In the matter of Pulse Health Limited

[2017] NSWSC 140

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Pulse Health Limited [2017] NSWSC 140
Hearing dates:	31 January 2017
Decision date:	31 January 2017
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The Court orders pursuant to s 411 of the Corporations Act 2001 (Cth) that the Plaintiff convene a meeting of shareholders for the purposes of considering and, if it thought fit, agreeing to a proposed scheme of arrangement between the Plaintiff and its members, and makes ancillary orders.
Catchwords:	CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application under s 411 of the Corporations Act 2001 (Cth) for orders convening a meeting of members to consider and if it thought fit to agree to a proposed scheme of arrangement – where scheme of arrangement involved the plaintiff’s shareholders transferring their shares to another company for cash consideration – whether requirements to order scheme meeting are satisfied.
Legislation Cited:	- Corporations Act 2001 (Cth), s 411, Ch 6 - Corporations Regulations 2001 (Cth), reg 5.6.13 - Supreme Court (Corporations) Rules 1999 (NSW), r 2.15
Cases Cited:	- Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 - FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 - Re ACM Gold Ltd; Re Mt Leyshon Gold Mines Ltd [1992] FCA 89; (1992) 34 FCR 530 - Re Andean Resources Ltd [2010] FCA 1190 - Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 - Re Aspen Group Ltd [2015] NSWSC 1718 - Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 - Re BigAir Group Ltd [2016] FCA 1296 - Re Brambles Industries Ltd [2006] FCA 1273; (2006) 59 ACSR 501 - Re Coles Group Ltd [2007] VSC 523; (2007) ACSR 494 - Re Cytopia Ltd [2009] VSC 560 - Re Dyno Nobel Ltd [2008] VSC 154 - Re Intecq Ltd [2016] NSWSC 1429 - Re Investa Properties Ltd [2007] FCA 1104; (2007) 25 ACLC 1186 - Re NRMA Ltd (No 1) [2000] NSWSC 82; (2000) 33 ACSR 595 - Re Orion Telecommunications Ltd [2007] FCA 1389 - Re Prime Infrastructure Holdings Ltd [2010] NSWSC 1104; (2010) 80 ACSR 193 - Re SAI Global Ltd [2016] FCA 1312 - Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 - Re Talent2 International Ltd [2012] FCA 771 - Re The Trust Company Ltd [2013] NSWSC 1680 - Re Toll Holdings Ltd [2015] VSC 123 - Re Veda Group Ltd [2015] FCA 1506 - Re WebCentral Group Ltd [2006] FCA 937 - Re Wridgways Australia Ltd [2010] FCA 1187
Texts Cited:	- T Damian & A Rich, Schemes, Takeovers and Himalayan Peaks: The use of schemes of arrangement to effect change of control transactions, 3rd ed, 2013
Category:	Principal judgment
Parties:	Pulse Health Limited (Plaintiff)
Representation:	Counsel: G Rich (Plaintiff) N Kidd (Healthe Care Australia Pty Ltd)   Solicitors: Norton Rose Fulbright (Plaintiff) Allens (Healthe Care Australia Pty Ltd)
File Number(s):	2017/12556

Judgment

1. By Originating Process filed on 13 January 2017, Pulse Health Limited (“Pulse”) seeks an order under s 411(1) of the Corporations Act 2001 (Cth) that a meeting of the members of Pulse be held to consider and, if thought fit, approve, with or without modification, a proposed scheme of arrangement between Pulse and its members. Pulse also seeks ancillary orders concerning the time and place of the scheme meeting; the appointment of a chairman for the scheme meeting; approval of the scheme booklet that is proposed to be sent to shareholders in Pulse in advance of the scheme meeting; the manner in which the Supreme Court (Corporations) Rules 1999 (NSW) will apply to the scheme meeting; the publication of a notice of the second court hearing; and providing for email notification of the scheme meeting to certain of its shareholders.

2. Mr Rich, who appears for Pulse, made comprehensive submissions in support of the application and I have drawn on those submissions in this judgment. Another party to the transaction, Healthe Care Australia Pty Limited (“Healthe Care”) was granted leave to appear at the hearing and was represented by Mr Kidd, although it was ultimately not necessary for it to make submissions.

Background to the scheme

3. Pulse is listed on Australian Securities Exchange (ASX) and operates several private hospitals in Australia and New Zealand. On 20 October 2016, Pulse announced to ASX that it had received a non-binding indicative proposal from Healthe Care to acquire all of the shares in Pulse for $0.47 per share by a scheme of arrangement. Healthe Care also operates private hospitals, and is a subsidiary of Luye Medical International Pte Ltd, incorporated and headquartered in Singapore. Its ultimate holding company is Luye Investment Group, incorporated in the People's Republic of China.

4. Pulse entered into a Scheme Implementation Deed with Healthe Care on 30 November 2016. That matter was announced to ASX on the same day, and the terms of the that Deed and its annexures, including the proposed scheme, were also released to ASX (Hays 12.1.17, Ex MH-1, tab 7). If the scheme is approved and becomes effective, Healthe Care will acquire all of the issued shares of Pulse from its existing shareholders in exchange for cash consideration in the amount of $0.47 per Pulse share. The amount significantly exceeds the market price of Pulse’s shares during the 90 trading days immediately preceding the announcement of Healthe Care’s proposal (Hays 12.1.17 [16]). The directors of Pulse have unanimously recommended that shareholders in Pulse vote in favour of the scheme, in the absence of a superior proposal and subject to an independent expert concluding and continuing to conclude that the scheme is in the best interests of Pulse shareholders. The independent expert appointed by Pulse has since concluded that the scheme is in the best interests of Pulse shareholders.

Affidavit evidence

5. In support of its application, Pulse relies on the affidavit of its chief financial officer, Mr Mark Hays, affirmed on 12 January 2017, which addresses aspects of the Scheme Implementation Deed (to which I refer below) and exhibits relevant documents including the relevant announcements to ASX, the Scheme Implementation Deed, the scheme terms, a deed poll that has been made by Healthe Care in favour of Pulse shareholders and the proposed notice of scheme meeting to accompany the scheme booklet. Mr Hays’ evidence is also that, on 30 November 2016, the Pulse directors unanimously resolved to recommend that Pulse shareholders vote in favour of the scheme, in the absence of a superior proposal and subject to the independent expert concluding (as it has) and continuing to conclude that the Scheme is in the best interests of the shareholders (Hays 12.1.17 [27]).

6. Pulse also relies on a second affidavit of Mr Hays, affirmed on 30 January 2017, which refers to the provision of drafts of the scheme booklet to the Australian Securities & Investments Commission (“ASIC”) and exhibits the fourth of those drafts of the scheme booklet (Ex MH2, tab 1), and correspondence from various parties evidencing their consent to the inclusion of their names in the scheme booklet (Ex MH2, tab 2). Mr Hays’ evidence is that, if the court orders that a scheme meeting be convened and approves the scheme booklet, Pulse intends to send the scheme booklet to Pulse shareholders on or before 10 February 2017 by pre-paid post, or by email (in the case of those shareholders who have previously nominated an email address for the purpose of receiving notices from Pulse (Hays 30.1.17 [9]). Mr Hays also sets out the due diligence and verification process undertaken by Pulse, with a view to ensuring that the scheme booklet provides adequate disclosure of information pertaining to the scheme and is not misleading or deceptive (Hays 30.1.17 [10]–[22]). Mr Hays also addresses, in that affidavit, the position as to several conditions precedent to the scheme (Hayes 30.1.17 [24]); the entry into an Option Cancellation Deed between Pulse and its only option holder, in respect of options that are presently out of the money (Hays 30.1.17 [25], tab 7); the steps that Pulse will take after the release of its half-yearly financial statements on about 28 February 2017 (Hays 30.1.17 [26]); the basis of a trigger for a break fee payable to Healthe Care (Hays 30.1.17 [27]) and the matching right available to Healthe Care under the Scheme Implementation Deed (Hays 30.1.17 [28]).

7. Pulse also relies on the affidavit of Mr Conal Henderson, the chief financial officer of Healthe Care, affirmed on 25 January 2017, which refers to the due diligence and verification process that has been undertaken by Healthe Care with a view to ensuring that the information set out in section 6 of the scheme booklet, entitled “Profile of Healthe Care”, provides adequate disclosure and is not misleading or deceptive, and also addresses one of the triggers for payment of a break fee to Healthe Care. A second affidavit of Mr Henderson dated 31 January 2017 deals with the matching right under the Scheme Implementation Deed.

8. Pulse relies on the affidavit of Mr Richard Norris, a director of Leadenhall Corporate Advisory, affirmed on 27 January 2017 which confirms that Mr Morris held and continues to hold the opinions expressed in the Independent Expert’s Report. An affidavit of Mr James Stewart, a partner of the form of solicitors representing Pulse in this application, affirmed on 30 January 2017 addresses communications with ASIC concerning the scheme, the first court hearing date and the content of the scheme booklet. ASIC has confirmed, by letter dated 30 January 2017, that it has had a reasonable opportunity to consider the proposed scheme and does not intend to appear to make submissions at this hearing. Pulse also relies on affidavits of its chairman, Mr Stuart James, affirmed on 25 January 2017 which indicates that he is willing to act as chairman of the scheme meeting, and of a non-executive director, Mr Craig Coleman, affirmed on 25 January 2017 which indicates that he is willing to act as alternative chairman of the scheme meeting.

Matters to be addressed at the first court hearing

9. As Mr Rich points out, the Court’s role at a first court hearing in respect of a scheme is primarily to determine whether to approve the convening of a scheme meeting and the explanatory statement: Re Intecq Ltd [2016] NSWSC 1429 at [11]. The Court will generally approve the convening of a meeting if the proposed scheme is one that seems fit for consideration by a meeting of members and a commercial proposition that, if passed by the requisite majorities, is likely to gain the Court’s approval on an uncontested application: Re ACM Gold Ltd; Re Mt Leyshon Gold Mines Ltd [1992] FCA 89; (1992) 34 FCR 530 at 535; Re The Trust Company Ltd [2013] NSWSC 1680 at [5]; Re Intecq Ltd above at [12]. Conversely, the Court “will not ordinarily summon a meeting unless the scheme 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”: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, per Street CJ; Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504; Re Intecq Ltd above at [12]. The Court does not substitute its commercial judgment for that of the members to whom the scheme is directed, but considers whether the scheme is one that sensible business people might conclude is of benefit to members: Re Prime Infrastructure Holdings Ltd [2010] NSWSC 1104; (2010) 80 ACSR 193 at [13]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [13]; Re Aspen Group Ltd [2015] NSWSC 1718 at [11].

10. Mr Rich submits, and I accept, that the matters that must be established at the first hearing include, first, that the plaintiff is a “Part 5.1 body”; that the proposed scheme is an “arrangement” within the meaning of s 411 of the Corporations Act; that the explanatory statement or scheme booklet will provide proper disclosure to members; that the scheme is bona fide and properly proposed; that ASIC has had a reasonable opportunity to examine the proposed scheme and explanatory statement, to make submissions, and has had at least 14 days’ notice of the date of the first court hearing; and that any other procedural requirements have been met: Re NRMA Ltd (No 1) [2000] NSWSC 82; (2000) 33 ACSR 595 at [14]–[26]; Re Aspen Group Ltd above at [10]–[11]; Re Intecq Ltd above at [11].

11. In this case, Pulse is a company within the meaning of the Corporations Act (Hays 12.1.17 [5]; Ex MH-1, tabs 2 & 3) and is a Part 5.1 body for the purposes of s 411(1) of the Corporations Act. The concept of an “arrangement” is a broad one and, as Mr Rich also submits, unless a proposed scheme “is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed,” will qualify as an “arrangement” within the scope of s 411(1) of the Act: Re NRMA Ltd (No 1) above at [20]; Re Intecq Ltd above at [13]. The proposed scheme concerns the rights and obligations of Pulse and its members and a scheme similarly for shareholders to transfer their shares to another entity in exchange for cash is a relatively common form of an “arrangement” for the purposes of the Corporations Act: Re Intecq Ltd above. No question of an ultra vires transaction or any special procedure or restriction imposed by the Corporations Act arises in this case.

12. Mr Rich also fairly draws attention to s 411(17) of the Corporations Act, which prevents approval of an arrangement unless the Court is satisfied that the arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Corporations Act or a statement in writing by ASIC stating that ASIC has no objection to the arrangement is produced to the Court. However, as Mr Rich points out, the balance of the case law indicates that it is not necessary for the Court to consider this matter at the convening stage and it should be deferred to the second hearing, when ASIC would generally indicate its view for the purposes of s 411(17)(b): Re Coles Group Ltd (No 2) [2007] VSC 523; (2007) 65 ACSR 494; 25 ACLC 1876 at [16]–[24]; Re Intecq Ltd above at [16]. I will take that course.

13. I am satisfied that the scheme booklet (Ex MH-2, tab 1), which is in common form, provides adequate disclosure to members. The scheme booklet includes the notice required by paragraph 30 of Practice Note SC Eq 4; contains a “Highlights” section which identifies both reasons to vote for or to consider voting against the scheme; outlines key dates in a timetable; and contains a letter from Pulse’s chairman which refers to significant matters and a list of “frequently asked questions” and answers to those questions which address significant features of the scheme. A section outlines “Key features of the Scheme” and a further section “Matters you should consider before voting on the Scheme” addresses a range of relevant matters, including the recommendation of the Pulse directors and the view formed by the independent expert. The scheme booklet also includes detailed information as to Pulse and Healthe Care; the independent expert’s report; a section identifying “Australian taxation implications” in general terms; and a section entitled “Implementation of the Scheme” which includes a summary of key terms of the Scheme Implementation Deed. Other relevant documents will be sent to Pulse shareholders together with the scheme booklet, including the deed poll made by Healthe Care in favour of shareholders participating in the scheme; the terms of the scheme; the notice of the scheme meeting; and the Scheme Implementation Deed. I have referred above to the evidence of the due diligence and verification process adopted in respect of the scheme booklet, which adopted a common approach.

14. One question of general application arose in the course of the hearing as to the cover page of the scheme booklet which included the phrase “VOTE YES” in bold capitals in a large font and, in a somewhat smaller font, the statement:

“The Pulse Directors unanimously recommend that you vote in favour of the Scheme, in the absence of a Superior proposal and subject to the Independent Expert continuing to conclude that the scheme is in the best interests of Pulse Shareholders.”

15. It appears to be common practice in schemes to set out a recommendation "vote in favour" or "vote yes", a reference to the recommendation of the board, on the cover of the scheme booklet, and below that to set out the directors’ recommendation and any qualification to it, typically that the recommendation is made in the absence of a superior proposal and subject to the independent expert's continuing opinion that a scheme is in the best interests of shareholders. I accept that practice desirably draws shareholders’ attention to the directors’ recommendation which will be explained in detail in the scheme booklet. It also seems to me to be desirable that the font in which any recommendation "vote yes" or "vote in favour" appears and the font in which the more detailed description of the directors’ recommendation appear on the title page are such that the latter has sufficient prominence. After discussion of this question in the course of submissions, Pulse indicated that it will increase the font in which the more detailed description of the directors’ recommendation appears. It seems to me that that is a desirable course and will assist in informing shareholders of the directors’ recommendation.

16. I am satisfied that the scheme is a bona fide proposal which is properly put to shareholders for their consideration. The evidence also demonstrates that ASIC has had at least 14 days’ notice of the first court hearing and ASIC has confirmed that it has had a reasonable opportunity to examine the terms of the scheme and the content of the scheme booklet, and to make submissions, and the requirements of s 411(2) are satisfied.

Exclusivity provisions

17. Mr Rich properly draws attention to the “exclusivity provisions” in cll 9.2, 9.3 and 9.5 of the Scheme Implementation Deed (Ex MH-1, tab 7). Clause 9.2 (in a form commonly referred to as a “no shop” provision) applies during the Exclusivity Period (as defined) and prevents Pulse from soliciting, initiating, inviting or encouraging any enquiries, negotiations or discussions in relation to a Competing Proposal (as defined). Clause 9.3 (on a form commonly referred to as a “no talk” provision) also applies during the Exclusivity Period (as defined) and prevents Pulse from facilitating, entering into or participating in negotiations or discussions with any person regarding a Competing Proposal (as defined) and from approving or recommending such a proposal. Those restrictions are, properly, subject to a “fiduciary carve out”, in cl 9.5, and do not apply to the extent that they would restrict Pulse, its directors or representatives from taking action with respect to a bona fide offer or proposal for a Competing Proposal, if continued compliance with cl 9.3 would, in the opinion of Pulse’s board, result or be likely to result in a breach of the Pulse directors’ statutory or fiduciary duties.

18. These provisions are fully disclosed in the scheme booklet and Mr Hays’ evidence is that that the terms of the Scheme Implementation Deed including these provisions were the subject of arms-length negotiations between Pulse and Healthe Care, and that Pulse was advised and represented by its solicitors and its commercial advisers in those negotiations (Hays 12.1.17 [25]). Mr Hays gives reasons for his belief that the exclusivity and break fee provisions (to which I refer below) contained in the Scheme Implementation Deed are reasonable in the circumstances (Hays 12.1.17 [26]). Provisions of this kind have now been accepted in many cases and I am satisfied that they should not prevent the scheme from being put to Pulse shareholders for their consideration: Re Orion Telecommunications Ltd [2007] FCA 1389 at [7]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [26]–[30]; Re The Trust Company Ltd above at [19]; Re Intecq Ltd above at [18].

Matching right

19. Clause 9.6 of the Scheme Implementation Deed also allows Healthe Care the right, if a Competing Proposal (as defined) is made, to make a Counter Proposal during a period of 5 business days. Mr Henderson’s evidence is that the inclusion of this clause was a prerequisite to Healthe Care’s entry into the Scheme Implementation Deed, and is considered a fundamental aspect of the basis on which Healthe Care is prepared to proceed with the scheme and he explains the basis of the 5 business day period provided by that clause (Henderson 31.1.17 [4]). Mr Hays’ evidence is that the matching right was the subject of considerable negotiations between the parties and that each member of the Pulse board has expressed the belief that the provision does not operate against the interests of Pulse shareholders, and that it is in the best interests of the shareholders as, without it, the Pulse shareholders would most likely be deprived of the opportunity to accept the deal being offered by Healthe Care (Hays 30.1.17 [28]). These are significant matters since they suggest that the matching right is a necessary aspect of the opportunity for Pulse shareholders to consider the proposal.

20. Mr Rich fairly recognises a potential concern that matching rights can be anti-competitive, by deterring competing bidders, as was also recognised in Takeovers Panel, Guidance Note 7, [13]–[18] and in Re Wridgways Australia Ltd [2010] FCA 1187 at [13]–[25], where Jacobson J recognised that risk but held (at [21]) that the “overall effect” of the matching provision in that scheme was “pro-competitive”. As Mr Rich points out, cl 9.6 of the Scheme Implementation Deed is similar to the clause considered in that case. Mr Rich also submits, with substantial force, that it is doubtful that the “matching” provision would deter competing bids that might otherwise be made, since the process under that clause corresponds to the course that a prospective bidder would expect Pulse to take in any event, even without such a provision, in order to obtain the best possible offer if competing bidders emerged. Mr Rich submits, and I also accept, that aspects of that clause are pro-competitive, particularly so far as it allows Pulse to pursue a competing bid by terminating the Scheme Implementation Deed if Healthe Care does not submit a Counter Proposal, or if the board determines that the Counter Proposal is not more favourable to Pulse shareholders than the Competing Proposal. Mr Rich also points out, and I accept, that notification and matching rights of this kind have become reasonably common in schemes of arrangement since Re Wridgways Australia Ltd above: Re The Trust Company Ltd above at [19]; Re Veda Group Ltd [2015] FCA 1506 at [10]; Re Toll Holdings Ltd [2015] VSC 123 at [35]–[36]; ReBigAir Group Ltd [2016] FCA 1296 at [20]; Re SAI Global Ltd [2016] FCA 1312 at [61]; see also T Damian & A Rich, Schemes, Takeovers and Himalayan Peaks: The use of schemes of arrangement to effect change of control transactions, 3rd ed, 2013, [7.3.5].

21. Mr Rich also makes a submission, which seems to me to have real force, that matching rights may be less significant in the context of a scheme than in a takeover context, since the extended timetable for a scheme will allow time for a rival bid to emerge and be properly considered and will have the result that it could not practically be “shut out” before the shareholders meeting to consider the scheme or the second court hearing to approve it. That submission would not necessarily address any risk that a matching right would deter such a bid, if the competing bidder considered that it would always be overbid by the other party to the scheme. However, that risk seems to me to exist whether or not a matching right is included in a scheme, since one might expect an “auction” to develop once a competing bid was made and the competing bidder would be exposed to that risk in any event.

22. On balance, I accept Mr Rich’s submission that cl 9.6 of the Scheme Implementation Deed is not likely to deter competing offers; will not operate against the interests of the Pulse shareholders; and is a necessary aspect of securing the opportunity to consider the scheme for Pulse shareholders. That clause is also disclosed in the scheme booklet. I do not consider that it provides reason not to make the orders sought.

Break fee provisions

23. Mr Rich also draws attention to a provision for a break fee in cll 11.1–11.6 of the Scheme Implementation Deed (Ex MH-1, tab 7). Clauses 11.1 and 11.2 record that Healthe Care required the inclusion of cl 11.4, “in the absence of which it would not have entered into” the Scheme Implementation Deed (cl 11.1(1)); acknowledge that, if the scheme does not become effective, Healthe Care will have incurred significant costs and losses, and that the break fee (in the amount of $1.2 million) is a genuine and reasonable estimate of those costs and losses (cl 11.2(1)–(2)); and record that, having received legal advice, Pulse considers cl 11 to be fair and reasonable, and that it is appropriate to agree to its terms in order to secure the significant benefits to it and Pulse shareholders resulting from the scheme (cl 11.2(3)). The break fee provisions are disclosed in the scheme booklet and addressed in Mr Hays’ and Mr Henderson’s evidence. There is evidence that Healthe Care would not have entered into the Scheme Implementation Deed without the break fee.

24. One of those circumstances in which a break fee is payable arises if the scheme is voted on but not approved at the scheme meeting, and a “Sante Capital Party” (as defined) voted against the scheme, and within 12 months of the scheme meeting, there exists a Competing Proposal (as defined) which involves a Sante Capital Party and that proposal becomes unconditional or is implemented (cl 11.4(2)(b)). Mr Henderson’s evidence is that this provision was required by Healthe Care as one of the conditions to entering into the Scheme Implementation Deed, where the Sante Capital Parties acquired approximately 10.9% of the Pulse shares in July 2016 (a holding that has now increased to about 15.7%) and Healthe Care was concerned that the scheme may be voted down by those parties with a view to pursuing their own proposal for Pulse (Henderson [22]–[23]). Mr Rich submits, and I accept, that Healthe Care’s position reflects the fact that a prospective acquirer of shares under a scheme would not wish to spend considerable time and money on a proposal and then find that a substantial shareholder of the target has used that proposal as a “stalking horse” for another proposal of their own. Mr Rich also points out, and I also accept, that it was necessary for Pulse to accept that provision in order to allow its shareholders an opportunity to consider the scheme (Hays [26]–[27]). Where it was commercially reasonable for Pulse to agree to that provision and it is disclosed in the scheme booklet, it is not a reason to decline to make the orders sought.

25. The amount of the break fee, $1.2 million, otherwise does not exceed 1% of the implied equity value of Pulse, calculated on the basis of the $0.47 offer price and the number of Pulse shares on issue (Hays 12.1.17 [24]) and is within the range contemplated by Guidance Note 7 issued by the Takeovers Panel, to which the courts have frequently had regard in respect of schemes of arrangement. Mr Rich submits, and I also accept, that break fees are not uncommon in transactions of this kind and the amount and clause generally is reasonable in the circumstances and should not prevent the Court from making the orders sought: Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 at [7]; Re Intecq Ltd above at [18].

Performance risk

26. Several cases have identified the need to address performance risk by ensuring that there is a mechanism for scheme members to enforce the right to entitlements that are to be received under a scheme: Re SFE Corporation Ltd above; Re WebCentral Group Ltd [2006] FCA 937; Re Brambles Industries Ltd [2006] FCA 1273; (2006) 59 ACSR 501; Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [23]. Mr Rich submits, and I accept, that the question of “performance risk” has been properly addressed in the structure of the scheme. A deed poll given by Healthe Care in favour of Scheme Shareholders (as defined) includes an undertaking by Healthe Care to deposit or procure the deposit of the aggregate Scheme Consideration (as defined) into a Trust Account (as defined), no later than the business day before the Implementation Date (as defined) of the scheme. Pulse or its agent then holds the aggregate Scheme Consideration on trust for the purpose of paying that consideration to Scheme Shareholders in accordance with cl 6.2 of the scheme. Clause 5.2 of the scheme in turn provides that the scheme shares will not be transferred to Healthe Care until after the aggregate Scheme Consideration has been deposited into the Trust Account and paid to Scheme Shareholders in accordance with cl 6.2 of the scheme. I am satisfied that this matter is no obstacle to the Court ordering the convening of a meeting.

Deemed warranties

27. Clause 5.6 of the scheme provides that each Scheme Shareholder (as defined) is taken to have warranted to Pulse and Healthe Care that their Pulse shares will be transferred free from any encumbrance. The scheme booklet disclosed that warranty and provisions of this character have been accepted in the case law, on the basis that the purpose and effect of such a clause simply is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd above at [57]–[63]; Re Investa Properties Ltd [2007] FCA 1104; (2007) 25 ACLC 1186 at [21]; Re Dyno Nobel Ltd [2008] VSC 154 at [26]; Re Cytopia Ltd [2009] VSC 560 at [23]; Re Intecq Ltd [2016] NSWSC 1429 at [17]. I am satisfied that this matter is also no obstacle to the Court ordering the convening of a meeting.

Half-yearly financial statements

28. Mr Hays’ evidence is that Pulse expects to release its half yearly financial statements to ASX on about 28 February 2017, between the first court hearing and the proposed scheme meeting and that, following the release of those financial statements, Pulse will seek the independent expert’s confirmation that they do not alter the expert’s opinion whether the scheme is fair and reasonable and in the best interests of Pulse shareholders. The independent expert’s response will be announced to the market, and if his opinion has altered, Pulse will relist the matter before the Court prior to the scheme meeting (Hays 30.1.17 [26]). These matters are also disclosed in section 5.8 of the scheme booklet, which seeks to encourage Pulse shareholders to read the half yearly financial statements and the announcement of to the expert’s opinion before deciding how to vote at the scheme meeting. Mr Rich points out that the course which Pulse proposes to take is essentially the same as was proposed and approved in Re Andean Resources Ltd [2010] FCA 1190 at [26] and in Re Talent2 International Ltd [2012] FCA 771 at [30]–[31] and it seems to me to address the issue.

Disclosure of intentions of major shareholder

29. The scheme booklet also discloses that Viburnum Funds Pty Ltd (“Viburnum”) and related parties hold 19.29% of the Pulse Shares (defined as being fully paid ordinary shares in the capital of Pulse) and that:

“Viburnum has informed Pulse that it intends to vote the Pulse Shares it holds at the time of the Scheme Meeting in favour of the Scheme, in the absence of a superior proposal (as determined by Viburnum acting reasonably)…”

There is evidence that Viburnum has expressed this intention and it seems to me that that intention may be relevant to other shareholders and can properly be disclosed to them. I note that, as Mr Rich fairly points out, the proposed alternative chairman of the scheme meeting, Mr Coleman, is the executive chairman of Viburnum as well as a director of Pulse (Coleman [5(F)]) and that matter is also disclosed in the scheme booklet.

Conclusion and orders

30. For these reasons, I am satisfied that the scheme booklet provides proper disclosure to Pulse shareholders, the proposed scheme is proper for consideration by those shareholders, and there is no apparent reason why the scheme should not in due course be approved by the Court if the requisite majorities are achieved at the scheme meeting. I am satisfied that the Court should make orders 1 and 3 of the orders proposed by Pulse, with the amendments made in the course of the hearing, ordering that the scheme meeting be convened for the purpose of considering and (if thought fit) approving the scheme, and that the scheme booklet be approved for dispatch to members in advance of the meeting.

31. Pulse also seeks orders as to the date of the scheme meeting and the appointment of a chairman; an order in common form that, with the exception of reg 5.6.13 of the Corporations Regulations 2001 (Cth) 5.6.13, the regulations referred to in rule 2.15 of the Corporations Rules will not apply to the scheme meeting); and an order as to the publication of a notice of the second court hearing and as to notification of certain shareholders by email, to similar effect to that made in Re Alinta Ltd (No 2) [2007] FCA 1378. Each of these orders should be made.

32. I therefore make orders in the form initialled by me and placed in the file.

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Decision last updated: 03 March 2017