In the matter of Ansarada Group Limited [2024] NSWSC 411

Supreme Court of NSW|2024-04-12|Before: Black J

Solicitors: DLA Piper (Plaintiff) Allens (Bidder) File Number(s): 2024/114209

Judgment

By Originating Process filed on 26 March 2024, the Plaintiff, Ansarada Group Ltd ("Ansarada") seeks an order under s 411 of the Corporations Act 2001 (Cth) ("Act") that it convene and hold a shareholder meeting to consider a proposed scheme of arrangement and associated orders.
By way of background, Ansarada is a public company limited by shares that is listed on the Australian Securities Exchange ("ASX"), which provides a Software-as-a-Service (SaaS) platform with products used by companies and governments to govern information and processes. On 13 February 2024, Ansarada announced on ASX that it had entered into a Scheme Implementation Deed ("SID") with DS Answer Pty Ltd ("Datasite BidCo") under which it is proposed, inter alia, that Datasite BidCo will acquire all of the fully paid ordinary shares in Ansarada under the proposed scheme for a total cash consideration of $2.50 per share. Datasite BidCo is a special purpose company and indirectly a wholly owned subsidiary of Mermaid BidCo Inc ("Datasite Guarantor"), which is in turn a wholly owned subsidiary of Mermaid Equity Co LP ("Datasite"). Datasite and its subsidiaries are controlled by funds managed by CapVest Partners LLP through intermediate holding companies in Australia and the United States.

Affidavit evidence

Ansarada reads the affidavit dated 26 March 2024 of its solicitor, Mr Prescott. Mr Prescott's affidavit exhibited a company search for Ansarada and a copy of the announcement made by Ansarada to ASX on 13 February 2024 concerning the proposed scheme.
Ansarada also reads the affidavit dated 11 April 2024 of Mr James Drake, who is its Chief Financial Officer. Mr Drake outlines the corporate history of Ansarada and notes that the Ansarada board established an independent board committee, constituted by three non-executive independent directors, to evaluate and oversee the proposed scheme and the Carve-Out Transaction. He outlines the proposed scheme and Carve-Out Transaction and notes that they are inter-conditional, so that neither will proceed unless both are approved by Ansarada's shareholders. Mr Drake also refers to the provisions of the SID which deal with the scheme consideration and to the execution of a deed poll in favour of Ansarada shareholders by Datasite BidCo and Datasite Guarantor. He notes that, under cl 4.5 of the SID, Ansarada may at any time prior to the implementation date declare fully franked special dividend(s) up to the amount of $0.0784 per Ansarada share, although he is not aware of the payment of such a dividend or of any intention of Ansarada to pay such a dividend.
Mr Drake identifies Ansarada's substantial shareholders and also refers to the interests held by Mr Riley, Ansarada's independent director, comprising the members of the independent board committee and Mr Clout, who is an executive director, in Ansarada's shares. Mr Drake also refers to the issue of incentives including Ansarada Matching Share Rights to Ansarada employees. Mr Drake also addresses several other aspects of the SID, to which I refer below, including break fees payable in respect of the transaction and exclusivity provisions, and notes that Ansarada's independent directors have resolved to recommend that Ansarada shareholders vote in favour of the proposed scheme, and Mr Riley makes no recommendation in respect of the proposed scheme, given his interest in the Carve-Out Transaction.
Mr Drake also outlines the due diligence and verification process which was adopted by Ansarada in respect of the explanatory booklet, which was in customary form. He also outlines the conditions precedent to the proposed scheme, which include a condition precedent relating to approval of the Foreign Investment Review Board ("FIRB") and notes that that approval cannot be obtained until the Australian Competition and Consumer Commission ("ACCC") has provided notice that it does not object to the proposed scheme and that the ACCC has commenced a public review of that scheme. Mr Drake also refers to the independent expert's report contained in the explanatory booklet, which expresses the opinions that the proposed scheme is fair and reasonable and in the best interests of Ansarada shareholders; the Carve-Out Transaction is not fair but is reasonable to Ansarada shareholders not associated with Mr Riley; and, overall, the proposed transaction is in the best interests of Ansarada shareholders.
Mr Drake also refers to the manner in which the scheme meeting will be held as a hybrid meeting that shareholders can attend virtually or in person, and to the proposed general meeting in respect of the Carve-Out Transaction, which will also take place as a hybrid meeting, immediately before the proposed scheme meeting. He notes that the proposed chair and alternate chair of the scheme meeting, who are each independent directors of Ansarada, have consented to act as chair and alternate chair of the scheme meeting respectively. Mr Drake also outlines the manner in which scheme documents will be sent to Ansarada shareholders, which is in orthodox form, and refers to a proposed inbound telephone inquiry line to be operated by a third party on Ansarada's behalf and a proposed outbound call campaign. The scripts for those communications have been placed before the Court and I have no difficulty with them although, in accordance with current scheme practice, Ansarada does not seek the Court's approval of them. Mr Drake also notes that Ansarada proposes to make a copy of the explanatory booklet for the scheme available, inter alia, on its website and the ASX website and will, also in accordance with current scheme practice, communicate the date of the second Court hearing to Ansarada shareholders by an announcement made to ASX.
By an affidavit dated 11 April 2024, Mr David Ryan, who is also a solicitor acting for Ansarada, refers to correspondence with the Australian Securities and Investments Commission ("ASIC") in respect of the proposed explanatory booklet. Ansarada also tendered a letter dated 11 April 2024 from ASIC at the hearing, which reserved ASIC's position concerning s 411(17)(b) of the Act to the second Court hearing and Indicated that ASIC did not currently propose to make submissions or intervene to oppose the scheme at the first Court hearing.
By an affidavit dated 11 April 2024, Mr Thomas Story, who is a partner in the firm of solicitors acting for Datasite BidCo and Datasite Guarantor addressed the structure of the proposed transaction and outlined the verification process adopted by those entities in respect of information concerning them in the explanatory booklet. Mr Story also referred to the approval of that information by Datasite BidCo's board and to a deed poll executed by Datasite BidCo and Datasite Guarantor in favour of Ansarada shareholders, by which each of them has undertaken to pay the consideration under the scheme if it becomes effective and to perform the actions required of them under the scheme.

Matters relevant to whether to convene the scheme meeting

Mr Izzo submits, uncontroversially, that the Court's role at the first Court hearing in respect of a scheme is primarily to determine, in the exercise of its discretion, whether to approve the convening of a scheme meeting and the explanatory statement if it is satisfied of several matters, relevantly that Ansarada is a Part 5.1 body for the purposes of the Act; the proposed scheme is an "arrangement" within the meaning of s 411 of the Act; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the proposed scheme and explanatory statement, to make submissions and has had 14 days' notice of the proposed hearing date of the first Court hearing; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) ("Rules") have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]; Re Vocus Group Ltd [2021] NSWSC 630 at [12]. Mr Izzo rightly notes that, if the preconditions to the exercise of the Court's power under s 411(1) of the Act are satisfied, then the Court will consider whether it should exercise its discretion to exercise its powers under s 411(1) of the Act, and he refers to Halley J's summary of the applicable principles in Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22].
Mr Izzo submits and I accept that each of the preconditions to the exercise of the Court's discretion under s 411(1) of the Act is satisfied. Ansarada is a company registered under the Act and a Part 5.1 body and the proposed scheme is an "arrangement" between Ansarada and its shareholders as a single class. A draft explanatory booklet together with its attachments was lodged with ASIC together with notice of the first Court hearing date; ASIC has been given more than 14 days' notice as required under s 411(2) of the Act; and, as I noted above, Ansarada has tendered a letter from ASIC confirming, inter alia, that it does not currently propose to appear to make submissions or intervene to oppose the scheme at the first hearing. I have referred above to the evidence led by Ansarada and Datasite BidCo as to the verification processes adopted by them for their respective parts of the explanatory booklet, and the procedural requirements under the Rules have been met or are properly dispensed with.
Mr Izzo points out that Ansarada's independent directors (being all directors except for Mr Riley, who rightly makes no recommendation) unanimously recommend that Ansarada shareholders vote in favour of the scheme, in the absence of a Superior Proposal (as defined in the SID) and subject to the independent expert concluding (and continuing to conclude) that the scheme is in the best interests of Ansarada shareholders; and, subject to the same qualifications, each of Ansarada's independent directors intends to vote, or cause to be voted, all Ansarada shares held or controlled by them in favour of the scheme. He points out that, as I noted above, the scheme will only proceed if the requisite majority of Ansarada shareholders approves the Carve-Out Transaction. I accept that the benefit to Mr Riley of that transaction is prominently disclosed in the explanatory booklet and addressed by the independent expert report.
In the independent expert report, Mr De Cian and Ms James of Grant Thornton assess the fair market value of Ansarada shares on a control basis to be within the range of $2.11 to $2.59, with regard to discounted cash flow and revenue and EBITDA multiple methodologies and also with reference to Ansarada's traded security price, and the scheme consideration of $2.50 falls within that range. As I noted above, they there express the opinions that the proposed scheme is fair and reasonable and therefore in the best interests of Ansarada shareholders in the absence of a Superior Proposal (as defined); and they also address the position as to the proposed Carve-Out Transaction and the overall transaction, which shareholders will likely consider as a whole in exercising their votes at the proposed scheme meeting and associated general meeting.
Subject to the particular matters that I address below, I am satisfied that, if the scheme receives the requisite statutory majorities at the scheme meeting, nothing in the terms of the scheme or its effect on Ansarada shareholders would presently appear to warrant the Court declining to approve the scheme at the second Court hearing.

Several particular matters

Mr Izzo also draws several matters to the Court's attention, having regard to Ansarada's ex parte disclosure obligation. First, Mr Izzo points to the independent expert's review of the proposed Carve-Out Transaction and his opinion that the Carve-Out Transaction was not fair but reasonable to Ansarada shareholders, and the proposed transaction overall is in the best interests of Ansarada's shareholders. I am satisfied that matter and the analysis underpinning it is sufficiently disclosed in the independent expert's report and explanatory booklet. Mr Izzo submits and I accept that the independent expert's view that the Carve-Out Transaction is not fair but reasonable, should not preclude the convening of the scheme meeting. I recognise that properly informed shareholders might chose to approve the Carve-Out Transaction in order to allow the proposed scheme to go forward, where the two are inter-conditional. There is no reason to take a different approach here to that which the Court would generally take if the independent assessment had concluded that the scheme was not fair but reasonable, by convening the scheme meeting to allow properly informed shareholders to exercise their own commercial judgment in that regard: Re Blackgold International Holdings Ltd [2017] FCA 601 at [18]-[19]; Re WOTSO Ltd; Re Blackwall Fund Services Ltd as responsible entity of Blackwall Property Trust [2021] NSWSC 21 at [28]; Re Essential Metals Ltd [2023] FCA 1101 at [31]-[35].
Second, Mr Izzo notes that, where a director will receive a substantial benefit in relation to a scheme which other shareholders will not receive, that benefit should be disclosed as a matter for shareholders to take into account when considering that director's recommendation: Re Kidman Resources Ltd (2019) 375 ALR 760; [2019] FCA 1226 at [115]. The potential benefit to Mr Riley in the Carve-Out Transaction is sufficiently disclosed here and, in any event, Mr Riley has properly abstained from making a recommendation on the proposed scheme and the Carve-Out Transaction where he has a more substantial personal interest in the transactions than is ordinarily the case.
Third, Mr Izzo notes and I also noted above, that it is a condition precedent of the scheme that FIRB approval be obtained before 5.00pm on the business day before the second Court date and the ACCC has commenced a public review of the scheme and has issued a market inquiries letter inviting submissions from interested parties, including Ansarada and Datasite's major customers. Mr Izzo notes that the ACCC has set a provisional decision date for the announcement of the ACCC's findings of 6 June 2024, but may change this provisional decision date. I recognise that key dates in respect of the scheme (including the date of the scheme meeting and the second Court hearing and dates relating to the implementation of the scheme) may be affected by these matters, but there is no difficulty with Ansarada deferring those dates and advising its shareholders of any such deferral.
Fourth, Mr Izzo points out that Ansarada operates employee incentive plans involving incentives in the form of options and Matching Share Rights, each subject to various vesting conditions. The incentive plans are disclosed in the explanatory booklet and I referred to Mr Drake's evidence in that respect above. Mr Izzo points out that the Ansarada options are all presently "in-the-money", since they can be exercised for less than the scheme consideration to be received in respect of Ansarada shares if the scheme proceeds, and this is also disclosed in the explanatory booklet. Subject to the scheme becoming effective, the Ansarada board has determined to fully vest all Ansarada options and facilitate a cashless exercise of all such options, and to accelerate the matching of Ansarada matching share rights such that holders of Ansarada matching share rights will be allocated matching shares on the Effective Date (as defined), which will be acquired by Datasite BidCo under the scheme. The explanatory booklet sets out the Ansarada directors' interests in Ansarada shares and options, and those directors do not hold matching share rights. I accept that that holders of options and other incentive rights who are (or will become) shareholders are not in a separate class by reason only that they hold those rights: Re ELMO Software Ltd [2023] NSWSC 12 ("Elmo") at [25].
Fifth, Mr Izzo addresses the question of performance risk. He notes that cl 5 of the Scheme requires that Datasite BidCo deposit the scheme consideration into a trust account maintained by Ansarada on trust for scheme shareholders, and for the transfer of Ansarada shares from Ansarada shareholders to Datasite BidCo to occur only after the scheme consideration is received on trust or distributed to Ansarada shareholders. I accept that this structure is in conventional form and substantially protects shareholders against the risk that they will suffer delay or default in the provision of the scheme consideration after their Ansarada shares have been transferred to Datasite BidCo, and scheme shareholders will not be left to the remedy of suing on the Deed Poll: ELMO at [27]. I also recognise that, as Mr Izzo points out, Datasite BidCo and Datasite Guarantor have executed the Deed Poll covenanting and undertaking in favour of scheme shareholders that it will, inter alia, observe and perform its obligations under the scheme, which is governed by the law of New South Wales and contains a non-exclusive jurisdiction clause in favour of New South Wales. No evidence has been led of Delaware law regarding due execution of the Deed Poll by Datasite Guarantor, and there is no reason to think there is any uncertainty as to that matter. I accept that, where a deed poll in respect of a scheme contains a non-exclusive jurisdiction clause in favour of an Australian jurisdiction, further evidence of the enforceability of the deed poll is not required: Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1766 at [14].
Sixth, Mr Izzo also rightly recognises that issues may arise where the party to the deed poll is a special purpose vehicle which does not have the capacity to perform its obligations under that deed poll without financial support from a holding company: Re Spark Infrastructure RE Ltd [2021] NSWSC 1385 at [31]-[32] and see Supreme Court Practice Note SC Eq 4, Supreme Court Equity Division- Corporations List, [28(b)]. The explanatory booklet here addresses the availability of funding for the scheme, through a combination of financing facilities available to Datasite Guarantor and the Datasite Group's existing cash reserves.
Seventh, Mr Izzo notes that the SID imposes several restrictions and obligations on Ansarada in relation to negotiations with third parties including "no current discussions", "no shop", "no talk" and "no due diligence" restrictions, a "notification of approach" obligation and a "matching right". Mr Izzo submits and I accept that exclusivity provisions of this kind are now commonplace in schemes of arrangement, and the exclusivity period here (of 8 months) is a reasonable period comparable with that accepted in other schemes of a similar character and capable of precise ascertainment; the "no talk" and "no due diligence" restrictions are subject to Ansarada board's fiduciary and statutory obligations; and the provisions are sufficiently disclosed in the explanatory booklet: Re Sirtex Medical Ltd [2018] FCA 1315 at [37]; Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207 ("Villa World") at [23]; Re Asaleo Care Ltd [2021] FCA 406 at [55]; Re Trust Co (Re Services) Ltd as responsible entity of VitalHarvest Freehold Trust [2021] NSWSC 108 at [38]-[40].
Eighth, Mr Izzo notes that cl 13.4 of the SID provides for Ansarada to pay to Datasite BidCo a break fee, defined in the SID to mean $2,360,000, in specified circumstances and cl 14.5 of the SID similarly provides for Datasite BidCo to pay to Ansarada a Reverse Break Fee, defined in the SID to mean the same amount, in specified circumstances. Each of the break fees represents approximately 1% of the total implied equity value of Ansarada on a fully diluted basis (based on the scheme consideration) and accords with the 1% maximum recognised by the Takeovers Panel's guidance and I accept that break fees are now common features in schemes of arrangement and will generally be permitted unless the amount of the break fee is such that it could influence voting at the meeting to be convened or if there are some unusual circumstances: Villa World at [24].
Ninth, Mr Izzo addresses the question of communications between Ansarada and its shareholders. He points out that, as I noted above, Ansarada has appointed a third party to operate an inbound telephone information line to respond to queries from Ansarada shareholders in relation to the proposed scheme and has another form to conduct outgoing shareholder engagement calls. As I noted above, the scripts for those calls are in evidence and I have no difficulty with them, and, in accordance with current scheme practice, Ansarada does not seek approval of them at this Court hearing.

Determination and orders

I was satisfied, at the conclusion of the first Court hearing on 12 April 2024, that the proposed scheme was of such a nature and cast in such terms that, if it achieves the statutory majorities at the scheme meeting, the Court would be likely to approve it, and that none of the particular matters to which I have referred above give rise to any reason not to convene the scheme meeting. For these reasons, I made the orders sought by Ansarada at the conclusion of that hearing.

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: 18 April 2024

Corporations Act 2001(Cth)ss 411, 1319

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