MDA National Limited v M

BANKS-SMITH J: 1 On 30 October 2018 I heard an application under s 411 of the Corporations Act 2001 (Cth) (Act) to approve the convening of a scheme and the explanatory statement to be sent to members concerning the scheme. I made orders on that date, and these are my reasons. Proposed scheme 2 On 20 September 2018 the plaintiff (Decimal) announced that it had entered into a scheme implementation agreement (SIA) with Sargon pursuant to which Sargon will acquire all of the issued capital of Decimal. Under the terms of the scheme, Decimal shareholders are to receive 1.41 cents for each Decimal share. It is a relatively simple cash transfer scheme, with both Decimal and Sargon domiciled in Australia. The parties 3 Decimal is an Australian public company listed on the Australian Securities Exchange (ASX). It operates a cloud-based digital advice platform that enables enterprises such as banks and superannuation funds to provide automated, online financial advice. 4 Sargon is a private company which provides financial institutions and entrepreneurs with technology and infrastructure for investment funds and financial products. 5 By the scheme, Decimal will become a wholly owned subsidiary of Sargon, and would then apply to be delisted from the ASX. Materials relied upon 6 Decimal relies upon the following affidavits: (a) affidavit of Russell Philip of Corrs Chambers Westgarth (Decimal's lawyers) filed 11 October 2018 attaching the SIA and various corporate records, including annual reports of Decimal; (b) affidavit of Pauline Vamos, a director of Decimal, filed 23 October 2018 agreeing to be an alternative meeting chairperson and disclosing certain interests; (c) second affidavit of Russell Philip filed 23 October 2018 confirming that the relevant documents were provided to the Australian Securities and Investments Commission (ASIC) for its review; (d) affidavit of Mark Potts, a director of Decimal, filed 24 October 2018 deposing to his willingness to act as chairperson and disclosing certain interests; (e) affidavit of Nadine Marke, a director of RSM Corporate Australia Pty Ltd (RSM), attaching the draft independent expert report dated 4 October 2018 and confirming that she supervised the team who prepared the report and had overall responsibility for it, and confirming that the opinions expressed in the report are opinions that she continues to hold; (f) affidavit of Fiona Borrelli, general counsel and secretary of Sargon, filed 25 October 2018 deposing to the due diligence process undertaken with respect to verifying matters in the scheme insofar as they relate to Sargon and attaching a copy of the executed deed poll in favour of the scheme participants (Deed Poll); (g) affidavit of Damon Watkins, the chief executive officer of Decimal, filed 25 October 2018 deposing to the due diligence process undertaken by Decimal with respect to the scheme and addressing the process of drafting of the scheme booklet, the existence of certain loan facilities provided by Sargon and providing a history of a strategic review process that was undertaken with Deloitte to engage with a wide range of parties, a process that resulted in Sargon's proposal to acquire Decimal shares; (h) affidavit of Jonathan Dos Santos of Corrs Chambers Westgarth providing details of conferral with ASIC, disclosing minor amendments that were made to the scheme booklet, and attaching a final version of the proposed scheme booklet; and (i) third affidavit of Russell Philip attaching the letter from ASIC in accordance with s 411(2)(a) and (b) of the Act. 7 Decimal's solicitors also provided a checklist identifying where in the affidavits the matters prescribed by each of s 411 of the Act, the Corporations Regulations 2001 (Cth) and the ASIC Regulatory Guide 60 are dealt with in the materials. Principles 8 I have set out the principles previously in a number of scheme applications, but for ease of reference will provide a short summary in these reasons. 9 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 of the body in a summary way, order a meeting of the members to be convened in such manner and to be held in such place as the Court directs. Where the Court makes such an order, the Court may approve the explanatory statement required by s 412(1)(a) to accompany the notice of such a meeting. 10 Section 412(1)(a) of the Act relevantly provides that where a meeting is convened under s 411, the Pt 5.1 body must, with every notice convening the meeting, send a statement explaining the effect of the arrangement. That statement must state any material interests of the directors and the effect of the proposed arrangement on those interests where they differ from the effect on the same interests of other persons. The statement must also set out such information as is prescribed and any other information that is material to a member's decision to agree or not agree to the arrangement. 11 There are generally six matters to be established at the first stage: (a) the applicant is a Pt 5.1 body; (b) the proposed scheme is an 'arrangement' within the meaning of s 411 of the Act; (c) the explanatory statement will provide proper disclosure to members; (d) the scheme is bona fide and properly proposed; (e) ASIC has had a reasonable opportunity to examine the proposed scheme and the explanatory statement, has had a reasonable opportunity to make submissions and has had 14 days notice of the hearing date of the first Court hearing; and (f) any other procedural requirements have been met. 12 There are many cases to similar effect but I note in particular the collection of such matters in Amcom Telecommunications Limited, in the matter of Amcom Telecommunications Limited [2015] FCA 341 at [9] (McKerracher J) and EcoBiotics Limited, in the matter of EcoBiotics Limited [2017] FCA 643 at [20] (Gleeson J). 13 The principles as to the nature of the review at the first Court hearing are also summarised elsewhere: for recent examples, see Programmed Maintenance Services Limited, in the matter of Programmed Maintenance Services Limited [2017] FCA 1265 at [11]-[14] (McKerracher J); Signature Gold Ltd, in the matter of Signature Gold Ltd [2017] FCA 1481 at [22]-[23] (Markovic J). 14 In summary, the standard of review is whether the proposed scheme is not inappropriate and is one that sensible business people might consider is of benefit to its members. If the proposed arrangement is one that seems fit for consideration by a meeting of members and is a commercial proposition likely to gain the Court's approval if passed by the necessary majority, then leave should be given to convene the meeting. Part 5.1 body 15 A Pt 5.1 body is defined by the Act to include, relevantly, a company. A review of the historical records of Decimal as evidenced by copies of the extracts from the ASIC registry satisfy me that Decimal is a company. Arrangement 16 I am satisfied on the basis of the SIA and the scheme booklet contents that the scheme is an arrangement between Decimal and its members. As already noted, this is a simple cash transfer scheme, and such schemes have been approved on many occasions. Disclosure and verification of scheme booklet 17 The scheme booklet to be provided to the shareholders includes the RSM report, the proposed scheme, a copy of the Deed Poll and the notice of scheme meeting. It also includes a summary of the key terms of the SIA, with instructions as to how the full document can be accessed online by reference to Decimal's ASX announcements. The explanatory statement will be registered by ASIC before it is despatched, as required by s 412(6). 18 The explanatory statement provided to shareholders must provide proper disclosure as required by s 411(3) of the Act. I have, with the assistance of the checklist, reviewed the affidavit evidence to ensure that the matters which must be disclosed have been properly disclosed, and I consider that is the case. 19 Both Decimal and Sargon have provided by way of affidavit evidence a record of the process each entity undertook with respect to verification of the relevant parts of the scheme booklet. 20 The Board of Decimal unanimously supports the scheme and recommends that all shareholders vote in favour of the scheme. The Board has resolved to adopt the scheme booklet (substantially in its current form) for release. A single class 21 In this scheme, there is a single class of shareholders and all members have the same rights under the scheme. Decimal currently has on issue some 30,500,002 unlisted options to acquire Decimal shares, but Decimal has disclosed that it has entered into a deed with each option holder whereby the options are to be cancelled for nil consideration, subject to the scheme becoming effective. Decimal was obliged to procure such agreements under the SIA. This course is disclosed in the scheme booklet. No question of a different class arises. Independent expert report 22 RSM has concluded that, in the absence of any other relevant information or superior proposal, the scheme is fair and reasonable to Decimal shareholders and that the scheme is in their best interests. The explanatory statement discloses that since the announcement of the scheme, no superior proposal has emerged. 23 RSM has assessed the value of a Decimal share as being between 1.0 cents and 1.35 cents, with a preferred mid-point value of 1.17 cents on a controlling basis. 24 The RSM report concludes that the scheme has a number of advantages and disadvantages. As to advantages, it notes that: (a) the offer of 1.41 cents per share represents a premium of 76% to the closing share price of Decimal immediately prior to the announcement of the scheme, being 0.8 cents, and a premium of 20.5% of an assessment of the preferred value of a share on a controlling basis of 1.17 cents prior to the scheme - so the offer allows shareholders to realise value for their shares in excess of the price at which they were trading before the scheme was announced; (b) the scheme allows shareholders to receive certain and immediate value for their investment by way of cash; (c) Decimal requires additional working capital funding to continue its operations: the scheme alleviates this funding risk; (d) the directors have disclosed that there is a significant risk of Decimal being unable to continue as a going concern in the event that the scheme does not proceed; and (e) the scheme frees up cash proceeds and enables shareholders to reinvest in alternative investments. 25 The RSM report also notes the disadvantages for shareholders: (a) implementation of the scheme means that Decimal shareholders will no longer hold an interest in Decimal and will not benefit from any potential future capital growth or profits it generates; (b) the findings of the Financial Services Royal Commission could lead to financial institutions seeking to address regulatory requirements using automated advice technology such as that provided by Decimal, although the long-term potential of growth opportunities is unknown; and (c) implementation of the scheme may result in tax consequences for shareholders. 26 All of these matters are disclosed to the shareholders. Deemed warranty 27 The scheme provides that each of the Decimal shareholders is deemed to have warranted to Sargon that all of their shares transferred under the scheme are fully paid and free of encumbrances at the date of the transfer. Such deemed warranties are not unusual and despite some views to the contrary, the courts have generally held that the warranty is a device directed to ensuring that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: see for example APN News & Media Limited, in the matter of APN News & Media Limited [2007] FCA 770; (2007) 62 ACSR 400 at [60] (Lindgren J); Tower Australia Group Limited, in the matter of Tower Australia Group Limited [2011] FCA 224 at [14] (Stone J). The deemed warranty is disclosed in the explanatory statement. Performance risk/Deed Poll 28 It is important that the Court be satisfied that Sargon has effectively bound itself to take all steps necessary on its part to implement the scheme. As is usual, Sargon has bound itself to the implementation of the scheme through execution of the Deed Poll. 29 The Deed Poll contains an undertaking by Sargon in favour of the target shareholders to perform the obligations attributed to it in the scheme and gives the shareholders a direct contractual right against Sargon in the event that it fails to perform its obligations. 30 The terms of the scheme are also important: (a) Sargon is obliged to pay the scheme consideration (the aggregate amount required to pay all scheme shareholders) by paying immediately available funds into a trust account two clear business days prior to the implementation date (cl 5.2(b)); (b) the trust account is operated by Decimal and the funds are held on trust for the scheme shareholders and for the purpose of payment of the consideration to them (definition of 'Trust Account'); (c) on the implementation date Decimal must pay each shareholder the consideration due to them under the scheme either electronically or by issuing a cheque (as elected by the shareholder) (cl 5.2(c)); (d) the payment is made to the shareholders in consideration for the transfer of the shares (cl 5.1); (e) Decimal (not Sargon) is appointed attorney for the shareholders for the purpose of executing the share transfers (or a master share transfer) (cl 6.2); (f) in consideration of and subject to provision of the scheme consideration, the scheme shares are to be transferred to Sargon (cl 4.2); (g) Decimal is to deliver the share transfer(s) to Sargon on the implementation date and Sargon is to execute and deliver to Decimal the share transfer(s) on the implementation date (cl 4.2); (h) Sargon is beneficially entitled to the shares from the time of the provision of the consideration to the shareholders (cl 4.5 and cl 5.2); and (i) Decimal is to register Sargon in the Decimal register of shareholders immediately following receipt of the share transfer(s) from Sargon (cl 4.3). 31 As can be seen, there are interdependent obligations on the part of Sargon and the shareholders that arise on the implementation date. 32 There are examples where, taking into account the particular circumstances, the timing of the provision of the consideration to the shareholders and the provision of the executed share transfers to the acquirer have been expressed or required to be consecutive obligations: such examples include Re APN News & Media Limited at [23]; Re Kangaroo Resources Ltd; Ex parte Kangaroo Resources Ltd [2018] WASC 327 at [48]-[49] (Vaughan J). 33 That is not expressly provided for in this case. However, leaving aside the advance payment of the consideration into the trust account, all steps are still to be implemented on the implementation date. There are many examples of schemes where virtually identical arrangements to that proposed by Sargon have been approved: recent examples include APN Outdoor Group Limited, in the matter of APN Outdoor Group Limited [2018] FCA 1425 at [29]-[30] (Markovic J); Sino Gas & Energy Holdings Limited, in the matter of Sino Gas & Energy Holdings Limited [2018] FCA 1183 at [43] (Gleeson J); Re Westfield Corporation Limited [2018] NSWSC 584 at [32] (Black J); Bulletproof Group Limited, in the matter of Bulletproof Group Limited [2018] FCA 497 at [10]-[11] (Yates J); Mantra Group Limited, in the matter of Mantra Group Limited [2018] FCA 510 at [37] (Markovic J). 34 In my view, the fact that Sargon must provide the funds in advance, the fact that all other relevant steps occur on the implementation date, the fact that Decimal controls each of the trust account, the process by which the funds are to be provided to the shareholders and the timing of provision of the share transfer(s) to Sargon, and the fact that beneficial ownership by Sargon is said to arise after provision of the consideration to the shareholders all operate to minimise and protect the shareholders from performance risk. Deal protection - exclusivity provisions 35 Clause 7 of the SIA contains exclusivity provisions which include 'no shop', 'no talk', and 'no due diligence' sub-clauses. The terms of such provisions must be viewed against the duties of the directors more generally. 36 In general, and as discussed in Re APN News and Media Ltd at [29] and Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 at [9] (Santow J), exclusivity provisions should: (a) exist for no more than a reasonable period which is properly defined; (b) be subject to the directors' fiduciary and other duties; and (c) be given adequate prominence when disclosed in the scheme booklet. 37 Decimal submits that the exclusivity provisions meet these criteria in this case because: (a) the exclusivity provisions will operate from 20 September 2018 until the earlier of: (i) the termination of the SIA in accordance with its terms; (ii) 31 December 2018 or such later date as Decimal and Sargon agree in writing; and (iii) the implementation date, or such other date as ordered by the Court or agreed between Decimal and Sargon, and are capable of precise ascertainment from the terms of the SIA; (b) assuming no extension of the end date, the longest contemplated exclusivity period would be from 20 September 2018 to 31 December 2018 - or about 101 days or just over three months. This period is well within parameters considered to be reasonable; (c) the exclusivity provisions contain directors' fiduciary and statutory duty qualifications; (d) the 'lock up' device that is the matching right given to Sargon when a 'Competing Proposal' is made should work to the benefit of Decimal shareholders; and (e) prominence is given to the exclusivity provisions. 38 I have considered the relevant provisions of the SIA and accept Decimal's submission that there is nothing inappropriate or unreasonable about the exclusivity provisions. 39 There is clear disclosure of the exclusivity provisions in the scheme booklet.

Sargon loan facilities 40 The evidence disclosed that on 31 July 2018, Sargon and Decimal entered into a loan facility agreement under which Sargon agreed to provide Decimal with an unsecured loan facility of up to $300,000 to assist Decimal in meeting its general working capital requirements whilst the scheme is being implemented. A further loan facility agreement between Sargon and Decimal for the same amount for working capital was entered into on 20 September 2018. 41 The first loan facility has been drawn down in full, but the second has yet to be drawn down (as at 25 October 2018). 42 The possibility that such a loan agreement entered into between the acquirer and target could constitute a 'lock up by a side-wind' was considered in Cortona Resources Limited, in the matter of Cortona Resources Limited [2012] FCA 1295 at [42]-[45] (Barker J). 43 Barker J indicated that nothing in an arm's length transaction on commercial terms suggested it would impede free consideration by members of the proposed scheme: see also Anatolia Energy Limited, in the matter of Anatolia Energy Limited [2015] FCA 1134 at [44]-[46] (McKerracher J) and Black Range Minerals Limited, in the matter of Black Range Minerals Limited [2015] FCA 1162 at [15]-[20] (McKerracher J). 44 The terms of the Sargon loans were provided to the Court. I consider those loans should not prevent free consideration of the scheme by members because: (a) a summary of the terms of the Sargon loan facilities is disclosed in the scheme booklet for their consideration; (b) the loans become repayable six months after the date the relevant facility was entered into (not on any event related to the Decimal shareholders voting against the scheme and not if the SIA is terminated, so as to coerce Decimal shareholders to vote a particular way); (c) the period for repayment of any amounts drawn down is a sufficient period after the proposed scheme to enable Decimal to urgently seek alternative financing arrangements if the scheme is not implemented; and (d) the events of default in the Sargon loan facilities are ordinary events for debt instruments. 45 I note that RSM did not express concern as to the Sargon loan facilities. Conditions precedent 46 The implementation of the scheme is subject to a number of conditions precedent. They are set out in the SIA. As at the date of the hearing, the evidence was to the effect that there is no fact, matter or circumstance known to Decimal or Sargon that has resulted in, or is likely to result in, the failure of the conditions precedent to implementation of the scheme.

Other procedural matters 47 The requisite consents to act as chairperson and alternate chairperson were provided by way of the affidavits of Mr Potts and Ms Vamos and I am otherwise satisfied that the procedural requirements for making the orders sought were met. Proper purpose 48 I am satisfied that the scheme is properly proposed. There is nothing in the materials before me that suggests it has not been properly proposed. Distribution of scheme booklet 49 Decimal proposes to despatch a document (substantially in the form of the scheme booklet that was before me), a proxy form and a reply paid envelope addressed to each shareholder on Decimal's register of members as at 4.00 pm on 30 October 2018, and in the case of shareholders who have nominated an electronic address for the purposes of receiving notifications of meetings, it is proposed that Decimal will email to the nominated email addresses a link to a website at which shareholders can access the relevant documents and lodge a proxy form. 50 There is no issue that the Court may make orders that provide for the electronic despatch of the scheme booklet: MDA National Limited v Medical Defence Australia Ltd [2014] FCA 954 at [105] (Yates J). The provision of an email with a link as proposed is a permissible manner of electronic despatch. ASIC 51 Section 411(2) requires that the Court be satisfied that ASIC has been given notice of the hearing and that it has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement, and has had the opportunity to make submissions to the Court. 52 I am satisfied that there has been proper notice provided to ASIC and indeed ASIC and Corrs Chambers Westgarth have communicated about various matters which have been addressed. Further, ASIC indicated that its intention was not to intervene or oppose the scheme at the hearing before me. Conclusion 53 For the above reasons, I was satisfied that each of the matters relevant to an order convening a scheme meeting under s 411 was addressed by the evidence and that it was appropriate to make the orders sought by Decimal, including those relating to the convening of the meeting, approving the explanatory statement for distribution and the conduct of the scheme meeting. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.