Lifehealthcare Group Limited, in the matter of Lifehealthcare Group Limited [2018] FCA 586

MARKOVIC J: 1 By originating process filed on 6 March 2018 the plaintiff, LifeHealthcare Group Limited (LifeHealthcare), sought orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act) convening a meeting of LifeHealthcare shareholders (Scheme Shareholders) for the purpose of considering a proposed scheme of arrangement and, subsequently, approval of the scheme (Scheme). 2 On 29 March 2018, at the conclusion of the first hearing, I made orders for the convening of a meeting of Scheme Shareholders. These are my reasons for making those orders.

background 3 LifeHealthcare, a publicly listed company admitted to the official list of the Australian Securities Exchange (ASX), is a medical devices distributor operating in Australia and New Zealand. As at 27 March 2018 it had: 44,933,172 ordinary shares on issue; 2,673,327 options (Options); and 147,122 performance rights (Performance Rights). 4 Pacific Health Supplies BidCo Pty Limited (Pacific Health), the bidder company, is a wholly owned subsidiary of Pacific Health Supplies HoldCo Pty Limited which is, in turn, a wholly owned subsidiary of Pacific Health Supplies MezzCo Pty Limited, Pacific Health Supplies TopCo Pty Limited and Pacific Health Supplies TopCo1 Pty Limited, a group of companies which are owned by funds managed or advised by Pacific Equity Partners.

proposed scheme 5 On 5 February 2018 LifeHealthcare entered into a Scheme Implementation Deed (SID) with Pacific Health pursuant to the terms of which it is proposed that Pacific Health will acquire all of the shares in LifeHealthcare by way of the Scheme in return for payment of the scheme consideration (see [6] below). 6 The Scheme is subject to a number of conditions precedent which are set out in cl 3 of the SID. If the Scheme is approved and becomes effective, Scheme Shareholders will receive the cash consideration of $3.75 per share for the shares they hold on the record date in respect of the Scheme less: (1) $0.075 per share, being the amount of the interim dividend in respect of the financial half year ended 31 December 2017 declared by the board of LifeHealthcare on 20 February 2018 and paid by LifeHealthcare on 21 March 2018 (Interim Dividend); and (2) the amount of any fully franked special dividend of $0.18 per share held by a Scheme Shareholder at 7.00 pm on the record date of the Special Dividend (being 16 May 2018 or such other date as notified by LifeHealthcare to the ASX), if declared by the LifeHealthcare board (Special Dividend), (Scheme Consideration). 7 As the Interim Dividend was paid by LifeHealthcare on 21 March 2018, the Scheme Consideration as at the date of the first hearing was $3.675 per share. 8 Pacific Health's obligations under the Scheme are supported by a deed poll executed by Pacific Health on 14 March 2018 (Deed Poll) under which Pacific Health has undertaken in favour of the Scheme Shareholders to: (1) be bound by the terms of the Scheme as if they were parties to the Scheme; and (2) perform all obligations and actions attributed to them under the Scheme, subject to and in accordance with the terms of the Scheme. 9 LifeHealthcare has prepared a draft explanatory statement for distribution to Scheme Shareholders (Scheme Booklet). A copy of the Deed Poll and the Scheme are attached to the Scheme Booklet. 10 In the absence of a superior proposal and subject to the independent expert concluding in its report, or any update of it, that the Scheme is in the best interests of Scheme Shareholders, the LifeHealthcare directors unanimously recommend that Scheme Shareholders vote in favour of the Scheme. Subject to those qualifications, the LifeHealthcare directors intend to vote, or cause to be voted, all LifeHealthcare shares held or controlled by them in favour of the Scheme.

Independent expert report 11 KPMG Corporate Finance (KPMG), a division of KPMG Financial Advisory Services (Australia) Pty Ltd, has prepared an independent expert report in relation to the Scheme which is to be included as an attachment to the Scheme Booklet. 12 KPMG is of the opinion that the Scheme is in the best interests of Scheme Shareholders in the absence of a superior proposal. In coming to its opinion KPMG assessed whether the Scheme is: fair, by comparing the total cash payment to their assessed value of a LifeHealthcare share on a controlling interest basis; and reasonable, by assessing the implications of the Scheme for Scheme Shareholders, the available alternatives to the Scheme and the consequences for Scheme Shareholders of not approving the Scheme. 13 KPMG assessed the value of LifeHealthcare shares on a controlling interest basis to be in the range of $3.54 to $3.96 per share. As the Scheme Consideration of $3.675 is within that range KPMG considers the Scheme to be fair. 14 KPMG assessed that the Scheme Consideration of $3.675 plus Interim Dividend represents a premium of: 45.9% of LifeHealthcare's closing share price of $2.57 on 2 February 2018, being the last trading day before the announcement of the Scheme; 43.8% to the one month volume weighted average price (VWAP) of $2.61 to 2 February 2018; 42.4% to the three month VWAP of $2.63 to 2 February 2018; 50.8% to the six month VWAP of $2.49 to 2 February 2018; and 56.7% to the 12 month VWAP of $2.39 to 2 February 2018. 15 KPMG concluded that the Scheme is fair and reasonable and thus, in accordance with Australian Securities and Investments Commission (ASIC) Regulatory Guide 111 - Content of Expert Reports, also concluded that the Scheme is in the best interests of Scheme Shareholders.

statutory framework and applicable principals 16 Section 411(1) of the Act relevantly provides that where an arrangement is proposed between a Pt 5.1 body and its members the Court may, on the application in a summary way of the body, order a meeting of the members of the body to be convened in such a manner and to be held in such place as the Court directs. The Court may also approve the explanatory statement required by s 412(1)(a) of the Act to accompany the notice of meeting. 17 Section 412(1)(a) provides that where a meeting is convened under s 411, the body must, with every notice convening the meeting, send a statement explaining the effect of the arrangement which must state any material interests of the directors and the effect of the proposed arrangement on those interests insofar as that effect is different from the effect on the like interest of other persons. The statement must also set out such information as is prescribed and any other information that is material to the making of a decision by a member whether or not to agree to the arrangement. 18 Section 411(2) provides that the Court must not make an order pursuant to s 411(1) unless 14 days' notice of the hearing of the application has been given to ASIC and the Court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and a draft explanatory statement relating to it and make submissions to the Court in relation to the proposed arrangement and draft explanatory statement. 19 The Court will not ordinarily order a scheme meeting unless the scheme is of such nature and cast in such terms that, if it receives the support of the statutory majority at the scheme meeting, the Court would be likely to approve it on an unopposed application: see Re CSR Ltd (2010) 183 FCR 358 at [12] citing Re Central Pacific Minerals NL [2002] FCA 239 at [8]-[11]. 20 The Court does not need to be satisfied that a better scheme could have been proposed. The question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Centrebet International Limited, in the matter of Centrebet International Limited [2011] FCA 870 at [29]. Ultimately, the question is for members themselves: see Texon Petroleum Limited, in the matter of Texon Petroleum Limited [2013] FCA 29 at [4].. 21 As the initial application is usually an ex parte application, the plaintiff has a duty to bring to the Court's attention all matters that could be considered relevant to the exercise of its discretion: Permanent Trustee Company (2002) 43 ACSR 601; [2002] NSWSC 1177 at [7]. 22 More generally, at the first hearing the following matters need to be established: (1) the plaintiff is a Pt 5.1 body; (2) the proposed scheme is an "arrangement" within the meaning of s 411 of the Act; (3) the explanatory statement will provide proper disclosure to members; (4) the scheme is bona fide and properly proposed; (5) ASIC has had a reasonable opportunity to examine the proposed scheme, make submissions and has had 14 days' notice of the proposed hearing date; and (6) any other procedural requirements have been met, see EcoBiotics Limited, in the matter of EcoBiotics Limited [2017] FCA 643 at [20].

Part 5.1 body 23 The term Pt 5.1 body is relevantly defined in s 9 of the Act to mean a company. The evidence confirms that LifeHealthcare is a Pt 5.1 body.

The proposed scheme is an arrangement 24 I am satisfied that the proposed scheme is an arrangement between LifeHealthcare and its members.

Proper disclosure to shareholders in relation to the proposed Scheme 25 The Scheme Booklet includes the explanatory statement for the Scheme. 26 The information contained in the explanatory statement has been the subject of a verification process as described by Matthew Peter Muscio, chief executive officer of LifeHealthcare, and Geoff Hutchinson, managing director of Pacific Health. 27 The verification process undertaken required each person involved in that process, among other things, to consider the statements in the Scheme Booklet allocated to him or her, assess whether they were true and not misleading or deceptive or likely to mislead or deceive and consider whether those statements needed to be amended to ensure that they were true and not misleading or deceptive and that no material information was omitted. 28 In relation to the process undertaken by LifeHealthCare, each person signed a verification certificate in which, among other things, that person confirmed his or her belief that as at that date each material statement allocated to him or her to review was true and not misleading or deceptive or likely to mislead or deceive. Mr Muscio deposed that on 8 March 2018 the board of LifeHealthcare confirmed that, to the best of their knowledge, the LifeHealthcare information included in the Scheme Booklet does not contain any misleading or deceptive statements or any material omissions. 29 In relation to the process undertaken by Pacific Health, each verifying person confirmed directly to Mr Hutchinson that, among other things, the material statements of fact in the bidder information are accurate and complete, true and correct and not misleading or deceptive or likely to mislead or deceive, including by omission and that material forward-looking statements or statements of opinion or current intention in the bidder information are fair and based on reasonable grounds. Mr Hutchinson deposed that, based on the verification process described by him, he was satisfied that all material statements in the bidder information had been verified, are accurate and complete, true and correct and not misleading or deceptive and that the bidder information does not omit any material information.

Bona fide and properly proposed Scheme 30 The SID under which LifeHealthcare agrees to propose a Scheme and Pacific Health agrees to assist in proposing the Scheme is prima facie evidence that the Scheme is bona fide and properly proposed.

Notice to ASIC 31 There is evidence that ASIC has had sufficient opportunity to examine the proposed Scheme and the explanatory statement and that queries raised by ASIC have been addressed by LifeHealthcare. 32 By letter dated 28 March 2018 ASIC indicated that, in respect of the final form of the Scheme Booklet, 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.

Other procedural requirements have been met 33 Consents to act as chairperson and alternative chairperson of the Scheme Meeting were in evidence before me. I was otherwise satisfied that the various procedural requirements for making the orders sought were met.

Break fee 34 Clause 9.2 of the SID provides for the payment of approximately $1.8m as a break fee if any of the events set out therein occur. Section 3.10 of the Scheme Booklet summarises the circumstances in which the break fee is payable by LifeHealthcare as well as the amount of the break fee. 35 The break fee was negotiated by representatives of LifeHealthcare, Pacific Health and their legal and financial advisors. LifeHealthcare believes that the payment of the break fee is in the interest of Scheme Shareholders and is reasonable and appropriate in order to secure Pacific Health's entry into the SID and to commit to implement the proposed Scheme. 36 The break fee represents 1% of the aggregate amount of the total cash payment of $3.675 per LifeHealthcare share and the Interim Dividend and is in accordance with the Takeover Panel's Guidance Note 7: Lock-up devices which provides at cl 9 that "[i]n the absence of other factors, a break fee not exceeding 1% of the equity value of the target is generally not unacceptable". 37 Here, the break fee is not triggered by Scheme Shareholders failing to approve the Scheme. It is not, therefore, a disincentive to shareholders in their consideration of the proposed transaction: Adelaide Bank Limited, in the matter of Adelaide Bank Limited ACN 061 461 550 [2007] FCA 1582 at [31].

Options and Performance Rights 38 As noted at [3] above, LifeHealthcare currently has 2,673,327 Options and 147,122 Performance Rights. 39 Under the LifeHealthcare Long Term Incentive Plan (LTIP), in the event of a proposed change of control in respect of LifeHealthcare, the board has discretion to determine the treatment of any unvested Options and Performance Rights and the timing of such treatment. The LifeHealthcare board has determined that, if the Scheme becomes effective, the Options and Performance Rights will vest and be treated as follows: (1) the Performance Rights will, on the date when the Scheme becomes effective (Effective Date) and after trading in LifeHealthcare shares is suspended on the ASX on that date, automatically convert to LifeHealthcare shares; (2) the Options may be exercised in accordance with the terms of issue and the LTIP at any time up to 5.00 pm on the business day before the Effective Date; (3) if validly exercised, the Options will convert into LifeHealthcare shares on the Effective Date and after trading in LifeHealthcare shares is suspended on the ASX on that date; and (4) any Options that are not exercised in accordance with subpara (2) above will lapse. 40 All LifeHealthcare shares issued to the former holders of Options and Performance Rights in accordance with [39] above will be acquired by Pacific Health, along with the other LifeHealthcare shares held by Scheme Shareholders. The holders of those LifeHealthcare shares will be entitled to receive the Scheme Consideration and the Special Dividend if declared. 41 Clause 4.4(b) of the SID contemplates that a holder of Options and/or Performance Rights could agree on an alternative treatment of their Options and/or Performance Rights with Pacific Health other than that described at [39] above (Alternative Incentive Arrangements). However, the evidence establishes that no Alternative Incentive Arrangements have been entered into.

Exclusivity provisions 42 Clause 8 of the SID contains exclusivity provisions which include "no shop", "no talk" and a "no due diligence" restrictions and "notification" and "matching right" obligations. 43 Where there are such provisions the Court is concerned to ensure that: (1) any exclusivity period is for no more than a reasonable period capable of precise ascertainment; (2) an exclusivity clause directed at dealing with a solicited or unsolicited alternative merger proposal is framed so that it is subject to a fiduciary carve-out; and (3) the provision is clearly disclosed in the explanatory statement sent to Scheme Shareholders, see Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]. 44 In this case: (1) the exclusivity period, which affects the "no shop", "no talk" and "no due diligence" provisions, is capable of precise ascertainment. It is the period from the date of the SID, 5 February 2018, to whichever comes first, either the termination of the SID under cl 12 or the End Date which is defined to mean 27 July 2018 or such later date as Pacific Health and LifeHealthcare agree in writing. In my opinion, that period is reasonable; (2) the "no talk" and "no due diligence" restrictions are subject to the fiduciary carve-out in cl 8.6 of the SID and the overriding obligation that the LifeHealthcare directors do not breach their fiduciary duties; and (3) the exclusivity provisions are set out in section 3.9 of the Scheme Booklet.

Deemed warranty 45 Clause 8.2 of the Scheme is a deemed warranty by the Scheme Shareholders that their shares transferred under the proposed Scheme will be fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and interest of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind. The Scheme Shareholders are also taken to warrant that they have full power and capacity to transfer their Scheme shares to Pacific Health under the proposed Scheme. The deemed warranty is disclosed to Scheme Shareholders in section 8.8 of the Scheme Booklet. 46 Clauses to this effect are common place and have been approved in other schemes where they are disclosed to the relevant security holders: see, for example, Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [57]-[63]; Tower Australia Group Limited, in the matter of Tower Australia Group Limited [2011] FCA 224 at [13]-[15].

Performance risk 47 There are appropriate procedures in place to guard against performance risk. In particular: (1) pursuant to cl 5.2 of the Scheme, Pacific Health must provide the Scheme Consideration by depositing, in cleared funds an amount equal to the aggregate Scheme Consideration for all Scheme shares, into a trust account by close of business on the business day before the implementation date as defined in the Scheme. This amount will be held on trust by LifeHealthcare for the Scheme Shareholders; (2) subject to Pacific Health's compliance with the requirement referred to in subpara (1) above, LifeHealthcare will, on the implementation date, disburse the Scheme Consideration to Scheme Shareholders prior to the acquisition of LifeHealthcare shares by Pacific Health pursuant to cl 4.2 of the Scheme; and (3) by the Deed Poll, Pacific Health has undertaken, subject to the terms of the Scheme, to: (a) deposit, or procure the deposit of, the Scheme Consideration payable to all the Scheme Shareholders in cleared funds; and (b) undertake all actions attributed to it under the Scheme.

conclusion 48 I was satisfied that the proposed Scheme was of such a nature that, if approved at the Scheme Meeting, the Court would be likely to approve the Scheme on the hearing of an unopposed application. Accordingly, I made the orders sought by LifeHealthcare under s 411(1) of the Act to convene the meeting of the Scheme Shareholders for the purposes of considering the proposed Scheme. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.