Cellnet Group Limited, in the matter of Cellnet Group Limited [2023] FCA 767

Introduction 1 By Originating Process dated 6 June 2023, the plaintiff (Cellnet) seeks orders for the convening of a meeting (Scheme Meeting) of its fully paid ordinary shareholders, other than Wentronic Holding GmbH (the Bidder) and its associates (as defined in s 12 of the Corporations Act 2001 (Cth) (Corporations Act), (Cellnet Shareholders), for the purpose of considering, and if thought fit, approving a proposed scheme of arrangement (Scheme). 2 The application is supported by the following affidavits: (a) Affidavit of Paul Welling of KHQ Lawyers, Cellnet's solicitors, affirmed 6 June 2023 (Welling First Affidavit); (b) Affidavit of Tony Masahiro Pearson, Cellnet's non-executive chairman, affirmed 30 June 2023 (First Pearson Affidavit); (c) Further affidavit of Mr Pearson, affirmed 30 June 2023 (Second Pearson Affidavit); (d) Affidavit of Thomas Charles Gardner, of Thomson Geer Lawyers, the Bidder's solicitors, sworn 30 June 2023 (First Gardner Affidavit); (e) Further affidavit of Mr Gardner sworn 30 June 2023 (Second Gardner Affidavit); (f) Affidavit of Stefan Galbo, partner of PKF Melbourne Corporate Pty Ltd (PKF), affirmed 28 June 2023 (Galbo Affidavit); (g) Affidavit of Sean Collins, partner of KPMG, affirmed 30 June 2023 (Collins Affidavit); (h) Further affidavit of Mr Welling, affirmed 3 July 2023 (Welling Second Affidavit). 3 The Scheme is a "cash for scrip" acquisition in conventional form. If passed by Cellnet Shareholders at the Scheme Meeting and approved at the second Court hearing, the Bidder will acquire all of the shares in Cellnet other than those which it and its associates do not already hold, for the scheme consideration of $0.027 per Cellnet share (Scheme Consideration). The implied transaction value, based on Cellnet Shareholders holding 46.77% of the 243,578,629 ordinary shares on issue, is approximately $3.076 million. 4 Cellnet has prepared an explanatory statement as required by s 412 of the Corporations Act, to accompany the notice of meeting (Scheme Booklet). The Scheme Booklet sets out in detail the prescribed information and other information which is material to the decision of Cellnet Shareholders to agree to or reject the Scheme. Earlier drafts of the Scheme Booklet have been lodged, and have been the subject of consultation, with the Australian Securities and Investments Commission (ASIC). Save for one matter, ASIC's comments on the Scheme Booklet would appear to have been resolved by way of Cellnet making amendments to the Scheme Booklet. 5 By virtue both of the Bidder's shareholding in Cellnet, and the presence of a common director as between the Bidder and Cellnet, reg 5.1.01 and cl 8303 of Part 3 of Schedule 8 of the Corporations Regulations 2001 (Cth) (Corporations Regulations) require that the Scheme Booklet be accompanied by an independent expert report stating whether or not, in the expert's opinion, the scheme is in the best interests of members of Cellnet and setting out the reasons for that opinion. PKF prepared an Independent Expert Report in respect of the proposed Scheme on 26 June 2020. The outstanding matter is that ASIC has raised concerns with respect to that report, which is to form Attachment E to the Scheme Booklet. 6 The PKF Independent Expert Report concludes that the scheme is fair and reasonable to the Cellnet Shareholders and is therefore in their best interests. The reasons for that conclusion are that the Scheme Consideration is greater than the control value range of a Cellnet share, and that the advantages to Cellnet Shareholders of the Scheme outweigh the disadvantages. 7 A draft of PKF's Independent Expert Report was provided to ASIC on 7 June 2023. In response, ASIC raised concerns about the Independent Export Report relating to the appropriateness of the valuation methodologies adopted by PKF, and whether PKF had regard to or could have regard to asset-based methodologies in assessing value. Following consultation between ASIC and PKF, PKF have provided a revised Independent Expert Report (which is annexed to the Galbo Affidavit), which sets out in greater detail the valuation methodologies PKF has adopted to value Cellnet Shareholders' shares and to cross-check the reasonableness of that valuation, and PKF's reasons for doing so. 8 Separately, Cellnet commissioned KPMG to provide an opinion as to the reasonableness of the valuation methodology adopted by PKF (KPMG Methodology Review), for the purpose of inclusion in any submissions to the Court and to ASIC. The KPMG Methodology Review, which is annexed to the Collins Affidavit, concludes that the valuation methodology adopted by PKF is reasonable in the circumstances surrounding the operations of Cellnet and the Scheme. Notably, the KPMG Methodology Review explains, inter alia, that PKF's adoption of two valuation methodologies is consistent with best practice and with ASIC's Regulatory Guide 111 (Content of Expert Reports). 9 The first Court hearing in this proceeding was held on 4 July 2023. On that day, I made the orders sought convening the Scheme Meeting and ancillary orders. These are my reasons for those orders.

Proposed scheme 10 Cellnet is a publicly listed company whose shares trade on the Australian Securities Exchange (ASX) under the ticker code "CLT". 11 On 11 May 2023, Cellnet and the Bidder entered into a Scheme Implementation Deed, pursuant to which it is proposed that the Bidder acquire by way of the Scheme all of the ordinary shares in Cellnet other than those shares which the Bidder and its associates already hold, on payment of consideration to Cellnet Shareholders of the Scheme Consideration. 12 As at 6 June 2023, the Bidder and its director, Mr Michael Wendt, hold some 53.23% of the share capital of Cellnet, with Cellnet Shareholders holding the remaining 46.77%. Mr Wendt is also a director (non-executive deputy chairman) of Cellnet. 13 In order to consider and progress the Scheme, Cellnet established an Independent Board Committee comprising its two independent directors, Mr Pearson and Mr Giles Karhan (non-executive directors). 14 As required by s 412(1)(a) of the Corporations Act, Cellnet has prepared the Scheme Booklet. A draft of the Scheme Booklet, which was provided to ASIC on or about 27 June 2023, was annexed to the First Pearson Affidavit. A revised version of the Scheme Booklet, containing further amendments to the Scheme Booklet as at 3 July 2023, was tendered during the first Court hearing on 4 July 2023. A clean copy of the Scheme Booklet was sent to my chambers immediately following the hearing. 15 Relevantly for present purposes, the final version of the Scheme Booklet attaches the Scheme Implementation Deed and the Scheme, as Attachments A and C respectively. The key steps to implementation of the Scheme are addressed in detail in Section 11 of the Scheme Booklet. The key points are as follows: (a) Cellnet Shareholders will vote on the Scheme at the Scheme Meeting, proposed to be held at 8.30 am on 7 August 2023 at Tenancy E1, 5 Grevillea Place, Brisbane Airport, Queensland; (b) assuming the Scheme is approved by Cellnet Shareholders at the Scheme Meeting (by way of attainment of the statutory majorities in s 411(4) of the Corporations Act), and all of the conditions to the Scheme other than Court approval have been satisfied or waived, Cellnet will seek orders at the second Court hearing presently listed for 10 August 2023, approving the Scheme pursuant to s 411(4) of the Corporations Act; (c) upon lodgement of any Court orders approving the Scheme with ASIC, the Scheme will become effective; (d) Cellnet Shareholders on Cellnet's register on the Scheme Record Date (expected to be 7.00 pm on 18 August 2023) will be entitled to receive the Scheme Consideration; (e) on the Implementation Date (expected to be 25 August 2023): (i) the Bidder will pay, and each eligible Cellnet Shareholder will receive, the Scheme Consideration; and (ii) once paid, the Scheme shares will be transferred to the Bidder (without Cellnet Shareholders needing to take any further action) and the Bidder will be listed as the holder of all the Scheme shares, with Cellnet to be subsequently removed from the official list of the ASX. 16 As the Bidder is to pay the Scheme Consideration, but is not a party to the Scheme, it has executed a deed poll in favour of Cellnet Shareholders to provide or procure the provision of the Scheme Consideration in accordance with the Scheme (Deed Poll), in accordance with established practice. A copy of the Deed Poll is Attachment B to the Scheme Booklet.

Power to make orders under section 411 of the corporations act 17 As noted by O'Bryan J in Re DuluxGroup Ltd [2019] FCA 961 (Re DuluxGroup) at [14]: Part 5.1 of the Corporations Act provides a procedure whereby an arrangement between a company and its members (a scheme) can be made binding on all members. Section 411 is the principal provision. The procedure involves three main steps: (a) an application to the Court for an order that the company convene a meeting of its members; (b) if such an order is made, the holding of such a meeting at which a resolution agreeing to the scheme is considered, and perhaps passed; and (c) if the resolution is passed by the required majority (see s 411(4)), an application to the Court for approval of the scheme. 18 The first Court hearing concerns the first step of obtaining orders to convene the Scheme Meeting. 19 Section 411(1) of the Corporations Act confers a discretion on the Court to make orders convening a scheme meeting if certain requirements are satisfied. Those requirements were summarised in Re DuluxGroup Ltd at [15] as follows: (a) a compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them): see s 411(1); (b) an application for the order is made in a summary way by the body: see s 411(1); (c) 14 days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits): see s 411(2)(a); and (d) the Court is satisfied that ASIC has had a reasonable opportunity to: (i) examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (ii) make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement: see s 411(2)(b). 20 In addition, the procedure is regulated by s 412 of the Corporations Act and reg 5.1.01 and Schedule 8 of the Corporations Regulations, and by the Federal Court (Corporations) Rules 2000 (Cth) (Rules). Section 412 of the Corporations Act, reg 5.01.01 and Schedule 8 of the Corporations Regulations and the Rules prescribe certain information which is required to be sent to the members about the Scheme as part of the explanatory statement (ie, the Scheme Booklet). 21 I am satisfied that the procedural steps necessary to enliven the Court's discretion to convene the Scheme Meeting are satisfied here as: (a) Cellnet is a company registered under the Corporations Act and therefore a "Part 5.1 body"; (b) Cellnet has made this application in a summary way, namely by Originating Process, as prescribed by the Rules; (c) ASIC was given notice of the first Court hearing on 9 June 2023; (d) ASIC was first provided with a copy of the draft Scheme Booklet on 7 June 2023 and has corresponded with KHQ Lawyers, Cellnet's solicitors, about its contents in the period since. Accordingly, ASIC has had a reasonable opportunity to consider the Scheme and the Scheme Booklet and make submissions to the Court about those matters; (e) the Scheme Booklet sets out the information prescribed by s 412 of the Corporations Act and reg 5.01.01 and Schedule 8 of the Corporations Regulations. The Scheme Booklet is clear and comprehensive, setting out the nature of the Scheme in detail and otherwise addressing the matters prescribed by the relevant statutory provisions. The Scheme Booklet has been through verification procedures and has been subject to the required consultation with ASIC. In addition, PKF's Independent Expert Report ,which will accompany the Scheme Booklet, contains a detailed evaluation of the Scheme, presented in a way that enables a shareholder to form his or her own view of the merits of the Scheme; (f) there has been compliance with the Rules: a company search carried out on the date of the Originating Process is annexed to the Welling Affidavit (r 2.4(2)); the First Pearson Affidavit addresses the requirements of the Rules concerning the nomination of the chairperson and alternate chairperson for the conduct of the Scheme Meeting (r 3.2); the proposed orders identify the Scheme as being annexed to the Scheme Booklet (r 3.3(1)). As to the requirement to publish a notice of the second Court hearing (r 3.4), the proposed orders contemplate Cellnet doing so via ASX and website announcements, and otherwise seek dispensation with the requirement to publish notice of the second Court hearing in a national newspaper, in accordance with the approach recently adopted by Jackman J in Re Vita Group Limited [2023] FCA 400 at [23]; (g) finally, as required by Schedule 1 to the Commercial and Corporations Practice Note (C&C-1) at [26], the Scheme Booklet at [1.10] displays a notice that the fact the Court has made the convening orders and approved the Scheme Booklet does not mean it has formed any view as to the merits of the Scheme or how members should vote, nor does it mean that the Court has prepared, or is responsible for, the Scheme Booklet.

Exercise of the court's discretion 22 The function on an application to convene a meeting is supervisory, and was described by Beach J in Re Amcor Ltd [2019] FCA 346 at [47] (omitting citations) as follows: My function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is, the proposed scheme appears now to be on its face "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further". But in the present case, in my view there is no issue arising from the Scheme which would unquestionably lead to a refusal to approve the Scheme at the approval hearing. It cannot be said that the Scheme on its face is "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further". Put another way, the Scheme is not of such a nature and cast in such terms that if it receives the support of the statutory majorities at the meeting, nevertheless I would not be likely to approve it at the second court hearing. 23 Before ordering a meeting, the Court needs to be satisfied of two matters: Re DuluxGroup Ltd at [13]: (a) firstly, that the Scheme is fit for consideration, in the sense that it is of such a nature and cast in such terms that, if it achieves the statutory majorities at the Scheme Meeting, the Court would be likely to approve the Scheme at the second Court hearing if it is unopposed; and (b) secondly, that members are to be properly informed as to the nature of the Scheme before the Scheme Meeting.

The Scheme is fit for consideration 24 The question whether or not to accept particular consideration for shares is quintessentially commercial matter for the Cellnet Shareholders to assess, and they ought not be prevented from having the opportunity to do so provided the Court can be satisfied they are acting on sufficient information and with time to consider what they are voting about: Re DuluxGroup at [20]. 25 Relevantly in this respect, the Scheme Booklet contains: (a) a recommendation from the independent directors of Cellnet - that is, Mr Pearson and Mr Giles Karhan - that Cellnet Shareholders vote in favour of the Scheme; (b) a statement that the directors eligible to vote on the Scheme intend to vote their shares in favour of the Scheme; and (c) the Independent Expert Report prepared by PKF, which concludes that the Scheme is fair and reasonable and in the best interests of Cellnet Shareholders. 26 The Court will also scrutinise the terms of the Scheme to satisfy itself there is no element of unfairness in those terms that would be likely to preclude the approval of the Scheme if it came before the Court for approval: Re DuluxGroup at [22]. 27 The plaintiff drew the Court's attention to the following features of the Scheme: (a) performance risk; (b) deemed warranties; (c) exclusivity arrangements; (d) break fees; (e) the application of s 411(17) of the Corporations Act.

Performance risk 28 The Bidder has executed a Deed Poll in favour of Cellnet Shareholders by which it undertakes to pay the Scheme Consideration and otherwise perform its obligations in respect of the Scheme (to which it is not a party). In addition, the terms of the Scheme are such that the transfer of Scheme shares to the Bidder is subject to the Bidder providing the Scheme Consideration to Cellnet Shareholders. Accordingly, Cellnet has adopted the accepted means of addressing performance risk in respect of the Bidder's obligation to pay the Scheme Consideration and no issue arises in this regard: Re DuluxGroup at [25]-[26].

Deemed warranties 29 Clause 8.4 of the Scheme provides that Cellnet Shareholders are deemed to have warranted that their Scheme shares will be free from encumbrances and that they have full power and capacity to transfer them under the Scheme. The deemed warranties are in conventional form and are disclosed in the Scheme Booklet at [11.4], and as such may be regarded as acceptable by the Court: Re DuluxGroup at [27].

Exclusivity arrangements 30 Clause 14 of the Scheme Implementation Deed sets out the parties' exclusivity arrangements during the period from 11 May 2023 until the Effective Date of the Scheme or the Scheme Implementation Deed is terminated. They include "no shop" (cl 14.2), "no talk" (cl 14.3), no due diligence (cl 14.4), notification of approaches (cl 14.5) and matching right (cl 14.6). Relevantly, the "no talk" and no due diligence requirements are subject to a fiduciary carve out (cl 14.7). The exclusivity arrangements are described in [3.4(d)] of the Scheme Booklet. They are also addressed in the First Pearson Affidavit: at [23]-[25]. The exclusivity arrangements are in conventional form and do not present any barrier to the making of convening orders: Re DuluxGroup at [33]-[38].

Break Fee 31 The Break Fee (Reimbursement Payment) the subject of clause 12 of the Scheme Implementation Deed is addressed in the First Pearson Affidavit: at [26]-[32]. Here, the amount of the Break Fee ($250,000) exceeds the guideline issued by the Takeovers Panel that a fee not exceeding 1% of equity value is generally not unacceptable; the Break Fee here represents 3.8% of the total equity value of Cellnet based on the Scheme offer: First Pearson Affidavit, [29]. However, that figure is within the range, both in dollar and percentage terms, of the break fee considered by Davies J in Re Cytopia [2009] VSC 560 at [14]-[18] (there, $500,000 and 4.57% of implied transaction value), which was not considered to be an obstacle to the convening of the meeting in that case: Re DuluxGroup at [31]. 32 As in that case, the parties in this case have agreed that the Break Fee represents a genuine pre-estimate of the Bidder's costs associated with pursuing the proposed Scheme, and that it was a necessary condition to entry into the Scheme Implementation Deed. Importantly, the Break Fee is not payable if Cellnet Shareholders do not vote in favour of the Scheme. Given this, the provision of the Break Fee is unlikely to influence voting at the meeting: Re Cytopia at [15]-[16]; First Pearson Affidavit, [26]-[30]; First Gardner Affidavit, [18]-[23]. Moreover, the Break Fee, and a corresponding Reverse Break Fee in favour of Cellnet, are disclosed in the Scheme Booklet at [3.4(c)]: Re DuluxGroup at [54].

Section 411(17) of the Corporations Act 33 Section 411(17) of the Corporations Act relevantly provides: The Court must not approve a compromise or arrangement under this section unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b). 34 As noted in Re DuluxGroup at [54]-[57]: The Court's jurisdiction to approve a scheme is restricted by s 411(17) of the Act. This is a matter which affects the discretion ultimately to approve the Scheme, rather than the discretion to order the convening of a meeting: Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 at 370 [27] per Barrett J. At the second approval stage, the Court needs to be satisfied that there is no proscribed purpose as described in s 411(17)(a) or there must be provided to the Court a statement in writing by ASIC that it has no objection to the arrangement as per s 411(17)(b): see Re Coles Group Ltd (No 2) (2007) 65 ACSR 494 at [16]-[24]. ASIC's Regulatory Guide 60 (RG 60) states at [104] that ASIC will provide a statement under s 411(17)(b) if: (a) all material information relating to the proposed scheme has been disclosed to ASIC; (b) the standard of disclosure to all members fulfils the requirements under regulation 5.1.01 and Schedule 8 of the Corporations Regulations; (c) the standard of disclosure to, and treatment of, all members is equivalent to the standard that would be required by the disclosure requirements and the principles in s 602 of the Act relating to the target securities in a takeover bid; and (d) there are no other reasons to oppose the scheme (eg public policy grounds) and the other matters referred to in RG 60 have been complied with. If such a statement is provided by ASIC, it will not be provided until the second court hearing: RG 60 at [60.106]. Section 411(17) does not present a bar to a meeting being convened if it seems likely that ASIC will produce the relevant statement at the second Court hearing. Where … ASIC has indicated that it does not oppose the application for convening the meeting, it is appropriate to proceed on the basis that an application for approval would be unopposed by ASIC and that, in due course, ASIC will provide a statement for the purpose of s 411(17)(b): Re Lonsdale Financial Group Ltd [2007] VSC 394 at [31]-[40] per Robson J. 35 In this case, I consider that the requirements of s 411(17) (which arise at the approval stage) do not present a bar to the Court convening the Scheme Meeting, having regard to: (a) Cellnet's and PKF's response to the matters raised by ASIC with respect to the Independent Expert Report; (b) the fact that, as discussed further below, ASIC has not opposed the convening of the Scheme Meeting; and (c) there is nothing in the affidavit evidence before me to suggest the Scheme has been proposed for a proscribed purpose.

Shareholders will be properly informed 36 The second matter relevant to the exercise of the Court's discretion is the adequacy of information provided to shareholders. Section 412(1) of the Corporations Act has three requirements, as summarised in Re DuluxGroup at [58]: (a) firstly, the explanatory statement must explain the effect of the compromise or arrangement, and in particular state any material interest of the directors, and the effect on those interests of the compromise or arrangement so far as it is different from the effect on the like interests of other persons (s 412(1)(a)(i)); (b) secondly, the explanatory statement must set out the prescribed information. The prescribed information is the information set out in reg 5.1.01 and Schedule 8 (Part 3) of the Corporations Regulations (s 412(1)(a)(ii)); (c) thirdly, the explanatory statement must set out any other information that is material to the making of a decision whether or not to agree with the compromise or arrangement, being information which is within the knowledge of the directors and has not previously been disclosed (s 412(1)(b)). 37 The Scheme Booklet, which is detailed and comprehensive, addresses the prescribed requirements and has been through consultation with ASIC. ASIC has raised particular matters concerning PKF's Independent Expert Report which I refer to below.

PKF's Independent Expert Report and matters raised by ASIC 38 Because Cellnet and the Bidder share a common director (Mr Michael Wendt), and separately because the Bidder holds more than 30% of the shares in Cellnet, the Scheme Booklet must be accompanied by an Independent Expert Report stating whether or not, in the Independent Expert's opinion, the Scheme is in the best interests of Cellnet Shareholders and setting out the reasons for that opinion (reg 5.1.01 and Schedule 8 of the Corporations Regulations). 39 Cellnet has obtained an Independent Expert Report from Stefan Galbo and Steven Perri of PKF, which is proposed to be attached as Attachment E to the Scheme Booklet. 40 PKF's Independent Expert Report concludes that the Scheme is fair and reasonable to Cellnet Shareholders and is therefore in the best interests of Cellnet Shareholders. The reasons for that conclusion are, in summary, that: (a) the Scheme is fair, as the value of the Scheme Consideration ($0.027 per Cellnet share) is greater than the control value range ($0.020 to $0.025 per Cellnet share); and (b) in the absence of a superior offer, the advantages of the Scheme outweigh the disadvantages of the Scheme and for this reason the Scheme is reasonable for Cellnet Shareholders. 41 The Second Pearson Affidavit deals in detail with concerns raised by ASIC following the provision of a draft of the PKF Independent Expert Report provided to ASIC on 7 June 2023. In short compass, those concerns relate to whether or not a share price methodology, as adopted by PKF, is an appropriate valuation methodology having regard to the liquidity of Cellnet shares, and whether, and to what extent, PKF had regard to, or could have regard to, asset-based methodologies in assessing value. 42 On 26 June 2023, following further exchanges between PKF and ASIC, PKF provided ASIC with a revised version of the Independent Expert Report in mark up and clean. In short, PKF's revised Independent Expert Report incorporated amendments to: (a) further explain and address the liquidity of Cellnet shares in the context of PKF's adoption of the share price valuation methodology to value Cellnet's shares (section 7.3); (b) further explain and address why PKF considers a net assets valuation methodology to be not applicable in valuing Cellnet's shares (section 7.6); and (c) include further analysis of the implied value per Cellnet share under an orderly realisation of assets scenario (range of $0.013 to $0.025 per Cellnet share), as a reasonable cross-check to the results of the share price valuation methodology (sections 7.6 and 7.9). 43 Since the provision of PKF's revised Independent Expert Report, there have been further exchanges between ASIC and PKF concerning PKF's revised Independent Expert Report. 44 In light of the concerns raised by ASIC, the Independent Directors of Cellnet engaged Mr Sean Collins of KPMG on 27 June 2023 to review PKF's revised Independent Expert Report of 26 June 2023, and provide an opinion as to whether the valuation methodology adopted is reasonable in the circumstances surrounding Cellnet's operations and the Scheme (the KPMG Methodology Review), for the purposes of inclusion in any submissions to be made by Cellnet to the Court or ASIC. The KPMG Methodology Review is contained in a letter from Mr Collins of KPMG dated 29 June 2023, annexed to the Collins Affidavit, [4]. 45 The KPMG Methodology Review expresses the opinion that the valuation methodology adopted by PKF in valuing a Cellnet share is reasonable in the circumstances surrounding Cellnet's operations and the Scheme. In so concluding, KPMG notes the following: (a) a capitalisation of earnings methodology is unable to be applied to Cellnet; (b) a discounted cash flow methodology is unable to be applied to Cellnet; (c) although not commonly applied, reference to the quoted price at which the equivalent shares are traded in an active market is an acceptable valuation methodology as noted in ASIC's Regulatory Guide 111 (Content of Expert Reports) at paragraph 111.86, and whilst PKF has considered trading liquidity to be low, sufficient volumes are traded to consider the market in Cellnet shares to be liquid when considering the limited free float available in the market, and PKF has applied the necessary adjustments to determine the "control value" of a Cellnet share; (d) the uncertainty surrounding Cellnet's short term liquidity position means the application of a realisation of assets methodology is an appropriate valuation methodology for Cellnet, which methodology sets a floor value for an entity, which allows a relative assessment to be undertaken in relation to the outcomes of other valuation methodologies applied, to provide support for the valuation range selected; and (e) PKF has adopted two valuation methodologies in its assessment of the value of a Cellnet share, and the use of at least two valuation methodologies is considered best practice, and is consistent with ASIC's guidance in Regulatory Guide 111 at paragraph 111.82 that an expert should, when possible, use more than one valuation methodology. 46 Separately, the Second Pearson Affidavit addresses matters raised by ASIC with Cellnet in connection with ASIC's concerns in respect of the PKF Independent Expert Report. Relevantly, between 22 and 23 June 2023, ASIC sought submissions from Cellnet concerning the prospect of Cellnet obtaining a second independent expert's report, as well as submissions concerning certain disclosures said to have been made by Mr Pearson at a meeting with ASIC on 22 June 2023. 47 KHQ Lawyers on behalf of Cellnet provided those submissions to ASIC by way of email on 27 June 2023. Relevantly, those submissions: (a) noted Cellnet's concern that any delay to the current timetable to procure a second independent expert's report (as had been suggested by ASIC), together with the increased costs of doing so, may lead to the Scheme not proceeding and deprive Cellnet Shareholders of the opportunity of considering it; (b) noted the possibility that a second independent expert's report would not reach a different conclusion, such that Cellnet Shareholders would be exposed to the risks of delay without any benefit in terms of their being informed as to the nature of the Scheme; (c) noted the risks that if the Scheme is not implemented, and Cellnet undertakes a capital raising, it is most likely that it would be at a share price much lower than the current Scheme proposal, with the result that Cellnet Shareholders who do not participate in the capital raising would most likely be materially diluted, in addition to being deprived of the opportunity to consider the Scheme; and (d) sought to clarify and explain the comments made by Mr Pearson in the meeting of 22 June 2023. 48 ASIC responded to KHQ Lawyers on the same day with further queries relating to Mr Pearson's comments and seeking financial information concerning Cellnet - namely, Cellnet's expectation of its financial performance for the second half of 2023. KHQ Lawyers responded to these queries by email and attachment on 28 June 2023. 49 On 30 June 2023, ASIC emailed PKF seeking final submissions in relation to two matters: firstly, whether PKF had a reasonable basis for concluding that there was a "liquid and active market", which was necessary if the expert was to rely on the quoted price for listed securities for the purposes of valuing those securities (as PFK had done); and secondly, whether PKF's use of an asset-based orderly realisation of assets methodology to cross-check its primary methodology understated the fair value of Cellnet as it, amongst other things, only considered tangible assets. 50 PKF responded to ASIC's email on the same day. In relation to the first issue raised by ASIC, PKF noted that ASIC's Regulatory Guide 111 did not define a "liquid and active market". PKF stated that the concept has to be applied using commercial judgment in all the circumstances of each company. PKF stated that, in its view, having regard to the available "free float" in Cellnet shares, the market in those shares was sufficiently liquid and active to be justified in reaching the conclusions expressed in PKF's report. In relation to the second issue raised by ASIC, PKF agreed that it had placed no value on Cellnet's intangible assets, as there was no evidence supporting the value of any intangible assets. 51 On 3 July 2023, by letter to KHQ Lawyers, ASIC provided an indication of intent pursuant to s 411(17)(b) of the Corporations Act (Indication of Intent). ASIC accepted that Cellnet had satisfied the requirements in s 411(2)(a)-(b) of the Corporations Act, namely that it receive at least 14 days' notice of the first Court hearing, and that it have a reasonable opportunity to examine the terms of the Scheme. ASIC stated that it did not propose to appear and make submissions or intervene to oppose the Scheme at the first Court hearing, based on its examination of the terms of the Scheme and the draft explanatory statement, including PKF'S Independent Expert Report. ASIC further noted that the KPMG Methodology Review had concluded that the valuation methodology adopted by PKF was reasonable in the circumstances. ASIC concluded by stating: ASIC notes that while some concerns regarding the Expert have not been fully resolved, including with respect to having appropriate policies for selection of methodologies, in considering the opinion provided by KPMG Corporate Finance to the independent directors of the Company, ASIC does not currently propose to appear to make submissions or intervene to oppose the Schemes at the first hearing under s411 (1) of the Corporations Act. 52 I am satisfied that ASIC's concerns have been addressed in a manner that is satisfactory for the purposes of exercising my discretion to convene the Scheme Meeting, having regard to: (a) the detail provided in PKF's revised Independent Expert Report; (b) the KPMG Methodology Review of PKF's Report; and (c) the correspondence between KHQ Lawyers, PFK and ASIC, including ASIC's Indication of Intent. 53 I am satisfied that PKF's Independent Expert Report properly and adequately fulfils its function of assessing, from the perspective of an independent expert, whether or not the Scheme is in the best interests of Cellnet Shareholders, as required by the Corporations Regulations. As such, both it and the Scheme Booklet more generally will ensure that Cellnet Shareholders are properly informed ahead of the Scheme Meeting of the nature of the Scheme, so as to assess commercial merits of it for themselves. 54 I am satisfied that none of the matters raised by ASIC, taken in the light of PKF's and Cellnet's responses to them, are such as would lead the Court to refuse to exercise its discretion to convene the Scheme Meeting on the basis Cellnet Shareholders will not be properly informed. 55 I am satisfied that Cellnet Shareholders will be acting on sufficient information and with time to consider what they are voting about, with the result that they ought not be prevented from having the opportunity to assess what the courts have recognised is quintessentially a commercial matter for shareholders to assess, namely whether or not to accept a particular consideration for shares: Re DuluxGroup at [20]. 56 Other than the issues raised by ASIC concerning the PKF Independent Expert Report outlined above, there do not appear to be any outstanding issues concerning the content of the Scheme Booklet itself, having regard to the recent correspondence between ASIC and KHQ Lawyers, including the Indication of Intent.

Verification of the Scheme Booklet 57 The First Pearson Affidavit details the due diligence process undertaken by Cellnet to ensure the Scheme Booklet does not contain any misleading or deceptive statements and satisfies the applicable disclosure requirements. The First Gardner Affidavit details the verification process undertaken by the Bidder to ensure that the information in the Scheme Booklet for which the Bidder is responsible is not misleading or deceptive. Accordingly, I am satisfied the Scheme Booklet has been through appropriate verification procedures: Re DuluxGroup at [59].

Dispatch of the Scheme Booklet to Cellnet Shareholders 58 The First Pearson Affidavit addresses how Cellnet proposes to dispatch the Scheme Booklet should the Court make orders convening the Scheme Meeting. In accordance with conventional practice, that will entail sending the Scheme materials electronically to Cellnet Shareholders who have elected to receive communications in that manner, and by post for all other Cellnet Shareholders.

Disposition 59 For the reasons outlined above: (a) the procedural requirements for the convening of the Scheme Meeting are satisfied, such that the Court's discretion to make orders convening such a Meeting is enlivened; and (b) I am satisfied that the Court should exercise its discretion to make orders convening the Scheme Meeting on the basis that: (i) the Scheme, which is conventional in form, is cast in such terms as would likely lead to its approval at a subsequent, unopposed hearing, should it receive the statutory majorities at the Scheme Meeting; and (ii) Cellnet Shareholders will be properly informed as to the nature of the Scheme ahead of consideration of it by them at the proposed Scheme Meeting. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anderson.