In the matter of Class Limited [2022] NSWSC 22

Specific issues arising in respect of the proposed scheme

Consistent with the Court's expectations noted by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603; [2002] NSWSC 1177, Mr Lockhart draws attention to several aspects of the scheme.
First, Mr Lockhart notes that Spheria Asset Management Pty Limited ("Spheria") is the largest securityholder in Class, holding approximately 19.99% of the ordinary Class shares on issue. Spheria has confirmed to Class that it intends to vote, or recommend voting, in favour of the scheme in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is in the best interests of Class shareholders. Mr Lockhart notes that Class has not entered into any agreement or understanding obliging Spheria to vote in favour of the scheme and Spheria does not stand to derive any collateral benefit should the scheme be implemented.
Second, Mr Lockhart notes that cl 11 of the Amended and Restated SID contains "no-shop", "no talk" and "no due diligence" restrictions on Class (cl 11.2); an obligation on Class to notify HUB24 of a Competing Proposal (cl 11.4); and a "matching right" in favour of HUB24 in respect of any Competing Proposal (cl 11.7). He points out that the "no talk" and "no due diligence" restrictions in cl 11.2 of the Amended and Restated SID are subject to a "fiduciary carve-out" (cl 11.3), in circumstances where not taking certain actions would likely be inconsistent with the Class directors' duties under applicable law. Mr Lockhart rightly observes that exclusivity provisions in this form are now commonplace in schemes or arrangement and these restrictions are consistent with the terms of the Takeovers Panel's Guidance Note 7: Lock-up devices. He submits, and I accept, that neither that Guidance Note nor prior authority requires a fiduciary carve-out with respect to "no-shop" provisions: Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366 at [18]-[19]; Re Coles Group Ltd (2007) 25 ACLC 1380 at [62]-[63]; Re Intega Group Ltd above at [17].
Mr Lockhart notes that the matching right provided under the of the Amended and Restated SID is not subject to a fiduciary carve-out. He submits, and I accept, that this is common in schemes and that matching rights are unlikely to be anticompetitive where the terms of a competing proposal would likely need to be disclosed in any event under Class' continuous disclosure obligations and the matching right process corresponds to the course a prospective bidder would expect Class to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Ltd above at [24]; Re Intega Group Ltd above at [17].
Mr Lockhart also rightly recognises that the Court is concerned to ensure that such exclusivity restrictions are in effect for no more than a reasonable period capable of precise ascertainment and that they be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]. I am satisfied that is established here where the "Exclusivity Period" specified in cl 1.1 of the SID lasts for a maximum of six months from the date of the SID, unless a later date is agreed by the parties, and are prominently disclosed in the scheme booklet. I also accept that the evidence indicates that the exclusivity provisions in the SID were the product of arm's length negotiations between the parties. This matter does not give rise to any reason not to convene the scheme meeting.
Third, Mr Lockhart points out that cl 12 of the SID provides for a "break fee" of $3.5 million (inclusive of GST) potentially payable by Class to HUB24 in specified circumstances and that fee is also disclosed in the scheme booklet. As is now the usual and appropriate practice in schemes of arrangement, that break fee is not triggered solely by Class shareholders failing to approve the scheme and is not a disincentive to shareholders in their consideration of the proposal: Re Adelaide Bank Ltd [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; [2007] FCA 2078. Mr Lockhart points out that the evidence indicates that the break fee was negotiated between the parties in the course of arm's length negotiations in which all parties were represented by experienced advisers and also indicates the components of the out-of-pocket expenses and opportunity costs that support the break fee amount: Re APN News & Media Ltd (2007) 62 ACSR 400 at 411; [2007] FCA 770; Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [24]; Re Spark Infrastructure RE Limited [2021] NSWSC 1385 at [41]. Mr Lockhart points out that the break fee represents approximately 0.90% of the equity value of Class immediately prior to the announcement of the scheme on 18 October 2021 and is therefore consistent with the Takeovers Panel's Guidance Note 7: Lock-up Devices. These matters do not give rise to any reason not to convene the scheme meeting.
Fourth, Mr Lockhart notes that Class has provided employee incentive arrangements in the form of Performance Rights, Deferred Rights and Options (as defined) to key management personnel, senior executives and employees. Under clause 3.1(m) of the Amended and Restated SID, it is a condition precedent to the scheme that arrangements be put in place so that no Performance Rights, Deferred Rights or Options (as defined) exist on the scheme record date. The proposed treatment of the incentives is set out in the scheme booklet and Class shareholders will have the opportunity to take that matter into account in voting at a scheme meeting. Mr Lockhart also submits, and I accept, that the holders of Performance Rights, Deferred Rights or Options who are also Class shareholders are not in a separate class by reason only that they hold such interests: Re Cashcard Australia Ltd (2004) 48 ACSR 738; [2004] FCA 223; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re rhipe Ltd [2021] NSWSC 1170 at [19].
Fifth, Mr Lockhart points out that, as disclosed in the scheme booklet, Mr Andrew Russell, the Chief Executive Officer and Managing Director of Class, holds 198,084 Class Shares; 971,457 Performance Rights, of which 659,980 are expected to vest subject to the scheme becoming effective; and 81,614 Deferred Rights, of which all are expected to vest subject to the scheme becoming effective. The value of Mr Russell's Performance Rights and Deferred Rights (if vested) is expected to be approximately $2.32 million (based on an implied value of $3.13 per Class share, which depends on the trading price of HUB24 shares on the Implementation Date for the scheme). Mr Lockhart also points out that this issue is prominently disclosed in the letter from the Chairman of Class contained in the scheme booklet, which also states that the board of Class (excluding Mr Russell) has determined that it is appropriate for him to provide a recommendation to Class shareholders in relation to voting on the scheme, notwithstanding the nature and quantum of the benefits he stands to receive if the scheme is implemented.
Consistent with the approach taken in several recent decisions in this Court and other Courts, I accept that Mr Russell's interest does not prevent him from making a voting recommendation to Class shareholders where that interest is sufficiently disclosed in the scheme booklet and Class shareholders may take it into account in determining the weight to give to that recommendation: Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Re Villa World Ltd above; Re GBST Holdings Ltd [2019] NSWSC 1280; Re Coca-Cola Amatil Ltd above; Re BINGO Industries Ltd [2021] NSWSC 798; Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580; Re RXP Services Ltd [2021] FCA 38; Re Mainstream Group Holdings Ltd [2021] FCA 948. This matter also does not provide any reason not to order the convening of the scheme meeting.
Sixth, Mr Lockhart notes that cl 8.4 of the scheme provides for a deemed warranty by Class shareholders that their shares will be free from encumbrances, and that is disclosed at section 10.7 of the scheme booklet in the manner contemplated by cases including Re APN News and Media Ltd above and Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]. This matter does not provide any reason not to order the convening of the scheme meeting.
Seventh, Mr Lockhart refers to my observation in Re Ellerston Global Investments Ltd above at [29] that a practice has developed to address performance risk, by which the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders, and there are numerous cases which have endorsed that practice. That practice has been followed in this case. There is also evidence that HUB24 proposes to fund the cash consideration payable by its available cash resources and that it will issue HUB24 shares to satisfy the Scrip Consideration (as defined), and it does not require HUB24 shareholder approval to do so.
Eighth, Mr Lockhart draws attention to the treatment of Ineligible Foreign Shareholders, as defined. In accordance with common practice in respect of such shareholders, HUB24 must procure that those HUB24 shares to which Ineligible Foreign Shareholders would otherwise have been entitled be issued to a sale agent and sold pursuant to a sale facility, with the net proceeds of sale distributed on a pro rata basis to the Ineligible Foreign Shareholders. This matter is disclosed in the scheme booklet. I accept that any Ineligible Foreign Shareholders do not constitute a separate class, consistent with the decisions in Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104; [2002] NSWSC 897; Re Australian Leisure and Entertainment Property Management Ltd above at [23].
Ninth, Mr Lockhart draws attention to the manner in which Class proposes that the relevant materials be distributed to shareholders, as set out in Mr Russell's affidavit to which I referred above. Mr Lockhart submits, and I accept, that the dispatch of a shareholder letter and email notification in similar form to those proposed by Class has been accepted in several recent schemes: Re Real Energy Corporation Ltd [2020] FCA 1634; Re OneVue Holdings Ltd [2020] FCA 132; Re Coca-Cola Amatil Ltd above at [26]; Re BINGO Industries Limited above. Mr Lockhart also points out that the dispatch of a scheme booklet to those shareholders who have made a specific election to receive hard copy documents pursuant to s 253RB of the Act is consistent with the recent decision in Re 1300 Smiles Limited [2021] FCA 1287.
Tenth, it is proposed that the scheme meeting be held as a virtual meeting at which Class shareholders and their proxies, attorneys or corporate representatives may attend online using the Link online meeting platform. Class shareholders who participate in the scheme meeting by the online platform will be able to listen to the scheme meeting, cast an online vote and ask questions online. As Mr Lockhart points out, virtual members' meetings are now permitted and regulated by Part 2G.5 of the Act, which received Royal Assent on 13 August 2021, and online attendance at the scheme meeting is permitted by s 253Q of the Act provided the technology used gives members as a whole a reasonable opportunity to participate without physically being present in the same place. A virtual meeting of members is also provided for in clause 8.1A of the constitution of Class. Virtual scheme meetings are now commonplace and this provides no reason not to convene the scheme meeting.
Finally, in accordance with the usual practice, the Court will address the question raised by s 411(17) of the Act on an application to approve a scheme at the second Court hearing.

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