Supreme Court New South Wales Medium Neutral Citation: In the matter of ResApp Health Ltd [2022] NSWSC 1090 Hearing dates: 5 August 2022 Date of orders: 5 August 2022 Decision date: 15 August 2022 Jurisdiction: Equity - Corporations List Before: Black J Decision: Order made approving supplementary explanatory booklet for distribution to shareholders. Catchwords: CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Amendment of scheme – dispatch of supplementary explanatory booklet. Legislation Cited: Corporations Act 2001 (Cth), s 411(1), s 411(17)(b) Cases Cited: - Re Amcom Telecommunications Ltd (No 2) [2015] FCA 410 - Re Centro Retail Ltd [2011] NSWSC 1321 - Re Investa Listed Funds Management Ltd [2016] NSWSC 344 - Re Investa Listed Funds Management Ltd [2016] NSWSC 369 - Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1369 - Re Prime Media Group Ltd [2019] NSWSC 1888 - Re ResApp Health Ltd [2022] NSWSC 1014 - Redflex Holdings Limited, in the matter of Redflex Holdings Limited (No 2) [2021] FCA 474 - Re Tawana Resources NL (No 2) [2018] FCA 1724 - Re Trust Company Ltd [2013] NSWSC 1946 - Re Zenith Energy Ltd; Ex Parte Zenith Energy Ltd (No 2) [2020] WASC 275 Category: Procedural rulings Parties: ResApp Health Limited (Plaintiff) Representation: Counsel: P M Wood (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. 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. 2. The then proposed cash consideration under the scheme depended on the results of a data confirmation study in relation to the "ResApp COVID-19 algorithm", and would be $0.207 per share if a Qualifying Confirmatory Data Readout Condition (as defined) was satisfied, or $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. I made the orders sought by ResApp in respect of the first scheme meeting on 15 July 2022 and I made further orders on 22 July 2022 approving specified communications between ResApp's shareholders and a third party acting for ResApp. 3. Subsequently, on 3 August 2022, ResApp and Pfizer Australia entered into an Amended and Restated Scheme Implementation Deed ("Second Amended SID"). The amendments made under the terms of the Second Amended SID include an increase in the scheme consideration from the amount of $0.146 per share in cash (being the lower end of the range provided by the independent expert) to the amount of $0.208 per share in cash (being the "preferred value" identified by the independent expert); an increase in the ResApp and Pfizer break fees from the amount of $1,255,158 to the amount of $1,788,170, reflecting the increased scheme consideration; a requirement for Pfizer Australia to enter into a new deed poll, in which Pfizer Australia covenants in favour of each Scheme Shareholder (as defined) that it will observe and perform all actions contemplated of it under the proposed scheme; increases in the amounts payable in relation to the cancellation of the ResApp Options (as defined) to reflect the increased cash consideration payable under the proposed scheme; and amendments to the proposed scheme to reflect the revised scheme consideration. 4. On 5 August 2022, ResApp sought orders in respect of the dispatch of a supplementary scheme booklet to its shareholders to reflect the increase in the consideration offered by Pfizer Australia to acquire its shares under the scheme. I made the orders sought at the conclusion of that hearing and these are my reasons for doing so. I have drawn on the helpful submissions of Mr Wood, who appeared for ResApp at that hearing, in this judgment. Affidavit evidence 1. ResApp reads the affidavit dated 4 August 2022 of Dr Anthony Keating, the chief executive officer and managing director of ResApp. He refers to the announcement made by ResApp to ASX in respect of the entry into the Second Amended SID. He acknowledges an error in that announcement, which had stated that the supplementary explanatory booklet had been provided to the Court before that occurred, and explains how that error arose and points to its correction by a subsequent announcement to ASX. Nothing turns on that error for present purposes. Dr Keating also refers to the increase in the scheme consideration under the Second Amended SID and to a corresponding increase in the break fees payable under the Second Amended SID and a new deed poll executed by Pfizer Australia. Dr Keating also addresses the corresponding increase in the option consideration payable in respect of the scheme and outlined the verification process that had been undertaken by ResApp in respect of the supplementary scheme booklet, and the ResApp directors' recommendation in respect of the Second Amended SID. 2. Dr Keating also sets out the manner in which updated materials would be dispatched to ResApp shareholders, by a supplementary shareholder letter, supplementary email notification and the dispatch of a new proxy form. The form of the proposed new proxy form was amended, during the course of the hearing, to reflect the proposed structure of the resolutions to be put to ResApp shareholders, which properly comprise a first resolution in respect of the amendment of the scheme and a second resolution to approve the amended scheme. Dr Keating also notes that it is proposed that ResApp would treat proxies that had already been lodged with it as valid. Mr Wood took me to the relevant case law in submissions and I am satisfied that that course is acceptable, at least where the only change made in an amended scheme is an increase in the scheme consideration payable. Dr Keating also refers to proposed updated outbound call script, inbound call script, and a proposed script for one-on-one communications that he proposed to make to ResApp shareholders and to proposed ASX announcements in respect of the scheme. 3. By his affidavit dated 3 August 2022, Mr Tyler Conway, who is corporate counsel, mergers and acquisitions and licensing with Pfizer Inc, refers to Pfizer Australia's entry into the Second Amended SID, increasing the scheme consideration to $0.208 per share and also increasing the ResApp Break Fee (as defined) payable under the SID and the option consideration payable in respect of the scheme. He also outlined the verification process which had been adopted by Pfizer Australia in respect of the supplementary scheme booklet, and addressed the negotiations of the revised break fee under the Second Amended SID, to reflect the increase in the consideration payable by Pfizer Australia, and the execution of a second deed poll by which Pfizer Australia covenanted to perform its obligations under the amended scheme. 4. ResApp also reads the affidavit dated 3 August 2022 of Mr Adam Myers, who is a director of BDO Corporate Finance (WA) Pty Ltd ("BDO") and prepared an independent expert's report in respect of the scheme, when the consideration proposed to be paid by Pfizer Australia was a lesser amount. Mr Myers notes that the revised scheme consideration amount increases the consideration payable from the "low" end of the assessed value of a ResApp share in his independent expert report to the "preferred value" for that share in that report. He indicates that he has considered his report and ResApp's circumstances since the date of that report and is satisfied that his opinion remains current as at 3 August 2022 and continues to hold that opinion. His affidavit also exhibits a letter dated 3 August 2022, which confirms his view that the ResApp scheme, with the revised scheme consideration amount, continues to be fair and reasonable and in the best interests of ResApp shareholders. That conclusion is perhaps unsurprising, where he had reached the same conclusion in respect of Pfizer Australia proposed acquisition of ResApp's shares at a lower price. 5. By his affidavit dated 4 August 2022, Mr James Nicholls, who is a partner in the firm of solicitors acting for ResApp, addresses lodgement of the supplementary scheme booklet with the Australian Securities and Investments Commission ("ASIC") and correspondence with ASIC in connection with the supplementary scheme booklet and the scheme. 6. ResApp also tendered a letter dated 5 August 2022 from ASIC (Ex A) relating to the scheme, which referred to the draft supplementary explanatory statement in respect of the scheme, and indicated that ASIC did not currently propose to appear to make submissions, or intervene to oppose the scheme, at the hearing to approve dispatch of the supplementary explanatory booklet. ASIC helpfully also addressed the adequacy of the time that would be provided for ResApp shareholders to consider the matters raised by the supplementary explanatory booklet, by reference to its policy as set out in Regulatory Guide 60 – Schemes of Arrangement ("RG 60"), and I address its comments below. Dispatch of supplementary explanatory booklet, timing, conduct of scheme meeting and proxies 1. Where the Court has ordered the convening of a scheme meeting and has approved an explanatory statement, its approval should be sought before additional explanatory material is dispatched: Re Centro Retail Ltd [2011] NSWSC 1321 at [11]; Re Trust Company Ltd [2013] NSWSC 1946 at [6]-[8]; Re Investa Listed Funds Management Ltd [2016] NSWSC 344 at [4]; Re Investa Listed Funds Management Ltd [2016] NSWSC 369 at [1]; Re Prime Media Group Ltd [2019] NSWSC 1888 at [5]; Re ResApp Health Ltd [2022] NSWSC 1014. Relevant matters to whether such a communication should be approved include whether shareholders have been given sufficient information and time to consider and evaluate the supplementary information; whether the supplementary disclosure provides adequate disclosure of events that have led to the application; and, in the case of a proposed amendment to a scheme, whether the amended terms of the scheme are more favourable to members than the original terms reflected by the proposed scheme identified in the orders made at the first Court hearing: Re Centro Retail Ltd above at [12]; Re Investa Listed Funds Management Ltd above at [10], [14]; Re Prime Media Group Ltd above at [6]. I have drawn on my recent judgment in Re Link Administration Holdings Limited [2022] NSWSC 1057 for this summary of these principles. 2. The supplementary scheme booklet fairly discloses the relevant amendments to the proposed scheme and has been verified in the usual way. I have also given consideration to the time available to shareholders to consider the information provided to them. As I noted above, by its letter dated 5 August 2022 (Ex A), ASIC helpfully addressed that question, by reference to its policy as set out in RG 60. ASIC noted that if (as is the case) dispatch of the supplementary explanatory booklet is approved at the hearing on 5 August 2022, it was expected to be dispatched by no later than 10 August 2022, proxy votes would be required to be submitted by 2pm (AEST) on 17 August 2022 and the scheme meeting was scheduled for 2pm (AEST) on 19 August 2022. ASIC observed that: "The effect of the matters described above is that members may only be afforded a limited time in which to consider the new information contained in the [s]upplementary [explanatory booklet] before casting a vote on the Scheme Resolution. Inter alia, section 602 of the Act, in enunciating the principles underlying Chapter 6 of the Act, provides that holders of shares in a listed company should have a reasonable time to consider a proposal under which a person will acquire a substantial interest in the company (s 602(b)(ii)). ASIC considers that this principle is relevant in determining whether shareholders are adequately informed and protected in a scheme of arrangement that effects a control transaction: see ASIC Regulatory Guide 60.9. ASIC considers that a change in consideration of the terms of the Scheme within a short period before a Scheme meeting, which may deny members a reasonable time to carefully and properly assess that change and how it impacts upon them, may in some circumstances be inconsistent with the principles in 602(b)(ii). However, the change in consideration in this case is an additional amount of cash. This kind of change is readily understandable and requires no additional information to enable its value to be determined. ASIC understand that members will have between 7 to 9 days to consider the information contained in the [s]upplementary [explanatory booklet] prior to the Scheme Meeting (depending on the method of delivery effected). These factors help mitigate (but do not completely alleviate) concerns which may arise from the short amount of time that members are afforded to consider the changes. Generally, we consider that the question of whether such circumstances infringe on the principles in Chapter 6 will largely turn on the facts in each particular case." 1. ASIC also fairly reserved its ability to take these matters into account in determining whether to provide a letter of no objection to the scheme for the purposes of s 411(17)(b) of the Act or to take any other action. The position in respect of s 411(17)(b) of the Act is a matter to be addressed at the second Court hearing. 2. I recognise that RG 60 indicates that ASIC considers that it will generally be appropriate for scheme participants, including those voting by proxy, to be given at least 10 days to consider any supplementary documentation distributed before being required to vote on a scheme. Courts have on several occasions considered whether sufficient time will be given to shareholders to consider supplementary information in question and to understand its effect, and relevant matters include whether the information had already been made available through a market announcement, as it has in this matter; the complexity and significance of the supplementary information, and any respo0nse to that information by the expert and ASIC: Re Amcom Telecommunications Ltd (No 2) [2015] FCA 410 at [20]; Re Tawana Resources NL (No 2) [2018] FCA 1724 at [34]; Re Prime Media Group Ltd above at [8]; Re Zenith Energy Ltd; Ex Parte Zenith Energy Ltd (No 2) [2020] WASC 275 at [15]. 3. In a somewhat similar case, in Re Investa Listed Funds Management Ltd as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1369 ("Investa"), a supplementary scheme booklet was proposed to be sent to unitholders and released on ASX following an increase in the proposed (all cash) offer consideration, and unitholders would have five clear calendar days (being three clear business days) from the date the supplementary scheme booklet was to be released to the ASX until proxies were due and a further two clear business days until the meetings. I did not there require a longer adjournment of the meetings where the proposed increase in the cash consideration would be readily understood by unitholders, the revised proposal had been well-publicised in ASX announcements since its receipt and any unitholder had likely been on notice of the scheme's more favourable terms for at least 10 days prior to the due date for proxies: Investa at [14]. In Redflex Holdings Limited, in the matter of Redflex Holdings Limited (No 2) [2021] FCA 474 ("Redflex"), an order was made to dispatch a supplementary scheme booklet following an increase in the proposed (all cash) offer consideration three days prior to the proxy deadline, and five days prior to the scheme meeting. The Court was also there satisfied that shareholders had adequate time to respond to the changed circumstances where the only material change to the scheme was increased scheme consideration, and the supplementary scheme booklet provided adequate further information for shareholders to consider the proposed change to the scheme, adequately addressed the reasons for the proposed change, and gave clear notice of how that change qualified the other information in the original scheme booklet which the Court previously approved: Redflex at [9]-[11]. 4. I am satisfied that ResApp shareholders will here have sufficient time to consider the supplementary information contained in the supplementary explanatory booklet and to understand the supplementary information being provided. The only material information disclosed in the supplementary explanatory booklet is the increase in the consideration payable under the revised scheme and that information is straightforward to understand and clearly and prominently disclosed. The independent expert has also prepared a supplementary report which concludes that the proposed scheme remains fair and reasonable to, and in the best interests of, ResApp shareholders in the absence of a superior proposal. 5. Mr Wood also notes that the proposed procedure at the proposed scheme meeting is that shareholders will first be asked to consider a resolution to amend the existing scheme resolution (of which notice is given in the notice of meeting) to take account of the revised scheme consideration. If that resolution is passed, shareholders will then be invited to vote on the amended scheme resolution for the proposed scheme with the revised scheme consideration. That procedure is in accordance with the approach approved by Barrett J in Re Citect Corporation Ltd (2006) 225 ALR 137 and also applied in Redflex at [23]-25. 6. Mr Wood notes that ResApp seeks an order that valid proxy forms for the scheme meeting convened by the Court on 15 July 2022 remain valid for the purposes of the scheme meeting, in accordance with their terms, but that any appointment to those proxy forms may be varied or revoked by the appointing shareholder at any time up to 2.00pm (AEST) on 17 August 2022. He points out that that approach is in accordance with the principles outlined in Redflex at [15] and [26]-[28], although he fairly recognises that there the authority of the proxy holder was to act generally at the meeting (at [26]) and the proxy form in this matter does not include those words. He submits and I accept that the authorisation of the proxy holder in this matter to vote "…if no directions have been given, and subject to the relevant laws as the proxy sees fit…" (emphasis added) is analogous to the position in Redflex. He also submits, and I also accept that, where directions have been given it is implicit in the authority conferred by the proxy form in the present matter which is directed to a "scheme of arrangement…(with or without alterations or conditions…)" that it extends to a resolution in relation to an amended scheme and also to a resolution to propose an amended scheme resolution, or at least to those matters where the only change is an increase in the scheme consideration. 7. There is therefore no reason why the Court should not approve the dispatch of the supplementary scheme booklet to ResApp shareholders in accordance with the principles I have set out above. Further communications to shareholders 1. ResApp also seeks orders approving a form of email and letter communications to be sent to ResApp shareholders; a disclosure to be made to ASX in relation to the proposed supplementary scheme booklet; a "Second Updated Outbound Call Script", an "Updated Inbound Call Script"; a script for one on one calls by Dr Keating to shareholders; and a disclosure to the ASX to advise the market of the dispatch of certain documents. I was satisfied these communications, which fairly inform shareholders of the increase in the scheme consideration and the dispatch of the relevant documents, should be approved, other than in respect of the calls by Dr Keating to shareholders. 2. As Mr Wood noted, ResApp also sought approval for a "one on one" conversation script for use by Dr Keating, which could at least potentially be used in his calling individual ResApp shareholders. My attention was not drawn to any authority in which a Court has approved a script for one-on-one communications initiated by a chief executive to shareholders in respect of a scheme and I was not persuaded of the need for or the desirability of such communications, at least in any systematic way. There was no convincing explanation of why it would be necessary for the chief executive officer, rather than a shareholder communication service, to undertake such communications with shareholders in any systematic way, if all that was intended was to communicate information concerning the scheme in a neutral manner. It seems to me that a chief executive officer undertaking a campaign of outbound calls to shareholders (if that was what was intended) could readily become implied advocacy for the scheme, arising from the unusualness of such conduct, even where what was said offered a balanced account of the advantages and disadvantages of the scheme. For that reason, I did not approve the script for direct communications between Dr Keating and individual shareholders in respect of the scheme. Orders 1. For these reasons, I made the orders sought by ResApp at the close of the hearing, other than that approving the script for calls by Dr Keating to shareholders to which I referred above. ********** 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: 16 August 2022