Re Health House International Limited
[2023] WASC 133
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RE HEALTH HOUSE INTERNATIONAL LIMITED; EX PARTE HEALTH HOUSE INTERNATIONAL LIMITED [2023] WASC 133
CORAM: HILL J
HEARD: 21-22 MARCH 2023
DELIVERED : 22 MARCH 2023
PUBLISHED : 28 APRIL 2023
FILE NO/S: COR 30 of 2023
MATTER: IN THE MATTER OF HEALTH INTERNATIONAL LIMITED
EX PARTE
HEALTH HOUSE INTERNATIONAL LIMITED
Plaintiff
Catchwords:
Corporations law - Scheme of arrangement - Application for orders convening scheme meeting under s 411(1) of the Corporations Act 2001 (Cth) - Whether requirements to order scheme meeting are satisfied - Orders made convening scheme meeting
Legislation:
Corporations Act 2001 (Cth) s 411(1), s 412(1)(a), s 1319
Corporations Regulations 2001 (Cth) sch 8
Supreme Court (Corporations) (WA) Rules 2004 (WA) r 3.2
Result:
Orders made convening scheme meeting
Category: B
Representation:
Counsel:
| Plaintiff | : | A J Papamatheos |
Solicitors:
| Plaintiff | : | Blackwall Legal |
Case(s) referred to in decision(s):
Re Amcom Telecommunications Ltd [2015] FCA 341
Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400
Re CannPal Animal Therapeutics Ltd [2021] WASC 37
Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358
Re David Jones Ltd [No 2] [2014] FCA 720; (2014) 101 ACSR 381
Re Doray Minerals Ltd [2019] WASC 57
Re DUET Management Company 1 Ltd [2013] NSWSC 817; (2013) 95 ACSR 34
Re Investa Properties Ltd [2007] FCA 1104
Re Kangaroo Resources Ltd [2018] WASC 327
Re Macquarie Private Capital A Ltd [2008] NSWSC 323
Re Nusantara Resources Ltd [2021] WASC 334
Re Nzuri Copper Ltd [2019] WASC 189
Re Oklo Resources Ltd [2022] WASC 289
Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20
Re Ozgrowth Ltd [2022] WASC 107
Re Pacific Energy Limited [2019] WASC 443
Re PetroNor E&P Ltd [2021] WASC 426
Re Piedmont Lithium Ltd [2021] WASC 76
Re Saracen Mineral Holdings Ltd [2020] WASC 483
Re Scarborough Equities Ltd [No 2] [2009] FCA 484
Re SRG Ltd [2018] FCA 1092
Re Swick Mining Services Ltd [2022] WASC 79
Re Wesfarmers Ltd [2018] WASC 308
Re Wesfarmers Ltd [No 2] [2018] WASC 357
Re Western Areas Ltd [2022] WASC 193
HILL J:
The plaintiff, Health House International Limited (Health House), is an Australian public company listed on the Australian Securities Exchange (ASX). On 20 November 2022, Health House entered into a Scheme Implementation Deed (SID) with Creso Pharma Limited (Creso) (Scheme).[1] Under the Scheme, it is proposed that each shareholder would receive one fully paid ordinary share in Creso and 0.25 of a fully paid option in Creso for approximately every 2.9 fully paid shares held in Health House, subject to an adjustment based on the amount then owing under a Loan Facility Agreement entered into between the parties (Scheme Consideration). If the Scheme is implemented, Health House will become a wholly owned subsidiary of Creso.
[1] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW26'.
By an originating process dated 28 February 2023, Health House sought orders pursuant to s 411 and s 1319 of the Corporations Act 2001 (Cth) (Act) convening a meeting of its members to consider the proposed scheme of arrangement. The application came before me on 21 March 2023. At the conclusion of the hearing, I adjourned the application to 22 March 2023 to enable Health House to finalise its discussions with the Australian Securities and Investments Commission (ASIC) in respect of matters that had been raised by ASIC.[2]
[2] ts 2.
On 22 March 2023, after hearing further submissions from counsel for Health House, I made orders pursuant to s 411(1) of the Act to convene a meeting of Health House's members to consider and vote on the proposed Scheme. Orders were also made approving the distribution of a Scheme booklet to Health House's shareholders under s 412(1)(a) of the Act as well as ancillary orders as to the convening and conduct of the Scheme meeting under s 1319 of the Act.
In making those orders, I stated that I would subsequently publish written reasons for my orders. These are my reasons for decision.
Evidence for the first court hearing
For the purpose of the first court hearing, Health House read 11 affidavits, which are briefly described below.
(a)An affidavit of David Colin Wheeler, an executive director of Health House, filed 28 February 2023. Mr Wheeler gave a brief overview of Health House, the proposed Scheme, and the loan facility agreement executed with Creso on 5 September 2022, and described the drafting and verification process of the Scheme booklet. Annexed to Mr Wheeler's affidavit, among other things, were a company search of Health House, a copy of its constitution, and lists of security holders, as well as copies of the SID (and the first deed of variation), the proposed Scheme, the loan facility agreement (and various deeds of variation) and the draft Scheme booklet.
(b)A second affidavit of Mr Wheeler filed 10 March 2023. Mr Wheeler is nominated as the chairperson of the Scheme Meeting. By his affidavit, Mr Wheeler consented to act as chairperson of the Scheme meeting and provided the necessary disclosures required by r 3.2 of the Supreme Court (Corporations) (WA) Rules 2004 (WA) (Corporation Rules).
(c)An affidavit of Timothy Ryan Slate, the company secretary of Health House, filed 10 March 2023. Mr Slate is nominated as the alternate chairperson of the Scheme Meeting. By his affidavit, Mr Slate consented to act as alternative chairperson of the Scheme meeting and provided the necessary disclosures required by r 3.2 of the Corporation Rules.
(d)An affidavit of Jamie George Michael Ogilvie filed 14 March 2023. Mr Ogilvie is a partner at Blackwall Legal LLP, the solicitors for the plaintiff. His affidavit annexed copies of the email correspondence between his firm and ASIC between December 2022 and March 2023, and confirmed the draft Scheme booklet was lodged with ASIC on 13 January 2023.
(e)An affidavit of Peter Gray filed 14 March 2023. Mr Gray is a director at Moore Australia, the independent expert appointed by Health House to provide an opinion on the proposed Scheme. His affidavit annexed the profiles of himself and Ms Carmin Johnson, an Associate Director at Moore Australia, as well as a copy of the Independent Expert Report.
(f)A second affidavit of Mr Ogilvie filed 14 March 2023 which annexed further correspondence with ASIC, copies of the updated drafts of the Scheme booklet (both marked‑up and clean versions) and correspondence from Health House on the amount then owing under the Loan Facility Agreement.
(g)An affidavit of Belinda Sarah Giles filed 18 March 2023. Ms Giles is a senior associate employed by Blackwall Legal. Ms Giles' affidavit annexed a copy of the updated draft Scheme booklet, copies of deeds of variation of the SID, as well as copies of email correspondence between Blackwall Legal and ASIC.
(h)An affidavit of William Barrington Lay, the Managing Director and Chief Executive Officer of Creso, filed 18 March 2023. Mr Lay deposed to the verification process in relation to the information about Creso in the Scheme booklet. His affidavit annexed a copy of the SID, executed by both parties, and the verification report, approved by circular resolution of the Creso board.
(i)A second affidavit of Mr Slate filed 20 March 2023 concerning the delay in finalising Health House's annual report and holding its Annual General Meeting. His affidavit annexed the ASX announcements made by Health House from 19 April 2022, its half‑yearly accounts, a further deed of variation of the SID and deed poll, as well as the most recent amendments that had been made to the Scheme and Scheme booklet.
(j)A second affidavit of Ms Giles filed 21 March 2023 which annexed copies of further correspondence with ASIC, a copy of CPS Capital's mandate, the corporate advisor of Health House, a deed of settlement and release with Celtic Capital Pty Ltd (Celtic Capital) (which I address below at [66]), as well as various ASX announcements by Creso.
(k)A third affidavit of Ms Giles filed 22 March 2023 which annexed an amended Scheme and Scheme booklet, incorporating the matters raised at the hearing on 21 March 2023, as well as the correspondence with ASIC. Her affidavit also annexed ASIC's letter of intention regarding the first court hearing.
Factual background
Health House
Health House is an international pharmaceutical distribution company which specialises in the distribution of medicinal cannabis products across Australasia, the United Kingdom and Europe.[3] Initially, Health House was registered in February 2011 and listed on the ASX in July 2011 under the name International Coal Limited.[4] After various acquisitions and name changes, since February 2021, it has been called Health House International Limited.[5]
[3] Affidavit of David Colin Wheeler filed 28 February 2023 [8].
[4] Affidavit of David Colin Wheeler filed 28 February 2023 [7].
[5] Affidavit of David Colin Wheeler filed 28 February 2023 'DGW1'.
As at 28 February 2023, Health House had an issued capital of 178,224,621 fully paid ordinary shares (Shares), 36,900,000 performance shares (Performance Shares) and 8,289,946 options (Options).[6]
Creso
[6] Affidavit of David Colin Wheeler filed 28 February 2023 [17].
Creso is an Australian public company, whose shares are listed on the ASX. Creso is a global producer and marketer in high growth segments of plant‑based products.[7] It has a number of subsidiaries across Canada, the United States and Switzerland.[8]
Nature of proposed Scheme
[7] Scheme booklet [12].
[8] Scheme booklet, Creso Chairman's Letter.
On 20 November 2022, Health House and Creso entered into the SID for the proposed Scheme, which was announced to the ASX on 21 November 2022.[9] The purpose of the proposed Scheme between Health House and Creso is to create a combined group with strong medicinal cannabis product and distribution capabilities.[10] It will allow for greater geographic diversification, more financial strength, better access to capital for future growth, and an experienced management team in the medicinal cannabis industry.[11] The effect of the proposed Scheme is to make Health House a wholly owned subsidiary of Creso. If the Scheme is implemented, Health House will be subsequently delisted from the ASX.
[9] Affidavit of David Colin Wheeler filed 28 February 2023 'DGW30'.
[10] Affidavit of David Colin Wheeler filed 28 February 2023 'DGW30'.
[11] Scheme booklet, Creso Chairman's Letter.
If the Scheme is implemented, Creso will acquire all of the Health House Shares on issue as at the Scheme Implementation Date and Health House's shareholders will receive the Scheme Consideration.[12] The Scheme Consideration is variable and is subject to adjustments based on the amount then owing under a Loan Facility Agreement entered into between the parties, as set out below at [55] ‑ [60].
[12] Scheme booklet, Health House Chairman's Letter.
Health House shareholders who do not have a registered address in Australia and its external territories, New Zealand, the United Kingdom, Germany or Spain (Foreign Scheme Shareholders) are ineligible to receive the Scheme Consideration.[13] Foreign Scheme Shareholders will receive a pro‑rata share of the net proceeds from the sale of their Scheme Consideration, which will be sold through a sale facility.[14] As at 23 February 2023, there were 14 Foreign Scheme Shareholders, which represented 0.9% of shareholders by number and 1.5% of shares in Health House.[15]
[13] Affidavit of David Colin Wheeler filed 28 February 2023 [58].
[14] Scheme, cl 7.2.
[15] Affidavit of David Colin Wheeler filed 28 February 2023 [58].
The Performance Shares and Options are being dealt with outside the Scheme.
There are 36,900,000 Health House Performance Shares on issued, being 12,300,000 of each of Class A, Class B and Class C Performance Shares.[16] All of the Performance Shares will vest and convert into Health House Shares upon the Scheme becoming effective.[17]
[16] Affidavit of David Colin Wheeler filed 28 February 2023 [26], 'DCW14'.
[17] SID, cl 5(a); Scheme Booklet [9.12].
Pursuant to the SID, Health House is required to use all reasonable endeavours to obtain the written agreement for the cancellation of the Options and for the Optionholders to receive a reasonably equivalent number of options in Creso.[18] Health House and Creso have since entered into cancellation deeds with each of the two Optionholders.[19]
[18] SID, cl 5(b).
[19] Scheme booklet [11.5(d)].
Health House's directors have unanimously recommended that 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 Health House shareholders.[20]
[20] Scheme booklet, covering page.
Health House retained an independent expert to provide an opinion and recommendation on the proposed Scheme. The independent expert, Moore Australia, has concluded that, in the absence of a superior proposal, the proposed Scheme is fair and reasonable and in the best interests of Shareholders.[21] In reaching this conclusion, the independent expert considered the value of a Health House Share prior to the proposed Scheme on a control basis, and the value of the Scheme Consideration post the proposed Scheme on a minority basis. Specifically, the independent expert report (IER) expresses the opinion that the value of a Health House Share prior to the proposed Scheme on a control basis was $nil (both low and high) and that the range of the value of a Health House Share after the proposed Scheme on a minority basis is between $0.001 (low) and $0.006 (high). This assessment does not include the potential impact on the value of Creso from the proposed acquisition of Abby and Finn LLC, because this proposed acquisition (which was then at a non‑binding stage) would not, in their view, materially impact the valuation.[22] The independent expert drew attention to the wide range of values post the proposed Scheme, which, in their opinion, was an appropriate reflection of the risks associated with an investment in Creso.
[21] Affidavit of Peter Gray filed 14 March 2023 'PG3'.
[22] Affidavit of Peter Gray filed 14 March 2023 'PG3' [10.27].
The basis for the valuation and the methodology used are set out in the IER. The consideration of advantages, disadvantages and other factors that are likely to impact shareholders are also set out comprehensively in the IER.
The Scheme will not be implemented unless and until a number of conditions precedent are satisfied or waived.[23] The conditions precedent which are required to be satisfied or waived are set out in the Scheme booklet.[24]
[23] SID, cl 3.1.
[24] Scheme booklet [9.8].
The SID sets out the procedures that have been agreed for the implementation of the proposed Scheme. The obligations of Creso under the Scheme are supported by a Deed Poll which was executed by Creso on 14 March 2023 (Deed Poll),[25] and re‑executed on 20 March 2023 to take account of the variation to the Scheme on that date.[26]
[25] Affidavit of Timothy Ryan Slate filed 20 March 2023 'TRS7'.
[26] Affidavit of Belinda Sarah Giles filed 18 March 2023 'BSG1'.
I was provided with the draft Scheme booklet which was submitted to ASIC on 13 January 2023 and the amendments that have been made to the document since then.[27]
[27] The final version of the draft Scheme booklet is annexed to the affidavit of Belinda Sarah Giles filed 22 March 2023 'BSG4'.
The Scheme booklet contains the following sections:
(a)a section on important dates and the expected timetable for the Scheme;
(b)letters from the executive chairpersons of Health House and Creso;
(c)a 'frequently asked questions' table, which addresses all essential matters;
(d)sections on the considerations which are relevant to the vote of shareholders, including reasons to vote in favour of or against the Scheme, and other relevant considerations;
(e)a summary of the Scheme;
(f)a section on how to vote;
(g)an overview of Health House and Creso;
(h)a section on risk factors;
(i)a section on the taxation implications for Health House shareholders;
(j)a section on additional information, which includes details of the relevant interests of Health House's directors and confirming the directors will not receive any benefit if the Scheme is approved; and
(k)a glossary of defined terms.
The Scheme booklet includes several important annexures which will form part of the Scheme booklet. These include a Summary of the Scheme Implementation Deed, the Independent Expert's Report, the Scheme of Arrangement, the Deed Poll and the Notice of Scheme Meeting.
The proposed Scheme has been amended on a number of occasions.[28] These changes have been made to address matters raised by ASIC as well as a clarification to the manner in which the Scheme Consideration was expressed, proposed by the court on 21 March 2023.
[28] The latest version is annexed to the affidavit of Timothy Ryan Slate filed 20 March 2023 'TRS7'.
Legal principles in respect of the scheme
Pursuant to s 411 of the Act, a scheme of arrangement can be used to re‑organise a company in a manner which will be binding on its members, provided that:
(a)the arrangement is agreed by the requisite majorities as prescribed by s 411(4)(a) of the Act, namely 75% of shareholders by value and 50% by number; and
(b)the court approves the arrangement pursuant to s 411(4)(b) of the Act.
There are three stages to an application under s 411 of the Act. First, the court approves the convening of a scheme meeting and the draft explanatory statement to be sent to the scheme members. Second, the members vote on the proposed scheme at the scheme meeting. Third, assuming the first two stages have occurred, the court approves the proposed scheme.[29]
[29] Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 [7].
There are well‑established principles which apply to the first stage of proceedings. The court will order the convening of the scheme meeting and approve the dispatch of the scheme booklet if it is satisfied that:[30]
(a)there is a pt 5.1 body;
(b)there is a compromise or arrangement within the meaning of s 411 of the Act;
(c)the proposed scheme booklet contains the prescribed information[31] and provides proper disclosure;[32]
(d)the scheme is bona fide and properly proposed;
(e)ASIC has had at least 14 days' notice of the proposed hearing date and a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions;[33]
(f)the procedural requirements of the Act and the Corporations Rules have been met; and
(g)the scheme is of such a nature that, if it receives the necessary statutory majority at the scheme meeting, the court will be likely to approve it.
[30] Re SRG Ltd [2018] FCA 1092 [11]; Re Wesfarmers Ltd [2018] WASC 308 [60].
[31] Corporations Act 2001 (Cth) s 412(1)(a)(ii); Corporations Regulations 2001 (Cth) reg 5.1.01, Sch 8 cl 8301 ‑ 8310.
[32] Corporations Act 2001 (Cth) s 412(1)(a)(i).
[33] Corporations Act 2001 (Cth) s 411(2)(b).
Any issue about classes of members is usually determined at the first hearing.[34] This is so costs and court time are not wasted which would otherwise occur if this issue was left to the second hearing.[35]
[34] Re CSR Ltd [73].
[35] Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20 [20].
The standard of review undertaken by the court at the first hearing is whether the proposed scheme is not inappropriate and is one that sensible businesspeople might consider is of benefit to its members.[36] If the proposed arrangement is one that appears fit for consideration by a meeting of members and is a commercial proposition likely to gain the Court's approval if passed by the necessary majority, leave should be given to convene the meeting.[37]
[36] Re Amcom Telecommunications Ltd [2015] FCA 341 [10].
[37] Re SRG Ltd [12]; Re Wesfarmers Ltd [72] - [76].
Disposition
The formal matters that Health House has to prove are satisfied.
Health House is a company and, accordingly, is a pt 5.1 body. The proposed Scheme constitutes an 'arrangement' of a type that has been approved by courts as an arrangement on numerous occasions.
Health House filed the affidavits, required by r 3.2 of the Corporations Rules, from the people who have been nominated to be the chairperson and alternate chairperson for the Scheme meeting.[38]
[38] Affidavit of David Colin Wheeler filed 10 March 2023 [8] ‑ [9]; affidavit of Timothy Ryan Slate filed 10 March 2023.
By letter dated 22 March 2023, ASIC confirmed that it had been given 14 days' notice of the hearing and a reasonable opportunity to examine the terms of the Scheme and the draft explanatory statement or Scheme booklet. However, ASIC noted it was not in a position to advise the court whether it proposed to appear at the first court hearing to make submissions or intervene to oppose the Scheme until the second court hearing.[39]
[39] Affidavit of Belinda Sarah Giles filed 22 March 2023 'BSG8'.
On the materials before me, there was nothing to suggest the Scheme was not properly proposed. The constitution of Health House does not prevent the Scheme.[40]
[40] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW3'.
There are a number of conditions precedent to the Scheme.[41] Mr Wheeler has deposed he is not aware of any basis to believe that any condition precedent will not be satisfied or waived prior to implementation of the Scheme.[42]
Disclosure and Scheme booklet
[41] SID, cl 3.
[42] Affidavit of David Colin Wheeler filed 28 February 2023 [50].
I have read the initial draft of the Scheme booklet (as provided to ASIC). I have also been provided with the correspondence between ASIC and Health House's solicitors relating to ASIC's review of the draft Scheme booklet,[43] as well as copies of the amended Scheme booklets that have been provided to ASIC. The updated Scheme booklet for the purposes of the first court hearing was provided to ASIC on 22 March 2023.[44]
[43] Affidavit of Belinda Sarah Giles filed 27 March 2023 'BSG8'.
[44] Affidavit of Belinda Sarah Giles filed 27 March 2023 'BSG8'.
I was and am satisfied that there will be proper disclosure as to the effect of the proposed Scheme and the material considerations for shareholders of Health House.
There is evidence before me as to the due diligence and verification process that was undertaken by both Health House and Creso. On the basis of this evidence, I accept that:
(a)Health House undertook a process of due diligence and verification to verify the accuracy of statements attributable to Health House in the Scheme booklet;[45]
(b)Creso undertook a similar process to verify the statements attributable to them;[46] and
(c)appropriate steps have been taken to satisfy Health House and Creso that the Scheme booklet does not omit any material information.
[45] Affidavit of David Colin Wheeler filed 28 February 2023 [71] ‑ [83], 'DCW35'.
[46] Affidavit of William Barrington Lay filed 18 March 2023 [11] ‑ [16], 'WBL2'.
Based on the checklist provided by counsel for Health House,[47] I am and was satisfied the Scheme booklet contained the prescribed information in accordance with s 412(1)(a)(ii) of the Act and sch 8 of the Corporations Regulations 2001 (Cth).
[47] Plaintiff's submissions for First Court Hearing [27].
In written and oral submissions, counsel for the plaintiff drew my attention to some specific matters. I address each of these below.
Variable consideration
As set out above, the Scheme Consideration payable under the proposed Scheme is variable. At the hearing on 21 March 2023, the Scheme Consideration was to be calculated using the following formula:
At the hearing, I raised a concern with counsel for Health House that the formula was not clear. This was because it was unclear whether the denominator (SP) applied only to the amount outstanding under the Facility Agreement or to '4,630,388 ‑ FA'. Counsel accepted this was not clear case and agreed to seek instructions to amend the formula to clarify this. Prior to the hearing on 22 March 2023, the parties agreed to amend the proposed formula for the Scheme Consideration and it was proposed at that hearing that it be calculated using the following formula:
Courts have previously accepted that the quantum of consideration payable to shareholders under a proposed scheme can be determined by reference to a formula. The fact that the exact number of shares to be issued may not be known at the date of the scheme meeting is not a sufficient reason for the court not to convene the meeting where the variability of the Scheme Consideration is prominently disclosed in the scheme booklet as a risk that applies to the Scheme.[48] While the courts' previous consideration of this issue has primarily arisen in respect of schemes involving listed investment companies, in my view, there is no reason that these same considerations do not apply more broadly.
[48] See Re Ozgrowth Ltd [2022] WASC 107 [61] ‑ [66] and the authorities cited there.
This is consistent with the role of the court at the first court hearing which is to consider the 'legal efficacy of the proposed arrangement' as opposed to the commercial merits of the proposed transaction.[49] If the scheme is one which is open for shareholders to adopt, it is not the role of the court to be satisfied as to its commercial desirability.[50]
[49] Re Wesfarmers Ltd [72].
[50] Re Wesfarmers Ltd [74].
In this case, I am satisfied that the fact the Scheme Consideration is variable is prominently disclosed in the Scheme booklet. It is referred to in the Health House Chairman's letter and is listed as the first key reason to vote against the Scheme, the Scheme booklet includes examples as to how the Scheme Consideration may change depending on the amount outstanding under the Facility Agreement,[51] and the variability of the Scheme Consideration is referred to at a number of places in the Scheme booklet.[52]
[51] Scheme booklet [8.2].
[52] Scheme booklet Chairman's letter, [4], Frequently asked questions, [6(a)], [8.2], [8.6].
In my view, this is a commercial matter for Shareholders to consider and is not a reason for the court to refuse to order the convening of the Scheme meeting.
Performance risk
I was and am satisfied that the nature and terms of each of the proposed Schemes are such that the shareholders are adequately protected against the risk that they will not receive the Scheme Consideration and have no capacity to sue Creso to recover their shares or for damages.
In that respect, I have had regard to the terms of the Scheme and the Deed Poll. Pursuant to these documents:
(a)Creso must allot and issue (or procure the allotment and issue of) all of the Creso Consideration Securities to each eligible shareholder and to the Sale Agent for each Health House Share they hold on the Implementation Date;[53]
(b)transfer of the Shares is subject to confirmation that the Scheme Consideration has been provided as contemplated by cl 7.3(a) of the Scheme;[54]
(c)beneficial title in Health House Shares does not pass unless the Scheme Consideration has been issued in accordance with the Scheme;[55]
(d)Creso has covenanted to perform all obligations under the Scheme and, specifically, to provide the Scheme Consideration in accordance with the Scheme;[56] and
(e)Health House and each Scheme participant have individual rights against Creso in the event that Creso fails to provide the Scheme Consideration.[57]
[53] Scheme, cl 7.3(a).
[54] Scheme, cl 6.2(a).
[55] Scheme, cl 10.5(b).
[56] Deed Poll, cl 4.1 and 4.2.
[57] Deed Poll, cl 3.3.
The arrangements under the terms of the proposed Scheme are supported by a Deed Poll. By the Deed Poll, Creso covenants in favour of each Health House shareholder that it will perform all actions attributed to it under the Scheme. There is also an acknowledgement that the Deed Poll may be relied on and enforced by any Scheme shareholder in accordance with its terms.[58] In my view, the shareholders are sufficiently identified within the Deed Poll to enable them to enforce the Deed Poll as against Creso.
Exclusivity provisions and Break Fee
[58] Deed Poll, cl 2.
The SID contains the customary lock up devices in the form of 'no shop', 'no talk', 'no due diligence', 'notification' and 'matching right' provisions.[59] The 'no shop' and 'no talk' provisions are subject to a fiduciary carve out.[60] In certain circumstances, a Break Fee of $100,000 is payable by Health House to Creso[61] and by Creso to Health House.[62]
[59] SID, cl 16.2, cl 16.3, cl 16.4.
[60] SID, cl 16.5.
[61] SID, cl 14.3.
[62] SID, cl 15.
In considering whether the exclusivity provisions impact on completion of the transaction and the duties of directors, the court has regard to:[63]
(a)the period of the exclusivity, which should be no more than a reasonable period and capable of precise ascertainment;
(b)whether the provisions are subject to an overriding obligation that the directors not breach their fiduciary duties or are otherwise unlawful; and
(c)whether there is adequate prominence given to these provisions in the Scheme booklet.
[63] Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 [29] ‑ [35]; Re Kangaroo Resources Ltd [2018] WASC 327 [57] ‑ [61]; RePacific Energy Limited [2019] WASC 443 [58].
Under the terms of the SID (as varied), the period of exclusivity is less than six months.[64] The affidavit of Mr Wheeler sets out the commercial justification for the exclusivity provisions and the Break Fee and deposed that it was reasonable and appropriate.[65] I accept his evidence that the inclusion of these provisions in the SID followed arm's‑length commercial negotiations in which all parties were separately advised, was agreed to by the Health House Board and represented by external legal advisers.[66]
[64] Affidavit of Belinda Sara Giles filed 18 March 2023 'BSG3'.
[65] Affidavit of David Colin Wheeler filed 28 February 2023 [110].
[66] Affidavit of David Colin Wheeler filed 28 February 2023 [107] ‑ [111].
Mr Wheeler annexed to his first affidavit a copy of a memorandum dated 9 January 2023 from Health House's solicitors to the directors of Health House in relation to the Break Fee.[67] The memorandum drew the directors' attention to the fact that the Break Fee of $100,000 was more than 1% of the implied deal value of $4.6 million (the general recommendation of the Takeovers Panel in Guidance Note 7), but expressed the view that it complied with this guidance note and was unlikely to be considered unacceptable. The reasons set out in the memorandum included that the Break Fee is capped at $100,000, this amount reasonably reflected the costs, effort or risk involved in preparing the Scheme as well as the actual expenses incurred by the parties in progressing the Scheme, the Break Fee was consistent for both Creso and Health House, and that, in this case, a Break Fee of approximately 1% of the implied deal value would be insufficient to reimburse either party for their reasonable costs of the Scheme.[68]
[67] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW39'.
[68] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW39'.
The Break Fee is prominently disclosed in the Scheme booklet.[69]
[69] Scheme booklet, Frequently Asked Questions, [7(d)], Annexure A.
In my view, while the Break Fee is more than the general recommendation in the guidance note, the actual amount that may become payable is unlikely to influence shareholders in their decision to vote on the Scheme and is, by itself, not a reason not to convene a meeting of shareholders to consider the proposed Scheme.
Loan Facility Agreement
On 5 September 2022, Health House and Creso entered into a Loan Facility Agreement.[70] Under the Loan Facility Agreement, Creso agreed to loan up to $700,000 to Health House for general corporate purposes and working capital. The repayment date of the Facility was 30 November 2022, with an interest rate of 12% per annum and 18% per annum payable on any overdue amounts.[71]
[70] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW42'.
[71] Loan Facility Agreement, cl 5.1(c) and cl 5.3(b).
On 19 November 2022, the parties entered into the first variation deed of the Loan Facility Agreement which increased the loan amount to $3,400,000 and the extended the repayment date to 31 March 2023.[72] On 10 January 2023, a second variation deed was entered into amending the repayment date to 31 May 2023 and reducing the interest rate payable on any overdue amounts to 15% per annum.[73] On 12 January 2023, a third variation deed was executed which amended the timing for when outstanding payments could be declared payable after an event of default.[74]
[72] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW43'.
[73] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW44'.
[74] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW45'.
Prior to entering into the Loan Facility Agreement, on 31 August 2022, Health House had executed a Short Term Funding Facility Deed (Short Term Deed) with Zelira Therapeutics Limited (Zelira).[75] Health House had previously entered into a scheme implementation deed with Zelira, which was terminated on 22 June 2022, and had received a $1.5 million working capital facility loan. Health House had partially repaid this facility in August 2022 and entered into the Short Term Deed. Health House was required to repay Zelira in late 2022 and required funds to be able to do this.
[75] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW23'.
In Re Nzuri Copper Ltd, Vaughan J summarised the relevant considerations for the court where a bidder has provided a loan to the target in the following terms:[76]
There are authorities in which the court has been concerned to ensure that a loan between bidder and target does not operate as a lock‑up device. For example, in Re Cortona Resources Ltd, a loan term sheet was entered into on the morning of the first hearing. The loan was a drawdown facility and was not repayable on demand. If the scheme was not implemented the target would be provided to give security. Barker J stated:
'There is nothing obvious in that transaction, in my view, to suggest that it is a "lock up" device or in the nature of a break fee by a side wind, which might prevent the free consideration by members of the scheme proposal.
…
I do not consider that the term sheet transaction identified is a reason not to make the orders convening a meeting of members. It too is a matter that the members may properly consider at the meeting in light of the disclosure made.'
In Re Anatolia Energy Ltd McKerracher J also adopted the touchstone of whether the loan agreement would prevent free consideration of the proposed scheme by members. (citations omitted)
[76] Re Nzuri Copper Ltd [2019] WASC 189 [67] ‑ [68].
In this case, counsel drew my attention to the following factors:
(a)a 'no' vote at the Scheme Meeting or the receipt of a competing proposal by Health House is an event of default under the Loan facility requiring any funds that have been advanced to be immediately repaid. Under the terms of the Facility Agreement, the funds are repayable 60 days after receipt of a notice on an announcement of a change in control, which provides sufficient time for Health House to obtain alternative funding;[77]
(b)given the financial position of Health House, the terms of the Loan Facility Agreement are reasonable and commercial. These terms include the fact the loan is secured and an interest rate of 12% per annum;
(c)the Loan Facility Agreement was the subject of arm's‑length negotiations between Health House and Creso where both parties were independently advised as to both legal and corporate matters;[78]
(d)the terms of the Loan Facility Agreement have been previously disclosed to the market,[79] and are set out in the Scheme booklet;[80] and
(e)neither the independent expert nor ASIC has expressed any concern as to the Loan Facility Agreement.
[77] Loan Facility Agreement, cl 10; Affidavit of David Colin Wheeler filed 28 February 2023 [139(b)].
[78] Affidavit of David Colin Wheeler filed 28 February 2023 [138].
[79] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW21', 'DCW22'.
[80] Scheme booklet [17.5].
For these reasons, I was and am satisfied that the Loan Facility Agreement was not a lock‑up device that would have a coercive effect on Shareholders and prevent them from considering the merits of the proposed Scheme. Given there has been sufficient disclosure of the Loan Facility Agreement and its terms, this is, in my view, a matter for the Shareholders to consider at the Scheme meeting.
No collateral benefit which should prevent approval of the Scheme
The court must examine whether a benefit exists for one shareholder in particular, so as to bring into question the overall fairness of the Scheme.[81] To determine whether there is a collateral benefit, the court considers the 'net benefits' test, to ensure that there is no overall disparity in favour of the party to the non‑Scheme transaction.[82] If no net benefit is present, then, prima facie, the equality principle under s 602(c) of the Act is satisfied.
[81] Re David Jones Ltd [No 2] [2014] FCA 720; (2014) 101 ACSR 381 [16] ‑ [21] (Farrell J).
[82] Takeovers Panel, Guidance Note 21: Collateral Benefits [15].
Counsel drew to my attention the fact that Mr Petersen, a director and indirect shareholder of CPS Capital, is a substantial shareholder of Health House, holding 17,336,651 Health House shares, or 9.7%.[83] Mr Peterson is the managing director of CPS Capital who will receive a success fee on the successful implementation of the Scheme of 13,731,358 Shares. This represents approximately 6% of Health House's total issued capital.
[83] Plaintiff's submissions [36], [125].
Counsel for Health House submitted the issue of these Shares to CPS Capital was not a collateral benefit. He emphasised that:
(a)prior to entry into the SID, CPS Capital was appointed as corporate adviser to Health House for a period of 12 months, under a mandate dated 1 December 2021;[84]
(b)the obligation to pay the success fee arises from the term sheet which was entered into prior to the negotiation and execution of the SID;[85]
(c)at current value of the Shares, the success fee payable to CPS Capital equated to approximately $50,000. This amount is not substantial and is for corporate advisory services provided by CPS Capital;[86]
(d)the payment of this success fee is disclosed in the Scheme booklet.[87]
[84] Affidavit of Belinda Sarah Giles filed 21 March 2023 'BSG3'. Ms Giles confirmed that she was instructed the date in the mandate (of 2020) is a typographical error.
[85] Affidavit of David Colin Wheeler filed 28 February 2023 'DCW18'.
[86] Plaintiff's submissions [126(b)].
[87] Scheme booklet [11.5(c)].
Counsel also drew to my attention the fact that CPS Capital was broker to an offer of convertible notes by Creso on about 1 November 2022, and received fees of 6% of the amount raised in that capacity.[88] Payment of these fees were not conditional on the support of the proposed Scheme and were paid for the services that had been provided by CPS Capital.
[88] Affidavit of Belinda Sarah Giles filed 22 March 2023 'BSG5'.
In the updated Scheme Booklet, Health House included an additional section titled 'Potential for collateral benefit' which reflected the potential collateral benefit that might be received by directors.[89]
[89] Scheme booklet [17.4(d)].
In addition to the payment of the success fee, counsel for the plaintiff also drew my attention to the fact that another entity associated with Mr Peterson, Celtic Capital had previously advanced $400,000 to Health House by way of a convertible note. On 20 November 2022, Celtic Capital, Creso and Health House entered into a deed of settlement, under which Creso assumed the obligation to pay Celtic Capital the amount due under the convertible note.[90]
[90] Affidavit of Belinda Sarah Giles filed 21 March 2023 'BSG6'.
Counsel for Health House submitted the issue of these Shares to CPS Capital was not a collateral benefit. He emphasised that:
(a)prior to entry into the SID, CPS Capital had agreed to provide this funding;
(b)the assumption by Creso of Health House's obligation to repay this funding is not conditional on the Scheme being implemented; and
(c)the agreement is disclosed in the Scheme booklet.[91]
[91] Scheme booklet [17.5].
Following the hearing on 21 March 2023, Health House further amended the Scheme booklet to provide additional disclosure in relation to these matters. This additional disclosure was to the effect that each of these matters may constitute a collateral benefit. While I accept, given the correspondence that Health House's solicitors had exchanged with ASIC, that it was expedient for Health House to include this section in the updated Scheme Booklet, my preliminary view, on the evidence currently before me, is that I do not consider the issue of these shares to CPS Capital or the payments made to them is or are a collateral benefit which could prevent approval of the Scheme at the second court hearing. This is for two primary reasons. First, the benefits which have been disclosed to the court are not conditional on CPS Capital (or their related parties) voting in favour of the Scheme or successful implementation of the Scheme. Second, the benefits being paid to the related entities of Mr Peterson are being paid to them in their capacity as a corporate adviser or lender to Health House. There is no evidence that any payment is being offered or made to these entities in their capacity as a shareholder of Health House.
In the correspondence between ASIC and the solicitors for Health House, ASIC requested that the votes of Mr Peterson (and his associated entities) at the Scheme meeting be tagged.[92] Health House has agreed to do this.[93]
Class issue
[92] Affidavit of Belinda Sarah Giles filed 22 March 2023 'BSG9'.
[93] ts 11 ‑ 12.
The Act does not define the term 'class'. To determine whether separate classes of members are required, the test involves three questions. First, what are the rights which existing members have against the company and to what extent are they different. Second, to what extent are these rights affected differently by the scheme. Third, does the different treatment of rights make it impossible for the members in question to consider the scheme as one class. The test is not one of identical treatment but of 'community of interest'. It is necessary for the court to determine whether the rights of different groups, viewed in the context of the proposed scheme, are so dissimilar as to make it impossible for them to consult together with a view to their common interests. Ordinarily, divergent commercial interests external to share membership will not be a factor which differentiates classes, although this is a question of degree.
In approaching the issue of classes, a practical, business‑like approach should be adopted by the court. As Finkelstein J noted in Re Opes Prime Stockbroking, there is a built‑in safeguard against majority oppression in that the court is not bound by the decision of the meeting.[94]
[94] Re Opes Prime Stockbroking Ltd [66].
In this case, Health House proposed, and I accept, given the terms of the proposed Scheme, there was only one class of shareholders and there should be only one shareholder meeting to consider the proposed Scheme.
None of the separate agreements with Mr Peterson or his related entities provides for Mr Peterson or these entities to receive different rights under the Scheme. I accept that there is nothing in these arrangements that would make it 'impossible' for Mr Peterson and the other Shareholders to meet and consider the terms of the Scheme.
Director benefits and director recommendations
The Health House directors have unanimously recommended that, in the absence of a superior proposal, Shareholders vote in favour of the Scheme.
Counsel drew my attention to the fact that each of the directors owns Shares in Health House. None of them hold Performance Rights or Options.[95] In these circumstances, I accept the submission of counsel that no issue as to the appropriateness of the directors making a recommendation arises in this case.[96]
Relevance of late financial accounts and delay in convening of 2022 Annual General Meeting
[95] Affidavit of David Colin Wheeler filed 28 February 2023 [24]; Plaintiff's submissions [124].
[96] Plaintiff's submissions [136].
Counsel for Health House drew to my attention that:
(a)Health House was late in sending to Shareholders its financial statements for the year ending 30 June 2022. The financial statements were released to the ASX on 22 December 2022 and were dispatched to Shareholders on 20 March 2023;
(b)Health House had not yet held its annual general meeting for 2022. The notice of annual general meeting was sent to Shareholders on 20 March 2023 and the annual general meeting is scheduled to take place 30 minutes before the Scheme meeting, at 1.00 pm (AWST) on 28 April 2023; and
(c)Health House proposed seeking orders at the second court hearing pursuant to s 1322 of the Act for extensions of time under the Act to regularise these matters.
Mr Slate explained that the reason for the delay in completing the annual report was due to the inability of the directors to provide solvency declarations to their auditor prior to the finalisation of negotiations with Creso regarding the SID.[97] His explanation for the delay in holding the annual general meeting is that Health House knew it was going to have to convene a Scheme meeting in the near future and considered it was more cost-effective to hold the AGM and the Scheme meeting on the same day.[98]
[97] Affidavit of Timothy Ryan Slate filed 20 March 2023 [8] ‑ [24].
[98] Affidavit of Timothy Ryan Slate filed 20 March 2023 [26] ‑ [30].
Counsel for the plaintiff submitted, which I accept, that neither of these matters should prevent the court from convening the Scheme meeting or approving the Scheme booklet for distribution. Neither of these matters are preconditions to the exercise of power under s 411 of the Act nor are they matters which, of themselves, are sufficient to compel the court to exercise its discretion to refuse the orders sought.
ASIC is aware that Health House has not held its 2022 annual general meeting and that, as at 17 March 2023, the 2022 Annual Report had not been dispatched and did not contend that this should impact on the orders to be made at the first court hearing.
Counsel for the plaintiff drew to my attention that Health House has relied upon the financial statements for the financial year ending 30 June 2022 in the Scheme booklet[99] and the directors have confirmed there has been no material change since this time, as required by cl 8302(h) of sch 8 of the Corporations Regulations 2001 (Cth).[100]
Deemed warranties and no encumbrances
[99] Scheme booklet [11.7].
[100] Scheme booklet [11.8]; Affidavit of Timothy Ryan Slate filed 20 March 2023 [32] ‑ [33].
Counsel drew my attention to the 'clear title' and 'Warranty by Scheme Participants' provisions in the proposed Scheme.[101]
[101] Scheme cl 10.5(a), cl 10.4.
The Scheme provides that, to the extent permitted by law, the Shares will transfer free from all security interests.[102] The terms of this clause is in standard terms and includes the opening words 'To the extent permitted by law'. The inclusion of these words addresses the concern that has previously been expressed as to whether third parties may otherwise gain the impression that their rights have been extinguished.[103]
[102] Scheme cl 10.5(a).
[103] Re Investa Properties Ltd [2007] FCA 1104 [25] ‑ [30]; Re Scarborough Equities Ltd [No 2] [2009] FCA 484 [9] ‑ [10].
In relation to the warranty provision, this provision is disclosed in the Scheme booklet.[104] Deemed warranty clauses are not unusual and are acceptable provided there is adequate disclosure that it is a condition.[105]
[104] Scheme Booklet [4] (Frequently Asked Questions), [14.2].
[105] Re APN News and Media Ltd [57] ‑ [63]; Re DUET Management Company 1 Ltd [2013] NSWSC 817; (2013) 95 ACSR 34 [23]; Re Nzuri Copper Ltd [90]; Re Macquarie Private Capital A Ltd [2008] NSWSC 323 [13] ‑ [14]; Re Doray Minerals Ltd [71].
I was and am satisfied that adequate disclosure has been given of these clauses.
No liability when acting in good faith
Counsel for Health House drew to my attention the inclusion of cl 11.5 in the Scheme. This clause provides an exclusion from liability for acts or omissions done by Health House or Creso in good faith in performance of the Scheme or Deed Poll.
It is my view that, on the proper construction of the Scheme, this clause does not exclude liability for acts or omissions in breach of the Scheme or the Deed Poll.[106] Any such acts or omissions could not be in performance of the Scheme or Deed Poll. For this reason, I do not consider that this clause will deprive members of their intended benefits under the Scheme.
Electronic despatch of the Scheme booklet
[106] This is consistent with the view reached on similar clauses in Re Wesfarmers Ltd [No 2] [2018] WASC 357 [49] (Vaughan J) and Re Oklo Resources Ltd [2022] WASC 289 [75] ‑ [76].
Health House sought orders pursuant to s 1319 of the Act for electronic despatch (by email) of the Scheme booklet and applicable proxy form to Health House Shareholders that have nominated an electronic address for the purpose of receiving shareholder communications from Health House (Email Shareholders). These orders are now common.[107] Details were provided as to the terms of the proposed electronic notification, namely that email notices would be sent to Health House's shareholders containing links to the Scheme booklet and proxy form.
[107] See, for example, Re SRG Limited [48]; Re Doray Minerals Ltd [2019] WASC 57 [72]; Re Saracen Mineral Holdings Ltd [2020] WASC 483 [81]. See too Re CannPal Animal Therapeutics Ltd [2021] WASC 37 [73] ‑ [75]; Re Piedmont Lithium Ltd [2021] WASC 76 [69]; Re Nusantara Resources Ltd [2021] WASC 334 [66] ‑ [68]; Re PetroNor E&P Ltd [2021] WASC 426 [64] ‑ [65]; Re Swick Mining Services Ltd [2022] WASC 79 [79]; Re Western Areas Ltd [2022] WASC 193 [82].
I was and am satisfied that an order for electronic despatch of the Scheme booklet is appropriate.
In respect of the Shareholders who have elected to only receive physical copies of shareholder communications, these shareholders will receive a hard copy of the Scheme booklet and a proxy form.
In respect of the remaining Shareholders (who have not elected the manner in which they will receive documents from Health House), Health House proposed the despatch of a hardcopy letter by post with the relevant forms and a link to the Scheme booklet.
I was and am satisfied that the proposed orders in relation to the despatch of Scheme materials to these Shareholders is appropriate.
Conclusion on first hearing
At the conclusion of the first hearing, I was satisfied that the substantive and procedural requirements under s 411(1) and s 1319 of the Act had been satisfied and that the proposed Scheme was fit for consideration by Health House's members.
For these reasons, at the conclusion of the hearing on 22 March 2023, I made orders in terms of 'Annexure A' to this judgment in respect of the Scheme.
On 28 March 2023, Health House filed a third affidavit of Ms Giles. Ms Giles explained that some further amendments had been made to the Scheme booklet to reflect orders of 22 March 2023, and provided an update on the anticipated timing of the completion of Creso's audited accounts. I did not consider that either of these matters needed to be the subject of any further orders and could be addressed, to the extent required, at the second court hearing.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
JN
Associate to the Honourable Justice Hill
28 APRIL 2023
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