Supreme Court New South Wales Medium Neutral Citation: In the matter of Pulse Health Limited [2017] NSWSC 651 Hearing dates: 3 May 2017 Decision date: 03 May 2017 Jurisdiction: Equity - Corporations List Before: Black J Decision: The Court approves the proposed scheme of arrangement pursuant to s 411 of the Corporations Act 2001 (Cth). Catchwords: CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application for approval of scheme of arrangement – where scheme of arrangement involves the Plaintiff's shareholders transferring their shares to a purchaser for cash consideration – whether certain shareholder would receive collateral benefit – whether scheme of arrangement should be approved Cases Cited: - Perpetual Custodians Limited (as custodian for Tamoran Pty Ltd as trustee for Crivelli) v IOOF Investment Management Limited [2013] NSWCA 231; (2013) 304 ALR 436 - Re Amcom Telecommunications Limited (No 4) [2015] FCA 720; (2015) 107 ACSR 341 - Re Aston Resources Limited [2012] FCA 229 - Re Boart Longyear Limited [2017] NSWSC 567 - Re Central Pacific Minerals NL [2002] FCA 239 - Re David Jones Limited (No 2) [2014] FCA 720; (2014) 101 ACSR 381 - Re David Jones Limited (No 3) [2014] FCA 753 - Re iSoft Group Limited [2011] FCA 680 - Re Mosaic Oil NL (No 2) [2010] FCA 1186; (2010) 80 ACSR 281 - Re Opes Prime Stockbroking Limited (No 2) [2009] FCA 813; (2009) 179 FCR 20 - Re People Telecom Limited [2009] FCA 180 - Re Redcape Property Fund Ltd and Trust Company (RE Services) Ltd (as the responsible entity for the Redcape Property Trust) [2012] NSWSC 486 - Re Seven Network Ltd (No 3) [2010] FCA 400; (2010) 77 ACSR 701 - Re Straits Resources Limited [2010] FCA 1466 - Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 Category: Principal judgment Parties: Pulse Health Limited (Plaintiff) Representation: Counsel: G Rich SC/R Foreman (Plaintiff) N Kidd SC (Healthe Care Australia Pty Ltd) Solicitors: Norton Rose Fulbright (Plaintiff) Allens (Healthe Care Australia Pty Ltd) File Number(s): 2017/12556 Judgment Background 1. By Originating Process filed on 13 January 2017, Pulse Health Limited ("Pulse") sought an order under s 411(1) of the Corporations Act 2001 (Cth) that a meeting of the members of Pulse be held to consider and, if thought fit, approve, with or without modification, a proposed scheme of arrangement between Pulse and its members, and ancillary orders. 2. As I noted in an earlier judgment ("Earlier Judgment"), Pulse is listed on Australian Securities Exchange ("ASX") and operates several private hospitals in Australia and New Zealand. On 20 October 2016, Pulse announced to ASX that it had received a non-binding indicative proposal from Healthe Care Australia Pty Ltd ("Healthe Care") to acquire all of the shares in Pulse for $0.47 per share by a scheme of arrangement. Healthe Care also operates private hospitals, and is a subsidiary of Luye Medical International Pte Ltd, incorporated and headquartered in Singapore. Its ultimate holding company is Luye Investment Group, incorporated in the People's Republic of China. The effect of implementation of the proposed scheme would be that Healthe Care would acquire 100% of the issued shares of Pulse from the Pulse shareholders in exchange for cash consideration of $0.47 per share. 3. For the reasons set out in the Earlier Judgment, I made orders on 31 January 2017 that Pulse convene a meeting of its shareholders for the purposes of considering and, if thought fit, agreeing to a proposed scheme of arrangement and approving a draft explanatory statement to be sent to Pulse shareholders. 4. The explanatory statement for the scheme was dispatched to Pulse shareholders on 8 February 2017 and the scheme meeting was originally scheduled to occur on 22 March 2017. On 21 March 2017, I ordered, on Pulse's application, that the scheme meeting be held on a later date, 1 May 2017, and on 10 April 2017, I approved the dispatch of a supplementary explanatory statement to Pulse shareholders. The scheme meeting was adjourned by reason that Healthe Care had reached agreement, on 17 March 2017, with Evolution Healthcare Partners Pty Ltd ("Evolution") as trustee of the EHPO Trust ("Evolution trust") to acquire all of the shares in the entities that own two hospitals and a day surgery ("Evolution hospital assets") located in the Illawarra region of New South Wales for $53 million, subject to adjustments ("Evolution transaction"). The supplementary explanatory statement was dispatched to Pulse shareholders on 13 April 2017 and provided further information to Pulse shareholders as to that transaction. 5. The scheme meeting took place on 1 May 2017 and the Pulse shareholders approved the proposed scheme of arrangement by a substantial majority. Nearly 97.8% of Pulse shareholders voting at the meeting, by number of votes cast, and 86.3% of shareholders voting, by number of shares on issue (comprising 357 shareholders) voted in favour of the relevant resolution. 6. Pulse fairly recognises, as it had previously advised the Court at a further hearing on 10 April 2017, that there is some commonality between stakeholders in Evolution and Sante Capital Investments Nominees Pty Ltd ("Sante Capital") and the Evolution trust and the Sante Capital No.1 trust and that Sante Capital as trustee of the Sante Capital No.1 trust holds approximately 15.79% of the shares in Pulse. Pulse considers that Evolution and Sante Capital are associates, although that proposition is not accepted by Evolution or Sante Capital. As was disclosed in the explanatory statement, Sante Capital as trustee of the Sante Capital No.1 trust had undertaken to Healthe Care that it would vote in favour of the scheme and would not transfer its shares, subject to various qualifications. Pulse tagged Sante Capital's votes at the scheme meeting and, if its votes were excluded, the resolution would still have passed by substantial majorities of shareholders voting at the meeting, being 97.3% by number of votes cast and 84.56% by number of shareholders voting. As Mr Rich points out, it follows that the requisite majorities were (overwhelmingly) obtained at the scheme meeting, irrespective of Sante Capital's votes. 7. At the second court hearing on 3 May 2017, Pulse sought orders approving the scheme and I made those orders on that date. These are my reasons for making those orders. I have drawn on the comprehensive submissions made on that occasion by Mr Rich, who appears with Mr Foreman for Pulse, in this judgment. Healthe Care was also granted leave to appear at the second hearing and was represented by Mr Kidd, although it was ultimately not necessary for it to make submissions. Matters relevant to approval of the scheme 1. At a second court hearing as to a scheme of arrangement, the Court considers whether the procedural requirements for scheme approval have been satisfied and also exercises a judicial discretion as to whether or not to approve the scheme: Re Central Pacific Minerals NL [2002] FCA 239 at [12]; Re Seven Network Ltd (No 3) [2010] FCA 400; (2010) 77 ACSR 701 at [31]; Re Mosaic Oil NL (No 2) [2010] FCA 1186; (2010) 80 ACSR 281 at 284; Re Redcape Property Fund Ltd and Trust Company (RE Services) Ltd (as the responsible entity for the Redcape Property Trust) [2012] NSWSC 486 at [7]. In exercising that discretion, the Court has regard to the assessment by members of their interests, as manifested in the voting at the meeting: Re Central Pacific Minerals NL above at [14]. 2. As Mr Rich points out, the Court will also have regard to other relevant matters at the second court hearing, including whether shareholders have voted in good faith and not for an improper purpose; whether the proposal is fair and reasonable so that an intelligent and honest person who was a member of the relevant class, properly informed and acting alone might approve it; whether 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; whether there has been full and fair disclosure of all information material to the decision; whether minority shareholders would be oppressed by the scheme; whether the scheme offends public policy; and whether the interests of other groups who are not parties to, but are affected by, the scheme are dealt with appropriately: Re Seven Network Limited above at [35]–[40]; Re David Jones Limited (No 3) [2014] FCA 753. 3. Pulse has led evidence at this hearing to address the applicable procedural requirements, including that the scheme booklet and orders made at the first court hearing were lodged with the Australian Securities and Investments Commission ("ASIC") after that hearing; the scheme booklet and proxy forms were dispatched to shareholders, in a form corresponding with that approved by the Court; the supplementary explanatory statement and proxy forms were dispatched to shareholders, also in a form corresponding with that approved by the Court; the receipt of proxy forms and collation of proxies; and the holding of the scheme meeting, counting of votes and that the necessary majorities were obtained at that meeting. Pulse has also led evidence as to the advertisement of the second court hearing to approve the scheme; that no notice of intention to appear at the second court hearing was received; and that ASIC has provided a letter under s 411(17) of the Corporations Act in respect of the scheme. 4. Turning now to the exercise of the Court's discretion whether to approve the scheme, Mr Rich submits, and I accept, that the scheme is a relatively common form of "arrangement" that is suitable for approval under s 411 of the Corporations Act, so far as Healthe Care, a company which had no pre-existing interest in Pulse shares, will acquire all of the issued shares in Pulse for cash under the scheme. The amount Healthe Care will pay for those shares significantly exceeds the market price of Pulse's shares during the 90 trading days immediately preceding the announcement of the proposal; an independent expert has expressed the view that Healthe Care's proposal is fair and reasonable; and the Pulse directors unanimously recommended that shareholders vote in favour of the scheme. Mr Rich submits, and I also accept, that the Court can be satisfied that an intelligent person in the position of the Pulse shareholders, properly informed and acting alone, might sensibly approve the scheme in these circumstances. 5. Mr Rich submits, and I accept, that there has been appropriate disclosure to Pulse shareholders, including in respect of the Evolution transaction, by the explanatory statement and the supplementary explanatory statement, including a report of Lonergan Edwards & Associates Limited ("Lonergan Edwards") that assessed whether that transaction gave rise to a "net benefit" to Evolution. I address the question of classes and collateral benefit below, and otherwise accept Mr Rich's submission that no matters of public policy or possible oppression of minorities, improper purposes or any unjustified effect on third parties have arisen which might tend against approval of the scheme. Classes and tagging 1. At the hearing on 10 April 2017, Mr Rich submitted and I accepted that the Evolution transaction did not require that Pulse shareholders vote in different classes at the scheme meeting where there was no differing effect on their legal interests arising from that transaction, and it was not impossible for them to consult together in the one meeting. I also accepted that the fact that Sante Capital had undertaken to vote its shares in favour of the scheme did not, in itself, require that it vote in a separate class: Re People Telecom Limited [2009] FCA 180 at [7]–[8]; Re Straits Resources Limited [2010] FCA 1466 at [43]–[45]. The votes cast by Sante Capital at the scheme meeting were, appropriately, tagged and the voting results, to which I referred above, demonstrate that the requisite majorities were satisfied by a substantial margin, irrespective of Sante Capital's vote. 2. I consider that separate class meetings were not required, because the rights and entitlements of Sante Capital and other shareholders, viewed in the totality of the scheme's context, were not so dissimilar as to make it impossible for them to consult together with a view to their common interest, and the Court accordingly is not deprived of jurisdiction to approve the scheme by any failure to convene such separate class meetings: Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583; Re Opes Prime Stockbroking Limited [2009] FCA 813; (2009) 179 FCR 20 at [64]–[71]; Re iSoft Group Limited [2011] FCA 680; Re Aston Resources Limited [2012] FCA 229; Perpetual Custodians Limited (as custodian for Tamoran Pty Ltd as trustee for Crivelli) v IOOF Investment Management Limited [2013] NSWCA 231; (2013) 304 ALR 436 at [51] per Leeming JA (with whom McColl and Gleeson JJA agreed); Re Amcom Telecommunications Limited (No 4) [2015] FCA 720; (2015) 107 ACSR 341 at [64]; Re Boart Longyear Limited [2017] NSWSC 567 at [30]ff. Collateral benefit 1. Pulse relies on several matters for the submission that matters arising from the Evolution transaction did not confer a collateral benefit on Sante Capital and that issue was properly addressed in the disclosure to Pulse shareholders. The concept of a collateral benefit, as arising in a scheme of arrangement, was addressed by Farrell J in Re David Jones Limited (No 3) above at [15]–[16], where her Honour observed that: "In the context of a scheme, I accept that the appropriate measure of whether a benefit exists is the 'net benefits' test which has been adopted by the Takeovers Panel in Guidance Note 21: Collateral Benefits (GN 21) at [15] and [31] in determining whether 'unacceptable circumstances' exist by reason of the existence of such an interest. This test was posited by Santow J in Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638 at 680: The preferred holistic view instead takes into account whatever rights or benefits are conferred by each transaction, to be netted off against whatever rights or benefits are thereby given up, to the extent such benefits are commensurable at least in an approximate sense. The resultant net benefit is to be compared under each transaction. Only if there is overall disparity in favour of the party to the non-bid transaction is s 698(1) [now s 623] contravened. This is in the sense of a balance of advantage, profit or good in favour of the party to the non-bid transaction. I also accept that, as contemplated by GN 21 at [32], there may be 'inducement' arising from collateral benefits which should be taken into account where there is no material 'net benefit' but a shareholder is offered the opportunity to acquire or dispose of an asset for which there is no ready market or easily ascertainable value." 1. In Re David Jones Ltd (No 2) [2014] FCA 720; (2014) 101 ACSR 381 at [30]–[31], Farrell J noted one approach to addressing the question of collateral benefits in a scheme, namely that: "Where an issue emerges of whether a shareholder in a scheme company may receive some benefit different from other shareholders if the scheme is approved, the best information for shareholders or the court in considering whether to approve the scheme is an appropriately qualified independent expert's report which identifies the nature and extent of the benefit. It is for this reason that it has become usual for proponents of a scheme which may benefit a shareholder, director or other related party differently from other scheme participants to provide an expert's report concerning the nature and extent of the likely benefit at the first court hearing to assist the court in making orders convening a scheme meeting under s 411(1). …" 1. In David Jones No 3 at [12]–[13], her Honour also observed that: "…The transaction under consideration is a scheme of arrangement to which s 623 does not apply. The relevance of the principles set out in s 602 goes to the question of fairness and the desirability of there being, so far as relevant and possible, neutrality between "acquisition" schemes and Ch 6 takeovers. However, one of the reasons for the continued existence of the s 411 avenue for effecting mergers is that it is a flexible way of accommodating differences in the treatment of shareholders. It is for this reason that it is not illegal for a collateral benefit to be offered or given. Nor is it necessarily inappropriate for there to be differential consideration or collateral benefits subject to how the related questions of fairness and adequacy of disclosure to shareholders who will not participate in a benefit are addressed. The "fairness" issue is usually dealt with in one of two ways: first, by deciding whether there are differences which are "class creating" or, second (and arguably more appropriately where the issue is collateral benefits), by enquiring whether processes have been established by the scheme company to "tag" votes of interested shareholders or for interested shareholders to abstain from voting. Either approach allows appropriately informed shareholders who will not share in a benefit to determine the outcome of the approval resolution and prevents shareholders with greater bargaining power from being advantaged over shareholders with less bargaining power without the consent of the less powerful shareholders." 1. In this matter, the Lonergan Edwards report addressed whether the consideration to be received by Evolution for the sale of the Evolution hospital assets and the leases for the premises occupied by those hospital assets amounted to a "net benefit" received by Sante Capital within the meaning of the Takeovers Panel's Guidance Note 21: Collateral Benefits. Lonergan Edwards expressed the view that the purchase price for the Evolution hospital assets was consistent with its assessed value range for those assets; the rent to be charged under the leasing arrangements appeared to be consistent with market benchmarks; and neither Evolution nor Sante Capital was receiving a net benefit with respect to the sale of the Evolution hospital assets or the leasing arrangements. Lonergan Edwards also noted that nothing had come to its attention to indicate that either the Evolution transaction or the leasing arrangements were not negotiated at arm's length. The independent expert in respect of the scheme, Leadenhall Corporate Advisory ("Leadenhall"), also confirmed their view in a supplementary letter that the scheme continued to be fair and reasonable and in the best interests of Pulse shareholders, in the absence of a superior proposal, after considering the Evolution transaction. 2. Mr Rich also refers to the fact that the Evolution transaction was disclosed in the supplementary explanatory statement and both the Lonergan Edwards report and Leadenhall's supplementary letter were included in the supplementary explanatory statement provided to Pulse shareholders; Pulse's directors continue to recommend that its shareholders vote in favour of the scheme, in the absence of a superior proposal; and Pulse shareholders were provided with adequate time to consider the supplementary explanatory statement, Lonergan Edwards' report and Leadenhall's supplementary letter prior to the rescheduled scheme meeting and were provided with an adequate opportunity to change their proxy vote following the provision of those materials. Mr Rich also emphasises that the statutory majorities were obtained at the second scheme meeting and the same result would have followed even if Sante Capital's votes were disregarded. 3. In these circumstances, Mr Rich submits, and I accept, this matter does not constitute the provision of a "net benefit" to Sante Capital so as to prevent the Court from approving the scheme, particularly where it has obtained the approval of the requisite majorities of shareholders other than Sante Capital. Section 411(17) 1. Section 411(17) of the Act provides that: "The Court must not approve a compromise or arrangement under this section unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b)." 1. ASIC has provided a statement pursuant to section 411(17)(b) of the Corporations Act and the circumstances of this transaction do not provide any reason not to proceed on the basis of that statement. Orders 1. For these reasons, I made the orders proposed by Pulse in the form initialled by me and placed in the file. ********** 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: 25 May 2017