Onthehouse Holdings Limited, in the matter of Onthehouse Holdings Limited [2016] FCA 1167

Background 4 OTH was admitted to the official list of the ASX in June 2011. Its business is to provide software and mobile products in relation to marketing, back-end software solutions and mobile applications that enable real estate agents to grow and manage their businesses. OTH generates recurring revenue from its real estate software, which includes a locally-installed property management software program, a cloud-based sales customer relationship management software solution and a cloud-based platform to deliver websites for real estate agencies. 5 On 23 December 2015, Macquarie Group Limited filed a substantial holder notice with the ASX notifying that 77VSV and PIQ1 Pty Ltd had entered into an Exclusivity and Standstill Agreement with RP Data on 21 December 2015. It advised that 77VSV and PIQ1 intended to form a consortium with a view to the consortium acquiring all of the shares in OTH not already held by them pursuant to a scheme of arrangement. RP Data would not be a member of the consortium but it would provide technical advice, assistance (including financial assistance) and ultimately acquire shares in OTH once the scheme had been implemented. On 24 December 2015, Mr Daniel Dempsey filed a substantial holding notice indicating that he would work with 77VSV and PIQ1 in relation to the acquisition of OTH. 6 On 5 July 2016, OTH entered into a Scheme Implementation Deed with a consortium comprising 77VSV, PIQ1, Macquarie Corporate Holdings Pty Ltd (MCHPL) and Sandrift Pte Limited (each a Consortium Member and together the Consortium). PIQ1 and MCHPL are wholly owned subsidiaries of Macquarie Group. 77VSV and Sandrift are affiliated with Messrs Michael and Daniel Dempsey who are directors of OTH. Details of Consortium Members and arrangements between the Consortium and RP Data, including the conduct of the Scheme and standstill and exclusivity obligations are set out at Sections 4.1-4.5 of the Scheme Booklet. 7 The Scheme Implementation Deed was further amended on 6 September 2016 to accommodate the need to make the Scheme conditional on the OTH shareholders passing the Corrective Resolution at the EGM. By letter dated 24 August 2016, the ASX advised the solicitors for OTH that it considered that Listing Rule 10.1 required shareholder approval of the sale of the COD Business to RP Data having regard to its view that the value of the consideration for the COD Business was greater than 5% of the equity interests in OTH (based on Appendix 4D lodged with the ASX on 26 February 2016) and the fact that RP Data had a relevant interest in more than 10% in the issued shares in OTH at the time of the transaction. 8 OTH options are held by current and former directors or executives of OTH. Between 24 June 2016 and 1 July 2016, each option holder signed an option cancellation letter pursuant to which each holder will receive cash consideration for their options upon the Scheme becoming effective. That consideration was calculated using the Black-Scholes option valuation methodology on the basis that each OTH share was valued at $0.85. The ASX has waived compliance with Listing Rule 6.23.2 in relation to these payments subject to the Scheme coming into effect. Some options lapsed on 30 June 2016 and further options will lapse on 30 September 2016, before the Scheme Meeting. At the hearing, counsel for OTH, Mr Lockhart SC, advised that none of options in which the OTH directors have a relevant interest will lapse before the Scheme Meeting. 9 Sections 3.7 and 7.2 of the Scheme Booklet disclose the names of the directors of OTH and their interests in OTH shares and options. (1) The directors identified as independent are: (a) Mr Tony Scotton, who is the Chairman. He has a relevant interest in 361,907 shares and 300,000 options; (b) Mr Angus Johnson has a relevant interest in 5,941,743 shares and 250,000 options; and (c) Ms Lisa Hickson has a relevant interest in 250,000 options. (2) The directors affiliated with the Consortium are: (a) Mr Michael Dempsey who has a relevant interest in the 15,837,745 shares (through 77VSV) and 250,000 options; and (b) Mr Daniel Dempsey has a relevant interest in 250,000 options. 10 Mr Scotton will receive $91,405.00 and the other directors will each receive $84,150.00 for the cancellation of their options if the Scheme becomes effective. 11 The independent directors commissioned an independent expert's report from Lonergan Edwards and Associates Limited who concluded that the value of each OTH share, on a controlling basis, is between $0.65-$0.75 and on that basis, in the absence of a superior proposal, in their opinion the Scheme is fair and reasonable and in the best interests of OTH shareholders. The Lonergan Edwards report is set out at Attachment D of the Scheme Booklet. 12 The independent directors recommend that shareholders vote both in favour of the Corrective Resolution and (in the absence of a superior proposal) to approve the Scheme. The independent directors who have relevant interests in OTH shares state that they intend to vote in favour of the Scheme in respect of all the shares they control. 13 Messrs Michael and Daniel Dempsey have refrained from making any recommendation as to how OTH shareholders should vote in light of their affiliation with Consortium Members and no votes will be cast at the Scheme Meeting in relation to shares held by or on behalf of 77VSV. The interests of Messrs Michael and Daniel Dempsey through 77VSV and Sandrift are set out at Sections 4.1(b), 4.1(c) and 4.2 of the Scheme Booklet. 14 PIQ1 and MCHPL are wholly owned subsidiaries of Macquarie Group and disclosures concerning them are set out at Sections 4.1(a) and 4.2 of the Scheme Booklet. Through Macquarie Group's subsidiary, Macquarie Investment Management Limited (MIML), PIQ1 and MCHPL have relevant interests in 30,000 OTH shares held on behalf of the Macquarie Superannuation Plan. MIML will not exercise the vote in relation to those shares at the Scheme Meeting. MIML also holds 49,000 OTH shares as a bare trustee and custodian for third party investors and MIML may (and will) only vote to approve the Scheme as directed by those investors: see Section 4.2 of the Scheme Booklet. 15 A copy of the Notice of the EGM was tendered at the hearing in response to enquiries made by the Court as to the nature of the disclosures which will be made in connection to a meeting to be held so proximately to the Scheme Meeting and in circumstances where the Scheme Meeting will not be held if the Corrective Resolution is not passed. A voting exclusion statement indicates that any votes cast on the Corrective Resolution by RP Data or its associates (including PIQ1, MCHPL, 77VSV and Sandrift) will be disregarded. 16 Section 2 of the Scheme Booklet sets out the steps for implementing the Scheme and summarises important aspects of the Scheme and the Scheme Implementation Deed. Disclosures include: (1) The conditions precedent to the Scheme. They are typical, other than the condition related to passage of the Corrective Resolution at the EGM; (2) That a Deed Poll (in the form set out in Attachment C to the Scheme Booklet) has been executed by each of PIQ1, MCHPL and Sandrift which provides, among other things, for payment of their respective portions of the Scheme Consideration and that payment of the Scheme Consideration must be made before the transfer of Scheme Shares to PIQ1, MCHPL and Sandrift; (3) The circumstances in which the Scheme Implementation Deed may be terminated; (4) Exclusivity provisions, including "no-talk", "no due diligence" and "notification of approaches" provisions, subject to "fiduciary out" provisions which have become typical. There are also "no shop" and "matching rights" provisions. The "end date" for these provisions is 16 January 2017; (5) A Reimbursement Fee (commonly also known as a break fee) of $720,000 is payable if an independent director changes his or her recommendation, or a competing proposal is announced during the exclusivity period and is completed within six months, or the Scheme Implementation Deed is terminated for material breach by OTH and the Scheme does not become effective or a "prescribed occurrence" occurs more than two hours before the second court hearing in relation to the Scheme or the Court refuses to approve the Scheme as a result of a material non-compliance by OTH with its obligations under the Scheme Implementation Deed. It is notable that payment of the Reimbursement Fee is not triggered by a decision of the OTH shareholders not to approve the Scheme or pass the Corrective Resolution. Mr Lockhart submitted, and the Court accepted, that expenses incurred by the Consortium thus far had exceeded $720,000 and the fact that the Reimbursement Fee slightly exceeds 1% of the equity value of OTH (which is the guideline adopted by the Takeovers Panel in assessing whether such a fee gives rise to unacceptable circumstances) should not preclude the Court from making the orders sought; and (6) Warranties provided by OTH shareholders under clause 8.4 of the Scheme, which are in a form which has become typical. 17 Section 4.3 of the Scheme Booklet sets out the funding arrangements for the Scheme Consideration. PIQ1, MCHPL and Sandrift will respectively acquire 19,334,342, 30,425,009 and 17,034,388 OTH shares pursuant to the Scheme for which they will respectively be obliged to pay $16,434,190.70, $25,861,257.65 and $14,479,229.80. PIQ1 and MCHPL will fund their proportions of the Scheme Consideration pursuant to internal Macquarie Group funding arrangements through which they will have access to cash reserves held by members of the Macquarie Group. Sandrift proposes to fund the payment of its portion of the Scheme Consideration through an equity injection by Vistra Trust (Singapore) Pte Limited, the legal holder of all of the shares in Sandrift. This obligation is supported by a personal guarantee given by Mr Michael Dempsey. The equity injection will be made before the Scheme Meeting. 18 Section 4.4 of the Scheme Booklet sets out the intentions of the Consortium if the Scheme is implemented. Among other things, it discloses that the independent directors will be replaced and (together with Sections 4.5(b) and (c)) that OTH will acquire PropertyIQ and the RP Office Business. The Consortium Agreement entered into on 5 July 2016 between the Consortium Members, their related bodies corporate and RP Data is summarised at Section 4.5(a) of the Scheme Booklet. Disclosures include: (1) The manner in which the Reimbursement Fee (should it become payable by OTH) will be split between Consortium Members and RP Data; and (2) Exclusivity, standstill and upside sharing arrangements, which (among other things) excuse Messrs Michael and Daniel Dempsey from disclosing competing proposals for OTH of which they become aware in their capacity as directors of OTH where such notification would cause them to be in breach of their duties at directors of OTH. 19 By letter dated 7 September 2016, the Australian Securities & Investments Commission (ASIC) indicated that it had reviewed drafts of the Scheme Booklet, that it was of the view that it had had the required notice of the Court hearing and a reasonable opportunity to examine the Scheme Booklet as contemplated by s 411(2) and that it did not intend to appear at the first court hearing to oppose the Court making orders convening the Scheme Meeting. 20 A number of affidavits were sworn or affirmed in these proceedings. They related to, among other things, details of correspondence with the ASX and ASIC; a search of ASIC's database indicating that OTH was incorporated on 29 March 2011 as a company limited by shares and that it has not been wound up or had administrators appointed as well as the details of its current officers; the background to the proposed Scheme, including evidence of the Scheme Implementation Deed and Deed Polls; the manner in which verification of the Scheme Booklet was undertaken; and the basis for negotiation of the exclusivity arrangements and Reimbursement Fee. The deponents of the affidavits were: (1) Crispian Paul Lynch, a partner of Gilbert + Tobin, solicitors for OTH in relation to the Scheme; (2) Christopher John Meehan, OTH's Chief Executive Officer; (3) John Christopher Williamson-Noble, a partner of Gilbert + Tobin; (4) Craig Lloyd Edwards, managing director of Lonergan Edwards, the firm which provided the independent expert's report in relation to the Scheme; (5) Kirk Kileff, a Division Director of Macquarie Group, in relation to verification of information concerning PIQ1; (6) Belinda Cooney, a Division Director of Macquarie Capital, a business division of Macquarie Group, in relation to verification of information concerning MCHPL; (7) Michael Perry Dempsey, in relation to verification of information concerning 77VSV and Sandrift; (8) James John Shirbin, a solicitor in the employ of Corrs Chambers Westgarth, solicitors for MCHPL in relation to updating information for each of the Consortium Members and RP Data since the date of original verification in light of the postponement of the date of the Scheme Meeting; (9) Angus William Johnson, a non-executive director of OTH, in relation to his consent to act as Chairman of the Scheme Meeting in the event that Mr Tony Scotton was unable or unwilling to do so. As the date of the Scheme Meeting had been postponed from the proposed original date, Mr Scotton will be overseas and therefore will not be available; and (10) Lisa Jane Hickson, a non-executive director of OTH, in relation to her consent to act as Chairman of the Scheme Meeting if Mr Johnson was unable or unwilling to do so.

Discussion 21 In the course of the hearing a number of issues arose. OTH and the Consortium Members were prompt and willing in addressing the Court's concerns. 22 First, the Court noted that the form of the proposed orders (which would convene a meeting of OTH shareholders other than 77VSV) and the definition of "Excluded Shareholder" and "Excluded Share" in the Scheme Booklet suggested that 77VSV was the legal owner of shares in OTH. However, the list of OTH's "top 20" shareholders set out in Section 7.8 of the Scheme Booklet indicated that 15,837,745 shares were held by Asgard Capital Management Ltd , which indicated that the legal holder of the shares was Asgard Capital Management Limited as custodian for 77VSV. Although intentions were reasonably clear, these minor differences were inimical to unambiguous implementation of the Scheme. As a result, the form of order 1(a) was amended to refer to shares held "by or on behalf of" 77VSV and similar changes were made to the definition of "Excluded Share"; the Scheme Implementation Deed was amended to facilitate these changes. 23 Second, the Chairman's letter in the Scheme Booklet referred to the fact that the Scheme Meeting would be held following the EGM. However, the background to the EGM was not set out in the Scheme Booklet and the Court had not been provided with a copy of the information to be despatched to shareholders. 24 In Damian T and Rich A Schemes, Takeovers and Himalayan Peaks (3rd ed, The University of Sydney, Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2013) at [4.3.6], the authors comment that where there is a "related" general meeting to effect a corporate action, the outcome of which is a condition of a scheme, it is the usual practice to incorporate the notice of that meeting in the scheme booklet. I endorse this practice. In my view, the Court should be in a position to ensure that the "message" embodied in the explanatory statement which is approved by the Court is not "interfered with" by material otherwise provided by the company in connection with a meeting to be held contemporaneously with the scheme meeting. It is the same principle which has been adopted in relation to the despatch of supplementary information after a scheme meeting has been convened: see PR Finance Group Limited, in the matter of PR Finance Group Limited (No 3) [2013] FCA 704 at [16]. I accept Mr Lockhart's submission that the Court need not approve information in relation to the related meeting as it does the explanatory statement. However, the Court should be advised of its content before making orders under s 411(1) in relation to the scheme meeting. 25 After an adjournment, the following documents were tendered: (1) a covering letter from OTH's Chairman enclosing the notice of meeting and explanatory memorandum for the EGM, the independent expert's report in relation to the disposal of the COD Business to RP Data and proxy form for the EGM, and the Scheme Booklet and proxy form for the scheme meeting; (2) a draft Notice of EGM; and (3) a draft independent expert's report in relation to the consideration paid by RP Data for the COD Business. I was satisfied that those materials did not interfere with the "message" conveyed by the Scheme Booklet. 26 Third, the draft Scheme Booklet contained a copy of the Scheme Implementation Deed with amendments made on 6 September 2016, notwithstanding that it was summarised in Section 2 of the Scheme Booklet and that the Scheme Implementation Deed, as amended, was available in full on the ASX website. After discussion, OTH determined not to include a copy of the Scheme Implementation Deed in Exhibit 1. In my view, this was appropriate and makes the Scheme Booklet more approachable by and comprehensible for OTH shareholders. 27 OTH determined to retain the Deed Poll and Exhibit 1 contains counterpart copies of it. I was less concerned about including the Deed Poll in the Scheme Booklet, since it lacks the bulk of the Scheme Implementation Deed and shareholders have a direct right of recourse against PIQ1, MCHPL and Sandrift under the Deed Poll. I indicated to Mr Lockhart at the resumed hearing that I was satisfied that the Scheme Booklet as despatched would be "substantially" in the form of Exhibit 1 if only one copy of the Deed Poll was included. 28 As a matter of principle, there should be no need to include the Deed Poll in the Scheme Booklet where its effect is summarised in the Scheme Booklet and it is in the same form as it appears in a schedule to the Scheme Implementation Deed which has been disclosed to the ASX; this was such a case. 29 Having said these things, it remains appropriate for the Scheme Implementation Deed and Deed Poll (if already executed) to be provided in evidence to the Court. 30 Fourth, the final material issue was that there were repeated statements in the Chairman's letter and other early parts of the Scheme Booklet that the independent directors recommended the Scheme, but the disclosure of the potential benefits that those directors would receive if the Scheme is implemented (through the sale of their shares and options) was to be found much later in the booklet at Sections 3.7 and 7.2. The benefit from the agreement to cancel the directors' options was not one in which other shareholders would share and at approximately $91,000 and $85,000, the sums involved were not immaterial. The draft Scheme Booklet was amended to cross-refer to the benefits the independent directors would receive if the Scheme is implemented at the same point as the directors' recommendations were repeated.

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Judgment (5 paragraphs)

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