Viralytics Limited, in the matter of Viralytics Limited [2018] FCA 637

Federal Court of Australia|2018-04-20|Before: Gleeson J

Pursuant to subsection 411(1) Corporations Act 2001 (Cth) ("Act"), the plaintiff convene a meeting of its members ("scheme meeting"), for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed between the plaintiff and its members ("scheme") being the scheme of arrangement set forth in annexure C of the explanatory statement in relation to the scheme, which is exhibit 1 in the proceeding ("scheme booklet").
The scheme meeting be held on 28 May 2018 at Warrane Theatre, Museum of Sydney, Corner Phillip and Bridge Streets, Sydney, NSW, 2000, commencing at 2 pm.
Pursuant to subsection 411(1) of the Act, the scheme booklet be approved for distribution to the members of the plaintiff.
The scheme booklet to be dispatched to members of the plaintiff be in the form, or to the effect of, that which is exhibit 1.
Paul Hopper or, in his absence, Malcolm Lindsay McColl, act as chairperson of the scheme meeting.
Except for procedural motions, all voting at the scheme meeting be by poll as declared by the chairperson.
The chairperson of the scheme meeting has the power to adjourn such meeting in his absolute discretion.
Rule 2.15 of the Federal Court (Corporations) Rules 2000 shall not apply to the scheme meeting, except for Rule 75-15(2) of the Insolvency Practice Rules (Corporations) 2016.
Pursuant to section 1319 of the Act, on or before 26 April 2018, there be dispatched to: (a) each member of the plaintiff who has nominated, to Viralytics' share register provider Link Market Services Limited, an electronic address for the purposes of receiving notices of meeting and proxy forms from Viralytics, at such address, an email substantially in the form of the document behind tab 8 of exhibit MLM-1, including URL links to the scheme booklet and a sample proxy form in respect of the scheme meeting substantially in the form of the document behind tab 9 of exhibit MLM-1 ("proxy form"); and (b) each other member of the plaintiff, by hand at, or prepaid post or courier to, or the case of a member whose registered address is outside the country, by pre-paid airmail post, or dispatched by air courier for overseas pre-paid post to, the address of that scheme shareholder as set out in the register of members of Viralytics, a copy of the scheme booklet and a personalised proxy form.

GLEESON J: 1 On 20 April 2018, I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) ("Act") after a first hearing in relation to a proposed scheme of arrangement, including orders to convene the proposed scheme meeting and approving the explanatory statement required by s 412(1)(a) to accompany notices of the scheme meeting ("scheme booklet"). 2 These are my reasons for making those orders.

Background 3 Viralytics Limited ("Viralytics") is an Australian Stock Exchange ("ASX") listed company focussed on oncolytic immunotherapy treatments for a range of cancers. The company's lead investigational product, CAVATAK®, is currently being studied in clinical trials for the treatment of melanoma, as well as bladder and lung cancers. 4 As at 4 April 2018, Viralytics had current issued capital of 278,262,889 ordinary shares, in respect of which the total amount paid or taken to be paid was $154,409.659.34. 5 As at 17 April 2018, there were 5,296 Viralytics shareholders, of which 2,191 had elected to receive electronic notification of meetings. 6 There are 14,183,667 options over unissued Viralytics shares, which are held by ten option-holders. The options were issued at various times under an employee share plan to eligible employees and directors of Viralytics. 7 In addition, performance rights have been issued to Viralytics employees. Each performance right entitles the holder to receive one share subject to the satisfaction of applicable performance hurdles. There are currently 131,500 Viralytics performance rights on issue, held by 17 Viralytics performance rights holders.

Proposed scheme 8 The proposal is that: (1) Viralytic shareholders will transfer their shares to Merck Sharp & Dohme (Holdings) Pty Ltd ("MSD"), a wholly owned subsidiary of Merck & Co Inc, a New York Stock Exchange ("NYSE") listed global health care company; (2) the consideration for each share transferred is $1.75 cash; (3) payment of the scheme consideration is secured by a deed poll executed by MSD; and (4) the scheme will effect the acquisition of Viralytics by MSD and will result in Viralytics becoming a wholly owned subsidiary of MSD. 9 On 21 February 2018, Viralytics and MSD entered into a scheme implementation agreement under which they agreed to implement the proposed scheme. Viralytics and MSD made an announcement to the ASX in relation to the proposed scheme the same day. 10 The directors of Viralytics ("directors") have unanimously recommended that, in the absence of a superior proposal, shareholders vote in favour of the scheme at the proposed scheme meeting. The chairman's letter in the scheme booklet states that the scheme consideration represents a premium of 160% to the one-month volume weighted average price ("VWAP") of Viralytics' shares prior to the announcement of the scheme on 21 February 2018. 11 The independent expert appointed by the directors, Deloitte Corporate Finance Pty Ltd ("Deloitte"), concludes that the proposed scheme is fair and reasonable and therefore in the best interests of shareholders. The cash consideration offered by MSD is above the range of Deloitte's estimate of the fair market value of a share in Viralytics, which is between $1.40 and $1.73. The fair market value was estimated by applying the probability weighted discounted cash flow method, which estimated the value of Viralytics by discounting its estimated probability weighted future cash flows to their present value. 12 It is proposed to hold a single scheme meeting on Monday 28 May 2018 at 2pm.

Evidence and submissions 13 Viralytics relied on the following evidence in support of the application: (1) two affidavits of Malcolm McColl, managing director and chief executive officer of Viralytics and proposed alternative chairperson, both sworn 18 April 2018, together with a single volume marked exhibit "MLM-1"; (2) an affidavit of Peter Stokes, Viralytics' solicitor, affirmed 4 April 2018; (3) an affidavit of Paul Hopper, non-executive director and chairman of Viralytics and proposed chairperson for scheme meeting, affirmed 12 April 2018; (4) an affidavit of Stephen Reid, director of Deloitte, affirmed 13 April 2018; (5) an affidavit of Ben Wood, solicitor, sworn 13 April 2018; (6) an affidavit of Jennifer Nolte, director, Legal, Corporate Transactions at Merck, Sharp & Dohme Corp (another wholly owned subsidiary of Merck & Co Inc), affirmed 17 April 2018; (7) a letter dated 19 April 2018 from the Australian Securities and Investments Commission ("ASIC") confirming compliance with s 411(2)(a) and expressing the view that ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet for the purposes of s 411(2)(b)(i); and (8) the scheme booklet (marked "exhibit 1"). 14 Viralytics filed written submissions dated 19 April 2018. The written submissions set out the relevant legal principles and identified the evidence necessary to justify the orders sought. 15 In addition to the written submissions, senior counsel for Viraltyics, Mr Oakes SC, made oral submissions that identified important aspects of the evidence. 16 Counsel for MSD, Mr Izzo, also made brief supporting oral submissions.

Issue for decision 17 At the first hearing, the Court's task is to decide whether to approve both the convening of the proposed scheme meeting pursuant to s 411(1) and the scheme booklet, that is the explanatory statement required by s 412(1)(a) to accompany notices of the scheme meeting. 18 The relevant legal framework is set out in the submissions filed by Viralytics. It is also explained in Re Staging Connections Group Ltd [2015] FCA 1012. 19 I was satisfied that senior counsel for Viralytics sought conscientiously to discharge the duty of candour which applies in ex parte applications of this kind (see Re Permanent Trustee Company Ltd [2002] NSWSC 1177; (2002) 43 ACSR 601 at [7]), both bringing to the Court's attention all matters that could be considered relevant to the Court's decision and referring to that duty in his written submissions.

Part 5.1 body 20 The term "Part 5.1 body" is defined in s 9 of the Act to mean, relevantly, a company. The evidence confirmed that Viralytics is a Pt 5.1 body.

Proposed scheme is an "arrangement" 21 Generally, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members, and which is properly proposed, is an "arrangement" within the meaning of s 411: see Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20] (Santow J). The text of the scheme (annexure C to the scheme booklet) provides prima face evidence that the proposed scheme is an "arrangement". 22 Viralytics has committed itself to propounding the scheme by the scheme implementation agreement, providing prima facie evidence that the scheme is bona fide and has been properly proposed.

Scheme booklet will provide proper disclosure to members 23 Mr McColl's second affidavit described the process by which Viraltyics has ensured that the scheme booklet does not omit any material required to be included in the scheme booklet, and is neither false in a material particular nor materially misleading. 24 Mr McColl also verified his belief that, based on the verification process described in his second affidavit, all of the statements of fact made in the scheme booklet, so far as those facts relate to Viralytics, are true and correct, except to the extent that they stated that orders had been made by the Court which had not been made at the time of swearing his affidavit; and the scheme booklet had been registered with ASIC. Mr McColl also verified that there was no omission of material information from the scheme booklet in relation to Viraltyics. 25 On 13 April 2018, the Viralytics' board of directors resolved by circular resolution that the latest version of the scheme booklet was approved and was to be lodged with the Court as part of the affidavit evidence for this application. 26 Ms Nolte verified in her affidavit that she was satisfied that all material statements in the bidder information (comprising all information regarding MSD as was reasonably required for inclusion in the scheme booklet) had been verified in the manner described in her affidavit; were true and complete; not misleading or deceptive; and that the bidder information did not omit any material information. 27 I accepted that the affidavits of Mr McColl and Ms Nolte demonstrate that reasonable steps have been taken to confirm that the statements in the scheme booklet are accurate, are not misleading or deceptive and that no material information has been omitted in respect of those statements. 28 On the basis of the evidence set out above, I was satisfied that there is prima facie evidence that the scheme booklet will provide proper disclosure to members.

Other procedural requirements have been met 29 Division 3 of the Federal Court (Corporations) Rules 2000 ("Corporations Rules") applies relevantly to an application for approval of an arrangement between a Part 5.1 body and its members (r 3.1). 30 The affidavits of Mr Hopper and Mr McColl met the requirements in r 3.2 of the Corporations Rules (concerning nomination of the chairperson for the scheme meeting). 31 The proposed orders were in a form that met the requirements of r 3.3 and provided for publication of the notice required by r 3.4.

Proposed electronic notification of shareholders 32 Viralytics proposes to email those shareholders who have elected to receive notices by email with links to the scheme booklet. 33 Sections 249J(3)(c) and (ca) of the Act contemplate sending notices of meetings to members. Rule 3.3(2) of the Corporations Rules contemplates, in the absence of court orders to the contrary, that a meeting of members ordered under s 411 must be convened, held and conducted in accordance with the provisions of Pt 2G.2 of the Act (in which s 249J appears) and Viralytics' constitution (to the extent that it is not inconsistent with Pt 2G.2). 34 Rule 30.1(a)(iii) of Viralytics' constitution deals with electronic mail-out in a manner not inconsistent with Pt 2G.2. 35 Electronic mail-out orders are now commonly made in relation to scheme meetings: see, for example, Re David Jones Ltd [2014] FCA 530; Re Staging Connections at [49]-[52]; Re Signature Gold Ltd [2017] FCA 1481 at [55]; Re Intecq Ltd [2016] NSWSC 1429 at [21]; and Re Sirtex Medical Ltd [2018] FCA 584 at [33]-[37]. 36 The proposed form of notification conforms with the requirement that information concerning the scheme booklet precede any invitation for shareholders to act (for instance, by submission of proxy forms): David Jones at [37] per Farrell J.

Dispensation from application of r 2.15 of Corporations Rules 37 Rule 2.15 provides: Subject to the Corporations Act, these Rules and any direction of the Court to the contrary, regulations 5.6.11 to 5.6.36A of the Corporations Regulations apply to meetings ordered by the Court. 38 Regulations 5.6.11 to 5.6.36A of the Corporations Regulations 2001 (Cth) were substantially repealed as of 1 September 2017 by the Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth). 39 Mr Oakes SC submitted that the reference to those regulations should be construed as a reference to the re-enacted provisions, found in Insolvency Practice Rules (Corporations) 2016 (Cth) ("Insolvency Practice Rules"), relying on s 10 of the Acts Interpretation Act 1901 (Cth). He then sought dispensation from those re-enacted provisions, set out in Division 75 of the Insolvency Practice Rules, except r 75-15(2). Rule 75-15(2), which re-enacts the former reg 5.6.13 provides for proof of a notice of meeting. 40 The Court frequently provided dispensation from r 2.15, except in so far as that rule applied reg 5.6.13: see, for example Re Seymour Whyte Ltd [2017] FCA 1009; Re Onthehouse Holdings Ltd [2016] FCA 1167; and Re Signature Capital Investments Ltd [2016] FCA 258. I accepted that it was appropriate to make an order in the terms sought by Mr Oakes SC.

No apparent reason why the scheme should not receive the Court's approval if the necessary number of votes are achieved 41 I was satisfied that there was no order sought which goes beyond current accepted practice. 42 I was also satisfied that the proposed scheme is of such a nature and is cast in such terms that, if it were to receive the requisite statutory majority, the Court would be likely to approve the scheme on the hearing of an unopposed application. 43 Mr Oakes SC drew the following five matters to the court's attention, although his submission was that none of these matters should be of concern to the Court. I accepted that submission.

One class for voting purposes 44 Viralytics proposes a single class for voting purposes. Viralytics' submissions noted the following matters, which it submitted were not class-creating: (1) Mr McColl, who owns 1,200,000 Viralytics' shares (representing 0.43% voting power) and 5,400,000 options in respect of Viralytics' shares, is proposed to be appointed as a director of Viralytics as a wholly owned subsidiary of MSD; and (2) Lepu Medical Group, a 13% shareholder in Viralytics, has informed Viralytics that it intends to vote in favour of the scheme in the absence of a superior proposal. 45 Viralytics submitted, and I accepted, that the test for whether members are required to be divided into different classes is whether their rights are so dissimilar as to make it impossible for them to consult together with a view to their common interest: Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583; Re Nine Entertainment Group Ltd (No 1) (2012) 211 FCR 439 at [53]. As Barrett J emphasised in Re Hills Motorway Ltd (2002) 43 ACSR 101 at [12] (see also Re Nine Entertainment Group Ltd at [56]), the test is not one of differentiation or identical treatment, but of community of interest. 46 Viralytics' submissions noted that an option cancellation deed will be entered into with each Viralytics optionholder by the second court hearing and the performance rights will be amended to vest before the "Record Date" under the scheme. Viralytics did not suggest that the various option and performance rights were class creating. 47 In accordance with the authorities identified in the previous paragraph, I was satisfied that the proposed single class was appropriate.

Deal protection clauses 48 Clause 11 of the scheme implementation agreement includes exclusivity provisions which are referred to at section 8.5 of the scheme booklet, described as "no shop", "no talk", "notification of approaches" and "right to match" provisions. 49 The scheme implementation agreement also provides for a break fee of $5,022,092 which represents 1% of the total equity value of Viralytics based on the offer under the scheme. 50 Viralytics made the following submissions in relation to these provisions: 20. It is submitted that the break fee is reasonable in the circumstances for the following reasons: (a) it represents 1% of the total equity value of Viralytics referred to under the Takeovers Panel Guidance Note 7 on lock up devices; (b) there is a 'reverse break fee' in clause 13.3; (c) the break fee was agreed after negotiation; (d) clause 13.1 of the SID notes that neither party would have entered into the SID without the break fee - thus it was commercially sensible for Viralytics to agree the break fee to secure the proposal for shareholders; and (e) clause [13.1] of the SID notes an acknowledgment that the break fee represents an amount which is appropriate to compensate the other party for its reasonable external and internal costs and opportunity costs in connection with the Scheme. 51 The acknowledgement referred to in para 20(e) of the submissions is in cl 13.1(b) of the scheme implementation agreement. 52 In Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [55] ("Re APN"), Lindgren J expressed the view that it would be desirable that applications under s 411(1) be supported by affidavit evidence directed to showing: • that the no-shop and break fee provisions are the result of a normal commercial negotiation, and explaining, at least briefly and in general terms, the factual basis for that statement…; • that the directors of the target company, or at least those directors of it who are not affiliated with the offeror, believe that the provisions do not operate against the interests of offeree shareholders, and that in fact it was in the interests of such shareholders that the directors agreed to the inclusion of the provisions in the merger implementation agreement (see … In re Paramount Communications Inc Shareholders' Litigation 637 A2d 34 (Del Supr 1993) for a case in which a target company's directors' commitment to no-shop and break fee provisions was held, in all the circumstances, to constitute a breach of their fiduciary duty); and • in the case of the break fee, explaining, by reference to calculations based on the evidence before the Court, the percentage that the break fee represents (a) of the "equity value" of the target company, calculated in accordance with para 7.18 of the Takeovers Panel's Guidance Note 7, and (b) of the scheme consideration (the explanation might, instead, be conveyed in a submission, but still by reference to the evidence before the Court). 53 Paragraphs 33 to 47 of Mr McColl's second affidavit address the matters identified by Lindgren J in Re APN, as set out above. 54 I did not conclude that the exclusivity arrangements should cause me not to make the orders sought. In particular, I did not identify any reason to think that the break fee payable by Viralytics is excessive or will operate coercively in the circumstances: see Re Staging Connections at [37]-[42].

Deed poll 55 In Re Simavita Holdings Ltd [2013] FCA 1274, relevantly at [43], Farrell J explained: A deed poll operates under Australian law to allow those for whose benefit it is expressed to sue on the promises in the deed poll. This is a common mechanism, especially in acquisition schemes, for binding an "outsider" to a scheme to perform its obligations under the scheme … especially the payment of scheme consideration. This is an important element of managing "performance risk". 56 The deed poll was executed on 28 March 2018 and is annexure D to the scheme booklet. I was satisfied that the deed poll has been duly executed and is prima facie enforceable.

Performance risk 57 Clause 5.2 of the scheme provides for the transfer of the scheme shares subject to payment of the scheme consideration in accordance with cl 6 of the scheme. Thus, the scheme consideration must be provided before the transfer of scheme shares, satisfying concerns that might otherwise exist about performance risk.

Conditions precedent 58 The scheme is subject to certain conditions precedent set out in cl 3.1. Subject to usual court orders and such orders being lodged with ASIC, these need to be satisfied or waived by 8:00 am on the second court hearing date. If this is done, the scheme will be self-executing upon the making of the second court hearing orders, and the registration of those orders with ASIC.

Conclusion 59 Accordingly, I made the orders sought by Viralytics. I certify that the preceding fifty-nine (59) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.

Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016(Cth)

Corporations Act 2001(Cth)ss 9, 411, 412, 249J

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