In the matter of rhipe Limited [2021] NSWSC 1170

Judgment

1. By Originating Process filed on 27 August 2021, the Plaintiff, rhipe Limited ("rhipe") seeks an order under s 411 of the Corporations Act 2001 (Cth) that it convene a meeting of its shareholders to consider and, if thought fit, agree a scheme of arrangement by which, Crayon Group Holding ASA, by its wholly-owned subsidiary Crayon Software Experts Australia Pty Ltd (together, "Crayon") will acquire all of the shares in rhipe, and associated orders.
2. By way of background, rhipe is a publicly listed company admitted to the official list of the Australian Securities Exchange ("ASX"), and is a wholesale provider of subscription-based cloud licences, infrastructure and services. Crayon Group Holding ASA is a leading information technology advisory firm which provides software and digital transformation services and has its headquarters in Norway and worldwide operations. The scheme provides for Crayon's acquisition of all of the ordinary shares in rhipe for a cash consideration of $2.50 for each rhipe share less the amount of any special dividend of up to $0.13 per rhipe share paid before implementation of the scheme. The total cash amount to be received by rhipe shareholders would be $2.50 per rhipe share, either by way of consideration payable under the scheme or a combination of a fully franked special dividend and scheme consideration.
3. At the conclusion of the first Court hearing, I made the orders sought by rhipe. I also made some brief observations as to one issue, while indicating that I would deliver more detailed reasons for judgment in due course. These are my reasons for making the orders that I made at the first Court hearing. I have drawn on Mr Williams' helpful submissions in support of the application in these reasons.

Affidavit evidence

1. rhipe relies on the affidavit dated 27 August 2021 of its solicitor, Ms Alexandra Mason, which refers, inter alia, to a release made by rhipe to ASX in respect of the scheme. An affidavit dated 6 September 2021 of rhipe's chief operating officer and chief financial officer, Mr Mark McLellan, exhibits documents relating to the proposed scheme and a copy of the proposed scheme booklet. Mr McLellan refers to the nature of rhipe's business and to rhipe's announcement to ASX of its entry into a Scheme Implementation Deed with Crayon on 6 July 2021. Mr McLellan outlines the steps involved in implementation of the scheme and the arrangements which have been made for the dispatch of the scheme booklet to unitholders, by electronic means or by a letter to shareholders as appropriate. Mr McLellan also outlines the process which has been adopted for drafting the scheme booklet and for its verification in common form, addresses the process by which exclusivity provisions contained in cl 11 of the Scheme Implementation Deed and a break fee contained in cl 12.2 of the Scheme Implementation Deed were negotiated, and also refers to the treatment of rhipe employee incentive arrangements under the proposed scheme. Mr Williams also addressed the content of the scheme booklet in detail in submissions.
2. By an affidavit dated 31 August 2021, Mr Gary Cox, who is a non-executive director of rhipe and a member of its remuneration and nomination committee and its people and culture committee consents to act as chair of the proposed scheme meeting. By an affidavit dated 1 September 2021, Mr Mark St John Pierce, who is a non-executive director of rhipe and the chair of its audit and risk committee, consents to act as chair of the scheme meeting if Mr Cox is unable or unwilling to do so.
3. By an affidavit dated 3 September 2021, Mr Andreas Rafen, who is the Vice President M&A and Legal Structure of Crayon, addressed the verification of information relating to Crayon contained in the scheme booklet and the process by which exclusivity and break fee provisions were negotiated. By an affidavit also dated 3 September 2021 Mr Gard Skogstrom, who is a solicitor admitted to the practice of law in Norway and a partner of the Norwegian firm which represents Crayon in relation to the acquisition of rhipe, confirmed that the Deed Poll in respect of the scheme had been validly executed by Crayon and, on specified assumptions, that a claim of a scheme shareholder under the Deed Poll would be enforceable against Crayon in a Norwegian Court.
4. By an affidavit dated 3 September 2021, Mr Sean Collins, who is a partner of KPMG and an authorised representative of KPMG Financial Advisory Services (Australia) Pty Ltd referred to the preparation of an independent expert's report, and confirmed that he holds the opinions contained in that report. By an affidavit dated 6 September 2021, Mr Charles Ashton, who is a partner in the solicitors acting for rhipe in respect of the scheme, addressed the provision of materials to the Australian Securities and Investments Commission ("ASIC") in respect of the scheme. By letter dated 6 September 2021, ASIC advised that it did not propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing under s 411(1) of the Act, and reserved its position as to a statement under s 411(17) of the Act to the second Court hearing in the usual way.

Applicable principles

1. I summarised the applicable principles in Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[26] as follows: "It is, of course, well-established that the Court will order the convening of a scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Corporations Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]- [20]; Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554 at [30]; Re Duet Finance Ltd [2017] NSWSC 415 at [15]; Re Villa World Ltd [2019] NSWSC 1207 at [15]. The Court will not ordinarily summon a meeting at the first court hearing unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. In Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44] (cited with apparent approval in Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [58]), French J observed that: "... by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J). ... The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court ... That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
2. Mr Williams points out that, at the first Court hearing, the Court is not concerned with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate for it to be submitted for shareholders' consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2006] NSWSC 1309 at [23]; Re Villa World [2019] NSWSC 1207 at [18]. The Court is also not required to be satisfied that no better scheme could have been proposed, but with whether sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re BIS Finance Pty Ltd Finance Pty Ltd [2017] NSWSC 1713 at [22].
3. Mr Williams also submits, and I accept, that the relevant formal requirements have been satisfied with respect to the proposed scheme. The scheme contemplates the acquisition by one company of shares in another, and falls within the concept of a "compromise or arrangement" within the meaning of s 411(1) of the Act: Re NRMA Ltd (2000) 33 ACSR 595; [2000] NSWSC 82 at [20]; Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [39]. ASIC has been provided with a reasonable opportunity to examine the terms of the scheme, and has confirmed it has no further comment on the scheme booklet, and, as I noted above, rhipe has tendered a letter from ASIC confirming that it does not intend to appear at the first Court hearing. The relevant requirements under the Supreme Court (Corporations) Rules 1999 (NSW) are satisfied.
4. I am satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the required majorities at the scheme meeting, the Court would be likely to approve the scheme at the second Court hearing: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Limited (2010) 183 FCR 358; (2010) 77 ACSR 592; [2010] FCAFC 34 at [12]. The scheme is unanimously recommended by rhipe's board 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 rhipe's shareholders; the independent expert, KPMG, has determined that, in the absence of a superior proposal, the scheme is fair and reasonable and therefore in its opinion is in the best interests of rhipe's shareholders; the scheme is straightforward in its operation and involves an all cash bid for the shares in rhipe, subject to the adjustment as to the proposed special dividend and the scheme booklet appears to provide sufficient disclosure of the terms of the scheme, including key features and the scheme's advantages and disadvantages.

Particular aspects of the scheme

1. In accordance with common practice and as suggested by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603; [2002] NSWSC 1177, Mr Williams draws several aspects of the scheme to the Court's specific attention. He submits, and I also accept, that none of these matters would prevent the making of an order to convene the scheme meeting. Special dividend
2. Mr Williams points out, and I note, that the rhipe directors intend to pay a fully franked special dividend of up to $0.13 prior to the Implementation Date (as defined) conditional on the scheme being approved and becoming effective. The amount of the cash consideration payable under the scheme will be reduced by the amount of any special dividend paid. The benefit to rhipe shareholders of receiving part of the total cash consideration for their shares in the form of a dividend is the franking credit attached to any proposed dividend. Under the Scheme Implementation Deed, rhipe must not pay a special dividend if rhipe's net cash position following payment is less than a specified amount and, based on information currently available, the rhipe directors expect to be able to determine to pay that special dividend. The directors' determination will be communicated to rhipe shareholders by way of ASX announcement prior to the second Court hearing, although it may not be known at the time of the meeting. I am satisfied that provides no reason not to approve the scheme, where shareholders will, at worst, know and be able to vote by reference to the total scheme consideration and treat the potential franking credit as a prospective further benefit. Deed Poll and performance risk
3. Mr Williams points out that rhipe's obligations under the scheme are supported by the Deed Poll given by Crayon in favour of rhipe shareholders. I have referred above to Mr Skogstrom's affidavit and his opinion as to the due execution and enforceability of the Deed Poll under Norwegian law.
4. Mr Williams also addresses the question of performance risk. He points out that, as disclosed in section 5.5(b) of the scheme booklet, Crayon proposes to fund the scheme consideration through a combination of a recently completed floating rate bond issue, a revolving credit facility with Danske Bank and existing cash reserves. Mr Williams also notes, by reference to Re Ellerston Global Investments Ltd above at [29], that a practice has developed to address performance risk, by which the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders, and there are numerous cases which have endorsed that practice. In this case, the scheme consideration will be paid to rhipe shareholders as a money payment, and the shares held by rhipe shareholders will only be transferred to the Crayon subsidiary if Crayon has paid the aggregate scheme consideration into the trust account. As a result, rhipe shareholders will not be left to an action under the Deed Poll if Crayon failed to pay the amount due. Independent expert report
5. Mr Williams also notes that the proposed scheme booklet contains an independent expert's report prepared by representatives of KPMG, and I have referred to Mr Collins' affidavit concerning that report above. That report expresses the view that that, in the absence of a superior proposal, the scheme is fair and reasonable and therefore in the best interests of rhipe shareholders. rhipe performance rights and directors' recommendation
6. Mr Williams also points out that rhipe operates a Performance Rights Plan under which Performance Rights are granted to rhipe's key management personnel and senior executives. Each Performance Right confers on its holder the right to acquire one rhipe share upon satisfaction of the vesting conditions, as determined by the rhipe board at the end of the relevant performance period. No amount is payable by the holder of the Performance Right upon vesting. The Performance Rights that rhipe presently has on issue are 1,262,472 vested Performance Rights pursuant to the 2019-2021 Long Term Incentive Plan which have vested in the ordinary course (and not in connection with the scheme); and 2,549,200 unvested Performance Rights on issue granted pursuant to the 2020-2022 Long Term Incentive Plan and 2021-2023 Long Term Incentive Plan. Under cl 3.1(h) of the Scheme Implementation Deed and cl 2.1(a) of the scheme, a condition precedent to the scheme is that arrangements have been put in place such that no Performance Rights (as defined in the Scheme Implementation Deed) exist on the scheme record date.
7. Mr Williams points out that rhipe's board has exercised its discretion under the rules of the 2020-2022 and 2021-2023 Long Term Incentive Plans so that all unvested Performance Rights granted pursuant to the 2020-2022 Long Term Incentive Plan will vest and automatically convert into rhipe shares on the Effective Date (as defined); and, in respect of unvested Performance Rights under the 2021-2023 Long Term Incentive Plan, 75% of the Performance Rights for those participants who participated in both the 2020-2022 and 2021-2023 plans; and 100% of the Performance Rights for those participants who participated only in the 2021-2023 plan, will vest and automatically convert into rhipe shares on the Effective Date. The holders of Performance Rights will therefore participate in the scheme in respect of the rhipe shares issued upon vesting of the Performance Rights and receive the cash consideration under the scheme for those shares. The treatment of Performance Rights is in turn set out in detail in section 8.2 of the scheme booklet.
8. Mr Williams submits and I accept that holders of Performance Rights who are also rhipe shareholders are not in a separate class by reason only that they also hold Performance Rights: Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Cashcard Australia Ltd (2004) 48 ACSR 738; [2004] FCA 223.
9. Mr Williams points out that rhipe's chief executive officer and managing director, Mr O'Hanlon, has made a recommendation with other directors in favour of the scheme. He holds or controls 2,657,840 rhipe shares (which have a value of approximately $6,644,600 based on the cash consideration of $2.50 for each rhipe share); holds 393,467 vested Performance Rights granted pursuant to the 2019-2021 Long Term Incentive Plan, the vesting of which occurred in the ordinary course and was not connected to the scheme, and which have a value of approximately $983,668 based on the cash consideration of $2.50 for each rhipe share); and, subject to the scheme becoming effective, will be entitled to receive $1,063,523 in connection with the early vesting of 425,409 unvested Performance Rights granted pursuant to the 2020-2022 and 2021-2023 Long Term Incentive Plan, based on the cash consideration of $2.50 for each rhipe share. Mr Williams points out that this matter is prominently disclosed in the chairman's letter which states that, given the importance of the scheme and Mr O'Hanlon's role as a director of rhipe and in the management of rhipe and his industry knowledge, the board of rhipe (excluding Mr O'Hanlon) has determined that it is appropriate for him to provide a recommendation to rhipe shareholders in relation to voting on the scheme, notwithstanding the nature and quantum of the benefits he stands to receive if the scheme is implemented.
10. Mr Williams submits that these matters do not compromise Mr O'Halloran's recommendation that rhipe shareholders vote in favour of the scheme: Re Gazal Corporation Limited [2019] FCA 701; Re Ruralco Holdings Limited (2019) 136 ACSR 628; [2019] FCA 878; Re Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348 at [40]. I accept this submission and that, given disclosure, the potential benefit to Mr O'Hanlon is not a reason to prevent him from making a recommendation to shareholders in relation to the scheme: Re Villa World Ltd above at [38]ff; Re DWS Ltd (2020) 148 ACSR 616; [2020] FCA 1590 at [41]-[49]. Break fee
11. Mr Williams also draws attention to a break fee and reverse break fee that are payable in specified circumstances. A break fee of $4 million is potentially payable by rhipe to Crayon ("rhipe Break Fee") in specified circumstances as set out in cl 12 of the Scheme Implementation Deed and summarised in section 8.11(e) of the scheme booklet. Mr Williams also submits, and I accept, that the break fee is not payable simply because rhipe shareholders reject the scheme, and is not a disincentive to shareholders in their consideration of the proposed transaction: Re Adelaide Bank Limited [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; [2007] FCA 2078. A break fee of $4 million potentially payable by Crayon to rhipe is set out in cl 13 of the Scheme Implementation Deed and summarised in section 8.11(f) of the scheme booklet, and is payable if rhipe terminates the Scheme Implementation Deed for material breach by Crayon.
12. There is evidence in common form that the negotiation of that fee was of the kind referred to in Re APN News & Media Ltd (2007) 62 ACSR 400 at 411 [2007] FCA 770. The break fee is less than the 1% guideline set out in the Takeovers Panel's Guidance Note 7: Lock Up Devices. I also accept that the break fee represents a genuine pre-estimate of Crayon's costs of participating in the scheme and was required in order to secure the continuing participation of Crayon in the scheme. Exclusivity
13. Clause 11 of the SID contains exclusivity provisions, namely "no-shop", "no talk" and "no due diligence" restrictions on rhipe (cl 11.2); an obligation on rhipe to notify Crayon of third party competing proposal (cl 11.3); and a "matching right" in favour of Crayon in respect of any competing proposal (cl 11.4). The "no talk" and "no due diligence" restrictions in cl 11.2 are subject to a "fiduciary carve-out" (cl 11.5), in circumstances where not taking certain actions would likely be inconsistent with rhipe's directors' duties under applicable law. I accept that broadly similar provisions have been accepted in Re ERM Power Ltd [2019] NSWSC 1502 at [24]; Re Prime Media Group Ltd (2019) 142 ACSR 1; [2019] NSWSC 1805; Re Windlab Ltd [2020] NSWSC 571 at [18]; and Re TPG Telecom Ltd [2020] NSWSC 772 at [22].
14. The Court will wish to be satisfied that any exclusivity period is for no more than a reasonable period which is capable of precise ascertainment; that an exclusivity clause dealing with an unsolicited alternative merger proposal is subject to a fiduciary carve out; and that the provision is clearly disclosed in the explanatory statement to the scheme shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re TPG Telecom Ltd above at [22]. Both those concerns are satisfied here, where the "Exclusivity Period" is clearly defined in cl 1.1 of the Scheme Implementation Deed and, at most, lasts for six months from the date of the Scheme Implementation Deed (unless a later date is agreed by the parties); and the exclusivity provisions are prominently disclosed in the scheme booklet in section 8.11(d). Deemed warranty
15. Clause 8.10 of the scheme provides for a deemed warranty by rhipe shareholders that their rhipe shares will be free from encumbrances. That deemed warranty is commonplace and sufficiently disclosed in the scheme booklet: Re APN News & Media Ltd above at [57]-[63]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]. Dispatch of explanatory material and virtual meeting
16. In oral observations before making orders at the conclusion of the first Court hearing, I noted that the only relatively novel aspect of this scheme is that those shareholders who will receive a mail out of hard copy documents are sent a copy of the chairman's letter and provided an electronic link to the explanatory memorandum. The Courts have permitted the practice of sending a letter which contains a link to the scheme document, which would include the chairman's letter, in recent years. Here, shareholders will be sent the chairman's letter, but will need to access the link to the explanatory memorandum. It seems to me that the provision of the chairman's letter is helpful to shareholders, so far as it allows them to access at least an overview of the scheme, without accessing the link to the explanatory memorandum. However, that is also a disadvantage of that course, because it raises a risk that, as a practical matter, shareholders may disregard the good advice given in the chairman's letter to access the link and the explanatory memorandum, and rely only on what they are told in the chairman's letter. It seems to me that the risk that that may occur is real, in practical terms. However, on balance, it does not seem to me that the Court should decline to convene the scheme meeting, because the scheme proponent wishes to helpfully provide the chairman's letter to shareholders, and in that letter fairly and prominently draws shareholders' attention to the need to read the explanatory memorandum. Notwithstanding the practical risk which I have noted, it seems to me that it would be perverse to refuse to convene a scheme meeting, because more information was initially provided to shareholders in the form of the chairperson's letter, to allow them to form at least a broad view of the nature of the scheme before clicking on the link to access the explanatory memorandum, if they accept the good advice to do so.
17. It is proposed that the scheme meeting be held as a virtual meeting, having regard to the uncertainty and potential health risks associated with large gatherings during the COVID-19 pandemic. Mr Williams points out that, following amendments to the Act with effect from 13 August 2021, virtual members' meetings are permitted and regulated by Part 2G.5 of the Act, and online attendance at the scheme meeting is permitted by s 253Q of the Act provided the technology used gives members as a whole a reasonable opportunity to participate without physically being present in the same place. That requirement is satisfied and the procedures for voting and participation at the scheme meeting are disclosed in the chairman's letter and the "Frequently Asked Questions" section of the scheme booklet and in the Notice of Meeting at Annexure D to the scheme booklet. I am satisfied that the meeting is properly conducted in that way. Section 411(17) of the Act
18. Mr Williams submits, and I accept, that the Court should defer addressing the question raised by s 411(17) of the Act, and any question of avoidance of the operation of Chapter 6 of the Act to the second Court hearing, when the scheme is being considered for approval: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[27].

Orders

1. For these reasons, I made orders at the conclusion of the first Court hearing in accordance with the short minutes of order, initialled by me and placed in the file.

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