In the matter of Afterpay Limited [2021] NSWSC 1640

Affidavit evidence

1. Afterpay relies on the affidavit dated 7 December 2021 of its solicitor, Ms Rachael Bassil, in support of the application. Ms Bassil notes that a condition precedent to the scheme relates to the receipt of a number of regulatory approvals, including from jurisdictions outside Australia and the United States of America, and identifies one of those conditions precedent as relating to the receipt of confirmation of approval for the transfer of certain Spanish subsidiaries by the Bank of Spain. Ms Bassil notes that, at the date of her affidavit, the condition precedent relating to that approval had not been satisfied, and refers to an announcement made by Afterpay to ASX on 2 December 2021 which updated shareholders as to the progress of that approval, noted that Afterpay had decided to open and then adjourn the scheme meeting on 6 December 2021 and that meeting has now been adjourned to 14 December 2021.
2. Ms Bassil also refers to an amendment to the SID made on or around 6 December 2021 by Square Acquirer, Square and Afterpay, with effect that that the requirement for regulatory approval by the Bank of Spain would become a condition subsequent to the scheme rather than a condition precedent to the scheme. The Amending Deed in respect of the SID has currently been executed by those parties and the executed counterparts of the amended SID are currently held in escrow pending Court approval to dispatch supplementary material to Afterpay securityholders.
3. Ms Bassil also addresses the position in respect of certain A$1.5 billion zero coupon convertible notes ("SGX Notes"), holders of which acquire certain rights on a change of control of Afterpay. It appears that the redemption right of holders of the SGX Notes will be triggered by shareholder approval of the scheme at the scheme meeting, although the scheme would then still be subject to satisfaction of the condition subsequent as to regulatory approval by the Bank of Spain and Court approval. Ms Bassil's evidence, on information and belief, is that Afterpay has sufficient funds, including through existing funding arrangements, to fund a redemption of the SGX Notes if it is necessary to do so.
4. Ms Bassil also refers to information which has been prepared by way of supplementary disclosure to Afterpay shareholders, which addresses the adjournment of the scheme meeting, matters relating to regulatory approval by the Bank of Spain and the proposal to amend the scheme, at the scheme meeting, to provide for that regulatory approval to be treated as a condition subsequent rather than a condition precedent. The information to be sent to shareholders also includes a letter from the independent experts in relation to the scheme, addressing the implications of a decrease in Square's share price since the scheme was announced, and indicating that they continue to hold the view that the scheme is fair and reasonable and in the best interests of Afterpay shareholders in the absence of a Superior Proposal (as defined). Ms Bassil also addresses the process which will be adopted for dispatch of additional information to scheme shareholders and the reasons that Afterpay does not wish to delay the scheme meeting into the new year while it awaits approval from the Bank of Spain, which now anticipates it will receive in mid-January 2022.
5. By his affidavit dated 6 December 2021, Mr Anthony Boogert, who is a solicitor acting for Square and Square Acquirer in the scheme, refers to the condition precedent as to the Bank of Spain's approval and outlines the process adopted to obtain that approval from the Bank of Spain and the steps which have been taken by Square to advance that process. He notes that the proposal for approval of Square's application for that approval is to be included in an agenda for the executive committee for the Bank of Spain for 12 January 2022, although the Bank of Spain's review period in relation to the application does not expire until mid-February 2022. His evidence is that Square is not aware of any reason why the Bank of Spain's approval should not be granted.
6. By an affidavit dated 6 December 2021, Ms Cassandra Williams, who is the Chief Enterprise Risk Officer of Afterpay, addresses the supplementary disclosure to be made by Afterpay in respect of the scheme and the verification process which has been undertaken in respect of that supplementary disclosure. By her affidavit dated 7 December 2021, Ms Olivia Blakiston, who is a solicitor in the firm of solicitors acting for Afterpay in the proceedings, also addresses the question of verification of supplementary disclosure.
7. By their affidavits dated 7 December 2021, Mr Craig Edwards and Mr Jorge Resende of Lonergan Edwards & Associates ("LEA") refer to their supplementary letter to Afterpay shareholders in respect of their independent expert's report, as revised to address comments made by ASIC in relation to an earlier version of that letter. That supplementary letter addresses a valuation issue arising from the decline in Square's share price. LEA note that decline and note similar declines in share prices of other buy now pay later and fintech companies and reassess the value of the scheme consideration at a lower figure. They also reach an assessment, by considering market prices of other companies within the relevant market sectors, that there is likely to be a decline of at least 20% in the value of Afterpay, broadly corresponding with the decline in the value of Square, and on that basis have adopted a revised market value of $90 to $108 per share for Afterpay and reconfirmed their fair and reasonable opinion. I will refer this matter below.

The issue as to the Bank of Spain's approval

1. Mr Jackman, with whom Ms Ng appears for Afterpay, notes that Afterpay will propose the amended scheme to Afterpay shareholders at the adjourned scheme meeting by an amended resolution. The notice of meeting for the adjourned scheme meeting provides that the resolution to be considered at the adjourned scheme meeting may be approved with or without amendment (Ex 1, Scheme Booklet, Attachment E). If the amended scheme is approved at the adjourned Scheme Meeting on 14 December 2021, Afterpay will seek orders at the second Court hearing approving the amended scheme under s 411(6) of the Act. Mr Jackman points out that a two-staged approach of that kind was approved by Barrett J in Re Citect Corporation Limited (2006) 225 ALR 137; (2006) 56 ACSR 663; [2006] NSWSC 143 at [13], [16] and [18].
2. Mr Jackman also points out that the jurisdiction conferred on the court by s 411(6) of the Act is to be exercised judicially, having regard to its statutory purpose and in light of the whole of the circumstances surrounding the matter, and refers to my judgment in Re Boart Longyear (No 2) (2017) 122 ACSR 437; [2017] NSWSC 1105 at [108]. He points out that that power can be used where the amendment to the scheme is of a substantive character, if those who are most directly affected by the amendment consent to it and it is otherwise just to make the amendment: Re Boart Longyear Ltd (No 2) above at [92]. He also points out that, in Re Redflex Holdings Limited (No 3) [2021] FCA 527 at [23]-[25], Yates J approved an amended scheme under s 411(6) of the Act in a similar situation, where a condition precedent (approval from the General Authority for Competition in the Kingdom of Saudi Arabia) was converted into a condition subsequent after delays obtaining the relevant approval prior to the second Court hearing. The amended scheme was there foreshadowed in an ASX announcement made a business day prior to the scheme meeting, referred to by the chair in the scheme meeting and approved at the scheme meeting. That approach is broadly consistent with what is sought to be done here, although here shareholders will be given notice of the proposed amendment prior to the date of the scheme meeting, together with an explanation of its terms and further information.
3. Mr Jackman also submits, and I accept, that the inclusion of conditions subsequent in schemes is not unusual, although members must be able to see clearly at the time the scheme is proposed what they are being asked to accept, and the court must be able to see what it is being asked to approve: Re NRMA Insurance Ltd (2000) 33 ACSR 595 at Appendix A (28)-(29); [2000] NSWSC 82; Re Wollongong Coal Limited and Jindal Steel & Coal Australia Pty Ltd [2020] NSWSC 73 at [49]; Redflex Holdings above at [22]). Mr Jackman submits that a condition subsequent relating to Bank of Spain approval has the necessary clarity and certainty, and the amended scheme would be self-executing, so that, if the Bank of Spain approval condition subsequent was not satisfied on or before 14 April 2022 the amended Scheme would lapse and be of no further force or effect (cl 3.4 of the amended Scheme, Ex RLB-2 at Tab 6). That question is ultimately one for the second hearing, and this matter provides no reason not to make the orders sought.

SGX Notes

1. Mr Jackman also refers to the position in respect of the SGX Notes. He submits, and I accept, that the evidence indicates that, if the scheme is approved by Afterpay shareholders at the adjourned scheme meeting, but the Court declines to approve the Scheme or the Bank of Spain approval condition subsequent is not satisfied, Afterpay has sufficient funds (including through funding arrangements that have been put in place) to satisfy the redemption by holders of the SGX Notes of the full-face value of those notes.

Content of supplementary disclosure

1. Mr Jackman points out that Afterpay seeks the Court's approval to dispatch supplementary disclosure materials to Afterpay shareholders in advance of the adjourned Scheme Meeting being a one-page "Member Access Letter" or a "Shareholder Letter" (with annexures). The proposed Member Access Letter (Ex RLB-2, Tab 7) discloses the date of the adjourned scheme meeting; draws attention to an additional document in relation to the scheme published on the ASX and Afterpay's website that requires the shareholder's immediate attention and that should be read together with the scheme booklet; and provides a URL address where the Shareholder Letter and its annexures can be accessed. The Shareholder Letter (Ex RLB-2, Tab 8) in turn discloses, inter alia, amongst other matters, the date of the adjourned scheme meeting; the reasons for the adjournment of that meeting; the amendments to the SID relating to the change of the Bank of Spain approval condition precedent to a condition subsequent and the reasons for that change; that Afterpay has sufficient funding in place to meet the redemption of the SGX Notes if the Court does not approve the scheme or the Bank of Spain approval condition subsequent is not satisfied; the proposed amended resolution that will be put to shareholders at the adjourned scheme meeting in relation to the amended scheme; and an updated implementation timetable following the satisfaction of the condition subsequent. It also deals with proxy forms
2. The Shareholder Letter will also annex a supplementary letter from the independent experts confirming that they have considered the decrease in Square's share price on the value of the consideration offered by Square to Afterpay shareholders under the scheme and that they continue to conclude that the scheme is fair and reasonable and in the best interests of Afterpay shareholders, in the absence of a Superior Proposal, an executed copy of the Amended SID and a marked-up version of the amended scheme. The Shareholder Letter and its annexures have been subject to verification by Afterpay (Williams 6.12.2021[10]-[13]).
3. An issue arose as to supplementary disclosure in respect of the independent expert's opinion. Afterpay tendered a letter dated 7 December 2021 from the Australian Securities & Investments Commission ("ASIC") (Ex P1) which noted that it had reviewed the supplementary material that was proposed to be dispatched to Afterpay shareholders and had concerns as to LEA's supplementary letter, as revised to address ASIC's comments on an earlier version of that letter. I set out ASIC's identification comments as to the matter in full: "In response to ASIC's concerns [as to the earlier version of that letter], LEA provided a revised letter on 7 December which included new valuation range for Afterpay shares of between A$92 to A$108 ("New Afterpay Value"). By way of summary it appears that LEA derived this new range by simply applying a 20% discount to the Initial Afterpay Value range on the basis of recent declines in trading prices of other comparable companies to Afterpay. Although the inclusion of the New Afterpay Value range allows a comparison of the value of Afterpay and Square to determine if the Scheme is 'fair'. ASIC is concerned with the approach undertaken by LEA in deriving the New Afterpay Value range. As noted in RG 111.81, an expert must have a reasonable basis for the approach or methodology it undertakes to value securities and that [sic] where there is no reasonable basis the expert report may be misleading. ASIC considers that the New Afterpay Value range has not been derived through an assessment using robust methodologies and procedures such as those utilised during the preparation of the IER in deriving the Initial Afterpay Value in the IER. For example, it does not appear that LEA has conducted an updated assessment of its market approach re-estimating and selecting appropriate multiples to use to value Afterpay in the current circumstances. Rather, it appears that LEA has simply adopted a discount of 20% to its previous of Afterpay without conducting the processes required to conclude that such a discount is appropriate. Although we note that LEA indicates it has had regard to the effects of recent declines in trading prices or trading multiples, we note that the Initial Afterpay Value was determined by factors not affected by listed market trading prices. As noted in the IER the Initial Afterpay Value was derived predominantly in reliance on the conclusions of the income approach and market approach (which itself includes multiples based on transaction evidence and hence values not affected by trading prices) and accordingly we are concerned that the process of simply applying a 20% discount to the Initial Afterpay Value may contain logical inconsistencies, and lacks robustness and objectivity. Having regard to the above ASIC is concerned that the approach adopted by the expert to derive the New Afterpay Value upon which LEA has drawn its 'fairness' conclusion lacks sufficient robustness and accordingly it is unclear whether there are reasonable grounds supporting the expert's conclusion that the Scheme is 'fair'. ASIC notes that the above concerns and comments is not exhaustive and is based on the limited time ASIC has had to consider those issues."
4. Notwithstanding that criticism of LEA's approach, ASIC then noted that it did not intend to oppose the scheme at the second Court hearing, although it wished to bring these matters to the Court's attention to consider in its decision whether to approve dispatch of the supplementary materials including the LEA letter. Not entirely consistently with that position, ASIC then indicated that it has reserved its position in relation to those matters and would consider them in deciding whether to provide a no objection letter or make submissions at the second Court hearing.
5. As I noted in my oral ex tempore judgment at the conclusion of the hearing on 7 December, it seems to me that three things can be said about the matters raised by ASIC, for present purposes. The first, and likely most important, is that it is plain that Mr Edwards and Mr Resende do not share ASIC's reservations as to the appropriateness of the approach they have adopted, since each of them confirms that they continue to hold the opinions set out in their revised report, based upon their specialised knowledge, and having regard to the Expert Witness Code of Conduct and the applicable standards. The second is that, on one view, ASIC's approach would give rise to real practical difficulty in circumstances where there are industry-wide market movements, involving a change of share prices of an acquiring entity and an acquired entity within the same or broadly similar industry categories, if a change in market prices across industry participants generally required a full reassessment of the value of the target in order to reconfirm a fair and reasonable opinion. That approach would be particularly troublesome where if, in periods of market volatility, it is entirely possible that, by the time a full reassessment had been undertaken, market conditions would have again changed it so as to displace its utility. Third, in any event, ASIC has not sought to appear today to seek to oppose the information being sent to Afterpay shareholders, although it has wished to have these matters drawn to the Court's attention, as they have been. As I noted above, ASIC has reserved its position to the second Court hearing and the Court, at that hearing, will have the opportunity to consider the question whether the scheme should there be approved and ASIC will have the opportunity to make submissions as to that matter.
6. It seems to me that it is in the interests of Afterpay shareholders that they be informed of the reasons that the independent experts continue to hold the view, broadly, that the share prices of Square and Afterpay are moving in a parallel fashion, since shareholders would otherwise be asking themselves the question of how the change in the Square share price might impact the attractiveness or otherwise of the proposed scheme. It seems to me that shareholders will have the ability to assess the cogency of LEA's reasoning, and there is every reason to think that shareholders will actively devote their minds to that question, in a scheme which has received a degree of publicity and informed market commentary, and where it is likely that there are informed market participants amongst Afterpay's shareholders, who will critically assess the further information that is provided to them and very likely express their views about it in the marketplace. In any event, it seems to me that, generally speaking, shareholders are likely to be better informed by being provided information of this character, which the independent experts themselves consider adopts an appropriate methodology, rather than not being provided such information.

Manner and timing of despatch of supplementary disclosure

1. Mr Jackman also notes that the Member Access Letter and the Shareholder Letter (with annexures) will be dispatched by Computershare to those Afterpay shareholders whose name is recorded in Afterpay's register of members as at 3 December 2021. For those Afterpay shareholders who have nominated an electronic email address for the purpose of receiving communications from Afterpay ("Email Recipients"), the Shareholder Letter will be dispatched by sending an email to their email address with a link to a website where the Shareholder Letter (and its annexures) can be accessed. For those Afterpay shareholders who are not Email Recipients and who have a registered address in Australia, the Member Access Letter will be dispatched to those shareholders by priority post and the current delivery estimate for priority post within Australia is 2 business days within the same state and 2 to 4 business days interstate.
2. For Afterpay shareholders who are not Email Recipients and who have a registered address outside of Australia, Afterpay seeks an order dispensing with dispatch of the Shareholder Letter to those shareholders where it is unlikely any post will be received by those shareholders in advance of the adjourned scheme meeting on 14 December 2021. A relatively small number of shareholders holding 0.62% of Afterpay's issued shares fall in that category and they are likely to see the material by other forms of release. In particular, the Shareholder Letter and its annexures will also be made available to Afterpay shareholders as part of an ASX announcement which is accessible on the ASX online platform and on the Afterpay website by a "microsite" that contains all information related to the scheme.
3. Mr Jackman also submits, and I accept, that although the period of time between despatch of the Member Access Letter or the Shareholder Letter and the adjourned scheme meeting is less than the 10 days stated in ASIC's Regulatory Guide 60, the information in the Shareholder Letter is not complex and it would not take shareholders long to understand the effect of the conversion of the Bank of Spain approval condition precedent to a condition subsequent in the amended scheme. Mr Jackman otherwise submits, and I also accept that, if there are any issues as to the adequacy of the notice given in relation to the Shareholder Letter, it can be considered when the Court is asked to approve the scheme: Re Seven Network Ltd (No 2) (2010) 77 ACSR 587; [2010] FCA 355 at [23]; Re Ross Human Directions Limited (No 2) [2010] FCA 1175 at [13]; Re Investa Listed Funds Management Limited as responsible entity for the Armstrong Jones Office Fund and Prime Credit Property Trust [2018] NSWSC 1369 at [14].

Determination

1. As I indicated in my oral ex tempore judgment at the conclusion of the hearing on 7 December 2021, I am satisfied, at least to the level that I can properly authorise the communication with members of this matter, that the proposed amendments may properly be put to members at the scheme meeting, reserving the final approval of the scheme to the second scheme meeting. For these reasons, I made the orders sought by Afterpay at that time.

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 December 2021