What’s on Justice Black’s mind? Recent comments from the NSW Supreme Court on shareholder communications before the first Court hearing

1. calls between the CEO of Ansarada (who was proposed to acquire certain of Ansarada’s businesses in connection with the scheme which the bidder did not wish to acquire) and Ansarada’s shareholders. These were in relation to the value of the relevant assets that were carved-out from the scheme and to be acquired by the CEO and the CEO’s motivations in respect of that transaction; and
2. communications responding to inquiries from Ansarada shareholders in relation to the scheme, including questions as to the delay in the scheme resulting from the ACCC’s review of the transactions.

The communications were based on a document entitled “Project Answer Q&A Focus Questions” which had not been brought to the Court’s attention at the first Court hearing.

The second Court hearing

Ansarada argued that the communications were not relevant to bring to the Court’s attention because:

• at the time of the communications (which was prior to the first Court hearing), there was no Court-approved script for communications with shareholders;
• the answers set out in the internal Q&A document on which the communications were based were fair and balanced and consistent with publicly disclosed information at the time and the subsequently dispatched explanatory booklet;
• while there is no “absolute proposition” that the Court is not concerned with communications with shareholders prior to the first Court hearing, the issue for the Court was whether the communications adversely affected the integrity of the subsequent steps taken in respect of the scheme. In this case, after the communications, Ansarada shareholders were provided with the explanatory booklet and had ample opportunity to consider it;
• the communications were largely focused on explaining the ancillary ‘carve-out’ transaction which was approved by shareholders at a general meeting immediately prior to the scheme meeting and was “not subject to the same prescriptions” as those relating directly to the scheme. Again, the relevant communications were consistent with public disclosure at the time and the information subsequently disclosed in the explanatory booklet;
• the CEO framed his communications with shareholders as personal motivations rather than independent advice; and
• most of the calls made by Ansarada were to institutional investors who were sophisticated parties and able enough to reach their own views about the scheme.

Black J did not think that the communications provided reason for the Court to withhold approval for the scheme. However, his Honour, referring also to his consideration of similar issues in the ResApp scheme, thought that the relevant communications should have been brought to the Court’s attention at the first Court hearing.

This included because:

• the fact that the Court will be concerned with whether communications adversely affected the integrity of subsequent steps taken in a scheme was itself sufficient reason for the relevant matters to be put before the Court, although any assessment of their impact would likely have been deferred to the second Court hearing;
• his Honour disagreed that the communications concerning approval of the carve-out transaction were “not subject to the same prescriptions” as those relating to voting on the scheme. His Honour was of the view that the Court will have regard to the content of communications between a target and its shareholders at the second Court hearing, and that review will likely extend to communications concerning a transaction that is closely connected to the scheme; and
• communications prior to the announcement of a scheme, including with sophisticated shareholders, have the risk of affecting their response to the explanatory booklet and the scheme.

Black J also noted that, given the Court is reliant on evidence led by the target company in a scheme because of the typically uncontested nature of scheme hearings, this was a further practical reason why the relevant communications should have been brought to the Court’s attention at the first Court hearing.

Commentary

In a scheme context, the focus of target companies is often on shareholder communications that occur after a scheme booklet has been issued and before the scheme is approved, including to ensure such communications occur within the guardrails of the scripts that are brought to the Court’s attention at the first Court hearing.

However, the Ansarada scheme highlights that the Court is not just concerned with shareholder communications that occur after the first Court hearing. Any shareholder communications that occur before the first Court hearing may also be relevant to the Court’s approval of a scheme at the second Court hearing and should therefore be brought to the Court’s attention at the first Court hearing.

Relevantly, the Court is concerned as to:

• whether any shareholder communications before the first Court hearing adversely affected the integrity of subsequent steps taken in a scheme; and
• even where communications are to sophisticated shareholders, whether these have the risk of affecting shareholders’ response to the scheme booklet and the scheme (noting the Court relies on the candour of target companies to bring such matters to the Court’s attention given the typically uncontested nature of scheme hearings).

In ASIC’s recent October 2024 Corporate Finance Update, ASIC too has emphasised that the decisions in the Ansarada scheme and the recent first Court hearing for the proposed Vonex scheme², remind the market of the importance of informing the Court of communications, both proposed and made with target shareholders. Consistent with its current practice, ASIC has also now specifically stated that, in order to discharge its role, it requires the nature of intended communications with shareholders to be disclosed to ASIC before the first Court hearing.

Footnotes

1. Re Ansarada Group Ltd [2024] NSWSC 1121.
2. In the Vonex matter, the target proposed to have its company secretary respond to calls from shareholders without an established call script. In accepting the approach, Justice Black highlighted that the company secretary would be responding to shareholder inquires in an unscripted way but consistent with the scheme booklet, and that Vonex would maintain a register of all inbound calls relating to the scheme, including how many calls were received and details as to the responses provided to shareholders. The Court also emphasised that Vonex would need to give particular attention to its disclosure obligations at the second Court hearing, and that Vonex would likely be required to provide evidence of the content of those communications at the second Court hearing.