Re Viralytics Ltd

Case [2018] FCA 637

FEDERAL COURT OF AUSTRALIA

Viralytics Limited, in the matter of Viralytics Limited [2018] FCA 637

File number: NSD 504 of 2018
Judge: GLEESON J
Date of judgment: 20 April 2018
Date of publication of reasons: 8 May 2018
Catchwords: CORPORATIONS – scheme of arrangement – application for order pursuant to s 411 of the Corporations Act 2001 (Cth) that company convene meeting of members
Legislation:

Acts Interpretation Act 1901 (Cth) s 10

Corporations Act 2001 (Cth) ss 9, 411, 412, 249J

Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth)

Corporations Regulations 2001 (Cth)

Insolvency Practice Rules (Corporations) 2016 (Cth)

Federal Court (Corporations) Rules 2000 rr 3.1, 3.2, 3.3, 3.4

Cases cited:

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

Re David Jones Ltd [2014] FCA 530

Re Hills Motorway Ltd (2002) 43 ACSR 101

Re Intecq Ltd [2016] NSWSC 1429

Re Nine Entertainment Group Ltd (No 1) (2012) 211 FCR 439

Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349

Re Onthehouse Holdings Ltd [2016] FCA 1167

Re Seymour Whyte Ltd [2017] FCA 1009

Re Signature Gold Ltd [2017] FCA 1481

Re SimavitaHoldings Ltd [2013] FCA 1274

Re Sirtex Medical Ltd [2018] FCA 584

Re Staging Connections Group Ltd [2015] FCA 1012

Re Permanent Trustee Company Ltd [2002] NSWSC 1177; (2002) 43 ACSR 601

Sovereign Life Assurance Co v Dodd [1892] 2 QB 573
Date of hearing: 20 April 2018
Registry: New South Wales
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Category: Catchwords
Number of paragraphs: 59
Counsel for the Plaintiff: Mr M Oakes SC
Solicitor for the Plaintiff: McCullough Robertson Lawyers
Counsel for Merck Sharp & Dohme (Holdings) Pty Ltd Mr M Izzo
Solicitor for Merck Sharp & Dohme (Holdings) Pty Ltd Baker McKenzie

ORDERS

NSD 504 of 2018

IN THE MATTER OF VIRALYTICS LIMITED ACN 010 657 351

VIRALYTICS LIMITED ACN 010 657 351

Plaintiff

JUDGE:

GLEESON J

DATE OF ORDER:

20 APRIL 2018

THE COURT ORDERS THAT:

1.Pursuant to subsection 411(1) Corporations Act 2001 (Cth) (“Act”), the plaintiff convene a meeting of its members (“scheme meeting”), for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed between the plaintiff and its members (“scheme”) being the scheme of arrangement set forth in annexure C of the explanatory statement in relation to the scheme, which is exhibit 1 in the proceeding (“scheme booklet”).

2.The scheme meeting be held on 28 May 2018 at Warrane Theatre, Museum of Sydney, Corner Phillip and Bridge Streets, Sydney, NSW, 2000, commencing at 2 pm.

3.Pursuant to subsection 411(1) of the Act, the scheme booklet be approved for distribution to the members of the plaintiff.

4.The scheme booklet to be dispatched to members of the plaintiff be in the form, or to the effect of, that which is exhibit 1.

5.Paul Hopper or, in his absence, Malcolm Lindsay McColl, act as…

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Re Viralytics Ltd [2018] FCA 637
Case
[2018] FCA 637
Decision Date

CaseChat Overview and Summary

The Federal Court of Australia was asked to approve the convening of a scheme meeting of Viralytics Limited's members to consider a proposed scheme of arrangement between the company and its members. The scheme involves the transfer of Viralytics shareholders' shares to Merck Sharp & Dohme (Holdings) Pty Ltd, a wholly owned subsidiary of Merck & Co Inc, in exchange for $1.75 cash per share. The Court had to determine whether to approve both the convening of the proposed scheme meeting pursuant to s 411(1) of the Corporations Act 2001 (Cth) and the scheme booklet, the explanatory statement required by s 412(1)(a) to accompany notices of the scheme meeting. The Court was satisfied that Viralytics is a Part 5.1 body, the proposed scheme is an arrangement, and the scheme booklet provides proper disclosure to members. The Court found that the scheme booklet was accurate, not misleading or deceptive, and did not omit any material information. Therefore, the Court granted the orders sought by Viralytics, including convening the scheme meeting on 28 May 2018 and approving the scheme booklet for distribution to the members of Viralytics.

The Court was satisfied that Viralytics had taken reasonable steps to ensure that the scheme booklet was accurate, not misleading or deceptive, and did not omit any material information. The Court found that the affidavits of Mr McColl and Ms Nolte demonstrated that the verification process described in their affidavits was sufficient to confirm the accuracy of the statements in the scheme booklet. The Court also found that the scheme booklet had been registered with ASIC, and the bidder information did not omit any material information. The Court accepted that the scheme booklet would provide proper disclosure to members and was satisfied that the duty of candour had been discharged by senior counsel for Viralytics. The Court was satisfied that the proposed scheme was fair and reasonable and in the best interests of shareholders, and the cash consideration offered by MSD was above the range of Deloitte's estimate of the fair market value of a share in Viralytics. Therefore, the Court approved the convening of the scheme meeting and the scheme booklet.

Orders

Orders of the court

1. Pursuant to subsection 411(1) Corporations Act 2001 (Cth) (“Act”), the plaintiff convene a meeting of its members (“scheme meeting”), for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed between the plaintiff and its members (“scheme”) being the scheme of arrangement set forth in annexure C of the explanatory statement in relation to the scheme, which is exhibit 1 in the proceeding (“scheme booklet”).

2. The scheme meeting be held on 28 May 2018 at Warrane Theatre, Museum of Sydney, Corner Phillip and Bridge Streets, Sydney, NSW, 2000, commencing at 2 pm.

3. Pursuant to subsection 411(1) of the Act, the scheme booklet be approved for distribution to the members of the plaintiff.

4. The scheme booklet to be dispatched to members of the plaintiff be in the form, or to the effect of, that which is exhibit 1.

5. Paul Hopper or, in his absence, Malcolm Lindsay McColl, act as chairperson of the scheme meeting.

6. Except for procedural motions, all voting at the scheme meeting be by poll as declared by the chairperson.

7. The chairperson of the scheme meeting has the power to adjourn such meeting in his absolute discretion.

8. Rule 2.15 of the Federal Court (Corporations) Rules 2000 shall not apply to the scheme meeting, except for Rule 75-15(2) of the Insolvency Practice Rules (Corporations) 2016.

9. Pursuant to section 1319 of the Act, on or before 26 April 2018, there be dispatched to:

(a) each member of the plaintiff who has nominated, to Viralytics’ share register provider Link Market Services Limited, an electronic address for the purposes of receiving notices of meeting and proxy forms from Viralytics, at such address, an email substantially in the form of the document behind tab 8 of exhibit MLM-1, including URL links to the scheme booklet and a sample proxy form in respect of the scheme meeting substantially in the form of the document behind tab 9 of exhibit MLM-1 (“proxy form”); and

(b) each other member of the plaintiff, by hand at, or prepaid post or courier to, or the case of a member whose registered address is outside the country, by pre-paid airmail post, or dispatched by air courier for overseas pre-paid post to, the address of that scheme shareholder as set out in the register of members of Viralytics, a copy of the scheme booklet and a personalised proxy form.

10. The plaintiff publish a notice of hearing of any application to approve the scheme on or before 25 May 2018, in The Australian newspaper by an advertisement substantially in the form of annexure A to these orders, and the plaintiff shall otherwise be exempted from compliance with Rule 3.4(3)(b) Federal Court (Corporations) Rules 2000 (Cth).

11. The proceeding be stood over to 10.15 am on Monday, 4 June 2018 before Gleeson J for the hearing of any application to approve the scheme of arrangement.

12. Liberty to restore on two days’ notice.

13. These orders be entered forthwith.

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

“A”

Notice of hearing to approve compromise or arrangement

(rule 3.4)

No. NSD504 of 2018

FEDERAL COURT OF AUSTRALIA

DISTRICT REGISTRY: NEW SOUTH WALES

DIVISION: GENERAL

IN THE MATTER OF VIRALYTICS LIMITED ACN 010 657 351

VIRALYTICS LIMITED ACN 010 657 351

plaintiff

TO all the creditors and members of Viralytics Limited ACN 010 657 351 (Viralytics)

TAKE NOTICE that at 10.15am on 4 June 2018, the Federal Court of Australia at the Law Courts Building, Queen’s Square, Sydney will hear an application by Viralytics seeking the approval of a compromise or arrangement between the above-named company and its members, proposed by a resolution to be considered, and if thought fit, passed (with or without modification) at the meeting of the members of the company to be held on 28 May 2018 at Warrane Theatre, Museum of Sydney, Corner Phillip and Bridge Streets, Sydney, NSW, 2000, commencing at 2pm.

If you wish to oppose the approval of the compromise or arrangement, you must file and serve on the plaintiff, Viralytics, 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 the plaintiff, Viralytics, at their address for service at least 1 day before the date fixed for the hearing of the application.

The address for service of the plaintiff is McCullough Robertson Lawyers, Level 11, Central Plaza Two, 66 Eagle Street, Brisbane, Queensland 4001.

Name of person giving notice or of person’s legal practitioner: Peter Stokes, McCullough Robertson Lawyers - 07 3233 8714.

Background

Background to the litigation

These are my reasons for making those orders.BACKGROUND Viralytics Limited (“Viralytics”) is an Australian Stock Exchange (“ASX”) listed company focussed on oncolytic immunotherapy treatments for a range of cancers. The company’s lead investigational product, CAVATAK®, is currently being studied in clinical trials for the treatment of melanoma, as well as bladder and lung cancers. As at 4 April 2018, Viralytics had current issued capital of 278,262,889 ordinary shares, in respect of which the total amount paid or taken to be paid was $154,409.659.34. As at 17 April 2018, there were 5,296 Viralytics shareholders, of which 2,191 had elected to receive electronic notification of meetings. There are 14,183,667 options over unissued Viralytics shares, which are held by ten option-holders. The options were issued at various times under an employee share plan to eligible employees and directors of Viralytics. In addition, performance rights have been issued to Viralytics employees. Each performance right entitles the holder to receive one share subject to the satisfaction of applicable performance hurdles. There are currently 131,500 Viralytics performance rights on issue, held by 17 Viralytics performance rights holders.PROPOSED SCHEME The proposal is that:(1)Viralytic shareholders will transfer their shares to Merck Sharp & Dohme (Holdings) Pty Ltd (“MSD”), a wholly owned subsidiary of Merck & Co Inc, a New York Stock Exchange (“NYSE”) listed global health care company;(2)the consideration for each share transferred is $1.75 cash;(3)payment of the scheme consideration is secured by a deed poll executed by MSD; and(4)the scheme will effect the acquisition of Viralytics by MSD and will result in Viralytics becoming a wholly owned subsidiary of MSD. On 21 February 2018, Viralytics and MSD entered into a scheme implementation agreement under which they agreed to implement the proposed scheme. Viralytics and MSD made an announcement to the ASX in relation to the proposed scheme the same day. The directors of Viralytics (“directors”) have unanimously recommended that, in the absence of a superior proposal, shareholders vote in favour of the scheme at the proposed scheme meeting. The chairman’s letter in the scheme booklet states that the scheme consideration represents a premium of 160% to the one-month volume weighted average price (“VWAP”) of Viralytics’ shares prior to the announcement of the scheme on 21 February 2018. The independent expert appointed by the directors, Deloitte Corporate Finance Pty Ltd (“Deloitte”), concludes that the proposed scheme is fair and reasonable and therefore in the best interests of shareholders. The cash consideration offered by MSD is above the range of Deloitte’s estimate of the fair market value of a share in Viralytics, which is between $1.40 and $1.73. The fair market value was estimated by applying the probability weighted discounted cash flow method, which estimated the value of Viralytics by discounting its estimated probability weighted future cash flows to their present value.

Evidence

Evidence Before The Court

It is proposed to hold a single scheme meeting on Monday 28 May 2018 at 2pm.EVIDENCE AND SUBMISSIONS Viralytics relied on the following evidence in support of the application:(1)two affidavits of Malcolm McColl, managing director and chief executive officer of Viralytics and proposed alternative chairperson, both sworn 18 April 2018, together with a single volume marked exhibit “MLM-1”;(2)an affidavit of Peter Stokes, Viralytics’ solicitor, affirmed 4 April 2018;(3)an affidavit of Paul Hopper, non-executive director and chairman of Viralytics and proposed chairperson for scheme meeting, affirmed 12 April 2018;(4)an affidavit of Stephen Reid, director of Deloitte, affirmed 13 April 2018;(5)an affidavit of Ben Wood, solicitor, sworn 13 April 2018;(6)an affidavit of Jennifer Nolte, director, Legal, Corporate Transactions at Merck, Sharp & Dohme Corp (another wholly owned subsidiary of Merck & Co Inc), affirmed 17 April 2018;(7)a letter dated 19 April 2018 from the Australian Securities and Investments Commission (“ASIC”) confirming compliance with s 411(2)(a) and expressing the view that ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet for the purposes of s 411(2)(b)(i); and(8)the scheme booklet (marked “exhibit 1”). Viralytics filed written submissions dated 19 April 2018. The written submissions set out the relevant legal principles and identified the evidence necessary to justify the orders sought. In addition to the written submissions, senior counsel for Viraltyics, Mr Oakes SC, made oral submissions that identified important aspects of the evidence. Counsel for MSD, Mr Izzo, also made brief supporting oral submissions.ISSUE FOR DECISION At the first hearing, the Court’s task is to decide whether to approve both the convening of the proposed scheme meeting pursuant to s 411(1) and the scheme booklet, that is the explanatory statement required by s 412(1)(a) to accompany notices of the scheme meeting. The relevant legal framework is set out in the submissions filed by Viralytics. It is also explained in Re Staging Connections Group Ltd [2015] FCA 1012. I was satisfied that senior counsel for Viralytics sought conscientiously to discharge the duty of candour which applies in ex parte applications of this kind (see Re Permanent Trustee Company Ltd [2002] NSWSC 1177; (2002) 43 ACSR 601 at [7]), both bringing to the Court’s attention all matters that could be considered relevant to the Court’s decision and referring to that duty in his written submissions.CONSIDERATIONPart 5.1 body The term “Part 5.1 body” is defined in s 9 of the Act to mean, relevantly, a company. The evidence confirmed that Viralytics is a Pt 5.1 body.Proposed scheme is an “arrangement“ Generally, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members, and which is properly proposed, is an “arrangement” within the meaning of s 411: see Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20] (Santow J). The text of the scheme (annexure C to the scheme booklet) provides prima face evidence that the proposed scheme is an “arrangement”.

Decision

Reasons for decision

Counsel for MSD, Mr Izzo, also made brief supporting oral submissions.ISSUE FOR DECISION At the first hearing, the Court’s task is to decide whether to approve both the convening of the proposed scheme meeting pursuant to s 411(1) and the scheme booklet, that is the explanatory statement required by s 412(1)(a) to accompany notices of the scheme meeting. The relevant legal framework is set out in the submissions filed by Viralytics. It is also explained in Re Staging Connections Group Ltd [2015] FCA 1012. I was satisfied that senior counsel for Viralytics sought conscientiously to discharge the duty of candour which applies in ex parte applications of this kind (see Re Permanent Trustee Company Ltd [2002] NSWSC 1177; (2002) 43 ACSR 601 at [7]), both bringing to the Court’s attention all matters that could be considered relevant to the Court’s decision and referring to that duty in his written submissions.CONSIDERATIONPart 5.1 body The term “Part 5.1 body” is defined in s 9 of the Act to mean, relevantly, a company. The evidence confirmed that Viralytics is a Pt 5.1 body.Proposed scheme is an “arrangement“ Generally, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members, and which is properly proposed, is an “arrangement” within the meaning of s 411: see Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20] (Santow J). The text of the scheme (annexure C to the scheme booklet) provides prima face evidence that the proposed scheme is an “arrangement”. Viralytics has committed itself to propounding the scheme by the scheme implementation agreement, providing prima facie evidence that the scheme is bona fide and has been properly proposed.Scheme booklet will provide proper disclosure to members Mr McColl’s second affidavit described the process by which Viraltyics has ensured that the scheme booklet does not omit any material required to be included in the scheme booklet, and is neither false in a material particular nor materially misleading. Mr McColl also verified his belief that, based on the verification process described in his second affidavit, all of the statements of fact made in the scheme booklet, so far as those facts relate to Viralytics, are true and correct, except to the extent that they stated that orders had been made by the Court which had not been made at the time of swearing his affidavit; and the scheme booklet had been registered with ASIC. Mr McColl also verified that there was no omission of material information from the scheme booklet in relation to Viraltyics. On 13 April 2018, the Viralytics’ board of directors resolved by circular resolution that the latest version of the scheme booklet was approved and was to be lodged with the Court as part of the affidavit evidence for this application. Ms Nolte verified in her affidavit that she was satisfied that all material statements in the bidder information (comprising all information regarding MSD as was reasonably required for inclusion in the scheme booklet) had been verified in the manner described in her affidavit; were true and complete; not misleading or deceptive; and that the bidder information did not omit any material information.

Ratio Decidendi

Legal Principle Established

I was satisfied that senior counsel for Viralytics sought conscientiously to discharge the duty of candour which applies in ex parte applications of this kind (see Re Permanent Trustee Company Ltd [2002] NSWSC 1177; (2002) 43 ACSR 601 at [7]), both bringing to the Court’s attention all matters that could be considered relevant to the Court’s decision and referring to that duty in his written submissions.CONSIDERATIONPart 5.1 body The term “Part 5.1 body” is defined in s 9 of the Act to mean, relevantly, a company. The evidence confirmed that Viralytics is a Pt 5.1 body.Proposed scheme is an “arrangement“ Generally, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members, and which is properly proposed, is an “arrangement” within the meaning of s 411: see Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20] (Santow J). The text of the scheme (annexure C to the scheme booklet) provides prima face evidence that the proposed scheme is an “arrangement”. Viralytics has committed itself to propounding the scheme by the scheme implementation agreement, providing prima facie evidence that the scheme is bona fide and has been properly proposed.Scheme booklet will provide proper disclosure to members Mr McColl’s second affidavit described the process by which Viraltyics has ensured that the scheme booklet does not omit any material required to be included in the scheme booklet, and is neither false in a material particular nor materially misleading. Mr McColl also verified his belief that, based on the verification process described in his second affidavit, all of the statements of fact made in the scheme booklet, so far as those facts relate to Viralytics, are true and correct, except to the extent that they stated that orders had been made by the Court which had not been made at the time of swearing his affidavit; and the scheme booklet had been registered with ASIC. Mr McColl also verified that there was no omission of material information from the scheme booklet in relation to Viraltyics. On 13 April 2018, the Viralytics’ board of directors resolved by circular resolution that the latest version of the scheme booklet was approved and was to be lodged with the Court as part of the affidavit evidence for this application. Ms Nolte verified in her affidavit that she was satisfied that all material statements in the bidder information (comprising all information regarding MSD as was reasonably required for inclusion in the scheme booklet) had been verified in the manner described in her affidavit; were true and complete; not misleading or deceptive; and that the bidder information did not omit any material information. I accepted that the affidavits of Mr McColl and Ms Nolte demonstrate that reasonable steps have been taken to confirm that the statements in the scheme booklet are accurate, are not misleading or deceptive and that no material information has been omitted in respect of those statements.