Re Afterpay Ltd

[2021] NSWSC 1435

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Afterpay Limited [2021] NSWSC 1435

Hearing dates:

4 November 2021

Date of orders:

4 November 2021

Decision date:

08 November 2021

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Order made convening scheme meeting and approving the scheme booklet for distribution to shareholders.

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), s 411

Cases Cited:

-Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; (1993) 112 ALR 627; (1993) 10 ACSR 230; [1993] HCA 15

-F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69

- Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309

- Re ABB Grain Ltd [2010] FCA 1309

- Re AIRR Holdings Ltd [2019] FCA 2180

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

- Re Ardent Leisure Ltd [2018] NSWSC 1665

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

- Re Associated Advisory Practices Limited [2013] FCA 761

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

- Re Australian Leisure and Entertainment Property Management Ltd [2021] NSWSC 1421

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

- Re Bigair Group Ltd [2016] FCA 1296

- Re BINGO Industries Ltd [2021] NSWSC 798

- Re BIS Finance Pty Ltd [2017] NSWSC 1713

- Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510; [2007] FCA 2078

- Re Centrebet International Ltd [2011] FCA 870

- Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580

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

- Re CSR Ltd (2010) 183 FCR 358; (2010) 265 ALR 703; (2010) 77 ACSR 592; [2010] FCAFC 34

- Re DUET Finance Ltd [2017] NSWSC 415

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

- Re Ellerston Global Investments Ltd [2020] NSWSC 879

- Re Foster’s Group Ltd (No 2) [2011] VSC 547

- Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742

- Re Gazal Corporation Ltd [2019] FCA 701

- Re GBST Holdings Ltd [2019] NSWSC 1280

- Re Hills Motorway Ltd [2002] 43 ACSR 101; [2002] NSWSC 897

- Re Intega Limited [2021] NSWSC 1434

- Re Isentia Group Ltd [2021] NSWSC 910

- Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226

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

- Re Mainstream Group Holdings Ltd [2021] FCA 948

- Re Medical Australia Ltd [2017] FCA 1304

- Re Navitas Ltd (No 2) [2019] WASC 218

- Re rhipe Ltd [2021] NSWSC 1170

- Re Ross Human Directions Ltd [2010] ATP 8

- Re RXP Services Ltd [2021] FCA 38

- Re Simavita Holdings Ltd [2013] FCA 1274

- Re Sirtex Medical Ltd [2018] FCA 1315

-Re SMS Management & Technology Ltd [2017] VSC 257

- Re Spark Infrastructure RE Ltd [2021] NSWSC 1385

- Re Staging Connections Group Ltd [2015] FCA 1012

- Re TPG Telecom Ltd [2020] NSWSC 772

- Re Veda Group Ltd [2015] FCA 1506

- Re Villa World Ltd [2019] NSWSC 1207

- Re Windlab Ltd [2020] NSWSC 571

- Real Energy Corporation Ltd [2020] FCA 1634

Category:

Principal judgment

Parties:

Afterpay Limited (Plaintiff)

Representation:

Counsel:
I Jackman SC/B Ng (Plaintiff)
J Williams SC (Acquirers)

Solicitors:
Gilbert & Tobin (Plaintiff)
King & Wood Mallesons (Acquirers)

File Number(s):

2021/263585

Judgment

1. By Originating Process filed on 15 October 2021, the Plaintiff, Afterpay Limited (“Afterpay”) applies, under s 411 of the Corporations Act 2001 (Cth) for orders in respect of a proposed scheme of arrangement between Afterpay and the holders of its ordinary shares, relating to the acquisition of those shares by Lanai (AU) 2 Pty Ltd (“Square Acquirer”), which is a wholly owned Australian subsidiary of Square Inc (“Square”).

2. By way of background, Afterpay is an Australian public company and listed on the Australian Securities Exchange (“ASX”) and operates a global “buy now, pay later” platform serving many retailers and customers. Square is a financial services company incorporated in Delaware and listed on the New York Stock Exchange (“NYSE”), which operates through two key business segments, described as a “seller ecosystem” which offers businesses products and services to accept payments from customers, provide reporting and analytics of sales and next day cash settlement; and a “cash app ecosystem” which provides individuals several products and services to enable individuals to manage their money. Square has two classes of common stock and its Class A Shares are traded on the NYSE.

3. On 2 August 2021, Afterpay, Square and Square Acquirer entered into a Scheme Implementation Deed (“SID”) which contemplates that Square (through Square Acquirer) would acquire all of the issued shares in Afterpay under a scheme of arrangement. The proposed scheme provides that each fully paid Afterpay share would be exchanged for 0.375 of a fully paid Square Class A share (“New Square Shares”) or an interest in 0.375 of a fully paid Square Class A Share by way of an ASX CHESS Depositary Interest (“New Square CDIs”). The proposed scheme is subject to several conditions precedent as set out in clause 3.1 of the SID and disclosed in section 3.11 of the scheme booklet. An announcement as to the proposed scheme was made and the SID was released to the ASX on that day, which indicated that the proposed transaction had an implied value of approximately AUD$39 billion (or US$29 billion) based on the closing price of Square common stock on 30 July 2021.

4. I made the orders sought by Afterpay 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 Jackman and Ms Ng, who appear for Afterpay in respect of the application, and on my recent summaries of the applicable principles in Re Australian Leisure and Entertainment Property Management Ltd [2021] NSWSC 1421 and Re Intega Limited [2021] NSWSC 1434 in this judgment.

Affidavit evidence

5. Afterpay relies on the affidavit dated 15 September 2021 of Ms Colleen Platford who is a partner in the firm of solicitors acting for Afterpay in the application. Ms Platford sets out the background to the proposed scheme and exhibits the ASX announcement of the proposed scheme and the SID. By her affidavit dated 29 October 2021, Ms Elana Rubin, who is the chair of Afterpay and an independent non-executive director of Afterpay, indicates her consent to act as chair of the scheme meeting. By his affidavit dated 28 October 2021, Mr Patrick O’Sullivan, who is also an independent non-executive director of Afterpay, consents to act as chair of the scheme meeting if Ms Rubin is unable or unwilling to do so.

6. By her affidavit dated 2 November 2021, Ms Cassandra Williams, who is the Chief Enterprise Risk Officer at Afterpay and was involved in the day-to-day negotiations of the transaction with Square and Square Acquirer, addresses the background to the proposed scheme, the negotiations leading to the SID, the conditions precedent to the scheme, verification of the scheme booklet and also exhibits the proposed advertisement giving notice of the second Court hearing.

7. Afterpay also relies on the affidavit dated 1 November 2021 of Mr Craig Edwards, who is a managing director of Lonergan Edwards & Associates Limited and was engaged by Afterpay to prepare (together with Mr Jorge Resende) an independent expert report as to whether the scheme is in the best interests of Afterpay shareholders (“IER”). Mr Edwards has exhibited to his affidavit the draft IER which is proposed to be included in the scheme booklet, and confirms that he held the opinions expressed in the draft IER as at its date, that that report has been prepared in accordance with the Expert Witness Code of Conduct and that he had had regard to regulatory guidance published by the Australian Securities and Investments Commission (“ASIC”). The affidavit dated 1 November 2021 of Mr Jorge Resende, who is an associate director of Lonergan Edwards & Associates Limited and prepared the draft IER with Mr Edwards, addresses the same matters.

8. By her affidavit dated 1 November 2021, Ms Joanne Barker, who is a director of Ernst & Young Strategy and Transactions Limited and was engaged by Afterpay to prepare an independent limited assurance report on the historical financial information of Afterpay and Square and the pro forma historical financial information of the combined group of Afterpay and Square, exhibits the draft report which is proposed to be included as Attachment D in the scheme booklet and confirms she holds the opinions contained in it.

9. By her affidavit dated 3 November 2021, Ms Rachael Bassil, who is also a partner in the firm representing Afterpay in the proposed scheme, refers to communications with ASIC, including the provision of court documents and the scheme booklet to ASIC, and with ASX.

10. Afterpay also reads the affidavit dated 1 November 2021 of Christopher Paul Dedrick, who is a Relationship Manager with Computershare Investor Services Pty Limited (“Computershare”). He gives evidence of the manner in which the scheme booklet and other information will be sent to Afterpay shareholders and of the manner in which the virtual scheme meeting will be held and the poll will be conducted at that meeting.

11. By his affidavit dated 1 November 2021, Mr Vishal Dave, who is the Counsel Lead of the Mergers and Acquisitions and Antitrust legal team at Square, gives evidence of the component parts of the break fee to be paid to Square under the SID if the proposed scheme does not proceed in specified circumstances. By an affidavit dated 3 November 2021, Mr Anthony Boogert, who is a partner in the Australian firm of solicitors acting for Square and Square Acquirer, gives evidence of the verification of the Square Information (as defined in the scheme booklet) and also exhibits the Deed Poll made in favour of scheme shareholders and executed by Square and Square Acquirer. By his affidavit dated 29 October 2021, Mr Eric Klinger-Wilensky, who is a partner in a law firm in Delaware in the United States of America, exhibits his opinion as to the execution of the Deed Poll by Square.

Matters relevant to convening the scheme meeting

12. The Court will order the convening of the scheme meeting and approve the draft explanatory statement for the scheme if it is satisfied that Afterpay is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the scheme booklet 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 statement 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) 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 BIS Finance Pty Ltd [2017] NSWSC 1713 at [20].

13. The Court will not ordinarily summon a meeting unless a scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed, although it “does not ordinarily go very far” into that question at the first Court hearing: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; (1993) 112 ALR 627; (1993) 10 ACSR 230; [1993] HCA 15; Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44]; Re CSR Ltd (2010) 183 FCR 358; (2010) 265 ALR 703; (2010) 77 ACSR 592; [2010] FCAFC 34 at [58]. Mr Jackman also refers to Farrell J’s summary of the matters relevant to the exercise of the Court’s discretion in Re Associated Advisory Practices Limited [2013] FCA 761 at [22] as follows:

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: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504. 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): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Limited at 504-505. 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: In Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The Court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72.

14. The Court will assess at the first Court hearing whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309 at [23]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[27]. The Court is not required to be satisfied that no better scheme could have been proposed, and the question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re DUET Finance Ltd above at [14].

15. I am satisfied that Afterpay is a Part 5.1 body, the proposed scheme is an arrangement within the meaning of s 411 of the Act, there is no reason to doubt that the scheme booklet provides proper disclosure to Afterpay shareholders, and there has been a verification and due diligence process. 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) 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

Circumstances in which Afterpay board may change its recommendation in respect of the scheme

16. An issue arises in respect of cl 6.1(a) of the SID, which deals with the circumstances in which the Afterpay board may change its recommendation in respect of the scheme. That clause provides that the Afterpay board must make and not withdraw or change its recommendation in favour of the scheme unless, relevantly, there is an Afterpay Superior Proposal (as defined) and the Afterpay board determines “in good faith and acting reasonably” (emphasis added), having received legal advice from its external legal advisers (who must be reputable advisers experienced in transactions of this nature) that failing to do so would constitute a breach of their fiduciary or statutory duties to Afterpay Shareholders (as defined). A second aspect of that clause permits a change of recommendation where the independent expert concludes that the scheme is not in the best interests of Afterpay shareholders, or adversely changes its previously given opinion that the scheme is in the best interests of Afterpay shareholders.

17. It appears that the restriction in cl 6.1 of the SID, on the circumstances in which the recommendation of the Afterpay directors may be changed, is uncontroversial so far as it permits a change of recommendation which is made in good faith and after obtaining the relevant legal advice. However, ASIC raised a concern in respect of the additional words "and acting reasonably" in that clause in its letter dated 3 November 2021 indicating that it did not seek to be heard at this first Court hearing and reserving its position under s 411(17) of the Act to the second Court hearing in the usual way. ASIC there noted that it had raised concerns about the operation of cl 6.1(a) of the SID which, it indicated, appeared to confer an additional "reasonableness obligation" on the Afterpay board in ascertaining its fiduciary and statutory duties. ASIC observed that terms drafted in this way have previously been "deemed inappropriate" for inclusion in scheme implementation deeds, and referred to a decision of the Takeovers Panel in Re Ross Human Directions Ltd [2010] ATP 8 in that respect.

18. ASIC also noted that, in response to the concerns that it had raised, additional disclosure had been made in the scheme booklet, at section 3.11(b), which indicated that, if Square sought to enforce cl 6.1(a) of the SID, it would give no effect to the words "acting reasonably." The relevant disclosure in section 3.11(b) of the scheme booklet is as follows:

“Clause 6.1 of the Scheme Implementation Deed states that, subject to the exclusivity provisions, the Afterpay Board must make and not withdraw or change its recommendation in favour of the Scheme unless:

•   There is an Afterpay Superior Proposal and the Afterpay Board determines in good faith and acting reasonably, having received legal advice from its external legal advisers (who must be reputable advisers experienced in transactions of this nature) that failing to do so would constitute a breach of their fiduciary or statutory duties to Afterpay shareholders...”

19. That summary accurately paraphrases the relevant clause, and the summary then deals with the consequence of a change in the independent expert's opinion. The scheme booklet then states that:

“Square has acknowledged to Afterpay that, in circumstances where it sought to enforce cl 6.1(a) of the Scheme Implementation Deed, it would give no effect to the words 'acting reasonably' in cl 6.1(a) of the Scheme Implementation Deed."

20. I pause to note that that statement would plainly be understood as being made by, or at least endorsed by Square, although it occurs in a scheme booklet which is issued by Afterpay, because that scheme booklet includes a letter from Square's chief executive officer and chairman indicating Square's role in the transaction, and evidence has been led in this application as to the verification process which Square has adopted, directed, inter alia, to confirming the truth of the statements contained in the scheme booklet so far as they relate to it. I will return to the significance of that matter, which is not controversial as between Square and Afterpay, below.

21. Returning to ASIC's letter, ASIC then indicated its view, which has some attraction, that contractual matters of this kind would ordinarily be best dealt with through making amendments to the terms of the SID, implicitly, by contrast with making a statement in the scheme booklet that a party would not rely on an aspect of its rights under the SID. However, ASIC indicates that, in the particular circumstances, it has decided to provide an indication of its intent having regard to specified matters, including commercial reasons why the SID cannot be amended, by reason of a proxy solicitation process which has already occurred in the United States, where such an amendment would require an amended proxy statement to be re-sent to Square shareholders; Square has confirmed to Afterpay's board that it will not enforce cl 6.1(a) of the SID in a manner that gives effect to the words "acting reasonably"; and an email from Square's US legal advisers has in turn confirmed that position directly to ASIC. The confirmation provided by Square to Afterpay's board is not itself in evidence, but it seems to me that the substance of that confirmation is recorded in the scheme booklet, and I have no difficulty proceeding on the basis that it has been given. The confirmation provided by Square's US legal advisers to ASIC is in evidence. On that basis, while ASIC has reserved its position in relation to those matters, including in respect of whether to give a confirmation at the second hearing under s 411(17)(b) of the Act, it has indicated that it did not currently propose to appear to make submissions or intervene to oppose the scheme at this first Court hearing.

20. It seems to me that, notwithstanding the view which ASIC has formed in that respect, it is desirable that the Court also address this matter. I am satisfied that this matter does not give rise to any reason not to convene the scheme meeting or to deprive Afterpay shareholders of the opportunity to consider a scheme which contemplates the acquisition of their shares at a premium, for several reasons.

21. The first, which I note for completeness, is that it is not apparent that the decision in Re Ross Human Directions Ltd above addresses the particular issue which arises here. The clause which was considered by the Takeovers Panel in that case was a “no talk” provision in a scheme implementation agreement, and the Takeovers Panel there disapproved the narrowing of the exception to that provision, which would only allow the board to address a competing proposal where it was acting both in good faith and also to satisfy what it "reasonably" considered to be its fiduciary or statutory duties. By contrast, cl 6.1(a) of the SID which includes the words "acting reasonably", deals with a different matter, a change of recommendation by Afterpay directors, not with an exception to an exclusivity provision. As I noted above the exclusivity provisions in the SID and the exclusions from them are not here limited in the manner disapproved by the Takeovers Panel in Ross Human Directions Ltd above. I recognise that it may be arguable, by an extension of the view that the Takeovers Panel there took, that an “acting reasonably” requirement should also not apply to a change of recommendation, although that is not what the Takeovers Panel there decided. I need not address that possibility given the other views which I reach below.

22. The decision in Ross Human Directions Ltd above was considered, albeit briefly, in Re AIRR Holdings Ltd [2019] FCA 2180, where ASIC raised objection to a "reasonableness limitation" in a fiduciary carve-out from an exclusivity provision, and referred to Ross Human Directions Ltd above in that context. Besanko J concluded that the limitation did not confine the exception in a way that caused any difficulty, and did not need to address the approach taken in Ross Human Directions Ltd. In Real Energy Corporation Ltd [2020] FCA 1634, Yates J again referred to that decision, again in the context of an exception to an exclusivity provision, but also did not need to address the substance of the issue, where the acquiring entity and the relevant company had there agreed to execute a deed of variation which amended the reasonableness requirement in the exception to the exclusivity provision.

23. Second, the reference to “acting reasonably" in cl 6.1(a) of the SID does not have any apparent impact upon other provisions of the SID. In particular, cl 9 of the SID contains exclusivity provisions, which include, variously, “no shop”, “no talk” and due diligence provisions in relatively common form, which I will address below. An exception to cl 9.3 dealing with the no talk requirement and cl 9.4 dealing with due diligence information, applies, relevantly, where the Afterpay board has determined, in good faith after receiving advice from its financial and external legal advisers that an Afterpay Competing Transaction (as defined) is or would reasonably be expected to become an Afterpay Superior Proposal (as defined) and that failing to respond to that transaction would constitute a breach of the Afterpay board's fiduciary or statutory obligations, subject to a further obligation on Afterpay that is not presently relevant. That exception is not limited by any requirement that the board be "acting reasonably" in forming that view, although it would no doubt be expected that, in the ordinary course, the board would act reasonably in forming any such view. Clause 10 of the SID in turn provides for the circumstances in which Afterpay would be required to pay a substantial break fee to Square, but the inclusion of the words "acting reasonably" in cl 6.1(a) of the SID has no apparent effect on the operation of that clause, or the circumstances in which an exclusion from it would be available. Clause 13 of the SID provides for termination of the scheme in certain circumstances, including where there is an "Afterpay Board adverse recommendation change" as formulated in cl 13.1(b), but that provision is also not affected by the inclusion of the words "acting reasonably" in cl 6.1(a) of the SID. It appears that the words “acting reasonably” in cl 6.1(a) of the SID will therefore only make any practical difference if Square were to seek to enjoin a change of recommendation by the Afterpay board, or claim damages for a breach of that clause, notwithstanding that the Afterpay board was acting in good faith and had received legal advice from the relevant legal advisers, on the basis that the Afterpay board was not "acting reasonably" in changing that recommendation. I return below to Square’s confirmation that it would not rely on those words in enforcing that provision.

24. Third, it seems to me that the application of an “acting reasonably” standard has limited significance in the context of cl 6.1(a) of the SID in this scheme. That clause, as I noted above, restricts the circumstances in which the Afterpay board may change its recommendation, but the words "acting reasonably" will only confine the power of the Afterpay board to change that recommendation if that requirement was not satisfied, notwithstanding that the Afterpay board had reached the determination that there was an Afterpay Superior Proposal (as defined) in good faith (as the clause also requires), and had received legal advice from its external legal advisers (having the requisite qualities) that their failure to withdraw or change the recommendation would constitute a breach of their fiduciary or statutory duties to Afterpay shareholders. It might be thought that it is unlikely that, in a substantial transaction, which has significant implications for Afterpay and its shareholders, a board that was acting in good faith, and had taken legal advice of that character, would then act unreasonably in forming the view whether there was a relevant Afterpay Superior Proposal which required a withdrawal or change of recommendation.

25. Even assuming that position is notionally possible, while unlikely as a matter of fact, it seems to me that the words "acting reasonably" would still add little, if anything, to the statutory duty and general law duty of care and diligence owed by the Afterpay directors, which would likely impose a need to act reasonably in respect of a major decision having significant implications for Afterpay and its shareholders. That suggests that, perhaps contrary to the position which ASIC has taken, the requirement that the Afterpay board "act reasonably" in cl 6.1(a) of the SID likely adds little to the board's existing statutory and general law duties. I recognise that it may, notionally, add an element of litigation risk to a decision of the Afterpay board to withdraw or change a recommendation, so far as it raises a possibility for argument as to whether the board was "acting reasonably" in doing so, but it is difficult to see that such an argument would not already be available in respect of the board's general law and statutory duties to act with care and diligence.

26. Fourth, and decisively, it seems to me clear that Square has represented that, whether or not the words "acting reasonably" in cl 6.1(a) of the SID would have made any difference to the obligations of Afterpay’s board, it would give no effect to them in seeking to enforce cl 6.1(a) of the SID. That is the statement made in the scheme booklet, to which Square's CEO and chair has contributed a letter to shareholders; the evidence is that it has been verified by Square; it appears to reflect the statement separately provided to Afterpay's board; and it is consistent with the confirmation that Square's US legal advisers have provided to ASIC. Mr Jackman, who appears for Afterpay, and Mr Williams, who appears for Square, both accept that that statement would, in the unlikely event that Square sought to depart from it, give rise to an estoppel which would prevent it from doing so, or to grounds for statutory relief under the misleading and deceptive conduct provisions in Australian law, which would prevent Square departing from that representation.

27. It seems to me that, in these circumstances, the confirmation provided in the scheme booklet, and the other matters to which I have referred, are such that the Court can comfortably proceed on the basis that the words "acting reasonably" in cl 6.1(a) of the SID give rise to no reason that the scheme should not be put to Afterpay shareholders for its approval, and no reason for the Court not to make the orders that are sought in that respect.

Exclusivity provisions

30. As I noted above, cl 9 of the SID imposes several restrictions and obligations on Afterpay in relation to negotiations with third parties. Clause 9.1 of the SID is directed to “No existing discussions” and Mr Jackman points out that this clause confirms that Afterpay is not currently in negotiations or discussions in respect of any Afterpay Competing Transaction (as defined) with any person and does no more than require Afterpay to enforce its obligations under any confidentiality agreement entered into with a third party and to request the return of and terminate access to Afterpay’s confidential information from the date of the SID (2 August 2021). The SID also includes “no shop” (cl 9.2), “no talk” (cl 9.3), “no due diligence” (cl 9.4) restrictions, a “notification of approach” obligation (cl 9.7) and a “matching right” (cl 9.8). Mr Jackman submits, and I accept, that that exclusivity provisions in (or substantially in) the form of cl 9 of the SID are now commonplace in schemes of arrangement: see Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207 at [23]. I also recognise that matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive, where the terms of any competing proposal would likely need to be disclosed by Afterpay in any event under its continuous disclosure obligations and the matching right process under cl 9.8 of the SID corresponds to the course that a prospective bidder or merger proponent would expect Afterpay to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Ltd above at [24].

31. The case law indicates that an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should also be subject to a fiduciary carve-out, although the case law has also accepted that a “no shop” restriction need not be subject to a fiduciary carve-out: Re DUET Management Company 1 Ltd [2013] NSWSC 817 at [24]; Re Bigair Group Ltd [2016] FCA 1296 at [21]; Re Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348 at [44]. The “no talk” and “no due diligence” restrictions and the “matching right” are here subject to the Afterpay board’s fiduciary or statutory obligations under cll 9.5(b) and 9.8(c)-(g) of the SID and cl 9.9 of the SID records that each of Afterpay and Square acknowledges that it has received legal advice on the SID and the operation of cl 9 of the SID. Ms Williams’ evidence is that that the Afterpay board and the board sub-committee had discussed these provisions (Williams 2.11.21 [28]) and that these provisions were included in the SID following arm’s length commercial negotiations in which Afterpay and Square were represented in their negotiations by legal and financial advisors (Williams 2.11.21 [29]-[30]). Exclusivity provisions must also 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 Villa World Ltd above at [23]. These provisions are disclosed in section 3.11 of the scheme booklet (pages 51 to 52) and the terms of the SID, including cl 9, were also disclosed as part of the ASX announcement of the scheme. The Court will also consider whether exclusivity provisions operate for no more than a reasonable period capable of precise ascertainment. I accept that the exclusivity period is here within the range of periods accepted in other cases. The exclusivity provisions do not provide any reason not to order the convening of the scheme meeting.

Break fee

32. As I noted above, cl 10.2 of the SID provides for Afterpay to pay Square a Break Fee, as defined in the SID to mean the substantial amount of A$385 million, in specified circumstances, including if Afterpay or Square validly terminate the SID in accordance with cl 13.1(e) or (f) of the SID (“Afterpay Break Fee”). Clause 11.2 of the SID provides for Square to pay to Afterpay the Break Fee in specified circumstances, including if Afterpay validly terminates the SID in accordance with cl 13.1(e) of the SID (“Reverse Break Fee”). The Afterpay Break Fee and the Reverse Break Fee and the circumstances in which they would be paid are disclosed in section 3.11(i) of the scheme booklet. Mr Jackman also points out that, as at the date of the SID (2 August 2021), the Break Fee approximated the Takeover Panel’s guidance of up to 1% of the equity value of Afterpay which was approximately AUD$39 billion based on the then closing price of Square common stock on 30 July 2021 (Williams 2.11.21 [33]). As at 29 October 2021 (being the “last practicable date” prior to the date of the scheme booklet), Afterpay’s total equity value was approximately AUD$36.703 billion as implied by the scheme consideration of A$126.39 per Afterpay share and based on Afterpay’s share capital as at 29 October 2021 of 290,398,153 shares (Williams 2.11.21 [34]). As at 29 October 2021, the Break Fee slightly exceeded the Takeover Panel’s guidance of 1%, being 1.0489% of Afterpay’s total equity value as at 29 October 2021 (Williams 2.11.21 [34]).

33. Mr Jackman submits that break fees are common features in schemes of arrangements and will be permitted unless the amount of the break fee is such that it could influence voting at the meeting to be convened or if there are some other unusual circumstances, and that neither the Afterpay Break Fee or the Reverse Break Fee provide any reason not to convene the scheme meeting or approve the scheme booklet for dispatch. Mr Jackman submits, and I accept, that the Takeover Panel’s guidance of 1% of total equity is not determinative, and courts have previously ordered a meeting to consider a scheme notwithstanding the inclusion of a break fee that exceeds, or marginally exceeds, the 1% guidance: Re Cytopia Ltd [2009] VSC 560 at [12]-[18] (allowing an unusually high break fee); Re Isentia GroupLtd [2021] NSWSC 910 at [21]. Mr Jackman also points out that the obligation to pay the Afterpay Break Fee is not triggered by Afterpay shareholders failing to approve the scheme (Williams 2.11.21 [25]; Dave 1.11.21 [21]) and is not a disincentive to shareholders in their consideration of the proposed scheme: Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; [2007] FCA 2078.

34. Mr Jackman also submits that the Afterpay Break Fee and the Reverse Break Fee was each agreed where Square and Afterpay believe that the scheme will provide significant benefits to Square, Afterpay and their respective shareholders and Square and Afterpay acknowledge that, if they enter into the SID and the scheme is not implemented, Square and Afterpay and its shareholders will incur significant costs including those set out in cl 10.5 (Square’s costs) and cl 11.5 (Afterpay and shareholders’ costs) of the SID. He points to evidence that each party requested that the relevant clause concerning the payment of the break fee by the other be included in the SID, without which neither party would have entered into the SID; the Square board and the Afterpay board each believe that it is appropriate for both parties to agree to the payment of the Break Fee in clause 10 and 11 to secure the other party’s participation in the scheme; and both parties have received legal advice on the SID and the operation of cll 10 and 11 of the SID; and each of cll 10 and 11 of the SID were negotiated between the parties during the course of arm’s length negotiations in which the parties were represented by experienced legal and financial advisers, consistent with the approach noted in Re APN News Media Ltd (2007) 62 ACSR 400; [2007] FCA 770.

35. Mr Jackman also points to the parties’ agreement that the respective Break Fees compensate the relevant party for the costs set out in cll 10.5 and 11.5 of the SID, which are of a nature that cannot be accurately quantified and that a genuine pre-estimate of those costs would equal or exceed the Break Fees. Mr Dave also gives evidence of the nature of the costs supporting the Afterpay Break Fee in the manner contemplated in Re Coca-Cola Amatil Pty Ltd [2021] NSWSC 270 at [24] and cl 11.5 of the SID broadly identifies the components of the Reverse Break Fee. While the Afterpay Break Fee and Reverse Break Fee are large in absolute terms, this reflects the large size of the proposed transaction. They are otherwise consistent with the nature of break fees accepted in the case law and provide no reason not to convene the scheme meeting.

Afterpay minority interests

36. Mr Jackman draws attention to the fact that has several “Minority Interests” on issue (Williams 2.11.21 [46]-[59]), which are described in section 4.13 of the scheme booklet. These comprise the “Matrix Convertible Notes” which were issued by Afterpay’s US subsidiary to Matrix Partners X L.P and Weston & Co X LLC, which may be converted into Afterpay shares in certain circumstances; the “Clearpay Call Option” arising out of Afterpay’s acquisition of 90% of the issued shares in Clearpay from ThinkSmart Limited in August 2018; the “Pagantis Convertible Note” which is a convertible note issued in March 2021 by one of Afterpay’s European Union subsidiaries, which may be converted to Afterpay shares in certain circumstances; and “SGX Notes” which are zero coupon convertible notes listed on the Singapore Exchange on 15 March 2021 with a maturity date of 12 March 2026, which may also be converted into Afterpay shares in certain circumstances.

37. Clause 5.10(a) of the SID requires Afterpay to use all reasonable endeavours to ensure that, by the Record Date (as defined), there are no outstanding Minority Interests that are not owned, directly or indirectly by Afterpay. Clause 5.10(d) of the SID provides that if, despite Afterpay’s reasonable endeavours, there are outstanding Minority Interests that are not owned directly or indirectly by Afterpay by the Record Date, that circumstance does not constitute a breach of the SID or give rise to the failure of any condition precedent or give rise to any right of termination of the SID. Section 4.13 of the scheme booklet discloses that Afterpay is currently in discussions with the holders of each of the Afterpay Minority Interests prior to the Record Date. Ms Williams’ evidence is that, to the extent any Afterpay shares are issued to any holders of Afterpay Minority Interests, those shares will be treated like other Afterpay shares under the scheme as if those shares were held by a scheme participant (as defined), and the Afterpay Minority Interests will otherwise be dealt with in accordance with the terms of the relevant documents governing the Minority Interest (Williams 2.11.21 [46]). I notes this matter which seems to me to give rise to no reason not to convene the scheme meeting

Scheme consideration and treatment of Ineligible foreign shareholders

38. Mr Jackman points out that, if the scheme is approved, scheme participants will be entitled to the scheme consideration as summarised at section 3.1(c) of the scheme booklet. If the scheme participant’s registered address is outside of Australia or New Zealand and the scheme participant is not otherwise an Ineligible Foreign Shareholder (as defined), that scheme participant will receive in exchange for each of its Afterpay Shares, 0.375 New Square Shares, unless that scheme participant elects to receive New Square CDIs in specified manner, so that it will then receive 0.375 New Square CDIs. If the scheme participant’s registered address is within Australia or New Zealand, that scheme participant will receive in exchange for each of his, her or its Afterpay shares, 0.375 New Square CDIs, unless it elects to receive New Square Shares in a specified manner so that it will receive 0.375 New Share Shares. In the result, shareholders other than Ineligible Foreign Shareholders have an election to receive the scheme consideration either in the form of New Square Shares or New Square CDIs.

38. Mr Jackman also addresses the specified process for dealing with Afterpay shares held by an Ineligible Foreign Shareholder, which involves the common process of the issue of the New Square Shares to which the Ineligible Foreign Shareholder would be entitled to a nominee and sale of those shares, so that each Ineligible Foreign Shareholder receives their proportion of the net proceeds of sale. The proposed treatment of Ineligible Foreign Shareholders is disclosed at sections 3.2 and 3.5 of the scheme booklet and is also footnoted in the scheme booklet to references to the scheme consideration. The proposed approach for treatment of ineligible foreign scheme shareholders in this scheme is generally consistent with the approach taken in previous cases and does not give rise to any reason not to convene the scheme meeting. Mr Jackman submits, and I accept, that Afterpay shareholders who are Ineligible Foreign Shareholders under the scheme do not constitute a separate class for the scheme meeting: Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 at [9]-[13]; Re TPG Telecom Ltd [2020] NSWSC 772 at [21].

Afterpay Employee Incentives and consequential interests in directors’ recommendation

40. As at 29 October 2021, Afterpay had in place a number of equity and employee incentive plans (“Afterpay Employee Incentives”) which are disclosed in section 4.10 of the scheme booklet (Williams 2.11.21 [39]-[40]). Clause 4.8 of the SID deals with the treatment of each of the awards issued pursuant to the Afterpay Employee Incentives and outstanding on the Effective Date and that matter is addressed in section 4.11 of the scheme booklet. The awards under any Afterpay Employee Incentive plan will either be exercised, vested, accelerated, cancelled, forfeited or the subject of agreement with Square prior to implementation of the proposed scheme (Williams 2.11.21 [42]).

41. Messrs Eisen and Molnar, who are the co-CEOs and Managing Directors of Afterpay, have been issued options under an Afterpay Employee Incentive plan and will accordingly receive a benefit if the scheme proceeds namely in the treatment of their options (Williams 2.11.21 [60], [63]). They also join in the Afterpay board’s unanimous recommendation that Afterpay shareholders vote in favour of the scheme in the absence of a Superior Proposal (as defined) and subject to the independent expert’s continuing to conclude that the scheme is in the best interests of Afterpay shareholders. The nature and amount of the benefit to Messrs Eisen and Molnar if the scheme proceeds is disclosed in the scheme booklet as footnote 1 in section 10.1 as follows:

“The Co-CEOs, Anthony Eisen and Nick Molnar, each hold 165,203 Afterpay Options (together the Co-CEO Options).  Consistent with the manner in which each other Afterpay Option will be treated (as set out in section 4.11(b) of this Scheme Booklet), the Co-CEO Options held by Anthony Eisen and Nick Molnar will vest immediately following the Effective Date on a “pro rata basis” based on the proportion of the then-current vesting period that has elapsed at the Effective Date (measured based on the number of completed months).  Assuming the Effective Date is 10 December 2021, this means that approximately 242,654 Co-CEO Options in aggregate will vest and become exercisable into Afterpay Shares.  Based on the implied value of the Scheme Consideration as at 29 October 2021, being A$126.39 per Afterpay Share, and taking into account the exercise price of the Co-CEO Options, Anthony Eisen and Nick Molnar would each receive approximately $9,612,242 worth of Afterpay Shares issued as a result of the exercise of the Co-CEO Options. Any unvested Co-CEO Options remaining will be forfeited and, on the Implementation Date, Square will grant Square Options of comparable value to the forfeited Afterpay Options.  For more information on the treatment of Afterpay Options refer to section 4.11(b) of the Scheme Booklet.”

42. A similar footnote, again disclosing the estimated amount of the benefit, appears in respect of other references in the scheme booklet to the Afterpay board’s recommendation in favour of the scheme, and Afterpay shareholders are invited to have regard to the benefit to Messrs Eisen and Molnar when considering the Afterpay board’s recommendation to vote in favour of approving the scheme. Mr Jackman submits that, given the disclosure of the benefit to Messrs Eisen and Molnar in the scheme booklet, “they should not be prevented from making their recommendation to shareholders in relation to the scheme in accordance with the Afterpay Board’s disclosure obligations under the [Act] and the Corporations Regulations and the ordinary expectations of Afterpay’s shareholders.”

43. 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 Messrs Eisen and Molnar do not prevent them from making a voting recommendation to Afterpay shareholders where that interest is sufficiently disclosed in the scheme booklet and Afterpay shareholders may take it into account in determining the weight to give to that recommendation. This matter also does not provide any reason not to order the convening of the scheme meeting.

Deemed warranty

44. Clause 5.6 of the SID contains a deemed warranty by which scheme participants through Afterpay are taken to have warranted to Square Acquirer that their shares are fully paid and free from all Encumbrances (as defined in the SID) and that they have full power and capacity to sell and to transfer their shares, including any rights and entitlements attaching to those shares to Square Acquirer under the scheme. Mr Jackman points out that the SID was disclosed as part of the ASX announcement of the scheme and the effect of cl 5.6 of the SID is also disclosed in section 10.9 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 (2007) 62 ACSR 400; [2007] FCA 770 at [57]–[63]; Re ABB Grain Ltd [2010] FCA 1309 at [34]–[39]; Re Medical Australia Ltd [2017] FCA 1304 at [28]; Re DUET Management Company 1 Ltd above at [23]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]; Re Windlab Ltd [2020] NSWSC 571 at [21]; Re rhipe Ltd [2021] NSWSC 1170 at [26].

Performance Risk

45. The case law has addressed the question of “performance risk”, namely any risk that the acquirer will not comply with its obligation to pay the scheme consideration to shareholders of the scheme company: Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]; Re Ellerston Global Investments Ltd above at [29]. Mr Jackman points out that, pursuant to cl 5.3 of the scheme, Afterpay shares will only be transferred to Scheme Acquirer following the issue and provision of the scheme consideration in accordance with cl 6 of the scheme. Mr Jackman also points out that Square’s and Square Acquirer’s performance of their obligations under the scheme are supported by the deed poll that they have executed in favour of each scheme shareholder (Ex ACB-1, Tab 5). That deed poll is governed by the laws of Victoria and Square submits to the non-exclusive jurisdiction of the courts of Victoria by cl 10.1 of that deed poll). In binding Square and Square Acquirer as non-parties to the scheme to perform their obligations under the scheme, the deed poll assists in managing performance risk: Simavita Holdings above at [43]-[44].

46. Where a deed poll is executed by a foreign company, a practice has developed of providing an affidavit from an appropriate lawyer in the jurisdiction of incorporation providing due execution: Re Staging Connections Group [2015] FCA 1012 at [44]-[48]; Re Veda Group Ltd [2015] FCA 1506 at [30]-[33]. Mr Klinger-Wilensky’s evidence is that, as a matter of Delaware law, Square has the requisite corporate power and authority to execute, deliver and perform its obligations under the deed poll and Square has duly executed the deed poll (Ex ESKW-1, Tab 4). I am satisfied that the structure of the scheme and the deed poll sufficiently addresses performance risk.

Dispatch of scheme materials and conduct of virtual scheme meetings

47. The evidence addresses the dispatch of scheme documents by electronic means or hard copy as appropriate. Mr Jackman points out that, due to the uncertainty and potential health risks associated with the COVID-19 pandemic, the scheme meeting will be held virtually on an online platform through Computershare (Williams 2.11.21 [85]-[86]; Dedrick 1.11.21 [16]-[24]) and that Afterpay’s constitution permits meetings being held in two or more places using technology (Williams 2.11.21 [84]) and the same online platform proposed to be used for the scheme meeting was used for Afterpay’s annual general meeting in November 2020 (Dedrick 1.11.21 [17], [24]). Mr Jackman also points out that the courts have made orders for virtual scheme meetings throughout the pandemic: Re Isentia GroupLtd above at [26]; Re Spark Infrastructure RE Ltd [2021] NSWSC 1385 at [47]. I accept that online attendance at the meetings is permitted by s 253Q of the Act provided the technology used gives members as a whole a reasonable opportunity to participate without physically being present in the same place.

Section 411(17) of the Corporations Act

48. In accordance with the usual practice, the Court will address the question raised by s 411(17) of the Act on an application to approve a scheme at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37].

Exemption under s 3(a)(10) of the Securities Act 1933 (US)

49. Mr Jackman foreshadows that, if the scheme is approved by the Court, Square intends to rely on that approval to qualify for exemption from the requirements of the Securities Act 1933 (US) under s 3(a)(10) of that Act in connection with the New Square Shares that will be issued pursuant to the scheme (Dave 1.11.2021 [28]). Mr Jackman recognises that one of the requirements to rely on that exception is that Square (as the issuer of the securities) advises this Court before the hearing that Square will rely on the exemption if Court approves the scheme. I note that advice and the application of the exemption and the inclusion of a notation on any orders made by this Court approving the scheme can otherwise be addressed at the second Court hearing.

Orders

50. For these reasons, I was satisfied that the scheme was an arrangement for the purposes of s 411 of the Corporations Act and that, having regard to the evidence and matters to which I referred above, an order should be made convening the scheme meeting and approving the scheme booklet for distribution to shareholders. I made the orders sought by Afterpay at the conclusion of the first hearing.

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Decision last updated: 10 November 2021