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

Several additional matters

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.
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.
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].
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].
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].
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].
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].
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.
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.
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.
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.
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].

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Judgment (7 paragraphs)

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