In the matter of Quantum Health Group Limited

[2022] NSWSC 26

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Quantum Health Group Limited [2022] NSWSC 26

Hearing dates:

17 December 2021

Date of orders:

17 December 2021

Decision date:

21 January 2022

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Order convening scheme meeting and associated orders made.

Catchwords:

CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application under s 411 of the Corporations Act 2001 (Cth) for orders convening meeting of members to consider and, if thought fit, to agree to proposed scheme of arrangement – Whether requirements to order scheme meeting are satisfied.

Legislation Cited:

- Corporations Act 2001 (Cth), ss 411, 1319

Cases Cited:

- First Pacific Advisors LLC v Boart Longyear Ltd (2017) 121 ACSR 136; [2017] NSWCA 116

- Re Afterpay Ltd [2021] NSWSC 1435

-Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770

-Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40

- Re Associated Advisory Practices Ltd [2013] FCA 761

- Re Aston Resources Ltd [2012] FCA 229

- Re Atlas Iron Ltd (2016) 112 ACSR 554; [2016] FCA 366

- Re Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348

- Re Beadell Resources Ltd [2018] WASC 410

- Re Bigair Group Ltd [2016] FCA 1296

- Re BIS Finance Pty Ltd [2017] NSWSC 1713

- Re Blackgold International Holdings Ltd [2017] FCA 601

- Re CIC Australia Ltd [2015] NSWSC 557

- Re Capilano Honey (2018) 131 ACSR 9; [2018] FCA 1568

- Re Class Ltd [2022] NSWSC [ ]

- Re Coca-Cola Amatil Ltd [2021] NSWSC 270

- Re David Jones Ltd (No 2) (2014) 101 ACSR 381; [2014] FCA 720

- Re David Jones (No 3) [2014] FCA 753

- Re Dragontail Systems Ltd [2021] FCA 834

- Re DUET Finance Ltd [2017] NSWSC 415

- Re DUET Management Company 1 Ltd [2013] NSWSC 817

- Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 89

- Re Intega Group Ltd [2021] NSWSC 1434

- Re Macquarie Private Capital A Ltd [2008] NSWSC 323

- Re PM Capital Asian Opportunities Fund Ltd [2021] FCA 1380

- Re Staging Connections Group Ltd [2015] FCA 1012

- Re The Trust Company (Re Services) Limited as responsible entity of the VitalHarvest Freehold Trust [2021] NSWSC 108

- Re TPG Telecom Ltd [2020] NSWSC 772

- Re Tronox Limited [2019] FCA 312

- Re Villa World Ltd [2019] NSWSC 1207

Sovereign Life Assurance Co v Dodd [1892] 2 QB 573

Category:

Principal judgment

Parties:

Quantum Health Group Limited (Plaintiff)

Representation:

Counsel:
R Foreman SC (Plaintiff)
D Thomas SC (Acquirer)

Solicitors:
Johnson Winter & Slattery (Plaintiff)
Herbert Smith Freehills (Acquirer)

File Number(s):

2021/318441

Judgment

Nature of the application and background

1. By Originating Process filed on 9 November 2021 the Plaintiff, Quantum Health Group Limited (“Quantum”) seeks an order under s 411(1) of the Corporations Act 2001 (Cth) that it convene a scheme meeting of members holding fully paid ordinary shares in relation to a scheme of arrangement for the transfer of all of those shares to Paragon Care Limited (“Paragon”). Quantum also seeks an order approving the explanatory statement in respect of the scheme for distribution to scheme shareholders and associated orders in respect of the conduct of the scheme meeting under ss 411 and 1319 of the Corporations Act. Quantum is listed on Australian Securities Exchange (“ASX”) and operates in the business of the supply and distribution of medical equipment, devices and consumables. The proposed scheme provides for Paragon to acquire all of the issued shares in Quantum, in consideration for the issue to Quantum shareholders of 0.243 Paragon shares for each Quantum share they own as at the Scheme Record Date (as defined).

2. I made the orders sought by Quantum at the end of the first Court hearing in respect of the matter. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Foreman, who appeared for Quantum in the application.

Affidavit evidence

3. Quantum relies on the affidavit dated 9 November 2021 of its solicitor, Mr Byron Koster, who refers to an announcement made to ASX by Quantum on 8 November 2021 that it had entered into a scheme implementation deed (“SID”) with Paragon.

4. Quantum also relies on the affidavit of its managing director and chief executive officer, Mr John Walstab. Mr Walstab also refers to the announcement of the proposed scheme to ASX and notes that, since 2017, Quantum has been engaged in the distribution of high end medical equipment. He refers to two outstanding related party loans (“Related Party Loans”) made by himself and Mr Townsend to Quantum, which it is proposed are to be repaid as a condition precedent to the scheme, and which are disclosed in section 9.1.4 of the scheme booklet. Mr Walstab’s evidence is that, irrespective of the scheme, he has no reason to believe that the loans would not be repaid in full by Quantum in due course and, if the scheme is not implemented, it is Quantum’s current intention to repay them in full before 30 June 2022. I address that matter further below.

5. Mr Walstab also refers to a “Bid Response Protocol” adopted by Quantum in response to Paragon’s proposal to acquire its shares, where Mr Townsend and Mr Walstab had shareholdings in Quantum and a longstanding involvement with Quantum, and a third director of Quantum might not be considered an independent director. That Bid Response Protocol provided for another independent director of Quantum, Mr McCarthy, to consider whether the proposal and the scheme was in the best interests of Quantum as a whole, while Mr Walstab remained involved in Quantum’s response to the proposal given his role with Quantum and his knowledge of its business. Mr Walstab also outlines the steps which were taken to respond to Paragon’s proposal under the Bid Response Protocol, including his involvement in engaging an independent expert, in due diligence, in preparation and negotiation of the SID with Paragon, with the assistance of Quantum’s chief financial officer and Quantum’s board oversight role in respect of the scheme, and communications with Mr McCarthy in respect of significant developments in the scheme, and provision of information to him concerning such matters. I also address the Bid Response Protocol further below.

6. Mr Walstab also addresses the proposed conduct of the scheme meeting, as a virtual scheme meeting, and the arrangements which would be made by its registry provider, Boardroom, to dispatch the scheme booklet and associated documents to Quantum shareholders. He also refers to the contents of the scheme booklet and the verification process in respect of the scheme booklet, which was in common form, and to the Quantum board’s approval for the scheme booklet. Mr Walstab also refers to a disclosure letter, noted in the SID, which provides for the board of directors of Paragon to include up to two people nominated by Quantum, after implementation of the scheme, with Mr Walstab being one of the persons nominated by Quantum to join Paragon’s board, and also provides that Paragon will be permitted to declare a dividend of up to 0.01 cents per Paragon share, and, if it does so, Quantum is also entitled to declare a dividend calculated by a specified formula. I also address that matter further below.

7. Mr Walstab outlines the condition precedent to the scheme, the process for allocation of Paragon shares as scheme consideration and the treatment of Ineligible Foreign Shareholders (as defined) in respect of the scheme. His evidence is that there are a relatively small number of Ineligible Foreign Shareholders, and the Paragon shares which would otherwise be issued to them will be sold and the proceeds remitted to them if the scheme proceeds. I also address that question further below.

8. I was taken to the scheme booklet which is exhibited to Mr Walstab’s affidavit in submissions, and I note the chairman’s letter that Messrs Walstab and Townsend are substantial shareholders of Quantum and also discloses the treatment of their Related Party Loans to Quantum in connection with the scheme, to which I referred above, and the treatment of Ineligible Foreign Shareholders under the scheme. The chairman’s letter also notes the independent expert’s conclusion that the scheme is in the best interests of Quantum shareholders. The scheme booklet and that report provide further detail of that conclusion and, in particular, indicate that the independent expert has concluded that the scheme is not fair but is nonetheless reasonable in the relevant circumstances. I refer further to that conclusion below.

9. The scheme booklet also indicates the Quantum directors’ recommendation in favour of the scheme, in the absence of a Superior Proposal and subject to the independent expert continuing to conclude that it is in the best interests of Quantum shareholders. As I noted above, the scheme booklet also provides fuller disclosure of the independent expert’s conclusion, observing that:

“The Independent Expert considers that the Scheme is not fair but reasonable and the advantages to Quantum Shareholders outweigh the disadvantages”

with a cross-reference to the relevant section of the independent expert’s report. The booklet then refers to the independent expert’s conclusion, which I noted above, that the scheme was in the best interests of Quantum shareholders, in the absence of a Superior Proposal. The scheme booklet outlines possible reasons to vote in favour of or against the scheme in the usual manner, and draws attention to the warranty which will be given by scheme shareholders that their shares are fully paid and free from encumbrances which I address below. A table of “frequently asked questions” in turn addresses significant aspects of the scheme booklet, including reasons to vote in favour of and against the scheme, the position if the scheme is not implemented and conditions precedent to the scheme. The scheme booklet also discloses that a condition precedent requiring key executives to enter into new employment agreements with the Quantum Group or Paragon Group before the second Court date has been waived by Paragon. The scheme booklet also discloses the entry into an Escrow Deed in respect of shares to be issued by Paragon to Mr Walstab or his associates in connection with the scheme, which will restrict dealing and disposal with those shares on specified terms. The scheme booklet also fairly discloses that the implied value of the scheme consideration is liable to vary over time depending on the prevailing Paragon share price, and also identifies integration risk and a risk as to the realisation of synergies as a potential risk in implementation of the scheme.

10. As I noted above, the scheme booklet also includes the independent expert’s report prepared by Leadenhall, which assesses the fair market value of a Quantum share (on a controlled basis) using a capitalisation of future maintainable earnings methodology and cross-checks that valuation range against share trading in Quantum up to the announcement of the proposed transaction. Leadenhall have assessed the value per share in the proposed merged entity by reference to trading in Paragon shares after the announcement of the proposed transaction, cross-checking that valuation by reference to implied multiples. They observe that “[s]ince the assessed value of the Consideration is less than the assessed range of values of a Quantum share the Proposed Transaction is not fair to Shareholders”, but also observe that the transaction is reasonable, so far as its advantages to shareholders outweigh the disadvantages, for reasons set out in their report. They conclude that:

“Whilst the value of the Consideration does not include a full control premium, it is slightly higher than recent trading prices in Quantum shares and our assessment of a reasonable value of a Quantum share on a minority basis. We also consider there to be a potential upside to our assessed value of the Proposed Merged Entity for Shareholders holding Paragon shares in the medium term if the anticipated synergies from the Proposed Transaction are realised. To date no superior offer has been received by Quantum, and Paragon is the most likely buyer. On this basis, we consider the proposed transaction to be reasonable.”

11. Leadenhall concludes, on that basis, that the proposed transaction is not fair but reasonable to Quantum shareholders and is therefore in their best interests.

12. By his affidavit dated 15 December 2021, Mr Townsend consents to act as chair of the scheme meeting and discloses his interest in fully paid shares in Quantum, and the Related Party Loan that he has made to Quantum which should be repaid as a condition for the implementation of the scheme. Quantum also relies on an affidavit dated 16 December 2021 of Mr Michael Peters, who is its chief financial officer, who consents to act as chair of the scheme meeting if Mr Townsend is unable or unwilling to act in that capacity. Mr Peters also addresses the question of repayment of the Related Party Loans by Quantum to Mr Walstab and Mr Townsend as a condition of the scheme, and notes Quantum’s current intention to repay those loans in full prior to 30 June 2022 if the scheme is not implemented, and the fact that those loans were included as “current” liabilities in Quantum’s 2021 annual report.

13. By his second affidavit dated 16 December 2021, Mr Koster refers to lodgement of the scheme booklet with the Australian Securities and Investments Commission (“ASIC”) and annexes a letter dated 16 December 2021 from ASIC which confirms that ASIC has had 14 days’ notice of the hearing and a reasonable opportunity to examine the terms of the scheme, and does not currently propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing. ASIC reserves its position under s 411(17)(b) of the Corporations Act to the second Court hearing in the usual way. Mr Koster also addresses the process of negotiation of the SID and notes that the proposed break fee of $1 million represents approximately 1.2% of the equity value (on a fully diluted basis) placed on Quantum by the scheme. He nonetheless expresses the view, having regard to his experience, that the break fee provisions are commercially reasonable having regard to the costs incurred by Paragon, which are in turn disclosed in section 9.6.2 of the scheme booklet, and are consistent with market practice and in the best interests of Quantum shareholders where a break fee was necessary to secure Paragon’s agreement to the proposal. I address that break fee further below.

14. By his affidavit dated 15 December 2021, Mr Shane Tanner, who is a director of and the chairman of Paragon, also refers to the background to the scheme and identifies the verification process which has been undertaken by Paragon, with the assistance of its legal advisers, in respect of the information concerning Paragon set out in the scheme booklet. Mr Tanner also refers to exclusivity and break fee conditions contained in the SID, and provides a breakdown of the costs incurred by Paragon in respect of the scheme, which support the amount of the break fee. Mr Tanner addresses the position in respect of conditions precedent to the scheme, including the waiver of the condition precedent in respect of employment agreements to which I have referred above, and refers to Paragon’s execution of a deed poll in favour of Quantum shareholders by which it covenants to provide or procure the provision of the scheme consideration and take the other actions required by it under the scheme.

15. By his affidavit dated 16 December 2021, Mr Richard Norris addresses the independent expert report prepared by Leadenhall in respect of the scheme, to which I have referred above. He confirms that he holds the opinions expressed in that expert report, has made inquiries he believes were desirable and appropriate, and has prepared that report having regard to ASIC’s Regulatory Guide 111 Content of Expert Reports and ASIC Regulatory Guide 112 Independence of Experts. My attention was drawn, in the course of the scheme hearing, to a correction that was required in respect of a table in section 4.7 of that report to correct an arithmetical error and a further correction required in section 4.10 of that report in respect of the number and percentage of shares held by Mr Townsend and other shareholders in Quantum.

16. By an affidavit dated 17 December 2021, Ms Jemma Potesny, also a solicitor acting for the Plaintiffs in respect of the scheme, addressed minor amendments made to the scheme booklet, primarily relating to the agreement that Paragon may declare a dividend prior to implementation provided that Quantum has also declared a proportionate dividend, to which I return below. Those amendments also included a further disclosure that Paragon did not currently have any intention to change the terms of Mr Walstab’s employment.

Matters relevant to convening the scheme meeting

17. Many cases have summarised the matters that must be satisfied before a court will make the orders for convening the scheme meeting. Those matters include that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the explanatory memorandum will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the explanatory memorandum and make submissions and has had 14 days’ notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) (Rules) have been met; and 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: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554; [2016] FCA 366 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re Capilano Honey (2018) 131 ACSR 9; [2018] FCA 1568 at [32], to which Mr Foreman refers; Re Villa World Ltd [2019] NSWSC 1207 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]; Re Intega Group Ltd [2021] NSWSC 1434 at [13].

18. Mr Foreman also refers to Farrell J’s observation in Re Associated Advisory Practices Ltd [2013] FCA 761 at [22] that:

“The Court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the Court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application … By granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b) … The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members … The Court does not need to be satisfied that no better scheme could have been proposed … Ultimately, the question is for the members themselves …” [citations omitted]

19. Mr Foreman points out that the evidence here establishes that Quantum is a company and a Part 5.1 body; it has committed itself to propounding the scheme by the SID, and thus provides prima facie evidence that the scheme is bona fide and has been properly proposed; factual material in the scheme booklet has been subject to a verification process in the usual way; and the text of the scheme provides prima facie evidence that it is “an arrangement” within s 411 of the Act.

20. Mr Foreman also draws attention to the “Bid Response Protocol” adopted by Quantum’s board on 28 October 2021, which I noted above, which set out how Quantum would to manage its response to the then non-binding indicative proposal from Paragon to acquire all of the shares in Quantum, having regard to Mr Townsend’s and Mr Walstab’s shareholdings in Quantum and their longstanding involvement with Quantum; the fact that Mr McCarthy was Quantum’s sole independent director and the board’s view that it was appropriate that he be afforded the opportunity and means to discharge his duty as a director of Quantum in relation to the proposal and the scheme; and the board’s view that, given Mr Walstab’s role with Quantum and knowledge of its business, it would have been impracticable for Quantum to prudently respond to the proposal from Paragon without his significant involvement. I have referred to Mr Walstab’s evidence as to the implementation of that protocol above. Mr Foreman also points out that each of Quantum’s directors have recommended that Quantum shareholders 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 Quantum shareholders and indicated that, subject to those qualifications, they intend to vote all Quantum shares that they hold or control in favour of the scheme.

19. Mr Foreman points out that the independent expert has expressed the opinion that the scheme is not “fair”, because the independent expert’s assessed value of the scheme consideration (7.29-8.26 cents per share) is less than the independent expert’s assessed value of the scheme shares (8.71-9.57 cents per share) but the scheme is “reasonable”, because the advantages to Quantum shareholders outweigh its disadvantages. In particular, that expert observed that, although the value of the scheme consideration does not include a full control premium, it is slightly higher than recent trading prices in Quantum shares and the independent expert’s assessment of a reasonable value of a Quantum share on a minority basis; the independent expert also considers there is a potential “upside” to its assessed value of the proposed merged entity for shareholders holding Paragon shares in the medium term if the anticipated synergies from the scheme are realised; and no superior offer has been received by Quantum and Paragon is the most likely buyer. The independent expert concludes on that basis that the scheme is in the best interests of Quantum shareholders. Mr Foreman recognises that the cases have indicated the need for the court to proceed with caution where an independent expert’s view that a scheme is “not fair”. However, he also submits, and I accept, that the fact that the independent expert has concluded that the scheme is not fair but reasonable does not preclude the Court from convening the scheme meeting, where that matter is disclosed to the shareholders for them to make their own assessment of whether to vote in favour of the scheme: Re CIC Australia Ltd [2015] NSWSC 557 at [8]-[17]; Re Blackgold International Holdings Ltd [2017] FCA 601 at [18]-[19]; Re Beadell Resources Ltd [2018] WASC 410 at [59]-[64], where Vaughan J summarised the position as follows:

“ as long as the scheme participants are properly informed that the independent expert considers the scheme not to be fair, and why, it is ultimately for the members to decide whether it is an offer that they should accept.

It follows that a key consideration is whether the expert report satisfactorily discloses the basis of the expert's opinion. The members must be provided with a proper opportunity to understand and assess the basis of the opinion. The court should consider whether shareholders will be acting on sufficient information in order to make an informed decision as to whether to accept the scheme consideration for their shares.”

22. Mr Foreman submits, on this basis, and I accept that, the independent expert’s conclusion is not a reason not to convene the scheme meeting and that Quantum’s shareholders should be given the opportunity to consider the scheme.

23. Mr Foreman also refers to the conditions precedent to the scheme and notes that a condition precedent requiring Quantum’s key executives to enter into a new employment agreement with a Quantum Group or Paragon Group member before 5:00pm on the Business Day before the Second Court Date in a form approved by Paragon has been waived by Paragon. He points out that that condition applied only to Mr Walstab, and, following comments from ASIC, further disclosure in relation to Mr Walstab’s employment with the Paragon group has been included at section 6.6.4 of the scheme booklet.

24. I am satisfied that there is no reason to doubt that the scheme booklet provides proper disclosure to Quantum shareholders and there has been a verification and due diligence process in common form. Subject to the particular issues which I address below, there is no reason to doubt that the proposed scheme is bona fide and properly proposed and could be approved at the second Court hearing if it receives the requisite shareholder approvals. Although ASIC has reserved its position as to s 411(17)(b) of the Act in accordance with its usual practice, the Court can address that question at the second Court hearing. Subject to the particular issues which I address below, I am satisfied that the orders sought should be made in respect of the proposed scheme.

Specific issues arising in respect of the proposed scheme

25. Mr Foreman draws attention to several aspects of the scheme, in addition to the matters I have noted above. First, Mr Foreman notes that, under the SID, it is a condition to implementation of the scheme is that all Related Party Loans (as defined) are fully repaid prior to 5:00pm on the Business Day before the Second Court Date (as defined). As at 31 December 2021, amounts will be payable by Quantum to two Quantum directors in respect of Related Party Loans owed by it to them, namely $2,227,995 payable to Mr Walstab and $1,246,458 payable to Mr Townsend. Mr Foreman points out that those Related Party Loans are disclosed in sections 1.2.3 and 9.1.4 of the proposed scheme booklet, and also there disclosed in the context of the Quantum directors’ recommendation that Quantum shareholders vote in favour of the scheme which I address below.

26. Mr Foreman draws attention to Quantum’s Annual Report for 2021 which suggests that Quantum had sufficient current assets to repay the Related Party Loans, and to Mr Peters’ and Mr Walstab’s affidavit evidence that it is Quantum’s current intention to repay the Related Party Loans in full prior to 30 June 2022 even if the scheme is not implemented, and consistent with the fact that the Related Party Loans were included (as “Borrowings”) in the current liabilities of Quantum as set out in its 2021 Annual Report. Mr Tanner’s affidavit evidence is also that Paragon required the condition precedent for repayment of the Related Party Loans for specified commercial reasons. Mr Foreman also draws attention to correspondence with ASIC concerning this matter and notes that ASIC has now advised it has no further comments on the scheme booklet.

27. Mr Foreman addresses the concept of a “collateral benefit” and notes the Takeovers Panel’s approach to that matter as set out in Takeovers Panel Guidance Note 21: Collateral Benefits. He also refers to the case law that has considered the question of collateral benefits in the scheme context including Re David Jones Ltd (No 2) (2014) 101 ACSR 381; [2014] FCA 720 (“David Jones No 2”) and Re David Jones (No 3) [2014] FCA 753 (“David Jones No 3”).

28. In David Jones No 2 at [30]-[31], Farrell J noted a practice of providing an additional expert report where an issue of collateral benefit may arise in a scheme context. Mr Foreman points out that the question whether any collateral benefit is given to the directors whose related Party Loans are to be repaid has here been addressed by the independent expert’s report, which expresses the view that nothing that has come to the independent expert’s attention to indicate that the value of the Related Party Loans, as recognised in Quantum’s financial statements, should be discounted and that the repayment of the Related Party Loans will not result in a net financial benefit to Mr Walstab and/or Mr Townsend to the detriment of other Quantum shareholders. In David Jones (No 2) at [33], Farrell J also noted that the second Court hearing is the time for the Court to determine whether or not a collateral benefit has been received and (if so) the relevance to the Court’s discretion to approve the scheme having regard to the voting at the scheme meeting and the level of disclosure. Mr Foreman also rightly points out that, where one or more shareholders receive a potential collateral benefit under the scheme, then the Court will consider whether it is appropriate for the members to be placed into a separate class and that matter is properly addressed at the first Court hearing.

29. Mr Foreman also refers to Farrell J’s observation in David Jones No 3 at [12]-[13] that:

“…The transaction under consideration is a scheme of arrangement to which s 623 does not apply. The relevance of the principles set out in s 602 goes to the question of fairness and the desirability of there being, so far as relevant and possible, neutrality between “acquisition“ schemes and Ch 6 takeovers.

However, one of the reasons for the continued existence of the s 411 avenue for effecting mergers is that it is a flexible way of accommodating differences in the treatment of shareholders. It is for this reason that it is not illegal for a collateral benefit to be offered or given. Nor is it necessarily inappropriate for there to be differential consideration or collateral benefits subject to how the related questions of fairness and adequacy of disclosure to shareholders who will not participate in a benefit are addressed. The “fairness“ issue is usually dealt with in one of two ways: first, by deciding whether there are differences which are “class creating“ or, second (and arguably more appropriately where the issue is collateral benefits), by enquiring whether processes have been established by the scheme company to “tag“ votes of interested shareholders or for interested shareholders to abstain from voting. Either approach allows appropriately informed shareholders who will not share in a benefit to determine the outcome of the approval resolution and prevents shareholders with greater bargaining power from being advantaged over shareholders with less bargaining power without the consent of the less powerful shareholders.”

30. Her Honour also there addressed (at [15]-[16]) the question whether a scheme participant would receive a “net benefit” under the scheme so as to give rise to a collateral benefit as follows:

“In the context of a scheme, I accept that the appropriate measure of whether a benefit exists is the ‘net benefits’ test which has been adopted by the Takeovers Panel in Guidance Note 21: Collateral Benefits (GN 21) at [15] and [31] in determining whether ‘unacceptable circumstances’ exist by reason of the existence of such an interest. This test was posited by Santow J in Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638 at 680:

“The preferred holistic view instead takes into account whatever rights or benefits are conferred by each transaction, to be netted off against whatever rights or benefits are thereby given up, to the extent such benefits are commensurable at least in an approximate sense. The resultant net benefit is to be compared under each transaction. Only if there is overall disparity in favour of the party to the non-bid transaction is s 698(1) [now s 623] contravened. This is in the sense of a balance of advantage, profit or good in favour of the party to the non-bid transaction.”

I also accept that, as contemplated by GN 21 at [32], there may be ‘inducement’ arising from collateral benefits which should be taken into account where there is no material ‘net benefit’ but a shareholder is offered the opportunity to acquire or dispose of an asset for which there is no ready market or easily ascertainable value.”

31. Mr Foreman also referred to the consideration of this issue in Re Aston Resources Ltd [2012] FCA 229. I also recently addressed questions of an independent expert’s assessment of, and the disclosure of, a possible collateral benefit in Re The Trust Company (Re Services) Limited as responsible entity of the VitalHarvest Freehold Trust [2021] NSWSC 108 at [23]ff. Mr Foreman also draws attention to the case law concerning when shareholders must vote in different classes generally, in addressing the question whether Mr Townsend or Mr Walstab should be required to vote in a separate class at the scheme meeting: Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583, Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 at [12]; First Pacific Advisors LLC v Boart Longyear Ltd (2017) 121 ACSR 136; [2017] NSWCA 116 at [77]-[81]; Re Tronox Limited [2019] FCA 312 at [27].

32. Mr Foreman identifies relevant matters including that, as I noted above, Paragon here required that the Related Party Loans be repaid in arm’s length negotiations and has identified apparently sound commercial reasons for that requirement; they will be repaid at their face value where there is no apparent reason to discount their value, where Quantum has significant net current assets including cash; the amounts to be repaid to Mr Townsend and Mr Walstab are small relative to the value of their shareholdings in Quantum; there is evidence that it was intended that the Related Party Loans would be repaid in any event during the FY22 financial year; and repayment of those loans will deprive Mr Townsend and Mr Walstab of the (relatively high) interest payable in respect of those loans; and the independent expert has concluded that there is no reason to discount the value of the loans and that their repayment will not confer any net financial benefit on Mr Townsend or Mr Walstab. Mr Foreman also points out that the treatment of the Related Party Loans is prominently disclosed in the scheme booklet (including where the directors’ recommendation is referred to) and there will be a record of how Mr Townsend or Mr Walstab votes at the scheme meeting and the Court will be able, if necessary, to assess the result of that meeting excluding their votes. Mr Foreman submits for these reasons, and I accept, that the condition precedent in relation to and repayment of the Related Party Loans does not, in substance, give rise to a net benefit or a collateral benefit to Mr Townsend and Mr Walstab and does not require that they vote in a separate class. I am satisfied that these matters, where appropriately disclosed in the scheme booklet, do not give rise to any reason not to convene the scheme meetings or to require that Mr Townsend and Mr Walstab vote in a separate class at that meeting.

33. Second, Mr Foreman notes that all directors have made a recommendation, after disclosure of financial benefits they may receive from implementation of the scheme, and submits that approach is consistent with recent authority. He refers to my judgment in Re Afterpay Ltd [2021] NSWSC 1435 at [40]-[43] where I observed that:

“I again prefer the approach adopted in Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Re Villa World Ltd [2019] NSWSC 1207 and Re GBST Holdings Ltd [2019] NSWSC 1280 to that taken in Re Gazal Corporation Ltd [2019] FCA 701 and Re Navitas Ltd (No 2) [2019] WASC 218. I have also taken the former approach in Re Coca-Cola Amatil Ltd [2021] NSWSC 270 and Re BINGO Industries Ltd [2021] NSWSC 798, and the same view has recently been taken in the Federal Court of Australia in Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580; Re RXP Services Ltd [2021] FCA 38 and Re Mainstream Group Holdings Ltd [2021] FCA 948. I accept that the interests of [two directors] do not prevent them from making a voting recommendation to [scheme company] shareholders where that interest is sufficiently disclosed in the scheme booklet and [scheme company] shareholders may take it into account in determining the weight to give to that recommendation.”

34. Applying the same approach here, I am satisfied this matter does not give rise to any reason not to convene the proposed scheme meeting.

35. Third, Mr Foreman refers to the definition of “Ineligible Foreign Shareholders” under cl 1.1 of the scheme and to the disclosure as to that concept in section 3.3.5 of the proposed scheme booklet and notes that, under cl 5.4 of the scheme, in Paragon is not obliged to issue Paragon shares to “Ineligible Foreign Shareholders” (as defined) and the Paragon shares to which the Ineligible Foreign Shareholders would otherwise have been entitled to will be issued directly to a sale agent who will, as soon as reasonably practicable on or after the Implementation Date of the scheme, sell those shares on ASX and remit the applicable proceeds after costs to the Ineligible Foreign Shareholders. Mr Foreman also submits, and I accept, that Quantum shareholders who are Ineligible Foreign Shareholders under the scheme do not constitute a separate class for the scheme meeting: Re Hills Motorway Ltd above at [9]–[13]; Re TPG Telecom Ltd [2020] NSWSC 772 at [21]; Re Afterpay Ltd above at [39]. I am satisfied these matters do not give rise to any reason not to convene the proposed scheme meeting.

36. Fourth, Mr Foreman notes that, in a disclosure letter contemplated by the SID, Quantum and Paragon have agreed that Paragon is permitted to declare a dividend of up to $0.01 per Paragon share, and, if the record date for such a dividend is prior to the implementation date for the scheme, Quantum will then be entitled to declare a dividend of an amount equal to 0.243 multiplied by the amount of the dividend declared by Paragon. Paragon is required to provide Quantum with reasonable notice of such a dividend prior to it being declared but has not provided any such notice at this time. Mr Foreman submits, and I accept, that the application of that approach would have no impact on the scheme consideration. Mr Foreman also notes that the possibility of such a dividend is disclosed in section 9.3 of the scheme booklet and, following ASIC’s comments, further disclosure of the agreement between Quantum and Paragon as to this matter is made at sections 3.5.1(d) and (j) of the scheme booklet.

37. Fifth, Mr Foreman notes that cl 9 of the SID sets out the exclusivity provisions applicable to the scheme, which are summarised in section 3.5.2 of the scheme booklet. These include “no shop”, “no talk” and “no due diligence” provisions, a mutual notification obligation and a matching right. Quantum is not required to comply with the “no talk” and “no due diligence” provisions in the SID in relation to a bona fide Competing Proposal (as defined) from a third party if its board of directors has determined in good faith that that Competing Proposal is or may reasonably be expected to become a Superior Proposal (as defined) and, after receiving written legal advice from its external legal advisers, that compliance with those provisions would involve, or would be likely to involve, a breach of the directors’ fiduciary or statutory duties. The “Exclusivity Period” in which these provisions operate is defined in the SID as the period commencing on the date of the SID and ending on, inter alia, the End Date, being seven months after the date of the SID or such other date as Quantum and Paragon agree in writing.

38. The case law recognises an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve-out, although that is not required for a “no shop” restriction; matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive; and exclusivity provisions must be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re DUET Management Company 1 Ltd [2013] NSWSC 817 at [24]; Re Bigair Group Ltd [2016] FCA 1296 at [21]; Re Villa World Ltd above at [23]; Re Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348 at [44]. Mr Foreman submits, and I accept, that the period of the exclusivity restriction is capable of precise ascertainment and reasonable; the “no-talk” and “no due diligence” restrictions and the notification obligation and matching right are subject to a fiduciary carve-out, which is not necessary for the “no shop” restriction; the restrictions are appropriately disclosed in the scheme booklet; and the evidence addresses the negotiations that led to agreement as to these provisions. These matters give rise to no reason not to convene the scheme meeting.

39. Sixth, Mr Foreman notes that a break fee of $1,000,000 (“Break Fee”) is payable by either Quantum or Paragon in the circumstances specified in cl 10 of the SID. The fee is not payable merely because Quantum shareholders do not approve the scheme. That break fee of approximately 1.2% is higher than 1% of the total equity value of Quantum, and therefore is higher than the 1% percentage referred to under the Takeovers Panel Guidance Note 7. Mr Foreman points out that the reasonableness and appropriateness of the break fee provisions is supported by affidavit evidence of the kind referred to by Lindgren J in Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [55] and is disclosed in the scheme booklet. On balance, the size and structure of the break fees do not give rise to reason not to convene the scheme meetings.

34. Seventh, Mr Foreman notes that cl 7.3 of the scheme provides for a deemed warranty by scheme shareholders that their shares will be free from security interests and encumbrances, which is disclosed in sections 1.4.4 and 3.6 of the scheme booklet. The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect 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 DUET Management Company 1 Ltd above at [23]; Re Villa World Ltd above at [25].

35. Eighth, Mr Foreman addresses the question of “performance risk”, as described in Re APN News & Media Ltd above and Re Afterpay Ltd above at [45]-[46] (where the scheme consideration was shares), which has been mitigated here by provisions in common form in cll 4.2, 5.1 and 5.2 of the scheme, including a provision that the transfer of the scheme shares on the Implementation Date is “subject to the provision of the Scheme Consideration in the manner contemplated by clause 5… ” of the scheme. A deed poll executed by Paragon is in evidence.

36. Ninth, Mr Foreman addresses the nature of the scheme consideration. Section 7.4.4 of the scheme booklet discloses that one of the risks of the scheme is that the value of the scheme consideration is not certain, where its implied value is liable to vary over time depending on the prevailing Paragon share price.

37. Tenth, Mr Foreman addresses the process for dispatch of the scheme booklet and associated documentation, which is consistent with that permitted in recent cases: Re PM Capital Asian Opportunities Fund Ltd [2021] FCA 1380 at [100]; Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [26]; Re Dragontail Systems Ltd [2021] FCA 834 at [44]-[46]. Mr Foreman also notes that, again consistent with recent practice, it is proposed that the scheme meeting will be conducted entirely online as a virtual meeting.

38. Eleventh, Mr Foreman submits, and I accept that that, in accordance with the usual practice, the question raised by s 411(17) of the Act is to be dealt with on an application to approve a scheme at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]–[37]; Re Afterpay Ltd above at [48].

Orders

45. For these reasons, I was satisfied that an order should be made convening the scheme meeting and I made the orders sought by Quantum at the conclusion of the first Court hearing in this matter.

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Decision last updated: 31 January 2022