Bulletproof Group Limited, in the matter of Bulletproof Group Limited [2018] FCA 497

Introduction 1 The plaintiff, Bulletproof Group Limited (Bulletproof), seeks an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) that it convene a meeting of its members for the purpose of considering and, if thought fit, agreeing, with or without modification, to a scheme of arrangement under which, if approved, Klikon Group Holdings Pty Ltd (KGH) will acquire all the shares in Bulletproof on issue at the Record Date (as defined) (the scheme shares) for the consideration of $0.152 per scheme share (the scheme consideration). The terms of the scheme are set out in Appendix 3 to the scheme booklet which has been tendered as Exhibit A (the scheme booklet). The scheme booklet stands as the explanatory statement required by s 412(1)(a) of the Act.

Background 2 Bulletproof is an Australian public company which is registered in New South Wales and listed on the Australian Securities Exchange (ASX). It provides managed public and private cloud services, and related professional services more particularly described in the scheme booklet. Its customers are in Australia and New Zealand. 3 KGH is an Australian private company registered in New South Wales. It is the holding company of Australian Centre for Advanced Computing and Communication Pty Ltd (referred to as AC3 Operations), which provides a range of information and communication technology services including cloud and managed services, cyber security, procurement, talent management and digital services. 4 On 15 February 2018, Bulletproof and KGH entered into a Scheme Implementation Deed providing for Bulletproof's proposal of the scheme. This was the outcome of a process of discussions with potential acquirers of Bulletproof following an announcement by Macquarie Cloud Services Pty Ltd (Macquarie Telecom) on 21 November 2017 of its intention to make a takeover bid for Bulletproof at $0.11 per share (the Macquarie Telecom Takeover Offer). The Macquarie Telecom Takeover Offer is unconditional and remains open until 30 April 2018. Macquarie Telecom holds 16.48% of Bulletproof's issued shares. These matters are referred to in the scheme booklet.

Evidence 5 The following affidavits were read: Craig Lehmann Farrow, affirmed 9 April 2018; Kenneth Martin Carr, sworn 6 April 2018; Daniel William Coote, affirmed 9 April 2018; Mark Christopher Malinas, sworn 9 April 2018; and Simon Xistouris, sworn 9 April 2018.

The scheme 6 The scheme reflects an all-cash bid for 100% of Bulletproof's issued capital. The scheme consideration appears to reflect a competitive auction process and represents a premium over the Macquarie Telecom Takeover Offer.

The independent expert 7 Bulletproof has engaged an independent expert, BDO Corporate Finance (East Coast) Pty Ltd (BDO), to provide an opinion on whether the scheme is in the best interests of members. BDO has prepared a report, which will be Appendix 1 to the scheme booklet. In its report, BDO expresses the opinion that the scheme is not fair because, on its analysis, the fair market value range for a Bulletproof share is $0.165 to $0.182, which exceeds the scheme consideration. Nonetheless, BDO has concluded that the scheme is reasonable and in the best interests of shareholders for the reasons expressed in the report. These opinions have been verified by Mr Coote, who is the director of BDO with overall responsibility for preparation of the report.

The directors' recommendation 8 Bulletproof's directors unanimously recommend that members vote in favour of the scheme, in the absence of a superior proposal. They have expressed the view that the scheme will crystallise value for the scheme shareholders and provide materially better value than the Macquarie Telecom Takeover Offer. The directors consider that the scheme will deliver immediate value to the scheme shareholders rather than the risks and potential capital costs of continuing to restructure Bulletproof and of competing in an increasingly competitive cloud hosting market.

Scheme shareholders' warranty 9 The scheme contains a warranty by the scheme shareholders that their scheme shares will, at the time of transfer to KGH pursuant to the scheme, be fully-paid and free from all mortgages etc. and restrictions on transfer of any kind, and that the scheme shareholders have full power and capacity to sell and transfer their shares to KGH pursuant to the scheme. The existence of the warranty and its terms are sufficiently disclosed in the scheme booklet.

Performance risk 10 Performance risk is managed by the terms of the scheme itself. The scheme requires that the scheme consideration be paid by KGH to Bulletproof as trustee for the scheme shareholders into a trust account in Australia before the Implementation Date (as defined). The scheme shares will not be transferred until the funds have been received by Bulletproof, who will then make or procure the payment of the relevant funds to the scheme shareholders. 11 In addition, KGH has executed a Deed Poll under which it covenants in favour of each scheme shareholder that it will observe and perform all obligations contemplated of it under the scheme, including its obligations relating to the provision of the scheme consideration. The Deed Poll is expressed to be governed by the laws of New South Wales and KGH has submitted to the non-exclusive jurisdiction of courts exercising jurisdiction in New South Wales in connection with matters concerning the Deed Poll.

Conditions precedent 12 The scheme is subject to a number of conditions precedent, including those set out in clause 3.1 of the Scheme Implementation Deed.

Exclusivity provisions 13 The Scheme Implementation Deed imposes "no-shop", "no-talk" and "no due diligence" restrictions on Bulletproof. Bulletproof is also obliged to notify KGH of third-party competing proposals. Further, the Scheme Implementation Deed confers a "matching right" on KGH in respect of competing proposals. The "no-talk" and "no due diligence" restrictions, and Bulletproof's obligation to notify KGH of third-party competing proposals and to provide it with a matching right, are subject to fiduciary carve-out provisions. The Exclusivity Period governing these provisions is capable of precise ascertainment. The period ends on the earlier of the termination of the Scheme Implementation Deed, or the Implementation Date or End Date under the scheme. The End Date is 31 July 2018, or such later date as KGH and Bulletproof may agree in writing. The Exclusivity Period is not unreasonable. The existence of the exclusivity provisions is sufficiently disclosed in the scheme booklet.

Break fee 14 Bulletproof has agreed to pay KGH a break fee of $246,000 in certain circumstances. The break fee will not be payable merely by reason of the fact that the scheme is not approved by members at the scheme meeting. The amount of the break fee is consistent with the Takeovers Panel's Guidance Note 7 - Lock-up devices. The existence of the break fee is sufficiently disclosed in the scheme booklet. There is evidence that it was agreed to after normal arms' length commercial negotiations in which Bulletproof was separately advised by independent legal and financial advisers. Mr Farrow, a director and the Chairman of Bulletproof, has deposed that he was closely involved in the negotiation of the break fee. He said that it was necessary for Bulletproof to agree to the break fee in order to secure KGH's agreement to the transaction. I note that a reverse break fee in the same amount is payable by KGH to Bulletproof in certain circumstances.

Employee incentive plans 15 Bulletproof shares have been issued under employee incentive plans. There are two such plans - the General Employee Share Plan and the Employee Share Ownership Plan. 16 Under the General Employee Share Plan, shares have been issued to selected employees at no cost to them. The terms of this plan generally prevent the employees from dealing with their shares for a period of three years. However, the relevant employees will be entitled to vote their shares at the scheme meeting, and, if the scheme is approved, those shares will be acquired in the same manner as other scheme shares. 17 Under the Employee Share Ownership Plan, shares have been issued to selected employees at $0.12, $0.30 and $0.40 per share. The acquisition of these shares has been funded by non-recourse loans provided by Bulletproof. The scheme will effect a "change of control event" under this plan. This allows the directors to accelerate the time for repayment of loans. 18 In minutes of a meeting held on 9 April 2018, the directors noted that they had previously resolved that the due date for repayment of loans with an outstanding amount of $0.30 or $0.40 per share be accelerated to 27 April 2018. As the amount of the loans substantially exceeds the scheme consideration, it is expected that the loans will not be repaid, with the consequence that the relevant shares will be forfeited and sold prior to the scheme meeting. 19 In the minutes of the meeting referred to above, the directors also noted that they had previously resolved that the due date for repayment of loans with an outstanding amount of $0.12 per share be accelerated to the Implementation Date, subject to the scheme becoming Effective (as defined). The scheme consideration in relation to the shares will be applied firstly in repayment of the loans, with the remaining $0.032 per scheme share then paid to the relevant scheme shareholders. Employees are generally restricted from dealing with shares acquired under this plan for a specified period. However, the relevant employees will be entitled to vote their shares at the scheme meeting, and, if the scheme is approved, those shares will be acquired in the same manner as other shares (subject to the payment arrangements described above). 20 Bulletproof's intentions in respect of shares issued under the employee incentive plans are sufficiently disclosed in the scheme booklet. I am satisfied that no class-creating circumstances arise.

Options 21 Mr Farrow has a relevant interest in 250,000 options, each in respect of one share, which vest on 11 May 2018 and can be exercised from that date until 11 November 2021 at an exercise price of $0.35 each. He also has a relevant interest in 250,000 options, each in respect of one share, which vest on 11 May 2018 and can be exercised from that date until 11 November 2021 at an exercise price of $0.39 each. Mr Farrow has entered into a deed with Bulletproof under which these options will be cancelled for nil consideration upon the scheme becoming Effective.

Verification of scheme booklet 22 There is evidence before me of the steps taken to verify the accuracy of information in the scheme booklet. 23 Bulletproof's directors have been provided with various drafts of the scheme booklet for review. On 9 April 2018, they resolved to approve the scheme booklet. 24 Since that resolution, there have been further minor amendments to the scheme booklet which have been approved by Mr Farrow and Mr Carr with the authorisation of the directors. 25 KGH's directors have been provided with various drafts of the scheme booklet for review. On 9 April 2018, they resolved to approve the scheme booklet and confirmed that they do not believe that the information in the scheme booklet that is "KGH responsible information" (information in the identified sections of the scheme booklet) contains: a statement that is misleading or deceptive or likely to mislead or deceive in any material respect; an omission in the relevant sections of the scheme booklet of information relating to KGH that is necessary to be included to ensure that is it not misleading or deceptive or not likely to mislead or deceive in any material respect; an omission in the relevant sections of the scheme booklet of information relating to KGH that is otherwise required to be included in the KGH responsible information in the relevant sections of the scheme booklet.

Distribution of the scheme booklet 26 Copies of the scheme booklet (which will include the independent expert's report; the Deed Poll; a copy of the scheme; and notice of the scheme meeting) and a proxy form will be dispatched by ordinary post (to members with a registered address in Australia) or by prepaid airmail or air courier (to members with a registered address outside Australia). Members who have nominated an electronic address for the purpose of receiving communications from Bulletproof will be sent an email which contains links to a website from which the scheme booklet and proxy form can be accessed. Further, a copy of the scheme booklet will be posted on Bulletproof's website and on the website of Link Market Services Ltd (Link), which provides registry services to Bulletproof. A telephone information line - the Bulletproof Shareholder Information Line - will be established and operated by Link to answer queries that members might have in relation to the scheme booklet or the scheme.

Chairman 27 Mr Farrow has consented to act as chairman of the scheme meeting. Mr Carr has agreed to act as Mr Farrow's alternate if for some reason Mr Farrow is unable to act in that position. They have each made an affidavit in compliance with r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth).

ASIC 28 The Australian Securities and Investments Commission (ASIC) has provided a letter dated 9 April 2018 in which it has advised that the requirements of s 411(2)(a) and s 411(2)(b) of the Act have been complied with. In that letter, it also stated that it did not intend to appear at the first court hearing to make submission or to oppose the scheme.

Conclusion and disposition 29 I am satisfied that Bulletproof is a Part 5.1 body and that the scheme is an "arrangement" for the purposes of s 411(1) of the Act. I am satisfied that the formal requirements that are preliminary to the Court convening a meeting under s 411(1) of the Act have been complied with. I am also satisfied that the proposed scheme is of such a nature and is cast in such terms that, if it is approved by the requisite statutory majorities at the scheme meeting, the Court would be likely to approve it on an unopposed application. 30 I am satisfied that the orders, as now sought, should be made. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.