- Australian Securities Commission v Marlborough Gold Mines Ltd

Specific issues arising in respect of the proposed scheme Exclusivity provisions

Mr Papamatheos points out that, under cl 11 of the Amended SID, ResApp and Pfizer Australia have agreed that ResApp and its representatives are restricted from, directly or indirectly (among other things), soliciting, encouraging, initiating or inviting any competing proposal (cl 11.2(a)) (a "no shop" provision); and from negotiating or entering into, or participating in negotiations or discussions regarding, a competing transaction or any agreement, understanding or arrangement that may be reasonably expected to lead to a competing transaction (cl 11.2(b)) ("no talk" and "no due diligence" provisions). The latter no talk and no due diligence clause is subject to an express fiduciary and statutory duties carve out in cl 11.3 of the Amended SID. The Amended SID also includes notification and "matching right" provisions which require ResApp to notify Pfizer Australia of any negotiations, discussions, approaches, etc as well as giving Pfizer Australia the right to match any offer or make a superior offer to that put forward by a rival bidder, under cll 11.4 and 11.5 of the Amended SID.
Mr Papamatheos submits that: "In general terms, an exclusivity provision should meet the following criteria: (a) it should be for no more than a reasonable period capable of precise ascertainment; (b) it must be framed so that the "no talk" provision is subject to an overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful; and (c) the exclusivity clause should be given adequate prominence in the explanatory statement sent to shareholders."
Mr Papamatheos also submits that the Exclusivity Period (as defined) is capable of precise ascertainment from the clauses (identified above), which are publicly announced so that any rival bidder can understand how they may make any approach or competing bid. He recognises that the Exclusivity Period extends for 9 months ending on 11 January 2023, and recognises that nine months is at the higher end of usual periods but submits that period has been accepted when there are regulatory approvals to seek and obtain. He points out that ACCC approval is here a significant condition precedent (SID, cl 3.1(a); Amended SID, cl 3.1(a)) and the parties are continuing to liaise with the ACCC. He points out that the "no talk" and "no due diligence" obligations do not apply to Competing Proposals (as defined) that were not solicited by ResApp in breach of cl 11.2(a), and that the terms of the fiduciary and statutory carve out in cl 11.3(a)-(b) are also common and practically workable for the board of ResApp if a competing proposal is received. He draws attention to Dr Keating's evidence that the board of ResApp took advice on these clauses, that they were negotiated at arm's length and the board considered that they would not prevent a competing bidder. He notes that the exclusivity provision has been adequately disclosed in the scheme booklet at the frequently asked questions table and sections 4.4 and 9.15.
Mr Papamatheos also submits that the RDLA made between ResApp and Pfizer Inc, which creates a non-exclusive licence and a joint venture, does not impose restraints upon the market for control for ResApp for several reasons. I have referred to that document above. I accept that the RDLA does not prevent a competing bid for ResApp and did not, prior to the SID, prevent ResApp from engaging with any third party or to solicit any proposal. I am satisfied that it did not amount to a pre-SID exclusivity arrangement that could lock out other valuable proposals for ResApp and does not now expand the exclusivity established under the SID.
I recognise that exclusivity provisions are now commonplace in schemes of arrangement: Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207 at [23]. I also recognise that matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive, where the terms of any competing proposal would likely need to be disclosed by ResApp in any event under its continuous disclosure obligations and the matching right process corresponds to the course that a prospective bidder or merger proponent would expect ResApp to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Ltd above at [24]. The case law indicates that an exclusivity provision directed at dealing with an unsolicited alternative merger proposal should also be subject to a fiduciary carve-out, although the case law has also accepted that a "no shop" restriction need not be subject to a fiduciary carve-out: Re DUET Management Company 1 Ltd [2013] NSWSC 817 at [24]; Re Aveo Group Ltd and Aveo Funds Management Ltd [2019] NSWSC 1348 at [44]. Exclusivity provisions must also be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re Villa World Ltd above at [23]. These provisions are disclosed in the scheme booklet.
The Court will also consider whether exclusivity provisions operate for no more than a reasonable period capable of precise ascertainment. I was concerned as to the length of the exclusivity provisions (9 months) in a relatively simple acquisition scheme but I was ultimately persuaded that the regulatory approvals involved may raise novel issues or matters of public policy, where ResApp is developing a diagnostic tool in respect of COVID-19 and the acquirer is a significant producer of COVID-19 vaccines. For that reason, a relatively long exclusivity period, which is at the longer end of the range of periods accepted in other cases, is acceptable here. The exclusivity provisions do not provide any reason not to order the convening of the scheme meeting. Break fees
Mr Papamatheos points out that cl 12 of the Amended SID (read with cl 1.1 which defines the term "ResApp Break Fee") provides for the payment of a "ResApp Break Fee" of $1,255,158 to Pfizer Australia by ResApp in specified circumstances. Clause 13 of the Amended SID also provides for Pfizer to pay a Pfizer Break Fee in specified circumstances. Mr Papamatheos submits that provisions of this kind are common in schemes of arrangement and do not prevent the Court making orders to convene meetings under s 411(1) of the Act, unless the break fee is so great that it may influence votes during the scheme meeting or if there is some other unusual circumstance or trigger which may give rise to a concern that shareholders would be coerced to vote for the proposal. He points out that the amount of the break fee is in line with the 1% threshold set by the Takeovers Panel, and represents 1% of the total equity value of ResApp, being $125,515,774 (as derived from the last closing price of ResApp shares prior to 14 June 2022 when the Amended SID was executed) (Keating, [49(b)]). He also points out that, under cl 12.2 of the Amended SID, the ResApp Break Fee is not payable if the proposed scheme is not approved by ResApp Shareholders (i.e., on a "naked no vote") or to the extent that any court or regulatory authority refuses approval; that the break fee is not payable by ResApp if any ResApp director directors withdraws his or her support or recommendation of the scheme as a result of the Independent Expert opining that the Scheme is not in the best interests of ResApp Shareholders (cl 1.2(a)) (other than where there is a competing proposal); and that there is evidence that the amount of the ResApp Break Fee was negotiated, after advice, at arm's length and represents a fair and reasonable pre-estimate of the minimum transaction costs Pfizer Australia would incur if the scheme did not proceed. The ResApp Break Fee is disclosed in sections 2.3(b) and 9.17 of the scheme booklet.
I accept that break fees are common features in schemes of arrangements and will be permitted unless the amount of the break fee is such that it could influence voting at the meeting to be convened or if there are some other unusual circumstances, and there is evidence that fee was negotiated between the parties during the course of arm's length negotiations, consistent with the approach noted in Re APN News Media Ltd (2007) 62 ACSR 400; [2007] FCA 770. I accept that the break fee does not provide any reason not to convene the scheme meeting or approve the scheme booklet for dispatch. ResApp options and consequential interests in directors' recommendation
Mr Papamatheos recognises that all but one of the directors of ResApp hold options and will benefit from the manner in which they are treated under the proposed scheme, although the amounts involved are not large, and the position in that respect is disclosed in the Chairman's Letter and section 10.2 of the scheme booklet. He submits that, as in other recent schemes, the interests of the directors do not prevent them from making a voting recommendation to ResApp shareholders as those interests are sufficiently disclosed in the scheme booklet and the shareholders may take such interests into account in giving weight to that recommendation
I adopt the approach taken in cases including Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Re Villa World Ltd [2019] NSWSC 1207; Re GBST Holdings Ltd [2019] NSWSC 1280; Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580; Re Coca-Cola Amatil Ltd [2021] NSWSC 270; Re Afterpay Ltd above; Re BINGO Industries Ltd [2021] NSWSC 798; Re RXP Services Ltd [2021] FCA 38 and Re Mainstream Group Holdings Ltd [2021] FCA 948. I accept that the interests of the relevant ResApp directors do not prevent them from making a voting recommendation to ResApp shareholders where that interest is sufficiently disclosed in the scheme booklet and ResApp shareholders may take it into account in determining the weight to give to that recommendation. This matter also does not provide any reason not to order the convening of the scheme meeting. Deemed warranty
The scheme contains a warranty (cl 8.4) by scheme shareholders, by which they warrant that their shares are fully paid and unencumbered, and that warranty is appropriately disclosed in the scheme booklet. The scheme also contained a "clear title" provision (cl 8.5), expressed as to "the extent permitted by law". The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd above at [57]-[63]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]; Re Windlab Ltd [2020] NSWSC 571 at [21]; Re rhipe Ltd [2021] NSWSC 1170 at [26]. Performance Risk
The case law has addressed the question of "performance risk", namely any risk that the acquirer will not comply with its obligation to pay the scheme consideration to shareholders of the scheme company: Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]; Re Ellerston Global Investments Ltd above at [29]. That risk is here addressed by cl 5.3(h) of the Amended SID, which required Pfizer Australia to execute a deed poll in favour of each ResApp shareholder prior to this hearing. That deed poll was executed on about 13 July 2022 and, by cl 4.1 of that Deed Poll, Pfizer Australia covenants in favour of each of the scheme shareholders that it will observe and perform all its obligations under the scheme, including the relevant obligations relating to the provision of scheme consideration, subject to and in accordance with the terms of the scheme. The terms of the scheme also require Pfizer Australia, by no later than the Business Day (as defined) before the Implementation Date (as defined), to deposit or procure the deposit of an amount at least equal to the aggregate amount of Scheme Consideration (as defined) payable to each scheme shareholder in cleared funds into the Trust Account (as defined) (Scheme, cl 5.2; Amended SID, cll 4.3 and 5.3(j)). The transfer of scheme shares to Pfizer Australia is subject to its having satisfied its obligations in cl 5.2 as to prior deposit of the aggregate scheme consideration into the Trust Account (Scheme, cl 4) and the beneficial entitlement to the scheme shares only passed to Pfizer on the deposit of the aggregate Scheme Consideration into the Trust Account (Scheme, cl 8.5(b)). Mr Papamatheos submits and I accept that this drafting prevents the transfer of a legal or beneficial interest in Scheme Shares (as defined) to Pfizer Australia prior to its payment of the Scheme Consideration and reflects the common practice that has developed to address performance risk. I am satisfied that the structure of the deed poll and the scheme sufficiently addresses performance risk. Dispatch of scheme materials and conduct of virtual scheme meetings
The evidence addresses the dispatch of scheme documents by electronic means or hard copy as appropriate and the manner in which the scheme meeting will be held. ResApp intends to conduct a hybrid physical and virtual scheme meeting, although I made orders in a form that will permit a virtual meeting only in the case if adverse developments in respect of COVID-19 cause difficulty in convening a physical meeting. The virtual aspect of that meeting is permitted by s 253Q of the Act where, as here, the technology used gives members as a whole a reasonable opportunity to participate without physically being present in the same place. Section 411(17) of the Corporations Act
In accordance with the usual practice, the Court will defer the question raised by s 411(17) of the Act to the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37].

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