In the matter of Afterpay Limited [2021] NSWSC 1709

Supreme Court of NSW|2021-12-17|Before: Black J

Solicitors: Gilbert & Tobin (Plaintiff) King & Wood Mallesons (Acquirers) File Number(s): 2021/263585

Judgment

By Originating Process filed on 15 October 2021, the Plaintiff, Afterpay Limited ("Afterpay") applied under s 411 of the Corporations Act 2001 (Cth) for orders in respect of a proposed scheme of arrangement between Afterpay and the holders of its ordinary shares, relating to the acquisition of those shares by Lanai (AU) 2 Pty Ltd, which is a wholly owned Australian subsidiary of Block Inc, formerly known as Square Inc ("Block"). By my judgment delivered on 4 November 2021 (Re Afterpay Ltd [2021] NSWSC 1435), I made orders convening the proposed scheme meeting and approving the scheme booklet for distribution to Afterpay shareholders.
On 2 December 2021, Afterpay made an announcement to Australian Securities Exchange ("ASX") indicating that all regulatory conditions under cl 3.1 of the Scheme Implementation Deed ("SID) (as summarised in section 3.11(a)(1) of the scheme booklet) had been satisfied, other than a condition precedent as to the Bank of Spain approval to the transaction; Afterpay and Block were confident that that condition would be satisfied, and Block expected that it would be satisfied in mid-January 2022; Afterpay and Block were then considering options to proceed with a scheme meeting before the end of this calendar year, although that condition would likely not be satisfied prior to 31 December 2021; Afterpay would open the scheme meeting on 6 December 2021 and then adjourn it to a date to be determined; and Afterpay intended to approach the Court for orders in connection with the adjourned scheme meeting and second Court hearing and for approval of further materials for dispatch to Afterpay shareholders. The scheme meeting was then held on 6 December 2021 but adjourned to 14 December 2021, by reason of the delay in obtaining the Bank of Spain's approval for the transaction.
By an Amended SID dated 7 December 2021 ("Amended SID"), the condition precedent relating to the Bank of Spain's approval was changed from a condition precedent to a condition subsequent to the scheme (Ex RLB-2, Tab 5) and the terms of the scheme were also amended to convert the Bank of Spain's approval into a condition subsequent to the scheme and make other consequential amendments (Ex RLB-2, Tab 6). By a second judgment delivered on 7 December 2021 (Re Afterpay Ltd [2021] NSWSC 1640) ("Second Judgment"), I made further orders in respect of the distribution of supplementary documents to shareholders, which dealt with that proposed amendment and other matters, and for the consequential adjournment of the second Court hearing.
The adjourned scheme meeting was held virtually on 14 December 2021 and a resolution (in the form previously notified by the supplementary disclosure) was proposed at that meeting: "To consider and, if thought fit to pass (with or without amendment) the following resolution: That, pursuant to and in accordance with section 411 of the Corporations Act 2001 (Cth), the scheme of arrangement proposed between Afterpay Limited ("Afterpay") and the holders of its fully paid ordinary shares, the terms of which are contained in and more particularly described in the Scheme Booklet (of which the notice convening the Scheme Meeting forms part) as amended by the amended Scheme Implementation Deed dated 7 December 2021, is approved (without or without alteration, or conditions as approved by the Supreme Court of New South Wales and agreed to by Afterpay and Block, Inc. (formerly known as Square, Inc.) and, subject to approval of the Scheme by the Court, the Afterpay Board is authorised to implement the Scheme with any such alterations or conditions."
Afterpay Shareholders approved the scheme (as amended by the Amended SID) at that meeting by a majority in number present and voting (in person or by proxy) and by more than 75% of the value of the votes cast (in person or by proxy). The results of the scheme meeting were as follows (Rubin [23]-[25], Ex EMR-1, Tab 4; Dedrick 15.12.2021 [62]-[64], Ex CPD-2 at Tab 7): Number of votes Percentage of votes Number of holders Percentage of holders For 199,516,526 99.95 2,209 95.34 Against 96,983 0.05 108 4.66

Thirty-eight Afterpay shareholders abstained from voting on that resolution (Dedrick 15.12.2021 [63(c)], Ex CPD-2, Tab 7).

At the second Court hearing on 16 December 2021, Afterpay sought an order under s 411(4)(b) of the Corporations Act that the scheme be approved and an order, under s 411(12) of the Act, that it be exempted from compliance with the requirements of s 411(11) of the Act. I made the orders sought at the conclusion of the hearing. These are my reasons for doing so.

Affidavit evidence

Afterpay relies on the affidavit dated 14 December 2021 of Ms Elaine Rubin, who is Afterpay's chair. She refers to the adjournment of the scheme meeting on 6 December 2021 to 14 December 2021 and to the conduct of the virtual scheme meeting on 14 December 2021. She identifies the scheme resolution put at that meeting, which, as I noted above, was amended by reference to the Amended SID to convert the condition precedent relating to the Bank of Spain's approval to a condition subsequent. Ms Rubin also addresses the results of the poll on the scheme resolution, which I noted above. The statutory requirements of a majority in number of Afterpay shareholders present at the adjourned scheme meeting and voting on the scheme resolution and more than 75% of the votes cast on the scheme resolution were comfortably satisfied.
Afterpay also relies on the affidavit dated 15 December 2021 of Mr Christopher Dedrick, who is a relationship manager at ComputerShare Investor Services Pty Ltd, who gives evidence of the steps taken for the dispatch of initial scheme materials, the adjournment of the scheme meeting on 6 December 2021 and the dispatch of supplementary scheme materials as approved by the Court on 7 December 2021, the receipt and recording of proxy votes and the passage of the scheme resolution at the adjourned scheme meeting on 14 December 2021. Mr Dedrick also refers to the relatively low attendance of Afterpay shareholders, by number, at that meeting, but notes that attendance is broadly comparable to voting participation rates at Afterpay's annual general meetings between 2018 and 2021 which are also relatively low.
Afterpay also reads the affidavit dated 15 December 2021 of its solicitor, Ms Rachel Bassil, who refers to registration of the scheme booklet with the Australian Securities and Investments Commission ("ASIC"), the publication of an advertisement concerning the second Court hearing, the provision of an Amended SID to Afterpay shareholders in the supplementary materials, an announcement made by Afterpay to ASX on 7 December 2021 after it had obtained orders from the Court in relation to the dispatch of supplementary material, and a further announcement made to ASX on 14 December 2021 that the scheme resolution had been carried at the adjourned scheme meeting.
By a further affidavit dated 15 December 2021, Ms Cassandra Williams, who is the Chief Enterprise Risk Officer of Afterpay, addresses the position in relation to conversion of awards under Afterpay's equity and employee incentive plans, the position in respect of certain minority interests in Afterpay, including SGX notes to which I referred in the Second Judgment.
Afterpay also tenders a letter dated 16 December 2021 from ASIC which referred to ASIC's earlier comments as to the terms of supplementary information dispatched to Afterpay shareholders, which I also noted in the Second Judgment, and advised that: "After having had the opportunity to observe the entirety of the Scheme process, pursuant to s 411(17)(b) of the Corporations Act, ASIC has no objection to the proposed Scheme."
Afterpay also tendered certificates as to satisfaction of conditions precedent, now excluding the Bank of Spain approval condition, executed by each of Afterpay and Block.

Submissions and determination

I have drawn on the helpful submissions of Mr Jackman, with whom Ms Ng appeared for Afterpay, and my recent judgment in Re Isentia Group Ltd [2021] NSWSC 1069 for this summary of the applicable principles. Section 411(4) of the Act provides that an arrangement is binding on Afterpay shareholders and Afterpay only if, at a meeting of Afterpay shareholders, it is passed by a majority of the shareholders present and voting and by 75% of votes cast and it is approved by order of the Court. Section 411(6) of the Act provides that the Court may grant approval subject to such alterations or conditions as it thinks just.
Afterpay must satisfy the Court at the second Court hearing that the relevant procedural requirements have been satisfied and the resolutions have been passed in accordance with the statutory requirements. Where those matters are established, the Court has a supervisory discretion and will consider whether the scheme involves oppression and whether the arrangement is capable of being accepted: Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 247. Mr Jackman points out that the Court will generally consider whether any other statutory or regulatory requirements for the scheme have been met; whether all conditions precedent to the scheme have been met or waived, save for Court approval and lodgement of the Court's orders with ASIC; whether the scheme is fair and reasonable so that an intelligent and honest man or woman who was a member of the relevant class, properly informed and acting alone, might approve it; whether there was full and fair disclosure to members and creditors of all information material to the decision whether to vote for or against the applicable scheme; whether there is any suggestion of oppression of any minority; whether there is no evidence that any third parties will be disproportionately adversely affected by the operation of the scheme; whether the scheme offends against any aspect of public policy; and whether the plaintiff has brought to the attention of the court all matters that could be considered relevant to the exercise of the Court's discretion: Re Central Pacific Minerals NL [2002] FCA 239 at [8]-[14]; Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; [2002] NSWSC 1177 at [8]-[10]; Re Solution 6 Holdings Ltd (2004) 50 ACSR 113; [2004] FCA 1049 at [18]-[24]; Re Seven Network Ltd (No 3) (2010) 77 ACSR 701; [2010] FCA 400 at [35]-[39]; Re Redcape Property Fund Ltd and Trust Company (RE Services) Ltd (as the responsible entity for the Redcape Property Trust) [2012] NSWSC 486 at [7]; Re Aveo Group Ltd [2019] NSWSC 1679 at [15]; Re Ellerston Global Investments Limited [2020] NSWSC 1108 at [11]-[12]):
The Court will have regard to the assessment by members of their interests as manifested in the voting at the scheme meeting, although it is not bound to approve a scheme merely because it has previously made orders for the convening of meeting of the members and the statutory majorities have been achieved: Re Central Pacific Minerals NL above at [12]; Re NRMA Ltd (No 2) (2000) 156 FLR 412; (2000) 34 ACSR 261; [2000] NSWSC 408 at [22]; Re Atlas Iron Ltd (No 2) [2016] FCA 481 at [5]; Re Redcape Property Fund Ltd and Trust Company (RE Services) Ltd (as the responsible entity for the Redcape Property Trust) above at [7]; Re Aveo Group Ltd above at [15].
Mr Jackman points out that Court approval is here sought under s 411(6) of the Act for the amended scheme, under which the condition precedent relating to the Bank of Spain's approval has become a condition subsequent, as documented by the Amended SID and approved by Afterpay shareholders at the adjourned scheme meeting. He submits, and I accept, that the Court's jurisdiction in respect of the amendment of a scheme under 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 that power can be exercised where an amendment to a 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) (2017) 122 ACSR 437; [2017] NSWSC 1105 at [92], [108].
Mr Jackman also submits, and I also accept, that the case law has accepted the inclusion of conditions subsequent in schemes: Re NRMA Ltd (2000) 33 ACSR 595; [2000] NSWSC 82 at Appendix A (28)-(29); Re Wollongong Coal Limited and Jindal Steel & Coal Australia Pty Ltd [2020] NSWSC 73 at [49]; Re Redflex Holdings Ltd (No 3) [2021] FCA 527 at [22]. I am satisfied that the condition subsequent as to Bank of Spain approval does not cause the amended scheme to become unclear or uncertain, or introduce a new decision making process after Court approval of the scheme, since the amended scheme clearly provides that it will lapse if that condition subsequent is not satisfied on or before 14 April 2022 (cl 3.4 of the Amended Scheme, Ex RLB-2 at Tab 6). There is evidence that, if that occurred, Afterpay will or may have already redeemed the SGX notes, but it has sufficient funds to do so. Mr Jackman also submits that the amendment of a scheme by which a condition precedent is converted into a condition subsequent is not "novel or unusual", although it is also not a particularly common event. I accept that there are examples of such an amendment in Re Tiger Resources Ltd (No 2) [2020] FCA 266 and in Re Redflex Holdings Limited (No 3) above, in each case relating to requirements for regulatory approval, and the amended schemes were approved by the Court in both cases.
I am satisfied that the procedural requirements in respect of the scheme have been satisfied. The affidavit evidence establishes that the Court's orders in respect of the dispatch of the scheme booklet, the supplementary material and the scheme meeting were complied with. There is no reason to doubt that Afterpay has brought to the Court's attention all matters that could be considered relevant to the exercise of the Court's discretion, or to doubt that there was full and fair disclosure to members of all information material to the decision whether to vote for or against the amended scheme. The information contained in the scheme booklet and supplementary disclosure was verified in the usual way and the scheme booklet and supplementary disclosure otherwise satisfies the relevant statutory requirements. The independent expert has concluded that the scheme is fair and reasonable and in the best interests of Afterpay's shareholders, in the absence of a superior proposal. As I noted above, the scheme was approved by the requisite majorities of votes cast and by number of Afterpay shareholders present at the scheme meeting and the statutory majorities in ss 411(4)(a)(ii)(A) and (B) of the Act have been satisfied. No Afterpay shareholder or other person indicated a wish to appear or appeared at the second Court hearing to object to the scheme and, as I noted above, ASIC has no objection to the scheme stated pursuant to s 411(17)(b) of the Act. As I also noted above, Afterpay tendered certificates in respect of the remaining conditions precedent to the scheme, other than those depending on Court approval of the scheme.

Section 3(a)(10) of the Securities Act 1933 (US)

As Mr Jackman had indicated at the first court hearing, Block will rely on the Court's approval of the scheme to qualify for an exemption from the registration requirements of the Securities Act 1933 (US) under s 3(a)(10) of that Act. The operation of that exemption has been noted in earlier case law including Re Central Pacific Minerals NL above at [28]-[34]; Re Simeon Wines Ltd (2002) 42 ACSR 454; [2002] SASC 204 at [21]-[26]; and Re Solution 6 Holdings Ltd above at [37]-[45], and, more recently, in Re Boart Longyear Ltd (No 2) (2017) 122 ACSR 437; [2017] NSWSC 1105 and Re Boart Longyear Ltd [2021] NSWSC 1269.
The orders I made at the second Court hearing included a notation that notice was given to this Court regarding Block's reliance on this exemption of a kind made in earlier cases. I also summarise several aspects of the schemes for this purpose, adopting Mr Jackman's summary of those matters: (a) The proposed amended scheme contemplates the issue of securities (being securities in Block (formerly Square) to be issued by Block) to Scheme Shareholders as consideration for their relevant Afterpay share; (b) Notice of the proposed reliance on the exemption was given to this Court prior to the commencement of the second Court hearing (see paragraphs 107 to 109 of the written submissions for the first Court hearing); (c) An independent expert report prepared by Messrs Edwards and Resende of Lonergan Edwards & Associates concludes that the amended scheme is in the best interests of scheme shareholders, which opinion was confirmed in their letter dated 6 December 2021 (Annexure A to the Shareholder Letter) and dispatched to Afterpay shareholders pursuant to the supplementary disclosure orders and released to the ASX on 7 December 2021; (d) The Court has held this hearing to consider the fairness and reasonableness of the amended scheme; (e) The second Court hearing was conducted in open court and any Afterpay shareholder subject to the amended scheme had standing to appear in opposition. Notice of the second Court hearing was given to Afterpay shareholders the subject of the amended scheme, and [by] an advertisement in the Australian newspaper on 9 December 2021; and (f) No Afterpay shareholder the subject of the amended scheme indicated an intention to appear to oppose the amended scheme or has opposed the approval of the amended scheme.

Orders

For these reasons, I made the orders sought by Afterpay at the conclusion of the second Court hearing in respect of the scheme.

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: 29 December 2021

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (8 paragraphs)

Legislation Cited (1)

Cases Cited (20)

Cited By (7)