Re K2fly Ltd
[2024] WASC 297
•19 AUGUST 2024
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: RE K2FLY LTD; EX PARTE K2FLY LTD [2024] WASC 297
CORAM: HILL J
HEARD: 5 AUGUST 2024
DELIVERED : 5 AUGUST 2024
PUBLISHED : 19 AUGUST 2024
FILE NO/S: COR 114 of 2024
MATTER: IN THE MATTER OF K2FLY LTD
EX PARTE
K2FLY LTD
Plaintiff
ARGYLE BIDCO PTY LTD
Interested Party
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, s 412, 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 | : | J M Healy |
| Interested Party | : | A J Papamatheos |
Solicitors:
| Plaintiff | : | Steinepreis Paganin |
| Interested Party | : | DLA Piper |
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 Azure Minerals Ltd [2024] WASC 58
Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358
Re Foster's Group Ltd (No 2) [2011] VSC 547
Re Kangaroo Resources Ltd [2018] WASC 327
Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20
Re Pacific Energy Ltd [2019] WASC 443
Re SRG Ltd [2018] FCA 1092
Re Wesfarmers Ltd [2018] WASC 308
HILL J:
The plaintiff, K2fly Ltd (K2fly), is an Australian public company listed on the Australian Securities Exchange (ASX). On 21 June 2024, K2fly announced it had entered into a Scheme Implementation Deed (SID) with Argyle Bidco Pty Ltd (Argyle).[1] Under the proposed scheme of arrangement, Argyle will acquire all the issued ordinary shares in K2fly, and K2fly will become a wholly owned subsidiary of Argyle (Scheme).
[1] Affidavit of Hugo James Shervington filed 12 July 2024, 'HJS-1'.
By an originating process dated 12 July 2024, K2fly sought orders pursuant to s 411 and s 1319 of the Corporations Act 2001 (Cth) (Act) for the convening of a meeting of its members to consider the proposed Scheme. The application came before me for the first court hearing on 5 August 2024. On that date, I made orders pursuant to s 411(1) of the Act to convene a meeting of K2fly's shareholders to consider and vote on the proposed Scheme. Orders were also made approving the distribution of a Scheme booklet to K2fly's shareholders, as well as ancillary orders for the convening and conduct of the Scheme meeting under s 1319 of the Act.
In making these 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
K2fly relied on ten affidavits for the purposes of the first court hearing, being:
(a)five affidavits of Hugo James Shervington, a solicitor employed by Steinepreis Paganin, the solicitors for K2fly, filed 12 July 2024, 22 July 2024, 1 August 2024, 2 August 2024 and 5 August 2024;
(b)an affidavit of Mark Foster, a partner at Steinepreis Paganin, filed 30 July 2024;
(c)an affidavit of Jonathan Heath Stuart Murray, a partner at Steinepreis Paganin, filed 30 July 2024;
(d)an affidavit of Nicholas Patrick Pollock, the chief executive officer of K2fly, filed 2 August 2024; and
(e)two affidavits of Dean Jacobson, a director of Argyle, filed 5 August 2024.
Nature of proposed scheme
K2fly is a publicly listed company that provides resource governance solutions.[2] As at 6 August 2024, K2fly had an issued capital of 187,669,689 fully paid ordinary shares (Shares), 483,280 unlisted options (Options), 660,000 unlisted performance rights (Performance Rights), 8,717,315 unlisted zero exercise price options (ZEPOs) and 3,063,140 unlisted performance shares (Performance Shares).[3]
[2] Scheme booklet [11.2].
[3] Scheme booklet [11.5].
Argyle was incorporated in March 2024 as a special purpose acquisition vehicle for Accel‑KKR Capital Partners VII, LP (A‑KKR Fund VII). A-KKR Fund VII is advised by AKKR Fund II Management Company, LP (A‑KKR), a private equity firm headquartered in Menlo Park, California, which invests in middle‑market software and tech‑enabled businesses.[4]
[4] Scheme booklet [12.1].
If the Scheme is implemented, Argyle will acquire all of the K2fly Shares on issue as at the Implementation Date and K2fly shareholders will receive $0.19 for each Share (Scheme Consideration).[5]
[5] Scheme booklet [10.3].
The remaining securities are not part of the Scheme. In relation to each of these classes of securities, K2fly is required to ensure that on the Record Date, there are no other securities other than Shares.[6] All existing options that have not been exercised prior to the Record Date will be cancelled for nil consideration. The remaining securities (Performance Rights, ZEPOs and Performance Shares) will be converted into Shares prior to the Record Date and be subject to the Scheme.[7]
[6] SID, cl 4.2(r).
[7] Scheme booklet [2].
K2fly's directors have unanimously recommended that shareholders vote in favour of the Scheme, in the absence of a superior proposal.
K2fly has retained an independent expert to provide an opinion and recommendation on the proposed Scheme. The independent expert, Grant Thornton Corporate Finance (Grant Thornton), has concluded that, in the absence of a superior proposal, the proposed Scheme is fair and reasonable and is in the best interests of shareholders.[8] In reaching this conclusion, Grant Thornton compared the value of a Share prior to the implementation of the proposed Scheme (on a control basis) to the Scheme Consideration. The independent expert report (IER) expresses the opinion that the value of a Share prior to the proposed Scheme on a control basis was between $0.17 (low) and $0.22 (high). 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 set out comprehensively in the IER.
[8] Scheme booklet, 'Annexure A' (Independent Expert Report).
The Scheme will not be implemented unless and until a number of conditions precedent are satisfied or waived. The conditions precedent which are required to be satisfied or waived are disclosed in the SID.[9]
[9] SID, cl 3.1.
The SID between K2fly and Argyle sets out the agreed procedures for the implementation of the proposed Scheme. The obligations of Argyle under the Scheme are supported by a Deed Poll which has been executed by Argyle (Deed Poll).[10]
[10] Affidavit of Dean Jacobson filed 5 August 2024, 'DJ-2'.
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.[11]
[11] 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:[12]
(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[13] and provides proper disclosure;[14]
(d)the scheme is bona fide and properly proposed;
(e)the Australian Securities and Investments Commission (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;[15]
(f)the procedural requirements of the Act and the Supreme Court (Corporations) (WA) Rules 2004 (WA) (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.
[12] Re SRG Ltd [2018] FCA 1092 [11]; Re Wesfarmers Ltd [2018] WASC 308 [60].
[13] Corporations Act 2001 (Cth) s 412(1)(a)(ii); Corporations Regulations 2001 (Cth) reg 5.1.01, sch 8 cl 8301 ‑ 8310.
[14] Corporations Act 2001 (Cth) s 412(1)(a)(i).
[15] Corporations Act 2001 (Cth) s 411(2)(b).
Any issue about classes of members is usually determined at the first hearing,[16] so that costs and court time are not wasted which would occur if this was left to the second hearing.[17]
[16] Re CSR Ltd [73].
[17] Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20 [20].
The standard of review that is 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.[18] 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.[19]
[18] Re Amcom Telecommunications Ltd [2015] FCA 341 [10].
[19] Re SRG Ltd [12]; Re Wesfarmers Ltd [72] - [76].
Should orders be made for the convening of the meeting to consider the proposed Scheme?
The formal matters that K2fly must prove are satisfied. K2fly is a company and, accordingly, is a pt 5.1 body. There is no doubt that the proposed Scheme constitutes an 'arrangement' of a type that has been approved by courts on numerous occasions.
K2fly filed two affidavits, as required by r 3.2 of the Corporations Rules, from the persons who have been nominated to be the chairperson and alternate chairperson for the Scheme meeting.[20]
[20] Affidavit of Mark Foster filed 30 July 2024; Affidavit of Jonathan Heath Stuart Murray filed 30 July 2024.
By letter dated 2 August 2024, 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. ASIC also gave notice that it did not propose to appear at the first court hearing to make submissions or intervene to oppose the Scheme.[21]
[21] Affidavit of Hugo James Shervington filed 2 August 2024, 'HJS-4'.
On the materials before me, there was nothing to suggest the Scheme was not properly proposed. The constitution of K2fly does not prevent the Scheme.[22]
[22] Affidavit of Hugo James Shervington filed 12 July 2024, 'HJS-5'.
There are a number of conditions precedent to the Scheme.[23] Mr Pollock is not aware of any reason that any of these will not be satisfied or waived prior to the Implementation Date.[24]
Disclosure and Scheme booklet
[23] SID, cl 3.1.
[24] Affidavit of Nicholas Patrick Pollock filed 2 August 2024 [26].
I have been provided with a copy of the draft Scheme booklet,[25] the correspondence between ASIC and K2fly's solicitors[26] and the updated Scheme booklet provided to ASIC on 1 August 2024.[27]
[25] Affidavit of Hugo James Shervington filed 1 August 2024, 'HJS-1'.
[26] Affidavit of Hugo James Shervington filed 22 July 2024, 'HJS-1', 'HJS-2', 'HJS-3'.
[27] Affidavit of Hugo James Shervington filed 2 August 2024 [5], 'HJS-2'.
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 K2fly, including as to the funding of the Scheme Consideration.[28]
[28] Scheme booklet [12.4].
There is evidence before me as to the due diligence and verification process that was undertaken by both K2fly and Argyle. On the basis of this evidence, I accept that K2fly and Argyle have undertaken processes to verify the accuracy of statements attributable to each of them in the Scheme booklet and to ensure that the Scheme booklet does not omit any material information.[29]
[29] Affidavit of Nicholas Patrick Pollock filed 2 August 2024 [45] – [51]; Affidavit of Dean Jacobson filed 5 August 2024.
Based on the checklist provided by counsel for K2fly,[30] I 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).
[30] Plaintiff's submissions filed 2 August 2024, Appendix B.
In written and oral submissions, counsel for the plaintiff drew my attention to some specific matters. I address each of these below.
Performance risk
On the evidence before the court, I was and am satisfied that the nature and terms of the proposed Scheme 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 Argyle to recover their shares or damages.
Under the terms of the Scheme and Deed Poll:[31]
[31] Scheme, cl 6.2; Deed Poll, cl 3.1.
(a)Argyle must issue (or procure the issue of) the Scheme Consideration to a trust account no later than the business day prior to the Implementation Date;
(b)the Scheme Consideration will be paid into an onshore trust account with an Australian authorised deposit-taking institution;[32]
(c)subject to receipt of the Scheme Consideration from Argyle, K2fly is required to issue the Share Consideration to its shareholders on the Implementation Date;
(d)transfer of the Shares is subject to provision of the Share Consideration;
(e)beneficial title does not pass unless the Scheme Consideration has been issued in accordance with the Scheme;
(f)K2fly and each shareholder will have individual rights against Argyle in the event that Argyle fails to provide the Scheme Consideration; and
(g)these arrangements are supported by the Deed Poll, which can be enforced by any shareholder.
Exclusivity provisions and break fees
[32] Affidavit of Hugo James Shervington filed 5 August 2024.
The SID contains the customary lock‑up devices in the form of 'no shop', 'no talk', 'no due diligence', 'notification obligations' and 'matching right' provisions.[33] The 'no talk' and 'no due diligence' provisions are subject to a fiduciary carve out.[34] In certain circumstances, K2fly may be liable to pay a break fee of $390,000 (Break Fee).[35] A reverse break fee of $700,000 may also be payable by Argyle if it does not complete the transaction (Reverse Break Fee).[36]
[33] SID, cl 8.
[34] SID, cl 8.5.
[35] SID, cl 9.2.
[36] SID, cl 10.3.
In considering whether the exclusivity provisions impact on completion of the transaction and the duties of directors, the court has regard to:[37]
(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 do not breach their fiduciary duties or are otherwise unlawful; and
(c)whether there is adequate prominence given to these provisions in the Scheme booklet.
[37] Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 [29] - [35]; Re Kangaroo Resources Ltd [2018] WASC 327 [57] - [61]; Re Pacific Energy Ltd [2019] WASC 443 [58].
In this case, the exclusivity period is, at most, a period of approximately six months.
Mr Pollock has explained the commercial justification for the exclusivity provisions, the Break Fee and the Reverse Break Fee.[38] 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 and represented by external legal and financial advisers.
[38] Affidavit of Nicholas Patrick Pollock filed 2 August 2024 [71] – [73], [75] – [77].
The amount of the Break Fee of $390,000, is approximately 1.03% of the equity value of K2fly based on the Scheme Consideration at the date of entering into the SID. Although the Break Fee exceeds the 1% referred to in the Australian Takeovers Panel Guidance Note 7: Deal Protection, it is only slightly over 1% even if the highest estimate of equity value is accepted. I accept that in all the circumstances, the Break Fee reasonably reflects the costs, effort and risk involved in preparing the Scheme, as well as the actual expenses incurred by the parties in progressing the Scheme. The amount of the Break Fee is unlikely to influence how shareholders will vote on the Scheme. The margin by which the fee exceeds 1% is minimal. In my view, this should not be a barrier to permitting the proposal for the Scheme to proceed to a meeting for consideration by shareholders.[39]
[39] Re Foster's Group Ltd (No 2) [2011] VSC 547 [44].
Importantly, the exclusivity arrangements, the Break Fee and the Reverse Break Fee are prominently disclosed in the Scheme booklet.[40]
Director benefits and recommendations
[40] Scheme booklet [16.2] ‑ [16.4].
The directors of K2fly have unanimously recommended that, in the absence of a superior proposal, shareholders of K2fly vote in favour of the Scheme, and subject to Grant Thornton continuing to conclude the Scheme is in the best interests of K2fly shareholders.
K2fly drew my attention to the fact that three out of the four K2fly directors have interests in K2fly Shares.[41] Notwithstanding this, each K2fly director considers it is appropriate for them to make a recommendation in relation to the Scheme.
[41] One of the directors also holds ZEPOs which will convert to Shares prior the Record Date.
For the following reasons, it was and is my view that it was not inappropriate for each of the directors to make a recommendation in respect of the Scheme.
First, the consideration each of the directors will receive if the Scheme is implemented is being issued to them as consideration for Shares owned in K2fly. That is, they will receive the same consideration as every other shareholder of K2fly.
Second, each of the directors has considered whether they should make a recommendation on the Scheme to shareholders of K2fly and considered that it was appropriate for them to do so. In circumstances where the primary matter identified in respect of the directors is that they will receive the Scheme Consideration if the Scheme is implemented, I accept that these interests should not prevent the directors from making a recommendation to shareholders.
Finally and importantly, the K2fly directors' respective interests in K2fly and the Scheme is fully disclosed in the Scheme booklet.
Shareholder voting intention statements
The Scheme booklet discloses that voting intention statements to vote in favour of the proposed Scheme had been received from five shareholders. Those statements are expressly subject to no superior proposal emerging. The statements have been given by Maptek Pty Ltd (who controls approximately 17.5% of the Shares on issue), Regal Partners Ltd (who controls approximately 10.3% of the Shares on issue), Tribeca Investment Partners Pty Ltd (who controls approximately 10% of the Shares on issue), CSBP Ltd (who controls approximately 7.3% of the Shares on issue), and Nicholas Axam (who controls approximately 3.3% of the Shares on issue).[42]
[42] Scheme booklet [7.12].
I was satisfied these statements were appropriately (and prominently) disclosed in the Scheme booklet, consistent with both the Australian Takeovers Panel Guidance Note 23: Shareholder Intention Statements, and previous authorities.[43]
Deemed warranties
[43] See Re Azure Minerals Ltd [2024] WASC 58 [66].
K2fly also drew my attention to the deemed warranty provisions in the proposed Scheme.
The proposed Scheme provides that each shareholder of K2fly is deemed to have warranted their Shares are unencumbered. Further, pursuant to the proposed Scheme, each shareholder of K2fly is taken to have full power and capacity to sell and transfer their Shares.[44]
[44] Scheme booklet [10.12].
The existence of this provision is drawn to the attention of shareholders in the Scheme booklet. Deemed warranty clauses are not unusual and are accepted provided there is adequate disclosure that it is a condition.
I was and am satisfied that adequate disclosure has been given of these clauses.
Electronic despatch of the Scheme booklet
K2fly sought orders pursuant to s 1319 of the Act for electronic despatch of the Scheme booklet and applicable proxy form by email to K2fly shareholders that nominated an electronic address for the purpose of receiving communications from K2fly. These orders are now common. Details were provided as to the terms of the proposed electronic notification, namely that email notices would be sent to K2fly's shareholders containing links to the Scheme booklet and proxy form.
Shareholders who have elected to receive hard copy correspondence will receive all documents, including a copy of the Scheme booklet, by post.
In respect of the remaining K2fly shareholders (including those shareholders in respect of whom electronic delivery has been notified as being ineffective), K2fly proposed the despatch of a letter detailing how the relevant documents can be accessed and a proxy form by post.
I was and am satisfied that the proposed orders in relation to the despatch of the Scheme booklet and notice of the Scheme meeting to K2fly shareholders are appropriate.
Conclusion and orders
At the first hearing before me, 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 K2fly's members.
For these reasons, at the conclusion of the hearing on 5 August 2024, I made orders in terms of 'Annexure A' to this judgment in respect of the Scheme.
'Annexure A'
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
19 AUGUST 2024
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