Key takeaways
While the Re Vita Group reforms have streamlined evidentiary requirements, courts continue to play a central supervisory role in ensuring schemes are fair, transparent and properly implemented.
Scheme proponents must still inform the court of any relevant issues, with rigorous verification of scheme booklets remaining a key requirement.
ASIC oversight and independent expert reports continue to provide important scrutiny and support the court's assessment of scheme transactions.
In 2023, the decision of Justice Jackman in Re Vita Group Ltd [2023] FCA 400 triggered significant reforms to the court process for schemes of arrangement in Australia.
While the reforms initially led to some uncertainty for practitioners, the position has now largely settled.
In practice, although the volume of affidavit evidence has been reduced, the court’s supervisory role remains paramount.
The courts continue to place strong emphasis on transparency, rigorous verification of materials, and independent oversight in the scheme process.
What is a scheme of arrangement?
A scheme of arrangement is a statutory mechanism under the Corporations Act 2001 (Cth) that allows a company to enter into a binding arrangement or compromise with all, or a particular class of its members or creditors.
In the context of mergers and acquisitions, schemes are commonly used in Australia to effect a change of control of a company.
They allow for a bidder to acquire 100% of the shares in a company, if a proposed scheme is approved by at least 75% by value and a majority in number of those voting.
Court supervision remains paramount
The court acts as a gatekeeper to schemes, ensuring fairness and transparency for members and creditors, especially those who may not vote in favour of a scheme but will still be bound by it.
A scheme is approved by way of a two-stage court process:
- at the first court hearing, the court considers whether to order that the scheme meeting be convened and approves the scheme booklet and related materials; and
- at the second court hearing, the court determines whether to grant final approval based on the voting results and whether the scheme is fair, reasonable, and properly implemented.
At each stage, the court retains a broad discretion to refuse approval if it is not satisfied that the relevant requirements have been met.
Traditionally, applicants were required to prepare voluminous affidavit material to satisfy the court that every aspect of the scheme and the material put before members and creditors was appropriate.
In 2023, Jackman’s J decision in Re Vita Group Ltd led to an updated Federal Court Practice Note (GPN-SOA) (Practice Note), which in effect reduces the volume of evidence required for scheme applications.
Equivalent practice notes have now been adopted in most Australian states, including the Supreme Courts of Queensland, New South Wales and Victoria.
Ensuring transparency in scheme applications
The Practice Note confirms that, although the intention is to make the court process more streamlined, the court’s supervisory role remains paramount.
Under the previous, more document-heavy approach, practitioners relied on comprehensive affidavit material to ensure that all relevant matters were before the court.
The new approach requires less documentation, but the obligation to ensure that the court is fully informed has not diminished.
The applications have an ex parte character, and as such the Practice Note emphasises that parties have a duty to bring to the court’s attention any matter that could bear on the exercise of its discretion, including any potential areas of concern.
As evidentiary requirements have become more streamlined, the hearing itself is the central forum in which the court tests the transaction.
At the first and second hearings, the court will engage directly with the legal representative appearing to explore areas of potential concern and uniqueness.
The legal representative appearing must have a deep understanding of the transaction and anticipate and respond to issues that may be raised during the hearings.
It is best practice for the bidder to also be represented at the hearings to address any issues that may arise.
Verification of the scheme booklet
The scheme booklet is the means by which shareholders or creditors are informed about the transaction and asked to make their decision.
While the Practice Note has, in many respects, accepted a more streamlined evidentiary approach, it makes clear that rigorous verification of the scheme booklet remains an essential part of satisfying the court that a scheme meeting should be convened.
The applicant must put on evidence of a person with direct experience of the verification process to confirm that all material statements are accurate and have been appropriately verified.
Independent oversight through ASIC and expert review
The role of ASIC also remains especially important under the streamlined procedure.
Two weeks prior to the first court hearing, the scheme proponent must notify ASIC of the application, and serve copies of the scheme booklet and other documentation.
ASIC then reviews the material and may ask the applicant questions or propose amendments to the material.
Following this process, ASIC may then issue a “no objection” letter, which will form part of the material put before the court.
While this letter is not determinative and the ultimate discretion remains with the court, the process of engaging with ASIC carries weight and provides the court with comfort that the scheme documentation has been subject to independent scrutiny.
The Practice Note requires the applicant to draw to the court’s attention any concerns or substantive issues arising from communications with ASIC.
Similarly, under the Corporations Regulations 2001 (Cth), in certain cases, the scheme booklet must be accompanied by an independent expert report which states, amongst other things, whether or not, in the expert’s opinion, the proposed scheme is in the best interests of the members or creditors.
Even where such a report is not strictly required under the Regulations, it is standard practice to commission an independent expert report for any takeover or complex transaction.
While the Practice Note states that there is no need for such a report to formally be admitted as expert evidence (at least where the Scheme is not contested), in practice, the court will rely on the report when exercising its discretion.
Implications: Navigating schemes under the new framework
The Practice Note was introduced to streamline the scheme process, not to lessen the level of scrutiny applied by the courts. While applicants may no longer need to rely on extensive affidavit evidence addressing routine matters, the court’s supervisory role remains central to the approval process.
For scheme proponents, the practical implication is clear - transparency, rigorous verification and effective engagement with ASIC and other stakeholders are more important than ever. Success under the streamlined framework depends not on the volume of evidence presented, but on ensuring the court is fully informed and satisfied that the scheme is fair, reasonable, and has been properly explained to members or creditors.