Diverger Limited, in the matter of Diverger Limited [2023] FCA 1614

MARKOVIC J: 1 By an originating process filed on 24 October 2023 the plaintiff, Diverger Limited, sought orders pursuant to s 411 and a direction pursuant to s 1319 of the Corporations Act 2001 (Cth) for the convening of a scheme meeting of its ordinary shareholders (Diverger shareholders) to consider a proposed scheme of arrangement (Scheme) between it and the Diverger shareholders. On 13 December 2023 I made the orders and direction sought. These are my reasons for doing so. 2 Diverger is a public company limited by shares. Its shares are listed on the Australian Stock Exchange (ASX). At the time of its listing on the ASX Diverger was called GoldLink GrowthPlus Limited. It has had several name changes since then and most recently changed its name to Diverger on 23 November 2021. 3 Diverger is a provider of services and solutions to the Australian accounting and wealth industry. Its business operates across three core business segments: wealth, accounting and technology. 4 On 22 September 2023 Diverger announced via the ASX that it had entered into a scheme implementation agreement (SIA) with Count Limited. 5 Count is a provider of integrated accounting and wealth services. 6 Following the announcement of the proposed Scheme, Count made an improved offer. As a result, on 17 November 2023 Diverger and Count entered into an amending deed to the SIA. I refer to the SIA as amended by the amending deed as the Amended SIA. 7 If the Scheme is approved and implemented, Count will acquire 100% of the issued shares in Diverger (Diverger Shares) and Diverger will be delisted from ASX shortly after the Implementation Date, defined in the explanatory booklet for the Scheme (Scheme booklet) as 1 March 2024. The implied value of the Scheme Consideration, being the consideration to be provided to Scheme shareholders under the terms of the Scheme, is $1.42 based on the closing price of Count shares on 6 December 2023, the last practicable date for finalising information in the Scheme booklet. 8 The Scheme has the following features: (1) Count will acquire all of the Diverger Shares on the Implementation Date in consideration for Diverger shareholders receiving: (a) $0.40 in cash per Diverger Share held (less the amount of any Permitted Dividend, as to which see below) (Cash Consideration) and 1.44 Count shares per Diverger Share held (Scrip Consideration) (Default Consideration); or (b) if they so elect, all cash or all shares calculated in the manner set out below subject to a scale back if the limits on total cash or scrip consideration are exceeded; (2) Diverger shareholders (other than a Foreign Scheme Shareholder or Small Shareholder, see [9] and [10] below) can elect to receive their Scheme Consideration in one of the following forms: (a) Maximum Cash Consideration comprising $1.20 cash per Diverger Share (less the amount of any fully franked cash dividend of up to $0.10 per Diverger Share (Permitted Dividend)) for 100% of Diverger Shares held at the Scheme Record Date, being the date on which Diverger shareholders must be registered as the holders of Diverger Shares in order to be entitled to receive the Scheme Consideration, subject to an aggregate cap of $15,907,873 (less the amount of any Permitted Dividend); or (b) Maximum Scrip Consideration comprising 2.16 Count shares per Diverger Share (reduced by the amount of any Permitted Dividend based on the formula set out in the definition in the Scheme of Maximum Scrip Consideration) for 100% of their Diverger Shares held at the Scheme Record Date, subject to an aggregate cap of 57,268,344 Count shares; or (c) if no election is made, Diverger shareholders will receive the Default Consideration; and (3) in the event that the aggregate cap of either the Cash Consideration or Scrip Consideration is exceeded on account of elections made by Diverger shareholders, scale back mechanisms will be applied. 9 A Foreign Scheme Shareholder is a shareholder with an address as at the Scheme Record Date located outside of Australia and its external territories, New Zealand and other jurisdictions agreed by Diverger and Count. 10 A Small Shareholder is a shareholder who is entitled to less than a marketable parcel of Count shares under the Scheme, which is generally a holding with a value of less than $500 on the Scheme Record Date. 11 Under the Amended SIA Diverger is permitted to declare and pay two dividends: a fully franked cash interim dividend for the financial year ended 30 June 2024 up to $0.02 per share which will not operate to reduce the Scheme Consideration; and a Permitted Dividend which will operate to reduce the Scheme Consideration by the amount of the Permitted Dividend. 12 The Diverger directors have unanimously recommended that Diverger shareholders vote in favour of the Scheme 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 Diverger shareholders. 13 A draft independent expert report prepared by Lonergan Edwards & Associates Limited is annexed to the Scheme booklet. In the opinion of the independent expert, the Scheme is fair and reasonable and in the best interests of Diverger shareholders, in the absence of a superior proposal.

STATUTORY FRAMEWORK 14 Section 411(1) of the Corporations Act confers a power on the Court to order a meeting of members of the company to be convened and to approve the relevant explanatory statement. 15 The statutory framework for a scheme involves three steps: first, the hearing of an application to the Court for orders to convene a meeting of members; secondly, the holding of the meeting; and thirdly, a further application to the Court for approval of the scheme: see Kidman Resources Limited, in the matter of Kidman Resources Limited (2019) 375 ALR 760; [2019] FCA 1226 at [21]. 16 In Xplore Wealth Limited, in the matter of Xplore Wealth Limited [2020] FCA 1868 at [23]-[24], I summarised the principles that apply when considering whether the Court should order the convening of a meeting of a company's members or creditors under s 411(1) of the Corporations Act as follows: 23 At the first court hearing, the Court will order the convening of a scheme meeting and approve a draft explanatory statement to be sent to scheme members if it is satisfied of the following matters: (1) the plaintiff is a Pt 5.1 body; (2) the proposed scheme is a compromise or (relevantly) an arrangement within the meaning of s 411(1) of the Act; (3) the scheme booklet will provide proper disclosure to shareholders; (4) the scheme is bona fide and properly proposed; (5) the Australian Securities and Investments Commission (ASIC) has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions to the Court, and has had 14 days' notice of the date of the first court hearing; and (6) the procedural requirements of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules) have been met, see Orion Telecommunications Ltd, re Orion Telecommunications Ltd [2007] FCA 1389 at [5]. 24 In addition, "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. 17 As to the Court's discretion to exercise the power under s 411(1) of the Corporations Act to convene the meeting once the necessary preconditions are met, in SILK Laser Australia Limited, in the matter of SILK Laser Australia Limited [2023] FCA 1191 at [24] Halley J referred to the following additional principles which guide the exercise of that discretion (authorities omitted): 24 In MOQ at [12]-[17], I explained that the following principles guided the exercise of the Court's discretion: … (b) At the first court hearing, the Court exercises its supervisory jurisdiction in order to review the scheme and to raise any queries that it might have with the plaintiff:… . The Court needs to be satisfied that there are no obvious flaws in the scheme and that there is an adequate explanation provided to persons who have a financial interest in the proposed scheme: .... (c) The Court should consider at the first court hearing whether the proposed scheme is not inappropriate and whether it is one that sensible business people might consider is of benefit to its members:.... (d) The Court does not need to be satisfied that no better scheme could have been proposed and ultimately, that is a question for the members themselves to determine at the scheme meeting:... (e) Although the second court hearing is when the Court makes its final determination, in practice, the first court hearing is where the Court will typically intervene if it has concerns. A reason advanced for this, is that the market views the approval by the Court of the convening of scheme meetings as providing assurance that the scheme, at least in form and substance, has received a preliminary clearance by the Court and that trading in the company's securities thereafter will proceed on that basis: ...

Formal requirements 18 Based on the evidence before me I was satisfied that Diverger had established each of the following matters which, as set out above, are considered to be necessary preconditions to the Court making orders for the convening of a scheme meeting: (1) Diverger is a Pt 5.1 body; (2) the Scheme is proposed between Diverger and its shareholders; (3) the Scheme can properly be described as an arrangement or a compromise; (4) the Scheme is bona fide and properly proposed; (5) the Australian Securities and Investments Commission (ASIC) has had at least 14 days' notice of the Court hearing as required by s 411(2) of the Corporations Act; (6) the Scheme booklet provides adequate disclosure and contains the prescribed information. Appropriate steps appear to have been taken to ensure that the information contained in it has been properly verified; (7) there has been compliance with the procedural requirements in the Federal Court (Corporations) Rules 2000 (Cth) in that a company search of Diverger from the records of ASIC obtained no earlier than seven days before the originating process was filed in compliance with r 2.4 was in evidence and there was evidence of the matters required by r 3.2 of the Rules in relation to the proposed chair and alternate chair of the Scheme meeting given in accordance with the Court's Schemes of Arrangement Practice Note (GPN-SOA) and the proposed draft order for the convening of the Scheme meeting identifies the Scheme as required by r 3.3(1) of the Rules; and (8) the Scheme was of a such a kind that if it received the requisite majorities the Court was likely to approve it at a further hearing. 19 That being so I was satisfied that the Court had a discretion to approve the Scheme.

Specific matters 20 Diverger drew my attention to a number of specific matters. For the reasons outlined below, I was satisfied that none of these matters would cause me to decline to order the convening of the proposed meeting.

Scheme Consideration 21 The Scheme Consideration is subject to a scale back mechanism as described above. Schemes of arrangement in which shareholders can elect between cash consideration or scrip consideration and which are subject to scale back provisions with the default consideration being a mix of cash and scrip have been approved on previous occasions: see for example DDH1 Limited, in the matter of DDH1 Limited [2023] FCA 982 at [31]; Over the Wire Holdings Limited, in the matter of Over the Wire Holdings Limited [2022] FCA 26 at [2]; In the matter of Cirrus Networks Holdings Ltd [2023] NSWSC 1298 at [17]-[18]. There was no aspect of the scale back mechanism and its disclosure which gave rise to any concern. 22 I accept that the fact that the ability for Diverger shareholders to elect a form of consideration does not create a need for separate classes given that all of the existing rights of Diverger shareholders and the rights afforded to them under the Scheme are the same and there is no impediment, let alone impossibility, of all Diverger shareholders consulting together with a view to their common interests: see Cirrus at [17].

Permitted Dividend 23 The Permitted Dividend (described above) is conditional on the Scheme and will operate to reduce the consideration under the Scheme. The decision whether to declare the Permitted Dividend will be made by the Diverger board and communicated to Diverger's shareholders by an ASX announcement prior to the second court hearing. 24 Diverger submitted, and I accepted, that a contingency of this kind is not unusual and, provided there is adequate disclosure of it, as there is in the Scheme booklet, it is not of a kind to justify the Court declining to convene the meeting. Any further argument on the issue can occur at the second hearing: see Re Vita Group Ltd (2023) 165 ACSR 576; [2023] FCA 400 at [8]-[9]. 25 Further, as Diverger submitted, the Permitted Dividend does not give rise to any issue of financial assistance being provided by Diverger to assist Count in acquiring Diverger shares for the purpose of s 260A of the Corporations Act. This is because: as disclosed in the Scheme booklet, Count does not hold a relevant interest or voting power in any Diverger Shares and thus will not receive the Permitted Dividend; and if Diverger declares and pays the Permitted Dividend to its shareholders it is not giving financial assistance to Count to acquire the Scheme Shares. Count will fund the Scheme Consideration and no reduction in that amount will occur by reason of the payment of any Permitted Dividend. Accordingly, there will not be any net benefit to Count or any assistance of any form provided by Diverger to Count: see Re Vita Group at [10].

A single class 26 Count will acquire the Diverger Shares to be issued to holders of performance rights (Diverger Performance Rights) on the Implementation Date. The Diverger Performance Rights are rights to acquire Diverger Shares granted under an incentive plan. The vesting of those rights will be accelerated to permit the holders of Diverger Performance Rights to receive Scheme Consideration for Diverger Shares issued pursuant to those rights. The maximum number of Diverger Shares that will be issued in accordance with the accelerated vesting of Diverger Performance Rights is 2,095,580 with an aggregate value of $2,975,724, based on the implied value of the Scheme Consideration of $1.42 per Diverger Share. This means that the total number of Diverger Shares for the Scheme will be 39,769,683. 27 In addition options for Diverger Shares on issue (Diverger Options) are held by HUB24 Limited. HUB24 has entered into an option cancellation deed with Diverger and Count under which all Diverger Options will be cancelled on the Scheme Record Date for a total of $1 cash consideration, subject to the Scheme becoming legally effective. 28 This treatment of Diverger Performance Rights and Diverger Options is not class creating. Holders of Diverger Performance Rights and Diverger Options who are also Diverger shareholders do not constitute a separate class for the purposes of s 411(1) of the Corporations Act. They will participate in the Scheme on the same basis and will receive the same Scheme Consideration as all other shareholders: see Cirrus at [19]-[20].

Ineligible shareholders 29 Foreign Scheme Shareholders and Small Shareholders (together Ineligible Shareholders) cannot make an election and will receive the Maximum Cash Consideration of $1.20 (less the amount of any permitted dividend for each Diverger share held by them on the Scheme Record Date). As Diverger submitted, the proposed treatment of Ineligible Shareholders accords with common practice adopted in schemes of arrangement where scrip comprises (or is a component of) the proposed Scheme Consideration and does not give rise to a need for those shareholders to meet together as a separate class: see Cirrus at [22]-[23].

Performance risk 30 As Diverger submits the Scheme adopts the conventional steps of making the transfer of Diverger Shares to Count subject to payment of the Scheme Consideration. Thus, no transfer of Diverger Shares will occur unless and until the total Scheme Consideration to which Diverger shareholders are entitled has been paid into a trust account for the benefit of those shareholders. In addition, a deed poll has been entered into by Count in favour of Diverger shareholders which provides a further layer of protection. 31 I accept that these steps are well established means of managing performance risk.

Break fee 32 Clause 14.3 of the Amended SIA requires Diverger to pay Count a fee of $500,000 (inclusive of GST) in certain circumstances. Those specified circumstances are consistent with standard practice. It is not necessary to set them out here. No such fee is payable simply because each resolution submitted to the Scheme meeting is not approved by the majorities required under s 411(4) of the Corporations Act. 33 Diverger submits, and I accept, that the break fee represents less than 1% of the implied equity value of Diverger under the Scheme which accords with the 1% guideline in the Australian Government Takeovers Panel Guidance Note 7: Deal Protection. 34 Clause 15 of the Amended SIA provides for a reverse break fee of $500,000 (inclusive of GST) payable by Count to Diverger where that agreement is terminated for material breach by Count or Count fails to comply with its obligations to pay the Scheme Consideration. The fact of a reverse break fee is relevant to establishing the reasonableness of a target break fee and a reverse break fee in an amount corresponding to a target break fee is not a reason to decline to convene the Scheme meeting: see Cirrus at [26]; In the matter of 3P Learning Limited [2020] NSWSC 1573 at [20].

Exclusivity arrangements 35 Clause 16 of the Amended SIA includes "no shop", "no talk", "no due diligence", "notification" and "matching right" obligations. These provisions, referred to collectively as exclusivity provisions, are sufficiently disclosed in the Scheme booklet and have previously been accepted by courts.

Shareholder communication 36 Diverger has engaged Link Market Services Limited, its share registry services provider, to conduct an inbound shareholder engagement campaign in relation to the Scheme and Georgeson Shareholder Communications Australia Pty Ltd, a shareholder advisory services firm, to conduct an outbound shareholder engagement campaign for the Scheme. The scripts of the inbound and outbound campaign were in evidence before me as was evidence that their content is consistent with the information contained in the Scheme booklet. 37 There is no requirement for the proposed scripts to be approved by the Court at the time of considering whether to order a meeting to be convened. However, the proponent of a scheme should proceed on the basis that, at the time of seeking an order for approval of a scheme, the Court will need to be informed about any relevant matters that have arisen from the way communications have occurred in the period leading up to the meeting: see DDH1 at [22].

CONCLUSION 38 For those reasons I was satisfied that the Scheme was of such a nature and cast in such terms that, if the statutory majorities are achieved at the Scheme meeting, the Court would be likely to approve the Scheme. 39 It was therefore appropriate to make the orders sought by the Diverger. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Markovic.