Heartware Limited, in the matter of Heartware Limited [2008] FCA 1997

REASONS FOR JUDGMENT 1 By originating process filed on 15 September 2008, the plaintiff, Heartware Limited (the Company), applied for orders under s 411 of the Corporations Act 2001 (Cth) (the Act). On 17 September 2008, Jacobson J made orders pursuant to s 411(1) of the Act that the Company convene meetings of its members, its option holders and its performance rights holders for the purpose of considering and, if thought fit, agreeing to schemes of arrangement proposed to be made between the Company and its members, option holders and performance rights holders respectively. The Company convened meetings in accordance with those orders and now seeks approval of the three schemes pursuant to s 411(4)(b) of the Act. 2 The Company is a public company with limited liability incorporated in Australia. The Company was incorporated on 26 November 2004 in Victoria and was subsequently listed on the Australian Securities Exchange (ASX), on 31 January 2005. The Company is also registered as a reporting entity in the United States under the Securities Exchange Act 1934 (USA). The Company's head office is located in Framingham, Massachusetts, in the United States, and its operations and manufacturing facility are located in Miami Lakes, Florida, in the United States. 3 The Company's operating subsidiary, Heartware Inc, is a Delaware corporation, which was incorporated on 8 April 2003. Since 10 July 2003 that subsidiary has operated the business formerly owned and operated by Kriton Medical Inc, which had been developing what is known as the Heartware LVAD System. The Company carries on a medical business focused on innovation in a left ventricular assist device, the LVAD market, by developing a family of blood pumps that are significantly smaller than competing products and that are implanted by progressively less invasive surgical techniques. 4 In light of the fact that the United States represents the largest single target market of the Company and its group and since the Company has a substantial majority of its operational and institutional shareholders located in the United States, the board considered that re-domiciliation was an obvious natural evolution for the group. 5 Accordingly, on 16 May 2008 the Company announced a proposed change of domicile of the group to the United States. That change is to be effected by means of the establishment of a new corporate structure under which Heartware International Inc (Heartware International), a corporation incorporated under the laws of the State of Delaware in the United States, will become the ultimate parent company of the group and the holder of all of the shares in the Company. The proposal involves all existing shares in the Company being transferred to Heartware International in exchange for the issue of Heartware International shares to existing shareholders of the Company. The proposed transfer is to be effected pursuant to a scheme of arrangement between the Company and its members. 6 In addition, the Company has option holders and performance rights holders. The proposal involves a scheme of arrangement between the Company and its option holders under which all existing options over shares in the Company will be cancelled and option holders will receive Heartware International options. A third scheme is to provide for cancellation of all performance rights in the Company and the issue by Heartware International to the holders of those rights of restricted stock units in Heartware International. 7 Because it is intended to list shares in Heartware International on NASDAC, it was considered desirable for an effective consolidation of the shares such that the proportion in which shares, options and restricted stock units in Heartware International will be allotted will be one for every 35 shares options or performance rights held in the Company. 8 The Company retained BDO Kendalls Corporate Finance (Queensland) Limited (BDO) to provide a written opinion as to whether the proposal was in the best interests of shareholders of the Company. In their report, BDO expressed the opinion that, in order to assess whether the proposed transaction would be in the best interests of the equity interest holders, it was appropriate to consider the following: · the advantages of the proposed transaction to the equity interest holders, · the disadvantages of the proposed transaction to the equity interest holders, · the impact of the proposed transaction on the liquidity of equity interests in the Company and Heartware International, · taxation impacts for equity interest holders, · additional matters that equity interest holders may wish to consider in deciding to vote in favour of or against the proposed transaction, and · the position of the equity interest holders if the proposed transaction is not approved. 9 In their report BDO examined each of those matters in some detail. In particular they considered the advantages are as follows: · The United States is a credible and large capital market for medical device companies and the Company has successfully raised significant funds from United States investors. · Improved United States investor and analyst understanding of Heartware's structure and results. · Foreign ownership restrictions in the United States would be removed. · ASX listing would be retained. · Costs savings would be achieved and compliance requirements will be reduced. · The opportunity to pursue a NASDAC listing has the potential for increased liquidity and re-rating. · There would be an increased opportunity for commercial partnering and joint venture arrangements in the United States. 10 The disadvantages perceived by BDO are as follows: · The protection of equity interest holders would be changed. · Australian investors would no longer hold equity interest in an Australian Company, instead they would hold CDIs rather than shares. · The costs of the proposed transaction would be borne by the Company. · Domicile in the United States may increase exposure to the risk of litigation. · There would be restrictions imposed on the sale of shares by affiliates. · There may be potential taxation consequences in some circumstances. 11 BDO expressed the view that, on balance, the advantages of the proposed transaction outweighed its disadvantages for equity interest holders of the Company. They concluded, therefore, that the proposed transaction is in the best interests of the equity interest holders of the Company. They expressly excluded from their opinion the position of ineligible foreign shareholders, being shareholders who would not be able to participate in the scheme by receipt of CDIs. 12 BDO also expressly referred to a successful private placement announced to ASX by the Company on 23 May 2008. The placement was made at a price of 50 cents per share and raised approximately $30,000,000. A number of the Company's existing institutional shareholders, together with new institutional shareholders, participated in the placement. The Company has now announced that 80 per cent of the shares were taken up by United States investors. BDO expressed the view that the placement indicates strong support for the Company in the United States at the present time. 13 The three schemes are in similar terms so far as their technical form is concerned. Each provides essentially for the effect that I have briefly summarised. At the meeting of members held on 22 October 2008, 159,153,370 votes were cast in favour of the resolution agreeing to the scheme. That number represents slightly more than 50 per cent of the 310,356,384 issued shares. On the other hand, 82,929 votes were cast against the proposal. Of 118 members who voted, 110 members voted in favour. Thus, of the total number of members who voted, 93.22 per cent voted in favour and, of the total votes cast, 99.95 per cent were cast in favour of the resolution. The resolution was therefore carried by well in excess of the majorities required by the Act. 14 At the meeting of option holders held on the same day, 12,013,080 votes, of a total number of 22,746,464 possible votes, were cast in favour of the resolution agreeing to the scheme. That represented 100% of the holders of options who voted. At the meeting of performance rights holders, 7 holders voted, representing 2,250,000 votes of a total possible number of 5 million. Of those who voted, all voted in favour of the resolution agreeing to the scheme. Thus, the second and third schemes have also been approved by the requisite majorities. 15 I have had regard to the affidavits of David John McIntyre made on 12 September 2008, Steven Alfred Sorbello made on 15 September 2008, Matthew Adam-Smith made on 15 September 2008, and Neil Cooke made on 15 September 2008. All of that evidence was before Jacobson J. I have also had regard to the affidavits of Howard Leibman made on 29 October 2008, Claire Michelle Tait made on 29 October 2008, Xue-Li Sheryl Lee made on 29 October 2008, Hannah Rachel Glass made on 29 October 2008, Richard Victor Powell made on 29 October 2008, Robert Bain Thomas made on 29 October 2008, and a second affidavit of Claire Michelle Tait made on 30 October 2008. 16 Section 412(6) of the Act required that the Company not send out an explanatory statement pursuant to s 412(1), unless a copy of the statement had been registered with the Australian Securities and Investment Commission (the Commission). As a result of a misunderstanding by the Company's solicitors, the explanatory memorandum was dispatched to members prior to its registration. That fact was drawn to the attention of the Commission, which appears to have raised no objection. In fact, the Commission had received a copy of the final form of the explanatory memorandum prior to its dispatch. Further, the Commission, by letter of 29 October 2008 addressed to the Company's solicitors, has indicated that it has no objection to the schemes of arrangement. 17 The Commission's letter states that that indication is given having regard to the Commission's criteria for providing the statement in writing that it has no objection, as set out in its Regulatory Guide Number 60 dealing with s 411(17) of the Act. Section 411(17) provides that the Court must not approve a compromise or arrangement under s 411 unless 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 Ch 6 of the Act, which deals with takeovers, or there is produced to the Court a statement in writing by the Commission stating that the Commission has no objection to the compromise or arrangement. 18 Jacobson J was informed on 17 September 2008 that Heartware International and the Company proposed to rely on the exemption from registration under the United States Securities Act pursuant to s 3A(10) of that Act. Before an issuer can rely on such an exemption certain conditions must be met as follows: · The securities must be issued in exchange for securities, claims or property interests. · A court or an authorised government entity must approve the fairness of the terms and conditions of the exchange. · Where relevant, the court must find that the terms and conditions of exchange are fair to those to whom the securities will be issued and be advised, before the hearing, that the issuer will rely on the s 3A(10) exemption based on the Court's approval of the transaction. · The Court must hold a hearing before approving the fairness of the terms and conditions of the transaction. · The fairness hearing must be open to everyone to whom securities will be issued in the proposed exchange. · Adequate notice must be given to all those persons. · There must not be any improper impediment to the appearance by such persons at the hearing. 19 From what I have already said, it is clear that the securities in Heartware International will be exchanged for securities in the Company. Having regard to the evidence to which I have referred and to the significant majority who voted in favour of the proposals, I am satisfied that the terms and conditions of the exchange are fair to the members and other security holders of the Company. 20 The hearing today has been advertised in accordance with the Federal; Court Rules and the Act; when the matter was called on for hearing today there was no appearance except by senior counsel appearing for the Company. The hearing was advertised in a fashion that invites persons who wish to be heard to notify the Company's solicitors. No one notified the Company's solicitors of any desire to be heard in opposition to the approval of the schemes. The hearing today was conducted in open court. I am satisfied that all persons affected by the schemes received adequate notice of the meetings and of today's hearing. There is no reason why anybody who wished to oppose the schemes could not have appeared today. There is no reason why anybody who wished to oppose could not have been heard in opposition. 21 Having regard to the evidence to which I have referred and the fact that the three schemes have been agreed to by the members, option holders, and performance rights holders respectively I am satisfied that orders should be made approving the schemes pursuant to s 411 of the Act. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.