In the matter of QANTM Intellectual Property Limited [2024] NSWSC 809

Affidavit and other evidence

1. QANTM reads the affidavit dated 11 June 2024 of its solicitor, Ms Whitby, which exhibits a current and historical company extract in relation to QANTM obtained from the Australian Securities and Investments Commission ("ASIC") and a copy of the announcement made by QANTM to ASX on 10 May 2024 in respect of its entry into the SID with BidCo.
2. QANTM also reads the affidavit dated 24 June 2024 of Ms Stewart, its general counsel and company secretary. Ms Stewart refers to the terms of the proposed scheme, which I have set out above; to several conditions precedent to the scheme; to break fees payable in respect of the scheme; and the treatment of Ineligible Foreign Shareholders in respect of the scheme. She also addresses the capital structure of QANTM; the interests of QANTM directors in QANTM shares; the several forms of incentives that have been issued by QANTM and their treatment under the proposed scheme; and the position in respect of contractual arrangements which provide for QANTM to issue QANTM shares to key employees in the future. Ms Stewart also addresses the verification process in respect of the scheme booklet which was in common form; the QANTM board's approval of statements attributable to the board contained in the scheme booklet and the passage of an associated board resolution; the proposed conduct of the scheme meeting; the consent of the proposed chair and alternate chair of that meeting, and the proposed publication of an advertisement for the second Court hearing on ASX, consistent with current scheme practice.
3. QANTM also relies on the affidavit dated 24 June 2024 of Ms Evans-Cullen, a solicitor acting for it, who addresses correspondence with ASIC in respect of the scheme and the manner in which scheme documents will be dispatched to QANTM shareholders, again in common form. Ms Evans-Cullen also refers to scripts for inbound calls received on a shareholder information line and for outbound calls proposed to be made to QANTM shareholders, and to three ASX announcements proposed to be made by QANTM in respect of the scheme. Ms Evans-Cullen also annexed to that affidavit a letter dated 24 June 2024 from ASIC which confirmed ASIC's view that it had had a reasonable opportunity to examine the terms of the scheme and the draft Explanatory Statement; reserved ASIC's position as to s 411(17)(b) of the Act to the second Court hearing, in accordance with its usual practice; and indicated it did not propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing.
4. QANTM also reads the affidavit dated 21 June 2024 of Mr Stuart, a director of BidCo and the managing director of Adamantem Capital, who refers to the verification process adopted by BidCo in respect of information contained in the scheme booklet, which was again in customary form, and also sets out the funding arrangements in respect of the scheme, involving both equity and debt commitments. Mr Stuart also addresses the terms of a Nominee Deed which would apply in respect of class B shareholders of HoldCo and refers to the execution of a deed poll in favour of scheme shareholders of BidCo and HoldCo.
5. QANTM also tendered the proposed scheme booklet in respect of the scheme, and Mr Hutton took me through that scheme booklet in the course of submissions.

Applicable principles

1. I summarised the principles governing an application for orders to convene a meeting of members under s 411(1) of the Act in my judgment in Re InvoCare Ltd [2023] NSWSC 1180 ("InvoCare") at [14] where I observed, by reference to Counsel's submissions, as follows: "subject to the matters in s 411(2), s 411 of the Act confers a power on the Court to order a meeting of members where a compromise or arrangement is proposed between a Part 5.1 body and its members or any class of them (s 411(1)); an application for the order is made in a summary way by the body (s 411(1)); 14 days' notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC (s 411(2)); the Court is satisfied that ASIC has had a reasonable opportunity to, first, examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement and, second, to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement (s 411(2))."
2. These requirements are satisfied here. QANTM is a Part 5.1 body and an acquisition scheme is a common example of an arrangement for the purposes of s 411 of the Act. ASIC has here been given appropriate notice as required under s 411(2) of the Act and I have referred to its letter in customary form above. It is proposed that the scheme meeting will be held as a hybrid meeting, as is now commonplace in respect of scheme meetings. The procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) ("Rules") have been satisfied; where a company search was undertaken as required by the Rules; The chair and the alternate chair nominated for the proposed scheme meeting have each confirmed the matters required by r 3.2(b) of the Rules; details of the second Court hearing will be advised to shareholders by an ASX announcement and, as is now common practice, QANTM seeks dispensation from the requirement under r 3.4 of the Rules for publication of a notice in the form of Form 6, consistently with Practice Note SC Eq 4 at [26(f)]; and the proposed draft orders for the convening of the scheme meeting identify the scheme as required by r 3.3(1) of the Rules.
3. I also set out the principles which apply to the exercise of the Court's discretion at a first Court hearing in my judgment in Re Villa World Ltd [2019] NSWSC 1207 at [15]-[19]. The Court will also wish to be satisfied that the scheme booklet provides proper disclosure to shareholders and that the scheme is fit for consideration by the proposed scheme meeting in the sense that it is of such a nature and cast in such terms that, if it achieves the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed; and shareholders are properly informed as to the nature of the scheme before the scheme meeting.
4. There is nothing in the terms of the scheme that would warrant the Court declining to permit its consideration by members. The evidence indicates that a verification process has been undertaken in customary from and, subject to the specific matters I address below, there is no reason to think that the Court would not approve the scheme at a second Court hearing if it receives the requisite majorities at the scheme meeting. The scheme booklet indicates that QANTM's directors unanimously recommend that QANTM 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 QANTM shareholders. Subject to the same qualifications, each QANTM director intends to vote, or procure the voting of, all QANTM shares held or controlled by them in favour of the scheme. The independent expert's report expresses the view that that the scheme is fair and reasonable and therefore is in the best interests of QANTM shareholders, in the absence of a superior proposal.

Several additional matters

1. Mr Hutton addresses several additional matters in respect of the proposed scheme. First, Mr Hutton points out that the proposed scheme allows QANTM shareholders to elect to receive the Mixed Consideration, which take the form of cash and "stub equity", being class B ordinary shares in HoldCo. He points out that the rationale for the offer of "stub equity" is to allow existing shareholders the opportunity of continuing to have an equity interest in the company being acquired, on terms which ensure that the acquirer maintains control over the target and that the presence of a minority equity interest held by existing shareholders does not constrain the acquirer's future ability to deal with the company or its assets. He also notes that, pursuant to cl 9.3 of the scheme, QANTM shareholders who elect to receive the Mixed Consideration will become bound by the HoldCo Shareholders' Agreement, which is attached to the scheme booklet, and includes competition restraints on shareholders.
2. Mr Hutton rightly recognises that ASIC had previously expressed concern as to "stub equity" consideration where the consideration offered was shares in an Australian proprietary company and where accepting shareholders were required to hold the offered scrip consideration through a custodian arrangement. ASIC then made ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734 ("Stub Equity Instrument") which modifies the Act to prevent the use of Australian proprietary companies as "stub equity" vehicles but does not prevent the use of "stub equity" offers by a public company with compulsory custodian arrangements on specified conditions. Mr Hutton points out that the HoldCo shares that are here offered as part of the Mixed Consideration do not comprise shares in an Australian proprietary company and, so far as the scheme provides for the scrip to be held through a custodial arrangement at BidCo's election, the conditions in the Stub Equity Instrument are met because the proposed Nominee Deed contains conversion and termination provisions which can only be amended by special resolution of the beneficial owners.
3. Mr Hutton submits and I recognise that several cases have held that the availability of scrip as alternative consideration, including where shareholders will become bound by a shareholders agreement with competition restraints, does not warrant the Court declining to convene the scheme meeting, so long as the risks associated with the stub equity are sufficiently disclosed to shareholders: Re Aveo Group Ltd and Aveo Funds Management Ltd [2019] NSWSC 1348 at [34]-[37]; Re BINGO Industries Ltd [2021] NSWSC 798 at [18]-[19]; InvoCare at [3]; Re Healthia Ltd [2023] NSWSC 1296 at [14]; Re Millenium Services Group Ltd [2024] NSWSC 307 at [13]-[18]; Re McGrath Ltd [2024] NSWSC 555 ("McGrath") at [15]. While the competition restraints contained in the HoldCo shareholders agreement are by no means commonplace, I accept they are sufficiently disclosed in the scheme booklet, and the wider risks associated with electing to receive Mixed Consideration and the nature of the class B shares in HoldCo are also sufficiently disclosed in the scheme booklet and recognised in the independent expert's report in respect of the scheme. Mr Hutton submits, and I accept, that this disclosure will allow QANTM shareholders to decide for themselves whether they wish to elect to receive the Mixed Consideration rather than receiving the default cash consideration. He also submits and I also accept that the fact that Ineligible Foreign Shareholders (as defined) can only receive the Cash Consideration is common practice and does not create class issues: Re Hills Motorway Ltd (2002) 43 ACSR 1010 at 104; [2002] FCA 973; McGrath at [22].
4. Second, Mr Hutton points out that the independent expert's report from Grant Thornton expressed the view that the proposed scheme, assessed by reference to the cash consideration, is fair and reasonable and therefore is in the best interest of QANTM shareholders, subject to a superior proposal being made. Mr Hutton recognises that Grant Thornton has not assessed the fair market value of Mixed Consideration, where it considered that it was not feasible to undertake an accurate estimate of the fair value of the shares in HoldCo. I accept that it is not uncommon for independent experts to make no recommendation in relation to a stub equity' alternative and that this causes no difficulty so long as the risks associated with the stub equity alternative are clearly received: McGrath at [17].
5. Third, Mr Hutton points out that, as I noted above, QANTM's directors have unanimously recommended that shareholders vote in favour of the scheme absent a superior proposal and subject to the independent expert concluding the scheme is in the best interests of QANTM shareholders. The directors' interest in the scheme is disclosed in the scheme booklet including in the text of the chair's letter and, in particular, Mr Dower, QANTM's chief executive officer and managing director, will have Performance Rights accelerated if the scheme is approved. The scheme booklet indicates the QANTM directors' view that it is appropriate for Mr Dower to make a recommendation given his knowledge of the business, and I accept that Mr Downer making such a recommendation, accompanied by disclosure of his interest, does not provide reason not to convene the scheme meeting: Re Kidman Resources Ltd [2019] FCA 1226 at [115]; Re DWS Ltd [2020] FCA 1590 at [41]-[49]; Re Pendal Group Ltd [2022] NSWSC 1648 at [25]. Mr Hutton notes that the board makes no recommendation in relation to the Mixed Consideration and I accept this approach is common in respect of stub equity and also provides no reason not to convene the scheme meeting: McGrath at [16].
6. Fourth, Mr Hutton addresses the arrangements that QANTM will put in to deal with existing incentive plans in connection with the scheme. QANTM maintains an Employee Incentive Plan; a significant number of Performance Rights under that plan are held by QANTM's chief executive office and managing director, Mr Dower; and the QANTM board proposes to exercise its discretion to permit Performance Rights holders to exercise their rights to take up their shares so as to participate in the scheme (if approved) but not so as to vote at the scheme meeting. QANTM also maintains a Non-Executive Director Fee Sacrifice Plan, and shares are held on trust for three non-executive directors under that plan subject to certain restrictions, and an employee share trust, under which shares are held on trust for certain employees. In each case, these shares will be acquired as part of the proposed scheme and the trustee will seek voting instructions from the directors or employees for the purpose of voting at the scheme meeting. Mr Hutton also addresses QANTM's proposed approach in respect of an Employee Benefits Trust, an Employee Share Trust and contractual entitlements of certain employees to be issued QANTM shares. QANTM's approach to these arrangements are disclosed in the scheme booklet and I accept that, to the extent shareholders who hold performance rights will receive any advantage under them, it is not sufficient to require that those shareholders constitute a separate voting class: Re ELMO Software Pty Ltd [2023] NSWSC 12 ("ELMO") at [25]; Re Ansararda Group Ltd [2024] NSWSC 411 at [20].
7. Fifth, Mr Hutton notes that BidCo has entered into Commitment Deeds with principals and consultants working in the QANTM business who hold approximately 19% of the QANTM Shares, who have committed to vote in favour of the scheme and elect to receive the Mixed Consideration, subject to certain conditions including no superior proposal being made and that the independent expert continues to conclude that the scheme is in the bests interests of scheme shareholders. I accept that these matters also do not require that these shareholders vote in a separate class, where their qualified voting intention does not prevent their consulting with other shareholders in respect of the scheme, and the election to receive the Mixed Consideration is also open to other shareholders, other than Ineligible Foreign Shareholders: Re Healthia Ltd [2023] NSWSC 1296 ("Healthia") at [36].
8. Sixth, Mr Hutton notes that BidCo is a special purpose entity created for the purpose of acquiring the ordinary shares in QANTM. He points out that cl 5.2 of the scheme adopts the conventional mechanism of making the transfer of QANTM shares to BidCo conditional on the payment of the total consideration into a trust account, and that BidCo and HoldCo have given a deed poll in favour of QANTM shareholders. He submits and I accept that these are well-established means of properly managing performance risk, although I also note that arrangements of this kind do not fully address the loss of opportunity to shareholders if a scheme does not proceed because the bidder lacks funding to complete it: ELMO at [27]-[28]; Re Altium Ltd [2024] NSWSC 736 at [26]. Appropriately, QANTM has led evidence as to BidCo's ability to fund the cash components of the scheme consideration in Mr Stuart's affidavit which I noted above. This matter gives rise to no reason not to convene the scheme meeting.
9. Seventh, Mr Hutton addresses the exclusivity and break fee provisions in respect of the proposed scheme. He notes that the SID contains deal protection mechanisms including "no shop", "no talk" and "no due diligence" obligations; the "no talk" and "no due diligence" obligations are subject to a fiduciary carve out; these provisions apply in the "Exclusivity Period" which ends on the earlier of 10 November 2024 (subject to a common provision for extension) and the date the SID is terminated in accordance with its terms; and they are disclosed in sections 5 and 9 of the scheme booklet. I accept that the exclusivity provisions are here for no more than a reasonable period which is capable of precise ascertainment; they are consistent with the requirement that an exclusivity clause dealing with an unsolicited alternative merger proposal is subject to a fiduciary carve out; they are disclosed in the explanatory statement to the scheme shareholders; and they are not for an unreasonable period: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re Tatts Group Ltd [2017] VSC 552 at [38]; Re TPG Telecom Ltd [2020] NSWSC 772 at [22]; Re Isentia Group Ltd [2021] NSWSC 910 at [23]; Re Origin Energy Ltd [2023] NSWSC 1246 at [33]. Under cl 11 of the SID, QANTM must pay BidCo a break fee of $2.6m in specified circumstances. The break fee is less than 1% of the total equity value of QANTM as implied by the scheme consideration, in accordance with the Takeovers Panel's guidance. I am satisfied that these matters do not give rise to reason not to convene the scheme meeting.
10. Eighth, the scheme booklet and associated documents will be dispatched in now common fashion, electronically, or in hard copy form depending on elections made by shareholders, and I accept that the proposed manner of dispatch is consistent with ss 110D-110E of the Act.
11. Ninth, Mr Hutton addresses proposed shareholder communications in respect of the scheme. QANTM will retain a third party to address inbound telephone inquiries in respect of the scheme, and tenders the proposed script for inbound calls; and has also retained a third party to undertake phone calls to QANTM shareholders in respect of the scheme, and also tenders the proposed script for outbound calls. Mr Hutton submits that the inbound and outbound call scripts do not travel beyond the information in the proposed scheme booklet; present information in a balanced and summary manner; and draw attention to the advantages and disadvantages of the scheme and encourage shareholders to read the scheme booklet in its entirety. While QANTM draws these proposed communications to the Court's attention, no orders are sought approving them, in accordance with current scheme practice noted in InvoCare (at [26]) and Practice Note SC Eq 4 [26(k)]. I have noted these communications and no matters emerge from them which are likely to give rise to difficulty at the second Court hearing and which I should now draw to QANTM's attention.
12. Finally, Mr Hutton points out that, by cl 9.4 of the scheme, QANTM shareholders will be deemed to give warranty to the effect their shares are fully paid, free from all security interests of third parties and that the shareholder has full power to sell and transfer their shares. The deemed warranty is disclosed in the scheme booklet and the case law recognises the legitimacy of these provisions provided they are appropriately disclosed: Re Intega Group Ltd [2021] NSWSC 1434 at [24].

Orders

1. For these reasons, I made the orders sought by QANTM at the conclusion of the first Court hearing on 24 June 2024.

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