Incannex Healthcare Limited, in the matter of Incannex Healthcare Limited [2023] FCA 1441

Introduction 1 On 4 October 2023, I made a number of orders pursuant to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (the Act). I also made an order pursuant to r 1.3 of the Federal Court (Corporations) Rules 2000 (Cth) (the Rules). The following are my reasons for making those orders. 2 By Originating process dated 19 September 2023, Incannex Healthcare Limited (IHL) made an application under ss 411 and 1319 of the Act seeking orders and directions in relation to the following schemes of arrangement: (1) a proposed scheme of arrangement (Share Scheme) between the plaintiff (IHL) and its members (IHL shareholders), under which Incannex Healthcare Inc. registered company number 7548640 (Incannex US) will acquire all of the fully paid ordinary shares in the capital of IHL (Shares); and (2) a proposed scheme of arrangement (Option Scheme) between IHL and the holders (optionholders) of options in IHL (Options), under which the Options will be cancelled in exchange for options in Incannex US (subject to certain ineligible foreign optionholders whose Options will be cancelled for nil consideration). 3 The orders sought by IHL included orders for the convening of a meeting of IHL shareholders (Share Scheme Meeting) pursuant to s 411(1) of the Act and an order for the convening of a meeting of optionholders (Option Scheme Meeting) pursuant to s 411(1) of the Act. Orders were also sought by IHL pursuant to s 1319 of the Act in relation to the manner in which the Share Scheme Meeting and the Option Scheme Meeting was to be convened and conducted and an order pursuant to the same section that the explanatory statement in relation to the Share Scheme and the Option Scheme accompany the notices of meeting. 4 IHL provided an accurate description of the commercial purpose of the Schemes. The commercial purpose of the Schemes is to effect the acquisition of IHL by Incannex US resulting in the re-domicile of IHL and its related bodies corporate (Incannex Group) from Australia to the United States of America. 5 IHL's application was supported by three affidavits, being affidavits in each case affirmed by Mr Joel Bradley Latham. The first affidavit was affirmed by Mr Latham on 19 September 2023 and is given by Mr Latham on behalf of IHL and in his capacity as Managing Director and Chief Executive Officer of IHL. Mr Latham describes the proposed Schemes and annexes a copy of an Australian Securities and Investments Commission (ASIC) company extract for IHL obtained on 19 September 2023. The second affidavit was affirmed on 3 October 2023 and is given by Mr Latham on behalf of IHL. Mr Latham describes the business and capital structure of IHL and identifies the main features of the Schemes. He also addresses the consideration of the Schemes by the directors of IHL, their voting recommendation and their voting intentions, the verification of the Scheme Booklet, the provision of the draft Scheme Booklet to ASIC, the proposed time and place for the holding of the Scheme Meetings and provides information as to the proposed chairperson and alternate chairperson of the Scheme Meetings. The third and final affidavit was also affirmed on 3 October 2023 and is given by Mr Latham on behalf of Incannex US and in his capacity as Chief Executive Officer and President of that company. Mr Latham describes the business and capital structure of Incannex US and any relationships or arrangements between Incannex US and IHL. He gives evidence in relation to the verification of the Incannex US Information in the Scheme Booklet, and he annexes copies of the Share Scheme Deed Poll and Option Scheme Deed Poll. 6 IHL is an Australian public company limited by shares and registered in the State of Western Australia. It is a biotech company involved in research and development of cannabinoid and psychedelic compound medicines for the treatment of a broad range of conditions, including inflammatory diseases, dementia, Parkinson's disease and obstructive sleep apnoea. The company is admitted to the official list of the Australian Securities Exchange (ASX) and its ordinary shares (Shares) are quoted for trading on the ASX (as its primary listing) and on Nasdaq in the form of American Depository Shares (as its secondary listing). Each American Depository Share represents 25 Shares in IHL. 7 The Scheme Booklet contains an independent expert's report dated 11 September 2023. It is a report of Findex Corporate Finance (Aust) Ltd (Findex). The independent expert's conclusions are that the advantages of the Share Scheme outweigh the disadvantages and accordingly the Share Scheme is in the best interest of the shareholders and the advantages of the Option Scheme outweigh the disadvantages and accordingly the Option Scheme is in the best interest of optionholders for IHL. 8 As at 30 August 2023, Incannex had a closing market capitalisation on the ASX of approximately A$130 million. 9 The independent expert referred to the Schemes as the "proposed re-domicile transaction". In its written submissions to this Court, IHL described the essence of the Share Scheme as follows: 6. The proposed redomiciliation of IHL to the US is to occur by means of a "top-hatting" transaction. This will be achieved by means of a newly incorporated US company (Incannex US) acquiring all of the Shares on issue in IHL in exchange for issuing new Incannex US Shares to the former holders of IHL Shares and ADSs (Shareholders). ADSs will cease to exist. This will occur pursuant to a member's scheme of arrangement under Part 5.1 of the Act (Share Scheme). 7. Accordingly, upon implementation of the Share Scheme, Shareholders will become holders of Incannex US Shares in their same proportions as their holdings of IHL Shares at the Record Date. Incannex US will list the Incannex US Shares on the Nasdaq as its sole listing, to replace IHL's current listings of Shares on ASX and ADSs on Nasdaq. Further, the business of Incannex US will consist entirely of the business of IHL, Incannex US will be managed by the existing board and senior management of IHL, and IHL will become a wholly-owned subsidiary of Incannex US. (Footnotes omitted.) 10 There is an exception to that aspect of the proposal whereby shareholders in IHL will receive new Incannex US Shares and that exception is in relation to Ineligible Foreign Shareholders and Small Parcel Holders, who will receive the cash proceeds of the sale of the Incannex US Shares to which they would otherwise have been entitled to. 11 The Scheme Booklet identifies a number of benefits attending the re-domiciliation of IHL to the United States and those benefits include the following: (1) improved access to lower-cost equity capital in the US markets, thus enabling future growth to be financed at a lower costs; (2) increased alignment with other prominent pharmaceutical companies that are already listed on Nasdaq which can enhance the group's visibility and reputation within the industry, making it more attractive to potential investors, strategic partners, and other stakeholders; (3) a US corporate structure that may increase the Incannex Group's attractiveness to potential merger partners, sellers or acquirers; (4) enhanced regulatory pathway for Incannex's pharmaceutical products through direct access to FDA resources, guidance, and expertise; (5) better collaborative opportunities with FDA; and (6) increased attractiveness of Incannex US to a broader US investor pool who previously could not invest in securities of non-US companies or American Depositary Shares. 12 The "top-hatting" method of effecting a change in the domicile of a company by a scheme of arrangement has been employed in a number of other cases (see, for example, News Corporation Ltd [2004] FCA 1480; (2004) 51 ACSR 394; GetSwift Limited, in the matter of GetSwift Limited (No 2) [2020] FCA 1733; OPUS Group Limited, in the matter of OPUS Group Limited [2018] FCA 959). 13 IHL also has issued options to purchase its Shares (Options). It is proposed that all of the Options will be cancelled in exchange for Incannex US issuing new Incannex US Options to each person who holds Options at the Record Date (optionholders). In particular, optionholders will receive one Incannex US Option for every 100 Options cancelled and on terms which mirror, to the extent possible, their existing Options (including the proportion of new Incannex US Shares that may be issued to them on the exercise of their Incannex US Options). This will occur pursuant to a creditors' scheme of arrangement under Part 5.1 of the Act (Option Scheme). As IHL pointed out, optionholders are treated as creditors for the purposes of the scheme of arrangement provisions in Part 5.1 of the Act (Damian T and Rich A, Schemes, Takeovers and Himalayan Peaks (4th ed, 2021) at [3.4.1(c)] and the cases cited in footnote 488 on p 116). 14 Subject to the independent expert continuing to conclude that the relevant Scheme is in the best interests of IHL shareholders or optionholders (as the case may be), the directors of IHL unanimously recommend that shareholders and optionholders vote in favour of the respective Schemes, and the directors intend to vote any Shares or Options held or controlled by them in favour of the Schemes. 15 Findex describe their understanding of the proposed schemes of arrangement as involving a change of control in that Incannex US will ultimately hold the assets of Incannex. However, the underlying economic interest of Incannex shareholders and Incannex optionholders in eligible jurisdictions will be virtually unchanged as a result of the proposed schemes of arrangement, that is, Incannex shareholders and Incannex optionholders, as a whole, will effectively retain virtually the same existing ownership interests in the underlying assets of Incannex. As I have said, the conclusion of the independent expert is that the advantages of the Share Scheme outweigh the disadvantages and the advantages of the Option Scheme outweigh the disadvantages. 16 The Scheme Booklet includes a copy of the Share Implementation Deed and this Deed sets out the terms of the Share Scheme and the Option Scheme respectively. 17 The Scheme Booklet was lodged with ASIC on 13 September 2023 and ASIC has stated that it has no comments on the Scheme Booklet. 18 The Court has proposed changes to the procedural and evidentiary requirements for schemes of arrangement hearings with a view to making the process more efficient. The starting point is the decision of Jackman J in Vita Group Ltd, in the matter of Vita Group Ltd [2023] FCA 400; (2023) 165 ACSR 576 (Re Vita Group) where his Honour identified a number of matters with respect to which evidence would no longer be required. His Honour's approach was then followed in a number of subsequent decisions of this Court. It is not necessary for me to set out the details. They are set out in IHL's written submissions on this application (para 25). 19 On 15 May 2023, a judge of this Court (Banks-Smith J) wrote to the presidents of the law societies and bar associations in Australia setting out a number of propositions relating to the procedure and evidence for schemes of arrangement hearings (Schemes Letter). There are 12 such propositions and, as IHL submitted, they are generally consistent with the approach of Jackman J in Re Vita Group, although less prescriptive as to the procedure to be adopted in any particular case. The Court has adopted the propositions in the Schemes Letter in three recent decisions (see IHL's written submissions at para 27). 20 It is important to note that the Option Scheme is conditional on the approval of the Share Scheme, and that means that if the Share Scheme is not agreed to by shareholders or is not approved by the Court, then neither Scheme will be implemented. However, the Share Scheme is not conditional on the approval of the Option Scheme and that means that if the Option Scheme is not agreed to by the optionholders, but the Share Scheme is agreed to by shareholders, the Share Scheme may still proceed. If the Share Scheme proceeded, but the Option Scheme did not, then IHL would proceed with the Share Scheme alone and optionholders would still hold Options exercisable over IHL Shares. The Scheme Booklet provides as follows: If that occurs, and Incannex proceeds with the Share Scheme alone, Optionholders would still hold options exercisable over Incannex Shares. In this case, Incannex US would consider all of the alternatives available to it, including compulsory acquisition (or cancellation) of the Options (if available). This may result in Optionholders receiving a consideration for their Options at a time and in a different form after they would have received it under the Option Scheme. (Footnotes omitted.) 21 The principles which apply to an application to convene a scheme meeting are well known and have been referred to in a number of decisions of this Court. In Re Cytopia Ltd [2009] VSC 560 at [3], Davies J said the following observations: … The authorities make it clear that the Court's role at this stage is not to express a view on whether the proposed scheme should be approved. It is also clear that it is not the Court's role to usurp the shareholders' decision, by attempting to intrude its own commercial judgment. The Court is to be concerned with whether there is adequate disclosure to the shareholders in the Scheme Booklet (or explanatory memorandum), whether the legal requirements otherwise have been complied with and whether the scheme, on its face, is one that is sufficiently "fair and reasonable" to be capable of being put to shareholders for their approval or rejection. 22 The question whether to accept particular consideration for shares is a commercial matter for the shareholders to assess and they ought not be prevented from having an opportunity to do so, provided that the Court can be satisfied that they are acting on sufficient information and with time to consider what they were voting on. Where the arrangement is one that seems fit for consideration by the meeting of members, and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then orders should be made to convene the meeting. In the Matter of Foundation Healthcare Limited [2002] FCA 742; (2002) 42 ACSR 252 (Re Foundation Healthcare), French J said (at [36] and [44]): 36 An application for leave to convene a scheme meeting is part of a three stage process, the Court's approval of the meeting, the members' or creditors' approval of the scheme and the Court's approval of the scheme. Owen J has observed that the practice has developed that the Court, on a first stage application, closely scrutinises the scheme documents. If it be of the view that the scheme would be unlikely to receive approval, then the Court should not give leave to convene the meeting - Re Bond Corporation Holdings Ltd (1991) 5 ACSR 304 at 316 and see Re Stockbridge Ltd (1993) 11 ACLC 201 (Murray J). It is however important to bear in mind 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) 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). … 44 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 - Re NRMA Ltd at 605. 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. The Court is not required to be satisfied either at the convening or approval stage that no better scheme could have been devised. The Scheme, on the face of it, is not obviously unfair or otherwise inappropriate. If there are interests adversely and unfairly affected then the probability is that the question will arise at either or both the Scheme meetings or the final approval stage.

The Statutory Prerequisites 23 IHL has issued an Originating process and it is a Part 5.1 body (see s 9 of the Act) and the proposal involves an arrangement within s 411(1). In Re Foundation Healthcare, French J said the following (at [39]): … The word "arrangement" is of wide import. As was said in Re NRMA Ltd, at FLR 357; ACSR 603: Generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or to evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed, may come under s 411 … 24 The provisions of s 411(2)(a) and (2)(b) concerning notice to ASIC and a reasonable opportunity to ASIC have been complied with as ASIC acknowledges in its letter dated 3 October 2023. The requirements of r 2.4(1) and (2), r 3.2(a) and (b)(i) and r 3.2(b)(ii) and (iii) of the Rules have been complied with. The explanatory statement included within the Scheme Booklet meets the requirements of s 412 of the Act and Reg 5.1.01 and Sch 8 of the Corporations Regulations 2001 (Cth) (the Regulations). 25 The Scheme Booklet is to be registered by ASIC before being sent to IHL shareholders (s 412(6)). Before registering the Scheme Booklet, ASIC must conclude that it appears to comply with the requirements of the Act, and must form the opinion that the Scheme Booklet does not contain any matter that is false in a material particular or misleading in the form and context in which it appears (s 412(8)). The registration of the Scheme Booklet provides further assurance of the satisfaction of the relevant disclosure requirements.

Discretion 26 The procedural requirements were satisfied and the Court's discretion was enlivened. The relevant discretionary considerations were whether the Schemes were fit for consideration by the members and whether the members were to be properly informed as to the nature of the Schemes. 27 The Schemes were fit for consideration by IHL's members in that the Schemes were of such a nature and cast in such terms that if agreed to at the Scheme Meetings, the Court would be likely to approve the Schemes at the second court hearing; there was no issue arising from the Schemes which would unquestionably lead to a refusal by the Court to approve the Schemes at the approval hearing and it cannot be said that the Schemes were, on their face, "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further" (Re Foundation Healthcare at [44]). 28 The Court looks to the terms of a scheme to satisfy itself that there is no unfairness that would be likely to preclude approval of the scheme. In this case, IHL raised the following features of the Scheme as matters which it accepted, should be considered by the Court. 29 First, it was accepted that the Court would consider the performance risk (Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 (Re Amcor) at [53] per Beach J). With respect to performance risk, although the Schemes provide for Incannex US to issue the consideration under both Schemes, Incannex US is not a party to the Schemes and is not directly bound by them. In those circumstances, the Court will wish to ensure that Incannex US is bound to perform the actions attributed to it under the Schemes and that its obligations are able to be enforced. This is often referred to as "performance risk". The safeguards in this case are that the Schemes require that Incannex US must first issue the consideration to shareholders and optionholders and it is only after the considerations are issued that the Scheme Shares and Scheme Options will be cancelled. This effectively removes any performance risk insofar as the transfer of the Scheme Shares and cancellation of the Scheme Options is concerned. Secondly, as required by the terms of the Scheme Implementation Deed, Incannex has executed deed polls in favour of Share Scheme participants and Option Scheme participants binding Incannex to perform the actions attributed to it under the Schemes, including issuing the consideration in the form of the new Incannex Shares and Incannex Options (Share Scheme Deed Poll, cl 4 and Options Scheme Deed Poll, cl 4). IHL submits that consistent with proposition 11 of the Schemes Letter and the decision in Blackmores Limited, in the matter of Blackmores Limited [2023] FCA 624, IHL has not provided an affidavit concerning foreign law advice in relation to the execution and enforceability of the Deed Poll. In this context, it is to be noted that Deed Polls are governed by the law of Victoria and Incannex US has submitted to the non-exclusive jurisdiction of courts exercising jurisdiction in Victoria (Share Scheme Deed Poll, cl 7.4. See also para 5 of the Practice Note made on 13 October 2023 after the First Court Hearing). 30 Secondly, with respect to treatment options, IHL submitted that an issue which is commonly considered in relation to options or performance rights is whether their proposed treatment under a scheme gives rise to the need for separate classes to be created. In this case, the issue was whether the proposed treatment of the Options gives rise to a need for separate classes to vote on the Share Scheme, given that some but not all IHL shareholders also hold Options. IHL submitted that there was no need for separate classes to vote on the Share Scheme. Courts have consistently held that members with existing performance rights or options which are to be cancelled in return for a cash payment or converted into shares which will participate in the scheme do not constitute a separate class for the purposes of voting on the scheme. IHL submitted that it must follow from this that options are to be replaced with equivalent options in the acquiring entity do not necessitate placing the holders of those options in a separate class for the purpose of voting on the Share Scheme. I accept these submissions and it is sufficient for me to refer to Re Skilled Group Ltd (No 1) [2015] VSC 789; (2015) 113 ACSR 525 at [60]-[86] per Robson J; and Healthscope Limited, in the matter of Healthscope Limited [2019] FCA 542; (2019) 139 ACSR 608 at [47] and following per Beach J). 31 Thirdly, with respect to common directors, the board of directors of each of IHL and Incannex US are the same and following the implementation of the Share Scheme, Incannex US will be managed by the existing board and senior management of IHL. IHL submits that the commonality of directors does not impact on the appropriateness of the IHL directors making a recommendation to shareholders and optionholders to vote in favour of the Schemes or require the directors to vote in a separate class. The common directorships of the directors are clearly disclosed in the Scheme Booklet and that circumstance is a matter that shareholders can take into account when assessing the directors' recommendation. With respect to IHL directors voting at the Scheme Meetings, IHL submitted that the fact of common directorships does not result in a separate class for voting purposes. It pointed to the fact that prior to entering into the Scheme Implementation Deed, Incannex had no operations and its sole purpose was to become the holding company of the Incannex Group following implementation. I accept these submissions. 32 Finally, with respect to Ineligible Foreign Shareholders and Small Parcel Holders, the Schemes contain the usual provisions to facilitate the sale and remittance of cash proceeds to Ineligible Foreign Shareholders and, in this case, the same procedure is to be used for Small Parcel Holders who do not elect to receive the Scheme Consideration. IHL submitted that the proposed treatment of these shareholders does not give rise to a requirement of separate class meetings. It submitted that it is common practice in schemes of arrangement where scrip comprises (or is a component of) the proposed scheme consideration that identified foreign shareholders were not entitled to receive the scrip consideration, but instead received cash as consideration for their scheme shares. This was usually achieved by the use of a sale facility mechanism as was provided for in this case. The scrip to which foreign shareholders would otherwise have been entitled is instead issued to a sale agent on their behalf who must subsequently sell those shares and remit the cash proceeds of the sale to the foreign shareholder. There was clear line of authority in relation to such cases that they do not require the ineligible foreign shareholders to meet together as a separate class for the purposes of considering the proposed scheme of arrangement. I agree and refer to Re Amcor Ltd at [42]-[43] and at [44] where Beach J said: Accordingly, in the present case, no separate class issue arises as regards the Ineligible Foreign Shareholders. There may not be identical treatment but there is nevertheless a community of interest. Clearly the relevant difference of treatment in the present case does not destroy the ability for the Ineligible Foreign Shareholders and the other Scheme Shareholders to "consult together in a common interest" (Re Hills Motorway Ltd (2002) 43 ACSR 101 at [12] per Barrett J and First Pacific Advisors LLC v Boart Longyear Ltd (2017) 320 FLR 78 at [77] to [81] per Bathurst CJ). All are receiving the same value, albeit in different form, but such differentiation in its formal effect does not destroy that commonality. 33 The other relevant aspect of the discretion involved a consideration of whether the members are to be properly informed as to the nature of the Schemes. 34 Section 412(1) of the Act and Sch 8 (Part 3) of the Regulations set out the disclosure requirements of the explanatory statement which is included within the Scheme Booklet. The significance of this circumstance was described by Moshinsky J in Japara Healthcare Limited, in the matter of Japara Healthcare Limited [2021] FCA 1150; (2021) 156 ASCR 695 at [75] as follows: … The prescription of the contents of the explanatory statement in these provisions ordinarily provides guidance to the Court in assessing this matter, in a context where these applications are made in a summary way. Accordingly, if the court is satisfied that the statutory disclosure requirements are met, it will ordinarily be satisfied that information to be provided to shareholders is adequate for the purposes of the exercise of the court's discretion to convene a meeting. 35 In addition, as IHL pointed out, its shareholders and optionholders are to be presented with an appropriately detailed and clear explanation of the Schemes in the Scheme Booklet and they will have the benefit of the opinion of the independent expert as set out in the independent expert's report. They also have the benefit of the recommendation of the directors in relation to the Schemes. 36 I reached the conclusion that the Schemes, if approved by the requisite majorities at Scheme Meetings were likely to be approved by the Court and, in those circumstances, it was appropriate to make the orders convening the meetings and the other orders sought by IHL. 37 Rule 3.4 of the Rules provides that unless the Court otherwise orders, the plaintiff must publish a notice of the hearing of the Second Court Hearing, being the application for approval of the scheme, in a newspaper at least five days before the date of the hearing and the notice must be in accordance with Form 6. Proposition 5 in the Schemes Letter states that advertising by newspaper is not considered necessary when effective electronic notice options now exist, and dispensation from compliance will normally be granted upon request (see Re Vita Group at [23]). The orders sought by IHL include an order dispensing with compliance of r 3.4 and that is an appropriate order. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Besanko.