Konekt Limited, in the matter of Konekt Limited (No 2) [2019] FCA 1997

Introduction 1 On 30 October 2019, the Court made orders under ss 411(1) and 1319 of the Corporations Act 2001 (Cth) convening a meeting of the shareholders of Konekt Limited (scheme meeting) to be held on 3 December 2019 for the purpose of considering and, if thought fit, approving a scheme of arrangement; and approving the form of an explanatory statement (scheme booklet) for despatch to shareholders: see Konekt Limited, in the matter of Konekt Limited [2019] FCA 1811. 2 The purpose of the scheme was to effect a takeover of Konekt by Advanced Personnel Management International Pty Ltd (ACN 606 330 910) (APM) in accordance with a Scheme Implementation Deed (SID) executed on 8 October 2019. 3 The Total Cash Consideration proposed under the scheme was $0.49 for each Konekt Share comprising a fully franked Special Dividend of $0.05 per Konekt Share payable to each person who is registered as a Konekt shareholder on the Special Dividend Record Date (expected to be 11 December 2019) and Scheme Consideration of $0.44 per Konekt Share payable to each person who is a Konekt shareholder on the Scheme Record Date (expected to be 16 December 2019). 4 After the Court made orders approving the scheme booklet and convening the scheme meeting, Konekt applied for orders under s 1319 of the Corporations Act approving despatch of a supplementary scheme booklet ahead of the scheme meeting. The application was first set down for hearing on 15 November 2019, at which time the Court was asked to approve despatch of a supplementary scheme booklet in the form of exhibit 3 designed to give Konekt shareholders details of APM's First Revised Offer (see below) and a first supplementary independent expert's report. The application was ultimately determined at a hearing on 22 November 2019 and these are the reasons for the orders made on that day.

Background 5 On about 7 November 2019, Konekt received a confidential, non-binding, incomplete, conditional competing proposal to acquire all of the Konekt shares pursuant to a scheme of arrangement subject to due diligence (First Maximus Proposal) from a competing bidder which the Court now knows to have been MAXIMUS Australia Holding Company Pty Ltd (Maximus), an Australian incorporated special purpose vehicle which is a related body corporate of MAXIMUS Inc. Having regard to cl 11.5 of the SID, Konekt notified APM of the First Maximus Proposal under the SID. Having regard to cl 11.6 of the SID, Konekt engaged with Maximus in relation to the First Maximus Proposal. 6 On about 7 November 2019, Konekt received an updated scheme proposal from APM and Konekt and APM reached an agreement on the key terms of a revised offer (First Revised Offer) as follows: (1) Increased Total Cash Consideration of $0.64 per Konekt Share, comprising: (a) The same Special Dividend of $0.05 per Konekt Share held on the Special Dividend Record Date payable by Konekt; and (b) Increased Scheme Consideration of $0.59 per Konekt Share held by each Scheme Shareholder on the Scheme Record Date payable by APM. (2) A break fee payable by Konekt to APM in the circumstances described in the scheme booklet was increased from $528,000 to $1,000,000. This was to take account of increased transaction costs incurred and expected to be incurred by APM (the Revised Reimbursement Fee). The Revised Reimbursement Fee was approximately 1.45% of the total equity value of Konekt as at 13 November 2019 being $68,635.96 based on Konekt's total diluted share capital (excluding any Konekt Performance Rights which would not become exercisable in connection with the scheme). (3) The other terms of the scheme and the indicative timetable for the scheme were unchanged. 7 Konekt and APM entered into a deed styled "Deed of Amendment and Restatement in respect of the Scheme Implementation Deed" (First Amended and Restated SID) dated 7 November 2019. 8 At the hearing on 15 November 2019, senior counsel for Konekt advised the Court that shortly before the hearing commenced, Konekt had received a further confidential, non-binding, incomplete, conditional competing proposal from an entity the name of which was not then told to the Court (Second Maximus Proposal). 9 Neither Konekt's board nor its advisors had had an opportunity to consider the Second Maximus Proposal at that time. After discussion, it was agreed that the hearing could proceed but before making orders, the Court would require evidence that the supplementary scheme booklet would not be rendered misleading or deceptive or have a material omission by reason of the omission of reference to the Second Maximus Proposal. The Court indicated that it would otherwise be prepared to make the orders sought on the basis of the evidence read at the hearing. The matter was stood over to Monday, 18 November 2019 to give Konekt and its advisors an opportunity to consider the Second Maximus Proposal and any necessary further disclosure. On that Monday, the Court was advised that more time was required and the hearing was relisted for 22 November 2019. 10 The Court has now been provided with an amended supplementary scheme booklet in the form of exhibit 6 which will include a second supplementary expert's report. 11 The amended supplementary scheme booklet records the history set out above and includes the following information: On 15 November 2019, Konekt received a further confidential, non-binding, incomplete, conditional competing proposal from Maximus to acquire all of the Konekt Shares pursuant to a scheme of arrangement subject to due diligence for $0.70 per Konekt Share (inclusive of a $0.05 special dividend) (Second Maximus Proposal). The Second Maximus Proposal was on the same terms and subject to the same conditions as the First Maximus Proposal (including the requirement to obtain consent to the change of control from each Fundamental Key Contract counterparty). Pursuant to its obligations under clause 11.5 of the First Amended and Restated SID, Konekt notified APM of the Second Maximus Proposal, and in accordance with its rights under clause 11.6 of the First Amended and Restated SID, Konekt engaged with Maximus in relation to the Second Maximus Proposal. On the morning of 21 November 2019, Konekt received a binding offer from Maximus to acquire all of the Konekt Shares pursuant to a scheme of arrangement, subject only to meetings with select members of Konekt management following which its offer would become unconditional, for $0.70 per Konekt Share (inclusive of the special dividend) (Third Maximus Proposal). The Third Maximus Proposal was conditional on customary conditions for a scheme of arrangement as well as: (a) one Fundamental Key Contract counterparty, being the Department of Employment, Skills, Small and Family Business not indicating to either Konekt or Maximus, or their respective advisers, that it intended to terminate the contract referenced in paragraph (a) of the definition of "Fundamental Key Contract" due to the change in control that would result from implementation of the Third Maximus Proposal; and (b) there being no Material Adverse Change, which would be triggered by a change or event resulting in either the diminution of consolidated net assets of at least $8.5 million or which had the effect of reducing the projected gross revenues of the Konekt Group in FY20 by more than 20%. In accordance with its rights under clause 11.6 of the First Amended and Restated SID, Konekt engaged with Maximus in relation to the Third Maximus Proposal and notified APM of the Third Maximus Proposal. In the evening of 21 November 2019, Konekt received a further confidential, indicative incomplete and non-binding proposal from APM to acquire all of the Konekt Shares pursuant to a scheme of arrangement for $0.70 per Konekt Share (inclusive of the Special Dividend), being the offer the subject of the Second Amended and Restated SID. 12 On 22 November 2019, Konekt and APM entered into a further deed of amendment and restatement in relation to the First Amended and Restated SID (Second Amended and Restated SID), pursuant to which APM committed to APM's Second Revised Offer. Konekt has ceased engagement with Maximus in relation to the Third Maximus Proposal. 13 Under APM's Second Revised Offer, the Revised Total Cash Consideration comprises: (1) A fully franked Special Dividend of $0.05 per Konekt Share held by each Konekt shareholder on the Special Dividend Record Date, payable by Konekt; and (2) The increased Scheme Consideration of $0.65 per Konekt Share held by each Scheme Shareholder on the Scheme Record Date, payable by APM. 14 Each of those matters is disclosed in the Chairman's Letter to be included in the amended supplementary scheme booklet. The Chairman's Letter also advises that the Revised Total Cash Consideration represents a premium to the closing price of Konekt Shares prior to the announcement of the scheme as follows: 141% to the closing price of $0.29 per Konekt Share on 4 October 2019, the last trading day prior to the announcement of the Scheme; 170% to the 1 month VWAP of $0.26 per Konekt Share; 186% to the 3 month VWAP of $0.25 per Konekt Share; and 274% to the 6 month VWAP of $0.20 per Konekt Share. 15 Under APM's Second Revised Offer, the Revised Reimbursement Fee of $1 million has not changed. The other terms of the scheme and the Key Dates set out on page 11 of the scheme booklet remain unchanged. 16 Section 3 of the amended supplementary scheme booklet contains "Additional Information". Section 3.1 updates the information in relation to the interests of Konekt's CEO and Managing Director, Damian Banks, and section 3.2 updates the implied value of the relevant interest of each of the directors in Konekt Shares as a result of the increased consideration. 17 The Australian Securities & Investments Commission (ASIC) was given the opportunity to consider and comment on the supplementary scheme booklet. The affidavit affirmed by Rachael Lindy Bassil, a partner at Gilbert + Tobin, on 14 November 2019 deposes to the communications with ASIC concerning the supplementary scheme booklet. By letter dated 14 November 2019, ASIC advised that it did not intend to appear at the hearing of Konekt's application for orders under s 1319 in relation to the despatch of a supplementary scheme booklet in that form. 18 By a further affidavit affirmed on 22 November 2019, Ms Bassil gives evidence concerning her communications with ASIC in relation to the amended supplementary scheme booklet. By a letter dated 22 November 2019, ASIC advised that it does not intend to make submissions or intervene to oppose the Court approving the despatch of an amended supplementary scheme booklet in that form, albeit that the period between likely despatch and the scheme meeting is between five days (if posted) and nine days (if sent electronically) which is less than the period which ASIC considers appropriate for shareholders to have to consider new information. As counsel for Konekt points out, in this case the information relates to an increase in a cash offer, which is not a matter of complexity and is unambiguously for the benefit of Konekt shareholders. 19 By an affidavit affirmed by Martin John Hall (a director of Lonergan Edwards & Associates) on 22 November 2019, Mr Hall deposes to holding the opinions expressed in the second supplementary expert's report which will be included in the amended supplementary scheme booklet. There is no change in the expert's opinion. 20 Having regard to Mr Bank's affidavit sworn on 22 November 2019 and the affidavit of Christopher Andrew Ryan sworn on 22 November 2019, the Court is satisfied that the amended supplementary scheme booklet has undergone a verification process designed to ensure that it is not misleading or deceptive or omit material information. Similar affidavits affirmed or sworn by Mr Ryan and Mr Banks are in evidence in relation to the process undertaken in relation to the first supplementary scheme booklet.

Revised reimbursement Fee 21 There is only one thing that requires specific comment. In connection with the hearing on 15 November 2019, Konekt provided submissions addressed to the Revised Reimbursement Fee given that its quantum was 1.45% of the equity value of Konekt (approximately $68,635,928.96) implied by the Scheme Consideration based on 105,786,735 Konekt shares on issue, 960,000 options and 1,039,804 performance rights immediately prior to the announcement of APM's First Revised Offer on 7 November 2019. That exceeded the 1% guidance set out in the Takeover Panel's Guidance Note 7: Lock-Up Devices (Takeover Panel Guideline). 22 The Revised Reimbursement Fee did not change in APM's Second Revised Offer. On that basis, it now represents 1.33% of the equity value of Konekt of approximately $75,103,127.30 (as implied by the Scheme Consideration having regard to the same number of issued shares, options and performance rights as at 21 November 2019). 23 In his affidavit affirmed on 14 November 2019 in relation to APM's First Revised Offer, Mr Ryan gave evidence that, in light of the First Maximus Proposal and the increase to the Total Cash Consideration from A$0.49 to A$0.64 per Konekt Share, the Reimbursement Fee of $528,000 was no longer a genuine and reasonable pre-estimate of its costs and any loss APM would suffer if the scheme is not implemented and the Revised Reimbursement Fee was a more realistic pre-estimate. 24 Mr Ryan gave evidence that the Revised Reimbursement Fee was negotiated and agreed having regard to APM's legal, financial and other professional advice fees associated with planning and implementing the scheme, which increased as a result of the First Maximus Proposal and the preparation of APM's First Revised Offer. He provided the following summary of estimated fees incurred by APM to complete the scheme, noting that it takes no account of internal costs associated with time spent by APM's directors and management in negotiating the First Revised Offer: Financial due diligence $193,921 Tax due diligence $64,950 IT due diligence $44,400 Legal (combination of Allens/ G + T/Banco Chambers/FIRB/ACCC) $459,200 Bank Refinancing (upfront fee and associated legal costs) $1,000,000 Total $1,762,471 GST $176, 247 Total (inclusive of GST) $1,938,719

25 Although the Revised Reimbursement Fee still slightly exceeds the 1% benchmark in the Takeover Panel's guidance having regard to the Revised Total Cash Consideration, the existence of that break fee would not be a reason for the Court to refuse approval of the scheme at the final court hearing because: (1) The Revised Reimbursement Fee was included in the Amended and Restated SID following arms-length commercial negotiations between APM and Konekt. Each of APM and Konekt were advised separately by independent legal and financial advisers in relation to negotiating the Revised Reimbursement Fee. It did not increase as a result of APM's Second Revised Offer. (2) The fact that the Reimbursement Fee has increased is fully disclosed in the amended supplementary scheme booklet and the circumstances in which the Revised Reimbursement Fee is payable under the SID have not changed from the disclosure in the scheme booklet. (3) The Revised Reimbursement Fee is not payable merely because Konekt shareholders do not approve the scheme at the scheme meeting. (4) The existence of the Revised Reimbursement Fee was disclosed to the ASX on 7 November 2019, before the Second Maximus Proposal was made. Its amount plainly did not deter a competitive bidder. (5) The Revised Reimbursement Fee is now only slightly in excess of the Takeover Panel's guidance in circumstances where the value of Konekt implied by the Scheme Consideration is less than $80 million and APM has now made three proposals, two in response to competitive offers and the evidence demonstrates that its actual costs are likely to exceed the Revised Reimbursement Fee substantially.

Conclusion 26 The Court accepts that the amended supplementary scheme booklet in the form of exhibit 6 should be approved for despatch on the basis that: (1) The events that have occurred since the scheme booklet was distributed are material to the Konekt shareholders' decision as to how to vote at the scheme meeting; (2) The increase in the consideration offered by APM and the conditions of that offer are critical to that decision; (3) The information in the supplementary scheme booklet has been subject to a verification process designed to ensure that its contents are accurate and not misleading and its content does not appear to be misleading. (4) ASIC has not raised any objection to the disclosure in the draft supplementary scheme booklet and has not appeared to oppose the orders being made. (5) The Revised Reimbursement Fee is not triggered if the Konekt shareholders fail to approve the scheme. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.