iSOFT Group Limited, in the matter of iSOFT Group Limited [2011] FCA 680

REASONS FOR JUDGMENT 1 By originating process filed on 16 May 2011, the plaintiff, iSOFT Group Limited (iSOFT), applied to the Court for the making of orders under s 411 of the Corporations Act 2001 (Cth) (the Corporations Act) that meetings of security holders be convened for the purposes of considering proposed schemes of arrangement. One scheme (the Share Scheme) is between iSOFT and the holders of ordinary shares in iSOFT. The other scheme (the Option Scheme) is between iSOFT and the holders of options issued by iSOFT. It was originally contemplated that there be a single meeting of all shareholders to consider the Share Scheme. As a result of discussions between iSOFT, the Australian Securities and Investments Commission (the Commission) and other shareholders, iSOFT now proposes, in the circumstances that I shall describe shortly, that there be two meetings of the holders of ordinary shares. 2 iSOFT is a supplier of healthcare software and information technology. It designs, implements and supports a range of information technology solutions that assist healthcare professionals to automate care processes and to support workflows in hospitals, clinics and primary care centres to enable integrated care of patients. iSOFT is an Australian public company, limited by shares, which are listed on the Australian Securities Exchange. The effect of the proposed schemes is that iSOFT will become a wholly-owned subsidiary of CSC Computer Sciences Australia Holdings Pty Limited (CSC Australia). CSC Australia is itself a wholly-owned subsidiary of Computer Sciences Corporation (CSC). CSC is listed on the New York Stock Exchange. It provides information technology services to commercial and government clients. As at 30 May 2011, CSC's market capitalisation was approximately US$6.8 billion. CSC Australia itself had revenues for the year ended 31 March 2010 of $1.032 billion. 3 The effect of the Share Scheme will be that all of the presently issued shares, and shares that may be issued pursuant to arrangements to which I shall refer, will be vested in CSC Australia. Under the Option Scheme, all of the options issued by iSOFT to subscribe for shares in iSOFT will be cancelled and CSC Australia will pay option holders the consideration contemplated by the Option Scheme. 4 Upon the schemes becoming effective, iSOFT will facilitate the vesting and automatic exercise of performance rights issued by it under its Employee Incentive Plan. On 24 May 2011, iSOFT had on issue some 5,750,000 performance rights granted in favour of certain employees. iSOFT has agreed to do all things reasonably necessary to facilitate the vesting and automatic exercise of the performance rights in accordance with the relevant rules of the Employee Incentive Plan prior to the Scheme Record Date. iSOFT shares will be issued pursuant to the exercise of the performance rights, and they will be part of the Share Scheme and hence will be acquired by CSC Australia. 5 It is also proposed that warrants issued by iSOFT to Oceania Healthcare Technology Investments Pty Limited (OHTI) will be extinguished. On 24 May 2011, iSOFT had 3,564,149 warrants on issue, all of which were owned by OHTI. On that date, an irrevocable notice of exercise was given in respect of some of those warrants, requiring iSOFT to allot 319,799 shares. Those shares will be subject to the Share Scheme. Following the exercise date for those warrants, iSOFT will have 3,244,350 warrants on issue, all owned by OHTI. The exercise price for those warrants is $0.1614. It is proposed that the outstanding warrants will be extinguished and OHTI will receive $0.0086 per warrant, which is the equivalent of the consideration being paid to the holders of ordinary shares under the Share Scheme, less the exercise price. The total amount involved is $30,651.68. 6 Finally, there will be also be arrangements made, upon the schemes becoming effective, for CSC to procure that funding be provided to iSOFT to enable iSOFT to discharge all of its external debt, including convertible notes issued under a deed poll dated 21 August 2007 (the Convertible Notes). All of the Convertible Notes are held by OHTI, which is a subsidiary of Oceania Capital Partners Limited (OCP). OHTI is a substantial shareholder in iSOFT. I shall return to the question of the Convertible Notes shortly. 7 The principles employed by the Court in determining whether to accede to an application under s 411 to convene meetings of members or creditors for the purpose of considering proposed schemes of arrangement are well established. The Court will not ordinarily order that a meeting be convened unless the relevant scheme is of such a nature and is cast in such terms that, if it receives the relevant statutory majority at the convened meeting, the Court will be likely to approve the scheme on the hearing of an unopposed application. The Court is not required to be satisfied that no better scheme could have been proposed. Rather, The Court must consider whether the scheme is not inappropriate, and whether it is reasonable to suppose that sensible business people might consider that the arrangement proposed is of benefit to members. The Court exercises a supervisory jurisdiction to review the scheme and the explanatory statement required by the Corporations Act to be sent to the shareholders or creditors who are invited to consider a proposed scheme. One function of the Court in exercising that jurisdiction is to ensure that a fair picture is presented to those who will be affected by a scheme. There must therefore be full and fair disclosure, albeit tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, and to ensure that the explanatory memorandum or statement is likely to assist rather than confuse. 8 iSOFT has appointed an independent expert, Lonergan Edwards & Associates Limited (Lonergan Edwards), to assess the merits of the Share Scheme and the Option Scheme. Lonergan Edwards has provided a report (the Expert Report) which will be included in the explanatory memorandum. The Expert Report concludes that each of the schemes is fair and reasonable and is in the best interests of shareholders and option holders, in the absence of a superior proposal. The Expert Report sets out the methodology adopted for the purposes of valuing the issued shares in iSOFT and concludes that the value of each iSOFT share is between $0.108 and $0.141. The consideration proposed to be paid to shareholders under the Share Scheme, namely $0.17 per share, exceeds Lonergan Edwards' valuation range for the shares. In relation to the Option Scheme, the Expert Report calculates the value of the options and values each option in the range between nothing and $0.021. The Expert Report concludes that the consideration to be paid to the holders of options under the Option Scheme exceeds the assessed value and is therefore fair and reasonable. 9 As I have indicated, iSOFT has issued Convertible Notes, which are held by OHTI. As a result of concerns expressed by the Commission and by some shareholders, a separate valuation was made of the Convertible Notes by Lonergan Edwards. That valuation will also be included in the explanatory memorandum to be sent to those affected by the schemes. Lonergan Edwards has concluded that, in the absence of a takeover or other change of control transaction, the value of the Convertible Notes is equal to their value as a pure debt security. Because of the risk of non-payment of principal, an investor would apply a discount of between 20 percent and 25 percent of the face value of the Convertible Notes when assessing their value. On that basis, Lonergan Edwards concludes that the value of the Convertible Notes ranges between $18.3 million and $26.7 million. Under the proposals that have been entered into between iSOFT and CSC, the Convertible Notes will be paid out at their full face value of approximately $39.7 million. It is therefore apparent that there is a benefit to be provided to the holders of the Convertible Notes. 10 Since OHTI, the holder of the Convertible Notes, is also a holder of a substantial number of shares in the capital of iSOFT, the concern arises that OHTI is receiving a benefit that is not being provided to the other shareholders of iSOFT. For that reason, the directors of iSOFT have concluded that it is appropriate that there be separate meetings of OHTI, and of the other shareholders. The consequence is that it will be necessary to obtain the relevant statutory majority approving any relevant resolution at each of those meetings. That is to say, there will have to be a statutory majority in favour of the proposal of all shareholders other than OHTI. 11 Those matters have been addressed in the proposed explanatory memorandum, a number of parts of which offer detailed disclosure of the effect of the arrangements. In particular, a detailed statement is contained in the chairman's letter proposed to be attached to the document recommending the approval of the schemes. 12 OHTI is represented on the board of iSOFT by two directors. Those directors have refrained from making a recommendation, although they propose to vote in favour of the schemes. The other directors of iSOFT all recommend that the proposals be accepted both by shareholders and option holders. 13 The terms of the schemes provide adequate protection for the shareholders and option holders, in the sense that the payment of the proposed consideration must occur prior to the transfer of any interest in shares or before the cancellation of options. The Share Scheme provides for a warranty by shareholders that the iSOFT shares are transferred free of encumbrance, and adequate disclosure of that obligation is made in the proposed explanatory memorandum. 14 On 1 April 2011, iSOFT, CSC and CSC Australia entered into a Scheme Implementation Agreement (the Agreement). The Agreement contains provisions described as deal protection clauses, which are common in arrangements of the nature presently before the Court. 15 By clause 13 of the Agreement, iSOFT gives undertakings in relation to negotiations with third parties. iSOFT agrees that, during a fixed period, it must not, except with the prior written consent of CSC and CSC Australia, solicit, invite or encourage any competing proposal, or initiate discussions with any third party with a view to obtaining expressions of interest in relation to a competing proposal. Further, iSOFT must not, except with the prior consent of CSC and CSC Australia, participate in any negotiations in relation to a competing proposal or which may reasonably be expected to lead to a competing proposal. There is however, an exception if the iSOFT board, acting in good faith, determines that a competing proposal is a superior proposal or that the steps that the board proposes to take may reasonably be expected to lead to a competing proposal that is a superior proposal. 16 In addition, there is a provision in the Agreement whereby, during the prescribed period of exclusivity, iSOFT must promptly notify CSC Australia and CSC if any competing proposal or written proposal which may reasonably be expected to lead to a competing proposal is received. If notice of such a proposal is given, iSOFT agrees that it will not, for a period of three business days following receipt of the notice, enter into any legally binding agreement with respect to the competing proposal, or publicly recommend the competing proposal. If such a notice is given, CSC Australia would have a right, but no obligation, to offer to amend the terms of the schemes or to propose any other transaction. 17 The deal protection clauses were agreed between iSOFT and CSC and CSC Australia following arm's length commercial negotiations in which both parties were separately advised and represented by external legal advisers and external financial advisers who have extensive experience with transactions of this kind. The provisions were included because CSC and CSC Australia insisted that they be included. The directors of iSOFT consider that the provisions in question are reasonable and appropriate. The exclusivity period is capable of precise ascertainment and its operation is restricted to a maximum period of approximately five and a half months by reference to the date of the Scheme Implementation Agreement. Further, as I have indicated, there are exceptions to take account of the fiduciary and statutory obligations of directors, and the window for matching any unsolicited competing proposal extends for only three days. 18 The Agreement also contains a provision for the payment of what is described as a break fee of $1,820,012 in certain circumstances. The break fee would be payable by iSOFT to CSC Australia if CSC Australia terminates the Agreement because of a material breach by iSOFT or if the Agreement is terminated because the iSOFT board determines and publicly announces that a competing proposal is a superior proposal. It will also be payable if the iSOFT board, other than the directors that represent OHTI, fails unanimously to recommend voting in favour of the schemes or changes its recommendation. The break fee does not exceed one per cent of the equity value of iSOFT based on the consideration of $0.17 per share, which, for somewhat over a billion shares, totals approximately $182 million. 19 As I have indicated, the Commission originally expressed concerns about the proposal, when it was contemplated that there would be one meeting of all shareholders. It is usually not the practice of the Commission to be represented at hearings of applications to convene meetings. It is, however, usual for the Commission to provide a letter to an applicant indicating that the Commission has no objection to a proposed scheme. The Commission has been represented on the hearing of this application and has presented arguments to the Court. Further, by letter of 8 June 2011, the Commission has informed the solicitors for iSOFT that the Commission has had a reasonable opportunity to examine the terms of the proposed schemes and the final draft explanatory statement. The Commission in its letter notes that the full and early repayment of the Convertible Notes in iSOFT held by OHTI may amount to a collateral benefit. The Commission notes that, to address that issue, iSOFT proposes to have OHTI vote on the Share Scheme in a class separate from the other iSOFT shareholders. The Commission also notes that the proposed explanatory memorandum adequately discloses the benefit conferred by the repayment of the Convertible Notes and the implications for shareholders. On that basis, the Commission does not propose to intervene to oppose the schemes at this hearing. 20 I am satisfied that iSOFT is a Part 5.1 body within the meaning of s 411 of the Corporations Act, and that each of the proposed schemes is an arrangement within the meaning of s 411. I am also satisfied that the proposed explanatory memorandum makes adequate disclosure to the shareholders and option holders, and that the Commission has had reasonable opportunity to examine the proposed schemes. In all of the circumstances, I consider that it is appropriate to accede to iSOFT's application, and I propose to make orders accordingly. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

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