In the matter of ResApp Health Ltd [2022] NSWSC 1014

Chronology of events

1. As I have noted, the application was heard on 15 July 2022 and orders were made on 15 July 2022 although, in accordance with common practice in respect of schemes, the Court did not deliver its reasons for judgment until 22 July 2022. On 18 July 2022, ResApp made an announcement to Australian Securities Exchange ("ASX"), although the form of that announcement was only put before the Court in Mr Nowotny-Walsh's further affidavit dated 21 July 2022, and that announcement was then the subject of correspondence with the Australian Securities and Investments Commission ("ASIC"), which was also only put before the Court in Mr Nowotny-Walsh's further affidavit.
2. The announcement made by ResApp to ASX on 18 July 2022 was headed "Scheme Booklet registered with ASIC", but went far beyond a simple statement that the scheme booklet had been registered with ASIC and would be sent to shareholders for their review. That announcement set out, at length, the reasons why the directors of ResApp unanimously recommended that ResApp shareholders vote in favour of the scheme. It noted, for example, that the scheme consideration was all cash and provided certainty of value and timing to ResApp shareholders, and that the ResApp share price may fall if the scheme does not proceed. While those matters did not go beyond the information contained in the scheme booklet, they had a degree of selectivity that the scheme booklet did not, in providing a full summary of the advantages of the scheme but doing no more than referring shareholders to the scheme booklet for its disadvantages. The selectivity in that approach plainly had the capacity to distort shareholders' decision making, where shareholders might rely on an apparently quite detailed announcement as a substitute for reading the scheme booklet, and pay attention to the advantages disclosed in that announcement but not the disadvantages omitted from it.
3. That announcement also drew attention to the independent expert's report and the independent expert's conclusion that the value of a ResApp share offered under the scheme was within the independent expert's valuation range. It also provided sufficient information for shareholders to deduce, although it did not expressly say, that the price offered ($0.146 per ResApp share) was at the very bottom of the independent expert's valuation range and significantly less than the independent expert's preferred value for each ResApp share.
4. On 19 July 2022 at 10.27am (referring to Sydney times, as I will throughout this chronology), after the announcement had been issued, ASIC advised ResApp's solicitors of its concern as to the emphasis which that ASX announcement had placed on the advantages rather than the disadvantages of the scheme. Late on 19 July 2022, ResApp's solicitors responded, pointing out that the information contained in the announcement did not extend beyond that which was contained in the scheme booklet. While that proposition was true, so far as it went, it failed to recognise the extent to which emphasis upon advantages, and omission of reference to disadvantages, from that announcement had the capacity to present a skewed or distorted view of the position in respect of the scheme.
5. On 20 July, ASIC responded, again emphasising its continued concerns and observing that: "Our position remains that the announcement should be amended to include a balance summary of both the advantages and disadvantages of the scheme or to remove the list of advantages in its entirety. In our view, scheme proponents should ensure that any disclosure or communication to shareholders beyond the scheme booklet should be presented in a manner that is consistent with, and does not interfere with the Court approved messaging contained within the scheme booklet. The disadvantages associated with the scheme are material to a shareholder's decision on whether or not to approve the scheme and should be clearly highlighted wherever the advantages of the scheme are not discussed."
6. That seems to me to be an uncontroversial summary of the well established position in respect of schemes of arrangement.
7. The outcome of these developments was that, on 20 July 2020, ResApp made a further announcement to ASX which, fairly, acknowledged that its earlier announcement dated 18 July 2020 had disclosed the reasons why the ResApp board considered ResApp shareholders should vote in favour of the scheme without also disclosing the reasons to vote against the scheme and retracted that announcement and reissued it in an amended form. That further announcement also fairly drew attention to the reasons to vote in favour of or against the scheme, together with the risks associated with ResApp continuing as a stand alone entity listed on ASX as disclosed in the scheme booklet, and rightly encouraged shareholders to read the scheme booklet. That announcement addressed ASIC's concerns, and the extent to which those matters may have impacted on shareholders' votes at the scheme meeting will be a matter to be addressed at the second Court hearing, in accordance with the authorities to which I refer below.
8. At the same time as these events were occurring, ResApp provided ASIC with a proposed script for telephone calls to be made to shareholders by a third party on ResApp's behalf and ASIC made comments on that script. On 20 July 2022 at 2.08pm, ASIC indicated that it had no further comments on that script. Perhaps oddly, ASIC does not appear to have raised the concern that it had already raised as to the initial version of the ASX announcement in respect of that script, although that script took the same approach as that initial version of the ASX announcement, by highlighting the advantages of the scheme without significant reference to its disadvantages.
9. After those communications with ASIC had concluded, on the evening of 20 July 2022, the solicitors for ResApp approached my Associate in chambers, as they could properly do, seeking that orders be made in chambers approving that form of script to be used in communications with shareholders. Neither the email sent to my Associate, nor the first affidavit of Mr Nowotny Walsh dated 20 July 2022 in support of the application for those orders, disclosed the previous issues which had arisen in respect of the first ASX announcement or the fact that a correcting announcement to ASX had been made early on 20 July 2022, without the Court's approval having been sought for either the first announcement or the correcting announcement.
10. On the morning of 21 July 2022, my Associate advised ResApp, at my request, that the Court would not make the proposed orders in chambers, and that I had concerns as to the form of the script, as it then stood, where aspects of it appeared to be advocacy for the scheme as distinct from a balanced provision of information to shareholders in respect of the scheme. Those concerns were of a similar nature to those which ASIC had previously raised in respect of the first ASX announcement, although the Court was not then aware either of the fact of that announcement or of the concerns which ASIC had raised in respect of it. By that time, I accept, a correcting announcement had been made, but that had also not been drawn to the Court's attention.
11. In that email, my Associate indicated that the matter could be relisted, if an application for approval of the script in that form was pressed. In the event, ResApp requested a relisting of the matter, but now seeks approval of a revised script to which I will return below.

The applicable case law

1. I now turn to the well-established authorities concerning these issues. In Re Centro Retail Ltd [2011] NSWSC 1321, Barrett J emphasised (at [7]) the duty on a company and its directors to ensure that information placed in the hands of members before a meeting was complete as to material matters and fully and fairly informed them of what was to be considered at the meeting, and was not misleading or deceptive. His Honour also emphasised (at [10]), by reference to earlier authority, that, where the Court has ordered the convening of a meeting and has approved an explanatory statement (as, I interpolate, had occurred here), the company should not dispatch additional explanatory material without first obtaining Court approval.
2. Many subsequent cases emphasise the principle that, if the Court has ordered the convening of a scheme meeting and approved an explanatory statement, its approval should be sought before additional explanatory material is dispatched, including at least Re Trust Company Ltd [2013] NSWSC 1946 at [6]-[8]; Re Investa Listed Funds Management Ltd [2016] NSWSC 344 at [4]; Re Investa Listed Funds Management Ltd [2016] NSWSC 369 at [1]; Re Billabong International Ltd (No 2) [2018] FCA 496; Re Tawana Resources NL (No 2) [2018] FCA 1724 at [18]; Re Prime Media Group Ltd [2019] NSWSC 1888; and Re Walsh and Company Investments Ltd [2020] NSWSC 1746 at [66]. In Re Walsh and Co Ltd above at [66], I also dealt with the question where, by inadvertence in that case, there had been communications with shareholders which had not been approved by the Court, and observed that the ultimate question was whether the manner in which those communications had occurred had compromised the integrity of the voting process at the scheme meeting. That question will also arise here and will be a matter to be addressed at the second Court hearing.
3. The need for the Court's approval of reminder to vote emails and investor presentations has also been noted in subsequent cases, including those to which I referred in Re Tabcorp Holdings Ltd [2022] NSWSC 448 at [22]. In that case, I accepted a submission of Senior Counsel that approval would generally be given to such communications, where the content of a proposed presentation "largely mirrors that contained, in more detail, in the [scheme] booklet and it prominently directs recipients to read the [scheme] booklet before making any voting decision in respect of the proposed [scheme]." Plainly, however, that proposition depends upon the fairness of the applicable summary and the fact that it does not, for example, highlight advantages rather than disadvantages of the proposed scheme.
4. Finally, although this principle ought to be too well-known to require repetition, applications in respect of schemes are often conducted on an ex parte basis, where there is no real contradictor. That position does not change where, as here, leave is granted to a potential acquirer to appear under rule 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW), because the potential acquirer will generally be in the same interest as the company which is the proponent of the scheme. The obligations upon the parties, and their legal representatives, in an ex parte application are well-established, and were summarised by Gageler J in Aristocrat Technologies Australia Pty Ltd [2016] HCA 3 at [15] as follows: "It is an elementary principle of our ordinarily adversarial system of justice that full and fair disclosure must be made by any person who seeks an order from a Court ex parte, with the result that failure to make such disclosure is ordinarily sufficient to warrant discharge of such order as might be made. The principle is not confined to particular types of interlocutory orders. Its rationale lies in the importance to the administration of justice of the Courts and the public being able to have confidence that an order will not be made in the absence of a person whose rights are immediately to be affected by that order unless the Court making the order has firstly been informed by the applicant of all facts known to the applicant which that absent person could be expected to have sought to place before the Court had the application for the order been contested."
5. In applications in respect of schemes of arrangements, the Court will not ordinarily hear from the regulator or from shareholders who might oppose to a scheme, at least prior to the second Court hearing. In these circumstances, as in other ex parte applications, it is essential that full and fair disclosure be made to the Court of matters which may be material to the ex parte orders which are sought, whether to convene a scheme meeting, authorise additional disclosure, or approve a scheme at a second Court hearing. I emphasise these matters, notwithstanding they should be familiar to practitioners, because of the difficulties which have arisen in this matter in that respect.

The position in this matter

1. It seems to me that the first ASX announcement (I interpolate, as to which the Court's approval had not been sought, and which would likely not have been approved in the form it was made), the fact of ASIC's concerns about it, and the correcting announcement made to the ASX, were all material matters which ought to have been disclosed to the Court when the application was made for approval of a script for further communications with shareholders. I understand Mr Papamatheos, who appears for ResApp, accepts that position, at least in hindsight. Mr Thomas, who appears for the acquiring party, Pfizer Australia, goes further to accept that the communications with ASIC ought to have been brought to the Court's attention irrespective of whether an application was later made for approval of a script for communications to shareholders.
2. It seems to me that there can be little doubt as to the materiality of those matters to the Court's subsequent decision. First, they plainly affected the information then known to shareholders, which would provide the context in which further communications to them would take place. Any further communications would have occurred in circumstances that some shareholders may have seen the first ASX announcement, but may not have seen the correcting announcement, and that was a matter which the Court was entitled to know, and to which it would have had regard. The fact of the concerns raised by ASIC would also have highlighted the question whether the further communications with shareholders adequately disclosed the disadvantages of the scheme, which in their first proposed version they did not. As it turned out, the Court identified that issue for itself, without knowing of the concerns that ASIC had raised, in respect of the corresponding omission from the ASX announcement. However, the risk that it might not have done so was increased, where those concerns had not been drawn to its attention.
3. I record these matters to emphasise the significance, first, of seeking the Court's approval for substantive communications with shareholders and, secondly, drawing the Court's attention to matters that are relevant to those communications, recognising the duty of fair and full disclosure in an ex parte application. I accept that, in the present circumstances, the issues as to the first announcement made to ASX, so far as its substantive content is concerned, are likely to have been mitigated by the correcting announcement. The extent to which they may impact on the exercise of the Court's discretion whether to approve the scheme is, as I have noted above, a matter to be addressed at that second Court hearing, likely by reference to the approach adopted in Re Walsh and Co Ltd above, namely whether the information provided, in that first announcement, adversely affected the integrity of the voting process at the scheme meeting.
4. So far as the script for communications to shareholders is concerned, ResApp has now revised that script to address the issues of selectivity and undue emphasis upon the advantages of the scheme which had arisen in respect of its original version. The script, as it now stands, as exhibited to Mr Nowotny Walsh's further affidavit dated 21 July 2022, fairly provides information to shareholders as to both the advantages and the disadvantages of the scheme, in a balanced way, and draws attention to the fact that the scheme booklet includes the advantages, disadvantages, risks of the proposed acquisition and risks of ResApp remaining a stand-alone ASX listed entity. The summary of the position taken by directors also properly recognises that it is a position taken in the absence of a superior proposal and subject to the independent expert report continuing to conclude that the scheme is in the best interest of shareholders, reflecting the position disclosed in the scheme booklet. It also draws their attention to the independent expert's report, which will be available to them in the scheme booklet; and emphasises the desirability of reading the scheme booklet and the desirability of also reading the independent expert's report.
5. That script also encourages shareholders to vote, and that encouragement is legitimate where the approval of a scheme depends, in part, upon the number of shareholders voting as well as the way in which they vote. So far as questions are asked as to shareholders' voting intentions, they emphasise the encouragement to shareholders to vote, which seems to me to be legitimate for the reasons noted above, and again draw attention to the scheme booklet and its contents and encourage shareholders to read it. The script otherwise confirms the fact that information provided to shareholders will be kept confidential, and the instructions given to those making the call are plain about the fact that, if a shareholder indicates that he or she does not wish to talk, then the call must be terminated, which is an appropriate course. The script to be provided to those making the calls is also conscious of issues as to privacy and the do not call register and does not raise any concerns in that respect.
6. Had that revised script been proposed for approval, in the first instance and without the difficulties to which I have referred above, I would readily have approved it. The position should not differ, notwithstanding those difficulties, because there is nothing in the script which would now cause any concern; the script is likely to encourage shareholders to make themselves familiar with the relevant information and vote at the scheme meeting; and these are desirable objectives. The issues which have arisen as to the other matters to which I have referred above have less impact as to whether the script should now be approved, in its revised form, but are matters which the Court will to take into account in determining whether to approve the scheme at the second Court hearing.
7. For these reasons, I am satisfied that, notwithstanding the process for approval of this script has given rise to other difficulties, it should be approved.

Orders

1. Accordingly, I make the following orders:
2. The Plaintiff is authorised to use an outbound call script substantially in the form of Exhibit MNW-20 to the affidavit of Matthew James Nowotny-Walsh affirmed on 21 July 2022.
3. There be liberty to apply.
4. These orders are entered forthwith.

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: 31 July 2022