Zenyth Therapeutics Ltd v Smith

Evidence in support of the application

1. BTH read four affidavits in support of its application.
2. The first was an affidavit of Ms Alexandra Whitby, who is a partner of Gilbert + Tobin, the solicitors for BTH. Her affidavit exhibited a company search for BTH, establishing that it is a Part 5.1 body.
3. The second was an affidavit of Mr David Keane, who is the Managing Director and Chief Executive Officer of BTH. He gave evidence regarding the nature of BTH's business, and outlined its capital structure. He identified the interests of the BTH directors in its shares and options and in certain equity incentives (which are described further below).
4. Mr Keane provided an overview of the proposed Schemes, and deposed that he was, as at the date of his affidavit, not aware of any matters which had resulted in, or were likely to result in, any of the conditions precedent to the Schemes not being satisfied.
5. Mr Keane also set out the proposed arrangements for the conduct of each of the Scheme Meetings, and confirmed that the proposed Chairperson and his alternate were willing and able to act as Chairperson and had no previous relationship with Vector BidCo or any interest or obligation which may give rise to a conflict if he were to act as Chairperson. In addition, Mr Keane set out the proposed strategy for engagement with securityholders in connection with the Schemes, and annexed the proposed call scripts for use in such engagement.
6. Finally, Mr Keane outlined the due diligence and verification process which was undertaken by BTH in respect of the proposed Scheme Booklet, which was in customary form.
7. The third affidavit was that of another partner of Gilbert + Tobin, Mr Wesley Bainbridge. He deposed to the provision of engagement with the Australian Securities and Investments Commission (ASIC) in respect of this application, including the lodgement of the draft Scheme Booklet and draft Independent Expert's Report. He also addressed the proposed means of despatching the Scheme materials to securityholders and annexed the proposed forms of email and postal communications.
8. The fourth affidavit was that of Mr Byron Koster, who is a partner of Johnson Winter Slattery, the solicitors for Vector BidCo. He provided evidence of the verification process adopted in relation to the bidder information in the proposed Scheme Booklet, which was in customary form.
9. In addition, Mr Koster deposed to the execution on 26 February 2025 of a Share Deed Poll and an Option Deed Poll. By the Share Deed Poll, Vector BidCo has undertaken in favour of each Scheme Shareholder to provide the Share Scheme consideration to which each such Shareholder is entitled and to perform its obligations under the Share Scheme, subject to that scheme becoming effective. Similarly, by the Option Deed Poll, Vector BidCo has undertaken in favour of each Scheme Optionholder to provide the Option Scheme consideration to which each such Optionholder is entitled and to perform its obligations under the Option Scheme, subject to that scheme becoming effective.
10. Finally, Mr Koster gave evidence of the arrangements which have been put in place in order to fund the Share Scheme and the Option Scheme. The maximum amount of consideration payable in respect of the Schemes has been calculated to be $184.35m. Mr Koster deposed that: 1. Vector VI has executed a legally binding equity commitment letter in favour of Vector BidCo and BTH, pursuant to which Vector VI has committed to contribute cash consideration so as to enable Vector BidCo to fulfil its obligations to pay the consideration for the Schemes, up to a maximum of $183.6m (which is an amount less than the aggregate amount of uncalled capital commitments in Vector VI); and 2. Big Wombat Holdings Inc (Vector HoldCo), which is an intermediate holding company of Vector BidCo and is a Delaware corporation, has entered into a debt commitment letter dated 13 January 2025 with Sixth Street Lending Partners and Sixth Street Speciality Lending Inc, by which those entities have agreed to provide senior secured debt facilities for an aggregate amount of up to the USD equivalent of A$73m. Those facilities are subject to conditions which are disclosed in the Scheme Booklet. Vector HoldCo is permitted to use the funds under the facilities to fund the Share Scheme consideration and certain related transactions and costs.
11. In addition to this affidavit evidence, BTH tendered a letter from ASIC in the usual form, dated 27 February 2025, confirming that it does not currently propose to appear to make submissions or intervene to oppose the Schemes at the first Court hearing.

Relevant Principles

1. The Court's role at the first Court hearing in respect of a scheme is to determine, in the exercise of its discretion, whether to approve the convening of a scheme meeting and the explanatory statement if it is satisfied of several matters, namely that: 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 scheme is bona fide and properly proposed; 4. ASIC has had a reasonable opportunity to examine the proposed scheme and explanatory statement, to make submissions and has had 14 days' notice of the proposed hearing date of the first Court hearing; 5. the procedural requirements under the Supreme Court (Corporations) Rules 1999 (NSW) (Rules) have been met; and 6. there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved. (See In the matter of Mason Stevens Group Limited [2025] NSWSC 84 at [9]-[11] and the authorities there cited)
2. If the preconditions to the exercise of power under s 411(1) of the Act are satisfied, it is necessary for the Court to determine whether it should, in its discretion, exercise that power. The Court will consider whether the proposed scheme is fit for consideration at the proposed scheme meeting, in the sense that it is of such a nature and cast in such terms that, if it achieves the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed; and that members are to be properly informed as to the nature of the scheme before the scheme meeting: Mason Stevens Group at [10] and the authorities there cited.
3. In Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [19]-[22], Halley J observed that: "At the first court hearing, the Court exercises its supervisory jurisdiction in order to review the scheme and the explanatory statement and to raise any queries that it might have with the plaintiff: Alstom Signalling Solutions Pty Ltd, Re Alstom Signalling Solutions Pty Ltd v Alstom Transport Australia Pty Ltd [2016] FCA 838 at [21] (Gleeson J). The Court needs to be satisfied that there are no obvious flaws in the scheme and that there is an adequate explanation provided to persons who have a financial interest in the proposed scheme: Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [13] (Black J) (Coca-Cola Amatil). The Court should consider at the first court hearing whether the proposed scheme is not inappropriate and whether it is one that sensible business people might consider is of benefit to its members: Australian Leaders Fund Ltd v Equity Trustees Ltd, Re Australian Leaders Fund Ltd [2021] FCA 88 (Leaders Fund) at [15] citing Re Sonodyne International Ltd (1994) 15 ACSR 494 at 499 (Hayne J); Integra Mining at [11] (McKerracher J); and Amcom at [10] (McKerracher J). The Court does not need to be satisfied that no better scheme could have been proposed and ultimately that is a question for the members themselves to determine at the scheme meeting: Associated Advisory Practices Ltd, Re Associated Advisory Practices Ltd [2013] FCA 761 at [22] (Farrell J); Coca-Cola Amatil at [13]; and Leaders Fund at [15]. Although the second court hearing is when the Court makes its final determination, in practice, the first court hearing is where the Court will typically intervene if it has concerns. A reason that has been advanced for this is that the market views the approval by the Court of the convening of scheme meetings as providing assurance that the scheme, at least in form and substance, has received a preliminary clearance by the Court and that trading in the company's securities thereafter will proceed on that basis: Re Archaean Gold NL (1997) 23 ACSR 143 at 147; and Leaders Fund at [15]."

Determination

1. I am satisfied that each of the preconditions to the exercise of the power in s 411(1) has been met.
2. BTH is registered under the Act and is a Part 5.1 body. Each of the Share Scheme and the Option Scheme is an "arrangement" between BTH and, respectively, shareholders and optionholders. ASIC has been given at least 14 days' notice of the application, and has been provided with the draft Scheme Booklet. The procedural requirements under the Rules have been met or are properly dispensed with.
3. The material in the proposed Scheme Booklet has been subject to a verification process, as described in the affidavits of Mr Keane and Mr Koster.
4. The directors of BTH unanimously recommend that shareholders vote in favour of the Share Scheme and that optionholders vote in favour of the Option Scheme, in the absence of the superior proposal, and subject to the Independent Expert continuing to conclude that the Share Scheme is in the best interests of shareholders and the Option Scheme is in the best interests of optionholders.
5. BTH appointed Lonergan Edwards and Associates Ltd as the Independent Expert to assess the merits of each Scheme. The Independent Expert's Report is attached to the proposed Scheme Booklet.
6. The Independent Expert has assessed the market value of BTH shares on a 100% controlling interest basis to be within the range of $0.19 to $0.23 per share. As the Share Scheme consideration ($0.22) falls within that range, the Independent Expert has concluded that the Share Scheme is fair and reasonable, and therefore in the best interests of shareholders.
7. According to the Independent Expert, the assessment of the Option Scheme is not clear cut, due to the number of tranches of options on issue and the differences, as between tranches, in respect of consideration, exercise price, vesting and expiry date.
8. The Independent Expert has assessed the value of the OTM Options by applying the Black-Scholes valuation model. The Independent Expert has concluded, in respect of 3 of the 48 tranches of OTM Options, that the consideration offered is below the assessed value, with the extent of the variances for these options being set out in the Independent Expert's Report.
9. In assessing the value of the ITM Options in the event that the Schemes do not proceed, the Independent Expert has expressed the view that it is necessary to take into account not only "intrinsic" value (being the Share Scheme consideration less the applicable exercise price), but also "time" value (being the probability that the intrinsic value will increase before the option expires). As a result, the Independent Expert has concluded, in respect of each of the five tranches of ITM Options, that the consideration offered by the Option Scheme (which has been calculated based on intrinsic value) is less than the assessed value in the event that the Schemes do not proceed (which is based on intrinsic value plus time value).
10. The Independent Expert has concluded that, for those tranches where the consideration is below the assessed value of the options in the event that the Schemes do not proceed, the consideration was "not fair".
11. The Independent Expert has expressed the view that, in assessing the fairness of the Option Scheme as a whole, it is more appropriate to evaluate the position in respect of each tranche of options, rather than to consider the tranches in the aggregate. Having concluded, in respect of a number of individual tranches, that the consideration is "not fair", it follows that the Independent Expert has concluded that the Option Scheme as a whole is "not fair".
12. ASIC's Regulatory Guide 111 "Content of expert reports" dated October 2020 (RG111.12) states that an offer is "reasonable" if it is "fair", and that it "might also be 'reasonable' if, despite being 'not fair', the expert believes that there are sufficient reasons for securityholders to accept the offer in the absence of any higher bid before the close of the offer".
13. The Independent Expert has expressed the view that, on balance, the Option Scheme, although "not fair", is "reasonable" and therefore is in the best interests of optionholders in the absence of a superior proposal.
14. The Independent Expert identified that the primary reason for this conclusion was that the Option Scheme provides optionholders with the opportunity to receive an immediate cash payment (which has been assessed to be, in respect of many of the individual tranches, "fair"), whereas otherwise there are likely to be significant delays and uncertainties associated with realising value, if any at all. The Independent Expert concluded that, while there are some tranches of options in respect of which the consideration offered is less than the assessed theoretical value of those options in the event that the Schemes do not proceed, the prima facie inadequate nature of the consideration is offset, for the purposes of assessing reasonableness, by the risk that the Share Scheme proceeds but the Option Scheme does not. (This risk arises because, as noted above, although the Share Scheme is conditional on approval of the Option Scheme, Vector BidCo may waive that condition.) The Independent Expert observed that, in such a scenario, optionholders "might be faced with the prospect of owning options over shares, or shares, in an unlisted entity which would be greatly reduced in value (relative to the theoretical position where the Schemes do not proceed) and difficult to monetise".
15. As noted in BTH's submissions, there have been numerous examples where courts have approved scheme meetings in circumstances where the independent expert has concluded that the scheme is reasonable but "not fair": see Re Beadell Resources Ltd [2018] WASC 410 at [60] (Vaughan J) and the authorities there cited. Courts should generally adopt a cautious approach to the approval of any scheme which an independent expert considers "not fair", particularly when it may involve expropriation at an undervalue: Zenyth Therapeutics Ltd v Smith [2006] VSC 436 at [114] (Dodds-Streeton J). Nonetheless, so long as securityholders are properly appraised that the independent expert considers the scheme "not fair", and why, it is ultimately a matter for them to decide whether it is an offer that they should accept: Re CIC Australia Ltd [2015] NSWSC 557 at [17] (Brereton J).
16. Mr Izzo drew the Court's attention to a number of other matters, having regard to BTH's ex parte disclosure obligations.
17. First, as noted above, the Share Scheme consideration may be reduced below $0.22 as a result of the application of the TC Adjustment Amount. This means that, as at the date of the issue of the Scheme Booklet, there is uncertainty as to what the amount of the Share Scheme consideration will be. However, as Mr Izzo noted: 1. the Scheme Booklet states that, as at the date of its issue, the directors of BTH expect the TC Adjustment Amount to be zero, such that there will be no adjustment to the Share Scheme consideration; 2. if there is to be any adjustment to the Share Scheme consideration as a result of the TC Adjustment Amount, BTH will announce the amount of any such adjustment to ASX, in advance of the Scheme Meetings; and 3. if there is any such adjustment, the directors of BTH will obtain confirmation from the Independent Expert as to whether any such adjustment changes the Independent Expert's opinion.
18. Accordingly, while there may be some adjustment to the Share Scheme consideration following the issue of the Scheme Booklet, any such adjustment will be calculated in accordance with the formula disclosed in the Scheme Booklet, and the securityholders will know, in advance of the Scheme Meetings, both the precise extent of any such adjustment and whether the Independent Expert's views have changed as a result of any such adjustment.
19. Secondly, there are proposed to be two meetings of optionholders, one for holders of ITM Options and the other for holders of OTM Options. There is not proposed to be a separate meeting for each different tranche of options issued by BTH.
20. As BTH submitted, there is ample precedent for requiring only two scheme meetings for optionholders, one for "in the money" options and the other for "out of the money" options: see, for example, Re Sino Gold Mining Ltd (No 1) [2009] FCA 1277 at [6] (Lindgren J); and Re Talent2 International Ltd [2012] FCA 771 at [22] (Yates J). Although the various options have been issued in different tranches with differences as to exercise prices, vesting, expiry and so forth, those differences do not require additional classes where there has been a "consistent and indiscriminate application of the same pricing or valuation methodology to options having different characteristics": Re MIA Group Ltd [2004] NSWSC 712 at [14] (Barrett J); Re Xplore Wealth Ltd [2020] FCA 1868 at [40]-[41] (Markovic J).
21. In the present case, a consistent and indiscriminate valuation methodology has been applied to the OTM Options, which have been valued by reference to the Black-Scholes option valuation model, and to the ITM Options, which have been valued by reference to the difference between the Share Scheme consideration and their exercise price. There is precedent for applying these methodologies to, respectively, "out of the money" options and "in the money" options in the context of a scheme of arrangement: see, for example, Talent2 at [20]-[21], Sino Gold Mining at [35]-[39] and MIA Group at [10]-[12]. Accordingly, I accept BTH's submission that it is appropriate that there be two meetings in respect of the Option Scheme.
22. The proposed orders provide that, for the purposes of voting, the value of the options held by an optionholder will be the same as the Option Scheme consideration payable for those options under the Option Scheme. Such an order regarding the value of the options for voting purposes is commonly made in option schemes: see, for example, MIA at [10] and Talent2.
23. The Scheme Booklet explains that 24m options have been issued to Regal Funds Management Pty Ltd (ACN 107 576 821) as trustee for the Regal Tactical Credit Fund (Regal Options). The Regal Options were issued upon the drawdown of a $15m loan facility with Regal. Pursuant to the SID, Vector BidCo and Regal have entered into a deed providing for cancellation, immediately prior to the Effective Date, of the unexercised Regal Options for nil consideration, subject to the repayment of Regal's loan and the Schemes becoming effective.
24. Thirdly, as Mr Izzo noted, it has been observed that issues may arise where the party to a scheme deed poll is a special purpose vehicle (such as Vector BidCo) which does not have capacity to perform the obligations under that deed poll without financial support from a holding company: In the matter of Ansarada Group Limited [2024] NSWSC 411 at [22]. However, in the present case, there is evidence that the equity funding and debt funding arrangements set out in paragraph [19] above have been put in place. In particular, the terms of the equity funding provide that, in the event that the Schemes becomes effective, BTH (which is a party to the equity commitment letter) may enforce Vector BidCo's right to cause the equity funding to be made. While the debt funding is subject to the satisfaction of various conditions, the Scheme Booklet discloses that Vector BidCo intends that all relevant credit documentation will be executed and delivered on the business day prior to the Second Court hearing, and is not aware of any reason why those conditions precedent will not be satisfied. Finally, the terms of the Schemes provide that the aggregate amount of the scheme consideration is to be paid into a trust account no later than the business day prior to the Implementation date. This is a well-established means of safeguarding against the risk that securityholders will suffer delay or default in the provision of the consideration after their securities have been transferred to Vector BidCo, ensuring that securityholders will not be left to the remedy of suing on the deed poll: In the matter of ELMO Software Pty Ltd [2023] NSWSC 12 at [27] (Black J) and the cases there cited.
25. Fourthly, Mr Izzo drew the Court's attention to the fact that BTH operates various short term and long term equity incentive arrangements under which employees, directors and contractors have been offered certain rights and securities from time to time. The Scheme Booklet discloses the proposed treatment of these equity incentives as part of the Share Scheme. As regards BTH Service Rights (which are subject to service-related vesting conditions), it is intended that by the Second Court hearing: (1) around 4.421m of such rights will have vested and been exercised, with either the holder of those rights having been issued with shares in BTH, or arrangements having been put in place for the rights to be settled in, or cancelled for, an amount of cash per share equivalent to the Share Scheme consideration; (2) if the vested BTH Service Rights have not been exercised, they will lapse; and (3) any remaining BTH Service Rights will lapse. As regards the equity incentives known as BTH PSARs (which all have an exercise price which is higher than the Share Scheme consideration), BTH will enter into a deed with Vector BidCo and the holders of those rights providing, subject to the Share Scheme becoming effective, for the cancellation of those rights in return for consideration, with the total payment for all such rights to be around $252,955 (subject to adjustment in the event that the Share Scheme Consideration is less than $0.22 as a result of the Transaction Costs Adjustment Amount).
26. As Mr Izzo noted, the holders of incentive rights who are (or will become) shareholders are not in a separate class by reason only that they hold such rights: ELMO at [25]. Similarly, the payments to be received by the holders of the BTH PSARS do not give rise to the need for the creation of any separate class: Re Oz Minerals Ltd [2023] FCA 197 at [63] (Beach J).
27. Mr Keane holds 13,100,184 BTH PSARs. It is proposed that he will enter into a deed with BTH and Vector BidCo cancelling his BTH PSARs in return for a cash payment of $217,284.42, if the Share Scheme becomes effective.
28. The critical consideration for the Court in applications of this type is to ensure that there is sufficient disclosure of the nature and extent of any benefit that a director stands to receive if the scheme is approved: Re Kidman Resources Ltd [2019] FCA 1226 at [115] (O'Callaghan J). There is no difficulty in a director who stands to receive such a benefit making a recommendation in relation to a scheme of arrangement, provided that there is adequate disclosure to shareholders of the relevant director's interest in the scheme: Re DWS Limited [2020] FCA 1590 at [41]-[49] (Beach J); Oz Minerals at [10], [18].
29. In the present case, the Scheme Booklet discloses Mr Keane's interest in the BTH PSARs and the payment he will receive in respect of those rights if the Share Scheme proceeds on each occasion that the Scheme Booklet mentions the BTH Directors' recommendation.
30. Fifthly, Mr Izzo noted that the SID imposes a number of restrictions and obligations on BTH and its directors in relation to negotiations with third parties, including "no shop", "no talk" and "no due diligence" restrictions, as well as a "notification of approaches" obligation and a "matching right". The "no talk" and "no due diligence" restrictions are subject to the BTH board's fiduciary and statutory obligations. Exclusivity provisions of this kind are now commonplace in schemes of arrangement. Further, the exclusivity period of nine months is comparable with the length of the exclusivity periods accepted in other schemes of a similar character: see Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [22] (Black J) and the cases there cited. In addition, the exclusivity provisions are sufficiently disclosed in the Scheme Booklet.
31. Sixthly, Mr Izzo notes that clause 10.3 of the SID requires BTH to pay Vector BidCo a break fee of $1,826,000 in specified circumstances; and that clause 11.2 requires Vector BidCo to pay BTH a break fee of the same amount in specified circumstances. Those break fees and the circumstances in which they are payable are disclosed in the Scheme Booklet. The BTH break fee is not payable if the Independent Expert opines that either Scheme is not in the best interests of shareholders or optionholders (as the case may be), and neither break fee is payable if either of the Schemes is not approved by the majorities required under s 411(4)(a)(ii) of the Act. Each of the break fees represents approximately 0.9% of the total equity value of BTH as implied by the Share Scheme consideration, and therefore accords with the 1% maximum recognised by the Takeover Panel's guidance. Break fees of this kind are now common features in schemes of arrangement and will generally be permitted unless the amount of the break fee is such that it could influence voting at the meeting or if there are some unusual features: Ansarada Group at [24].
32. Seventhly, Mr Izzo drew the Court's attention to the fact that the Scheme Booklet discloses that, at BTH's Annual General Meeting on 24 November 2024, for the second consecutive year, more than 25% of votes were cast against the resolution to adopt the Remuneration Report, with the result that a "spill resolution" was required to be put to shareholders pursuant to s 250V of the Act. Such a resolution was passed, requiring BTH to hold a "spill meeting" within 90 days of the 2024 Annual General Meeting. This spill meeting was held on 27 February 2025. The BTH Board did not receive any director nominations for the spill meeting, such that the meeting did not result in the appointment of any new director.
33. Finally, BTH has appointed a third party to operate an inbound telephone information line in order to respond to queries from shareholders and also to conduct an outbound call campaign on BTH's behalf before the Scheme Meetings. The relevant scripts were contained in the exhibit to Mr Keane's affidavit. In accordance with current scheme practice, BTH drew these proposed communications to the Court's attention, but did not seek orders approving the form of them.

conclusion

1. At the conclusion of the first Court hearing on 27 February 2025, I was satisfied that each of the proposed Share Scheme and Option Scheme is of such a nature and cast in such terms that, if it achieves the statutory majorities at the respective Scheme Meetings, the Court would be likely to approve it, and that none of the particular matters to which I have referred above gives rise to a reason not to convene the Scheme Meetings.
2. For these reasons, I made the orders sought by BTH.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 March 2025