By Originating Process filed on 7 October 2020, the Plaintiff, 3P Learning Ltd ("3PL") sought an order under s 411 of the Corporations Act 2001 (Cth) that it convene a meeting of its members for the purpose of considering, and if thought fit, approving a scheme of arrangement and ancillary orders. 3PL foreshadowed that, if the scheme is approved by its shareholders, it will seek orders at the second Court hearing that the scheme be approved. I made the orders sought by 3PL at the first Court hearing at the conclusion of that hearing. These are my reasons for making those orders.
3PL relies on the affidavit dated 6 October 2020 of its solicitor, Mr Rogers. That affidavit notes, by way of background, that 3PL is a public company limited by shares and incorporated under the Corporations Act and has been listed on the Australian Securities Exchange ("ASX") since mid-2014. Mr Rogers notes that 3PL was founded on 2004 and owns a portfolio of brands and product offerings that offer educational tools to school students across numeracy, literacy and science subject areas.
On 14 August 2020, 3PL entered into a Scheme Implementation Agreement with IXL Learning Inc ("IXL") and IXL Australia Pty Ltd ("IXL Australia"), which was announced to ASX on that date. The Scheme Implementation Agreement and the scheme contemplate that all of the shares in 3PL will be transferred to IXL Australia in consideration for the payment of $1.35 cash for each share held by a 3PL shareholder on the scheme record date. The scheme booklet, as provided to the Australian Securities and Investments Commission ("ASIC") on 28 September 2020 and a checklist dealing with disclosure requirements in respect of a scheme of arrangement are exhibited to Mr Rogers' affidavit.
3PL also relied on the affidavit dated 17 October 2020 of Mr Samuel Weiss, who is a director and the chairman of 3PL. Mr Weiss also referred to the background of 3PL and referred to 3PL's entry into the Scheme Implementation Agreement with IXL and IXL Australia and the announcement of that matter to ASX. Mr Weiss also addressed the preparation of the scheme booklet and its contents and outlined the verification process adopted in respect of the scheme booklet, which was in conventional terms.
Mr Weiss also referred to the interests of directors, including an interest of 3PL's chief executive officer, Ms O'Flaherty, in employee share rights and employee options, an entitlement to receive any unpaid award under 3PL's short term incentive plan if the scheme meeting is convened in the amount of $325,000 and a retention bonus of $379,309 if she remains employed with the 3PL Group until the scheme becomes effective. That interest is disclosed in the scheme booklet, so far as Ms O'Flaherty is one of the directors who makes a recommendation in favour of the scheme. Mr Weiss also refers to the wider treatment of employee share rights and employee options under the scheme and notes that a significant number of employee share rights and all employee options will lapse on the effective date of the scheme, although some employee share rights (including those of Ms O'Flaherty to which I referred above), will vest on the effective date and convert into 3PL shares.
Mr Weiss also refers to the negotiation of a break fee of $1,900,685 in respect of the scheme and notes that the 3PL board believes it was appropriate to agree to payment of the break fee in order to secure IXL Australia's participation in the scheme, and also refers to a reverse break fee payable by IXL Australia to 3PL in certain circumstances, if the scheme does not proceed, which is the same amount as the break fee payable by 3PL to IXL Australia. Mr Weiss also refers to exclusivity provisions, including no shop, no talk and no due diligence obligations contained in the Scheme Implementation Agreement, and disclosed in the scheme booklet. These are also in conventional terms, with the no talk, no due diligence and notification obligations being subject to 3PL's directors' fiduciary and statutory obligations.
Mr Weiss also referred to the requirement, under the Scheme Implementation Agreement, for IXL Australia to take reasonable steps to assist 3PL to implement the scheme on a basis consistent with the Scheme Implementation Agreement, including signing and delivering a deed poll under which IXL and IXL Australia covenant in favour of the 3PL shareholders to perform their obligations under the scheme. Mr Weiss also outlines the process for despatch of the scheme booklet, notes that it is proposed that the scheme meeting be held virtually, and consents to act as chair of the scheme meeting. By an affidavit dated 17 October 2020, Mr Amos, who is a director of 3PL, indicates that he is willing to act as replacement chair of the scheme meeting if Mr Weiss is unable to perform that role.
By an affidavit dated 16 October 2020, Mr Craig Edwards, who is a director of Lonergan Edwards & Associates Ltd, sets out his qualifications and confirms that he and Mr Martin Holt have prepared an independent expert report in respect of the scheme, and that he holds the opinions expressed in that report, including that the scheme is fair and reasonable and therefore in the best interests of 3PL shareholders taken as a whole in the absence of a superior proposal. Mr Edwards also indicates that he has made all inquiries that he believes are desirable and appropriate to prepare that report and is not aware of any material facts or circumstances which would cause him to alter those opinions, and that Mr Holt also holds those opinions.
By an affidavit dated 16 October 2020, Mr Paul Schroder, who is a solicitor acting for IXL and IXL Australia, refers to the verification of information concerning IXL in the scheme booklet and to the negotiation of exclusivity and break fee provisions between IXL and 3PL. By an affidavit dated 15 October 2020, Ms Stephanie Norman, who is a director of a law firm in Delaware in the United States of America, addresses an opinion which she has provided in respect of Delaware law in respect of the deed poll executed by IXL.
By a second affidavit dated 19 October 2020, Mr Rogers referred to correspondence between ASIC and his firm in relation to the scheme, and addressed changes which have been made to the scheme booklet in response to ASIC's comments, including in respect of the consent of a party to be named in the scheme booklet; disclosure of the independent expert's comments in relation to the impact of future potential opportunities of 3PL on its valuation, and disclosure of employee incentive arrangements relating to Ms O'Flaherty, to which I have referred above. A revised scheme booklet was exhibited to that affidavit. The chairman's letter there records the 3PL directors' unanimous recommendation that shareholders vote in favour of the scheme, in the absence of a superior proposal and subject to the independent expert continuing to consider that the scheme is in the best interests of 3PL shareholders, and indicates that each of the 3PL directors intends to vote, or cause to be voted, all 3PL shares held by or controlled by them in favour of the scheme. The scheme booklet was further amended, in the course of oral submissions before me, to insert a fuller disclosure of Ms O'Flaherty's interest in the chairman's letter and elsewhere in the scheme booklet, and to cross-refer to that disclosure as appropriate.
[3]
Applicable principles
Mr Redwood, who appears for 3PL, points out that s 411 of the Corporations Act contemplates a three-stage process in the approval of a scheme of arrangement involving, first, an application to the Court for an order for the convening of the scheme meeting; second, the holding of the scheme meeting at which members (or a relevant class of members) vote on the proposed scheme; and, third, an application to the Court at a second hearing to approve the proposed scheme: Re RHS Limited [2018] FCA 562 at [4]-[7]. Mr Redwood also points out that the Court will ordinarily not make an order to convene a scheme meeting at the first Court hearing 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 an application that is unopposed: FT Eastment & Sons v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72; Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[27]; Re Webcentral Group Limited [2020] NSWSC 1279 at [14]. Conversely, Mr Redwood points out that the Court would typically order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411; the scheme booklet provides proper disclosure to shareholders; the scheme is 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 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 BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]; Re Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348 at [22]. Mr Redwood also rightly submits that the Court's function is to consider the scheme put forward and not to speculate whether any other compromise or arrangement might have been devised: Re Boart Longyear Ltd (2017) 121 ACSR 328 at [28].
Plainly, 3PL is a Part 5.1 body and the scheme is evidently an "arrangement" that touches and concerns the rights of shareholders, involving a conventional members' scheme where the scheme consideration is wholly cash. There is no reason to think that the scheme booklet does not provide all material information to shareholders, given the verification process that was adopted. As Mr Redwood points out, ASIC has had a reasonable opportunity to consider the terms of the proposed scheme; the procedural requirements of the Corporations Rules have been met; and the independent expert has concluded that the scheme is fair and reasonable and in the best interests of 3PL shareholders, taken as whole in the absence of a superior proposal, because the scheme consideration of $1.35 per share is within their assessed valuation range and at a premium to the volume weighted average price at which 3PL's shares have traded; and the scheme is unanimously supported by 3PL's directors in the absence of any superior proposal or change in the independent expert's opinion. Subject to the specific issues that I address below, I accept Mr Redwood's submission that there is no reason to think the scheme is unlikely to receive the Court's approval at a second hearing if the necessary statutory majorities are obtained.
[4]
Performance risk
Mr Redwood rightly recognises that the Court will have regard to the manner in which a scheme safeguards against the risk that shareholders will suffer delay or default in the provision of the scheme consideration after their shares have been transferred: Re KAZ Group Ltd [2004] FCA 738; Re Tempo Services Ltd (2005) 53 ACSR 523 at 524; Re APN News & Media Ltd (2007) 62 ACSR 400 at 405. A practice has developed to address performance risk by which the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders, and there are numerous cases which have endorsed that practice: Re APN News & Media Ltd above at 405; Re SFE Corporation Ltd (2006) 59 ACSR 82 at [4]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484 at [43]; Re Gerard Lighting [2012] FCA 941 at [8]; Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]. Mr Redwood submits and I accept that performance risk is here addressed in a common manner by providing for the scheme consideration to be paid by IXL Australia into a trust account operated by 3PL as trustee for 3PL shareholders, before they are divested of their shares on the Implementation Date (cl 5.2 of the Scheme) and by the Deed Poll executed by IXL and IXL Australia.
Mr Redwood also recognises that the case law indicates that, where a deed poll is executed by a foreign entity such as IXL, it is desirable for evidence to be put before the Court that the deed poll is enforceable, and evidence as to due execution will be generally sufficient where (as here) the deed poll is governed by the law of an Australian jurisdiction and the parties have submitted to the jurisdiction of an Australian court: Re Simavita Holdings Limited above at [43]-[44]; Re Veda Group [2015] FCA 1506 at [30]-[33]; Re Investa Listed Funds Management Limited [2018] NSWSC 1766 at [14]. I accept that requirement is met by Ms Norman's affidavit containing the legal opinion of her firm.
[5]
Despatch of scheme booklet and conduct of virtual scheme meeting
3PL also proposes that the scheme booklet and notice of the scheme meeting be distributed to shareholders by an email or letter (postcard) containing instructions on how to download a copy of the scheme booklet and lodge a direct vote or proxy is in accordance with cl 5(1) of the Corporations (Coronavirus Economic Response) Determination (No 3) 2020 (Cth). Mr Redwood points out that this approach has been accepted in connection with other proposed schemes: Re OneVue Holdings Limited [2020] FCA 1321 at [34]. Mr Redwood also notes that 3PL has a small number of overseas shareholders, most of whom have elected to receive communications electronically (Weiss [60]), and any risk of postal delays as to hard copy scheme documents for overseas shareholders arising from the pandemic is not a material consideration. 3PL also proposes that the scheme meeting will be conducted virtually in order to comply with government guidelines and address ongoing health risks arising from the COVID-19 health pandemic. As Mr Redwood points out, scheme meetings conducted in this manner have now been accepted in several cases: Re Webcentral Group Limited above at [20]; Re OneVue Holdings Limited [2020] above at [38].
[6]
Exclusivity provisions
Mr Redwood notes that cl 9 of the Scheme Implementation Agreement is an exclusivity provision which includes common "deal protection" provisions in the form of a "no shop" restriction, a "no talk" restriction, a "no due diligence" restriction and "matching rights". Mr Redwood rightly recognises that, in respect of such provisions, the Court is concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve out; and the provisions must be sufficiently disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]; Re Andean Resources Ltd [2010] FCA 1190 at [20]; Re TPG Telecom Ltd [2020] NSWSC 772 at [22].
Mr Redwood submits, and I accept, that the exclusivity clause is here capable of precise ascertainment, and extends from the date of execution of the Scheme Implementation Agreement until the earlier of its termination or the "End Date" (being 14 February 2021 or such other date as may be agreed). Mr Redwood submits, and I also accept, that this is a reasonable period, although at the longer end of periods that past decisions have accepted, and that the length of this period does not give rise to any reason not to convene the scheme meeting. Mr Redwood points out that the "no talk" and "no due diligence" restrictions in cll 9.2 and 9.3 of the Scheme Implementation Agreement are subject to exceptions in cll 9.4 and 9.5 in respect of the 3PL directors' fiduciary duties and obligations regarding the provision of information and disclosure; the "no shop" provision in cl 9.1 is not subject to the fiduciary carve out, but that approach is consistent with Takeovers Panel Guidance No 7 and established precedent; and sufficient prominence is given to the exclusivity provisions in sections 1.5(e) and 8.7 of the scheme booklet.
Mr Redwood also points out that, by cll 9.6, 9.7 and 9.8 of the Scheme Implementation Agreement, 3PL is required to notify IXL Australia of any competing proposal that 3PL receives and provide IXL Australia with a matching right if a superior proposal is received. Mr Redwood submits, and I accept, that that "matching right" is also consistent with common market practice and does not give rise to any reason not to convene the scheme meeting: Re Webcentral Group Limited above at [27].
[7]
Break Fee and Reverse Break Fee
I have referred above to the break fee of $1,900,685 payable by 3PL to IXL Australia under cl 10.2 of the Scheme Implementation Agreement which is disclosed on page 12 and in section 4.8 of the scheme booklet. Mr Redwood points out that that break fee is not payable merely because shareholders vote down the scheme, or because of the termination of the Scheme Implementation Agreement by 3PL's directors if the independent expert concludes that the scheme is not or is no longer in the best interests of 3PL shareholders unless that conclusion is due to a competing proposal, and similar provisions have been accepted by the courts in other schemes: Re Webcentral Group Limited above at [29]. The affidavit evidence led by Mr Weiss in respect of the negotiation of the break fee (Weiss [46]-[47]) addresses relevant matters in respect of a break fee, as noted in Re APN News & Media Ltd above at 411. The break fee is approximately 1% of the total equity value of 3PL implied by the aggregate scheme consideration of approximately $189 million and is therefore in line with the Takeovers Panel's 1% guideline and not such that it would likely influence voting at the meeting: Re Billabong International Limited [2018] FCA 106 at [26]-[27].
Mr Redwood also points out that cl 11 of the Scheme Implementation Agreement provides for a reverse break fee in the same amount payable by IXL Australia to 3PL if there is a material breach by IXL Australia of that Agreement or a failure to pay the scheme consideration as required by that Agreement. Mr Redwood submits that the reverse break fee is for the benefit of 3PL and its shareholders and that such a fee in a similar amount to the break fee is neither uncommon nor a reason not to convene the scheme meeting. Several cases have referred to reverse break fees, generally without detailed review: Re Intecq Limited [2016] NSWSC 1429 at [18]; Re Viralytics Limited [2018] FCA 637 at [50]; Re Beadell Resources Ltd (2018) 133 ACSR 600 at [25]; Re DuluxGroup Limited (2019) 136 ACSR 546 at [28];. The capping of a reverse break fee in the same amount as the break fee may be an element of the bargain reflected in the Scheme Implementation Agreement, which may be in shareholders' interest so far as it enables a proposal to acquire their shares to be made available for their consideration. At the same time, whether a reverse break fee would benefit 3PL and its shareholders, if the circumstances in which it applied arose, may involve questions of some complexity. That provision may be to 3PL's advantage in setting the amount payable, where it may be difficult to quantify its loss if the scheme did not proceed, prior to a scheme meeting to approve it; but the cap on the amount recoverable may also limit its recoverable loss to less than its actual loss, depending on events. This is not a matter that would lead me to decline to order the scheme meeting, and deprive shareholders of the opportunity to consider a proposal which may be for their commercial advantage.
[8]
Deemed warranties
The scheme provides, in cl 8.4, for a deemed warranty by the shareholders that their shares will be free from encumbrances. As Mr Redwood points out, the cases have held that clauses of this kind are acceptable where, as here, the warranty is sufficiently disclosed in the explanatory statement to shareholders: Re APN News & Media Ltd above; Re Webcentral Group Limited above at [32].
[9]
Orders
For these reasons, I made the orders sought by 3PL at the first court hearing at the conclusion of that hearing on 20 October 2020.
[10]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 16 November 2020