Australian Securities Commissions v Marlborough Gold Mines Ltd

Nature of the application

1. By Originating Process filed on 24 August 2022, the Plaintiff, Kyckr Ltd ("Kyckr") applied for an order under s 411 of the Corporations Act 2001 (Cth) that it convene a meeting of shareholders to consider and, if thought fit, agree to a scheme of arrangement, and associated orders. By way of background, Kyckr is an Australian public company limited by shares, which are traded on the Australian Securities Exchange ("ASX"). It provides services which allow organisations to access primary sourced company data and assists them to comply with Know Your customer and money laundering regulations. On 6 July 2022, it announced to ASX that it had entered into a scheme implementation deed dated 6 July 2022 with RealWise KYK AV Pty Ltd ("RealWise"), which provided for RealWise to acquire all of its issued share capital (other than any shares held by RealWise or its wholly owned entities) by a scheme of arrangement for total cash consideration of $0.08 per Kyckr share. RealWise is wholly owned by Mr Richard White, who currently holds approximately 22.76% of the Kyckr shares on issue and is Kyckr's largest shareholder.
2. At the conclusion of the first Court hearing, I made the orders sought by Kyckr. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Williams, who appears for Kyckr, in this judgment.

Affidavit evidence

1. In support of the application, Kyckr read the affidavit dated 24 August 2022 of its solicitor, Ms Li-Jean Chew, which refers to the nature of Kyckr's business and its ASX announcement made on 6 July 2022. By a second affidavit dated 8 September 2022, Ms Chew dealt with the lodgement of the draft scheme booklet and the documents with the Australian Securities and Investments Commission ("ASIC") and correspondence with ASIC in respect of the scheme. By a third affidavit dated 12 September 2022, Ms Chew corrected an aspect of her second affidavit, and updated the position in respect of correspondence with ASIC in relation to the scheme. That affidavit annexed ASIC's letter dated 9 September 2022, which indicated that ASIC did not currently propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing, and reserved its position in respect of s 411(17) of the Corporations Act in accordance with its usual practice.
2. Kyckr also read the affidavit dated 8 September 2022 of its chief financial officer and company secretary, Mr Glenn Day, who also referred to the nature of its business and provided an overview of the terms of the scheme and addressed the conditions precedent to its implementation, which include a "no material adverse change" condition. Mr Day outlined the contents of the scheme booklet, through which I was taken by Mr Williams in the course of the first Court hearing. Mr Day notes that the scheme booklet includes an independent expert's report prepared by Mr Ian Jedlin of Kroll Australia Pty Ltd ("Kroll") to which I refer below. Mr Day also addressed the manner in which it was proposed that the scheme booklet and proxy form would be provided to shareholders and the process that had been adopted for verification of the scheme booklet, which was consistent with common practice. Mr Day also addressed the negotiation of exclusivity provisions, including "no shop", "no talk" and "no due diligence" obligations and certain matching rights and the negotiation of break fees. Mr Day also set out directors' interests, including their interests in options which were addressed in the scheme booklet and the position in respect of performance rights and options of senior executives.
3. By his affidavit dated 6 September 2022, Mr Rajarshi Ray, who is the chairman and an independent non-executive director of Kyckr, set out his interest in Kyckr shares and options and consented to act as chair of the scheme meeting. By an affidavit dated 2 September 2022, Mr George Venardos, who is an independent non-executive director of Kyckr, set out his interests in Kyckr shares and options and consented to act as chair of that meeting, if Mr Ray was unable to do so.
4. By an affidavit dated 8 September 2022, Mr Stratos Karousos, who is a director of Real Wise Management Pty Ltd, addressed the verification of information concerning Real Wise contained in the scheme booklet. By an affidavit dated 8 September 2022, Mr Richard White, who is the sole director and sole shareholder of RealWise, addressed RealWise's funding of the scheme consideration, through debt financing committed by RealWise Holdings Pty Ltd ("RealWise Holdings") and his evidence was that RealWise Holdings had uncommitted cash reserves sufficient to fund that commitment in accordance with the relevant loan agreement. Mr White also addressed the conditions precedent to implementation of the scheme, the verification of RealWise information contained in the scheme booklet, the entry into the deed poll in respect of scheme shareholders, negotiations regarding exclusivity and the break fee provision in the scheme implementation deed and other matters.
5. By his affidavit dated 8 September 2022, Mr Ian Jedlin, who is managing director - valuation advisory services with Kroll, addressed his preparation of an independent expert's report in respect of the scheme, together with a colleague, and confirms they had regard to the relevant ASIC Regulatory Guides in preparing that report and held the opinions set out in that report, including that the scheme is fair and reasonable and therefore in the best interests of Kyckr shareholders. He also indicates that they were prepared to sign a final version of that report and were not aware of any relevant matters of significance being withheld which would cause them to change the opinions expressed in that report.
6. Kyckr also relied on the affidavit dated 8 September 2022 of Mr Paul Cook, a listed client service manager at Boardroom Pty Ltd, which addressed the manner in which documents would be sent to Kyckr shareholders in respect of the scheme and the online platform that would be used at the scheme meeting.

Applicable principles

1. Mr Williams submits, uncontroversially, that the Court will order the convening of the scheme meeting and approve the draft scheme booklet if it is satisfied that Kyckr is a Pt 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Villa World Ltd [2019] NSWSC 1207 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20].
2. Mr Williams also rightly points out that the approach of the Court at the first Court hearing is that the Court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 (approved in Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504). He also refers to the observations of French J (as his Honour then was) in Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44] (in a passage cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358 at [58]) that: "… It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530 ; 107 ALR 359 ; 7 ACSR 231 ; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
3. Mr Williams also rightly points out that, at the first Court hearing, the Court is not concerned with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate for it to be submitted for shareholders' consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2006] NSWSC 1309 at [23]; Re Villa World, above at [18]. The Court is also not required to be satisfied that no better scheme could have been proposed, but with whether sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re BIS Finance Pty Ltd Finance Pty Ltd, above at [22].
4. Mr Williams submits, and I accept, that the relevant formal requirements have been satisfied with respect to the proposed scheme. The scheme contemplates the acquisition by one company of shares in another, and falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Corporations Act: Re NRMA Ltd (2000) 33 ACSR 595; [2000] NSWSC 82 at [20]; Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [39]. ASIC has been provided with a reasonable opportunity to examine the terms of the scheme, and has confirmed it has no further comment on the scheme booklet, and Kyckr has tendered a letter from ASIC confirming that it does not intend to appear at the first Court hearing. The relevant requirements under the Supreme Court (Corporations) Rules are satisfied.
5. Mr Williams submits, and I also accept, that the Court can be satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the required majorities at the scheme meeting, the Court would be likely to approve the scheme at the second Court hearing: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Limited, above at [12]. The scheme is unanimously recommended by Kyckr's board in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is in the best interests of Kyckr shareholders; the independent expert has expressed the view that, in the absence of a superior proposal, the scheme is fair and reasonable and therefore is in the best interests of Kyckr shareholders; the scheme is straightforward in its operation and involves an all cash bid for the shares in Kyckr; and the scheme booklet appears to provide sufficient disclosure of the terms of the scheme, including key features and the scheme's advantages and disadvantages.

Particular aspects of the scheme

1. In accordance with common practice and as suggested by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603; [2002] NSWSC 1177, Mr Williams draws several aspects of the scheme to the Court's specific attention. He submits, and I also accept, that none of these matters would prevent the making of an order to convene the scheme meeting. Voting by Mr White
2. Mr Williams points out that Mr White is not an "Excluded Shareholder", which is defined in the scheme as RealWise or an entity wholly owned by RealWise, and any Kyckr shares held by Mr White on the record date would be acquired by RealWise under the scheme. Mr Williams indicates that, if the scheme is approved by Kyckr shareholders and the Court, and becomes effective, Mr White intends to transfer his Kyckr shares to RealWise prior to the scheme record date in consideration for the issue of further RealWise shares, with the result that those shares will not be subject of the scheme as RealWise is an Excluded Shareholder under the scheme. Where Mr White will still be a Kyckr shareholder at the meeting record date, he would be entitled to vote his Kyckr shares at the scheme meeting. It is not necessary to determine whether he should be treated as a separate class of Kyckr shareholder, since he proposes to abstain from voting so that his vote will not have any influence on the outcome of the scheme meeting. Performance rights and options
3. Kyckr operates a long term incentive plan ("LTIP") under which performance rights and options are offered to senior executives, and 4,502,922 performance rights and 9,000,000 options are currently on issue under the LTIP. Kyckr has also issued 5,486,827 options to its directors as part of their remuneration for providing directors' services. It is a condition precedent to the scheme becoming effective that no performance rights or options are in existence on the scheme record date, and the Kyckr board has determined, under the LTIP rules, that all of the performance rights on issue will vest and convert to Kyckr shares on the effective date, and those shares will be subject to the scheme. Kyckr has also entered into option cancellation deeds with each holder of Kyckr options, including the Kyckr directors, and the options will be cancelled on the scheme becoming effective for a cash consideration equal to the value of the options calculated using the Black-Scholes option pricing model. The intended treatment of performance rights and options is disclosed in section 3.5 of the scheme booklet. Mr Williams submits and I accept that holders of performance rights and options who are also Kyckr shareholders are not in a separate class of members by reason only that they also hold incentive rights: Re Cashcard Australia Ltd (2004) 48 ACSR 738; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]. Directors' interests
4. All of Kyckr's directors are non-executive directors and each of them has been issued with options as part of their remuneration for acting as a director. The scheme booklet disclosed (in the chairman's letter and section 9.2) that, as I noted above, each of the directors will receive a cash payment equal to the value of their options calculated using the Black-Scholes formula in consideration for the cancellation of their options, if the scheme becomes effective each. The total cash consideration payable to the directors for cancellation of their options will be approximately $105,000. Mr Williams also notes that the Kyckr directors consider that they should make a recommendation to shareholders in relation to the scheme notwithstanding their interest in the scheme arising from their option holdings, given the relatively small value of the consideration payable for cancellation of their options and the importance of the scheme to shareholders.
5. Mr Williams rightly recognises that, where a director will receive a substantial benefit in relation to a scheme which other shareholders will not receive, that benefit should be fully and prominently disclosed as a matter for shareholders to take into account when considering that director's recommendation: Re SMS Management & Technology Ltd [2017] VSC 257 at [22]-[27]; Re Ruralco Holdings Ltd [2019] FCA 878 at [28]; Re Kidman Resources Ltd [2019] FCA 1226 at [115]. He also submits that a recommendation by an interested director is acceptable if sufficient disclosure of the relevant director's interest in the scheme is provided to shareholders and that, given the prominent disclosure of the modest benefits which these directors will or may receive if the scheme is implemented, their recommendation to Kyckr shareholders is not a reason to decline to convene the scheme meeting. I accept that, given disclosure, the benefit to the directors is not a reason to prevent them from making a recommendation to shareholders in relation to the scheme or to decline to convene the scheme meeting: Re Villa World Ltd above at [38]ff; Re DWS Ltd (2020) 148 ACSR 616; [2020] FCA 1590 at [41]-[49]. Source of cash consideration, performance risk and conditions precedent
6. RealWise will fund the scheme consideration through a $43.5 million loan from RealWise Holdings, another company controlled by Mr White, which provided a commitment letter dated 6 July 2022 in favour of RealWise and Kyckr, by which it agreed to loan funds to RealWise to enable it to pay the scheme consideration. He also refers to the evidence that RealWise Holdings has uncommitted cash reserves sufficient to fund the commitment. He submits and I accept that the fact that the commitment under that commitment letter is subject to satisfaction or waiver of the conditions to the scheme implementation deed ("SID") and deed poll poses no real risk to Kyckr shareholders as those conditions will be satisfied before their shares are acquired: Re Spark Infrastructure RE Ltd [2021] NSWSC 1564 at [20]. He also points out that the commitment is otherwise unconditional and will only terminate upon the payment of the scheme consideration or effective termination of the SID, and the commitment letter does not provide RealWise or RealWise Holdings with any rights of termination. Although RealWise Holdings is not party to the deed poll, Kyckr has the benefit of and may enforce the commitment letter and, under the terms of the scheme, Kyckr undertakes in favour of each Kyckr shareholder to enforce RealWise Holdings' obligations under that commitment letter if required. I accept that Kyckr shareholders are in a position to enforce RealWise's obligation to provide the scheme consideration by requiring performance of Kyckr's undertaking under the scheme to enforce Kyckr's rights under the commitment letter.
7. Mr Williams also submits and I accept that the mechanism here for payment of the cash scheme consideration to the trust account operated by Kyckr or on its behalf, prior to transfer of the Kyckr shares, is a safeguard against the risk that Kyckr shareholders will suffer delay or default in the provision of the scheme consideration after their shares have been transferred to RealWise, and that Kyckr shareholders will not be relegated to the remedy of suing on the deed poll.
8. I have noted above that the conditions precedent to the scheme include a "no material adverse change" condition. I am satisfied that this matter is properly addressed by disclosure of that matter in the scheme booklet: Re Vimy Resources Ltd [2022] WASC 233 at [97]ff. Exclusivity provisions and break fee
9. Clause 10 of the SID is an exclusivity provision which includes "no shop", "no talk" and "no due diligence" restrictions, and a "notification" and "matching right" obligation. Mr Williams submits and I accept that exclusivity provisions in this form are now commonplace in schemes of arrangement and not inconsistent with Guidance Note 7: Lock-Up Devices issued by the Takeovers Panel: Re Villa World Ltd, above at [23]. Mr Williams also submits and I also accept that the Court will consider whether any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; whether any exclusivity clause directed at dealing with an unsolicited alternative merger proposal is subject to a fiduciary carve out; and whether the provision is clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9].
10. Mr Williams submits and I accept that the exclusivity period is here capable of precise ascertainment, and is a reasonable period where it is limited to 6 months from the date of the SID, namely to 6 January 2023, and is comparable with exclusivity periods in other schemes: Re QMS Media Ltd [2019] FCA 2172 at [47]-[48]. He points out that, by cl 10.7 of the SID, the "no talk" and "no due diligence" restrictions in cll 10.3 and 10.4 are subject to the overriding obligation not to breach the directors' fiduciary or statutory duties, although the "no shop" restriction is not subject to fiduciary carve-out. That approach has been accepted in the case law: Re DUET Management Company 1 Ltd [2013] NSWSC 817 at [24]; Re Aveo Group Limited and Aveo Funds Management Ltd [2019] NSWSC 1348 at [44]. Mr Williams also submits and I also accept that, although the "matching right" is not subject to fiduciary carve-out, such rights are now common in schemes of arrangement and are unlikely to be anti-competitive because the terms of a competing proposal would likely need to be disclosed by Kyckr in any event under its continuous disclosure obligations and the matching right process under cl 10.6 corresponds to the course that a prospective bidder or merger proponent would expect Kyckr to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Ltd [2017] NSWSC 415 at [24]. I accept that broadly similar provisions have been accepted in Re ERM Power Ltd [2019] NSWSC 1502 at [24]; Re Prime Media Group Ltd [2019] NSWSC 1805; Re Windlab Ltd [2020] NSWSC 571 at [18]; Re TPG Telecom Ltd, above at [22]. Mr Williams also points out that the exclusivity provisions are clearly disclosed in section 9.4(g) of the scheme booklet and there is evidence they resulted from arms' length negotiations between the parties.
11. Clause 11 of the SID in turn provides for the payment of a break fee of $400,000, being less than 1% of the total equity value of Kyckr of approximately $43.5 million implied by the scheme consideration. That break fee is disclosed in the frequently asked questions in section 2 and in section 9.4(h) of the scheme booklet. It is not payable solely by Kyckr shareholders failing to approve the scheme and is not a disincentive to shareholders in their consideration of the proposal: Adelaide Bank Ltd [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513. Where that break fee is less than 1% of the equity value of Kyckr implied by the scheme consideration, it is consistent with the Takeovers Panel's Guidance Note 7: Lock-Up Devices, and payment of break fees of such magnitude are commonplace in schemes of this kind: Re Mosaic Oil NL [2010] FCA 985 at [19]; Re TPG Telecom Ltd [2020] NSWSC 772 at [24]. There is evidence that the break fee was also the result of negotiations of the kind referred to in Re APN News Media Ltd (2007) 62 ACSR 400 at 411. Deemed warranty
12. The scheme provides for a deemed warranty by Kyckr shareholders that their shares are fully paid, will be free from encumbrances and that they have full power to sell and transfer the scheme shares, under cl 9.4(a) of the scheme, and that provision is prominently disclosed in section 3.7 of the scheme booklet. I am satisfied that deemed warranty is commonplace and sufficiently disclosed in the scheme booklet: Re APN News and Media Ltd, above at [57]-[63]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]. Quarterly update for September 2022 quarter
13. Mr Williams notes that it is anticipated that Kyckr will release its quarterly report to ASX for the quarter ending September 2022 prior to the scheme meeting, and section 5.9 of the scheme booklet reminds Kyckr shareholders that the quarterly update will be available from ASX's website. He notes that, if the quarterly update for the September 2022 quarter discloses a material change from Kyckr's financial performance or prospects as disclosed in the scheme booklet, Kyckr will approach the Court for directions for supplementary disclosure to bring the update to the attention of Kyckr Shareholders. Conduct of the scheme meeting
14. It is proposed that the scheme meeting will be held as a hybrid meeting with a physical meeting and virtually through the Lumi online meeting platform. Mr Williams submits and I accept that hybrid meetings are now authorised by s 249R of the Corporations Act. Section 249S(7) of the Corporations Act requires that, where virtual meeting technology is used, the technology must allow members as a whole to exercise orally and in writing any rights to ask questions and make comments, and the Lumi platform allows that functionality. A hybrid meeting is also permitted by cl 3.5(b) of Kyckr's constitution.

Section 411(17) of the Corporations Act

1. Mr Williams submits, and I accept, that the Court should defer addressing the question raised by s 411(17) of the Corporations Act, and any question of avoidance of the operation of Ch 6 of the Corporations Act to the second Court hearing, when the scheme is being considered for approval: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[27].

Orders

1. For these reasons, I made orders at the conclusion of the first Court hearing in accordance with the short minutes of order, initialled by me and placed in the file.

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