In the matter of ResApp Health Ltd [2022] NSWSC 1353

Supreme Court of NSW|2022-09-14|Before: Black J

Solicitors: DLA Piper (Plaintiff) Allens (Acquirer) File Number(s): 2022/191161

Nature of the application and background

By Originating Process filed on 30 June 2022, ResApp Health Ltd ("ResApp") applied for orders under s 411(1) of the Corporations Act 2001 (Cth) ("Act"), in the first instance, convening a meeting of its members for the purpose of considering and voting upon a proposed scheme of arrangement by which Pfizer Australia Holdings Pty Ltd ("Pfizer"), a subsidiary of Pfizer Inc, would acquire all of its fully paid ordinary shares for a scheme consideration of $0.146 per share, and associated orders. By way of background, ResApp is an Australian public company that is listed on the Australian Securities Exchange ("ASX") and is involved in digital health and specialises in the diagnosis and management of a range of acute and chronic respiratory illnesses with a specific focus on smartphone-based audio diagnostic tools, and is developing a smart-phone based COVID-19 screening application. I made the orders sought on 15 July 2022 for the reasons set out in my judgment delivered on 21 July 2022 (Re ResApp Health Ltd [2022] NSWSC 983).

Affidavit evidence

ResApp relied on the evidence previously filed for and read at the several hearings before the Court on 15 July 2022, 22 July 2022, 1 August 2022, 5 August 2022, 19 August 2022 and 25 August 2022. ResApp also relied on a larger number of affidavits than would ordinarily be read at a second Court hearing, partly addressing issues raised by the Australian Securities and Investments Commission ("ASIC") in the course of the scheme. I should identify those issues before turning to that affidavit evidence below.
By email dated 8 August 2022, ASIC raised two queries with ResApp, namely: "1. Please provide submissions as to how ResApp's directors satisfied themselves and recommended that shareholders should vote to approve the scheme, on the basis of the initial revised scheme consideration of $0.146 per share. 2. Noting the basis upon which you have advised the scheme consideration was increased, please provide details of any queries or complaints received from shareholders by ResApp during the period between 14 June 2022 and 3 August 2022, and how the company or its agents responded to those communications. In your response, please outline specifically the nature of the query or complaint, the steps taken to investigate or rectify the query/complaint, and if a response was provided the details of the response, who gave the response and the method by which the response was provided." (Ex MNW-27, Tab 1)
ResApp's solicitors initially responded to that inquiry by an email dated 9 August 2022 and ASIC sought further detail by an email dated 1 September 2022, which was subsequently provided and which is addressed in several affidavits read by ResApp at this second Court hearing. By its detailed response dated 7 September 2022 in respect of communications with shareholders, ResApp disclosed numerous communications between ResApp and its shareholders, particularly in respect of Pfizer's initial and lower offer, to which the shareholders had reacted with a degree of hostility. I bear in mind that a significant number of those communications occurred in the period prior to ResApp's initial announcement of the proposed scheme to ASX and prior to the first Court hearing in respect of the matter. These communications included a communication between ResApp and a major institutional shareholder as to its attitude to the potential transaction, and ResApp also later engaged, after the scheme had been announced with an institutional shareholder which came onto its share register in that period.
By a further email dated 2 September 2022, ASIC drew ResApp's attention to media commentary suggesting the possibility that share splitting was occurring in respect of the scheme and that members had transferred small parcels of shares to a larger number of other persons, with the intention of increasing the number of votes that may be cast for the purposes of the headcount test. ResApp undertook a detailed review of share trading in response to that inquiry, which did not indicate that any share splitting had occurred. I return to that matter below.
By another email dated 8 September 2022 (Ex BL-2, Tab 5), ASIC raised an issue which I will address below in respect of a communication between a director of ResApp, Mr Leedman, and a ResApp shareholder and also raised a wider issue as follows: "In addition, we observed in the materials accompanying your email below (being an email dated 7 September 2022 from ResApp to ASIC addressing shareholder communications) a general tendency for director communications with shareholders to be somewhat unbalanced, with an emphasis often given to the advantages of the scheme and the risks of not accepting the scheme. As such, we hold concerns that Mr Leedman has been communicating in a manner that does not provide a fair and balanced view of the scheme and may infringe on the court's approved messaging in the scheme booklet. In Re Walsh and Company Investments Ltd [2020] NSWSC 1746 at [66]-[67], Justice Black dealt with the requirement for court approval of communications with members and noted that, where in that case an unauthorised communication had taken place, the ultimate question was whether that communication had compromised the integrity of the voting process or the adequacy of disclosure in the materials provided to shareholders. We request your client provide submissions as to the details of Mr Leedman's contact with shareholders and whether such communications are consistent with a fair and balanced account of the court approved messaging in the scheme booklet and why ResApp is otherwise satisfied that the integrity of the voting process for the scheme has not been compromised."
ASIC also there requested further information as to the results of the scheme meeting on 7 September 2022 and as to any agreement between ResApp and institutional shareholders as to their voting intentions in respect of the scheme.
Turning now to the affidavit evidence, by his sixth affidavit dated 8 September 2022, Mr Matthew James Nowotny-Walsh, who is a solicitor acting for ResApp in respect of the scheme, addresses correspondence with ASIC in respect of the scheme and the provision of call scripts to Georgeson Shareholder Communications Australia Pty Ltd ("Georgeson") in a form approved by the Court. He also refers to correspondence with Automic Pty Ltd ("Automic") in respect of the dispatch of documents relating to the scheme to shareholders, including the supplementary scheme booklet, notice of postponement of the scheme meeting and the second supplementary scheme booklet. He refers to the advertisement of the second Court hearing. Mr Nowotny-Walsh also addresses the inquiries made by ASIC in respect of the scheme, to which I referred above. I will refer to a seventh affidavit of Mr Nowotney-Walsh below.
By her second affidavit dated 9 September 2022, Ms Nicola Farley, ResApp's company secretary, referred to an ASX announcement made by ResApp on 18 July 2022 and to a corrective announcement made on 20 July 2022, the release of a supplementary scheme booklet pursuant to orders made by the Court on 5 August 2022, subsequent announcements made by ResApp to ASX and the release of a second supplementary scheme booklet pursuant to orders made by the Court on 25 August 2022. Ms Farley also addressed the release of ResApp's Appendix 4E and annual report on 30 August 2022. Ms Farley also referred to her involvement in ResApp's response to ASIC's inquiries concerning communications with shareholders and the possibility that share splitting may have taken place in respect of the scheme, to which I again return below. By a further affidavit dated 11 September 2022, Ms Farley, undertook an analysis, which ResApp accepts is imperfect but provides some assistance, of the likely result of the scheme hearing if shareholders who lodged proxies in the short period between the announcement of ResApp's financial results which referred to the scheme and the correcting announcements in that regard. I am satisfied that the votes cast by those shareholders would have had no impact on the outcome of the scheme meeting.
By her affidavit dated 8 September 2022, Ms Lorena De Pellegrin, who is a director at iPrint Plus Pty Ltd, addressed that firm's involvement in printing and mailing scheme documents to ResApp shareholders who received printed documents rather than emailed documents. By an affidavit dated 8 September 2022, Ms Kesone Sunphantry, who is a customer success manager with Automic, addressed the dispatch of documents relating to the scheme by hard copy and electronic means. By her further affidavit dated 12 September 2022, Ms Sunphantry of Automic addressed the receipt of proxy forms; the postponement of the scheme meeting; the conduct of the scheme meeting, including questions by shareholders and their answers at the scheme meeting; and also clarified aspects of the evidence given in her earlier affidavit to the dispatch of scheme documents.
By his affidavit dated 8 September 2022, Mr John Toll, who is a partner of Azure Capital Pty Ltd, the financial advisers engaged by ResApp, referred to searches which he had undertaken to identify communications with shareholders in response to ASIC's inquiries. He particular addressed two communications with an institutional shareholder in ResApp, one prior to the scheme, and a second while the scheme was under way, which took place where that institutional shareholder had undertaken not to trade in ResApp's shares to the extent that it was provided with material non-public information at that meeting in order to comply with the insider trading prohibition in the Act.
By his affidavit dated 9 September 2022, Mr Yi Fei (Philip) Xuan, who is an account director at Georgeson, addressed a "shareholder perception study" that was undertaken prior to the scheme, the operation of the shareholder information line during the scheme and outbound calls made by Georgeson using the scripts approved by the Court. Mr Xuan also addressed the work done by Georgeson to respond to ASIC's inquiries concerning shareholder communications in relation to the scheme.
By his affidavit dated 12 September 2022, Mr Danny Hunt, who is the chief operating officer, APAC, of Morrow Sodali, which provides strategic and shareholder services to corporate clients and was engaged by Pfizer in respect of the scheme, referred to a request made by Georgeson that it seek to contact several ResApp shareholders which Georgeson had not been able to contact, and to its contact with four of those shareholders. By his affidavit dated 12 September 2022, Mr Thomas Warner, who is an analyst in the investor engagement team of Morrow Sodali, gives evidence as to the shareholders who he had been asked to contact by Mr Hunt. His evidence is that he did not place calls to two of them for whom he did not have contact details and had conversations with only four of those shareholders. His evidence is that he followed the Court approved script for those conversations, other than that he informed the shareholder that he was calling on behalf of Morrow, which had been engaged by Pfizer, and his conversations did not follow the strict order of the script, since he responded to questions by reference to the script. Regrettably, Morrow Sodali's potential involvement was not disclosed to the Court at the time it approved the script for Georgeson's communications with shareholders. However, Morrow Sodali only ultimately contacted four ResApp shareholders which did not hold substantial numbers of shares and appears to have followed the Court approved script in doing so. It does not seem to me that this matter is material to the Court's decision whether to approve the scheme.
By his eighth affidavit dated 9 September 2022, Dr Anthony Keating, who is ResApp's chief executive officer and managing director, addressed ASX announcements made by ResApp in relation to the scheme and referred to his communications with ResApp shareholders in respect of the scheme, and described the steps which had been taken to identify those communications in relation to ASIC's inquiry. He also addressed the position of several other directors of ResApp, two of whom had no oral communications with ResApp shareholders, one of whom received one telephone call that he referred to Dr Keating and the fourth of whom, Mr Leedman, had more oral communications with shareholders, which were addressed by his separate affidavit which I address below. Many of Dr Keating's communications with shareholders took place prior to the first Court hearing, generally in response to emails received from shareholders expressing disappointment at the price originally proposed by Pfizer to acquire their shares, which was subsequently increased in the course of the scheme.
By his affidavit dated 9 September 2022, Mr Leedman, who is an executive director of ResApp, addressed his communication with shareholders in respect of the scheme. One of those communications attracted ASIC's particular attention. I am satisfied that that communication was prompted by Mr Leedman's concern that information which that shareholder proposed to release on a share trading website was factually incorrect and potentially misleading. I also note that that shareholder subsequently published a note on that share trading website indicating that he had changed his view and considered that it would be "irresponsible" for him to continue to oppose the takeover. As I noted above, ASIC raised a concern that Mr Leedman had advised the shareholder that ResApp was considering commencing legal action against him for defamatory remarks on that website and had sought to have the shareholder retract the comment and support a vote in favour of the scheme. Mr Leedman, in his affidavit evidence, denied saying that ResApp was considering legal action against the shareholder, although his affidavit acknowledged that he had said something to similar effect, raising the threat the ResApp would seek injunctive relief in respect of the publication of information that it perceived as misleading. Mr Leedman denied requesting that shareholder to urge other shareholders vote in favour of scheme. I have had regard to that evidence, although I need not and should not decide any contested factual question where no shareholder appeared to oppose the scheme and ASIC does not oppose the approval of the scheme, despite its inquiries into these matters. I address the wider position in respect of communications between a company and its shareholders in respect of a scheme below.
By his seventh affidavit dated 9 September 2022, Mr James Nicholls, who is a partner in the firm of solicitors acting for ResApp and acted as chair of that scheme meeting, in accordance with orders made by the Court on 25 August 2022, addressed steps taken in respect of the postponement of the scheme meeting, referred to the conduct of the scheme meeting and summarised the questions asked by shareholders which were answered at that meeting. He addressed the question of voter turnout at that meeting, which was about 23.9% by number of ResApp shareholders and 68.83% by percentage of total ResApp shares. Mr Nicholls exhibited a copy of the script used to conduct the meeting, including the chairman's address, to his affidavit and also exhibited the minutes of the scheme meeting and the record prepared by Automic of the result of the poll at that meeting. By his eighth affidavit dated 9 September 2022, Mr Nicholls addressed further correspondence with ASIC in relation to the scheme and the second Court hearing, including information provided to ASIC in respect of the issues of shareholder communications and share splitting.
In his seventh affidavit dated 13 September 2022, Mr Nowotny-Walsh in turn referred to the position in respect of conditions precedent to the scheme, which had relevantly been satisfied or waived, to the absence of notice to ResApp of any competing proposal to the scheme, and to further correspondence from ASIC, including ASIC's no objection letter under s 411(17)(b) of the Act. That affidavit also annexed a letter from the independent expert which confirmed that it had continued to monitor ResApp's announcements for material transactions which would result in a significant change to the information contained in the independent's expert report and were unaware of any such events, and that their opinion that the scheme is fair and reasonable and in the best interests of shareholders of ResApp, was unchanged. That affidavit also annexed an email from ASIC, by which its letter under s 411(17)(b) of the Act was provided (Ex MNW-28, Tab 8). That email also addressed Mr Leedman's communications with shareholders and an interaction between Azure Capital and an institutional investor which I need not address further for the purposes of this scheme. That email noted, in respect of Mr Leedman's contact with shareholders, that it was not possible to review details of all communications with shareholders prior to 16 August 2022, because Mr Leedman was unable to obtain a call log from his mobile telephone service provider of calls in that period in time for the second Court hearing. ASIC implicitly recognised that it had not been able to review all shareholder communications over the scheme period but noted that it had provided its no objection statement on the basis of the material that ASIC had reviewed to date.
ResApp also led evidence of the publication of the notice of the second Court hearing in a national newspaper, and confirmed that he had not received notice of any opposition to the application for approval of the scheme at the second Court hearing. As I noted above, no interested person appeared at the second Court hearing to oppose the scheme.

Applicable principles

Mr Wood draws attention to well-established principles in respect of the Court's role at a second Court hearing in relation to a scheme of arrangement. At that hearing, the Court will need to be satisfied that the relevant resolutions have been passed in accordance with the statutory requirements and that the procedural requirements have been satisfied and will then exercise its discretion whether to approve the scheme: Re AusNet Services Ltd (No 2) [2022] NSWSC 79 at [9]; Re Tabcorp Holdings Ltd (No 2) [2022] NSWSC 725 at [3] ("Tabcorp"). Mr Wood rightly points out that the Court is not bound to approve a scheme merely because it has previously made orders for the convening of meetings and the statutory majorities have been achieved, and will have regard to members' assessment of their interests as manifested in the voting at the scheme meeting, and will recognise that shareholders are generally "the best judges of whether an arrangement is to their commercial advantage", and will therefore "be reluctant to make decisions contrary to the views of security holders expressed at meetings": Re Seven Network Ltd (No 3) (2010) 267 ALR 583 at 588; [2010] FCA 400 ("Seven Network"); Re Coca-Cola Amatil Ltd [2021] NSWSC 489 at [7] ("Coca-Cola Amatil"); Re Vocus Group Ltd [2021] NSWSC 843 at [9]; Tabcorp at [3].
Mr Wood also rightly draws attention to several factors relevant to the exercise of the Court's discretion at the second Court hearing, including whether the members have voted in good faith and not for an improper purpose; whether the proposal is fair and reasonable so that an intelligent and honest person who was a member of the relevant class, properly informed and acting alone, might approve it; whether the plaintiff has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion; whether there has been full and frank disclosure of all information material to the members' decision; whether minority shareholders would be oppressed by the scheme; whether the Court is satisfied that the scheme has not been proposed to avoid Ch 6 of the Act; whether ASIC has no objection to the scheme; and whether the scheme offends public policy: Seven Network at 588-589, Coca-Cola Amatil at [8]-[9], Tabcorp at [4]; Re Crown Resorts Limited (No 2) [2022] FCA 710 at [13]-[14].

Compliance with the Court's orders and other statutory requirements

The evidence establishes that the scheme booklet was registered with ASIC and the Court's orders made at the first Court hearing were also lodged with ASIC on the day they were made, and also the process for dispatch of the scheme booklet and notice of the originally scheduled scheme meeting and the supplementary scheme booklet. As I noted above, the Court subsequently made an order postponing the scheme meeting and there is evidence that ResApp sent emails, letters and made an ASX announcement as to the postponement of the scheme meeting to a date to be determined as contemplated by those orders. There is also evidence as to the dispatch of the second supplementary scheme booklet and related materials.
There is evidence as to the use of inbound and outbound call scripts by Georgeson as approved by the Court's orders. Mr Wood fairly draws attention to the fact that, as I noted above, another firm, Morrow Sodali (which was engaged by the acquirer, Pfizer), was asked to call several ResApp shareholders using the approved outbound script, although it only made contact with four of those shareholders and followed the approved script in doing so. This was one of the many departures from the process approved by the Court in this matter, which significantly complicated the matter, but was ultimately not a material departure. Mr Wood also draws attention to the fact that an inbound information line was in place prior to the first Court hearing (15 July 2022) to receive queries, before a Court authorised inbound script was available, but there were no calls on 16 or 17 July 2022 and the approved script operated from 18 July 2022. This also was not a material matter.
There is also evidence as to the process adopted for reminder to vote emails and for the return of proxy forms and their collation. The evidence addresses the manner in which the postponed scheme meeting was conducted, as a hybrid meeting; the script followed and a presentation made by the chair at that meeting; the several questions asked by shareholders, including by the electronic platform, and their answers; and of the voting process for the resolutions to agree to the amendment to the scheme ("Amendment Resolution") and to agree to the scheme ("Scheme Resolution"). On 7 September 2022, ResApp released the results of that meeting by announcement to the ASX.
Mr Wood recognises that an arrangement is only binding if, at the end of the Court ordered meeting of members, the requisite voting majorities are satisfied and the Court approves the arrangement specified in s 411(4) of the Act. The requisite majorities are a majority in number of the members present and voting (either in person or by proxy) under s 411(4)(a)(ii)(A) and 75% of the votes cast on the resolution under s 411(4)(a)(ii)(B). As I noted above, the requisite majorities were achieved for the Amendment Resolution with 65.55% of shareholders by number and 83.69% of votes cast in favour of that resolution, and for the Scheme Resolution with 62.35% of shareholders by number and 82.21% of votes cast in favour of that resolution.
The number of ResApp shareholders who voted on the Scheme Resolution (including abstentions) were 1,504 of the 6,288 ResApp shareholders (23.9%) and the number of ResApp shares voted on the Scheme Resolution (including abstentions) were 591,735,152 of the 859,697,077 ResApp shares (68.83%) as at the entitlement to vote time at 7:00pm (Sydney time) on Monday 5 September 2022. Mr Wood submits and I accept that this was a reasonably strong voting turnout for a company with a smaller capitalisation and it creates no reason to doubt the adequacy of the communications to shareholders concerning the scheme meeting: Re Quantum Health Group Ltd (No 2) [2022] NSWSC 74, [13]-[14]; Re Vimy Resources Ltd [No 2] [2022] WASC 257 at [32]. There is also evidence as to the advertisement of the second Court hearing and, as I noted above, no interested persons gave notice of intention to appear or appeared to oppose the approval of the scheme.

Several issues raised by ASIC in respect of the scheme

It is convenient now to address the several issues raised by ASIC in the course of the scheme, although ASIC ultimately did not appear at the second Court hearing or oppose the approval of the scheme. I have identified those issues and the evidence led by ResApp to respond to them above.
First, Mr Wood points to ASIC's question about social media reports of possible share splitting in the scheme. ASIC advised ResApp that it had identified, through social media, a suggestion of share splitting prior to the ResApp scheme meeting (Sixth Nowotny-Walsh Affidavit, [18]; Ex MNW-27, Tab 4, 25). As I noted above, ResApp then undertook an analysis of its share register and trading activity in the period leading up to the scheme meeting. That analysis did not evidence any reason for concern as to any share splitting that might affect the voting at the scheme meeting, where there was no apparent increase in numbers of shareholders prior to the scheme meeting; no indication of "off-market" sales by which a shareholder might split their holding; and no readily apparent abnormal purchases or trading patterns, from a review of all trading in ResApp shares between 11 April 2022 and 2 September 2022. After completing that analysis, ResApp advised ASIC of its result and provided the underlying reports and data for its analysis (Sixth Nowotny-Walsh Affidavit [19]; Ex MNW-27, 31-137). ASIC responded that it did not have any specific concerns and simply wanted to draw the issue to ResApp's attention in light of the social media commentary (Eighth Nicholls Affidavit, [9]-[10], Ex JN-7, 7). As Mr Wood points out, any attempt to split votes to defeat the scheme was not successful given the majorities achieved at the scheme meeting. This matter does not warrant withholding approval to the scheme, where there is ultimately no evidence that any material share splitting occurred or that it had a material effect on the majorities at the scheme meeting: Re MIM Holdings Ltd (2003) 45 ACSR 559; [2003] QSC 181.
Mr Wood also draws attention to ASIC's question about agreements in respect of voting intentions. In particular, ASIC raised a question as to whether FIL Investment Management Limited ("Fidelity") and Weiss Asset Management LP ("Weiss"), which were substantial holders of ResApp shares, had agreed to state intentions to vote in favour of the scheme (Eighth Nicholls Affidavit [13]-[14]; Ex JN-7, 38). The evidence is that no such agreements about voting intentions were reached (Eighth Nicholls Affidavit, [15]; Toll Affidavit, [19]-[21]; Ex JT-1, 84-85, 93, 103, 107, 110). Neither ASIC nor any shareholder contended to the contrary and I need not address that question further.
Third, Mr Wood drew attention to the "[u]nbalanced or erroneous announcements", using his language, made by ResApp on 18 July, 3 and 16 August 2022. Mr Wood submits and I accept that the effect of these matters is to be assessed by reference to whether the unapproved communications compromised the integrity of the voting process at the scheme meeting or the adequacy of disclosure: Re Walsh and Company Investments Ltd [2020] NSWSC 1746 at [66]-[67]; Re AGL Limited [2022] NSWSC 576 at [42]; Re ResApp Health Ltd [2022] NSWSC 1014 at [16]; Re Vimy Resources Ltd [No 2] [2022] WASC 257 at [91].
The first of these matters relates to an ASX announcement made on 18 July 2022. ResApp accepts that announcement was unbalanced, since it listed reasons to vote in favour of the proposed scheme identified by the directors but did not list reasons to vote against the proposed scheme. ASIC rightly communicated its concern as to that announcement to ResApp which made a correcting announcement to ASX on 20 July 2022 (Third Nowotny-Walsh Affidavit, [8]-[11] and Exs MNW-22 - MNW-24). Mr Wood submits and I accept that this announcement would not have compromised the integrity of the voting process or the adequacy of disclosure where it was promptly retracted and referred to the need to read the scheme booklet in its entirety, which was attached to that announcement, and referred to "including the potential disadvantages and the reasons why you may wish to vote against the Scheme", although without indicating what they were, so that shareholders would not have thought there were no disadvantages or reasons to vote against the scheme. Mr Wood also points out that shareholders are unlikely to have been able to lodge proxy forms in reliance upon that unbalanced announcement as the online platform hosted by the share registry to receive proxy forms by online voting only opened after 5:00pm (Sydney time) on 20 July 2022 (Second Sunphantry Affidavit [25]), by which point the announcement was corrected. These disclosures were then supplemented by the dispatch of the supplementary scheme booklet around 5 to 9 August 2022 and the second supplementary scheme booklet around 25 to 29 August 2022.
The second of these matters relates to an ASX announcement on 3 August 2022, which correctly stated that, in light of the Second Amended SID, ResApp had submitted a draft explanatory statement to ASIC and incorrectly stated that it had submitted that document to the Supreme Court of New South Wales. This error was not material and was promptly corrected after the Court drew it to the attention of ResApp's solicitors and I need not address it further. The third matter concerns an ASX announcement on 16 August 2022, which wrongly stated that the bridging loan made by Pfizer was repayable on 10 business days' notice on the occurrence of certain events of default, when the bridging loan was in fact repayable on 5 business days' notice. A corrective statement was released to the ASX on 19 August 2022. Mr Wood submits and I accept that this announcement should not have compromised the integrity of the voting process or the adequacy of disclosure where it was corrected within 3 days; and was also superseded by the further subsequent dispatch of the second supplementary scheme booklet, which in addition to the corrective announcement on 19 August 2022, again set out the correct details as to the correct (5 day) notice period under the bridging loan. I accept that these matters ultimately did not compromise the integrity of the voting at the scheme meeting or the disclosure to shareholders, although they complicated the scheme process.
Fourth, Mr Wood points to other ASX releases made by ResApp which he submits did not affect the integrity of the scheme meeting. ResApp released a quarterly activities report on 25 July 2022 which contained no reference to the proposed scheme and its annual report on 30 August 2022 (Second Farley Affidavit, [30]; Ex NF-2, 705-766) contained an apparently balanced summary of past events relating to the scheme and referred shareholders to the scheme booklet, supplementary scheme booklet and second supplementary scheme booklet. Mr Wood points out that these reports were required under the Act and ASX Listing Rules. An ASX announcement made on 18 July 2022 as to ACCC approval received by Pfizer and notified to ResApp has a similar character. I accept that these announcements give rise to no difficulty for approval of the scheme.

ResApp's other communications with shareholders

ASIC also raised a question with ResApp as to its communications with shareholders, which were numerous and which were ultimately the subject of voluminous evidence led at this hearing. Mr Wood points out that these communications were largely receiving or responding to unsolicited and inbound calls or emails from shareholders who had accessed the direct contact details of management and responding to queries addressed to Georgeson, the authorised inbound call scripts of which contemplate that new or different inbound questions are escalated to management.
As I noted above, the chairman of ResApp and one non-executive director confirmed they had no oral engagement with shareholders (Eighth Keating Affidavit, [34(a)]) and a third non-executive director had only had one phone call from a shareholder which he directed to Dr Keating (Eighth Keating Affidavit [34(b)]) and those directors also did not have written communications with ResApp shareholders on any substantive matter (Eighth Keating Affidavit [24]). Dr Keating and Mr Leedman, who are executive directors of ResApp, had more extensive communications with shareholders, set out in a table provided to ASIC and contained in the Eighth Keating Affidavit (Ex AK-7, 46-49). Each confirmed they made no general outbound calls to shareholders (other than returning missed calls, those that Georgeson had indicated a shareholder had requested him to call back, or specific calls) and each says that he maintained balance, including not deviating from the content of the approved disclosure or overemphasise any particular matter (Eighth Keating Affidavit [25]-[33]; Second Leedman Affidavit at [31]-[33]). Mr Wood fairly recognises and ASIC has also noted that Mr Leedman was unable to provide any log of his calls or confirmation prior to 16 August 2022, where he has not been able to retrieve his phone records from his telephone provider (Second Leedman Affidavit, [23]-[30]). The affidavit evidence sets out, and Mr Wood also addresses the detail of Dr Keating's and Mr Leedman's communications with shareholders, and I have noted an issue raised by ASIC as to one communication from Mr Leedman to a shareholders above. I need not address those issues in further detail in this judgment. I broadly accept Mr Wood's submission that, to the extent that some emails from Mr Leedman engage in a measure of advocacy, that is permissible so long as it is fair and honest: Re Investa Listed Funds Management Ltd [2016] NSWSC 344 at [5]. I also accept, subject to the further observations that I make below, that there is a distinction between a general company communication to all shareholders and a response to an inquiry made by a specific shareholder of a company that is the subject of a scheme.
Turning now to wider issues arising from ResApp's communications with shareholders, I bear in mind that issues concerning shareholder communications have arisen in earlier cases, at least to some extent. In Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897, Barrett J observed (at [15]-[16]) that: "…it is a fundamental premise of Pt 5.1 that the documents which go to members in accordance with the orders of the court (including, in a case such as this, those which concern them in their related capacity as holders of trust units) should be the only vehicle by which there is communication of the substantive message relevant to members' decision making. Registration of the explanatory statement by ASIC and its examination by the court are steps taken with a view to validating its integrity as a suitable communication vehicle. The reality nevertheless remains that, in matters of this kind, it can be helpful to members and conducive to their taking advantage of their rights to engage in decision making that they have a point of contact to which they can refer if uncertain about how to proceed in order to participate or about the core aspects of the scheme. It is proposed in this case that such a means of communication should be available through the share registry. The personnel at the registry who deal with enquiries will be restricted in what they can say and will work from a script which will be so tailored that it does not add to what is said in the explanatory statement and other documents which are only permitted vehicle for substantive communication. There is no harm in that confined and structured approach; indeed, it is a helpful one."
His Honour there noted the possible desirability of the Court making an order for recording such communications, at least in a contentious scheme, and also observed (at [19]) that any controversy as to such communications "outside the formal documentary channels" may become a matter which "needs to be addressed upon any application for the Court's approval of the scheme". That approach is, in my view, consistent with the Court's general approach to schemes of arrangement, which is generally not to set prescriptive rules in advance, but instead to make an assessment whether the scheme should be approved at the second Court hearing, involving the exercise of a judicial discretion.
In Re Westfield Holdings Ltd (2004) 49 ACSR 734; [2004] NSWSC 458 at [12], Barrett J noted, without disapproval, a practice by which inquiries to a shareholder information line would be escalated to company executives who would maintain a record of such conversations and observed that: "These arrangements are, in my view, sufficient to anticipate any issues that may arise on the second hearing if the matter proceeds that far, as to the effect that communication with members outside the four corners of the documents may have had. The arrangements are such that there should, if they are observed, be in existence a record of each conversation that can be taken into account if any such issue arises at that point."
In Re Centro Retail Ltd and Centro MCS Manager Ltd in its capacity as responsible entity of Centro Retail Trust [2011] NSWSC 1321 at [10]-[11], Barrett J in turn addressed the position of wider communications to shareholders, in a frequently cited passage: "Where the court has ordered the convening of a meeting and has approved an explanatory statement, the company itself should not despatch additional explanatory material without first obtaining court approval. This was made clear by Emmett J in Re Coates Hire Ltd (No 2) [2007] FCA 2105. That was a case in which the explanatory statement approved by the court under s 411(1) was accompanied by additional material when sent to members. Emmett J said (at [6]) "Where the Court orders that a document in a particular form be sent to shareholders, the documents should not be accompanied by any further document that has not itself been approved by the Court. If it is proposed that other documents, such as covering letters, be sent, a draft of those other documents should be put before the Court at the time of the application for the order that the meeting be convened. The other documents can then be incorporated into the Court's order." This observation takes account of the function assigned to the court by s 411(1) in relation to the explanatory statement called for by s 412(1)(a) and, although concerned with initial despatch, applies with equal force to any proposal for later supplementation of the approved explanatory statement. Because the meeting is convened in accordance with an order of the court and the court has approved the explanatory statement, the court-approved "message" should not be interfered with by unilateral supplementation by the company."
Mr Wood here submits that the Court should not be concerned with communications with shareholders that took place before the first Court hearing, in deciding whether to approve a scheme at a second Court hearing. I do not accept that submission as an absolute proposition, since the Court would not disregard communications that took place before the first Court hearing and adversely affected the integrity of the subsequent steps taken in respect of the scheme. However, I accept that issue does not arise here.
Mr Wood also submits and I accept that, to the extent that individual communications take place with shareholders, the preferable approach is for the Court to review the position in respect of such communications after the event, as a matter that is relevant to whether a scheme should be approved at the second Court hearing, rather than seeking to establish prescriptive rules for such communications or approving scripts for such communications in advance. I also accept Mr Wood's submission that it may be appropriate for a company's chair, its directors or its executives to communicate with major shareholders in respect of a scheme, or with shareholders who feel strongly in respect of the scheme, in a particular case, although the practical risks of doing so in an unrestrained way are well illustrated by this matter. I return to that issue below. I also accept Mr Wood's submission that any prescriptive rule would give rise to difficulties in distinguishing between legitimate responses to administrative inquiries in respect of a scheme and responses that had a more substantive character. Those observations are consistent with Barrett J's approach in the cases that I have noted above.
Mr Wood also submits that the Court should recognise a suggested "reality that some shareholders are unable to understand properly a scheme booklet". I do not accept that that difficulty is sensibly addressed by a company's directors or executives engaging in unrestrained individual communications with shareholders, providing "simpler" explanation as to why shareholders should vote for the scheme, which potentially undermine the balanced assessment that a scheme booklet will seek to provide. An obviously better approach to difficulties in shareholders' comprehending a scheme booklet is to simplify it or at least include a clear chairman's letter, a summary of key terms and "frequently asked questions", as is common practice and was adopted here, so that booklet is more comprehensible to shareholders; and, possibly, also to release investor presentations to ASX, which have on occasion been approved by the Court in connection with schemes.
I accept Mr Wood's further submission that, as a matter of policy and as a matter of commerce, the Court should not seek to impose any "blanket embargo" on company officers responding to shareholder inquiries. I would add that the Court should particularly not seek to do so where there is no evidence before it as to the extent to which companies generally respond to such inquiries while a scheme is on foot. However, that observation does not displace the need for scheme companies to recognise the practical risks of such communications, which this matter again illustrates and to which I will return below. I also accept that, as Mr Wood submits, any attempt to constrain such communications might well exceed the Court's proper functions in respect of the approval of a scheme under s 411 of the Act and any initial approval of the explanatory statement and, by extension, the approval of systematic communications with shareholders which have the potential to interfere with or contradict a Court approved scheme booklet. I also recognise that a similar view is reflected in Barrett J's approach in the cases noted above.
Mr Thomas, who appears for Pfizer, also pointed out, and I also accept, that there would a real difficulty with setting prescriptive rules for communications with shareholders where the companies which propound schemes of arrangement differ in size, and there is a real distinction between, on the one hand, a scheme between a company and a large number of retail shareholders and, on the other hand, a scheme between a company and small number of sophisticated shareholders who already have a detailed understanding of its operation, of the kind considered by this Court in Re Crestone Holdings Ltd [2022] NSWSC 578. Mr Thomas also points to the significance of ex parte disclosure obligations in a scheme of arrangement, and fairly accepted that reliance on those obligations will generally require counsel and solicitors acting in a scheme of arrangement to make inquiries as to the communications between the scheme company or the acquirer and shareholders in respect of the scheme. Mr Thomas also pointed out, and I also accept, that the imposition of prescriptive limitations on a company's or directors' communications with shareholders would be potentially inconsistent with other obligations arising under the Act, including the directors' duties provisions.
Recognising all these matters, I should nonetheless note that the history of this scheme amply demonstrates why it may be practically desirable for a scheme company and its directors and executives generally to respond to shareholder communications after the proceedings had commenced by drawing attention to the disclosure in the scheme booklet and encouraging shareholders to reach their own assessment of the scheme on its merits. Here, ResApp's and its directors' vigorous and somewhat undisciplined approach to communications with its shareholders, in response to shareholder emails and telephone calls, plainly increased the risk of unbalanced communications occurring which had the potential to undermine the integrity of the scheme process, and that in turn required that ResApp lead voluminous evidence of those communications in a manner that will have substantially increased its costs of this hearing. Indeed, the second Court hearing in this matter has involved more affidavits and took more time than any other scheme heard in this Court in the last ten or so years, including those which have involved much larger and more complex commercial transactions. It is very likely that that would not have occurred had ResApp and its executives adopted a more disciplined approach to their communications with shareholders.

Other discretionary considerations

Mr Wood submits and I accept that the evidence does not raise any suggestion that ResApp shareholders have voted for an improper purpose. He submits and I accept that the Court may be satisfied that members have voted in good faith and not for an improper purpose where the proposed scheme is "for an acquisition transaction of a kind ordinarily approved by courts, does not involve any novel or exotic treatment of rights and, as such, voting in favour is unlikely to be motivated by some improper purpose"; the independent expert has expressed the opinion that, in the absence of any other relevant information or alternate proposal, the scheme is in the best interests of ResApp shareholders; and neither ASIC nor any shareholder has appeared to object to approval of the scheme at the second Court hearing.
Mr Wood also submits and I accept that the Court generally takes the view that the members are the best judges of whether an arrangement is to their commercial advantage, and the Court's role is not to assess the commerciality of the scheme overall or whether it is the best outcome, but only to consider whether the scheme is one that sensible business people might consider to be of benefit to members. I am satisfied of that matter, where proof of the relevant statutory majorities is prima facie evidence of the fairness and reasonableness of the proposed scheme; the scheme consideration was twice increased since the announcement of the proposed scheme on 11 April 2022 and is now $0.208 per ResApp share, being higher than the preferred value identified by the independent expert of $0.207; the independent expert has expressed the view that the proposed scheme is fair and reasonable and in the best interests of ResApp shareholders; and no Superior Proposal (as defined) to acquire ResApp's shares, business or assets has emerged since the scheme implementation deed was entered into. I recognise that Pfizer's position as to the scheme consideration was made clear to ResApp shareholders by its making its "best and final" statement after twice increasing the scheme consideration. Mr Wood also submits that the bridging loan made by Pfizer did not make the proposed scheme unfair or unreasonable, where ResApp's board and independent expert considered that loan and it was disclosed to ResApp shareholders. It seems to me that the Court cannot and should not second guess the decision of ResApp's board in that respect, in the circumstances which I have noted in earlier decisions in that matter, and I accept that loan was not coercive of ResApp shareholders in the circumstances.
I also accept that ResApp ultimately made full and fair disclosure to its shareholders, although its process for communications with shareholders was plainly fraught with difficulty and has required multiple applications in the matter. I accept that the scheme booklet, the supplementary scheme booklet and the second supplementary scheme booklet was each the subject of a verification process by both ResApp and Pfizer (as applicable) and approved by ResApp's board for release, on the basis that it was true and correct; and, as the scheme progressed, ASIC rightly gave close attention to the process and content of ResApp's disclosures and raised the several issues that I have addressed above.
Mr Wood submits and I accept that nothing in the structure of the scheme raises any question as to oppression of any minority interest in ResApp shares. He also submits and I accept that there is no reason to think that all relevant matters have not been brought to the Court's attention, in a scheme that has involved multiple applications to the Court to address the various issues noted above. I also recognise that cl 3.1 of the Second Amended SID and cl 2.1 of the proposed scheme contain conditions precedent which must be satisfied before the scheme becomes effective in accordance with its terms and certificates from ResApp and Pfizer evidencing the satisfaction or waiver of those conditions precedent are in evidence. Mr Wood also submits and I accept that there are no other matters that should give rise to any public policy concerns for the Court in approving the scheme.

Exemption from s 411(11) of the Act

ResApp also submits and I accept that there is no utility in having the Court's orders annexed to ResApp's constitution as those orders do not change its constitution.

Section 411(17) of the Act

ASIC has here indicated that it does not object to the scheme, for the purposes of Ch 6 of the Act and s 411(17) of the Act, although the question whether the scheme could have proceeded as a takeover under Ch 6 is relevant to the exercise of the Court's wider discretion whether to approve the scheme. I accept that the implementation of a merger by scheme, in order to provide certainty of outcome, generally does not offend s 411(17) of the Act and it does not do so here: Re The Trust Co Ltd [2013] NSWSC 1947 at [18].

Orders

For these reasons, I made the orders sought by ResApp at the conclusion of the second Court hearing.

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: 06 October 2022

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (12 paragraphs)

Legislation Cited (1)

Cases Cited (23)