In the matter of Class Limited [2022] NSWSC 22

Solicitors: Allens (Plaintiff) MinterEllison (Acquirer) File Number(s): 2021/333590

Background

1. By Originating Process filed on 23 November 2021 the Plaintiff, Class Ltd ("Class") seeks an order under s 411 of the Corporations Act 2001 (Cth) convening a meeting of the holders of its ordinary shares in respect of a scheme of arrangement by which it is proposed that HUB24 Ltd ("HUB24") will acquire all of the shares in Class, and associated directions under s 1319 of the Act. Further orders, including orders approving the scheme, would then be sought at a second Court hearing.
2. By way of background, Class was incorporated in 2005 and listed on Australian Securities Exchange ("ASX") in December 2015 and is a "software-as-a-service" technology company which develops and distributes cloud-based accounting, investment, reporting and administration software for accountants, administrators and advisers in Australia through several products. Class also operates in the document and corporate compliance segment through acquired businesses. The proposed acquirer, HUB24, is a listed Australian-based financial services company, which provides investment and superannuation portfolio administration services and technology and data services to the wealth management industry and operates through three segments, including Platform, Licensee, and IT (Information Technology) services.
3. Class announced to ASX that it has entered into a scheme implementation deed ("SID") with HUB24 on 18 October 2021. On 13 December 2021, Class and HUB24 agreed to amend the scheme proposal set out in the SID and executed an Amendment and Restatement Deed amending and restating the SID ("Amended and Restated SID"). The Amended and Restated SID was announced on the ASX on 14 December 2021. The scheme consideration includes HUB24 shares and cash consideration for each Class share, other than in respect of any Ineligible Foreign Shareholders (as defined), in respect of which a sale facility will be established.
4. I made the orders sought by Class at the end of the first Court hearing in respect of the matter. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Lockhart, who appeared for Class in the application, and on my recent summaries of the applicable principles in Re Australian Leisure and Entertainment Property Management Ltd [2021] NSWSC 1421 and Re Intega Ltd [2021] NSWSC 1434 and Re Afterpay Ltd [2021] NSWSC 1435 in this judgment.

Affidavit evidence

1. Class relies on the affidavit dated 23 November 2021 of its solicitor, Ms Alexandra Mason, who sets out the background to this application. By his affidavit dated 9 December 2021, Mr Matthew Quinn, who is a non-executive director and chair of Class, gives evidence of his consent to act as chair of the scheme meeting and also refers to his holding of a relatively small percentage of Class shares and his intent to vote those shares in favour of the resolutions to be put at the scheme meeting, in the absence of a "Superior Proposal" (as defined) and subject to the independent expert continuing to conclude that the scheme is in the best interests of Class shareholders. By her affidavit dated 9 December 2021, Ms Nicolette Rubinsztein, who is a non-executive director of Class, refers to her consent to act as alternate chair of the scheme meeting if Mr Quinn is unable to act or willing as chair, and to her relatively small holding of Class shares which she also proposes to vote in favour of the scheme subject to the same conditions.
2. By his affidavit dated 13 December 2021, Mr Aaron Calder, who is a senior client relationship manager of Link Market Services Ltd ("Link") refers to Link's provision of registry services to Class, which include maintaining Class' register of shareholders and to the manner in which scheme materials will be dispatched to Email Recipients, Postal Letter Recipients, Airmail Letter Recipients and postal and airmail booklet recipients (as defined). Mr Calder also refers to the operation of the Link platform which will be used for the conduct of a virtual scheme meeting and to the process to be adopted for registration of class shareholders and appointed proxy holders at the virtual scheme meeting and the provision of a poll report of that meeting.
3. By his affidavit dated 14 December 2021, Mr Andrew Russell, who is the chief executive officer and managing director of Class, refers to the nature of Class' business and the development of the proposed scheme, to which I have referred above. Mr Russell also outlines the process by which the scheme consideration is to be provided, the structure of the scheme booklet and the process for dispatch of documents to scheme shareholders by email or in hard copy form. Mr Russell outlines the drafting and verification process adopted by Class in respect of the scheme booklet, which is in conventional form, and refers to exclusivity provisions and a break fee in respect of the scheme, and outlines the manner in which those provisions were negotiated. Mr Russell also addresses the position as to equity instruments issued by Class as incentives under long term and short term incentive programs and the manner in which they will be treated under the scheme and outlines the proposed conduct of the scheme meeting.
4. By his affidavit dated 14 December 2021, Mr Richard Norris, who is a director of Leadenhall Corporate Advisory Pty Ltd, sets out his experience and background and confirms that he holds the opinions expressed in the draft independent expert report at the time of swearing his affidavit, and confirms his compliance with the expert witness code of conduct and with ASIC Regulatory Guide 111 Content of Expert Reports and ASIC Regulatory Guide 112 Independence of Experts. The independent expert report concludes that the proposed transaction is fair, comparing the assessed market value of a Class share on a controlled basis with the consideration offered, and is also reasonable having regard to the advantages and disadvantages of the proposed transaction.
5. By his affidavit dated 10 December 2021, Mr Jason Entwistle, who is the Director of Strategic Development of HUB24, addresses the negotiation of exclusivity provisions and the break fee payable under the SID and the costs incurred by HUB24 which would be compensated by payment of a break fee in the relevant circumstances, notes that a small percentage of Class shares are held by a wholly owned subsidiary of HUB24 in a superannuation fund and confirms that those shares will not be voted at the scheme meeting. By her affidavit dated 13 December 2021, Ms Kitrina Shanahan, who is the Chief Financial Officer and Joint Company Secretary of HUB24, addresses the verification process adopted in respect of information concerning HUB24 contained in the scheme booklet, which is in conventional terms, confirms the execution of a deed poll by HUB24 and notes that she is not aware of any matters that have resulted in, or are likely to result in, the failure of the conditions precedent to the implementation of the scheme.
6. By his affidavit dated 14 December 2021, Mr Thomas Story, who is a solicitor acting for Class in the proceedings, refers to the provision of materials to the Australian Securities and Investments Commission ("ASIC"), the receipt of certain regulatory relief from ASX and a number of changes made to the draft scheme booklet since a draft scheme booklet was approved by Class' board on 13 December 2021, none of which appear to be material. Mr Story also exhibits the latest version of the scheme booklet, to which I was taken in submissions. Class also tenders a letter dated 15 December 2021 from ASIC which confirms that it has had at least 14 days' notice of the hearing and has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statements and to make submissions about them, and indicates that it does not currently propose to make submissions or intervene to oppose the scheme at the first Court hearing. ASIC reserves its position in respect of s 411(17)(b) of the Act to the second Court hearing in the usual way.

Matters relevant to convening the scheme meeting

1. Mr Lockhart, who appears for Class, summarises the matters that must be satisfied before a court will make the orders for convening the scheme meeting in familiar terms, as including that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the explanatory memorandum will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the explanatory memorandum and make submissions and has had 14 days' notice of the proposed hearing date; 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 Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554; [2016] FCA 366 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]; Re Intega Group Ltd above at [13].
2. Mr Lockhart submits, and I accept, that the evidence establishes that Class is a Pt 5.1 body as defined in s 9 of the Act. He points out that the scheme will effect an acquisition by one company of shares in another and falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act: Re NRMA Ltd (2000) 33 ACSR 595; [2000] NSWSC 82 at [20]; Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [39]. A draft of the scheme booklet was provided to ASIC in sufficient time and notice was also provided of the date and time for the first Court hearing, and I have referred to ASIC's letter confirming those matters above.
3. Mr Lockhart also refers to my summary of the applicable principles in Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[26] as follows: "It is, of course, well-established that the Court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) 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 Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554 at [30]; Re Duet Finance Ltd [2017] NSWSC 415 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [15]. … The Court will not ordinarily summon a meeting at the first court hearing unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. In Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44] (cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358 at [58]), French J observed that: "… by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). … The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further.""
4. Mr Lockhart points out that, at the first Court hearing, the Court is concerned not with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211 at [23]; Re Villa World Ltd above at [18]. He also points out that the Court is not required to be satisfied that no better scheme could have been proposed, and the question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re DUET Finance Ltd above at [14]; Re BIS Finance Ltd above at [22].
5. Mr Lockhart points out that the directors of Class here unanimously recommend that Class shareholders vote 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. He also points out that Leadenhall were engaged to prepare an independent expert's report in relation to whether the scheme is fair and reasonable, and in the best interests of Class shareholders and that report is Annexure A to the scheme booklet. He points out that Leadenhall compared the value of a Class share on a controlling interest basis with the value of the consideration and concluded that the scheme is fair and reasonable and in the best interests of Class shareholders, in the absence of a superior proposal.
6. There is no reason to doubt that the scheme booklet provides proper disclosure to Class shareholders and there has been a verification and due diligence process in common form. Subject to the particular issues which I address below, there is no reason to doubt that the proposed scheme is bona fide and properly proposed and could be approved at the second Court hearing if it receives the requisite shareholder approvals. Although ASIC has reserved its position as to s 411(17)(b) of the Act in accordance with its usual practice, the Court can address that question at the second Court hearing. Subject to the particular issues which I address below, I am satisfied that the orders sought should be made in respect of the proposed scheme.

Specific issues arising in respect of the proposed scheme

1. 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.
2. 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.
3. 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].
4. 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].
5. 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.
6. 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.
7. 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].
8. 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.
9. 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.
10. 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.
11. 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.
12. 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].
13. 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.
14. 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.
15. 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.

Orders

1. For these reasons, I was satisfied that an order should be made convening the scheme meeting and approving the scheme booklet for distribution to shareholders and I made the orders sought by Class at the conclusion of the first Court 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: 21 January 2022