Re ResApp Health Ltd

[2022] NSWSC 983

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of ResApp Health Ltd [2022] NSWSC 983

Hearing dates:

15 July 2022

Date of orders:

15 July 2022

Decision date:

21 July 2022

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

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

Catchwords:

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

Legislation Cited:

- Corporations Act 2001 (Cth), s 411

Cases Cited:

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

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

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

- Re Afterpay Ltd [2021] NSWSC 1435

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

- Re Ardent Leisure Ltd [2018] NSWSC 1665

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

- Re Associated Advisory Practices Ltd [2013] FCA 761

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

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

- Re BINGO Industries Ltd [2021] NSWSC 798

- Re BIS Finance Pty Ltd [2017] NSWSC 1713

- Re Centrebet International Ltd [2011] FCA 870

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

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

- Re CSR Ltd (2010) 183 FCR 358; (2010) 265 ALR 703; (2010) 77 ACSR 592; [2010] FCAFC 3

- Re DUET Finance Ltd [2017] NSWSC 415

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

- Re Ellerston Global Investments Ltd [2020] NSWSC 879

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

- Re GBST Holdings Ltd [2019] NSWSC 1280

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

- Re Macquarie Private Capital A Ltd [2008] NSWSC 32

- Re Mainstream Group Holdings Ltd [2021] FCA 948

- Re rhipe Ltd [2021] NSWSC 1170

- Re Simavita Holdings Ltd [2013] FCA 12

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

- Re Villa World Ltd [2019] NSWSC 1207; Re RXP Services Ltd [2021] FCA 38 and

- Re Staging Connections Group Ltd [2015] FCA 1012

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

- Re Windlab Ltd [2020] NSWSC 571

Category:

Principal judgment

Parties:

ResApp Health Limited (Plaintiff)

Representation:

Counsel:
A J Papamatheos (Plaintiff)
D F C Thomas SC (Acquirer)

Solicitors:
DLA Piper (Plaintiff)
Allens (Acquirer)

File Number(s):

2022/191161

Judgment

Nature of the application and background

1. By Originating Process filed on 30 June 2022, ResApp Health Ltd (“ResApp”) applies for orders under s 411(1) of the Corporations Act 2001 (Cth) (“Act”), in the first instance, convening a meeting of its members for the purpose of considering and voting upon a proposed scheme of arrangement by which Pfizer Australia Holdings Pty Ltd (“Pfizer Australia”), a subsidiary of Pfizer Inc, would acquire all of its fully paid ordinary shares. ResApp also seeks associated orders in respect of the conduct of the scheme meeting and approving the explanatory memorandum for distribution to its members. If the scheme is approved by its shareholders, ResApp will seek an order under s 411(4)(b), and if necessary under s 411(6) of the Act, that the scheme be approved and associated orders.

2. By way of background, ResApp is an Australian public company that is listed on the Australian Securities Exchange (“ASX”). ResApp is involved in digital health and specialises in the diagnosis and management of a range of acute and chronic respiratory illnesses with a specific focus on smartphone-based audio diagnostic tools, and is developing a smart-phone based COVID-19 screening application. On 11 April 2022, ResApp announced to ASX that it had entered into a scheme implementation deed (“SID”) with Pfizer Australia which provided for Pfizer Australia to acquire all of its issued shares by the proposed scheme for a total cash consideration of $0.115 per share. Also on 11 April 2022, the same date as the SID, ResApp also entered into a research and development licence agreement (“RDLA”) with Pfizer Inc.]

3. In late April 2022, ResApp commissioned a third party to obtain initial feedback from major ResApp shareholders as to the initial consideration under the proposed scheme, which indicated that some of ResApp’s major shareholders did not support the scheme at the price originally proposed, and communicated that information to Pfizer Inc. ResApp also commissioned BDO Corporate Finance (WA) Pty Ltd (“BDO”) to prepare a report as to whether the proposed scheme was in the best interests of ResApp shareholders. On 30 May 2022, BDO provided a draft independent expert report to the ResApp board, which determined the value of a ResApp share (on a controlling interest basis) was $0.146 to $0.277, with a preferred value of $0.207 per share, with the implication that the then proposed transaction would be neither fair nor reasonable to ResApp shareholders.

4. After a period of consultation and negotiation between ResApp and Pfizer, they entered into an amended scheme implementation deed (Amended SID”), which increased the price payable in respect of the proposed scheme. On 14 June 2022, ResApp announced an amendment to the SID which contemplated that the cash consideration under the scheme would be increased, by an amount which depended on the results of a data confirmation study in relation to the “ResApp COVID-19 algorithm”, to $0.207 per share if a Qualifying Confirmatory Data Readout Condition (as defined) was satisfied, or to $0.146 per share if that condition was not satisfied. In the event, that condition was not satisfied so the lower consideration would be payable. On 30 June 2022, ResApp announced to ASX that Pfizer Australia had confirmed that it would not waive the relevant condition, with the result that the scheme consideration would be $0.146 per share in cash.

Affidavit evidence

5. ResApp relies on the affidavit dated 30 June 2022 of its solicitor, Mr Matthew Spain, who notes that ResApp is an Australian public company limited by shares and refers to the structure of the proposed scheme.

6. By an affidavit dated 8 July 2022, Dr Anthony Keating, who is the chief executive officer and managing director of ResApp outlines the background of the proposed scheme and sets out aspects of its history, to which I have referred above. Dr Keating addressed the manner in which the scheme consideration had been increased, as noted above, and referred to the spread of ResApp’s shareholders and addressed several specific aspects of the Amended SID, including break fees, exclusivity provisions and the recommendations made by directors, and also referred to the preparation of the proposed scheme booklet and the verification of ResApp information contained in that scheme booklet. Dr Keating also referred to the independent expert’s report, which was then dated 24 June 2022, and to advice provided by the independent expert that it had reviewed market announcement and ResApp’s assets and liabilities and concluded there was no change in its opinion, and it did not consider it necessary to address a supplementary or updated report. In the event, and desirably, the independent expert has since updated its report, and Dr Randerson of Acuity Technology Management has updated a valuation report on which the independent expert relies, so that each are current to the date of the first Court hearing. Dr Keating also refers to the proposed manner of dispatch of the scheme booklet and to the retainer of a third party to operate a shareholder information line which will respond to inquiries made by shareholders in respect of the proposed scheme. I have reviewed, and have no difficulty with, the information which is proposed to be provided to shareholders in response to such inquiries, which is consistent with the information contained in the scheme booklet.

7. By a second affidavit dated 12 July 2022, Dr Keating addresses the terms of the RDLA and observes that the proposed scheme is a separate transaction to the RDLA. He points to the fact that Pfizer Inc made a $4 million payment as consideration for ResApp performing its obligations under the RDLA; importantly, the termination events contained in the RDLA are independent of the termination events in the SID and the termination of one will not trigger the termination of the other; after the initial term of the RDLA, it may only be extended by mutual agreement; and a first right of negotiation in respect of commercial transactions granted by ResApp to Pfizer under the RDLA does not extend to any Competing Proposal (as defined) in respect of the scheme. Dr Keating points out that the material terms of the RDLA are disclosed in the scheme booklet. Importantly, the RDLA is also a non-exclusive arrangement and would not prevent the grant of rights to a competitor of Pfizer Inc or Pfizer Australia, including a competing acquirer, by ResApp.

8. By an affidavit dated 12 July 2022, Mr James Philips, who is an experienced former solicitor, consents to act as chair of the scheme meeting and, by an affidavit dated 12 July 2022, Mr James Nicholls, also an experienced solicitor, consents to act as chair of the scheme meeting if Mr Philips is unable to do so. It is relatively uncommon in scheme practice in New South Wales for independent solicitors to chair scheme meetings, although Mr Papamatheos, who appears for ResApp, points to the fact that that practice is more common in at least one other Australian state. Subsequent evidence, to which I refer below, confirms that Dr Keating and another executive of ResApp will be present at the scheme meeting, to address questions which shareholders may have in respect of the commercial rationale for the proposed transaction. On that basis, I see no particular difficulty with the use of an independent chair of the relevant meetings. I would have had greater reservations as to that course, if it had the potential that those to whom shareholders would direct questions at that meeting would not have had the knowledge necessary to answer them.

9. By an affidavit dated 13 July 2022, Mr Matthew Nowotny-Walsh, who is a solicitor acting for ResApp in the application, addresses waivers obtained by ResApp from ASX in relation to the cancellation of certain options in connection with the proposed transaction and to correspondence with the Australian Securities and Investments Commission (“ASIC”). Mr Nowotny-Walsh also addresses the script which is to be used by a third party provider in answering questions raised by shareholders who call the shareholder information line.

10. By his affidavit dated 13 July 2022, Mr Tyler Conway, who is corporate counsel, M&A and Licensing for Pfizer Inc, refers to the development of the proposed transaction and outlines the verification process which has been undertaken in respect of Pfizer information contained in the scheme booklet, and refers to the negotiation of exclusivity provisions and a break fee in respect of the scheme. He set out, in relatively general terms, the nature of the costs incurred by Pfizer which are the subject of that break fee, which is not large in absolute terms, and is within the Takeover Panel’s guidelines so far as the size of the transaction is concerned.

11. By his first affidavit dated 13 July 2022, Mr Adam Myers, who is a director of BDO, set out his qualifications and experience and referred to the preparation of an independent expert’s report in respect of the scheme, and confirmed that he held the opinions expressed in the then draft of that report at the date of his affidavit; he had had regard to applicable ASIC regulatory guidelines and to the Expert Witness Code of Conduct; and he had made all inquiries that he believed were desirable and necessary for the purposes of preparing the report, no matters that he considered were of significance had been omitted from it, and he was not aware of any facts or circumstances which would cause him to change the opinions expressed in that report. Mr Myers has since updated that report and provided a further affidavit in respect of that updated report, to which I refer below.

12. By his second affidavit dated 14 July 2022, Mr Myers addressed his updated expert’s report, now dated 14 July 2022, which referred to several non-material developments between the date of his earlier report and that date, and to an updated valuation report prepared by Dr Randerson of Acuity Technology Management which addressed developments between the date of its earlier report, 30 May 2022, and 14 July 2022. Mr Myers confirmed that he was satisfied that his opinion was current as at 14 July 2022 and he continued to hold that opinion, and also confirmed that he was satisfied of the qualifications of Dr Randerson who had prepared the technology valuation report on which he had relied, and had also reviewed the assumptions and methodologies used in that report, which seemed to him to be reasonable and to draw on appropriate source data.

13. By his third affidavit dated 14 July 2022, Dr Keating confirmed that he would attend the proposed scheme meeting on 19 August 2022 and any adjournment of it; that he would sit with the chair of that meeting in order to respond to questions from ResApp shareholders in relation to the proposed scheme and its commercial rationale; and that an executive director of ResApp, Mr Leedman, would also attend the scheme meeting with him. Dr Keating also confirmed that the trust account which was to be opened to receive the scheme consideration would be held with National Australia Bank Limited, which is an Australian ADI, so that shareholders will have the benefit of the Australian prudential regulation regime in respect of the bank that is holding those funds.

14. By a second affidavit dated 14 July 2022, Mr Spain addressed further correspondence with ASIC in respect of the first Court hearing and proposed communications with ResApp shareholders at the time of dispatch of the scheme booklet and exhibited the current version of the scheme booklet. By her affidavit dated 15 July 2022, Ms Margit Baranyay, also a solicitor employed by ResApp’s solicitors, exhibited further correspondence from ASIC, including a letter granting relief from cl 8302(h) of the Part 3 of Schedule 8 of the Corporations Regulations in respect of financial reports contained in the scheme booklet and a letter dated 15 July 2022 confirming that ASIC had been given at least 14 days’ notice of the hearing of this application and had had a reasonable opportunity to examine the terms of the scheme and the draft explanatory memorandum, and that ASIC did not currently propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing, while reserving its position in respect of s 411(17)(b) of the Act for the second Court hearing in accordance with its usual practice.

Matters relevant to convening the scheme meeting

15. The Court will order the convening of the scheme meeting and approve the draft explanatory statement for the scheme if it is satisfied that ResApp is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the explanatory statement and make submissions and has had 14 days’ notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court’s approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554; [2016] FCA 366 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20].

16. Mr Papamatheos in turn submits and I accept that:

“It is uncontroversial that, at the first stage, the standard of review is whether the scheme is not inappropriate and is one that sensible businesspeople might consider of benefit to the scheme’s members. If the proposed arrangement is one that seems 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.”

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

The Court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the Court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Limited at 504-505. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The Court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72.

18. The Court will assess at the first Court hearing whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309 at [23]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[27]. The Court is not required to be satisfied that no better scheme could have been proposed, and the question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re DUET Finance Ltd above at [14]. I have drawn on my summary of the applicable principles in Re Afterpay Ltd [2021] NSWSC 1435 in this regard.

18. I am satisfied that ResApp is a Part 5.1 body, the proposed scheme is an arrangement within the meaning of s 411 of the Act, there is no reason to doubt that the scheme booklet provides proper disclosure to ResApp shareholders, and there has been a verification and due diligence process. Subject to the particular issues which I address below, there is no reason to doubt that the proposed scheme is bona fide and properly proposed and could be approved at the second Court hearing if it receives the requisite shareholder approvals. Although ASIC has reserved its position as to s 411(17)(b) in accordance with its usual practice, the Court can address that question at the second Court hearing. Subject to the particular issues which I address below, I am satisfied that the orders sought should be made in respect of the proposed scheme.

Specific issues arising in respect of the proposed scheme

Exclusivity provisions

20. Mr Papamatheos points out that, under cl 11 of the Amended SID, ResApp and Pfizer Australia have agreed that ResApp and its representatives are restricted from, directly or indirectly (among other things), soliciting, encouraging, initiating or inviting any competing proposal (cl 11.2(a)) (a “no shop” provision); and from negotiating or entering into, or participating in negotiations or discussions regarding, a competing transaction or any agreement, understanding or arrangement that may be reasonably expected to lead to a competing transaction (cl 11.2(b)) (“no talk” and “no due diligence” provisions). The latter no talk and no due diligence clause is subject to an express fiduciary and statutory duties carve out in cl 11.3 of the Amended SID. The Amended SID also includes notification and “matching right” provisions which require ResApp to notify Pfizer Australia of any negotiations, discussions, approaches, etc as well as giving Pfizer Australia the right to match any offer or make a superior offer to that put forward by a rival bidder, under cll 11.4 and 11.5 of the Amended SID.

21. Mr Papamatheos submits that:

“In general terms, an exclusivity provision should meet the following criteria:

(a)   it should be for no more than a reasonable period capable of precise ascertainment;

(b)   it must be framed so that the “no talk” provision is subject to an overriding obligation not to breach the directors’ fiduciary duties or be otherwise unlawful; and

(c)   the exclusivity clause should be given adequate prominence in the explanatory statement sent to shareholders.”

22. Mr Papamatheos also submits that the Exclusivity Period (as defined) is capable of precise ascertainment from the clauses (identified above), which are publicly announced so that any rival bidder can understand how they may make any approach or competing bid. He recognises that the Exclusivity Period extends for 9 months ending on 11 January 2023, and recognises that nine months is at the higher end of usual periods but submits that period has been accepted when there are regulatory approvals to seek and obtain. He points out that ACCC approval is here a significant condition precedent (SID, cl 3.1(a); Amended SID, cl 3.1(a)) and the parties are continuing to liaise with the ACCC. He points out that the “no talk” and “no due diligence” obligations do not apply to Competing Proposals (as defined) that were not solicited by ResApp in breach of cl 11.2(a), and that the terms of the fiduciary and statutory carve out in cl 11.3(a)-(b) are also common and practically workable for the board of ResApp if a competing proposal is received. He draws attention to Dr Keating’s evidence that the board of ResApp took advice on these clauses, that they were negotiated at arm’s length and the board considered that they would not prevent a competing bidder. He notes that the exclusivity provision has been adequately disclosed in the scheme booklet at the frequently asked questions table and sections 4.4 and 9.15.

23. Mr Papamatheos also submits that the RDLA made between ResApp and Pfizer Inc, which creates a non-exclusive licence and a joint venture, does not impose restraints upon the market for control for ResApp for several reasons. I have referred to that document above. I accept that the RDLA does not prevent a competing bid for ResApp and did not, prior to the SID, prevent ResApp from engaging with any third party or to solicit any proposal. I am satisfied that it did not amount to a pre-SID exclusivity arrangement that could lock out other valuable proposals for ResApp and does not now expand the exclusivity established under the SID.

24. I recognise that exclusivity provisions are now commonplace in schemes of arrangement: Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207 at [23]. I also recognise that matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive, where the terms of any competing proposal would likely need to be disclosed by ResApp in any event under its continuous disclosure obligations and the matching right process corresponds to the course that a prospective bidder or merger proponent would expect ResApp to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Ltd above at [24]. The case law indicates that an exclusivity provision directed at dealing with an unsolicited alternative merger proposal should also be subject to a fiduciary carve-out, although the case law has also accepted that a “no shop” restriction need not be subject to a fiduciary carve-out: Re DUET Management Company 1 Ltd [2013] NSWSC 817 at [24]; Re Aveo Group Ltd and Aveo Funds Management Ltd [2019] NSWSC 1348 at [44]. Exclusivity provisions must also be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re Villa World Ltd above at [23]. These provisions are disclosed in the scheme booklet.

25. The Court will also consider whether exclusivity provisions operate for no more than a reasonable period capable of precise ascertainment. I was concerned as to the length of the exclusivity provisions (9 months) in a relatively simple acquisition scheme but I was ultimately persuaded that the regulatory approvals involved may raise novel issues or matters of public policy, where ResApp is developing a diagnostic tool in respect of COVID-19 and the acquirer is a significant producer of COVID-19 vaccines. For that reason, a relatively long exclusivity period, which is at the longer end of the range of periods accepted in other cases, is acceptable here. The exclusivity provisions do not provide any reason not to order the convening of the scheme meeting.

Break fees

26. Mr Papamatheos points out that cl 12 of the Amended SID (read with cl 1.1 which defines the term “ResApp Break Fee”) provides for the payment of a “ResApp Break Fee” of $1,255,158 to Pfizer Australia by ResApp in specified circumstances. Clause 13 of the Amended SID also provides for Pfizer to pay a Pfizer Break Fee in specified circumstances. Mr Papamatheos submits that provisions of this kind are common in schemes of arrangement and do not prevent the Court making orders to convene meetings under s 411(1) of the Act, unless the break fee is so great that it may influence votes during the scheme meeting or if there is some other unusual circumstance or trigger which may give rise to a concern that shareholders would be coerced to vote for the proposal. He points out that the amount of the break fee is in line with the 1% threshold set by the Takeovers Panel, and represents 1% of the total equity value of ResApp, being $125,515,774 (as derived from the last closing price of ResApp shares prior to 14 June 2022 when the Amended SID was executed) (Keating, [49(b)]). He also points out that, under cl 12.2 of the Amended SID, the ResApp Break Fee is not payable if the proposed scheme is not approved by ResApp Shareholders (i.e., on a “naked no vote”) or to the extent that any court or regulatory authority refuses approval; that the break fee is not payable by ResApp if any ResApp director directors withdraws his or her support or recommendation of the scheme as a result of the Independent Expert opining that the Scheme is not in the best interests of ResApp Shareholders (cl 1.2(a)) (other than where there is a competing proposal); and that there is evidence that the amount of the ResApp Break Fee was negotiated, after advice, at arm’s length and represents a fair and reasonable pre-estimate of the minimum transaction costs Pfizer Australia would incur if the scheme did not proceed. The ResApp Break Fee is disclosed in sections 2.3(b) and 9.17 of the scheme booklet.

27. I accept that break fees are common features in schemes of arrangements and will be permitted unless the amount of the break fee is such that it could influence voting at the meeting to be convened or if there are some other unusual circumstances, and there is evidence that fee was negotiated between the parties during the course of arm’s length negotiations, consistent with the approach noted in Re APN News Media Ltd (2007) 62 ACSR 400; [2007] FCA 770. I accept that the break fee does not provide any reason not to convene the scheme meeting or approve the scheme booklet for dispatch.

ResApp options and consequential interests in directors’ recommendation

28. Mr Papamatheos recognises that all but one of the directors of ResApp hold options and will benefit from the manner in which they are treated under the proposed scheme, although the amounts involved are not large, and the position in that respect is disclosed in the Chairman’s Letter and section 10.2 of the scheme booklet. He submits that, as in other recent schemes, the interests of the directors do not prevent them from making a voting recommendation to ResApp shareholders as those interests are sufficiently disclosed in the scheme booklet and the shareholders may take such interests into account in giving weight to that recommendation

29. I adopt the approach taken in cases including Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Re Villa World Ltd [2019] NSWSC 1207; Re GBST Holdings Ltd [2019] NSWSC 1280; Re Citadel Group Ltd (2020) 148 ACSR 598; [2020] FCA 1580; Re Coca-Cola Amatil Ltd [2021] NSWSC 270; Re Afterpay Ltd above; Re BINGO Industries Ltd [2021] NSWSC 798; Re RXP Services Ltd [2021] FCA 38 and Re Mainstream Group Holdings Ltd [2021] FCA 948. I accept that the interests of the relevant ResApp directors do not prevent them from making a voting recommendation to ResApp shareholders where that interest is sufficiently disclosed in the scheme booklet and ResApp shareholders may take it into account in determining the weight to give to that recommendation. This matter also does not provide any reason not to order the convening of the scheme meeting.

Deemed warranty

30. The scheme contains a warranty (cl 8.4) by scheme shareholders, by which they warrant that their shares are fully paid and unencumbered, and that warranty is appropriately disclosed in the scheme booklet. The scheme also contained a “clear title” provision (cl 8.5), expressed as to “the extent permitted by law”. The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd above at [57]–[63]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd above at [25]; Re Windlab Ltd [2020] NSWSC 571 at [21]; Re rhipe Ltd [2021] NSWSC 1170 at [26].

Performance Risk

31. The case law has addressed the question of “performance risk”, namely any risk that the acquirer will not comply with its obligation to pay the scheme consideration to shareholders of the scheme company: Re Simavita Holdings Ltd [2013] FCA 1274 at [43]-[44]; Re Ellerston Global Investments Ltd above at [29]. That risk is here addressed by cl 5.3(h) of the Amended SID, which required Pfizer Australia to execute a deed poll in favour of each ResApp shareholder prior to this hearing. That deed poll was executed on about 13 July 2022 and, by cl 4.1 of that Deed Poll, Pfizer Australia covenants in favour of each of the scheme shareholders that it will observe and perform all its obligations under the scheme, including the relevant obligations relating to the provision of scheme consideration, subject to and in accordance with the terms of the scheme. The terms of the scheme also require Pfizer Australia, by no later than the Business Day (as defined) before the Implementation Date (as defined), to deposit or procure the deposit of an amount at least equal to the aggregate amount of Scheme Consideration (as defined) payable to each scheme shareholder in cleared funds into the Trust Account (as defined) (Scheme, cl 5.2; Amended SID, cll 4.3 and 5.3(j)). The transfer of scheme shares to Pfizer Australia is subject to its having satisfied its obligations in cl 5.2 as to prior deposit of the aggregate scheme consideration into the Trust Account (Scheme, cl 4) and the beneficial entitlement to the scheme shares only passed to Pfizer on the deposit of the aggregate Scheme Consideration into the Trust Account (Scheme, cl 8.5(b)). Mr Papamatheos submits and I accept that this drafting prevents the transfer of a legal or beneficial interest in Scheme Shares (as defined) to Pfizer Australia prior to its payment of the Scheme Consideration and reflects the common practice that has developed to address performance risk. I am satisfied that the structure of the deed poll and the scheme sufficiently addresses performance risk.

Dispatch of scheme materials and conduct of virtual scheme meetings

32. The evidence addresses the dispatch of scheme documents by electronic means or hard copy as appropriate and the manner in which the scheme meeting will be held. ResApp intends to conduct a hybrid physical and virtual scheme meeting, although I made orders in a form that will permit a virtual meeting only in the case if adverse developments in respect of COVID-19 cause difficulty in convening a physical meeting. The virtual aspect of that meeting is permitted by s 253Q of the Act where, as here, the technology used gives members as a whole a reasonable opportunity to participate without physically being present in the same place.

Section 411(17) of the Corporations Act

33. In accordance with the usual practice, the Court will defer the question raised by s 411(17) of the Act to the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37].

Orders

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

**********

Decision last updated: 31 July 2022