MDA National Limited v Medical Defence Australia Ltd

BANKS-SMITH J: 1 On 12 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 26 July 2018 the plaintiff (Spookfish) announced that it had entered into a scheme implementation agreement (SIA) with Eagle View Technologies Inc (EagleView) pursuant to which EagleView will acquire all of the issued capital of Spookfish that it does not already own. Under the terms of the scheme, Spookfish shareholders other than EagleView are to receive $.09 for each Spookfish share. It is a relatively simple transfer scheme.

The parties 3 Spookfish is an Australian public company listed on the Australian Securities Exchange (ASX). It is engaged in the development and commercialisation of geospatial imagery products and services, and is based in Perth, Western Australia. 4 EagleView is a United States domiciled company wholly owned by EagleView Technology Corporation, a private company also based in the United States. EagleView provides aerial imagery, data analytics and geographic information system solutions to government, infrastructure and commercial sectors. EagleView is Spookfish's largest shareholder with a relevant interest of approximately 10.4% in the voting shares of Spookfish (as at 10 September 2018). 5 By the scheme, Spookfish will become a fully owned subsidiary of EagleView.

Materials relied upon 6 Spookfish relies upon the following affidavits: (a) affidavit of Mark Paganin which attaches correspondence to the Australian Securities and Investments Commission (ASIC), which in turn attaches (relevantly) the proposed scheme booklet and independent expert's report prepared by KPMG; (b) affidavit of Shannon Robinson, a director of Spookfish, confirming her consent to acting as alternate chairperson of the proposed meeting, and disclosing that she has interests in Spookfish by way of certain performance rights and options; (c) affidavit of Jason Marinko, the chairman of the Board of directors of Spookfish, consenting to act as chairperson of the proposed meeting and disclosing that he has certain interests by way of performance rights and options; (d) further affidavit of Shannon Robinson deposing to, relevantly, the due diligence process with respect to the scheme that has been undertaken by Spookfish, attaching the SIA and addressing certain relevant matters including a break fee and deed poll secured from EagleView (Deed Poll); (e) affidavit of Andrew Shawber, a United States lawyer who discloses his qualifications and provides an opinion as to the valid execution of the Deed Poll by EagleView; (f) affidavit of David Silverman of EagleView, deposing to the due diligence process undertaken with respect to verifying matters in the scheme insofar as they relate to EagleView; (g) affidavit of Jason Hughes of KPMG, the lead author of the independent expert's report, confirming the nature of the report; (h) further affidavit of Mark Paganin attaching a marked up copy of what is proposed to be the final version of the scheme booklet to be despatched to shareholders and copies of relevant correspondence from ASIC; and (i) affidavit of Stephen Neale attaching a deed of variation with respect to the SIA dated 12 October 2018, which varies one of the deal protection clauses (to which I will return). 7 Spookfish'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 summarised the principles previously in a number of scheme applications, and for ease of reference will repeat those in these reasons, conscious of the fact that reasons are primarily provided for the particular parties to any application. 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 insofar as they may differ from the effect on the like 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 The authorities refer generally to six matters to be proved 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 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 review of the historical records of Spookfish as evidenced by copies of the extracts from the ASIC registry satisfy me that Spookfish is a Pt 5.1 body within the meaning of the Act.

Arrangement 16 I am satisfied on the basis of the SIA and the scheme booklet contents that the scheme is an arrangement between Spookfish and its members. The type of arrangement proposed is consistent with many schemes where shares have been transferred to an acquirer for cash or equity.

Disclosure and verification of scheme booklet 17 The draft scheme booklet includes the KPMG report, the proposed scheme, a copy of the Deed Poll and the notice of meeting. 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 the proposed scheme booklet makes appropriate disclosure of the relevant matters to the Spookfish shareholders. 19 It is important to note that both Spookfish and EagleView 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 I also note that the Board of Spookfish has approved the release of the final draft of the scheme booklet.

A single class 21 In this scheme, there is a single class of shareholders and all members have the same rights under the scheme. To the extent there are questions with respect to performance rights and options, they are addressed below. I do not consider any separate class is created.

Independent expert report 22 The KPMG report concludes that the scheme has a number of advantages and disadvantages. As to advantages, it notes that: (a) the scheme consideration of $.09 for each Spookfish share represents a premium to Spookfish's historical volume weighted average price in the 12 months leading up to the announcement of the scheme; (b) the scheme provides the opportunity for shareholders to exit their investment for a certain cash amount and without incurring brokerage fees; (c) the scheme is currently the only option available for shareholders to realise value in excess of recently traded prices, and notes it is unlikely that an alternative offer would emerge taking into account that EagleView has a 10.4% shareholding, which represents a blocking stake to an unsolicited takeover offer as Spookfish as a whole, in the absence of EagleView's agreement; (d) in the absence of the scheme, Spookfish's share price may fall from current levels, which have likely been influenced by the announcement of the scheme although Spookfish shares have consistently traded below the scheme consideration since the announcement of the scheme; (e) in the period prior to the announcement of the scheme the scheme consideration represents a value that is higher than any price at which Spookfish shares have traded since 10 November 2017; and (f) Spookfish's results for the six months ended 30 June 2018 indicate that it continued to incur losses and it is likely therefore that Spookfish's share price will trade below current trading levels in the absence of a superior offer. 23 KPMG also noted the disadvantages for shareholders: (a) shareholders who wish to retain an interest in Spookfish will be unable to do so and will no longer have any exposure to any potential future upside or downside with respect to Spookfish's transition from product development to commercialisation, although KPMG notes that with respect to Spookfish's projects, there remain risks as to funding, certain contingent obligations and competition; and (b) if the scheme is implemented, depending upon individual non-associated shareholder's taxation position, there may be capital gains tax implications for shareholders. 24 KPMG also refers to other relevant considerations for shareholders, including that a major shareholder of Spookfish, Hoperidge, has indicated that in the absence of a superior proposal it intends to vote its approximate 19.9% relevant interest in Spookfish in favour of the scheme and that Spookfish's directors have advised the market that in the absence of a superior proposal, they unanimously recommend the scheme to shareholders. 25 KPMG states that in its opinion, and having considered the overall implications of the scheme, the scheme is fair and reasonable and is in the best interests of shareholders, in the absence of a superior offer. 26 I note the valuation process undertaken by KMPG is set out in its opinion and that the primary matter considered by KPMG in forming its opinion was whether the proposed scheme consideration of $.09 for each Spookfish ordinary share is fair to scheme shareholders. Having undertaken its valuation process, KPMG assessed the value of a Spookfish share, inclusive of a premium for control, as lying in the range of $.059 to $.075, in comparison to the scheme consideration of $.09 per Spookfish share.

Deemed warranty 27 The scheme provides that each of the Spookfish shareholders is deemed to have warranted to EagleView 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); Hostworks Group Limited, in the matter of Hostworks Group Limited [2008] FCA 64; (2008) 26 ACLC 137 at [41] (Mansfield J).

Performance risk/Deed Poll 28 The risk that consideration will not pass for the shares is addressed by the manner in which the scheme is structured and the Deed Poll executed by EagleView. By reason of s 11 of the Property Law Act 1969 (WA) and cl 1.3 of the Deed Poll, each shareholder has the benefit of the Deed Poll. In those circumstances, performance risk on the part of EagleView is minimised: APN News & Media Limited at [23]. 29 Mr Shawber has provided his expert opinion as to the validity of the execution of the Deed Poll, and I accept his opinion.

Unlisted Securities and Rights 30 Spookfish has 10,851,300 performance rights on issue, 235,763,256 options on issue and contractual obligations to issue up to a maximum of 219,576,293 additional shares, options and performance rights in certain circumstances (Unlisted Securities and Rights). 31 In the event that holders of the Unlisted Securities and Rights do not also hold shares in Spookfish, they would not be entitled to vote at the scheme meeting in any capacity: Re Skilled Group Ltd (No 1) [2015] VSC 789; (2015) 113 ACSR 525 at [62] (Robson J). 32 Under the SIA, by 5.00 pm on the business day immediately prior to the date on which any application under s 411(4)(b) of the Act is heard (that is, the usual second Court hearing), Spookfish is required to put in place arrangements so that there will be no outstanding Unlisted Securities and Rights on the Record Date (as defined in the SIA) and that no person has any residual entitlement to shares or options or any other consideration under or arising from any Unlisted Securities and Rights. 33 Accordingly, any holder of Unlisted Securities and Rights whose rights or securities vest or are exercised prior to the Record Date will be treated as a member and will share in the scheme consideration.

Deal protection clauses 34 Under the SIA, Spookfish and EagleView have agreed to a number of deal protection mechanisms. Having considered those mechanisms, I am satisfied for the purpose of these orders that it does not appear that such arrangements operate against the interests of the shareholders. I deal with them separately.

Break Fee 35 Under cl 10.2 of the SIA, Spookfish is required to pay a break fee of $1,327,500 if (in summary): (a) a Competing Proposal (as defined in the SIA) is announced by a third party during the Exclusivity Period (as referred to at [38] below) (whether or not such a proposal is stated to be subject to any pre-conditions) and within 12 months of such announcement, the third party proposing or participating in the Competing Proposal (or any associate of that third party): (i) completes a Competing Proposal of a certain kind; (ii) acquires a relevant interest in more than 50% of the shares; or (iii) enters into an agreement, arrangement or understanding with one or more members of the Spookfish group or the Spookfish directors that requires the abandonment, or otherwise the failure to proceed with, the acquisition by EagleView of the shares it does not already own pursuant to the scheme; (b) any Spookfish director withdraws their recommendation in relation to the scheme (with certain exceptions); (c) Spookfish validly terminates the SIA due to KPMG concluding that the scheme is not in the best interests of shareholders where the reason for that conclusion is a Competing Proposal; or (d) EagleView validly terminates the SIA under certain provisions (relating to a material breach of the SIA by Spookfish) and at such time Spookfish does not have a right to terminate the SIA for EagleView's material breach. 36 Spookfish submitted that: (a) the break fee will not be payable where the scheme becomes effective; (b) the break fee is less than the 1% guideline given by the Australian Takeovers Panel Guidance Note 7 (at para 9); (c) under the SIA EagleView is also subject to a break fee under certain circumstances; (d) the break fee has been negotiated at arm's length; and (e) there has been full disclosure of the break fee in both the SIA and the scheme booklet. 37 Taking into account the reasoning of Barker J in Rusina Mining NL, in the matter of Rusina Mining [2010] FCA 517 at [52], I accept Spookfish's submission that the break fee is not excessive and will not operate coercively.

Exclusivity Provisions 38 Clause 9 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. 39 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. 40 The exclusivity period is capable of precise ascertainment. It is defined under the SIA as being the period from the date of the SIA (being 26 July 2018) and the earlier of the 'End Date' (being 26 January 2019, or some other date as agreed by Spookfish and EagleView), on termination of the SIA under cl 13, or the Implementation Date (being five business days after the scheme becomes effective). 41 Clause 9 of the SIA does not prevent Spookfish from providing information in certain circumstances, including providing information required to be provided by law or any regulatory authority or to its auditors, consultants, customers and suppliers acting in that capacity in the ordinary course of business. The exclusivity clauses at cl 9.2 and cl 9.3 are subject to the overriding obligation not to breach the directors' fiduciary and statutory duty under the 'fiduciary carve out' in cl 9.4 of the SIA (which I note was amended to have regard to a concern raised by ASIC). 42 There is clear disclosure of the exclusivity provisions in the scheme booklet. In addition, the provisions were negotiated by the parties with the assistance of legal firms.

Conditions precedent 43 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 Spookfish or EagleView that has resulted in, or is likely to result in, the failure of the conditions precedent to implementation of the scheme. 44 Spookfish has said that it proposes to provide particulars of the satisfaction or waiver of all conditions precedent, including any prescribed occurrence, to the implementation of the scheme at any hearing of an application for orders approving the scheme.

Other procedural matters 45 The requisite consents to act as chairperson and alternate chairperson were provided by way of the affidavits of Mr Marinko and Ms Robinson and I am otherwise satisfied that the procedural requirements for making the orders sought were met.

Distribution of scheme booklet 46 Spookfish 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 Computer Share Investor Services Pty Ltd (ComputerShare) to each shareholder on Spookfish's register of members as at 4.00 pm on 10 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 ComputerShare 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. 47 Spookfish's Constitution provides that notices of meeting may be provided electronically. Further, 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 48 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. 49 I am satisfied on the basis of the annexures to Mr Paganin's further affidavit that there has been proper notice provided to ASIC. Further, ASIC has indicated that its intention was not to intervene or oppose the scheme at the hearing before me. 50 I also note that ASIC has provided a letter to Spookfish granting a waiver of the requirement for the explanatory statement contained within the scheme booklet to comply with para 8302(h) of Pt 3 of Sch 8 of the Corporations Regulations.

Conclusion 51 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 Spookfish, including those relating to the convening of the meeting, approving the scheme booklet for distribution and the conduct of the scheme meeting. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.