In the matter of Prospa Group Limited [2024] NSWSC 790

Several additional matters

Consistent with the ex parte nature of the application, Mr Williams addresses several additional matters. First, Mr Williams recognises that ASIC had expressed concern about offers of "stub equity" consideration in control transactions where the consideration offered is shares in an Australian proprietary company and accepting shareholders are required to hold the offered scrip consideration through a custodial arrangement: ASIC Consultation Paper 312 Stub equity in control transactions; Re Capilano Honey Ltd [2018] FCA 1568 at [35]-[53]. He notes that ASIC subsequently executed ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734 (Instrument), which modified the Act to prevent the use of Australian proprietary companies as "stub equity" vehicles, but does not prevent a bidder making a "stub equity" offer by an Australian public company with compulsory custodial arrangements in specified circumstances. Mr Williams submits and I accept that the "stub equity" proposed to be offered to Prospa shareholders complies with the requirements of that Instrument. I also note that ASIC has not intervened to oppose this application by reference to this matter.
Mr Williams points out that, under the scheme, Prospa shareholders who make a valid election to receive the scrip consideration agree to become bound by the by the terms of HoldCo's Constitution and the HoldCo Shareholders' Deed and, where applicable, the Nominee Deed, and each of those documents is annexed to the scheme booklet, and the rights, liabilities, and risks relating to the HoldCo shares are summarised in sections 4.7, 4.8 and 5.4 of the scheme booklet. Mr Williams also submits and I accept that the scheme booklet discloses the characteristics of HoldCo shares and the risks involved in Prospa shareholders choosing the scrip consideration, including in the letter from the chair and sections 4 and 5.4 of the scheme booklet. I also accept that offers of "stub equity" as scheme consideration, including when held through nominees and where shareholders are required to enter into contractual arrangements such as a shareholders' deed, have been approved in previous schemes, and there is a real importance in consistency of decision-making in this regard: Aveo at [34]; BINGO at [17]-[21]. I am satisfied that the scrip consideration option made available to Prospa shareholders is not a matter which would warrant the Court declining to convene the Scheme Meeting.
Second, Mr Williams addresses the question of funding for the cash consideration for the proposed scheme. He points out that BidCo intends to fund the cash consideration payable under the scheme of approximately $19.8 million through a combination of equity financing of $7,814,827 provided by the Consortium and the balance through a loan from a Prospa subsidiary, by way of on-lending of funds drawn under the Prospa group's existing corporate debt facility with iPartners, to which I referred above, subject to shareholder approval. Mr Williams points out that the funding arrangements for the scheme consideration are set out in sections 2.6 and 4.6 of the scheme booklet.
Mr Williams also notes that the equity funding will be provided by the Consortium pursuant to an equity commitment letter dated 26 February 2024, and the Consortium members are severally responsible for providing their proportionate share of the equity funding by way of subscription for shares in HoldCo in sufficient time to enable BidCo to meet its obligations to pay the Aggregate Cash Consideration (as defined) under the scheme. The obligation to provide the equity funding is conditional only on satisfaction or waiver of the conditions precedent in the SID. Importantly, Prospa led evidence to establish the financial capacity of Consortium members to comply with that obligation, by Mr Ruddock's second affidavit dated 12 June 2024, as contemplated by paragraph 28(b) of Practice Note SC Eq 4, which recognises that: "Where a special purpose vehicle with minimal assets is to acquire securities of substantial value under a scheme, a risk of a scheme not completing is likely to be material to securityholders, irrespective of the fact that their securities are not transferred to that special purpose vehicle until the consideration is paid. Disclosure of such a risk is also important to maintaining a fully informed market. Evidence should be led at the first Court hearing of the availability of the funding or other financial support on which the special purpose vehicle will rely to complete the scheme."
It seems to me that trust arrangements in respect of the transfer of scheme shares are not, without more, sufficient to address the risk of a loss of opportunity to shareholders if, ultimately, funding for a scheme involving a special purpose vehicle was not in place, and the scheme failed. The market will also likely trade on the basis that a scheme is sufficiently funded from the point at which it is announced. Both of those propositions are recognised by the acknowledgement of the importance of proof of funding in respect of schemes involving special purpose vehicles in the harmonised scheme practice note, which is now operative both in this Court, the Federal Court of Australia and several other State courts. Mr Ruddock's further evidence of the availability of funds to Consortium members to fund BidCo was therefore significant for the outcome of the application.
Mr Williams notes that the debt funding for the scheme is being sourced from an earlier drawdown under Prospa's existing debt financing facility with iPartners, and Prospa and iPartners have entered into binding documentation allowing the funds to be on-lent to BidCo for the purpose of funding the aggregate cash consideration for the scheme and otherwise consenting to the transaction. Prospa rightly recognises that this funding involves the provision of financial assistance by Prospa to BidCo for the acquisition of Prospa shares; is subject to approval by Prospa shareholders under s 260B of the Act and as a related party transaction under s 208 of the Act; and that Consortium members and their associates will not be entitled to vote on the resolutions. Mr Williams submits and I accept that the financial assistance to be provided by Prospa for the acquisition of its shares under the scheme is not a matter which should prevent the convening of the scheme meeting, where the giving of that assistance is to be separately approved (or not) by special resolution of Prospa shareholders: Re Clough Ltd [2013] FCA 1149 at [4]; Re ThinkSmart Ltd [2022] FCA 1314 at [42]-[43]; Re Thorn Group Ltd [2023] NSWSC 1299 at [17].
Third, Mr Williams notes, as I also noted above, that the scheme contains a condition subsequent in cl 4.3, which provides for automatic termination of the scheme if one or more Prospa shareholders who elected the scrip consideration transfers some or all of their Prospa shares before the scheme record date, or changes their registered address to become an Ineligible Foreign Shareholder, with the result that total scrip consideration elections are for less than 73.3% of the Prospa shares on issue on the scheme record date. Mr Williams points out that that condition subsequent addresses the risk that the Minimum Election Condition Precedent (as defined, to which I referred above) is satisfied as at the second Court hearing date, but valid elections for scrip consideration are ultimately made for less than 73.3% of Prospa shares because an electing Prospa shareholder transfers their shares or becomes ineligible to receive the scrip consideration after the scheme becomes effective and before the scheme record date.
Mr Williams points out that the principles applicable to approval of a scheme that is subject to a condition subsequent were identified by Santow J in Re NRMA Ltd (2000) 33 ACSR 595 at 646-648; [2000] NSWSC 82, particularly at 647 as follows: "Clarity and certainty are thus the touchstones. Provided that clarity and certainty are present on the face of the scheme and no new decision making process intrudes after court approval, it does not matter that different results may emerge in different (but clearly identified) eventualities. A key question is whether the scheme is, according to its own terms, self-executing in the sense that certain results follow in certain defined events."
Mr Williams submits and I accept that this test is satisfied here where, if the condition subsequent is triggered, the scheme will automatically terminate. I also recognise that approval has been granted to several schemes which remain subject to conditions: Re iProperty Group Ltd [2015] FCA 1507 at [24]-[27]; Re Spark Infrastructure RE Ltd [2021] NSWSC 1564 at [24]. I am conscious that this condition introduces a degree of uncertainty as to whether the scheme will ultimately be implemented and there is a, possibly remote, risk that a Consortium member could deliberately cause its failure in the case of adverse developments as to Prospa or the market generally or if it had second thoughts as to its participation in the Consortium. However, on balance, I accept that this condition is not a reason to prevent convening of the scheme meeting and allowing shareholders to consider the commercial proposal that is to be put to them.
Fourth, Mr Williams address the position as to Ineligible Foreign Shareholders, to which I referred above. I accept that Ineligible Foreign Shareholders do not constitute a separate class as the scheme hearing: Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104; [2002] NSWSC 897.
Fifth, Mr Williams refers to Prospa Equity Incentives. He notes that, as set out in section 6.5 of the proposed scheme booklet, Prospa operates incentive plans under which directors, senior executives and key employees are offered performance rights and/or options ("Prospa Equity Incentives") which, subject to satisfaction of certain conditions, will, if vested, allow participants to receive fully ordinary paid shares in Prospa. He Outlines the treatment of Prospa Equity Incentives in respect of the scheme. He also submits and I accept that holders of performance rights or similar rights to receive Prospa shares who are also Prospa shareholders are not in a separate class of members by reason only that they also hold such rights: Re Cashcard Australia Ltd (2004) 48 ACSR 738; [2004] FCA 223; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43].
Sixth, and unusually, Mr Williams points out that the SID does not contain any exclusivity provisions in favour of the Consortium and Prospa is free to engage with any third parties in relation to an alternative transaction.
Seventh, Mr Williams points out that, under cl 11.2 of the SID, Prospa must pay BidCo a reimbursement fee of $600,000 (exclusive of GST) in specified circumstances, which do not depart from standard practice, and that fee is not payable merely because the resolution submitted to the scheme meeting is not approved by the required majorities. That fee represents approximately 0.8% of the equity value of Prospa implied by the cash consideration, consistent with guidance issued by the Takeovers Panel in respect of "deal protection" measures. Under cl 12 of the SID, BidCo must pay Prospa a reverse reimbursement fee of $600,000 (exclusive of GST) in specified circumstances. These matters do not provide any reason not to convene the scheme meeting.
Eighth, Mr Williams notes that the scheme adopts the conventional mechanism of making the transfer of Prospa shares to BidCo conditional on the provision of the total scheme consideration, and that Prospa shareholders are therefore protected against the risk that their Prospa shares are transferred without receiving the scheme consideration, and that Prospa shareholders have the further protection of a Deed Poll entered into by BidCo, HoldCo and Prospa in their favour and governed by NSW law. Mr Williams submits and I accept that these are well-established means of managing performance risk (Re ELMO Software Pty Ltd [2023] NSWSC 12 at [27]-[28]), although their existence does not exclude the need for the proof of the Consortium members' capacity to fund the bid consideration to which I referred above.
Ninth, Mr Williams addresses the manner of dispatch of scheme documents to Prospa shareholders, which is in common form, although allowing for shareholders' election as to the form of scrip consideration, and gives rise to no reason not to convene the scheme meeting.
Tenth, Mr Williams notes that, following dispatch of the scheme booklet, Prospa proposes that a third party will operate an inbound shareholder information line, and drafts of the "Inbound Q&A script" and the "Scheme Banner messages" are in evidence. Mr Williams submits and I accept that these scripts do not travel beyond the information in the scheme booklet, present information in a balanced manner, and draw attention to advantages and disadvantages of the scheme and encourage shareholders to read the scheme booklet in its entirety. Prospa draws these proposed communications to the Court's attention but does not seek orders approving them. Consistent with the approach taken in InvoCare, I have reviewed these scripts, had no difficulty with them and I record that matter in this judgment.

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