Xenith IP Group Limited, in the matter of Xenith IP Group Limited
[2019] FCA 173
•19 February 2019
FEDERAL COURT OF AUSTRALIA
Xenith IP Group Limited, in the matter of Xenith IP Group Limited [2019] FCA 173
File number: NSD 156 of 2019 Judge: YATES J Date of judgment: 19 February 2019 Date of publication of reasons: 20 February 2019 Catchwords: CORPORATIONS – scheme of arrangement – application for orders to convene meeting of shareholders Legislation: Corporations Act 2001 (Cth) ss 12(1), 411(1), 411(2), 412(1) 1319
Federal Court (Corporations) Rules 2000 rr 2.15, 3.2, 3.4
Date of hearing: 19 February 2019 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 44 Counsel for the Plaintiff: T L Wong
S ScottSolicitors for the Plaintiff: Baker McKenzie Counsel for QANTM Intellectual Property Limited M Oakes SC Solicitors for QANTM Intellectual Property Limited Minter Ellison ORDERS
NSD 156 of 2019 IN THE MATTER OF XENITH IP GROUP LIMITED ACN 607 873 209
XENITH IP GROUP LIMITED ACN 607 873 209
Plaintiff
QANTM INTELLECTUAL PROPERTY LIMITED
Interested PersonJUDGE:
YATES J
DATE OF ORDER:
19 FEBRUARY 2019
THE COURT ORDERS THAT:
1.Pursuant to subsection 411(1) and section 1319 of the Corporations Act 2001 (Cth) (the Act):
(a)the plaintiff convene a meeting (Scheme Meeting) of the holders of ordinary shares in the plaintiff other than QANTM Intellectual Property Limited (QANTM), any Associate (as that term is defined in Division 2 of Part 1.2 of the Act as if s 12(1) of the Act included a reference to the Scheme) of QANTM or any of QANTM's Related Bodies Corporate (as that term is defined in the Act) (Scheme Shareholders), for the purpose of considering and if thought fit, agreeing (with or without modification) to the proposed scheme of arrangement (Scheme) between the Plaintiff and the Scheme Shareholders, the terms of which scheme of arrangement are set out in Annexure C of the document which has been tendered and marked Exhibit 1 (Scheme Booklet);
(b)the Scheme Meeting be held on 3 April 2019 at level 9, 60 Margaret Street, Sydney NSW 2000 commencing at 10.30 am;
(c)the chairperson of the Scheme Meeting be Sibylle Krieger, or failing her, Robert Alexander;
(d)the chairperson appointed to the Scheme Meeting has the power to adjourn or postpone the Scheme Meeting in her or his absolute discretion for such time and to such date as she or he considers appropriate;
(e)at the Scheme Meeting, two Scheme Shareholders present and entitled to vote in person or by proxy or by an attorney under power or by a corporate representative (if applicable) shall constitute a quorum;
(f)at the Scheme Meeting, each Scheme Shareholder, present and entitled to vote, be entitled to one vote for each fully paid ordinary share in the capital of the plaintiff that the Scheme Shareholder is registered as holding at 7.00 pm (Sydney time) on 1 April 2019;
(g)at the Scheme Meeting, the resolution to approve the Scheme be decided by way of a poll;
(h)the explanatory statement substantially in the form of the Scheme Booklet be approved for distribution to Scheme Shareholders.
2.Pursuant to section 1319 of the Act, there be despatched to:
(a)each Scheme Shareholder who has nominated an electronic address for the purpose of receiving notices of meeting and proxy forms from the plaintiff, at such address:
(i)an email substantially in the form of the document which has been tendered and marked Exhibit 2; and
(ii)if requested in writing by the Scheme Shareholder: by hand at, or by ordinary pre-paid post or courier to the address of that Scheme Shareholder set out in the register of members of the plaintiff; or, in the case of a Scheme Shareholder whose registered address is outside Australia, by airmail or facsimile to the address of that Scheme Shareholder as set out in the register of members of the plaintiff, a copy of the Scheme Booklet, a proxy form and a reply envelope addressed to the plaintiff c/- Computershare, and
(b)each other Scheme Shareholder:
(i)by hand at, or by ordinary pre-paid post or courier to the address of that Scheme Shareholder set out in the register of members of the plaintiff; or
(ii)in the case of a Scheme Shareholder whose registered address is outside Australia, by airmail or facsimile to the address of that Scheme Shareholder as set out in the register of members of the plaintiff,
a copy of the Scheme Booklet, a proxy form and a reply envelope addressed to the plaintiff c/- Computershare.
3.If an email notification of a failure to deliver an email to a Scheme Shareholder's nominated electronic address pursuant to order 2(a) above of these orders is received, there be dispatched by hand at, or by ordinary pre-paid post or courier to, the address of each such Scheme Shareholder as set out in the register of members of the plaintiff, a copy of the Scheme Booklet, a proxy form and a reply envelope addressed to the Plaintiff c/- Computershare.
4.The Plaintiff be exempted from compliance with the requirements of rule 2.15 of the Federal Court (Corporations) Rules 2000 (the Rules).
5.Notice of the hearing of the application for orders approving the proposed Scheme be published once in "The Australian" newspaper, by advertisement substantially in the form of annexure "A" to these Orders, such advertisement to be published on or before 2 April 2019 and the Plaintiff otherwise be exempted from compliance with rule 3.4 of the Rules.
6.The proceeding be stood over to 9 April 2019 at 10.15 am before Justice Yates for the hearing of any application to approve the Scheme.
7.There be liberty to apply.
8.These orders be entered forthwith.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
YATES J:
Introduction
The plaintiff, Xenith IP Group Limited (XIP), seeks orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) requiring it to convene a meeting of its members, other than QANTM Intellectual Property Limited (QANTM), any Associate (as that term is defined in Div 2 of Pt 1.2 of the Act as if s 12(1) of the Act included a reference to the scheme) of QANTM or any of QANTM’s related bodies corporate (as that term is defined in the Act), for the purpose of considering, and if thought fit, agreeing (with or without modification) to a scheme of arrangement (the scheme) between XIP and those members (defined as Scheme Shareholders). The effect of the scheme, if approved and implemented, will be that the Scheme Shareholders will cease to be shareholders of XIP and will, instead, become shareholders of QANTM.
Exhibit 1 in this application is a Scheme Booklet which is to stand as the explanatory statement required under s 412(1) of the Act. Unless otherwise defined herein, the capitalised terms used in these reasons are defined in the Scheme Booklet.
XIP is a public company limited by shares. It is registered under the Act. It is admitted to the official list of the Australian Securities Exchange (ASX). It operates four businesses—Shelston IP, Griffith Hack, Watermark and Glasshouse Advisory—which provide specialist intellectual property and ancillary services that include the identification, registration, management, valuation, commercialisation and enforcement of intellectual property rights. The businesses employ approximately 400 staff across 12 offices in Australia.
QANTM is also a public company that is limited by shares and registered under the Act. It is also admitted to the official list of the ASX. It is the holding company of a number of private companies that provide specialist intellectual property services.
On 26 November 2018, XIP and QANTM entered into a Scheme Implementation Deed that provides for XIP to propose and implement the scheme. If the scheme is approved and implemented, XIP will become a wholly-owned subsidiary of QANTM and XIP will be delisted from the ASX.
The transaction contemplated under the Scheme Implementation Deed is, in essence, a merger between XIP and QANTM, with the Scheme Shareholders and QANTM Shareholders owning approximately 45% and 55% respectively of the merged entity.
The evidence
The following affidavits were read in support of the present application:
·Heather Lindsay Sandell, sworn 7 February 2019;
·Robert Ian Alexander, affirmed 15 February 2019;
·Sibylle Irmgard Krieger, affirmed 15 February 2019;
·Justine Laughton, affirmed 15 February 2019;
·Craig Lloyd Edwards, affirmed 15 February 2019;
·Steven Shirtliff, affirmed 15 February 2019;
·David Anthony Holland, affirmed 18 February 2019;
·Chris Bevitt, affirmed 18 February 2019; and
·Nicholas Ward, sworn 18 February 2019.
The scheme
There is nothing in the scheme itself that requires particular mention. It is in fairly standard terms. Completion risk is managed, in part, by the requirement that the Scheme Consideration be provided prior to the transfer of the Scheme Shares to QANTM. QANTM has also executed a deed poll in which it has covenanted, in favour of the Scheme Shareholders, to perform the actions attributed to it under the scheme, including the provision of the Scheme Consideration.
The Scheme Consideration payable to the Scheme Shareholders is 1.22 QANTM Shares for each XIP share. Thus, the value of the Scheme Consideration is not fixed, but will depend on the traded price of QANTM shares on the Implementation Date. The implied value of the Scheme Consideration, based on the closing price of QANTM Shares immediately prior to XIP and QANTM entering into the Scheme Implementation Deed, represents a premium for XIP’s members compared to recent trading prices of XIP shares.
As at 13 February 2019, XIP had 88,717,931 fully-paid ordinary shares on issue. As at 15 February 2019, it had 593,240 Performance Rights on issue. As I have noted, the shares are quoted on the ASX. The Performance Rights are not quoted on any official market. The Performance Rights have been issued to two executives under the Xenith IP Employee Incentive Plan, subject to certain vesting conditions. Under cl 4.6 of the Scheme Implementation Deed, XIP is required to take all steps in accordance with the plan rules to give notice to the rights holders of the early vesting of certain of the Performance Rights, with the balance to lapse. Once this step is taken, and XIP shares are issued to the rights holders, the number of XIP shares on issue will increase by 331,209 shares, taking the total number of shares on issue to 89,049,140 shares. These shares will participate in the scheme. However, because the shares will not be issued prior to the holding of the scheme meeting, they will not be voted on the scheme resolution.
QANTM will be under no obligation to issue, and must not issue, QANTM Shares to Foreign Scheme Shareholders. Instead, QANTM will procure the issue of Sale Shares to a Sale Agent on the Implementation Date, who will sell the Sale Shares and pay the proceeds into a trust account for payment by XIP to the Foreign Scheme Shareholders as provided for under the scheme.
The scheme contains a deemed warranty by each Scheme Shareholder. Attention is drawn in the Scheme Booklet to the warranty and its terms.
The scheme is subject to a number of conditions precedent.
Miscellaneous matters
The attitude of XIP’s directors
In the absence of a Superior Proposal, and subject to the Independent Expert continuing to conclude that the scheme is in the best interests of members (see below), the directors have recommended that members vote in favour of the scheme. Each director intends to vote the shares held or controlled by him or her in favour of the scheme.
The opinion of the Independent Expert
Lonergan Edwards & Associates Limited (Lonergan Edwards) has been engaged to provide an independent expert’s report stating whether, in its opinion, the scheme is in the best interests of XIP’s members and the reasons for that opinion.
Lonergan Edwards has expressed the opinion that, in the absence of a Superior Proposal, the scheme is in the best interests of XIP’s members and that the terms are fair and reasonable to them.
In expressing this opinion, Lonergan Edwards has noted that the scheme is not structured as a change of control transaction but as a merger. Ownership of the merged entity will be shared between the Scheme Shareholders and QANTM Shareholders, as will operational control, with key executive and Board positions being sourced from both companies. Lonergan Edwards has assessed the scheme accordingly.
Lonergan Edwards has noted that, from the perspective of XIP’s members, the key issues in respect of the scheme are whether the members (the Scheme Shareholders) will obtain a collective ownership interest in the merged entity that is consistent with (or greater than) the relative value they will have contributed to the merged entity; from a value perspective, whether XIP’s members (the Scheme Shareholders) are likely to be better off if the merger proceeds; and whether the advantages of the merger outweigh its disadvantages.
As to these matters, Lonergan Edwards has concluded that the collective interest that the Scheme Shareholders will acquire in the merged entity is greater than the relative value they will have contributed. Accordingly, in its view the terms of the merger are fair to XIP’s members. In addition, XIP’s members (the Scheme Shareholders) will be provided with an appropriate share of expected synergies that should be significantly value accretive. In its view, the advantages of the merger outweigh its disadvantages.
Mr Edwards is a director of Lonergan Edwards and is a co-author of the report that has been prepared. Mr Edwards has verified the opinions expressed in the report.
The Investigating Accountant’s report
KPMG financial Advisory Services Pty Limited (KPMG) was engaged by XIP and QANTM to prepare an investigating accountant’s report on the “Merged Group” pro forma historical financial information for inclusion in the Scheme Booklet. Mr Shirtliff is a partner in the Transaction Services Group of KPMG. He has had overall responsibility for the preparation of the report. He supervised the team that assisted him in its preparation.
KPMG has stated that nothing has come to its attention that causes it to believe that the pro forma historical information has not been prepared or presented fairly on the basis of the pro forma transactions and/or adjustments described in the Scheme Booklet, and in accordance with the recognition and measurement principles prescribed in the Australian Accounting Standards and XIP’s accounting policies.
Mr Shirtliff has deposed that, to the best of his knowledge and belief, the Investigating Accountant’s report is true and correct. He has also deposed that the conclusions expressed in the report are views that he holds.
Deal protection clauses
The Scheme Implementation Deed contains certain exclusivity provisions, including “no shop”, “no talk” and “no due diligence” provisions. The “no talk” and “no due diligence” provisions are subject to a fiduciary carve-out. Further, XIP and QANTM are obliged to notify each other of third-party approaches that would require action of the kind contemplated by the “no talk” and “no due diligence” provisions to be taken. The Scheme Implementation Deed also provides for the manner in which Competing Proposals are to be treated, including the right to make a matching proposal.
Each of these provisions applies during the Exclusivity Period, which is defined as the period from the date of the Scheme Implementation Deed and the earlier of the termination of the deed, the Effective Date and the End Date. The End Date is 30 June 2019. It is capable of being extended by agreement between XIP and QANTM.
The Exclusivity Period is, therefore, capable of precise determination. The period is quite lengthy (potentially greater than seven months), but not beyond the bounds of reasonableness.
Attention is drawn to the existence and terms of the exclusivity provisions in the Scheme Booklet.
The Scheme Implementation Deed also provides for the payment of mutual break fees in certain circumstances. Each break fee is $1.6 million. The amount of the break fees was derived as a proximate average between QANTM’s market capitalisation on 26 November 2018 of $174,300,000 and the equity value of XIP, based on the traded price of QANTM’s Shares on 26 November 2018 ($1.31 per share) and an exchange/offer ratio of 1.22 QANTM Shares for each XIP Share, yielding an implied value of $142,300,000. The midpoint of these figures is $158,300,000. One percent (1%) of this midpoint was taken ($1,538,000) and rounded up to $1.6 million.
Having regard to XIP’s implied equity value as at 26 November 2018, the break fee potentially payable by it exceeds the 1% guideline contained in the Takeovers Panel Guidance Note 7: Lock-Up Devices. It has, however, been calculated on the basis of a “merger between equals”. In the Scheme Implementation Deed, the parties acknowledge that the fee has been agreed upon to reimburse QANTM for:
·its fees for legal and financial advice in planning and implementing the merger transaction;
·reasonable opportunity costs incurred in engaging in the transaction (or not engaging in other alternative acquisitions or strategic initiatives);
·the costs of management and directors’ time in planning and implementing the transaction;
·out-of-pocket expenses incurred in planning and implementing the transaction; and
·any damage to QANTM’s reputation associated with the transaction failing and the implications of that failure should QANTM should seek to execute an alternative acquisition in the future.
The Scheme Implementation Deed also records that, without provision being made for break fees, the parties would not have entered into the deed or otherwise agreed to implement the scheme.
The evidence before me is that the deal protection clauses (the exclusivity provisions and the break fees) were agreed between XIP and QANTM following arm’s length commercial negotiations in which the parties were separately advised and represented by external legal advisers and external financial advisers. QANTM required the clauses and XIP was satisfied that they were acceptable, including by making the payment of break fees mutual.
In XIP’s case, one of the circumstances in which the fee would be payable is if an XIP Competing Proposal is publicly announced prior to the End Date and, within 12 months of that announcement, the proponent of that proposal completes, implements and consummates the proposal or acquires a relevant interest in at least 50% of XIP’s shares in an unconditional transaction, or otherwise acquires control of XIP or the XIP Group. However, importantly, no break fee is payable by XIP simply because its members do not approve the scheme that is proposed.
Attention is drawn in the Scheme Booklet to the existence of the break fees and the terms on which they will be payable.
IPH Limited
On 13 February 2019, IPH Limited (IPH), a competitor of each of XIP and QANTM, announced to the ASX that it had acquired an equity interest of approximately 19.9% in XIP and that it did not intend to vote in favour of the scheme “on the basis of the information released to date”. In its announcement, IPH stated that it intends to seek discussions with XIP and/or QANTM in relation to an alternative transaction to the scheme.
On 13 February 2019, XIP and QANTM each made responding announcements to the ASX. These announcements record XIP’s and QANTM’s respective intentions to proceed with the implementation of the proposed merger in accordance with the Scheme Implementation Deed.
As at 15 February 2019, IPH had not put forward any proposal to either XIP or QANTM regarding an alternative transaction. I note, however, that, on 27 November 2018, IPH announced that it had recently made a number of non-binding conditional proposals to QANTM to combine the IPH and QANTM businesses through a scheme of arrangement. The QANTM Board did not consider these proposals to be in the best interests of QANTM’s members. There remains, of course, the possibility that IPH may make an offer to acquire QANTM which is capable of acceptance. This matter has been brought to the attention of XIP’s members in the Scheme Booklet, as has the possibility that IPH might make a Competing Proposal to XIP which is a Superior Proposal.
The equity interest acquired by IPH is not, by itself, of sufficient value to block the proposed scheme from proceeding. It is still possible for the statutory majorities to be attained at a scheme meeting. XIP submits that IPH’s announcement should be taken as a statement of its intention at the time, qualified by reference to “information released to date”. XIP submits that there is utility in a scheme meeting being convened and in allowing XIP’s members the opportunity to “have their say” by casting their votes on the present merger proposal.
Chairperson
Ms Krieger, who is a director of XIP, has consented to be chairperson of the scheme meeting. Mr Alexander, also a director of XIP, has consented to be chairperson of the scheme meeting if Ms Krieger is unable to act in that role. Ms Krieger and Mr Alexander have made affidavits which have been filed in compliance with r 3.2 of the Federal Court (Corporations) Rules 2000.
ASIC
The Australian Securities and Investments Commission has provided its “usual letter” signifying that it has been given 14 days’ notice of the hearing of the present application and that it has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement, and to make submissions to the Court: see s 411(2) of the Act.
ASIC has drawn attention to the fact that QANTM will release its half-yearly results on 22 February 2019 and that XIP will release its half-yearly results on 27 February 2019, before the scheme meeting. ASIC has stated that, in the event that the results include material information relevant to the valuation of QANTM or XIP (or the transaction generally), it may be necessary for XIP to make supplementary disclosure which would need to be provided to scheme participants ten days before voting on the scheme: Regulatory Guide 60: Schemes of Arrangement at 60.91 and 60.93. ASIC has expressed its expectation that Lonergan Edwards should confirm whether the results change the opinions expressed in the Independent Expert’s report.
Verification of the explanatory statement
Certain information in the Scheme Booklet can be described as the QANTM Information and the QANTM Joint Information. Evidence has been given as to the process undertaken to verify the accuracy of this information. The process included consideration by QANTM’s directors of advanced drafts of the Scheme Booklet, which they approved. Mr Ward, QANTM’s General Counsel, had oversight of this process. Mr Ward has deposed that, to the best of his knowledge, information and belief, the QANTM Information and the QANTM Joint Information is complete and accurate in material respects and is not misleading or deceptive in any material respect. He has also deposed that there is no material omission in respect of that information which renders it misleading or deceptive in any material respect.
Mr Bevitt, who is a principal of Shelston Lawyers, coordinated and managed the verification process on behalf of XIP. This involved the verification of all information in the Scheme Booklet other than the QANTM Information, the Independent Expert’s report prepared by Lonergan Edwards and the Investigating Accountant’s report prepared by KPMG (the XIP Information). Mr Bevitt has deposed that, to the best of his knowledge and belief, the XIP Information is correct in all material respects. He has deposed that, to the extent that it is based on future matters, the XIP Information has been made on a reasonable basis. He has also deposed that the XIP Information does not contain material omissions and that it is not misleading or deceptive (or likely to mislead or deceive) in any material respect.
Conclusion and disposition
I am satisfied that XIP is a Pt 5.1 body and that the scheme is a “compromise or arrangement” for the purposes of s 411(1) of the Act. I am satisfied that the formal requirements that are preliminary to the Court convening a meeting under s 411(1) have been satisfied. Further, I am satisfied that the proposed scheme is of such a nature and is cast in such terms that, if it receives the requisite statutory majorities, the Court would be likely to approve it on an unopposed application. I note the interest held by IPH and the expression of its voting intentions as at 13 February 2019. I accept that, notwithstanding the expression of that intention, there is utility in the Court ordering the proposed meeting to be convened.
For these reasons, the orders that are presently sought should be made.
I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate:
Dated: 20 February 2019
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