Genea Limited, in the matter of Genea Limited [2018] FCA 1681

MARKOVIC J: 1 On 29 October 2018 on the application of the plaintiff, Genea Limited (Genea), after a first hearing, I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act). They included orders for: (1) the convening of: (a) a meeting of Genea's members for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed between Genea and its shareholders (Merger Scheme) relating to the proposed acquisition of shares in Genea by MW Fertility Pte Ltd (MW Fertility); and (b) a meeting of Genea's members for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed between Genea and its members (Demerger Scheme) relating to the proposed demerger of Genea's stem cell research business (Biocells Business); and (2) the approval and distribution of the scheme booklets, being the explanatory statements required by s 412(1)(a) of the Act, for both the Merger Scheme and the Demerger Scheme to accompany notices of the scheme meetings. 2 These are my reasons for making those orders.

background 3 Genea is a provider of fertility treatment, research and science. It operates an integrated platform of clinical services, technologies, medical devices and consumables with global reach. It has five key business units, one of which is the Biocells Business, currently owned by Genea Biocells Australia (Holdings) Ltd (Biocells Australia Holdco) and its subsidiaries. That business is focused on developing therapeutics for neuromuscular diseases using a human stem cell driven platform for the accelerated development of clinical candidates. 4 Both Genea and Biocells Australia Holdco are unlisted Australian public companies limited by shares registered in New South Wales. 5 MW Fertility, a limited liability company incorporated in Singapore on 12 June 2018, is a special purpose vehicle representing a consortium of investors comprising Talent Triumph Developments Limited (Talent), Prospere Capital SPC, Fortuna Fund L.P., GL Intellectus Fund L.P. and Integrated Asset Management (Asia) Limited. Talent is a special purpose vehicle whose shareholders are Aldworth Equity 1 SP, Aldworth Opportunities Fund SP, We Doctor (HK) Limited, and Mason IVF Limited.

The Merger Scheme and the Demerger Scheme 6 On 27 August 2018 Genea, Biocells Australia Holdco and MW Fertility entered into a scheme implementation agreement (SIA) pursuant to which, subject to satisfaction or waiver of a number of conditions precedent, it is proposed that MW Fertility will acquire 89.5% of the issued capital in Genea held by Genea shareholders. 7 If the Merger Scheme is approved, Genea shareholders will receive $73.85 per share. 8 Following the completion of the Merger Scheme, MW Fertility will own 89.5% of the total issued share capital in Genea. 9 The SIA also provides that the Biocells Business be demerged. In summary, that is to be effected in the following way: (1) Genea will reduce its share capital by approximately $1.513m pursuant to s 256C of the Act in favour of Genea shareholders on a pro rata basis; (2) Genea will pay a demerger dividend of approximately $8.98m in favour of Genea shareholders on a pro rata basis; and (3) no cash will be received by Genea shareholders as a result of the capital reduction and the demerger dividend. Rather, Genea will apply those amounts as consideration in full for the transfer by Genea of shares in the Biocells Business to each Genea shareholder with one Biocell Business share being allocated for each Genea share held by the shareholder as at 5.00 pm on the second business day following the second Court date, 6 December 2018, or such other date as Genea and MW Fertility may agree in writing. 10 While the Demerger Scheme is separate from the Merger Scheme, the two schemes are inter-conditional. If both schemes are approved, the Demerger Scheme will be implemented prior to the Merger Scheme. 11 On 3 December 2018, on the same day as the scheme meetings, two general meetings of Genea shareholders will also be held: (1) one such meeting will be to consider and, if thought fit, approve resolutions in relation to the transaction the subject of the Merger Scheme. In particular, shareholders will be asked to consider a resolution to modify the Genea constitution in three ways, one of which will be to prevent the compulsory acquisition of Genea shares until the "Put and Call Option" included in the "Option Deed" described at [25]-[28] below expires; and (2) the other such meeting will be to consider and, if thought fit, approve resolutions in relation to the transaction the subject of the Demerger Scheme as described in [9] above. 12 Despite the notice of general meeting included in the Demerger Scheme booklet referring to this meeting taking place on 1 December 2018, it is evident from the balance of the material before me that it is intended to take place on 3 December 2018.

Independent expert reports 13 The Genea directors appointed Lonergan Edwards & Associates Limited (Lonergan Edwards) as the independent expert to prepare two reports: a report to consider whether, in their opinion, the Merger Scheme is fair and reasonable and in the best interests of Genea shareholders; and a report to consider whether the Demerger Scheme is in the best interests of Genea shareholders (together, IE Reports). 14 In their first report, concerning the Merger Scheme, Lonergan Edwards concluded that the Merger Scheme is fair and reasonable and in the best interests of Genea shareholders in the absence of a superior proposal. Lonergan Edwards is of the view that the Merger Scheme consideration of $73.85 per share is within their assessed valuation range for Genea shares on a 100% controlling interest basis, being between a low of $68.11 and a high of $76.59 per share. 15 In their second report, concerning the Demerger Scheme, Lonergan Edwards concluded that the Demerger Scheme is in the best interests of Genea shareholders. 16 In an affidavit sworn by Craig Lloyd Edwards, the managing director and authorised representative of Lonergan Edwards, who had overall responsibility for the preparation of the IE Reports in conjunction with Grant Kepler, he confirmed that he continued to hold the opinions expressed in the draft IE Reports. He also said that he was not aware of any facts or circumstances which would cause him to change the opinions expressed in those reports and that, subject to any matters raised by the Court, he intended to sign a copy of the current draft of the IE Reports for inclusion in the Merger Scheme booklet and the Demerger Scheme booklet as applicable.

Genea's directors' recommendations 17 The Genea directors have considered the advantages and disadvantages of both the Merger Scheme and the Demerger Scheme. They have: recommended that Genea shareholders should vote in favour of the Scheme in the absence of a superior proposal and subject to the independent expert maintaining its conclusion that the Merger Scheme is in their best interests; and concluded that the Demerger Scheme is in the best interests of Genea shareholders and that it "has the potential to deliver greater shareholder value to Genea [s]hareholders than the current structure, as the Demerger is a condition precedent to the Scheme proceeding". They thus unanimously recommended that Genea shareholders vote in favour of the resolutions to approve the Demerger Scheme.

statutory framework and general principles 18 In APN Outdoor Group Limited, in the matter of APN Outdoor Group Limited [2018] FCA 1425 at [9] I summarised the requirements of s 411 and s 412 of the Act in relation to the convening of a meeting of members and approval of the applicable explanatory statement as follows: 9 Section 411(1) of the Act confers a power on the Court to order a meeting of members to be convened, and to approve the applicable explanatory statement, where the following matters are satisfied: (1) a compromise or arrangement is proposed between a Pt. 5.1 body and its members or any class of them; (2) application for the order is made in a summary way by, relevantly, the body; (3) 14 days' notice of the hearing of the application, or such lesser period of notice as the Court or the Australian Securities and Investments Commission (ASIC) permits, has been given to ASIC: s 411(2)(a) of the Act; (4) the Court is satisfied that ASIC has had a reasonable opportunity to: (a) examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement; and (b) make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement: s 411(2)(b) of the Act; and (5) the proposed Scheme Booklet provides proper disclosure to shareholders: s 412(1)(a) of the Act, see In the matter of DUET Finance Limited [2017] NSWSC 415 at [15] (perBlack J) and the cases cited therein. 19 There is also a need to demonstrate that the scheme is bona fide and properly proposed: see Staging Connections Group Limited, in the matter of Staging Connections Group Limited [2015] FCA 1012 at [19]. 20 Once the preconditions to the exercise of the power under s 411 of the Act are satisfied, the Court retains a discretion to determine whether it ought to exercise that power. The manner in which the Court will exercise that discretion was summarised by Farrell J in Associated Advisory Practices Limited, in the matter of Associated Advisory Practices Limited [2013] FCA 761 at [22] as follows: 22 The Court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the Court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Limited at 504-505. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The Court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. 21 At both the first Court hearing, when the Court approves the convening of a scheme meeting and the draft explanatory statement to be sent to members, and the second Court hearing, when the Court approves the proposed scheme, there is a duty of disclosure which falls on the plaintiff and its counsel given that, in a technical sense, the application proceeds ex parte in the absence of any defendant or contradictor: see Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; [2002] NSWSC 1177 at [7] (per Barrett J).

matters for the court's satisfaction 22 Having considered the evidence relied on by Genea, I was satisfied that: (1) Genea is a Pt 5.1 body as defined in s 9 of the Act; (2) both the Merger Scheme and the Demerger Scheme comfortably fall within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act; (3) Genea had applied, by way of its originating process, for orders pursuant to s 411(1) of the Act in respect of the Merger Scheme and the Demerger Scheme; (4) copies of the draft Merger Scheme booklet and the draft Demerger Scheme booklet together with notice of the date of the first Court hearing were first given to the Australian Securities and Investments Commission (ASIC) on 4 October 2018, which was more than 14 days before the first Court hearing; (5) in its letter dated 29 October 2018 to the chair of Genea, ASIC indicated that it had had a reasonable opportunity to examine the terms of the Merger Scheme, the Merger Scheme booklet, the Demerger Scheme and the Demerger Scheme booklet and to make submissions to the Court in relation to those schemes and the draft booklets as required by s 411(2)(b) of the Act; (6) the Merger Scheme booklet and the Demerger Scheme booklet provide adequate disclosure to members. Each of those booklets sets out the key features of the scheme to which it relates and its advantages and disadvantages. Further, the evidence established that steps were taken by Genea and MW Fertility, including each member of the consortium which it represents, to verify the statements and information appearing in the draft Merger Scheme booklet and Demerger Scheme booklet as applicable; and (7) I was satisfied that the Merger Scheme and Demerger Scheme are bona fide and properly proposed. 23 I was also satisfied that other procedural requirements set out in Div 3 of the Federal Court (Corporations) Rules 2000 (Cth) which apply to arrangements between a Pt 5.1 body and its members have been met. The affidavits of Robert John Woolcott and Tomas Stojanov each affirmed on 22 October 2018 in relation to their respective ability to chair the Merger Scheme and Demerger Scheme meetings each met the requirements of r 3.2 and the proposed orders were in a form that met the requirements of r 3.3.

other matters 24 Given its obligation to bring all relevant matters to the Court's attention, Genea brought five matters to the Court's attention in particular in relation to the Merger Scheme. Having considered each of those matters, I was of the opinion that none of them justified the Court declining to make the orders sought by Genea. A summary of each matter identified follows.

Option arrangement 25 The SIA provides that it is a condition precedent of the Merger Scheme that holders of at least approximately 2.687 million Genea shares enter into a "put and call" option deed (Option Deed) with MW Fertility. All Genea shareholders are invited to enter into the Option Deed but only those who sign the deed will obtain the benefit and burden of it (Put Option Holders). 26 Under the terms of the Option Deed, subject to the satisfaction or waiver of certain conditions precedent, Put Option Holders agree to grant MW Fertility an option to purchase (Call Option), and MW Fertility agrees to grant Put Option Holders an option to sell (Put Option), the remaining 10.5% of that Put Option Holders' Genea shares to MW Fertility. 27 The Option Deed contains conditions which limit the option exercise period and may result in the Put Option not being able to be exercised. The Put Option expires on the earlier of the termination of the SIA or three years after the scheme implementation date. The Option Deed also contains restrictions on the disposal by a Put Option Holder of their Genea shares during the term of the Put and Call Options. 28 While noting that the option arrangement is not particularly common in schemes, Genea submitted, and I accepted, that there is nothing about the Option Deed which would cause the Court to decline to convene the Merger Scheme meeting. The existence of the arrangement is disclosed in the Merger Scheme booklet and it is, as Genea submitted, entirely a matter for individual shareholders to determine whether they wish to enter into the arrangement.

Performance risk 29 On occasions courts have considered the extent to which a bidder will comply with its primary obligation to pay the scheme consideration to scheme members: see Re SFE Corporation Ltd (2006) 59 ASCR 82; [2006] FCA 670 at [4] (SFE Corporation); Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [23] (APN News). 30 In the present case, as a result of the combined operation of cll 5.2, 5.3 5.4, 6.1, 6.2 and 6.3 of the Merger Scheme, one business day prior to the implementation date, which is the second business day following the record date, MW Fertility must deposit into a trust account operated by Genea as trustee for the scheme participants the aggregate scheme consideration in cleared funds. The term "scheme participants" is defined as each person who is registered as a Genea shareholder as at 5.00 pm on the record date, being 5.00 pm on the second business day following the second Court date or such other date as agreed in writing. The transfer of 89.5% of Genea shares to MW Fertility cannot occur until that deposit has been made. 31 In addition, MW Fertility has executed a deed poll in favour of each scheme participant in which it undertakes to pay the scheme consideration in accordance with the Merger Scheme. There was evidence before the Court that confirmed that MW Fertility had the capacity to execute the deed poll, perform the obligations expressed therein and had duly executed the deed poll.

Exclusivity 32 Clause 10 of the SIA titled "Exclusivity" includes "No-shop" and "No-talk" provisions as follows: (a) the "No-shop" provision, set out in cl 10.2, provides that during the "Exclusivity Period" Genea must ensure that neither it nor any of its representatives directly or indirectly solicit, invite, encourage or initiate any enquiries, negotiations or discussions or communicate any intention to do any of those things with a view to obtaining any offer or proposal; and (b) the "No-talk" provision, set out in cl 10.3, provides that during the "Exclusivity Period" Genea must ensure that neither it nor any of its representatives negotiates or enters into or participates in negotiations or discussions with any person about a competing transaction or any agreement or arrangement that might lead to a competing transaction even if that competing transaction was not directly or indirectly solicited, encouraged, or initiated by Genea. 33 The "No-talk" restriction is subject to a fiduciary exception set out in cl 10.4 of the SIA. In summary, it does not apply to the extent that it restricts Genea or its board from taking or refusing to take any action in relation to a genuine competing transaction which was not solicited or encouraged by Genea in contravention of the "No-shop" restriction provided that the Genea board has determined in good faith and acting reasonably that such a transaction could be a superior proposal and that failing to respond to it would be reasonably likely to constitute a breach of the Genea board's fiduciary or statutory obligations. 34 In Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9] Santow J observed that an exclusivity clause should: (1) be for no more than a reasonable period capable of precise ascertainment; (2) where directed at dealing with a solicited or unsolicited alternative merger proposal, be framed so that it is subject to a fiduciary carve out; and (3) be clearly disclosed in the explanatory statement sent to shareholders. 35 In this case, the exclusivity clause meets those requirements as it applies for a reasonable and ascertainable period being from the date of the SIA, 27 August 2018, until the earlier of the termination of the SIA in accordance with its terms and the End Date, 31 December 2018 or such other date as is agreed by Genea and MW Fertility, it is subject to a fiduciary carve out and it is clearly disclosed in the Merger Scheme booklet. 36 Clause 10 of the SIA also includes a matching rights regime pursuant to which Genea is obliged to give MW Fertility notice of any competing transaction and MW Fertility then has the ability to provide a matching or superior proposal in response. As Genea submitted, while the Takeovers Panel has noted the possibility that matching rights can be anti-competitive, they are also increasingly common place in schemes of arrangement. In Re DUET Finance Limited [2017] NSWSC 415 at [24] Black J observed that the matching right provision in that case was unlikely to deter competing bids because "the process under this clause corresponds to the clause that a prospective bidder would expect DUET to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged". That observation equally applies here.

Break fee 37 Clause 11 of the SIA provides for payment by Genea of a break fee in certain circumstances should the Merger Scheme not proceed. The break fee was agreed in the circumstances set out in cl 11.1 of the SIA being that: (a) Bidder and Target believe that the Share Scheme will provide significant benefits to Bidder, Target and their respective shareholders, and Bidder and Target acknowledge that, if they enter into this document and the Scheme is subsequently not implemented, Bidder will incur significant costs, including those set out in clause 11.5; (b) Bidder requested that provision be made for the payment of the Break Fee, without which Bidder would not have entered into this document; (c) both the Bidder Board and Target Board believe that it is appropriate for both Bidder and Target to agree to the payment referred to in this clause to secure Bidder's participation in the Share Scheme; and (d) both Bidder and Target have received legal advice on this document and the operation of this clause. 38 Clause 11.5 of the SIA provides that the break fee is an amount to compensate MW Fertility for advisory costs and out of pocket expenses. 39 Lucy Alexandra Sarah Basten, the general counsel and company secretary of Genea and Biocells Australia Holdco, gave evidence about the negotiation of the break fee including that it was negotiated between the parties in circumstances where all parties were represented by experienced legal and financial advisors. She also said that during the course of those negotiations, MW Fertility made it clear that Genea would need to agree to a break fee for it to agree to the transaction; and, as Genea considered that the implementation of the Merger Scheme would provide significant benefits to Genea and its shareholders, it determined that it was appropriate for Genea to agree to the terms of the SIA concerning the break fee in order to secure MW Fertility's participation in the transaction. 40 As submitted by Genea, break fees are common features in schemes of arrangement and will be permitted unless "the amount of the break fee was such that it could influence voting at the meeting to be convened or if there were some other unusual circumstances": see SFE Corporation at [6]-[7]. I was satisfied that that was not the case here. 41 First, the break fee is not payable if the Merger Scheme is not approved at the Merger Scheme meeting. In those circumstances, the existence of the fee can have no influence on voting at the meeting: see Adelaide Bank Limited, in the matter of Adelaide Bank Limited ACN 061 461 550 [2007] FCA 1582 at [31]. 42 Secondly, the quantum of the break fee is consistent with the guideline that a break fee should not exceed 1% of the equity value of the target as set out by the Takeovers Panel in Guidance Note 7: Lock-up devices at [9]. That is, the break fee of approximately $2.64m was calculated by applying 1% to the "Equity Value" which is defined in the SIA as approximately $264.6m. In fact, Genea's evidence indicated that the "Equity Value" included in the SIA is slightly lower than its equity value as at the date the SIA was signed. When calculated on the latter basis, the negotiated break fee is 0.99996% of the equity value and, when calculated on the basis of Genea's enterprise value based on the Merger Scheme consideration of $73.85 per share, the break fee is 0.95535% of that value. 43 Thirdly, the existence of the break fee is adequately disclosed in the Merger Scheme booklet. 44 Finally, Genea has negotiated a reverse break fee of either 1% or 2% of the equity value depending on the circumstances in which that fee becomes payable by MW Fertility.

Deemed warranty 45 Clause 5.6 of the Merger Scheme contains a deemed warranty by which each Genea shareholder warrants to MW Fertility that the Genea shares held by them are transferred fully paid and free from all mortgages, charges, liens, pledges, trusts, power or title retentions or flawed deposit arrangements and any "security interest" as defined in s 12(1) or (2) of the Personal Property Securities Act 2009 (Cth) or any agreement to create any of them or allow them to exist and that they have full power and capacity to sell and transfer their shares to MW Fertility under the Merger Scheme. 46 Clauses in these terms are permissible and now commonplace: see for example APN News at [62]. The deemed warranty has also been adequately disclosed in the Merger Scheme booklet.

conclusion 47 I was satisfied that the proposed Merger Scheme and the proposed Demerger Scheme were of such a nature that, if approved at their respective meetings by the requisite statutory majorities, the Court would be likely to approve them on the hearing of an unopposed application. 48 Accordingly, and for the reasons set out above, I made the orders sought by Genea under s 411(1) of the Act. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.