily apply to schemes. An example is collateral benefits, which in the scheme context can be dealt with by the relevant shareholders voting as a separate class, and with appropriate disclosure of the benefit. This 'comity' argument also ignores the fact that the courts have consistently had regard to Takeover Panel policy on relevant issues, such as break fees and exclusivity provisions. It also ignores the fact that the Takeovers Panel can intervene if there is a takeover bid competing with a scheme for the same target, as it did in the Citect scheme a few years ago, and that the Panel can intervene in relation to a scheme before it comes before the court3. Also, as discussed above, if you want true comity, then do you increase the compulsory acquisition threshold on a scheme to 90%? That would not be helpful.
- The consistency point is interesting. The argument seems to be that, if a disclosure issue is tested in the Panel, the parties are more likely to get a more consistent result than if the matter were tested before the court. We are not sure about that. There are a handful of judges around Australia who hear most scheme applications versus 50 part-time members of the Panel. As we have seen in other areas of the Panel's jurisdiction (like association cases), there isn't always consistency of thinking or approach on issues.
- As to speed, there will be a few days saved by not having to go through the court process (usually the period between coming out of ASIC and the first court hearing is a few days only), but we suspect that if there is a dispute, it will take much longer to resolve before the Panel than the court. Most complaints around disclosure or voting on schemes are dealt with by the court almost immediately. When hearing the dispute, the court has the benefit of having reviewed the disclosure at the first court hearing. Compared with this, the average time to establish a sitting Panel on a matter is around one week, with an average of three weeks to resolve matters. So we can see a real risk of delays if jurisdiction over schemes is transferred to the Panel.
- As to costs, if schemes were transferred out of the courts, the proponents of the scheme would still need to prepare a scheme booklet, with presumably the same attention to accuracy and completeness of disclosure as is currently the case. So the costs that would be saved would be legal costs (counsel's and the target's lawyers) of the two court hearings, and the preparation of the affidavit evidence for those hearings (note that, unlike the Takeovers Panel, the court does not charge fees to hear an application). We know that those incremental costs can appear high in the context of a scheme for a small market cap company, but, as discussed above, there are real integrity benefits in having court oversight of the scheme, and having the scheme company's counsel confirm to the court ahead of despatch that the disclosure is adequate and that any other issues have been addressed. Also, court supervision of the scheme is the price that the scheme proponents pay if they want to use the scheme process to compulsorily acquire a target shareholder's shares.4
For the reasons given above, we don't think that the proponents of this 'reform' have made out the case for change. There would need to be much clearer compelling evidence before going down the proposed path, with its attendant disadvantages. We look forward to seeing Treasury's consultation paper in due course.
This Insight proceeds on the basis that what is being proposed is a transfer of jurisdiction over members' schemes from the courts to the Panel, but the exact terms of the proposal are not clear from the Treasury announcement. A variation of this is that the members' scheme of arrangement provisions could be left untouched, and a new scheme-like mechanism included in the takeovers provisions of the Corporations Act 2001 (Cth), with that new process then under the supervision of the Takeovers Panel. Much of the discussion in this Insight applies equally if the idea is to create an additional scheme process supervised by the Panel.
It is a fair question when there are arguably more worthy corporate law reforms that have been the subject of past consultations, which are still sitting in a box gathering dust in Treasury (eg the Treasury consultation a few years ago on reforms to takeover laws, including around the 'creep' rule).
The leading Takeovers Panel decision on break fees and exclusivity provisions (Re Ross Human Directions) actually concerned a scheme. Another example was the Takeover Panel proceedings in relation to the Pacific Energy scheme in 2019.
It is true that the affidavit evidence required in support of a scheme has tended to increase over the years, as successive courts introduce new matters that they require evidence on, but there are advantages in having sworn evidence in front of a court versus Takeovers Panel submissions (which are not evidence in themselves).