In the matter of Prospa Group Limited

1. [1]

   By Originating Process filed on 29 May 2024, the Plaintiff, Prospa Group Ltd (“Prospa”) seeks orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) (“Act”) in respect of a proposed scheme of arrangement.

2. [2]

   By way of background, Prospa is an Australian and New Zealand online lender to small business and is admitted to the official list of the financial market operated by the Australian Securities Exchange (“ASX”). On 27 February 2024, Prospa announced to ASX that it had entered into a Scheme Implementation Deed (“SID”) with a consortium led by Salter Brothers Asset Management Pty Ltd as trustee for Salter Brothers Tech Trust No 1 (“Salter Brothers Tech Fund”) (“Consortium”). The proposed scheme provides for the acquisition, under a scheme of arrangement, of all of the issued shares in Prospa (other than those held by Excluded Shareholders, as defined) by Salkbridge Pty Ltd (“BidCo”) which is an entity ultimately owned by members of the Consortium, and for Prospa shareholders (other than Excluded Shareholders and Ineligible Foreign Shareholders, as defined) to elect to receive either $0.45 in cash or a share in an unlisted company, PGL HoldCo Ltd, for each Prospa share they hold at the scheme record date. An Ineligible Foreign Shareholder is not entitled to receive an unlisted scrip and instead receives $0.45 in cash for each Prospa share, unless BidCo determines that it is lawful and not unduly onerous to issue the unlisted scrip alternative to that shareholder.

3. [3]

   I made the orders sought by Prospa at the conclusion of the hearing on 12 June 2024. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Williams who appears for Prospa in this judgment.

Affidavit evidence

1. [4]

   Prospa reads the affidavit dated 29 May 2024 of its solicitor, Mr Hastings, which exhibits an announcement made by Prospa to ASX on 27 February 2024 relating to the proposed scheme and a current company extract for Prospa obtained from the Australian Securities and Investments Commission (“ASIC”).

2. [5]

   Prospa also reads the affidavit dated 11 June 2024 of its chief financial officer, Mr Ross Aucutt. Mr Aucutt refers to the nature of Prospa’s business, which I have noted above, and to the background to the scheme Mr Aucutt identifies the several Consortium members and notes that the Consortium (excluding the Salter Brothers Tech Fund) has a relevant interest and voting power in approximately 4.96% of Prospa shares on issue at the Last Practicable Date (as defined). He exhibits a copy of the Consortium Agreement to his affidavit and also refers to the role of BidCo and BGL HoldCo Ltd (“HoldCo”) in respect of the proposed scheme. He refers to the terms of the scheme consideration, which I have noted above, and identifies a condition precedent to the scheme that Prospa shareholders holding at least 73.3% of the Prospa shares on issue on the Scheme Record Date (as defined) have made (or are deemed to have made) valid elections for the scrip consideration. He notes that several large shareholders in Prospa, including two of its executive directors, Messrs Moshal and Bertoli, representing a total of 73.3% shares in issue in Prospa, have advised Prospa’s independent board committee (“IBC”) that they intend to elect and receive the scrip consideration, in the absence of a Superior Proposal (as defined). Mr Aucutt also addresses a condition subsequent to the scheme, which provides for the scheme automatically to terminate in specified events which would have the result that valid elections for the script consideration comprised less than 73.3% of the Prospa shares on issue on the Scheme Record Date. That condition subsequent reinforces the operation of the condition precedent to the scheme.

3. [6]

   Mr Aucutt also refers to the treatment of Ineligible Foreign Shareholders in respect of the scheme and to the arrangements for the funding of scheme consideration, and his evidence in that respect was elaborated by further affidavit evidence. Mr Aucutt notes that BidCo intends to fund the Aggregate Cash Consideration (as defined) for the scheme by equity funding sourced from the Consortium in accordance with an Equity Commitment Letter (as defined), and debt funding. The debt funding contemplates that Prospa and iPartners Nominees Pty Ltd as trustee for a trust (“iPartners”) will loan up to $12 million in funds drawn under a corporate debt facility entered into on or about 7 July 2023, subject to approval by special resolution of Prospa shareholders at a general meeting to be held immediately prior to the scheme meeting.

4. [7]

   Mr Aucutt also refers to the execution of a deed poll by Prospa, BidCo and HoldCo in favour of each scheme shareholder, the arrangements for the general meeting associated with the scheme and the conditions to the scheme, and outlines the consideration of the scheme by Prospa’s IBC. He also addresses the terms of a reimbursement fee, reverse reimbursement fee and exclusivity in respect of the scheme; the treatment of Prospa Equity Incentives (as defined) in respect of the scheme; the consent of the proposed chair and deputy chair of the scheme meeting; the process adopted for verification of the scheme booklet; the proposed manner of dispatch of scheme documents to Prospa shareholders; proposed communications with Prospa shareholders by way of an inbound shareholder information line; and the proposed advertisement of the second Court hearing by an announcement made to ASX. By a second affidavit dated 12 June 2024, Mr Aucutt corrected an error in respect of one of the documents exhibited to his first affidavit.

5. [8]

   By an affidavit dated 11 June 2024, Mr Gregory Ruddock, who is the joint chief executive officer and founding partner of Ironbridge Capital Pty Ltd, a private equity firm, and a director of several companies associated with BidCo, also addresses entry into the SID by Prospa, BidCo and HoldCo, the membership of the Consortium, and the verification process conducted in relation to information concerning the Consortium, HoldCo and BidCo in the scheme booklet. Mr Ruddock also addresses the position in respect of funding of the aggregate cash consideration, involving equity funding and the iPartners funding as I noted above. By a second affidavit dated 12 June 2024, Mr Ruddock elaborated on the funding available to Consortium members in respect of their respective shares of the equity commitment for the scheme, providing direct evidence in respect of one Consortium member and evidence on information and belief in respect of other Consortium members to the availability of funding of their respective commitments.

6. [9]

   Prospa also tendered a letter dated 11 June 2024 by which ASIC reserved its position as to s 411(17)(b) of the Act to the second Court hearing; indicated that it considered that it had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement and make submissions to the Court; and indicated that it did not currently propose to make submissions or intervene to oppose the scheme at the first Court hearing.

Applicable principles

1. [10]

   The principles governing an application for orders to convene a meeting of members under s 411(1) of the Act are well-settled. In Re InvoCare Ltd [2023] NSWSC 1180 (“InvoCare”) at [14], I observed, by reference to Counsel’s submissions, that:

2. [11]

   These requirements are satisfied here. Prospa is a Part 5.1 body and an acquisition scheme is a common example of an arrangement for the purposes of s 411 of the Act. ASIC has here been given appropriate notice as required under s 411(2) of the Act and I have referred to its letter in customary form above. I am satisfied that the applicable procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) (“Rules”) will be met, although, as is now common practice, Prospa seeks dispensation from the requirement under r 3.4 of the Rules for publication of a notice in the form of Form 6, consistently with Practice Note SC Eq 4 at [26(f)].

3. [12]

   Where the preconditions to the exercise of power under s 411(1) of the Act are satisfied, it is necessary for the Court to consider whether the Court should in its discretion exercise its power under s 411(1) of the Act. Mr Williams refers to my judgment in Re Villa World Ltd [2019] NSWSC 1207 at [15]-[19] in that regard. I also summarised the principles relevant to the exercise of that discretion in Re Origin Energy [2023] NSWSC 1246 at [21]-[22], as follows:

4. [13]

   The offer of alternatives of cash and scrip consideration is common in schemes of arrangement, although the number of shareholders who will here elect the scrip consideration is larger than is often the case. There is here nothing in the terms of the scheme, or in its effect on Prospa shareholders, that would warrant the Court declining to permit its consideration by shareholders. A verification process has been undertaken in customary from and, subject to the specific matters I address below, there is no reason to think that the Court would not approve the scheme at a second Court hearing if it receives the requisite majorities at the scheme meeting.

5. [14]

   The IBC unanimously recommends that Prospa shareholders (other than Excluded Shareholders) vote in favour of the scheme at the scheme meeting, in the absence of a superior proposal and subject to the independent expert concluding, and continuing to conclude, that the scheme is fair and reasonable and in the best interests of Prospa shareholders (other than Excluded Shareholders). As Mr Williams recognises, the Prospa IBC’s recommendation is made on the basis of the cash consideration only, and it makes no recommendation in relation to the scrip consideration. I accept that it is common in “stub equity” transactions that the target board’s recommendation is made only on that basis, due to the risks in an investment in stub equity and the fact that the suitability of the stub equity depends on the characteristics and risk profile of individual shareholders: Re Aveo Group Limited and Aveo Funds Management Ltd [2019] NSWSC 1348 (“Aveo”); Re BINGO Industries Ltd [2021] NSWSC 798 (“BINGO”); Re Healthia Ltd [2023] NSWSC 1296; Re Millennium Services Group Ltd [2024] NSWSC 307; Re McGrath Ltd [2024] NSWSC 555 (“McGrath”). Subject to the same qualifications, each member of the Prospa IBC intends to vote all Prospa shares held or controlled by them in favour of the scheme.

6. [15]

   The independent expert’s report prepared by Kroll Australia Pty Ltd (“Kroll”) also expresses the opinion that the scheme is “fair” and “reasonable” and hence in the best interests of Prospa shareholders, on the basis of Kroll’s assessment that the value of a Prospa share on a 100% controlling interest basis is in the range of $0.43 to $0.49, and the cash consideration of $0.45 per Prospa share is within this range. Kroll also reaches that conclusion with reference to the value of the cash consideration and expresses the view that it is not possible reliably to estimate the value of a HoldCo share. I also accept that it is common for an independent expert to express no opinion as to the value of a stub equity alternative, due to the difficulty in reliably valuing stub equity, a matter noted in several of the cases to which I referred above.

7. [16]

   Subject to the additional matters that I address below, I am satisfied that there is no reason not to order that the scheme meeting be convened and make the additional orders sought by Prospa.

Several additional matters

1. [17]

   Consistent with the ex parte nature of the application, Mr Williams addresses several additional matters. First, Mr Williams recognises that ASIC had expressed concern about offers of “stub equity” consideration in control transactions where the consideration offered is shares in an Australian proprietary company and accepting shareholders are required to hold the offered scrip consideration through a custodial arrangement: ASIC Consultation Paper 312 Stub equity in control transactions; Re Capilano Honey Ltd [2018] FCA 1568 at [35]-[53]. He notes that ASIC subsequently executed ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734 (Instrument), which modified the Act to prevent the use of Australian proprietary companies as “stub equity” vehicles, but does not prevent a bidder making a “stub equity” offer by an Australian public company with compulsory custodial arrangements in specified circumstances. Mr Williams submits and I accept that the “stub equity” proposed to be offered to Prospa shareholders complies with the requirements of that Instrument. I also note that ASIC has not intervened to oppose this application by reference to this matter.

2. [18]

   Mr Williams points out that, under the scheme, Prospa shareholders who make a valid election to receive the scrip consideration agree to become bound by the by the terms of HoldCo’s Constitution and the HoldCo Shareholders' Deed and, where applicable, the Nominee Deed, and each of those documents is annexed to the scheme booklet, and the rights, liabilities, and risks relating to the HoldCo shares are summarised in sections 4.7, 4.8 and 5.4 of the scheme booklet. Mr Williams also submits and I accept that the scheme booklet discloses the characteristics of HoldCo shares and the risks involved in Prospa shareholders choosing the scrip consideration, including in the letter from the chair and sections 4 and 5.4 of the scheme booklet. I also accept that offers of “stub equity” as scheme consideration, including when held through nominees and where shareholders are required to enter into contractual arrangements such as a shareholders’ deed, have been approved in previous schemes, and there is a real importance in consistency of decision-making in this regard: Aveo at [34]; BINGO at [17]-[21]. I am satisfied that the scrip consideration option made available to Prospa shareholders is not a matter which would warrant the Court declining to convene the Scheme Meeting.

3. [19]

   Second, Mr Williams addresses the question of funding for the cash consideration for the proposed scheme. He points out that BidCo intends to fund the cash consideration payable under the scheme of approximately $19.8 million through a combination of equity financing of $7,814,827 provided by the Consortium and the balance through a loan from a Prospa subsidiary, by way of on-lending of funds drawn under the Prospa group’s existing corporate debt facility with iPartners, to which I referred above, subject to shareholder approval. Mr Williams points out that the funding arrangements for the scheme consideration are set out in sections 2.6 and 4.6 of the scheme booklet.

4. [20]

   Mr Williams also notes that the equity funding will be provided by the Consortium pursuant to an equity commitment letter dated 26 February 2024, and the Consortium members are severally responsible for providing their proportionate share of the equity funding by way of subscription for shares in HoldCo in sufficient time to enable BidCo to meet its obligations to pay the Aggregate Cash Consideration (as defined) under the scheme. The obligation to provide the equity funding is conditional only on satisfaction or waiver of the conditions precedent in the SID. Importantly, Prospa led evidence to establish the financial capacity of Consortium members to comply with that obligation, by Mr Ruddock’s second affidavit dated 12 June 2024, as contemplated by paragraph 28(b) of Practice Note SC Eq 4, which recognises that:

5. [21]

   It seems to me that trust arrangements in respect of the transfer of scheme shares are not, without more, sufficient to address the risk of a loss of opportunity to shareholders if, ultimately, funding for a scheme involving a special purpose vehicle was not in place, and the scheme failed. The market will also likely trade on the basis that a scheme is sufficiently funded from the point at which it is announced. Both of those propositions are recognised by the acknowledgement of the importance of proof of funding in respect of schemes involving special purpose vehicles in the harmonised scheme practice note, which is now operative both in this Court, the Federal Court of Australia and several other State courts. Mr Ruddock’s further evidence of the availability of funds to Consortium members to fund BidCo was therefore significant for the outcome of the application.

6. [22]

   Mr Williams notes that the debt funding for the scheme is being sourced from an earlier drawdown under Prospa’s existing debt financing facility with iPartners, and Prospa and iPartners have entered into binding documentation allowing the funds to be on-lent to BidCo for the purpose of funding the aggregate cash consideration for the scheme and otherwise consenting to the transaction. Prospa rightly recognises that this funding involves the provision of financial assistance by Prospa to BidCo for the acquisition of Prospa shares; is subject to approval by Prospa shareholders under s 260B of the Act and as a related party transaction under s 208 of the Act; and that Consortium members and their associates will not be entitled to vote on the resolutions. Mr Williams submits and I accept that the financial assistance to be provided by Prospa for the acquisition of its shares under the scheme is not a matter which should prevent the convening of the scheme meeting, where the giving of that assistance is to be separately approved (or not) by special resolution of Prospa shareholders: Re Clough Ltd [2013] FCA 1149 at [4]; Re ThinkSmart Ltd [2022] FCA 1314 at [42]-[43]; Re Thorn Group Ltd [2023] NSWSC 1299 at [17].

7. [23]

   Third, Mr Williams notes, as I also noted above, that the scheme contains a condition subsequent in cl 4.3, which provides for automatic termination of the scheme if one or more Prospa shareholders who elected the scrip consideration transfers some or all of their Prospa shares before the scheme record date, or changes their registered address to become an Ineligible Foreign Shareholder, with the result that total scrip consideration elections are for less than 73.3% of the Prospa shares on issue on the scheme record date. Mr Williams points out that that condition subsequent addresses the risk that the Minimum Election Condition Precedent (as defined, to which I referred above) is satisfied as at the second Court hearing date, but valid elections for scrip consideration are ultimately made for less than 73.3% of Prospa shares because an electing Prospa shareholder transfers their shares or becomes ineligible to receive the scrip consideration after the scheme becomes effective and before the scheme record date.

8. [24]

   Mr Williams points out that the principles applicable to approval of a scheme that is subject to a condition subsequent were identified by Santow J in Re NRMA Ltd (2000) 33 ACSR 595 at 646-648; [2000] NSWSC 82, particularly at 647 as follows:

9. [25]

   Mr Williams submits and I accept that this test is satisfied here where, if the condition subsequent is triggered, the scheme will automatically terminate. I also recognise that approval has been granted to several schemes which remain subject to conditions: Re iProperty Group Ltd [2015] FCA 1507 at [24]-[27]; Re Spark Infrastructure RE Ltd [2021] NSWSC 1564 at [24]. I am conscious that this condition introduces a degree of uncertainty as to whether the scheme will ultimately be implemented and there is a, possibly remote, risk that a Consortium member could deliberately cause its failure in the case of adverse developments as to Prospa or the market generally or if it had second thoughts as to its participation in the Consortium. However, on balance, I accept that this condition is not a reason to prevent convening of the scheme meeting and allowing shareholders to consider the commercial proposal that is to be put to them.

10. [26]

    Fourth, Mr Williams address the position as to Ineligible Foreign Shareholders, to which I referred above. I accept that Ineligible Foreign Shareholders do not constitute a separate class as the scheme hearing: Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104; [2002] NSWSC 897.

11. [27]

    Fifth, Mr Williams refers to Prospa Equity Incentives. He notes that, as set out in section 6.5 of the proposed scheme booklet, Prospa operates incentive plans under which directors, senior executives and key employees are offered performance rights and/or options (“Prospa Equity Incentives”) which, subject to satisfaction of certain conditions, will, if vested, allow participants to receive fully ordinary paid shares in Prospa. He Outlines the treatment of Prospa Equity Incentives in respect of the scheme. He also submits and I accept that holders of performance rights or similar rights to receive Prospa shares who are also Prospa shareholders are not in a separate class of members by reason only that they also hold such rights: Re Cashcard Australia Ltd (2004) 48 ACSR 738; [2004] FCA 223; Re Foster’s Group Ltd (No 2) [2011] VSC 547 at [38]-[43].

12. [28]

    Sixth, and unusually, Mr Williams points out that the SID does not contain any exclusivity provisions in favour of the Consortium and Prospa is free to engage with any third parties in relation to an alternative transaction.

13. [29]

    Seventh, Mr Williams points out that, under cl 11.2 of the SID, Prospa must pay BidCo a reimbursement fee of $600,000 (exclusive of GST) in specified circumstances, which do not depart from standard practice, and that fee is not payable merely because the resolution submitted to the scheme meeting is not approved by the required majorities. That fee represents approximately 0.8% of the equity value of Prospa implied by the cash consideration, consistent with guidance issued by the Takeovers Panel in respect of “deal protection” measures. Under cl 12 of the SID, BidCo must pay Prospa a reverse reimbursement fee of $600,000 (exclusive of GST) in specified circumstances. These matters do not provide any reason not to convene the scheme meeting.

14. [30]

    Eighth, Mr Williams notes that the scheme adopts the conventional mechanism of making the transfer of Prospa shares to BidCo conditional on the provision of the total scheme consideration, and that Prospa shareholders are therefore protected against the risk that their Prospa shares are transferred without receiving the scheme consideration, and that Prospa shareholders have the further protection of a Deed Poll entered into by BidCo, HoldCo and Prospa in their favour and governed by NSW law. Mr Williams submits and I accept that these are well-established means of managing performance risk (Re ELMO Software Pty Ltd [2023] NSWSC 12 at [27]-[28]), although their existence does not exclude the need for the proof of the Consortium members’ capacity to fund the bid consideration to which I referred above.

15. [31]

    Ninth, Mr Williams addresses the manner of dispatch of scheme documents to Prospa shareholders, which is in common form, although allowing for shareholders’ election as to the form of scrip consideration, and gives rise to no reason not to convene the scheme meeting.

16. [32]

    Tenth, Mr Williams notes that, following dispatch of the scheme booklet, Prospa proposes that a third party will operate an inbound shareholder information line, and drafts of the “Inbound Q&A script” and the “Scheme Banner messages” are in evidence. Mr Williams submits and I accept that these scripts do not travel beyond the information in the scheme booklet, present information in a balanced manner, and draw attention to advantages and disadvantages of the scheme and encourage shareholders to read the scheme booklet in its entirety. Prospa draws these proposed communications to the Court’s attention but does not seek orders approving them. Consistent with the approach taken in InvoCare, I have reviewed these scripts, had no difficulty with them and I record that matter in this judgment.

Orders

1. [33]

   For these reasons, I made the orders sought by Prospa at the conclusion of the first Court hearing on 12 June 2024.