In the matter of Ansarada Group Limited [2024] NSWSC 1121

Submissions and determination

I accept that Ansarada complied with the Court's orders in respect of the distribution of scheme documents to Ansarada shareholders. The necessary resolutions were approved by Ansarada shareholders in respect of the Carve-Out Transaction and, as I noted above, the scheme was approved at the scheme meeting by the requisite statutory majorities with a relatively high level of shareholder participation. This matter does not suggest any defect in the notice of the scheme given to Ansarada shareholders and does not give rise to any reason not to approve the scheme. Each of the other conditions precedent to the scheme have been satisfied or waived and ASIC has confirmed that it has no objection to the scheme for the purposes of s 411(17)(b) of the Act. I am satisfied that the procedural requirements for approval of the scheme are satisfied.
As I noted above, an issue arose in respect of communications between Ansarada and its shareholders, outside the framework of the shareholder information line and outbound call campaign, including several email communications and telephone communications, particularly those involving Mr Riley, in the period after the announcement of the proposed scheme and the first Court hearing. Those calls appear to have reflected the content of a document prepared by Ansarada prior to the first Court hearing, headed "Project Answer Q&A Focus Questions", which was not drawn to the Court's attention at the first Court hearing, but was in evidence at this hearing. Mr Drake's evidence, on information and belief from Mr Riley, is that an important focus of the calls was, understandably, on how the Carve-Out Assets were valued and that investors had also asked Mr Riley about his motivations in respect of the transaction. There were also further communications responding to inquiries by Ansarada shareholders in relation to the scheme including questions as to the delay in the scheme resulting from the ACCC's review of the transactions.
Ansarada also tendered correspondence with ASIC, which had rightly sought further information concerning these communications and whether they had been drawn to the Court's attention at the first Court hearing. Ansarada's solicitors responded to ASIC's inquiries as follows: "We confirm that the Pre-Registration Discussions were not brought to the Court's attention at the first Court Hearing. This is because [Ansarada's] legal representatives were not aware of the Pre-Registration Discussions at the time. Nevertheless, we do not consider it would have been relevant to bring the Pre-Registration Discussions to the Court['s] attention for the reasons set out below (which are an extract of the current version of [Ansarada's] written submissions that are to be settled by Counsel and circulated to ASIC): ● At the time, there was no Court-approved script for communications with shareholders. The answers set out in the internal Q&A document prepared for the Pre-Registration Discussions were fair and balanced and the messaging was consistent with information disclosed publicly at the time (see for example the Scheme announcement on 13 February) and also consistent with the information subsequently disclosed in the Explanatory Booklet. ● While there is no "absolute proposition" that the Court is not concerned with communications with shareholders prior to the First Court Hearing, the Court is only concerned with whether the communications adversely affected the integrity of the subsequent steps taken in respect of the Scheme … After these communications, Ansarada shareholders were provided with the Explanatory Booklet and had ample opportunity to consider it (including the reasons both for and against voting in favour of the Scheme). ● The focus of much of the communications was explaining the Carve-Out Transaction and the rationale for that transaction. Communications concerning the Carve-Out Resolution (which was passed at the General Meeting immediately prior to the Scheme Meeting) are not subject to the same prescriptions as those relating to voting on the Scheme itself. Again, the communications as to valuation and rationale were consistent with public disclosure at the time, and were also consistent with the information subsequently disclosed in the Explanatory Booklet. ● When asked about Mr Riley's personal motivations around doing the deal, he framed his response in that manner rather than providing independent advice. The Court has recognised that some degree of advocacy is permissible so long as it is fair and honest: Re Investa Listed Funds Management Ltd [2016] NSWSC 344 (Investa) at [5]; ResApp at [38]. Mr Riley's response meets that description. ● Of the 12 calls, 10 were to institutional investors. [Ansarada] can comfortably assume that those investors were sophisticated parties with a detailed understanding of the Scheme and able to reach their own views about the Scheme, including by reference to the materials later dispatched to them. 2 of the 10 institutional investors were not Ansarada Shareholders at the relevant time. ● The Independent Expert Report was annexed to the Explanatory Booklet, and the conclusions from that report were summarised in the body of the Explanatory Booklet. The Independent Expert considered and provided an opinion on the fairness and reasonableness of the Carve-Out Transaction to Ansarada Shareholders. The material was dispatched to Ansarada Shareholders after the Pre-Registration Discussions took place. Having regard to the above and the overwhelming voting participation rate (80.85% by number of Ansarada Shares), and the results of the vote (99.98% in favour) Ansarada considers that the Pre-Registration Discussions do not constitute a reason why the Scheme should not receive the Court's approval.
I will reach the same conclusion as was put by Ansarada's legal representatives to ASIC below, but I do not accept aspects of their reasoning in support of that conclusion. It seems to me that the extent of Ansarada's communications with shareholders prior to the first Court hearing should have been drawn to the Court's attention at that hearing, and I did not understand Mr Izzo to contend to the contrary at this hearing. The fact that the Court will be concerned with whether those communications adversely affected the integrity of subsequent steps taken in respect of the scheme, recognised in the case law noted below, was sufficient reason for those matters to be drawn to the Court's attention, although any assessment of their impact would likely have been deferred to the second Court hearing. I also do not accept the proposition that communications concerning the Carve-Out Resolution (as defined) "are not subject to the same prescriptions" as those relating to voting on the scheme. Putting aside those communications for which the Court's approval is required, the Court will have regard to the content of communications between a scheme company and its shareholders at the second Court hearing, and that review will likely extend to communications concerning a transaction that is closely connected to the scheme. I also refer below to the risk that communications prior to the announcement of a scheme, including with sophisticated shareholders, will affect their response to the explanatory booklet and the scheme. Having said that, I will accept below the submission put by Ansarada's legal representatives to ASIC that the communications in this matter are not reason for the Court to withhold approval for the proposed scheme.
Mr Izzo also addresses these communications in comprehensive submissions. He points out that Mr Riley; Mr Brake; Mr Duong, who is a financial advisor to Ansarada in relation to the scheme; Mr James, who is Ansarada's Non-Executive Chairman; and a Client Service Relationship Manager at Ansarada's share registry had communications with shareholders in respect of the scheme and he refers to a "log" ("Communications Log") of these communications exhibited to Mr Drake's second affidavit read at this hearing. Mr Izzo submits, by reference to the case law to which I refer below, that the Court is concerned to assess whether those communications compromised the integrity of the voting process at the scheme meeting or the adequacy of the disclosure and that the communications in this case do not give rise to any reason not to approve the scheme. He submits that: "The first category of communications is those between Mr Riley and/or Mr James with both retail and institutional shareholders after the announcement of the Scheme but prior to the First Court Hearing. There were 12 calls or video conferences. As described in the Second Drake Affidavit at paragraph 36, detailed notes of these calls and video conferences were not made at the time. However, Mr Riley and/or Mr James largely answered questions in accordance with an internal document prepared on 12 February 2024 for investor enquiries after the announcement of the Scheme on 13 February 2024 and which is exhibited at Tab 6 of Exhibit JD-2. In addition, Mr Riley recalls making comments as set out in paragraph 37 of the Second Drake Affidavit. While Mr Riley and/or Mr James engaged in a degree of advocacy on those calls, this should not cause the Court concern as to the integrity of the voting process for the following four reasons: (a) First, these communications occurred prior to the First Court Hearing. While there is no "absolute proposition" that the Court is not concerned with communications with shareholders prior to the First Court Hearing, the Court is only concerned with whether the communications adversely affected the integrity of the subsequent steps taken in respect of the Scheme …. After these communications, Ansarada Shareholders were provided with the Explanatory Booklet and had ample opportunity to consider it (including the reasons both for and against voting in favour of the Scheme). (b) Secondly, the focus of much of the communications was explaining the Carve-Out Transaction and the rationale for that transaction. Communications concerning the Carve-Out Resolution [(as defined)] (which was passed at the General Meeting immediately prior to the Scheme Meeting) are not subject to the same prescriptions as those relating to voting on the Scheme itself. (c) Thirdly, Mr Riley framed his response as being his personal motivation around doing the deal rather than providing independent advice. The Court has recognised that some degree of advocacy is permissible so long as it is fair and honest ... Mr Riley's response meets that description. The answers set out in the internal Q&A document relied on for these calls were generally fair and balanced, with some advocacy concerning the Carve-Out Transaction. The information provided was generally consistent with that later provided in the Explanatory Booklet, with some additional information provided in relation to the Carve-Out Transaction. Various valuation figures (for example concerning EBITDA multiples) were set out in this Q&A document that were later overtaken by the more comprehensive assessment in the Explanatory Booklet and Independent Expert's Report. (d) Fourthly, of the 12 calls, ten were to institutional investors. The Court can comfortably assume that those investors were sophisticated parties with a detailed understanding of the Scheme and able to reach their own views about the Scheme, including by reference to the materials later dispatched to them. Two of the ten institutional investors were not Ansarada Shareholders at the relevant time (although the shares of those two institutional investors may have been held by a nominee: Second Drake Affidavit at paragraph 39(d)). The Q&A document made various references to information that would be provided in the Explanatory Booklet and by the Independent Expert's Report in due course. The next category of communications are emails sent to various Ansarada Shareholders after the First Court Hearing (see Tab 5 of Exhibit JD-2). Those emails do not depart in any significant way from the materials otherwise disclosed in the Explanatory Booklet and/or call scripts, with one exception. That is an email from Mr Riley to [a shareholder who a professional relationship with Ansarada] of 12 August 2024, in which Mr Riley disclosed to [that shareholder] the results of the vote as at that time. Ansarada accepts that that disclosure should not have occurred. [That shareholder] held about 1.8% of Ansarada Shares. There is no evidence that [that shareholder] disclosed this information to others. [That shareholder's] vote could not have made a difference to the outcome of the vote. Finally, there were approximately six calls with Ansarada Shareholders after the First Court Hearing date. The Communications Log discloses that these calls generally concerned the status of the ACCC inquiry, were balanced and did not depart from the Explanatory Booklet and/or the telephone scripts in any significant way. In one call, an Ansarada Shareholder disclosed that he would vote in favour and Mr Riley encouraged him to vote. This encouragement to vote does not undermine the integrity of the Scheme process in circumstances where it concerned one institutional (and hence sophisticated) investor who owned approximately 1.4% of Ansarada Shares. There is no evidence that Ansarada Shareholders intending to vote against the Scheme were discouraged from voting."
I have addressed the issues in respect of communications of this kind in Re ResApp Health Ltd [2022] NSWSC 1353 ("ResApp Health") and more recently in Re Altium Ltd [2024] NSWSC 736 and Re Altium Ltd (No 2) [2024] NSWSC 935 ("Altium 2"). In ResApp Health (at [43]), I did not accept a submission that the Court should not be concerned with communications with shareholders that took place before the first Court hearing, in deciding whether to approve a scheme at a second Court hearing. I there noted that the Court would be concerned about such communications if they adversely affected the integrity of the subsequent steps taken in respect of the scheme. I also there accepted (at [44]) that: "to the extent that individual communications take place with shareholders, the preferable approach is for the Court to review the position in respect of such communications after the event, as a matter that is relevant to whether a scheme should be approved at the second Court hearing, rather than seeking to establish prescriptive rules for such communications or approving scripts for such communications in advance. … it may be appropriate for a company's chair, its directors or its executives to communicate with major shareholders in respect of a scheme, or with shareholders who feel strongly in respect of the scheme, in a particular case, although the practical risks of doing so in an unrestrained way are well illustrated by this matter." I also there accepted that any prescriptive rule would give rise to difficulties in distinguishing between legitimate responses to administrative inquiries in respect of a scheme and responses that had a more substantive character.
I there accepted (at [46]) that: "… as a matter of policy and as a matter of commerce, the Court should not seek to impose any "blanket embargo" on company officers responding to shareholder inquiries. I would add that the Court should particularly not seek to do so where there is no evidence before it as to the extent to which companies generally respond to such inquiries while a scheme is on foot. However, that observation does not displace the need for scheme companies to recognise the practical risks of such communications, which this matter again illustrates … I also accept that, as [Counsel in that case] submits, any attempt to constrain such communications might well exceed the Court's proper functions in respect of the approval of a scheme under s 411 of the Act and any initial approval of the explanatory statement and, by extension, the approval of systematic communications with shareholders which have the potential to interfere with or contradict a Court approved scheme booklet."
I also there accepted (at [47]) a further submission that there would be a real difficulty with setting prescriptive rules for communications with shareholders where the companies which propound schemes of arrangement differ in size, and there is a real distinction between, on the one hand, a scheme between a company and a large number of retail shareholders and, on the other hand, a scheme between a company and small number of sophisticated shareholders who already have a detailed understanding of its operation. Counsel there also pointed to the significance of ex parte disclosure obligations in a scheme of arrangement, and fairly accepted that reliance on those obligations will generally require counsel and solicitors acting in a scheme of arrangement to make inquiries as to the communications between the scheme company or the acquirer and shareholders in respect of the scheme. I also there accepted that the imposition of prescriptive limitations on a company's or directors' communications with shareholders would be potentially inconsistent with other obligations arising under the Act, including the directors' duties provisions.
However, I also there noted (at [48]) that: "Recognising all these matters, I should nonetheless note that the history of this scheme amply demonstrates why it may be practically desirable for a scheme company and its directors and executives generally to respond to shareholder communications after the proceedings had commenced by drawing attention to the disclosure in the scheme booklet and encouraging shareholders to reach their own assessment of the scheme on its merits. Here, ResApp's and its directors' vigorous and somewhat undisciplined approach to communications with its shareholders, in response to shareholder emails and telephone calls, plainly increased the risk of unbalanced communications occurring which had the potential to undermine the integrity of the scheme process, and that in turn required that ResApp lead voluminous evidence of those communications in a manner that will have substantially increased its costs of this hearing. Indeed, the second Court hearing in this matter has involved more affidavits and took more time than any other scheme heard in this Court in the last ten or so years, including those which have involved much larger and more complex commercial transactions. It is very likely that that would not have occurred had ResApp and its executives adopted a more disciplined approach to their communications with shareholders."
In Altium 2 (at [11]), I noted that the Court's role at this second Court hearing involves an assessment whether these communications compromised the integrity of the voting process at the scheme meeting or the adequacy of the disclosure in respect of the scheme: ResApp Health at [33]; Re Walsh and Company Investments Ltd [2020] NSWSC 1746 at [66]-[67]. I also recognise that a degree of advocacy in respect of a scheme is permissible so long as it is fair and honest: Re Investa Listed Funds Management Ltd [2016] NSWSC 344 at [5]; ResApp at [38].
I again recognise here that the Court has reason to consider communications prior to the first Court hearing, which may have the capacity to adversely affect the scheme process, and at least to shape the view of shareholders as to a scheme in a manner that may well influence their response to the information later included in scheme documents or, to put it differently, "precondition" the market before it has access to that information. There is a further practical reason for concern with communications of this kind, where the Court is reliant on the evidence led by the target company in a scheme as to those communications, and that evidence cannot readily be tested where there is typically no contradictor at a second Court hearing. Having said that, I note that these matters were drawn to ASIC's attention; it has not intervened to oppose the approval of the scheme at the second Court hearing; no shareholder opposes approval of the scheme at the second Court hearing; and these communications were largely responses to questions which were understandably asked by shareholders where the "carve-out" transaction was an unusual element of the scheme, and the transaction was then delayed by the ACCC's review, and the responses to those inquiries would not have adversely affected the integrity of the scheme process. The communication of the then voting position to a shareholder was unfortunate but would not have affected the outcome of the scheme. I am satisfied that these communications did not undermine the integrity of disclosure or the voting at the scheme meeting and do not give rise to any reason not to approve the scheme where it has been approved by shareholders by the requisite statutory majorities at the scheme meeting.
Turning now to the exercise of the Court's discretion in respect of the scheme, the independent expert whose report was included in the scheme booklet expressed the view that the scheme was fair and reasonable and in the best interests of Ansarada shareholders in the absence of a superior proposal. No Ansarada shareholder or other person indicated an intention to appear at the second Court hearing to oppose the scheme and there was no such appearance. There is no reason to doubt that the scheme is fair and reasonable so that an intelligent and honest Ansarada shareholder, properly informed and acting alone, might approve it. I am satisfied that there is otherwise no reason to doubt that Ansarada has brought to the Court's attention all matters that could be considered relevant to the exercise of the Court's discretion and that there was full and fair disclosure to Ansarada shareholders of all information material to the decision whether to vote for or against the applicable scheme. I am therefore satisfied that the scheme is appropriate for the Court's approval.
Ansarada also seeks an exemption under s 411(12) of the Act from compliance with s 411(11) so that a copy of the Court order approving the scheme does not need to be annexed to any copy of Ansarada's constitution that may be issued in the future. I am satisfied that such an order should be made where, as here, the rights of Ansarada shareholders are not modified by the scheme: Re Anaconda Nickel Holdings Pty Ltd (2003) 44 ACSR 229 at 240; [2003] WASC 19; Re GBST Holdings Ltd [2019] NSWSC 1503 at [15]; Re Bellamy's Australia Ltd [2019] NSWSC 1889 at [16].

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