Re Nitro Software Ltd

[2023] NSWSC 13

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Nitro Software Limited [2023] NSWSC 13

Hearing dates:

20 December 2022

Date of orders:

20 December 2022

Decision date:

24 January 2023

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Order convening scheme meeting and associated orders made.

Catchwords:

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

Legislation Cited:

- Corporations Act 2001 (Cth), ss 249R, 411, 131

Cases Cited:

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

- Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485

- Re Abacus Funds Management Ltd (2006) 24 ACLC 211

- Re Adelaide Bank Ltd [2007] FCA 1582

- Re Afterpay Ltd [2021] NSWSC 1435

- Re APN News & Media Ltd (2007) 62 ACSR 400

- Re Ardent Leisure Ltd [2018] NSWSC 1665

- Re Arthur Yates & Co Ltd (2001) 36 ACSR 758

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

- Re BIS Finance Pty Ltd [2017] NSWSC 1713

- Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510

- Re Cashcard Australia Ltd (2004) 48 ACSR 738

- Re Centrebet International Ltd [2011] FCA 870

- Re Coles Group Ltd (2007) 25 ACLC 1380

- Re CSR Ltd (2010) 183 FCR 358

- Re DUET Finance Ltd [2017] NSWSC 415

- Re DWS Ltd [2020] FCA 1590

- 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 GBST Holdings Ltd [2019] NSWSC 1280

- Re Healthscope Ltd (2019) 139 ACSR 608;

- Re Hostworks Group Ltd (2008) 26 ACLC 137

- Re Huon Aquaculture Group Ltd [2021] FCA 1170

- Re iSelect Ltd [2022] FCA 1329

- Re Kidman Resources Ltd (2019) 139 ASCR 122; [2019] FCA 1226

- Re Kyckr Ltd [2022] NSWSC 1316

- Re Macquarie Private Capital A Limited (2008) 26 ACLC 366; [2008] NSWSC 323

- Re MyDeal.com.au Ltd [2022] NSWSC 1094

- Re Pendal Group Ltd (No 2) [2022] NSWSC 1648

- Re Permanent Trustee Co Ltd (2002) 43 ACSR 601

- Re rhipe Ltd [2021] NSWSC 1170

- Re SAI Global Ltd [2016] FCA 1312

- Re Signature Gold Ltd [2017] FCA 766

- Re Simativa Holdings Ltd [2013] FCA 1274

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

- Re Spark Infrastructure RE Ltd [2021] NSWSC 1564

- Re Sydney Airport Limited and The Trust Company (Sydney Airport) Limited as responsible entity for Sydney Airport Trust 1 [2022] NSWSC 25

- Re Tax Free Solutions Ltd [2018] FCA 977

- Re Veda Group Ltd [2015] FCA 1506

- Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207

- Re Virtus Health Ltd [2022] NSWSC 597

- Re Vocus Group Ltd [2021] NSWSC 630

Category:

Principal judgment

Parties:

Nitro Software Ltd (Plaintiff)
Rocket BidCo Pty Limited (Bidder)
Potentia Capital Management Pty Ltd (Intervening entity)

Representation:

Counsel:
Mr D F C Thomas SC (Plaintiff)
Mr N M Bender SC (Bidder, Rocket BidCo Pty Limited)
Mr J Williams SC (Intervening entity, Potentia Capital Management Pty Ltd)

Solicitors:
Allens (Nitro Software Ltd)
Gilbert & Tobin (Rocket BidCo Pty Limited)
Johnson Winter Slattery (Potentia Capital Management Pty Ltd)

File Number(s):

2022/370396

Judgment

Nature of the application and background

1. By Originating Process filed 8 December 2022, Nitro Software Limited (“Nitro”) seeks orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) convening a meeting of all holders of fully paid ordinary shares of Nitro to consider and vote upon a proposed scheme of arrangement.

2. By way of background, Nitro is a listed public company that offers document productivity and e-signing software as a service solutions across a range of industries including real estate, healthcare, manufacturing, energy, oil and gas, financial and professional services and education. Under the proposed scheme, Rocket BidCo Pty Ltd (“Bidder”), which is incorporated in Australia, would acquire all fully paid ordinary shares in Nitro for a cash amount of A$2.15 for each Nitro share. The Bidder is a wholly-owned subsidiary of Cascade Parent Limited, trading as Alludo (“Alludo”), a private company incorporated in St Helier, Jersey, and Alludo is indirectly controlled by funds and/or investment vehicles managed and/or advised by one or more subsidiaries of KKR & Co. Inc.

3. Under an Implementation Deed dated 15 November 2022 and Amending Deed dated 12 December 2022, Nitro and Alludo agreed to implement the scheme subject to the satisfaction, or waiver, of various conditions precedent, including Nitro shareholder approval and Court approval of the scheme. As contemplated by the Implementation Deed, the Bidder is also making a simultaneous off-market takeover offer for all Nitro shares for the same cash consideration of A$2.15 per share (“Alludo Takeover Offer”), which is conditional on a number of matters, including that the scheme is not approved by the requisite majority of Nitro shareholders at the scheme meeting or not approved by the Court.

4. I made the orders sought at the conclusion of the hearing on 20 December 2022. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Thomas, who appears for Nitro in the application, in this judgment.

Affidavit evidence

5. Nitro relies on the several affidavits in support of its application. Nitro reads the affidavit dated 8 December 2022 of Ms Ellen Trevanion, a solicitor in the firm acting for Nitro in relation to the scheme. Nitro also reads the affidavit dated 16 December 2022 of Ms Sarah Morgan, a non-executive director of Nitro, which confirms her willingness to act as chair of the scheme meeting. By his affidavit dated 16 December 2022, Mr Kurt Alan Johnson, a non-executive director of Nitro, confirms his willingness to act as chair of the scheme meeting if Ms Morgan is unable to act as chair of that meeting.

6. By his affidavit dated 19 December 2022, Mr Samuel Chandler, who is the co-founder and chief executive officer of Nitro, summarises the proposed transaction and deals with the verification of the information contained in the transaction booklet for which Nitro is responsible.

7. By her affidavit dated 16 December 2022, Ms Doris Grave, a Senior Relationship Manager at Computershare Investor Services Pty Ltd (“Computershare”), outlines the services which Computershare will provide in connection with the scheme, including the despatch of transaction materials and compilation of proxy forms. By his affidavit dated affirmed 16 December 2022, Mr Gavin Reed, the general manager of Lumi Technologies Pty Ltd (“Lumi”), addresses its engagement to provide further services in connection with the scheme, including the recording of votes cast at the scheme meeting and the hosting of that meeting as a hybrid meeting allowing in-person attendance or online attendance on the Computershare platform, which will display a broadcast of the in person scheme meeting and enable Nitro shareholders to participate virtually in that meeting.

8. By her affidavit dated 18 December 2022, Ms Connie Yu-Wha Chen, the Chief Legal Officer of the Alludo Group of companies, sets out information about the Bidder and Alludo, the verification of the information contained in the transaction booklet for which the Bidder is responsible, exclusivity provisions and break fee provisions and the deed poll in respect of the scheme. By his affidavit dated sworn on 16 December 2022, Mr Paul Burton, addresses his legal opinion regarding the due execution and enforceability of the deed poll under Jersey law and, by his affidavit also dated 16 December 2022, Mr Grant Dixon addresses his opinion regarding the due execution and enforceability of an equity commitment letter under Cayman Islands law.

9. By his affidavit dated 19 December 2022, Mr Ian Jedlin, a Managing Director of Kroll Australia Pty Ltd (“Kroll”), addresses his independent expert's report.

10. Nitro also relies on an affidavit dated 20 December 2022 of Mr Noah Obradovic, a partner of Allens, which deals with the provision of the draft transaction booklet and other materials to the Australian Securities & Investments Commission (“ASIC”), an application for relief made to ASIC and ASIC's confirmation that it does not currently propose to appear to make submissions or intervene at the first Court hearing. Nitro also tendered ASIC’s letter dated 20 December 2022 (Ex P1), largely in conventional form, confirming that position and otherwise reserving its position as to s 411(17) of the Act to the second Court hearing. ASIC also there noted a matter raised by Potentia Capital Management Pty Ltd (“Potentia”), a shareholder in and competing bidder for Nitro, as to whether quoted and unquoted treasury shares in respect of Nitro’s employee share scheme (“ESS”) would be voted at the scheme meeting; noted that it had requested Nitro to “tag” any votes cast by the trustee of the ESS scheme (“ESS Trustee”) at the scheme meeting; and expressed the sensible view that that matter can be addressed at the second Court hearing in respect of the scheme.

Applicable principles

11. Mr Thomas draws attention to the well-established principles in respect of the Court’s role at the first Court hearing in respect of a scheme. As Mr Thomas points out, in considering whether to order that a scheme meeting be convened and whether to approve a draft explanatory memorandum under s 411 of the Act, the Court will have regard to matters including whether the plaintiff 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 shareholders; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine, and make submissions in respect of, the terms of the scheme and the scheme booklet and has had 14 days’ notice of the proposed first Court hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and whether there is any apparent reason why the scheme should not, in due course, receive the Court’s approval if the necessary majority of votes is achieved: Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]; Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207 at [15]. Mr Thomas also rightly recognises that, at the first Court hearing, the Court will not ordinarily summon a scheme meeting unless the scheme is of such a nature and cast in such terms that if it received the statutory majority at the scheme meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504.

12. Mr Thomas also refers to the frequently-cited observation of French J in Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44], cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358 at [58]), that:

“It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court’s approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O’Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to “introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage”: Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J).

The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further.”

13. Mr Thomas also notes that, at the first Court hearing, the Court is concerned not with whether final approval should be given to the scheme, but 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 for it to be submitted for consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211 at [23]; Re Villa World at [18]. Mr Thomas also rightly submits that the Court is not required to be satisfied at the first Court hearing that no better scheme could have been proposed, and that the Court will have regard to whether sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re DUET Finance Ltd at [14]; Re BIS Finance Pty Ltd at [22].

14. Mr Thomas submits and I accept that the formal requirements to convene a scheme meeting are satisfied in this application. Nitro is a Part 5.1 body as defined in s 9 of the Act. The proposed scheme is designed to effect an acquisition by one company of shares in another and falls within the concept of a “compromise or arrangement” within the meaning of s 411(1) of the Act. Nitro has applied, by way of the Originating Process, for an order pursuant to s 411(1) of the Act. On 5 December 2022, Nitro provided a draft of its proposed transaction booklet (including its annexures) to ASIC, more than 14 days before the first Court hearing on 20 December 2022, and ASIC was also advised of the date and time for the first Court hearing. A copy of the Originating Process was provided to ASIC on 14 December 2022; the evidence to be relied upon (either as filed or in final draft) was provided to ASIC; and, as I noted above, Nitro has tendered a letter from ASIC indicating that it does not currently propose to appear, to make submissions or intervene to oppose the convening of the scheme meeting. The matters prescribed by the Supreme Court (Corporations) Rules 1999 (NSW) are satisfied, where the affidavit in support of the Originating Process exhibited a company search of Nitro within the last 7 days; Ms Morgan’s and Mr Johnson’s affidavits confirm their willingness to act as chair of the scheme meeting; and Nitro’s proposed orders sufficiently identify the scheme.

15. Mr Thomas also points out that it is proposed that the scheme meeting is proposed be held as a hybrid meeting which Nitro shareholders may attend in person or virtually by using the online platform hosted by Lumi which will allow them to listen to the scheme meeting, ask questions online and cast an online vote. Mr Thomas submits and I accept that s 249R of the Act permits a company to hold a meeting of its members at one or more physical venues and using virtual meeting technology, provided that members as a whole have a reasonable opportunity to participate in the meeting, including by allowing them to exercise orally and in writing any rights of those members to ask questions and make comments. I am satisfied, having regard to Mr Reed’s affidavit, that the Lumi platform allows members to participate in the meeting in accordance with this requirement. Mr Thomas also points out that the procedures for voting and participation at the scheme meeting are disclosed in the transaction booklet.

16. Turning to the substantive terms of the proposed scheme, Mr Thomas points out that the Nitro directors unanimously recommend that Nitro shareholders vote in favour of the scheme, in the absence of a Superior Proposal (as defined) and subject to the independent expert continuing to conclude that the scheme is in the best interests of Nitro shareholders. The independent expert, Mr Jedlin, has assessed the value of a Nitro share to be in the range of A$2.00 to A$2.20 on a 100% controlling interest basis; observed that the scheme consideration (A$2.15) falls within that valuation range; and expressed the opinion that that the scheme is fair and reasonable and therefore in the best interests of Nitro shareholders, in the absence of a Superior Proposal. Subject to the particular matters that I address below, I accept that the proposed scheme is fit for consideration by a meeting of Nitro shareholders and reflects a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court on an uncontested application, and there are no discretionary matters warranting a refusal by the Court to convene the scheme meeting.

Particular aspects of the scheme

17. Mr Thomas rightly recognises the Court’s expectations in a hearing of this kind, as noted by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at 603, and specifically draws several aspects of the scheme to the Court’s attention.

18. First, Mr Thomas addresses the question of performance risk. He points out that the Bidder’s obligations under the scheme are supported by the deed poll given by the Bidder and Alludo in favour of Nitro shareholders. Where that deed poll is executed by a foreign company, affidavit evidence is generally led by a lawyer in the jurisdiction of its incorporation proving due execution; and, where the deed poll contains a jurisdiction clause in favour of an Australian jurisdiction, evidence of enforceability of the deed poll in the jurisdiction of incorporation is ordinarily not required: Re Simativa Holdings Ltd [2013] FCA 1274 at [43]; Re Veda Group Ltd [2015] FCA 1506 at [32]-[33]; Re BIS Finance Pty Ltd at [45]; Re Afterpay Ltd [2021] NSWSC 1435 at [45]. The due execution and enforceability of the deed poll as against Alludo, which is incorporated in Jersey, are addressed by Mr Burton’s affidavit to which I referred above. Mr Thomas points out that KKR Americas Fund XII L.P has also executed an equity commitment letter which is conditional upon the scheme becoming effective upon lodgement of the Court’s orders approving the scheme with ASIC. Mr Thomas submits and I accept that condition is mechanical in nature and poses no real risk to scheme securityholders as it will be satisfied before their securities are acquired: Re Spark Infrastructure RE Ltd [2021] NSWSC 1564 at [20]. The equity commitment letter only terminates upon the payment of the scheme consideration or effective termination of the Implementation Deed.

19. In accordance with what is now common practice, the transfer of Nitro shares to the Bidder is conditional upon the payment of the consideration to scheme consideration to Nitro shareholders in accordance with cll 4.2 and 6 of the scheme. This structure is a sufficient safeguard against the risk that Nitro shareholders will suffer delay or default in the provision of the cash consideration after their Nitro shares have been transferred to the Bidder, and avoids the risk that Nitro shareholders would be left to bring proceedings under the deed poll after the transfer of their shares: Re APN News & Media Ltd (2007) 62 ACSR 400 at [23]; Re Signature Gold Ltd [2017] FCA 766 at [66]; Re DUET Finance Ltd at [47]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [29]; Re MyDeal.com.au Ltd [2022] NSWSC 1094 at [29]; Re Pendal Group Ltd (No 2) [2022] NSWSC 1648 at [26].

20. Second, Mr Thomas addresses the position as to Nitro shares held within an employee share scheme (“ESS Securities”). He points out that Nitro provides certain employees, senior management and directors (“ESS Participants”) with equity-based incentives, and the nature of those ESS Securities and the impact of the scheme on them is set out in detail in sections 6.7 and 6.8 of the transaction booklet. Mr Thomas notes that the proposed waiver of vesting conditions of ESS Securities on the implementation of the scheme, and the Nitro board's reasons for deciding to waive the vesting conditions on occurrence of a change of control transaction, are disclosed in section 6.8 of the transaction booklet. He submits and I accept that it is common for such a waiver to occur and for securities in the nature of ESS Securities to vest on occurrence of a change of control transaction, and this matter does not provide a reason to decline to convene the scheme meeting: Re Tax Free Solutions Ltd [2018] FCA 977 at [47]; Re Kidman Resources Ltd (2019) 139 ASCR 122; [2019] FCA 1226 at [85]. Mr Thomas submits and I also accept that holders of ESS Securities who are also Nitro shareholders are not in a separate class by reason only that they also hold ESS Securities: Re Cashcard Australia Ltd (2004) 48 ACSR 738; Re Foster’s Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Kyckr Ltd [2022] NSWSC 1316 at [16].

17. Third, Mr Thomas also draws attention to a matter which ASIC had noted in its letter dated 20 December 2022 (Ex P1), to which I referred above. Nitro has on issue 6,283,923 unquoted treasury shares (“Unquoted Treasury Shares”) and 3,185,461 quoted Treasury Shares (“Quoted Treasury Shares”), which are available to satisfy its obligations to issue Nitro shares to ESS Participants following the vesting and/or exercise of their ESS Securities in accordance with the terms of issue under the relevant plan rules. Both the Unquoted Treasury Shares and Quoted Treasury Shares are held by the ESS Trustee, a third-party trustee, under the terms of the Nitro Employee Share Trust (“ESS Trust”) on behalf of the holders of ESS Securities who are eligible to participate in Nitro's incentive plans. Mr Thomas points out that both categories of shares are voting shares as defined in s 9 of the Corporations Act, although only the Quoted Treasury Shares are quoted on ASX. The Unquoted Treasury Shares and/or Quoted Treasury Shares are allocated to the relevant ESS Participant (“Allocated Plan Shares”) when ESS Securities vest in accordance with their terms of issue under Nitro's incentive plans. Allocated Plan Shares may be held by the ESS Trustee on behalf of the relevant ESS Participant but, by cl 9.2 of the ESS Trust, the ESS Trustee must only exercise voting rights attached to Allocated Plan Shares in accordance with the directions of the relevant ESS Participant. However, until Unquoted Treasury Shares and Quoted Treasury Shares are allocated to a specific ESS Participant, any voting rights in relation to the unallocated shares may be exercised at the ESS Trustee’s discretion.

18. Mr Thomas submits that these arrangements do not warrant the Court declining to convene the scheme meeting. He submits that the ESS Trustee is an independent third-party trustee with an express power conferred by the ESS Trust Deed to vote unallocated Unquoted Treasury Shares and Quoted Treasury Shares in accordance with its discretion, which will presumably be informed by its fiduciary obligations to ESS Participants as a whole. He also submits that this arrangement does not require that the ESS Trustee vote (if it does so) in a separate class, where the rights of the ESS Trustee as Nitro shareholder are relevantly the same as those of other registered holders, and no other aspect of the arrangements governing the ESS Trust renders consultation between the ESS Trustee and other shareholders impossible. As I noted above, ASIC has already requested that Nitro “tag” any votes cast by the ESS Trustee at the scheme meeting and expressed the sensible view that this matter can be addressed at the second Court hearing in respect of the scheme. Nitro has indicated that it will tag any votes cast by the ESS Trustee in respect of shares that have not been allocated to ESS Participants, where the decision as to how to vote would be made in the ESS Trustee’s discretion rather than by the ESS Participant. I am satisfied that any issue as to voting by the ESS Trustee at the scheme meeting, and the impact of any votes it casts on the outcome of the scheme meeting, is properly be addressed at the second Court hearing, in determining whether the Court should exercise its discretion to approve the scheme.

19. Fourth, Mr Thomas draws attention to the Nitro board’s unanimous recommendation that Nitro shareholders vote in favour of the scheme and accept the Alludo Takeover Offer, as set out in the Chairman’s letter and sections 3.5 and 3.7 of the transaction booklet. Those sections also indicate that each Nitro director intends to vote all Nitro shares that he or she controls or holds (being in aggregate 12% of Nitro shares) in favour of the scheme and intends to accept the Alludo Takeover Offer in respect of all of those shares. Mr Thomas also notes that the interests of Nitro directors and related parties in those shares are disclosed in section 6.9 of the transaction booklet. He recognises that, in addition to holding Nitro shares, five Nitro Directors also hold ESS Securities, which (as noted above) will vest as fully paid Nitro shares if the scheme becomes effective. Mr Thomas recognises that, on this basis, several Nitro directors stand to benefit from the scheme consideration if the scheme becomes effective. He also notes that it is anticipated that all share rights held by Nitro directors will vest prior to (and irrespective of) the scheme becoming effective, and he refers to disclosure as to the position of Mr Chandler, the chief executive officer of and a director of Nitro, and of Ms Gina O'Reilly, Nitro's chief operating officer and a related party of Mr Chandler, in the Chairman’s letter and in section 3.4 of the transaction booklet.

20. Mr Thomas submits and I accept that a director who will receive a benefit in relation to a scheme, which other shareholders will not receive, may make a recommendation as to the scheme, if that benefit is fully and prominently disclosed as a matter for shareholders to take into account when considering that recommendation: Re SMS Management & Technology Ltd [2017] VSC 257 at [22]-[27]; Re Kidman Resources Ltd at [115]; Re DWS Ltd [2020] FCA 1590 at [41]-[49]; Re Villa World Ltd at [38]; Re GBST Holdings Ltd [2019] NSWSC 1280 at [24]-[30]; Re Afterpay Ltd at [43]. I am satisfied that, where the transaction booklet sufficiently discloses the benefits that the relevant Nitro directors would receive if the scheme is implemented, the recommendation made by Nitro directors with interests in the scheme is not a reason to decline to convene the scheme meeting.

21. Fifth, Mr Thomas addresses the question of exclusivity provisions. Clause 13 of the Implementation Deed contains representations and warranties from Nitro as to the termination of discussions concerning competing proposals (cl 13.1); "no-shop", "no talk" and "no due diligence" restrictions on Nitro (cll 13.2-13.4); an obligation on Nitro to notify the Bidder of any third party competing proposal (cl 13.6); and a "matching right" in favour of the Bidder in respect of any competing proposal (cl 13.6). The "no talk" and "no due diligence" restrictions in cll 13.3 and 13.4 of the Implementation Deed are subject to a "fiduciary carve-out" under cl 13.5 of the Implementation Deed, which applies where not taking certain actions would likely be inconsistent with Nitro's directors' duties under applicable law. Mt Thomas submits and I accept that exclusivity provisions in this form are now commonplace in s 411 schemes. He submits and I accept that these restrictions are consistent with the guidance contained in the Takeovers Panel's Guidance Note 7: Lock-up devices, and that Guidance Note and prior authority do not require a fiduciary carve-out with respect to "no-shop" provisions: Re Coles Group Ltd (2007) 25 ACLC 1380 at [62]–[63]; Re Macquarie Private Capital A Ltd (2008) 26 ACLC 366; [2008] NSWSC 323 at [18]–[19]; Re Hostworks Group Ltd (2008) 26 ACLC 137 at [34]–[37].

22. Mr Thomas recognises that the Court will consider whether such exclusivity restrictions have effect for no more than a reasonable period capable of precise ascertainment, and whether they are clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9]. Here, the "Exclusivity Period" is defined in cl 1.1 of the Implementation Deed and, at most, lasts for 9 months from the date of the Implementation Deed, unless a later date is agreed by the parties; and there is evidence that that period was agreed in light of the requirement to obtain various foreign regulatory approvals in relation to the scheme and the holiday period from late December 2022 to January 2023. I also recognise that exclusivity periods of that length have previously been accepted in broadly comparable transactions: Re Vocus Group Ltd [2021] NSWSC 630 at [17]; Re iSelect Ltd [2022] FCA 1329 at [58]. I accept that the exclusivity provisions are prominently disclosed in section 10.1 of the transaction booklet and there is evidence that they were the product of negotiations between the parties at arm's length. This matter gives rise to no reason not to convene the scheme meeting.

23. Sixth, Mr Thomas addresses a break fee provided in respect of the scheme. A break fee of AU$5,000,000 is potentially payable by Nitro to the Bidder (“Nitro Break Fee”) under cl 14.2 of the Implementation Deed and that matter is disclosed in section 10.1(b) of the transaction booklet. The Nitro Break Fee is not triggered solely by Nitro shareholders failing to approve the scheme, and is not a disincentive to shareholders declining to approve the scheme: Re Adelaide Bank Ltd [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513 at [12]. There is evidence that the Nitro Break Fee was also negotiated between the parties in the course of negotiations at arm's length, in which all parties were represented by experienced advisers, and represents approximately 1% of the total scheme consideration being paid for the Nitro shares, as calculated at their traded price immediately prior to the announcement of the scheme on 15 November 2022. I accept that payment of break fees of this magnitude are also commonplace in schemes of this kind and this matter gives rise to no reason not to convene the scheme meeting.

24. Seventh, Mr Thomas points out that Nitro proposes to adopt a process for the despatch of materials, to be undertaken by Computershare, which is consistent with that adopted in several recent cases, involving despatch in electronic or hard copy form: Re rhipe Ltd [2021] NSWSC 1170 at [27]; Re Sydney Airport Limited and The Trust Company (Sydney Airport) Limited as responsible entity for Sydney Airport Trust 1 [2022] NSWSC 25; Re Australian Leisure and Entertainment Property Management Ltd [2021] NSWSC 1421. That process is not controversial and also provides no reason not to convene the scheme meeting

25. Eighth, Mt Thomas notes that the scheme provides for a deemed warranty by Nitro shareholders that their shares will be free from encumbrances (cl 9.4 of the scheme) which is disclosed in section 10.6 of the transaction booklet. A warranty of that kind, where appropriately disclosed, also, provides no reason not to convene the scheme meeting: Re APN News and Media Ltd at [57]-[63]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26].

26. Ninth, Mr Thomas rightly recognises that the Court will address the question posed by s 411(17) of the Act in determining whether to approve the scheme at the second Court hearing: Re Macquarie Private Capital A Ltd. I defer addressing that question to that point.

27. Tenth, as I have noted above, this transaction involves a parallel scheme of arrangement and takeover bid and that form of transaction has its potential complexities. However, that approach has been accepted in earlier case law, including the decisions in Re Healthscope Ltd (2019) 139 ACSR 608; [2019] FCA 542 and Re Huon Aquaculture Group Ltd [2021] FCA 1170. In Re Virtus Health Ltd [2022] NSWSC 597 at [25], I noted, in respect of a similar structure, that:

“I recognise that that approach was accepted in Re Healthscope Ltd (2019) 139 ACSR 608 [[2019] FCA 542] at [40], where Beach J indicated that Healthscope proposed to take that course and recorded, without further explanation, that he agreed with it. A similar approach appears to have been accepted, again without analysis, in Re Huon Aquaculture Group Ltd [2021] FCA 1170. I proceed on the basis that this approach is permissible, where [intervening party] did not contend to the contrary, and I am conscious of the desirability of consistent decision-making in respect of matters arising under national legislation, here the Corporations Act, particularly in commercial transactions such as schemes where predictability is an important value. Having said that, this matter highlights the complexities that may arise, where a transaction booklet seeks to deal with a proposed scheme, a contested takeover bid and, here, also a proposed capital return, at the same time. It also highlights the risk that collateral challenges to the information provided as to a takeover bid or associated transactions may then complicate the process of approval of the scheme. It seems to me that scheme proponents and their advisers, and possibly ASIC, may be well advised to give further thought to the desirability of this approach.”

32. I again recognise the desirability of consistent decision making in respect of matters arising under national legislation, relevantly the Corporations Act, and in commercial transactions such schemes where predictability is an important value. Having regard to those matters, I would not depart from that approach at this first Court hearing.

Orders

33. For these reasons, I made the orders sought by Nitro at the conclusion of the first Court hearing on 20 December 2022.

**********

Decision last updated: 27 January 2023