iProperty Group Limited, in the matter of iProperty Group Limited [2015] FCA 1507

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1324 of 2015

IN THE MATTER OF IPROPERTY GROUP LIMITED ACN 126 188 538 IPROPERTY GROUP LIMITED

JUDGE: YATES J DATE: 5 February 2016 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The plaintiff, iProperty Group Limited, seeks an order under s 411(1) of the Corporations Act 2001 (Cth) (the Act) that a meeting of its members be convened for the purposes of considering and, if thought fit, agreeing to (with or without modification) a scheme of arrangement between the plaintiff and its members other than Excluded Shareholders (the scheme). 2 In these reasons, capitalised terms and expressions, otherwise undefined, have the meanings given in the scheme.

Background 3 The plaintiff is an Australian public company limited by shares. It is admitted to the Official List of ASX Limited (ASX) and its shares are quoted for trading on the stock market conducted by ASX. The plaintiff operates a network of property websites in Asia under the umbrella brand "iProperty.com". As at 8 December 2015, the plaintiff had 187,699,917 ordinary shares on issue. 4 On 1 November 2015, the plaintiff, REA Group Limited (REA) and a wholly-owned subsidiary of REA, realestate.com.au Pty Limited (realestate.com.au), entered into a Scheme Implementation Deed under which it is proposed that a newly-incorporated, wholly-owned subsidiary of realestate.com.au, Austin Bidco Pty Limited (Bidco), will acquire all the plaintiff's issued ordinary shares, other than those held by Excluded Shareholders, as at the Record Date. Bidco's only asset will be the scheme shares. 5 The Scheme Implementation Deed was amended on 7 December 2015, but nothing turns on that fact for the purpose of these reasons. 6 REA is an Australian public company limited by shares. It is admitted to the Official List of ASX and its ordinary shares are quoted for trading on the stock market conducted by ASX. REA and its subsidiaries (together, the REA Group) operate the residential and commercial property websites realestate.com.au and realcommerial.com.au. 7 REA has a relevant interest in 42,558,118 (or 22.67%) of the plaintiff's issued shares. These shares are held through REA Austin Pty Ltd (REA Austin). REA Austin is a wholly-owned subsidiary of realestate.com.au. It is, in fact, the only Excluded Shareholder at the present time. 8 On 7 December 2015, REA Austin, realestate.com.au and Bidco entered into a Share Sale Deed. Under the deed all of REA Austin's shares in the plaintiff will be transferred to Bidco on the business day after the date on which the scheme, if approved, becomes effective in accordance with the Act. In consideration for that transfer, a corresponding number of ordinary shares in Bidco will be issued to realestate.com.au.

The scheme 9 Under the scheme, scheme shareholders (other than Excluded Shareholders) will be entitled to receive $4.00 in cash per scheme share (the cash consideration). Alternatively, scheme shareholders other than Excluded Shareholders and Ineligible Foreign Shareholders may elect to receive consideration comprising $1.20 in cash and 0.7 B-class shares to be issued in an unlisted Australian entity, Austin Rollco Limited (Rollco), for each of their shares in the plaintiff (the mixed consideration). 10 Rollco has been incorporated to hold Bidco shares on and from the Implementation Date (as to which, see [12] below) and to issue B-class shares to scheme shareholders who make a valid election for mixed consideration in accordance with the scheme. 11 At the present time, the only issued share in Rollco is one A-class share held by realestate.com.au. Following implementation of the scheme, this share will continue to be held by realestate.com.au, but with limited rights. Once the B-class shares in Rollco are issued to the scheme shareholders who elect to receive the mixed consideration, realestate.com.au will no longer have any voting rights in Rollco, although it will have certain veto rights. 12 Prior to any B-class shares being issued to scheme shareholders, Bidco must allot and issue to Rollco such number of Bidco shares equal to the total number of B-class shares to be issued by Rollco to scheme shareholders by way of mixed consideration. Rollco's only asset will be its shares in Bidco. By holding B-class shares in Rollco, scheme shareholders who have elected for the mixed consideration will thereby have a continuing, albeit indirect, minority interest in the plaintiff. 13 The mixed consideration is subject to a scale back mechanism. The extent of the scale back on the number of B-class shares to be received for each scheme share may be significant and will depend on the number of scheme shareholders who validly elect to receive the mixed consideration. This number will not be known until after the Record Date (ie after the scheme, if approved, becomes effective). The indirect minority interest that scheme shareholders (who elect to take the mixed consideration) will receive will be between 10.7% and 20% in Bidco until no later than the first half of the 2018 calendar year. realestate.com.au will hold the remaining 80% to 89.3% in Bidco. Rollco's rights and obligations in connection with its shareholding in Bidco is governed by a Shareholders' Deed between Bidco, Rollco, realestate.com.au and REA. 14 Put and call options over the B-class shares will provide a progressive exit mechanism for the B-class shareholders. It will allow them to sell their B-class shares to realestate.com.au during exercise windows following release of Bidco's financial statements for the 2016 and 2017 financial years, or at any time after 31 December 2016. The sale price for the B-class shares will be related to, amongst other things, the time of exercise of the put or call option and (in most cases) whether the plaintiff reaches certain revenue hurdles in the 2016 financial year or, when relevant, certain revenue and EBITDA hurdles in the 2017 financial year. 15 In normal circumstances, the price received for the B-class shares will range between $4.14 (for the sale of B-class shares during the first exercise window after Bidco's financial statements for the 2016 financial year are released, and assuming a failure to achieve the revenue hurdle for that year) and $5.29 (for the sale of B-class shares during the second exercise window after Bidco's financial statements for the 2017 financial year are released, and assuming the achievement of the highest revenue and EBITDA hurdles for that year, which may not occur). 16 While REA will guarantee the payment obligations of realestate.com.au in respect of the put and call options, no amounts will be specifically set aside by realestate.com.au or REA for that purpose. It follows that there is a risk that realestate.com.au or REA, as guarantor, might fail to pay the relevant consideration on the exercise of the options. 17 The plaintiff says that this risk is mitigated by three matters. 18 First, clause 10.6(c) of Rollco's Constitution provides that if there is a default in the relevant payment obligation, completion of the B-class share transfer to realestate.com.au will not take place and the B-class shareholder will retain the relevant shares and all rights attaching to them. The plaintiff says that this is an identical mechanism to that commonly used in schemes of arrangement to address the risk where the transfer of the target shares to the bidder is conditional on the dispatch of the consideration to the target members having first occurred: see Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [22]-[25]. Further, restrictions on the B-class shareholders selling their shares will be lifted, although a sale of the shares might be difficult because there will be no active market for those shares. 19 Secondly, clause 3.3(b) of the Deed Poll entered into by REA, realestate.com.au, Bidco and Rollco on 7 December 2015 in favour of scheme shareholders (see [58] below) provides a direct undertaking by REA and realestate.com.au to pay the scheme consideration. The undertaking can be enforced directly by scheme shareholders. 20 Thirdly, both REA and realestate.com.au are entities of significant financial standing. REA has a market capitalisation of approximately $6.9 billion and a reported profit of approximately $200.5 million for the 12 month period ending 30 June 2015. 21 I am satisfied that the risk involved in the implementation of the exit mechanism has been adequately disclosed to the plaintiff's members in the scheme booklet. 22 The scheme is conditional upon, amongst other things, a Maximum Cash Condition Precedent. In this connection, sufficient valid mixed consideration elections must be received from scheme shareholders, such that the aggregate cash consideration payable by Bidco under the scheme is less than or equal to $500 million. This condition will be satisfied if scheme shareholders holding an aggregate of at least 28,773,999 ordinary shares in the plaintiff, being approximately 19.8% of such shares excluding those held by Excluded Shareholders, make a valid mixed consideration election. 23 Catcha Group Pte Ltd (Catcha Group), whose issued share capital is held by two of the plaintiff's directors, is a substantial shareholder in the plaintiff. Catcha Group holds approximately 16.7% of the plaintiff's issued shares (or 21.6% of those shares if shares held by Excluded Shareholders are excluded). Catcha Group has advised the plaintiff that it intends to elect to receive the mixed consideration. Given this advice, the independent directors of the plaintiff are satisfied that there is a reasonable basis to expect that the Maximum Cash Condition Precedent will be satisfied. 24 The implementation of the scheme is also subject to a condition subsequent, namely that the scheme will be terminated if one or more scheme shareholders, who have made a valid mixed consideration election, either transfer some or all of their shares in the plaintiff that were the subject of the mixed consideration election or change their address such that they become Ineligible Foreign Shareholders, with the consequence that the aggregate cash consideration payable under the scheme would exceed $500 million. 25 Catcha Group has advised the plaintiff that its intention is to not to transfer any of its shares in the plaintiff on or before 16 February 2016 (being the proposed Implementation Date) or change its address on or before that date such that it becomes an Ineligible Foreign Shareholder. This advised intention is subject to there being no superior proposal and the independent expert maintaining its conclusion that the scheme is in the best interests of scheme shareholders, as to which see [53]-[56] below. On this basis, the plaintiff's independent directors are satisfied that there is a reasonable basis to expect that the condition subsequent will not be breached. 26 In Atlassian Corporation Pty Limited, in the matter of Atlassian Corporation Pty Limited [2013] FCA 1451 at [29], I referred to Re Westfield Holdings Ltd (2004) 49 ACSR 741; [2004] NSWSC 602 at [9]-[11] and noted that, ordinarily, schemes qualify for approval only after all conditions are satisfied. However, a term providing for a scheme to terminate in certain circumstances after Court approval is permissible: see the discussion in Re NRMA Ltd (2000) 33 ACSR 595; [2000] NSWSC 82 at [61]-[62] and in Appendix A to the reasons (particularly at 646-648). A distinction is to be drawn between the use of a condition subsequent to bring about termination of a scheme and a condition subsequent that could lead to variation of the terms of a scheme. Generally speaking, the latter is impermissible as it involves a new decision-making process with the possibility of different results and different eventualities, none of which have been voted on by those who are entitled to vote on the schemes. 27 In the present case, the condition subsequent is directed to termination of the scheme upon the happening of a specific and defined event. The condition subsequent is clear, certain and self-executing. In my view, subject to any submissions that might be made at a hearing for court approval of the scheme, such a term is permissible. 28 In order to make an election to receive the mixed consideration, scheme shareholders must complete and return an election form to the plaintiff's share registry no later than 5.00 pm (Sydney time) on the day which is two business days prior to the second court hearing date (2 February 2016). Accordingly, the latest election time is 5.00 pm on 29 January 2016. Any person who becomes a shareholder after that time will receive the cash consideration. An Ineligible Foreign Shareholder is only entitled to receive the cash consideration. 29 Clause 8.2(b) of the scheme contains a deemed warranty to the effect that each scheme shareholder warrants to the plaintiff and Bidco that that shareholder's scheme shares will, at the date of transfer under the scheme, be fully paid and free from encumbrances or other third party interests or restrictions on transfer of any kind. I am satisfied that the deemed warranty has been adequately brought to the attention of the plaintiff's members in the scheme booklet. 30 Clause 8.3(a) of the scheme contains a provision that, to the extent permitted by law, the scheme shares will be transferred to Bidco free from all security interests, encumbrances and other third party interests. The provision is prefaced by the words "[t]o the extent permitted by law" and is thus in a form that has been considered to be satisfactory: Investa Properties Limited, in the matter of Investa Properties Limited (2007) 25 ACLC 1,186; [2007] FCA 1104 at [22]-[30]. I am satisfied that the provision has been adequately brought to the attention of the plaintiff's members in the scheme booklet. 31 Overall, I am satisfied that the scheme has been adequately and satisfactorily explained in the scheme booklet.

Pre-implementation steps 32 These steps are referred to in clause 9 of the scheme. 33 I have already referred (at [8] above) to the Share Sale Deed under which Bidco will acquire all the shares in the plaintiff held by REA Austin. In consideration for the sale, Bidco will issue a corresponding number of shares in its capital to realestate.com.au. Under clause 9.1 of the scheme, the Share Sale Deed is not to be amended without the plaintiff's consent and the sale must be completed before the issue of the B-class shares in Rollco to scheme shareholders. 34 Under clause 9.2 of the scheme, Bidco's Constitution must be adopted and must not be amended without the plaintiff's consent, before the issue of the B-class shares in Rollco to scheme shareholders. Bidco adopted its Constitution in a form agreed between the plaintiff and realestate.com.au on 5 November 2015. 35 Under clause 9.3 of the scheme, REA, realestate.com.au, Bidco and Rollco are required to enter into a Shareholders' Deed (an unexecuted copy of which is included in the scheme booklet) and to ensure that the deed is not amended without the plaintiff's consent, before the issue of the B-class shares in Rollco to scheme shareholders. The Shareholders' Deed was entered into on 7 December 2015. 36 Under clause 9.4 of the scheme, Rollco's Constitution (a copy of which is included in the scheme booklet) must be adopted and must not be amended without the plaintiff's consent, before the issue of the B-class shares in Rollco to scheme shareholders. Rollco adopted its Constitution on 7 December 2015. 37 Under clause 9.5 of the scheme, Bidco must, before the issue of the B-class shares in Rollco to scheme shareholders, allot and issue to Rollco such number of shares in Bidco that corresponds to the B-class shares to be issued as part of the mixed consideration. 38 Under clause 9.6 of the scheme, Bidco must, before the issue of the B-class shares in Rollco to scheme shareholders, ensure that the maximum number of Bidco shares on issue is 187,699,917 (thereby replicating the total number of the plaintiff's shares on issue). This is to ensure that Rollco holds the appropriate percentage of Bidco shares post implementation of the scheme. 39 Under clause 9.7 of the scheme, Rollco must ensure that, prior to the issue of the B-class shares to scheme shareholders, the only security on issue in Rollco is the one A-class share to which I have referred at [11] above.

Options 40 As at 8 December 2015, there were 3,000,000 options on issue to subscribe for unissued shares in the plaintiff. All the options are held by Georg Johann Chmiel. Mr Chmiel is the Chief Executive Officer and Managing Director of the plaintiff. 41 On 1 November 2015, Mr Chmiel entered into an Option Cancellation Deed with the plaintiff and REA. Pursuant to the deed, all his options will be cancelled for the consideration of $2,612,100, subject to certain conditions, including that the scheme is implemented. The consideration for the cancellation represents $4.00 per option less the exercise price of each option.

Malaysian shareholders 42 As at 1 December 2015, there were 14 members of the plaintiff (holding in aggregate approximately 0.32% of the shares on issue) with registered addresses in Malaysia. Legal advice from Malaysian counsel indicates that there may be security law issues under the Malaysian Capital Markets and Services Act 2007 if the scheme booklet were to be sent to those members. 43 In order to address this issue, it is proposed that a letter be sent to those members informing them of the scheme. This approach was considered and accepted in Re DUET Management Company 1 Ltd (2013) 95 ACSR 34; [2013] NSWSC 817 at [15]-[19] and In the matter of DUET Management Company 1 Limited; DUET Management Company 1 Limited as responsible entity of Diversified Utility and Energy Trust No. 1; DUET Management Company 2 Limited as responsible entity of Diversified Utility and Energy Trust No. 3 (No 2) [2013] NSWSC 1060 at [8]-[9]. I can see no reason why that procedure should not be adopted in the present case. A copy of the draft letter is in evidence, and is acceptable. 44 The plaintiff has stated that, at the second court hearing, it proposes to seek an order under s 1322(4) of the Act to validate this non-compliance with s 412(1) of the Act.

Exclusivity 45 Clause 8 of the Scheme Implementation Deed contains "no-shop", "no-talk", "no due diligence" and "notification" provisions in relation to a competing proposal (but not a "matching right" proposal). These provisions came into effect 20 days after the Scheme Implementation Deed was entered into and terminate on the earliest of the date of termination of the Scheme Implementation Deed or the "End Date" or "Effective Date" (as defined in the Scheme Implementation Deed). For practical purposes, the exclusivity period, at its longest, is 21 November 2015 to 2 May 2016. I am satisfied that this period is not unreasonable in the circumstances. 46 The "no-talk", "no due diligence" and "notification" provisions are subject to a carve-out in respect of the directors' fiduciary and statutory duties to the plaintiff. 47 I am satisfied that the exclusivity provisions have been adequately brought to the attention of the plaintiff's members in the scheme booklet.

Break fee 48 Clause 9 of the Scheme Implementation Deed provides for the payment by the plaintiff of a break fee of $7.5 million in certain circumstances. The circumstances do not include the members failing to approve the scheme. 49 Clause 10 of the Scheme Implementation Deed provides for the payment by realestate.com.au of a break fee of $7.5 million in certain circumstances. 50 Evidence has been given that each break fee represents approximately 1% of the total equity value of the plaintiff as at 10 December 2015. The amount of the fee is in line with Takeovers Panel, Lock-up devices, GN 7, 11 February 2010, para 9. Evidence has also been given as to the manner in which each break fee was negotiated. 51 I am satisfied that the existence of each break fee, and the circumstances in which each is triggered, have been adequately brought to the attention of the plaintiff's members in the scheme booklet.

The independent directors 52 Two directors of the plaintiff are executives of REA. They have confirmed that they do not consider it appropriate to make a recommendation to the plaintiff's members in relation to the scheme. The remaining directors - the independent directors - have considered the advantages and disadvantages of the scheme and unanimously recommend that the plaintiff's members vote in favour of the scheme in the absence of a superior proposal and subject to the independent expert maintaining its conclusion that the scheme is in the best interests of members.

The independent expert 53 Deloitte Corporate Finance Pty Limited (Deloitte) has been appointed by the independent directors to provide an opinion as to whether the scheme is in the best interests of the scheme shareholders (other than Excluded Shareholders). 54 Deloitte has prepared a report in which it has assessed the fair market value of a share in the plaintiff to be in the range of $3.59-$4.54. Deloitte has estimated the minimum value of the mixed consideration to be $3.86. This estimate is based on the least favourable scenario (explained in the expert's report) for scheme shareholders with respect to payments under the progressive exit mechanism for B-class Rollco shares. The cash consideration and the estimated value of the mixed consideration fall within the fair market value assessed for each of the plaintiff's issued shares. Deloitte has concluded that, in these circumstances, the scheme is fair. Based on that conclusion, Deloitte has also concluded that the scheme is reasonable. 55 Deloitte has also considered the following factors in assessing the reasonableness of the scheme: REA holds a potential blocking stake with respect to any future potential offer if the scheme is not implemented; scheme shareholders have the opportunity to realise their investment in the plaintiff at a premium to the plaintiff's share price prior to the announcement of the scheme; the cash consideration removes uncertainty regarding the achievability of the plaintiff's future earnings growth; and in the absence of the scheme, the plaintiff's share price is likely to trade lower than the consideration that is being offered. 56 The opinions in the Deloitte report have been verified by Stephen James Ferris. Mr Ferris is a Corporate Finance partner in Deloitte who has had overall responsibility for the preparation of the report with his colleague Stephen Reid. The Deloitte report is included in the scheme booklet.

Tax opinion 57 The scheme booklet contains a letter from Greenwoods & Herbert Smith Freehills, which provides an overview of the Australian tax consequences of the scheme for scheme shareholders.

Deed Poll 58 On 7 December 2015, REA, realestate.com.au, REA Austin, Bidco and Rollco entered into a Deed Poll in favour of scheme shareholders in which they have undertaken to be bound by the scheme (as if they were parties thereto) and to perform all obligations and actions attributed to them under the scheme. REA, realestate.com.au, Bidco and Rollco have undertaken to provide or procure the provision of the scheme consideration. The Deed Poll is governed by the law in force in New South Wales, and REA, realestate.com.au, REA Austin, Bidco and Rollco have submitted to the non-exclusive jurisdiction of courts exercising jurisdiction in New South Wales: see Exhibit B.

Verification of scheme booklet 59 Evidence has been given concerning the verification of statements made in the scheme booklet. The verification process has been described in affidavits made by Mr Chmiel (in respect of information described as "iProperty Information") and Sarah Luise Turner (in respect of information described as "Bidder Information").

Chairman of scheme meeting 60 Patrick Grove, a director and the Chairman of the plaintiff, has consented to act as chairman of the scheme meeting. John Alexander Armstrong, a non-executive director of the plaintiff, has consented to act as Mr Grove's alternate. Mr Grove and Mr Armstrong have each made an affidavit in compliance with r 3.2 of the Federal Court (Corporations) Rules 2000.

ASIC 61 The Australian Securities and Investments Commission (ASIC) did not appear or make submissions in respect of the present application. ASIC has signified that the requirements of s 411(2) of the Act have been met.

Consideration 62 I am satisfied that the plaintiff is a Part 5.1 body and that the scheme is an "arrangement" for the purposes of s 411(1) of the Act. 63 I am satisfied that the formal requirements that are preliminary to the Court convening a meeting under s 411(1) of the Act have been satisfied. 64 I am satisfied that the scheme is of such a nature and is cast in such terms that, if it receives the requisite statutory majority, the Court would be likely to approve it on an unopposed application.

Disposition 65 Orders, substantially in the form sought, should be made. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.