Re Security Matters Limited

Case [2023] FCA 19

FEDERAL COURT OF AUSTRALIA

Security Matters Limited, in the matter of Security Matters Limited [2023] FCA 19  

File number: VID 777 of 2022
Judgment of: ANDERSON J
Date of judgment: 9 January 2023
Date of publication of reasons: 20 January 2023
Catchwords: CORPORATIONS – schemes of arrangement – share scheme and option scheme – special purpose acquisition company – first court hearing – orders sought under s 411(1) of the Corporations Act 2001 (Cth) – orders made for the convening of shareholders’ meeting and option-holders meeting
Legislation:

Corporations Act 2001 (Cth)

Corporations Regulations 2001 (Cth)

Federal Court (Corporations) Rules 2000 (Cth)

Insolvency Practice Rules (Corporations) 2016 (Cth)
Cases cited:

ASC v Marlborough Gold Mines Ltd (1993) 177 CLR 485

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

Re 86 400 Holdings Ltd [2021] FCA 311

Re Adelaide Air Conditioning & Domestic Engineers Ltd (In Liq); Re South Pacific Transport Pty Ltd (1972) 6 SASR 603

Re Amcor Limited [2019] FCA 346

Re Anatolia Energy Limited [2015] FCA 1134

Re Anatolia Energy Ltd [2015] FCA 1134

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

Re Atlassian Corporation Pty Limited [2013] FCA 1451

Re AWB Ltd [2010] VSC 456

Re AXA Asia Pacific Holdings Ltd [2011] VSC 4

Re Biosceptre International Limited [2013] FCA 1429

Re Cardtronics Plc [2021] EWHC 1617

Re Coles Group Ltd (2007) 25 ACLC 1380

Re Coles Group Ltd (No 2) (2007) 65 ACSR 494

Re Coventry Resources Ltd [2012] FCA 1252

Re CSR Ltd (2010) 183 FCR 358

Re Doray Minerals Ltd; Ex Parte Doray Minerals [2019] WASC 57

Re DuluxGroup Ltd (2019) 136 ACSR

Re Dyno Nobel Ltd [2008] VSC 154

Re Ecosave Holdings Ltd [2015] FCA 1121

Re English Scottish and Australian Chartered Bank [1893] 3 Ch 385

Re Equigold NL (No 2) [2008] FCA 826

Re Foundation Healthcare Ltd (2002) 42 ACSR 252

Re Healthscope Ltd [2010] VSC 367

Re Hostworks Group Ltd (2008) 26 ACLC 137

Re Humm Group Ltd [2022] FCA 614

Re Huon Aquaculture Group Ltd [2021] FCA 1170

Re Japara Healthcare Ltd (2021) 156 ACSR 695, [2021] FCA 1150

Re Kaz Group Ltd [2004] FCA 738

Re Kidman Resources Ltd (2019) 139 ACSR 122

Re Lonsdale Financial Group Ltd [2007] VSC 394

Re Mia Group Ltd (2004) 50 ACSR 29

Re Mitchell Communication Group [2010] VSC 423

Re Mod Resources Ltd [2019] WASC 326

Re NRMA Ltd (2000) 33 ACSR 595

Re Opes Prime Stockbroking Ltd (recs and mgrs apptd) (2009) 73 ACSR 385

Re Publishing and Broadcasting Ltd [2007] FCA 1610

Re Sino Gold Mining Ltd (2009) 74 ACSR 647

Re Talison Lithium Ltd [2012] FCA 1422

Re ThinkSmart Ltd [2022] FCA 1314

Re Tiger Investment Company (1999) 33 ACSR 438

Re Tronox Ltd (2019) 135 ACSR 343

Re Verdant Minerals Ltd [2019] FCA 556

Re Virtus Health Ltd [2022] NSWSC 597

Re Watermark Market Neutral Fund Limited [2019] FCA 315

Re Wellcome Group Ltd [2019] FCA…

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Details
AGLC
Re Security Matters Limited [2023] FCA 19
Case
[2023] FCA 19
Decision Date

CaseChat Overview and Summary

The matter before the Court involves Security Matters Limited (SMX) seeking orders under section 411(1) of the Corporations Act 2001 (Cth) for the convening of meetings of SMX’s shareholders and option-holders to consider proposed share and option schemes. The respondents, including Lionheart and Empatan, did not oppose the application. The legal issues before the Court were whether the terms of the proposed schemes met the statutory requirements and whether the Court should exercise its discretion to convene the meetings. The Court found that the schemes were in a conventional form, had been carefully prepared and verified, and met all statutory requirements. The Court also considered that if the schemes were approved by the necessary majorities at the meetings, it would likely approve them at the second hearing.

The Court held that it was appropriate to exercise its discretion and make the orders sought by SMX. The Court was satisfied that the requirements of the Act, the rules, and the Corporations Regulations had been met, and the checklist provided reflected the affidavit material. The Court noted that if the transactions were not to go through, it was not clear if SMX would be in a position to pay the break fee and other legal expenses. The Court made orders convening the meetings of SMX’s shareholders and option-holders on 1 February 2023. The orders also specified the manner in which the meetings were to be convened and conducted, including the dispatch of scheme booklets and proxy forms. The further hearing of the originating process was adjourned to 23 January 2023, and the hearing of the application for orders approving the schemes was listed at 9:30 am (Melbourne time) on 6 February 2023. The Court reserved liberty to apply and ordered that these orders be entered forthwith.

Orders

Orders of the court

1. The plaintiff is to convene and hold:

(a) a meeting (the Share Scheme Meeting) of its shareholders (Scheme Shareholders) to consider and, if thought fit, to approve (with or without any alterations or conditions) the scheme of arrangement (Share Scheme) proposed to be made between the plaintiff and its Scheme Shareholders, the terms of which are found at pages 702-725 of the affidavit of Nadav Prawer made on 8 January 2023 (third Prawer affidavit); and

(b) a meeting (the Option Scheme Meeting) of the holders of “SMX Options” (Scheme Option-holders) for the purpose of considering and, if thought fit, agreeing (with or without modification) to the scheme of arrangement (Option Scheme) proposed between the plaintiff and the Scheme Option-holders, the terms of which are found at pages 726-750 of the third Prawer affidavit (where “SMX Options” has the same meaning as in the Option Scheme),

(together, the Scheme Meetings).

2. The Share Scheme Meeting is to be held on 1 February 2023, commencing at 9.00am (Melbourne time), and the Option Scheme Meeting is to be held on 1 February 2023, commencing at 9.30am (Melbourne time) (or at the conclusion or adjournment of the Share Scheme Meeting, whichever is later), each to be conducted electronically through an online platform (which is to be accessed in accordance with the instructions included in the scheme booklet (Scheme Booklet) that is substantially in the form of annexure NP-10 to the third Prawer affidavit and the notices of meeting to be sent in accordance with paragraphs 3 and 4 below).

3. The Scheme Meeting is to be convened by sending on or before 10 January 2023:

(a) in the case of Scheme Shareholders who have elected to receive shareholder communications electronically by way of email, an email substantially in the form of pages 1405-1406 of the affidavit of Haggai Alon made on 6 January 2023 (Alon affidavit), which:

(i) includes a link to an online portal or website from which the Scheme Booklet (which contains among other things the proposed Share Scheme at Annexure G and the notice of Share Scheme Meeting at Annexure I) can be downloaded; and

(ii) attaches an electronic copy of a personalised proxy/voting form for the Share Scheme Meeting (substantially in the form of pages 782-783 of the third Prawer affidavit), which includes an electronic link to an online portal or website that is accessible by the Scheme Shareholders and enables them to lodge their proxy forms for the Share Scheme Meeting and voting instructions online; and

(b) in the case of Scheme Shareholders who have elected to receive hardcopy communications, the following documents by pre-paid post addressed to the relevant address(es) recorded in the plaintiff’s register:

(i) a copy of the Scheme Booklet;

(ii) a hardcopy personalised proxy/voting form for the Share Scheme Meeting (substantially in the form of pages 782-783 of the third Prawer affidavit);

(iii) a reply-paid envelope for the return of completed proxy/voting form;

(c) in the case of Scheme Shareholders who have not made an election for either electronic or hard copy communications, the following documents by pre-paid post addressed to the relevant address(es) recorded in the plaintiff’s register:

(i) a letter substantially in the form of pages 1408-1409 of the Alon affidavit, which includes a link to an online portal or website from which the Scheme Booklet can be downloaded; and

(ii) a hardcopy personalised proxy/voting form for the Share Scheme Meeting (substantially in the form of pages 782-783 of the third Prawer affidavit), which includes a link to the online portal or website that is accessible by the Scheme Shareholder and which enables them to lodge their proxy form for the Share Scheme Meeting and voting instructions online.

4. The Option Scheme Meeting is to be convened by sending on or before 10 January 2023:

(a) in the case of Scheme Option-holders who have elected to receive optionholder communications electronically by way of email, an email substantially in the form of pages 1415-1406 of the Alon affidavit, which:

(i) includes a link to an online portal or website from which the Scheme Booklet (which contains among other things the proposed Option Scheme at Annexure H and the notice of Option Scheme Meeting at Annexure J) can be downloaded;

(ii) attaches an electronic copy of a personalised proxy/voting form for the Option Scheme Meeting (substantially in the form of pages 780-781 of the third Prawer affidavit), which contains an electronic link to the online portal or website that is accessible by them and which enables the Scheme Option-holder to lodge their proxy form for the Option Scheme Meeting and voting instructions online;

(b) in the case of Scheme Option-holders who have elected to receive hard copy communications, the following documents by pre-paid post addressed to the relevant address(es) recorded in the plaintiff’s register:

(i) a copy of the Scheme Booklet;

(ii) a hardcopy personalised proxy/voting form for the Option Scheme Meeting (substantially in the form of pages 780-781 of the third Prawer affidavit);

(iii) a reply-paid envelope for the return of completed proxy/voting form;

(c) in the case of Scheme Option-holders who have not made an election for either electronic or hard copy communications, the following documents by pre-paid post addressed to the relevant address(es) recorded in the plaintiff’s register:

(i) a letter substantially in the form of pages 1408-1409 to the Alon affidavit, which includes a link to an online portal or website from which the Scheme Booklet can be downloaded; and:

(ii) attaches a hardcopy personalised proxy/voting form for the Option Scheme Meeting (substantially in the form of pages 780-781 of the third Prawer affidavit), which included a link to the online portal or website that is accessible by the Scheme Option-holders and which enables them to lodge their proxy form for the Option Scheme Meeting and voting instructions online.

5. If the plaintiff receives an automatic, system generated notification that the documents were unable to be delivered to the nominated electronic address of any Scheme Shareholder or Scheme Option-holder to whom scheme documents were dispatched in accordance with paragraphs 3(a) and 4(a) above (undelivered email recipients), the documents be dispatched by the plaintiff to undelivered email recipients in accordance with paragraphs 3(b) and 4(b) above.

6. The “Option Scheme Meeting Record Date” under the Option Scheme will be 9.00am (Melbourne time) on 30 January 2023.

7. Except to the extent addressed by this order, the Share Scheme Meeting and Option Scheme Meeting are to be convened, held and conducted in accordance with the provisions of:

8. Part 2G.2 of the Act (save for any applicable replaceable rule) that apply to a meeting of the plaintiff’s shareholders; and

9. the plaintiff’s constitution that apply in relation to meetings of shareholders and that are not inconsistent with Part 2G.2 of the Act.

10. Voting on the resolutions to approve the Share Scheme and the Option Scheme is to be conducted by way of poll.

11. A proxy form, appointment of a corporate representative, or power of attorney to act on behalf of the relevant Scheme Shareholder or Scheme Option-holder in respect of the Share Scheme Meeting and the Option Scheme Meeting respectively will be valid and effective if, and only if, it is completed and delivered in accordance with its terms and this order by 9.00am (Melbourne time) on 30 January 2023.

12. Everadus Hofland, or failing him Amir Bader, is to be the chair of the Scheme Meetings.

13. The chair of the Scheme Meetings shall have the power to adjourn either or both meetings to such time, date, and place as they consider appropriate.

14. The plaintiff may provide access to the Scheme Meetings for such other persons as it thinks fit.

15. Compliance with r 2.15 of the Federal Court (Corporations) Rules 2000 (Rules) is dispensed with.

16. Notice of the hearing of an application under s 411(4) of the Act for an order approving the Scheme is to be published once in “The Australian” newspaper by an advertisement substantially in the form of Annexure A to these orders, such advertisement to be published on or before 25 January 2023, and the plaintiff is otherwise exempted from compliance with r 3.4 of the Rules.

17. The further hearing of the originating process is adjourned to 9:30 am (Melbourne time) on 23 January 2023 before Justice O’Bryan.

18. Subject to further order, the hearing of the plaintiff’s application for orders approving the Schemes is listed at 9.30 am (Melbourne time) on 6 February 2023.

19. Liberty to apply is reserved.

20. These orders are to be entered forthwith.

Annexure A

Notice of Second Court Hearing

Notice of hearing to approve compromise or arrangement

TO all the members of Security Matters Limited (ACN 626 192 998) (SMX)

TAKE NOTICE that at that at 9:30 am on 6 February 2023 the Federal Court of Australia (Victorian Registry) at Owen Dixon Commonwealth Law Courts Building, 305 William Street, Melbourne, will hear an application by SMX seeking the approval of a scheme of arrangement between SMX and its members and scheme of arrangement between SMX and certain of its option-holders, if agreed to by resolutions to be considered, and, if thought fit, passed at meetings of such members and option-holders.

The meetings are to be held electronically through an online meeting platform, Lumi, on 1 February 2023, commencing at:

· 9.00am (Melbourne time) for shareholders, and accessible via https://web.lumiagm.com/310257505 and

· 9.30am (Melbourne time) for option-holders (or at the conclusion or adjournment of the meeting for shareholders, accessible via whichever is later), and accessible via https://web.lumiagm.com/399731351

If you wish to oppose the approval of the compromise or arrangement, you must file and serve on SMX a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on SMX at its address for service by 5.00 pm on 3 February 2023.

The address for service of SMX is: c/o Mann Lawyers Pty Ltd, Level 17, 31 Queen Street Melbourne VIC 3000 [Ref: Nadav Prawer].

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

SMX seeks, under subsection 411(1) of the Act, orders (amongst others):(a)convening a meeting of SMX’s shareholders to consider the Share Scheme; and(b)convening a meeting of the relevant option-holders to consider the Option Scheme; and(c)concerning the dispatch of the scheme booklet.PROCEDURAL HISTORY AND EVIDENCE The proceeding was commenced by an originating process filed on 23 December 2022, supported by an affidavit of SMX’s solicitor, Nadav Prawer of Mann Lawyers Pty Ltd (first Prawer affidavit). Since then, SMX has filed the following further affidavits:(a)an affidavit made on 5 January 2023 by Everardus Hofland, an executive director and the chairman of SMX – regarding his consent to act as chairperson of the scheme meetings (first Hofland affidavit);(b)an affidavit made on 2 January 2023 by Amir Bader, a non-executive director of SMX – confirming his consent to act as alternate chairperson of the meetings (first Bader affidavit);(c)an affidavit made on 6 January 2023 by Haggai Alon, an executive director and the chief executive officer of SMX – which describes SMX, the proposed schemes, the negotiations between SMX and Lionheart that preceded the proposed transaction, preparation of the scheme booklet and how the booklet will be dispatched to members and option holders (first Alon affidavit);(d)an affidavit made on 5 January 2023 by Doron Afik, who is the managing partner of Afik & Co Law (the Israeli legal advisors to SMX) and SMX’s general counsel – explaining how the scheme booklet was approved and verified (Afik affidavit);(e)a second affidavit of SMX’s solicitor, Dr Prawer, made on 6 January 2023 (second Prawer affidavit), explaining the lodgment of notice with ASIC, ASIC’s feedback about the scheme booklet, the waiver of certain ASX listing rules and certain requirements under Schedule 8 of the Corporations Regulations 2001 (Cth) (Corporations Regulations);(f)an affidavit made on 5 January 2023 by Connor Manning of Arthur Cox LLP, an Irish solicitor – which provides an opinion on questions of Irish law about the deed poll (Manning affidavit); (g)an affidavit made on 5 January 2023 by Brent Goldman – annexing his independent expert’s report about whether the schemes are fair and reasonable (Goldman affidavit); and(h)a third affidavit of Dr Prawer – exhibiting the latest draft of the scheme booklet (incorporating the most recent amendments, requested by ASIC) and dealing with ASIC’s attitude to the application (third Prawer affidavit). Prior to the hearing, Lionheart filed an affidavit made on 6 January 2023 by Paul Howard Rapisarda, the Chief Financial Officer of Lionheart which deposed to:(a) the verification of information in the draft scheme booklet;(b)the execution of a deed poll in favour of the Scheme Participants and the Option Scheme Participants; and (c)information about negotiations regarding exclusivity and break fee provisions.THE PROPOSED SCHEME On 26 July 2022, SMX, Lionheart and Empatan entered a scheme implementation deed (SID), by which SMX agreed to propose and implement the schemes and undertake the capital reduction.

Decision

Reasons for decision

Mr Bevins sought to clarify that SMX has around $634,000 in cash currently. Mr Bevins noted that if the transactions were not to go through, it is not clear if SMX would be in a position to pay the break fee as well as the US$2.5 million in fees for lawyers and related legal expenses. Mr Bevins sought to note this practical issue and underscored that ASIC is taking this into consideration. CONCLUSION ON THE EXERCISE OF DISCRETION The Court can be satisfied that each of the schemes is of such a nature and cast in such terms that, if it achieves the statutory majorities at the scheme meeting, the Court would be likely to approve it, and that it is therefore appropriate to make the orders sought by SMX. Stated succinctly, the reasons are as follows:(a)the terms of the proposed schemes are in a conventional form;(b)there is no reason the schemes, if considered and adopted by the members and option holders (as the case might be), would not likely be approved by the Court at the second hearing;(c)the SMX members and option-holders will receive the careful analysis and assessment by an independent expert of the transaction and its advantages and disadvantages – and an updated report, as well as the recommendation of SMX’s directors;(d)the draft scheme booklet meets all the statutory requirements, has been carefully prepared and verified by SMX (and Lionheart, where relevant), and has been examined at length by ASIC; and(e)it cannot be said that either of the schemes appears so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. This is a case for the exercise of discretion to make orders convening the meetings of SMX’s members and option-holders to enable them to consider the schemes. For these reasons, I was satisfied that the requirements of the Act, Rules and also the Corporations Regulations have been satisfied which enlivens the jurisdiction of the Court and the discretion of the Court to make the orders that are sought. I made those orders on the basis of the material which I read as well as the checklist which was provided prior to the hearing, and I satisfied myself that the checklist accurately reflects the affidavit material and that it was appropriate to make the orders that were sought.

Ratio Decidendi

Legal Principle Established

As explained below, SMX seeks orders convening the scheme meetings on 1 February 2023, shortly after the general meeting.Operation of the schemes A transaction that involves both a share scheme and an option scheme is not unusual. In several cases, this Court has considered transactions involving both types of scheme: for instance, Re Foundation Healthcare Ltd (2002) 42 ACSR 252 (Re Foundation Healthcare); Re Sino Gold Mining Ltd (ACN 093 518 579) (2009) 74 ACSR 647, Re Talison Lithium Ltd [2012] FCA 1422, Re Coventry Resources Ltd [2012] FCA 1252, Re Atlassian Corporation Pty Limited [2013] FCA 1451, Re Ecosave Holdings Ltd [2015] FCA 1121, Re Anatolia Energy Limited [2015] FCA 1134 and Re Xplore Wealth Ltd [2020] FCA 1868 (Re Xplore Wealth). The relevant steps are as follows:(a)the Court, if it deems it appropriate, will order that each scheme meeting be convened;(b)shareholders and option-holders will meet to consider the Share Scheme and the Option Scheme respectively;(c)if the conditions precedent for each scheme (including the necessary statutory majorities at the meetings) are satisfied or waived by the time the schemes come before the Court for approval at the second hearing; (i)the Court, if it deems it appropriate, will make orders approving each scheme;(ii)SMX will lodge the orders with ASIC;(d)under the Share Scheme, all SMX shares are cancelled in return for Empatan shares according to the ratio set out in the scheme (currently expected to be one new Empatan share for every 10.3490 SMX shares); and(e)under the Option Scheme, all SMX options (other than those excluded from the scheme) will be deemed to have been exercised on a cashless basis in exchange for SMX shares in accordance with a Black Sholes Model calculation, which shares will then be cancelled in return for Empatan shares according to the same ratio as the Share Scheme. Two categories of options in SMX are excluded from – and will therefore not be affected by – the Option Scheme. These are the “ESOP Options” and “Legacy Performance Options”.(a)The “ESOP Options” are options issued to SMX employees under its employee share and option plan (ESOP). Holders of ESOP Options have entered private agreements within Empatan, under which their options will be cancelled in exchange for the issue of options in Empatan (as explained in section 15.7(e) (“Employee, service provider and founder options”) of the draft scheme booklet). Thus, the ESOP Options are excluded from the Option Scheme. (b)The “Legacy Performance Options” were granted to entities associated with SMX’s CEO, Mr Alon, and its chairman, Mr Hofland, at the time of SMX’s initial public offering in October 2018. SMX, Empatan and the holders of these options have agreed (subject to the schemes becoming effective) to cancel the options, in consideration for payment of nominal consideration (AUD 10.00 to each of the holders). Because the consideration for the cancellation of the Legacy Performance Options is nominal (approximately AUD 0.000002 per option), ASX has waived the operation of Listing Rule 6.23.2. The issue is also explained in section 5.18 “Legacy Performance Options” of draft scheme booklet.Deeds poll