In the matter of Isentia Group Limited [2021] NSWSC 910

Nature of the application

1. The Plaintiff, Isentia Group Limited ("Isentia") seeks an order, at the first Court hearing, under s 411(1) of the Corporations Act 2001 (Cth) that it convene a meeting of its shareholders to consider and, if thought fit, agree to a proposed scheme of arrangement between Isentia and its ordinary shareholders other than Access Intelligence plc ("Access Intelligence") and its subsidiaries.
2. By way of background, Isentia is a publicly listed company admitted to the official list of the Australian Securities Exchange ("ASX"), and operates a media intelligence and insights business, operating in eight markets with its head office in Sydney. Access Intelligence is a public company incorporated in England and Wales listed on the Alternative Investment Market, which is a sub-market of the London Stock Exchange. Access Intelligence, through a wholly owned subsidiary, acquired a 19.6% shareholding in Isentia on 15 June 2021. The proposed scheme involves the acquisition by Access Intelligence of all the ordinary shares of Isentia that it does not already hold for a cash consideration of $0.175 per fully paid ordinary share, and the aggregate scheme consideration is approximately $28.7 million. The scheme consideration represents a premium of 157% to the closing price of $0.068 per Isentia share on 11 June 2021, being the last trading day prior to Isentia announcing the scheme to the ASX.
3. At the conclusion of the first Court hearing, I made the orders sought by Isentia. I also made some brief observations, while indicating that I would deliver more detailed reasons for judgment in due course. I observed that I was satisfied that the Court should convene the scheme meeting to allow the proposed scheme to be put before shareholders for their approval and that there is no reason to think that the Court would not approve the scheme at the second Court hearing if shareholders had voted in favour of it at the scheme meeting, subject to one matter (as to the timing of the conditions precedent to Access Intelligence's funding arrangements for the scheme) that I will address below. These are my reasons for making the orders that I made at the first Court hearing. I have drawn on Mr William's helpful submissions in support of the application in these reasons.

Affidavit evidence

1. Isentia reads, in support of its application, an affidavit dated 18 June 2021 of Ms Colleen Platford, a solicitor acting for Isentia in respect of this application, in support of the Originating Process, which sets out the background to the proposed scheme. Isentia also reads an affidavit affirmed 15 July 2021 of Mr Douglas Snedden, a non-executive director and Chairman of Isentia, which confirms that he is willing to act as chair of the scheme meeting. By his affidavit also dated 15 July 2021, Mr Edward Harrison, the managing director of Isentia, indicates his willingness to act as chair of the scheme meeting if Mr Snedden is unable to do so.
2. By her affidavit dated 15 July 2021, Ms Jacqueline Shanahan, the General Counsel and Company Secretary of Isentia, outlines aspects of the proposed scheme, the verification process for the scheme booklet and the proposed process for dispatch of the scheme booklet to Isentia shareholders. By his affidavit dated 14 July 2021, Mr Sean Collins, who is a partner of KPMG, addresses the independent expert report proposed to be dispatched as part of the scheme booklet to Isentia shareholders. By her affidavit dated 15 July 2021, Ms Rachael Bassil, a solicitor acting for Isentia in respect of the scheme, refers to the provision of the draft scheme booklet and other documents to ASIC ahead of the hearing of Isentia's application.
3. Isentia also relies on an affidavit dated 14 July 2021 of Mr Aaron Calder, a Client Relationship Manager at Link Market Services Limited, which has been engaged by Isentia to provide services relating to dispatch of the materials relating to the scheme, compilation of proxy forms and recording votes cast at the scheme meeting, and providing the platform for the proposed virtual meeting.
4. Isentia also relies on an affidavit dated 13 July 2021 of Mr Mark Fautley, the Chief Financial Officer of Access Intelligence, which summarises the verification process for the parts of the scheme booklet for which Access Intelligence was responsible, the break fee and exclusivity provisions in the scheme implementation deed ("SID") and entry into the Deed Poll by Access Intelligence. By his affidavit dated 13 July 2021, Mr George Cotter, a partner of the law firm Fieldfisher LLP which has been engaged by Access Intelligence, provides an opinion regarding the due execution and enforceability of the Deed Poll under the laws of England and Wales.

Applicable principles

1. Mr Williams rightly points out that, at the first Court hearing, the Court is not concerned 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 for it to be submitted for shareholders' consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2006] NSWSC 1309 at [23]; Re Villa World [2019] NSWSC 1207 at [18]. The Court is also not required to be satisfied that no better scheme could have been proposed, but with whether 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 BIS Finance Pty Ltd Finance Pty Ltd [2017] NSWSC 1713 at [22]. Mr Williams 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] FCA 366; (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] HCA 15; (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] FCAFC 34; (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."
2. Mr Williams submits, and I accept, that the relevant formal requirements have been satisfied with respect to the proposed scheme. The scheme contemplates the 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]. The Australian Securities and Investments Commission ("ASIC") has been provided with a reasonable opportunity to examine the terms of the scheme, and has confirmed it has no further comment on the scheme booklet, and Isentia has tendered a letter from ASIC confirming that it does not intend to appear at the first Court hearing. The relevant requirements under the Supreme Court (Corporations) Rules 1999 (NSW) are satisfied.
3. Mr Williams submits, and I also accept, that the Court can be satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the required majorities at the scheme meeting, the Court would be likely to approve the scheme at the second Court hearing: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Limited (2010) 183 FCR 358; (2010) 77 ACSR 592; [2010] FCAFC 34 at [12]. As Mr Williams points out, the scheme is unanimously recommended by Isentia's board in the absence of a Superior Proposal (as defined in the SID) and subject to the independent expert continuing to conclude that the scheme is in the best interests of Isentia shareholders; the independent expert, KPMG, has determined that, in the absence of a Superior Proposal, the scheme is fair and reasonable and therefore in its opinion is in the best interests of Isentia shareholders; the scheme consideration represents a premium of 157% to the last closing price prior to announcement of the scheme on ASX, at a time that Isentia faces business challenges noted in the scheme booklet; the scheme is straightforward in its operation and involves an all cash bid for the shares in Isentia; and the scheme booklet, on its face, appears to provide sufficient disclosure of the terms of the scheme, including key features and the scheme's advantages and disadvantages.

Particular aspects of the Scheme

1. In accordance with common practice and as suggested by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603; [2002] NSWSC 1177, Mr Williams draws several aspects of the scheme to the Court's specific attention. He submits, and I also accept, that none of these matters would prevent the making of an order to convene the scheme meeting. Performance risk
2. Mr Williams first addresses the questions of performance risk and notes, by reference to 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, where the scheme consideration will be paid to Isentia shareholders as a money payment, and the shares held by Isentia shareholders will only be transferred to Access Intelligence if Access Intelligence has paid the aggregate scheme consideration into the trust account by the prior day. As a result, Isentia shareholders will not be left to an action under the Deed Poll if Access Intelligence failed to pay the amount due.
3. Mr Williams also points out that, as disclosed in section 5.5 of the scheme booklet, Access Intelligence intends to fund the scheme consideration through a placement and subscription for Access Intelligence shares in the United Kingdom. Under a Placing Agreement dated 14 June 2021, Access Intelligence has conditionally placed 39,847,658 ordinary Access Intelligence shares with institutional and other investors to raise gross proceeds of approximately $88 million. The conditions to the placement, which is due to complete on the business day following the second Court hearing, are set out in section 5.5(b) of the scheme booklet and Access Intelligence has confirmed it is not aware of any reason why those conditions would not be satisfied to enable the placement to complete. An investor has also agreed to subscribe for 1,819,009 new Access Intelligence shares under a subscription letter to raise gross proceeds of approximately $4 million, subject to similar conditions. Mr Williams notes that Access Intelligence considers it has a reasonable basis for believing it will have sufficient funds to pay the aggregate scheme consideration.
4. An issue is raised by the fact that the conditions to these funding arrangements would not be satisfied until after the Court had been asked to approve the scheme at the second Court hearing, raising the risk that, after that approval was given, those conditions may not be satisfied and Access Intelligence may be unable to perform its obligations under the scheme. I noted, in the course of oral submissions at the first Court hearing, that a real question might arise as to whether the Court would be prepared to approve the scheme at a second Court hearing, if the conditions precedent to the funding arrangements had not then been satisfied. That is a different position, on one view, from those funding arrangements having become operative, even if subject to limited conditions subsequent directed to adverse market events. I am satisfied that it is not necessary to address that question at this hearing and it is preferable that I do not do so. As Mr Williams noted in submissions, the question may be resolved by a waiver of those conditions precedent by the time of the second Court hearing. If that issue is not resolved in that way, it is capable of being addressed at the second Court hearing, and there is no reason to deprive shareholders of the opportunity to consider the proposal, where that issue can then be addressed in the circumstances that then exist. Deed poll and independent expert report
5. Mr Williams points out that Access Intelligence's obligations under the scheme are supported by a Deed Poll given in favour of the Isentia shareholders. I have referred above to Mr Cotter's affidavit and his opinion as to the due execution and enforceability of the Deed Poll under the laws of England and Wales.
6. Mr Williams also notes that the proposed scheme booklet will contain an independent expert's report prepared by representatives of KPMG, and I have referred to Mr Collins' affidavit concerning that report above. That report expresses the view that that, in the absence of a Superior Proposal (as defined), the scheme is fair and reasonable and therefore in the best interests of Isentia shareholders. Isentia Performance Rights and directors' recommendation
7. Mr Williams also points out that, as disclosed in section 3.7 of the scheme booklet, the Isentia board intends to exercise a discretion under the terms of Isentia's long term incentive plan rules ("Isentia Incentive Plan") to determine, or take any other action required to ensure, that all unvested deferred equity rights granted under the Isentia Incentive Plan in respect of the FY19 and FY20 period ("Deferred Equity Rights") will vest, will be exercised and a corresponding number of Isentia Shares will be issued in respect of them; all restrictions on dealing or disposal applying to any unquoted Isentia share which is subject to restrictions on disposal or dealing, including holding locks, service conditions or other similar restrictions on disposal or dealing ("Isentia Restricted Shares") will be released or otherwise removed; and all of the long term performance rights granted pursuant to the Isentia Incentive Plan in accordance with specified plans ("Long Term Performance Rights") or other equity incentives in connection with the issued share capital of Isentia will lapse, expire or will otherwise be cancelled for nil consideration.
8. Mr Williams also notes that Isentia's directors of Isentia unanimously recommend that Isentia shareholders vote in favour of the scheme, in the absence of a Superior Proposal (as defined) and provided that the independent expert continues to consider that scheme is in the best interests of Isentia shareholders. Mr Williams points out that, as disclosed at sections 3.7 and 8.1 of the scheme booklet, Mr Harrison (who is, as I noted above, Isentia's Managing Director and Chief Executive Officer) holds 113,683 Deferred Equity Rights granted in relation to performance year FY20 which are subject only to service or continuity of employment condition, and the Isentia board will exercise its discretion under the terms of the Isentia Incentive Plan to determine that all of these rights will vest, will be exercised and a corresponding number of Isentia shares will be issued in respect of them before the scheme record date. The implied value of Mr Harrison's Deferred Equity Rights based on the scheme consideration is $19,895. Mr Harrison also holds 2,468,348 Long Term Performance Rights which have a range of performance conditions with vesting and testing dates ranging from 30 June 2021 to 30 June 2023, but (as described in section 3.7 of the scheme booklet) the Isentia board will exercise its discretion under the terms of the Isentia Incentive Plan to determine that all of these rights will lapse, expire or be cancelled for nil consideration before the scheme record date.
9. Mr Williams submits that these matters do not give rise to any difficulty in respect of Mr Harrison's recommendation that Isentia shareholders vote in favour of the scheme: Re Gazal Corporation Limited [2019] FCA 701; Re Ruralco Holdings Limited (2019) 136 ACSR 628; [2019] FCA 878; Re Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348 at [40]. I accept this submission where, as Mr Williams points out, the benefit which may be received by Mr Harrison through early vesting of his Deferred Equity Rights is disclosed in several parts of the scheme booklet, and, in particular, his interest arising from his Deferred Equity Rights is disclosed where the directors' recommendation appears in the scheme booklet, and shareholders are advised that they should have regard to that interest when considering his recommendation in respect of the scheme; the treatment of Mr Harrison's Deferred Equity Rights is consistent with the treatment of all Deferred Equity Rights as disclosed in the scheme booklet; and the total benefit to Mr Harrison of his Deferred Equity Rights is modest, amounting to approximately $19,895. I accept that, given disclosure, the potential but modest benefit to Mr Harrison from early vesting of his Deferred Equity Rights is not a reason to prevent him from making a recommendation to shareholders in relation to the scheme: Re Villa World Ltd above at [38]ff; Re DWS Ltd (2020) 148 ACSR 616; [2020] FCA 1590 at [41]-[49]. Break Fee
10. Mr Williams also draws attention to an Isentia reimbursement fee of $500,000 that is potentially payable by Isentia to Access Intelligence in specified circumstances. That fee is disclosed in "Frequently asked questions" section of the scheme booklet and section 3.11 of the scheme booklet. There is evidence of the negotiation of that fee of the kind referred to in Re APN News Media Ltd (2007) 62 ACSR 400 at 411 [2007] FCA 770. Mr Fautley's evidence (Fautley [42]) is also that, if the proposed scheme does not complete, the Access Intelligence board estimates that the costs it will have incurred in relation to the proposed acquisition will be approximately £3.476 million, well in excess of that fee.
11. Mr Williams fairly also points out that the Isentia reimbursement fee represents approximately 1.35% of the equity value of Isentia as implied by the scheme consideration (based on 203,012,599 Isentia shares on issue, and 9,883,468 Isentia Incentive Rights immediately prior to the announcement of the transaction on 15 June 2021) and therefore exceeds the 1% guideline set out in the Takeover Panel's Guidance Note 7: Lock Up Devices. He also submits, and I accept, that the 1% guideline is not determinative, and there are cases where Courts have ordered a meeting to consider a scheme although it included a break fee that exceeded that guideline: Re Cytopia [2009] VSC 560 at [12]-[18]; Re Toll Holdings Ltd [2015] VSC 123 at [27]-[30]; Re DuluxGroup Ltd (2019) 136 ACSR 546; [2019] FCA 961 at [31]. The Isentia reimbursement fee as a proportion of the equity value of Isentia is lower than other break fees which have been approved. I also recognise that, the lower the equity value of the scheme company, the greater the chance that the 1% guideline might be exceeded where many of the transaction costs incurred by acquirers have a fixed character.
12. Mr Williams also submits, and I accept, that the Isentia reimbursement fee is not payable simply because Isentia Shareholders reject the scheme, and is not a disincentive to shareholders in their consideration of the proposed transaction: Re Adelaide Bank Limited [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; [2007] FCA 2078. He points out that, apart from the size of the Isentia reimbursement fee, the relevant provisions in the SID regarding payment of that fee are standard and consistent with the Takeover Panel Guideline. He submits, and I also accept, that the Isentia reimbursement fee is unlikely to deter a potential bidder from making a competing offer; compare the fee payable in Re Konekt Ltd [2019] FCA 1997. I also accept that the Isentia reimbursement fee represents a genuine pre-estimate of Access Intelligence's costs of participating in the scheme and was required in order to secure the continuing participation of Access Intelligence. It seems to me that the higher percentage fee is justified by the relatively smaller size of the transaction and the complexity of the arrangements in respect of the acquisition by Access Intelligence, which involve associated transactions in the United Kingdom as well as the implementation of the scheme in Australia. Exclusivity
13. Clause 11 of the SID contains exclusivity provisions which include a "no shop", "no talk" and a "no due diligence" restriction and "notification" and "matching right" obligations. The Court will wish to be satisfied that any exclusivity period is for no more than a reasonable period which is capable of precise ascertainment; that an exclusivity clause dealing with an unsolicited alternative merger proposal is subject to a fiduciary carve out; and that the provision is clearly disclosed in the explanatory statement to the scheme shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re TPG Telecom Ltd [2020] NSWSC 772 at [22].
14. Mr Williams points out that the "no shop" exclusivity provision (cl 11.2 of the SID) is capable of precise ascertainment, and is restricted to the "Exclusivity Period" which lasts from the date of the SID until the earliest of the date of its termination, the "End Date" or the "Effective Date", from 15 June 2021 to on or around 15 December 2021 at the latest. I accept that the Exclusivity Period of 6 months between the date of the SID and the "End Date" is a reasonable period and comparable with exclusivity periods in other schemes: Re QMS Media Ltd [2019] FCA 2172 at [47]-[48]. The "no talk" and "no due diligence" restrictions (cl 11.3 of the SID), and, in part, the "notification obligation" (cl 11.4 of the SID) are subject to a fiduciary carve out (cl 11.7 of the SID) and the overriding obligation not to breach directors' fiduciary duties. I accept that broadly similar provisions have been accepted in Re ERM Power Ltd [2019] NSWSC 1502 at [24]; Re Prime Media Group Ltd [2019] NSWSC 1805; Re Windlab Ltd [2020] NSWSC 571 at [18] and Re TPG Telecom Ltd above at [22]. I also accept that these provisions are sufficiently disclosed in section 3.10 of the scheme booklet. Deemed warranty
15. The scheme provides for a deemed warranty by Isentia shareholders that their Isentia shares will be free from encumbrances (cl 9.2(b) of the scheme). That deemed warranty is commonplace and sufficiently disclosed in section 8.10 of the scheme booklet: Re APN News and Media Ltd above at [57]-[63]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]. Virtual meeting
16. It is proposed that the scheme meeting be held as a virtual meeting, having regard to the uncertainty and potential health risks associated with large gatherings during the COVID-19 pandemic. A virtual meeting is permitted by clause 32.4 of Isentia's constitution, which allows for the holding of meetings at two or more venues by using technology in terms similar to section 249S of the Act. As Mr Williams point out, ASIC has publicly outlined its "no action" position in relation to the convening and holding of virtual meetings, as reflected in ASIC's Guidelines for investor meetings using technology; and Courts have continued to make orders for virtual meetings, notwithstanding the expiration of the Corporations (Coronavirus Economic Response) Determination (No.4) 2020 (Cth): Re Redflex Holdings Limited [2021] FCA 417 at [41]-[46]; Re Asaleo Care Limited [2021] FCA 406 at [74]-[78]; Re Coca Cola Amatil Ltd [2021] NSWSC 270 at [28]; Re Vocus Group Limited [2021] NSWSC 630 at [20]-[21]; Re BINGO Industries Limited [2021] NSWSC 798 at [29]. I am satisfied that the meeting is properly conducted in that way, and the proposed manner of dispatch of scheme materials to shareholders is appropriate and consistent with that adopted in recent case law.

Section 411(17) of the Act

1. Mr Williams submits, and I accept, that the Court should defer addressing the question raised by s 411(17) of the Act, and any question of avoidance of the operation of Chapter 6 of the Act to the second Court hearing, when the scheme is being considered for approval: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[27].

Orders

1. For these reasons, I made orders at the conclusion of the first Court hearing in accordance with the short minutes of order, initialled by me and placed in the file.

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