Supreme Court New South Wales Medium Neutral Citation: In the matter of Quantum Health Group Limited (No 2) [2022] NSWSC 74 Hearing dates: 1 February 2022 Date of orders: 1 February 2022 Decision date: 09 February 2022 Jurisdiction: Equity - Corporations List Before: Black J Decision: Orders made approving a scheme of arrangement. Catchwords: CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application under s 411 of the Corporations Act 2001 (Cth) for orders approving scheme of arrangement – Where formal requirements satisfied – Whether scheme of arrangement should be approved. Legislation Cited: - Corporations Act 2001 (Cth), s 411 Cases Cited: - Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 - Re Amcor Limited (No 2) [2019] FCA 842 - Re Atlas Iron Ltd (No 2) [2016] FCA 481 - Re Aveo Group Ltd [2019] NSWSC 1679 - Re Central Pacific Minerals NL [2002] FCA 239 - Re Equinox Resources Ltd (2004) 49 ACSR 692; [2004] WASC 143 - Re Intega Group Ltd [2021] NSWSC 1707 - Re MYOB Group Ltd (No 2) [2019] FCA 668 - Re NRMA Ltd (No 2) (2000) 156 FLR 412; (2000) 34 ACSR 261; [2000] NSWSC 408 - Re Permanent Trustee Co Limited (2002) 43 ACSR 601; [2002] NSWSC 1177 - Re Seven Network Ltd (No 3) (2010) 77 ACSR 701; [2010] FCA 400 - Re Solution 6 Holdings Ltd (2004) 50 ACSR 113; [2004] FCA 1049 - Re Sundance Energy Australia Ltd [2019] FCA 1944 - Re Toll Holdings Ltd (No 2) [2015] VSC 236 - Re TriAusMin Ltd (No 2) [2014] FCA 833 Category: Principal judgment Parties: Quantum Health Group Limited (Plaintiff) Representation: Counsel: R Foreman SC (Plaintiff) D Thomas SC (Acquirer) Solicitors: Johnson Winter & Slattery (Plaintiff) Herbert Smith Freehills (Acquirer) File Number(s): 2021/318441 Judgment Nature of the application 1. On 17 December 2021, I made orders that the Plaintiff, Quantum Health Group Limited ("Quantum") convene and hold a meeting of Scheme Shareholders (as defined) for the purpose of considering, and if thought fit, agreeing to (with or without modification) a proposed scheme of arrangement and approving a scheme booklet to be sent to Scheme Shareholders, for the reasons set out in Re Quantum Health Group Ltd [2022] NSWSC 26 ("Earlier Judgment"). The proposed scheme provides for Paragon Care Ltd ("Paragon") to acquire all of the issued shares in Quantum, in consideration for Paragon issuing 0.243 Paragon shares to Quantum shareholders for each Quantum share they own as at the scheme record date. 2. At the second Court hearing on 1 February 2022, Quantum sought an order under s 411(4)(b) of the Corporations Act 2001 (Cth) ("Act") that the scheme be approved and an order, under s 411(12) of the Act, that it be exempted from compliance with the requirements of s 411(11) of the Act. I made the orders sought at the conclusion of the hearing. These are my reasons for doing so. I have drawn in this judgment on the helpful submissions of Mr Foreman, who appeared for Quantum, and on my recent summary of the applicable principles in Re Intega Group Ltd [2021] NSWSC 1707. Affidavit evidence 1. At the second Court hearing, Quantum read the affidavit dated 27 January 2022 of Mr John Walstab, who is the managing director and chief executive officer of Quantum, who gave evidence as to the repayment of certain "Related Party Loans" (as defined) that were addressed at the first Court hearing and updated the position in respect of other matters that had been addressed at that hearing, including his execution of an escrow deed in relation to shares which he holds (other than in relation to a small number of shares held by an associated superannuation fund as to which that requirement was waived by Paragon) and the fact that he had not been asked to execute a new employment agreement and understood that he would be employed by Paragon on the same or substantially the same terms as his current employment with Quantum. He also referred to voting at the first scheme meeting and set out the number of shares voted at the last five annual general meetings of Quantum. 2. By an affidavit dated 31 January 2022, Mr Drew Townsend, who is a non-executive director and chair of Quantum, gave evidence as to the conduct of the virtual scheme meeting on 27 January 2022 and the passage of resolutions at that meeting, and confirmed that shareholders were able to ask questions throughout that meeting by submitting them through the Lumi platform or asking them orally through a Zoom conference, although no such questions were asked or comments made at that meeting. Mr Townsend also addressed voting by shareholders with Related Party Loans at that meeting and the repayment of those loans, to which I return below. 3. By his affidavit dated 28 January 2022, Mr Shane Tanner, who is a director and the chair of Paragon, supplemented his evidence as to the verification process taken by Paragon, given at the first Court hearing, and noted that Paragon's board had approved the inclusion of a statement in the scheme booklet that Paragon did not currently have any intention to change the terms of Mr Walstab's employment. 4. By his affidavit dated 28 January 2022, Mr Byron Koster, who is a consultant to the firm of the solicitors acting for Quantum in respect of the scheme, addressed the registration of the scheme booklet by the Australian Securities and Investments Commission ("ASIC") and correspondence with ASIC, the announcement of the result of the scheme meeting to Australian Securities Exchange and the publication of an advertisement as to the second Court hearing. By her affidavit dated 28 January 2022, Ms Anna Pietruszka, a solicitor employed by the firm of solicitors acting for Quantum, who compared the scheme booklet that was made available to Quantum shareholders to the scheme booklet approved by the Court and identified several minor differences between them, including corrections which had been foreshadowed at the first Court hearing. 5. By his affidavit dated 31 January 2022, Mr Alexander Musgrave, who is a client services manager for Boardroom Pty Ltd, gave evidence as to the dispatch of scheme documentation by email and by post to Quantum shareholders, the means by which Quantum shareholders could vote at the scheme meeting and the process adopted for collation of proxies for the scheme meeting. He also addresses the process by which shareholders could attend and vote at that scheme meeting and exhibits a poll report. 6. By his affidavit dated 31 January 2022, Mr Christopher Beames, who is a partner in the firm of solicitors acting for Quantum in the proceedings, indicated that he had not received any notice of appearance or other notification of any person seeking to appear at the second Court hearing, and there was no such appearance on the day of the hearing. He also exhibited a letter dated 31 January 2022 from ASIC, indicating that it had no objection to the scheme for the purposes of s 411(17)(b) of the Act. By a further affidavit dated 1 February 2022, Mr Beames reconfirmed that no notice of appearance or notice of any person's intention to appear to oppose the scheme had been received on 1 February 2022, and exhibited a conditions precedent certificate in respect of the scheme executed by Quantum and Paragon. Submissions and determination 1. Section 411(4) of the Act provides that an arrangement is binding on Quantum and its shareholders if, at a meeting of Quantum's shareholders, it is passed by a majority of the shareholders present and voting and by 75% of votes cast and it is approved by order of the Court. Section 411(6) of the Act provides that the Court may grant approval subject to such alterations or conditions as it thinks just. 2. Mr Foreman points out that, at the second Court hearing, the Court will need to be satisfied that the procedural requirements for scheme approval have been satisfied and will then exercise a discretion whether or not to approve the scheme: Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 247. The Court will typically wish to be satisfied that its orders convening the shareholders meeting were complied with; that meeting has approved the scheme with the requisite majority; all other statutory requirements have been satisfied; the scheme is fair and reasonable so that an intelligent and honest man or woman who was a member of the relevant class, properly informed and acting alone, might approve it; the plaintiff has brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's discretion; and there was full and fair disclosure to members of all information material to the decision whether to vote for or against the applicable scheme: Re Central Pacific Minerals NL [2002] FCA 239 at [8]-[14]; Re Permanent Trustee Co Limited (2002) 43 ACSR 601; [2002] NSWSC 1177 at [8]-[10]; Re Solution 6 Holdings Ltd (2004) 50 ACSR 113; [2004] FCA 1049 at [18]-[24]; Re Seven Network Ltd (No 3) (2010) 77 ACSR 701; [2010] FCA 400 at [35]-[39]; Re Aveo Group Ltd [2019] NSWSC 1679 at [15]. The Court will have regard to the members' assessment of their interests as manifested in the voting at the meeting, and is not bound to approve a scheme merely because it has previously made orders for the convening of a meeting of the members and the statutory majorities have been achieved: Re Central Pacific Minerals NL above at [12]; Re NRMA Ltd (No 2) (2000) 156 FLR 412; (2000) 34 ACSR 261; [2000] NSWSC 408 at [22]; Re Atlas Iron Ltd (No 2) [2016] FCA 481 at [5]; Re Aveo Group Ltd above at [15]. 3. Dealing first with the applicable procedural requirements, Mr Foreman submits and I accept that the evidence (as summarised in a schedule to his submissions) establishes that the scheme booklet and Court's orders made at the first Court hearing were lodged with ASIC after that hearing and the scheme booklet and proxy forms were dispatched to shareholders, and the scheme booklet as dispatched corresponded with that approved by the Court. The evidence addresses the receipt of proxy forms and collation of proxies; the holding of the scheme meeting, tallying of votes and obtaining of necessary majorities; the advertisement of this second Court hearing for approval of the scheme; the fact that no notice of intention to appear at the second Court hearing was received from any person seeking to oppose the scheme; the receipt of a letter from ASIC addressing s 411(17)(b) of the Act. 4. No issues have arisen which warrant any concern as to the proper conduct of the scheme meeting. That meeting was held on 27 January 2022 and the scheme was approved by substantial majorities of the number of votes cast and the number of shareholders voting at the meeting, which satisfied the requisite statutory majorities in ss 411(4)(a)(ii)(A) and (B) of the Act. Some 71 shareholders, being 5.28% of the total of 1,345 Scheme Shareholders, who held 896,266,608 shares, being 79.43% of the total of 1,128,308,291 shares in Quantum, attended the meeting. Mr Foreman recognises that the turnout by number of shareholders at that meeting was not high and draws attention to the comparative position as to voter turnout at Quantum's last five annual general meetings. 5. Mr Foreman submits that the level of voter turnout at that meeting is not a basis for not approving the scheme. He draws attention to Farrell J's observation in Re TriAusMin Ltd (No 2) [2014] FCA 833 at [10]-[12], where a scheme was approved where 10.94% of shareholders had voted 52.9% of the shares, that: "Although the statutory requirement under s 411(4)(a)(ii) has been satisfied, it is the usual practice of the court at the second court hearing to consider the number of shareholders who attended the Scheme Meeting in person or by proxy. Low shareholder turnout may be an indication that some procedural irregularity occurred. It is inappropriate to assume (in the absence of complaint) that shareholders who did not vote either did not have notice of the meeting or were silent in protest of the scheme …. Nonetheless it does call for consideration to ensure that the vote not unrepresentative, since the court retains the discretion to withhold its approval in that case … It is relevant to consider whether members have been deterred from attending or voting at the meeting …. Relatively low shareholder turnout did not prevent orders being made in Re Avoca Resources Ltd [2011] FCA 208 (11.49% of shareholders holding 72.38% of shares) or Re Cortona Resources Ltd (No 2) [2013] FCA 302 (17.5% of shareholders holding 45.2% of shares); see also Re Redcape Property Fund Ltd and The Trust Co (RE Services) Ltd [2012] NSWSC 486 per Black J at [6]. In Re Auzex Resources Ltd (No 2) [2012] QSC 101 at [18] Applegarth J noted that a turnout of 9.75% of shareholders representing 42.3% of votes was substantially higher than at annual general meetings of the company. In Re Osiris Insurance Ltd [1999] 1 BCLC 182 only 35 of 971, scheme creditors with claims worth approximately 41% of the total value attended the meeting and Re British Aviation Insurance Co Ltd [2006] 1 BCLC 665, creditor turnout was 15% representing approximately 50% of claims. See Damian T and Rich A, Schemes, Takeovers and Himalayan Peaks (3rd edition, 2013, University of Sydney) at 4.4.2 for a full discussion of this issue." 1. Mr Foreman notes that Farrell J also referred to those matters in Re Sundance Energy Australia Ltd [2019] FCA 1944 at [47]-[50] and also refers to the observations of Beach J in Re Amcor Limited (No 2) [2019] FCA 842 at [19]-[20], to broadly similar effect and notes that his Honour there approved a scheme in which 6.70% of shareholders voted 72.20% of the shares. He also draws attention to the observation of Markovic J in Re MYOB Group Ltd (No 2) [2019] FCA 668 at [19(5)]: "In Avoca Resources Ltd, Re Avoca Resources Ltd [2011] FCA 208 (Avoca) at [21] Gilmour J noted that since the decision in Lion Nathan Ltd, Re Lion Nathan Ltd (No 2) [2009] FCA 1261, the Court had expressed an interest in knowing the turnout of eligible shares by percentage and, more recently, of shareholders. His Honour also noted that "[t]hese percentages have no statutory significance, but a low turnout percentage might suggest a flaw in the convening procedure". In Avoca, where there were voter turnout percentages of 72.38% by shares represented and 11.49% by shareholders participating, Gilmour J found that no inference to that effect ought to be drawn. Similarly, given the evidence about the mail out of the scheme documents, I would not infer that there was any flaw in the convening procedure for the Scheme Meeting". 1. Mr Foreman submits and I accept that there is no reason to think that there was any flaw in the convening procedure here and that the voter turnout is not a cause for concern and does not provide a basis for the Court to not approve the scheme. 2. Mr Foreman also addresses the position in respect of the repayment of two Related Party Loans (as defined in the Scheme Implementation Deed dated 6 November 2021 between Quantum and Paragon) made to Quantum by two of its directors, to which I referred in the Earlier Judgment. Those Related Party Loans were required to be repaid as a condition precedent to the scheme, and that matter was addressed in section 9.1.4 of the scheme booklet. The evidence establishes that those loans owing have now been repaid by Quantum, in the amounts outstanding as at 31 December 2021 with additional accrued interest up to the date of repayment. Mr Foreman also points to an additional Related Party Loan (as defined) owing by Quantum to a shareholder in the company, which was also repaid by Quantum, in the amount outstanding as at 31 December 2021 with additional accrued interest up to the date of repayment. Mr Foreman submits and I accept that the evidence establishes that the requisite majorities would still have been comfortably obtained at the scheme meeting if the parties to those loans and their associates were excluded from the calculation of the voting results. Mr Foreman fairly also pointed to a matter raised by ASIC in respect of the Related Party Loans after the first Court hearing, Quantum's response to that matter, and ASIC's reply that, having considered that response, it had no further comments or questions. I accept that this is not a cause for concern. 3. There is no reason to doubt that Quantum has brought to the Court's attention all matters that could be considered relevant to the exercise of the Court's discretion, or to doubt that there was full and fair disclosure to members of all information material to the decision whether to vote for or against the applicable scheme. The factual information contained in the scheme booklet was verified in the usual way and the scheme booklet otherwise satisfies the relevant statutory requirements. In making orders to convene the meeting of Quantum shareholders, I was previously satisfied that the scheme was of such a nature and cast in such terms that, if it received the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application that was unopposed. The independent expert, Leadenhall Corporate Advisory Pty Ltd, concluded that the scheme is in the best interests of Scheme Shareholders. No Quantum shareholder or other person indicated a wish to appear or appeared at the second Court hearing to object to the scheme and, as I noted above, ASIC has no objection to the scheme stated pursuant to s 411(17)(b) of the Act. Quantum has tendered certificates as to the satisfaction of conditions precedent to the scheme in common form. 4. I am satisfied that the Court should also make an order exempting Quantum from compliance with s 411(11) of the Act, where the scheme will not modify any rights of shareholders or of creditors or of persons dealing with Quantum: Re Equinox Resources Ltd (2004) 49 ACSR 692; [2004] WASC 143 at [22]; Re Toll Holdings Ltd (No 2) [2015] VSC 236 at [18]–[19]. Orders 1. For these reasons, I made the orders sought by Quantum at the conclusion of the second Court hearing in respect of the scheme. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 14 February 2022