FEDERAL COURT OF AUSTRALIA

Security Matters Limited, in the matter of Security Matters Limited (No 2) [2023] FCA 40

ORDERS

OTHER MATTERS:

A.    In this order, “Scheme Shareholders”, “Scheme Option-holders”, “Share Scheme”, “Option Scheme”, “Share Scheme Meeting” and “Option Scheme Meeting” have the same meaning as in the order made on 9 January 2023 in this proceeding (convening order).

THE COURT ORDERS THAT:

1.    The Share Scheme Meeting is postponed to 7 February 2023, commencing at 9.00am (Melbourne time), and the Option Scheme Meeting is postponed to 7 February 2023, commencing at 9.30am (Melbourne time) (or at the conclusion or adjournment of the Share Scheme Meeting, whichever is later), with each meeting to be conducted in the manner provided in paragraph 1 of the convening order.

2.    On or before 5.00pm on 30 January 2023, the plaintiff is to send a supplementary disclosure document, substantially in the form attached to the email sent to the Court on behalf of the plaintiff at 4:07pm on 27 January 2023, together with the annexures thereto (the supplementary disclosure document) by:

(a)    in the case of Scheme Shareholders who have elected to receive shareholder communications electronically by way of email, an email (substantially in the form of the proposed letter to shareholders and optionholders, also attached to the email from the plaintiff (the SDD letter)) that includes a link to an online portal or website from which the supplementary disclosure document can be downloaded;

(b)    in the case of Scheme Shareholders who have elected to receive hardcopy communications, a copy of the supplementary disclosure document, to the relevant address(es) recorded in the plaintiff’s register and sent:

(i)    for Scheme Shareholders whose addresses are in Australia, by Express Post;

(ii)    for Scheme Shareholders whose addresses are overseas, by International Express Post;

(c)    in the case of Scheme Shareholders who have not made an election for either electronic or hardcopy communications, a letter (substantially in the form of the SDD letter), which includes a link to an online portal or website from which the supplementary disclosure document can be downloaded, addressed to the relevant address(es) recorded in the plaintiff’s register and sent:

(i)    for Scheme Shareholders whose addresses are in Australia, by Express Post;

(ii)    for Scheme Shareholders whose addresses are overseas, by International Express Post.

3.    On or before 5.00pm on 30 January 2023, the plaintiff is to send the supplementary disclosure document by:

(a)    in the case of Scheme Option-holders who have elected to receive optionholder communications electronically by way of email, an email (substantially in the form of the SDD letter) that includes a link to an online portal or website from which the supplementary disclosure document can be downloaded;

(b)    in the case of Scheme Option-holders who have elected to receive hardcopy communications, a copy of the supplementary disclosure document to the relevant address(es) recorded in the plaintiff’s register and sent:

(i)    for Scheme Option-holders whose addresses are in Australia, by Express Post;

(ii)    for Scheme Option-holders whose addresses are overseas, by International Express Post;

(c)    in the case of Scheme Option-holders who have not made an election for either electronic or hardcopy communications, a letter (substantially in the form of the SDD letter), which includes a link to an online portal or website from which the supplementary disclosure document can be downloaded addressed to the relevant address(es) recorded in the plaintiff’s register and sent:

(i)    for Scheme Option-holders whose addresses are in Australia, by Express Post;

(ii)    for Scheme Option-holders whose addresses are overseas, by International Express Post.

4.    If Nexia Sydney Corporate Advisory Pty Ltd publishes any further report concerning the Share Scheme or the Option Scheme, the plaintiff:

(a)    must provide a copy of the report to the Australian Securities and Investments Commission, as soon as practicable after receiving it; and

(b)    has leave to apply for orders to send the report to Scheme Shareholders and Scheme Option-holders, such application to be made by an email to the associate to Justice O’Bryan and, subject to further order, determined in chambers.

5.    A proxy form, appointment of a corporate representative, or power of attorney to act on behalf of the relevant Scheme Shareholder or Scheme Option-holder in respect of the Share Scheme Meeting and the Option Scheme Meeting respectively that have been lodged with the plaintiff remain valid for the purposes of the respective meeting, in accordance with their terms, but any appointment pursuant to such instrument may be varied or revoked by the appointing shareholder or option-holder at any time up to 9.00am (AEST) on 6 February 2023.

6.    Further notice of the hearing of the application under s 411(4) of the Corporations Act 2001 for an order approving the Share Scheme and the Option Scheme is to be published once in “The Australian” newspaper by an advertisement substantially in the form of Annexure A to these orders, such advertisement to be published on or before 3 February 2023, and the plaintiff is otherwise exempted from compliance with r 3.4 of the Federal Court (Corporations) Rules 2000.

7.    Subject to further order, the hearing of the plaintiff’s application for orders approving the Schemes is listed at 10.15am (Melbourne time) on 10 February 2023.

8.    Liberty to apply is reserved, including to the Australian Securities and Investments Commission.

9.    These orders are to be entered forthwith.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Annexure A

Notice of Second Court Hearing

Notice of hearing to approve compromise or arrangement

TO all the members of Security Matters Limited (ACN 626 192 998) (SMX)

TAKE NOTICE that at 10.15 am on 10 February 2023 the Federal Court of Australia (Victorian Registry) at Owen Dixon Commonwealth Law Courts Building, 305 William Street, Melbourne, will hear an application by SMX seeking the approval of a scheme of arrangement between SMX and its members and scheme of arrangement between SMX and certain of its option-holders, if agreed to by resolutions to be considered, and, if thought fit, passed at meetings of such members and option-holders.

The meetings are to be held electronically through an online meeting platform, Lumi, on 7 February 2023, commencing at:

    9.00am (Melbourne time) for shareholders, and accessible via https://web.lumiagm.com/310257505 and

    9.30am (Melbourne time) for option-holders (or at the conclusion or adjournment of the meeting for shareholders, accessible via whichever is later), and accessible via https://web.lumiagm.com/399731351

If you wish to oppose the approval of the compromise or arrangement, you must file and serve on SMX a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on SMX at its address for service by 5.00pm on 9 February 2023.

Further disclosure in relation to the scheme, including a copy of a supplementary disclosure booklet, is available at the Company’s website – www.smx.tech. Included in that material is an updated independent expert report issued by Nexia Australia. If Nexia Australia issues any further report, it will also be available on the Company’s website.

The address for service of SMX is: c/o Mann Lawyers Pty Ltd, Level 17, 31 Queen Street Melbourne VIC 3000 [Ref: Nadav Prawer].

ORDERS

OTHER MATTERS:

A.    In this order, “Scheme Shareholders” and “Scheme Option-holders” have the same meaning as in the orders made on 27 January 2023 (supplementary disclosure order).

THE COURT ORDERS THAT:

1.    The supplementary disclosure order is varied, now for then, by the addition of the following paragraphs.

(a)    After paragraph 2:

“2A.    For Scheme Shareholders whose addresses recorded in the plaintiff’s register are in Israel, paragraphs 2(b)(ii) and 2(c)(ii) above will be satisfied if the documents are sent in Israel by 5.00pm on 30 January 2022 (Israel time) using “Priority Post 24”.

(b)    After paragraph 3:

“3A.    For Scheme Option-holders whose addresses recorded in the plaintiff’s register are in Israel, paragraphs 3(b)(ii) and 3(c)(ii) above will be satisfied if the documents are sent in Israel by 5.00pm on 30 January 2022 (Israel time) using “Priority Post 24”.

2.    Liberty to apply is reserved, including to the Australian Securities and Investments Commission.

3.    These orders are to be entered forthwith.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

O’BRYAN J:

Introduction

1    On 9 January 2023, Anderson J made orders under s 411 of the Corporations Act 2001 (Cth) (Act) convening the following meetings of the shareholders and certain of the optionholders in Security Matters Limited (which will be referred to as SMX, being its code on the Australian Securities Exchange):

(a)    a meeting of SMX shareholders (Scheme Shareholders) to consider and, if thought fit, to approve (with or without any alterations or conditions) the scheme of arrangement (Share Scheme) proposed to be made between SMX and its Scheme Shareholders (the Share Scheme Meeting); and

(b)    a meeting of the holders of “SMX Options” (Scheme Optionholders) for the purpose of considering and, if thought fit, agreeing (with or without modification) to the scheme of arrangement (Option Scheme) proposed between SMX and the Scheme Optionholders (the Option Scheme Meeting),

(together, the Scheme Meetings).

2    Under those orders, the Scheme Meetings were to be held on 1 February 2023, commencing at 9.00am (Melbourne time) in respect of the Share Scheme Meeting and at 9.30am (Melbourne time) (or at the conclusion or adjournment of the Share Scheme Meeting, whichever is later) in respect of the Option Scheme Meeting. Each of the meetings is to be conducted electronically through an online platform pursuant to s 249R(c) of the Act.

3    Order 15 of the orders made on 9 January 2023 provided that the originating process would return to the Court for further hearing on 23 January 2023. As noted in the recitals to those orders, the purpose of the further hearing was for the Court to consider a supplementary report from the independent expert, which was proposed to be provided to Scheme Shareholders and Scheme Optionholders (collectively, Scheme Securityholders) by way of supplementary disclosure. The background is further explained in Anderson J’s reasons (published as Security Matters Limited, in the matter of Security Matters Limited [2023] FCA 19). In short, the Scheme Booklet provided to Scheme Securityholders pursuant to the Court’s orders on 9 January 2023 (which includes the explanatory statement required by s 412 of the Act) contained an independent expert report from Mr Brent Goldman of Nexia Australia expressing the opinion that the Schemes are fair and reasonable and in the best interests of the Scheme Securityholders. The report was dated 7 October 2022. As noted by Anderson J (at [58]), the Australian Securities and Investments Commission (ASIC) had suggested, and SMX had agreed, that SMX should provide an updated report from the independent expert in time for the Scheme Securityholders to consider before the Scheme Meetings.

4    At a further hearing on 23 January 2023, SMX applied for orders that it dispatch on 24 January 2023 a supplementary disclosure booklet to Scheme Securityholders. The supplementary disclosure booklet contained a number of additional and updated disclosures including, most relevantly for present purposes, a supplementary independent expert’s report from Mr Goldman dated 22 January 2023. SMX’s application was supported by the following affidavits and documents:

(a)    an affidavit of Paul Rapisarda affirmed 18 January 2023;

(b)    an affidavit of Doron Afik affirmed 19 January 2023;

(c)    an affidavit of Doron Afik affirmed 20 January 2023;

(d)    an affidavit of Brent Goldman affirmed 23 January 2023;

(e)    an affidavit of Joshua Michael Samek affirmed 23 January 2023;

(f)    the proposed supplementary disclosure booklet; and

(g)    an outline of submissions dated 20 January 2023.

5    For the reasons explained below, I declined to make the orders sought by SMX. I considered that, having regard to certain features of the transaction and the opinions expressed by Mr Goldman in his supplementary report, the orders sought by SMX would not provide the Scheme Securityholders with sufficient time and information to make an informed decision about the proposed transaction. Conversely, a short postponement of the Scheme Meetings would enable the Scheme Securityholders to be given sufficient time and information to make an informed decision. Any disadvantages to Scheme Securityholders from a short postponement of the Scheme Meetings were outweighed by the advantages.

6    Subsequently, SMX applied for orders for both the dispatch of a supplementary disclosure booklet to Scheme Securityholders and the postponement of the Scheme Meetings. Following a further hearing on 27 January 2023, I made orders to that effect.

7    These are my reasons for declining to make the orders sought on 23 January 2023 and making orders on 27 January 2023.

Background

8    In his reasons, Anderson J summarised the transaction, of which the Schemes form a part, as follows (at [1]-[7]):

1     The plaintiff (SMX) is a public company limited by shares, headquartered in Israel and listed on the Australian Securities Exchange (ASX). SMX develops and commercialises track and trace technology for a variety of industries.

2     SMX seeks to become listed on the NASDAQ. To that end, it proposes to merge with Lionheart III Corp (Lionheart), which is a “SPAC”, that is, a “special-purpose acquisition company” (also known as a “blank cheque company”), incorporated in Delaware in the United States of America and is listed on the NASDAQ.

3     Essentially, the transaction involves a reverse takeover of Lionheart by SMX and redomiciliation of SMX - from Australia to Delaware - and insofar as it involves a scheme of arrangement, it is a “top-hat scheme”. This is the first case in Australia where the bidder is a United States “SPAC”. This feature means the transaction has attracted close scrutiny from the Australian Securities and Investments Commission (ASIC).

4     As SMX has both shares and options on issue, the transaction involves two schemes:

(a)     one involving SMX’s shareholders; and

(b)     the other, holders of certain options in SMX.

5     The transaction is complicated further by:

(a)     the imposition as part of the merger of an Irish company incorporated for the purposes of the transaction - called Empatan plc (Empatan); and

(b)     an equal capital reduction, involving the cancellation of all the shares in SMX (including those to which the option-holders will be entitled under the option scheme).

6     If the schemes are approved and implemented:

(a)     (merger / business combination) Lionheart will become a wholly-owned subsidiary of Empatan;

(b)     (capital reduction) by the capital reduction, all the shares in SMX will be cancelled;

(c)     (share scheme) by the scheme between SMX and its shareholders (the Share Scheme):

(i)     Empatan will apply for the shares it issues in itself (described below) to be listed on NASDAQ;

(ii)     SMX will implement the capital reduction;

(iii)     Empatan will issue the “Scheme Consideration” – being new shares in itself (the number of which will be calculated in accordance with a prescribed formula) to persons who had been SMX’s shareholders;

(iv)     SMX will issue one share to Empatan, making SMX a wholly-owned subsidiary of Empatan;

(d)     (option scheme) by the scheme between SMX and the option holders (the Option Scheme):

(i)     Empatan will apply for the shares it issues in itself (described below) to be listed on NASDAQ;

(ii)     the options in SMX will be deemed to have been exercised on a cashless basis and shares in SMX issued (in accordance with the value of the options, based on the Black-Scholes Model) to option-holders;

(iii)     those shares will be cancelled under the capital reduction;

(iv)     Empatan will issue the “Cancellation Consideration” – being new shares in itself (the number of which will be calculated in accordance with the same formula as the Share Scheme) to the persons who had been option-holders.

7     Each of the merger, the capital reduction, the Share Scheme and the Option Scheme are interdependent and conditional on each other.

9    For present purposes, the interdependence of the above transactions is important. Agreements to effect the proposed transactions were entered into on 26 July 2022. On that date:

(a)    SMX, Lionheart and Empatan entered a Scheme Implementation Deed, by which SMX agreed to propose and implement the Schemes and undertake the capital reduction; and

(b)    SMX, Lionheart and Empatan entered a Business Combination Agreement under which Empatan would become the parent of Lionheart and SMX and list on the NASDAQ. The business combination is subject to the terms and conditions set out in the Business Combination Agreement, including the approval of Lionheart’s shareholders.

10    As noted above, Lionheart is a “SPAC”. As explained by Anderson J at [17]-[19], a SPAC is a company established for the sole purpose of raising money through an initial public offering (IPO) so as eventually to acquire another company. A SPAC will typically have a two-year period to identify and complete an initial business combination transaction. Typically the SPAC’s IPO proceeds (less proceeds used for certain fees and expenses) are held in a trust account and earn interest. When the SPAC identifies a business combination, it provides its investors with the opportunity to redeem their shares rather than become a shareholder of the combined company.

11    The Scheme Booklet provided to Scheme Securityholders pursuant to the orders made on 9 January 2023 provided the following description of the transaction involving Lionheart:

1.2     What is a De-SPAC Transaction and How Does it Relate to this Proposed Scheme of Arrangement?

a.     A special purpose acquisition company (“SPAC”) is a company that is formed to raise capital in an initial public offering (“IPO”) to finance a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more operating businesses, with the goal of taking the operating business public on a stock exchange. A De-SPAC transaction involves a SPAC acquiring a company to effectively list it on that exchange. The Scheme and the Option Scheme are part of the first De-SPAC transaction involving an Australian public company. The time frame to consummate a De-SPAC transaction is limited and shareholders have rights to redeem their shares rather than proceed with an investment.

b.     In this instance, Lionheart III is the relevant SPAC. It trades on a United States stock exchange, the NASDAQ. An IPO was held and funds raised specifically for consummating a business transaction. Those funds are held on trust and are separate to operational funds, provided by the Founders of the SPAC (“The Founders”) who support the deal in exchange for stock. The funds raised from the IPO are held in a trust account that can be accessed solely to complete the business combination. Lionheart has raised over USD$120 million. This money remains on trust for the purposes of the business combination.

c.     SPAC’s, as noted, have limited time periods in which they must either successfully engage in a business combination, or liquidate. The Lionheart III SPAC has 12 months from the closing of its IPO to complete the Business Combination, but may extend the period of time by up to six additional months (in six, one-month extensions), for a total of 18 months to complete the Business Combination. Lionheart originally had until November 8, 2022 to complete a Business Combination. On November 8, 2022 and December 8, 2022, respectively, Lionheart caused USD $412,500 on each such date to be deposited in the trust account to extend the date by which it has to consummate the Business Combination to January 8, 2023 (or until May 8, 2023 if Lionheart extends the period of time to consummate the Business Combination pursuant to all further extension periods). Lionheart has obligated itself to also make a further payment in January and February if necessary to enable the consummation of this proposed transaction, but has not yet done so at the Last Practicable Date.

d.    At the consummation of the Business Combination, the funds in the trust account will be used to pay holders of the SPAC’s shares who have exercised redemption rights and to pay fees and expenses incurred in connection with the Business Combination, with the remaining funds flowing to the post-combination company. If the Business Combination is not completed in the allotted time, the SPAC must liquidate and return the IPO proceeds to the SPAC’s stockholders.

e.     This represents the first De-SPAC transaction with an Australian listed company. As such, there is an inherent uncertainty in the transaction, and increased execution risk compared to other transactions. The risks, process and procedures involved in both the Share Scheme and Optionholders Scheme are further set out in this Booklet.

12    As noted in the above extract, Lionheart conducted an IPO and raised over USD$120 million which is held in a trust account. However, Lionheart shareholders have the right to redeem their shares rather than proceed with an investment. This is further explained in the Scheme Booklet as follows:

1.9     Lionheart Shareholder redemptions

On 8 November 2021, US$126,250,000 of the gross proceeds from the Lionheart Public Offering and the sale of the Private Units was deposited in the Trust Fund with the Trustee. The trust proceeds are invested in US Treasury securities and accrue interest based upon the yield of such securities. The Lionheart Existing Charter requires Lionheart to provide all holders of shares of its Class A Common Stock with the opportunity to redeem all or a portion of their shares of Class A Common Stock upon the consummation of an initial business combination. Accordingly, if the Business Combination is approved by Lionheart's shareholders, the Public Shareholders may elect to redeem their shares of Class A Common Stock.

Upon redemption, each redeeming share is entitled to its pro rata portion of the proceeds of the trust. The remaining proceeds of the trust will be provided to Empatan, following the closing. The redemption rate will only be known on the date of the vote of the Lionheart stockholders which is expected to be held in January 2023.

If sufficient Lionheart Shareholders exercise their redemption rights in connection with the Business Combination and if the sale of some or all of the PIPE fails to close (see Section 1.10 below), Lionheart may lack sufficient funds to consummate the Business Combination.

For the avoidance of doubt, notwithstanding approval of the Schemes and Capital Reduction, if there are insufficient funds to consummate the Business Combination, the Business Combination will not proceed and SMX will continue to exist on the ASX.

13    The extent to which Lionheart shareholders redeem their shares, rather than participate in the Business Combination with SMX and Empatan, was a relevant factor in the independent expert’s assessment of whether the proposed transaction was fair and reasonable and in the best interests of Scheme Securityholders. In assessing the fairness of the Share Scheme, Mr Goldman’s report compared the fair value of each share in SMX (on a low, preferred and high estimate) with the fair value of each Empatan share if the transaction proceeds, taking into account the “exchange ratio”. The exchange ratio is the ratio of Empatan shares that will be issued as consideration for SMX shares pursuant to the Scheme. As explained in the Scheme Booklet, the exchange ratio is not fixed and is subject to changes arising in SMX’s capital structure up to the Scheme Record Date. However, as at the date of the Scheme Booklet, the exchange ratio was 1 Empatan share for every 10.3207 SMX shares held on the Scheme Record Date. On the information available to him as the date of his report, Mr Goldman concluded that: “The fair value of shares on a minority basis that SMX shareholders will hold in Empatan after the implementation of the Share Scheme is greater than the fair value of a share held in SMX on a control basis applying the exchange ratio”. Mr Goldman reached a similar conclusion in respect of the Option Scheme.

14    In making his assessment of the fair value of each Empatan share if the transaction proceeds, Mr Goldman was required to estimate the amount of cash that would be retained in the combined group on completion of the transaction. The principal source of cash will be the shareholder capital in Lionheart, being the amount of shareholder capital that is not redeemed. For that purpose, Mr Goldman assumed:

(a)    in the low value case, that 85% of Lionheart shares would be redeemed;

(b)    in the preferred value case, that 54% of Lionheart shares would be redeemed; and

(c)    in the high value case, that 23% of Lionheart shares would be redeemed.

15    Mr Goldman explained in his report that:

We have analysed the redemption rates of NASDAQ listed SPACs that completed a reverse merger such as proposed under the Schemes since January 2022, where publicly available information was available, to determine the redemption rates in those transactions. … There is a significant range in redemptions on completed SPAC transactions identified from 98% as a maximum to a minimum of 9%. In our analysis we have applied the mean of identified transactions as the mean redemption assumption. The high and low range represents one standard deviation of the transaction identified.

16    In considering the reasonableness of the Share Scheme, Mr Goldman described certain advantages and disadvantages of the Scheme. One of the identified disadvantages was that “The level of redemptions is unknown and therefore the level of capital available to the ongoing operations may be insufficient”, with Mr Goldman explaining:

There is no minimum level of funds that are required within Lionheart to implement the Share Scheme. The actual level of redemptions will not be known until after Lionheart’s shareholders have voted on the Share Scheme.

If Lionheart’s Class A shareholders exercise their rights beyond that assumed in our analysis of the fair value of Empatan in section 9.1.2 of a maximum of 85% then this will impact the fair value of Empatan after the implementation of the Share Scheme. The fair value of a share in Empatan after the implementation of the Share Scheme would reduce to A$2.16 if 100% of Lionheart’s Class A shares are redeemed.

A higher redemption rate will also impact the amount of funding available to further develop SMX’s technology and may require further fundraising activity to be undertaken in the short term.

17    The Scheme Booklet also disclosed that SMX planned to provide Scheme Securityholders with an updated independent expert report. In that regard, the Scheme Booklet stated:

The Independent Expert’s Report was provided and is dated 8 October 2022. SMX has engaged the Independent Expert to further consider both any developments in relation to Lionheart and also SMX’s current finances and significant deals, and provide an updated report well prior to the Scheme Meeting, the Option Scheme Meeting and the General Meeting, all called for 1 February 2023. In addition, should there be developments in relation to redemption rates by Lionheart shareholders, which SMX anticipates would be known a number of days before the meetings, the Independent Expert will be asked to venture their opinion on this as well. Updates to the Expert’s position and other information will be contained in supplementary scheme booklets once approved by the court. These will also be placed on the websites for the meetings, as detailed in the Notices sent to all Shareholders and Optionholders.

Shareholders should be conscious that the report is from October and that time has passed in which the company has continued to trade. The major developments in relation to SMX have been set out in the Scheme Booklet. However, shareholders and optionholders should take into consideration that the Expert Report annexed to this Scheme Booklet does not reflect any such changes in circumstances.

Supplementary disclosure booklet

18    The proposed supplementary disclosure booklet provided to the Court at the hearing on 23 January 2023 contained a number of supplementary disclosures including the following:

(a)    First, the booklet attached a copy of a supplementary independent expert report provided by Mr Goldman. In its form, the supplementary report is not merely an update to Mr Goldman’s original report. Rather, it supersedes and replaces Mr Goldman’s original report. The report does not identify which parts of the original report have been revised. Accordingly, a Scheme Securityholder who wished to gain a complete understanding of Mr Goldman’s opinion and the basis of the opinion would need to read the entire supplementary report.

(b)    Second, the booklet disclosed that Lionheart intends to hold its meeting of stockholders to approve the transaction on or about 30 January 2023 at 1.00pm, Eastern Standard Time (GMT-5). The booklet also made the following disclosure about the redemption of Lionheart shares:

SMX has been informed by Lionheart that Lionheart shareholders wishing to redeem their shares must give notice before the Lionheart Meeting. As such, Lionheart should be in receipt of redemption information by about the close of business on 26 January 2023 (Eastern Time, GMT-5). That information should be conveyed to SMX shortly thereafter, and to the independent expert. As soon as possible, the information will be published to shareholders and optionholders, as described in Section 7 below.

(c)    Third, the booklet disclosed that there has been a further issue and exercise of options in SMX as follows:

(i)    Pursuant to a commercial agreement between SMX and Isorad Ltd (Isorad), SMX agreed to issue of 864,000 options to acquire shares in SMX to Isorad. Despite the agreement, the options had not been issued to Isorad. The booklet discloses that the options have now been issued to Isorad but, because they are “ESOP” options, they will not participate in the Optionholder Scheme. The Isorad options will be cancelled with the same form of consideration along with the other ESOP options in accordance with the terms of the proposed transaction with Lionheart.

(ii)    77,025 ESOP options that had been issued to a former employee (and included in options described in the Scheme Booklet) have been exercised but shares have not been issued to the former employee. The booklet discloses that these options will be taken to be exercised at completion and immediately converted to Empatan shares. The booklet did not explain the legal mechanism by which that would be effected, whether pursuant to the Share or Option Scheme or pursuant to separate private agreement between all parties including the former employee.

(d)    Fourth, the booklet disclosed that SMX, Empatan and Lionheart have entered into a further deed of variation that modifies the Scheme Implementation Deed in order to reflect the grant of the ESOP options to Isorad, the treatment of the exercise of the ESOP options by the former employee and certain other matters. A copy of the deed of variation is attached to the Supplementary Disclosure Booklet.

(e)    Fifth, the booklet identified further announcements made to the ASX by SMX.

19    The supplementary independent expert report provided by Mr Goldman contains a significant variation to Mr Goldman’s original report. The report highlights, in bold type, that a significant assumption in Mr Goldman’s assessment that the Schemes are fair is that the redemption of shares by Lionheart shareholders is no higher than 85% (being the assumed redemption rate for the low value case in the original report). In respect of the Share Scheme, the supplementary report states:

A significant assumption in our assessment of fairness is that redemptions are a maximum of 85%. The level of redemptions will not be known until just prior to the shareholder meeting to approve the Share Scheme. Should redemptions be higher than 85% then our approach to the assessment of the fairness of the Share Scheme may change and this may affect our opinion on the fairness of the Share Scheme. In the event that redemptions are more than 85% we will be issuing a second supplementary report, which will supersede our opinion in this Supplementary Report.

20    The supplementary report contains the same qualification in respect of Mr Goldman’s assessment of the reasonableness of the Share Scheme, and also in respect of Mr Goldman’s assessment of the fairness and the reasonableness of the Option Scheme. It is clear that, in his supplementary report, Mr Goldman seeks to communicate to Scheme Securityholders that his opinion on the fairness and reasonableness of the Schemes is dependent upon the redemption of shares by Lionheart shareholders being no higher than 85%.

21    The evidence before the Court at the hearing on 23 January 2023 (through the affidavit of Mr Samek) confirmed that Lionheart would hold its meeting of stockholders to approve the transaction on 30 January 2023 at 1.00pm, Eastern Standard Time (GMT-5). The evidence also confirmed that Lionheart shareholders wishing to redeem their shares must give a written request prior to 5.00pm (Eastern Standard Time, GMT-5) on 26 January 2023, being two business days before the Lionheart meeting. Counsel for Lionheart said that a redemption made by that date can be revoked before the commencement of the shareholder meeting, but a redemption cannot be made after 5.00pm (Eastern Standard Time, GMT-5) on 26 January 2023. Accordingly, the maximum number of redemptions would be known by Lionheart at 5.00pm (Eastern Standard Time, GMT-5) on 26 January 2023, but the final number might reduce (and would only be known immediately prior to the Lionheart meeting on 30 January 2023).

22    Counsel for Lionheart expressed some reservation about the time at which the Lionheart redemption rate could be communicated to Scheme Securityholders. Counsel’s instructions were that, in the United States, the redemption rates are never announced before the meeting of the shareholders and are not typically announced until after the meeting of the shareholders. Counsel did not have instructions as to whether Lionheart would be willing and able to announce the redemption rate following the receipt of redemption requests on 26 January 2023.

23    By way of summary of the position reached at the 23 January 2023 hearing:

(a)    SMX acknowledged that it was necessary to provide Scheme Securityholders with the supplementary independent expert report so that the expert’s opinion could be considered prior to the Scheme Meetings to be held on 1 February 2023;

(b)    the expert’s opinion that the Schemes were fair and reasonable were based on an assumption that the redemption of shares by Lionheart shareholders is no higher than 85%;

(c)    in the circumstances, if the redemption of shares by Lionheart shareholders is higher than 85%, that further information (and any further opinion expressed by the expert) should also be provided to Scheme Securityholders so that it could be considered prior to the Scheme Meetings to be held on 1 February 2023;

(d)    the maximum level of redemption of Lionheart shares would be known by Lionheart at 5.00pm (Eastern Standard Time, GMT-5) on 26 January 2023 (being 9.00am Australian Eastern Daylight Time on 27 January 2023), but it is not certain that that information would be made available to Scheme Securityholders at that time;

(e)    the actual level of redemption of Lionheart shares would be known by Lionheart at 1.00pm (Eastern Standard Time, GMT-5) on 30 January 2023 (being 5.00am Australian Eastern Daylight Time on 31 January 2023).

Consideration of timing and manner of supplementary disclosures

24    It is uncontroversial that a company proposing a scheme of arrangement has an ongoing obligation to bring to the attention of members or creditors all material new information that arises after the scheme booklet has been dispatched: see for example Re NRMA Ltd [2000] NSWSC 82; 33 ACSR 595 at [19] (Santow J); Re MB Group plc [1989] BCLC 672 at 680 (Harman J); Re Bulong Nickel Pty Ltd (2002) 26 WAR 466 at [5] (EM Heenan J); Re Centro Retail Ltd and Centro MCS Manager Ltd in its capacity as responsible entity of Centro Retail Trust [2011] NSWSC 1321 (Centro Retail) at [7]-[8] (Barrett J). The Court has power under ss 411(1) and 1319 of the Act to vacate or vary orders made under s 411 in relation to a scheme meeting (whether or not the meeting has commenced), authorise the dispatch of further explanatory material, and make orders as to the validity of proxies lodged in relation to a scheme meeting: see for example Re Lend Lease Primelife Ltd, Re Lend Lease Village Responsible Entity Ltd [2009] NSWSC 1340 at [16] (Austin J); Re Felix Resources Pty Ltd (No 2) [2009] FCA 1337 at [10] (Logan J); Re Associated Advisory Practices Ltd (No 2) [2013] FCA 979 at [8] (Farrell J); Re Nexus Energy Ltd [2014] FCA 558 at [6] (Gilmour J); Re Aurora Oil & Gas Ltd [2014] FCA 612 at [3] (Gilmour J); Re Amcom Telecommunications Ltd (No 2) [2015] FCA 410 at [10]-[13] (McKerracher J); Re Amcom Telecommunications Ltd (No 3) [2015] FCA 596 at [14] (McKerracher J); Re Tawana Resources NL (No 2) [2018] FCA 1724 at [20] (Banks-Smith J); Re Piedmont Lithium Ltd; Ex parte Piedmont Lithium Ltd (No 2) [2021] WASC 106 at [11]-[12] and [23] (Hill J); Re Firefly Resources Ltd [2021] WASC 376 at [138] (Strk J).

25    Where the Court has ordered the convening of a scheme meeting and has approved an explanatory statement, the Court’s approval should be sought before additional explanatory material is dispatched: Centro Retail at [11]; Re Trust Company Ltd [2013] NSWSC 1946 at [6]-[7] (Black J); Re Prime Media Group Ltd [2019] NSWSC 1888 (Prime Media) at [5] (Black J); Re ResApp Health Ltd [2022] NSWSC 1014 at [16] (Black J). 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 and whether the supplementary disclosure provides adequate disclosure of events that have led to the application: Prime Media at [6]-[8] (Black J).

26    The orders sought by SMX at the hearing on 23 January 2023 were that:

(a)    on or before 12.00pm on 24 January 2023, SMX was to dispatch the supplementary disclosure booklet by:

(i)    in the case of Scheme Securityholders who have elected to receive shareholder or optionholder communications (as the case may be) electronically by way of email, by sending an email to those Scheme Securityholders that attaches the supplementary disclosure booklet;

(ii)    by including a link to the supplementary disclosure booklet on the online portals or websites previously made available to shareholders; and

(iii)    by publishing the supplementary disclosure booklet on SMX’s ASX announcements platform and on SMX’s website;

(b)    in the event that Nexia Australia publishes any further report concerning the Share Scheme or the Option Scheme, SMX is to dispatch that report forthwith in the manner set out in paragraph (a).

27    At the hearing on 23 January 2023, I concluded that the proposed timing and manner of providing the supplementary disclosures to Scheme Securityholders had the real potential to prejudice their interests, by failing to provide them with sufficient opportunity and time to consider the supplementary disclosures before they voted at the Scheme Meetings on 1 February 2023.

28    The orders of Anderson J made on 9 January 2023 required the Scheme Meetings to be convened, and the Scheme Booklet to be conveyed to Scheme Securityholders, by three methods:

(a)    in the case of Scheme Securityholders who have elected to receive communications electronically by email, by sending an email with an electronic link to an online portal or website from which the Scheme Booklet could be downloaded;

(b)    in the case of Scheme Securityholders who have elected to receive hard copy communications, by sending all relevant documents and information by pre-paid post; and

(c)    in the case of Scheme Securityholders who have not made an election for either electronic or hard copy communications, by sending a letter by pre-paid post which included a link to an online portal or website from which the Scheme Booklet could be downloaded.

29    Mr Alon, the Chief Executive Officer of SMX, gave evidence that he had been advised by SMX’s external share register provider (Boardroom Pty Ltd) (Boardroom) that, as at 30 December 2022, there were a total of 853 SMX shareholders and a total of 268 SMX optionholders. The table below contains a breakdown of the number of SMX shareholders and SMX optionholders:

(a)    who have nominated electronic addresses and are recorded as having elected to receive all investor correspondence by email (and in respect of whom SMX provided notification of the Scheme Meetings by way of email);

(b)    who have nominated to receive all investor correspondence by post (and in respect of whom SMX provided notification of the Scheme Meetings by post); and

(c)    who have made no nomination (and in respect of whom SMX provided notification of the Scheme Meetings by posting a summary letter or “postcard” which contained a link to an online portal or website from which the Scheme Booklet would be downloaded):

30    It can be seen from the above table that a substantial proportion of shareholders and optionholders receive communications from SMX by post rather than by email.

31    In contrast to the orders made on 9 January 2023, the proposed orders for the dispatch of the supplementary disclosure booklet, and any further information concerning the Lionheart redemption rate, did not provide for the booklet or further information to be sent to Scheme Securityholders by post. SMX submitted that such an order would be of little utility in circumstances where documents sent by post would be unlikely to reach Scheme Securityholders before the Scheme Meetings. That submission can be accepted, but it does not address the potential prejudice to Securityholders who have not provided SMX with email addresses and may fail to receive the contemplated supplementary disclosures prior to the Scheme Meetings.

32    In a letter to SMX dated 23 January 2023, ASIC raised similar concerns. ASIC’s letter included the following observations:

(a)    if the supplementary disclosure booklet were dispatched on 24 January 2023, Scheme Securityholders would have fewer than 10 days to consider the supplementary disclosure;

(b)    given that there are a significant number of Scheme Securityholders for whom SMX does not hold a valid email address, ASIC considered that those Securityholders should receive a hard copy of the supplementary disclosure booklet by post;

(c)    ASIC considered the Lionheart redemption rate to be material to the expert’s opinion and to ASIC’s position on the Schemes and that, if redemptions exceed 85%, Scheme Securityholders should receive a second supplementary disclosure booklet as contemplated by the expert and this may require the meeting to be postponed.

33    In its letter, ASIC advised SMX that it did not propose to appear at the hearing on 23 January 2023 to make submissions, or to intervene to oppose the Schemes, or to intervene in relation to the making of orders in connection with the proposed dispatch of the supplementary disclosure booklet. Effectively, ASIC reserved its right to oppose the approval of the Scheme at the second court hearing.

34    With respect to ASIC, the position it adopted by its letter dated 23 January 2023 was less than helpful to the Court. The matters raised by ASIC in its letter involved substantive concerns with respect to the timing and manner of disclosure of material information to Scheme Securityholders. The Court would have been assisted at the hearing by submissions from ASIC with respect to those matters.

35    Further, contrary to the position adopted by ASIC, it is not a satisfactory response to such concerns to await the outcome of the Scheme Meetings. The result of the Scheme Meetings, even if overwhelmingly in favour of the proposals, will not assist in determining whether Scheme Securityholders were adequately informed of the supplementary information. That is because it is commonly the case that scheme meetings are attended by only a proportion, and often a small proportion, of relevant securityholders. It cannot be known whether non-attending securityholders received the supplementary information or not, and no assumptions can be made based only upon the outcome of the meeting.

36    The appropriate course in circumstances such as the present is ordinarily to postpone the meeting to provide a sufficient opportunity for the supplementary information to be conveyed to securityholders. In determining whether a meeting should be postponed, the Court will have regard to any prejudice that might be occasioned to securityholders by the postponement.

37    The evidence adduced at the hearing on 23 January 2023 indicated that the risk of prejudice to Scheme Securityholders from postponing the Scheme Meetings for a short period was small. Under the Scheme Implementation Deed, each of the parties agrees to use all reasonable efforts to procure that the conditions precedent are satisfied, which include the approval of the Schemes by Securityholders and by the Court. While the Scheme Implementation Deed may be terminated by either Lionheart or SMX if the Scheme has not become effective on or before the “End Date”, that date is defined as 8 May 2023 (or such other date and time agreed in writing between Lionheart and SMX). Counsel for SMX and Lionheart submitted that delay to the transaction always carries some risk that intervening events may cause the transaction not to proceed. While I accept that submission, I do not consider that it weighs materially in the balance.

38    The Scheme Booklet contains the following disclosure concerning the time period in which Lionheart, as a SPAC, must complete the Business Combination and the relevance of the date of 8 May 2023:

6.15     Going concern of Lionheart

If the Business Combination is not consummated by 8 November 2022 (or until May 8, 2023 if Lionheart extends the period of time to consummate its initial business combination pursuant to any further extension period) (“Lionheart Liquidation Date”), there will be a mandatory liquidation and subsequent dissolution of Lionheart. Lionheart intends to complete the Business Combination before the Lionheart Liquidation Date, or otherwise to exercise the extension facilities available to it. However, there can be no assurance that Lionheart will be able to consummate the Business Combination.

If an initial business combination is not consummated by the Lionheart Liquidation Date, as may be extended until May 8, 2023, there will be a mandatory liquidation and subsequent dissolution of Lionheart.

Management of Lionheart has determined that the mandatory liquidation, should an initial business combination not occur, and potential subsequent dissolution of Lionheart, raises substantial doubt about its ability to continue as a going concern.

On 8 November 8 2022 [sic] and 8 December 8 2022 [sic], respectively, Lionheart caused $412,500 to be deposited on each date into Lionheart’s Trust Account for its public stockholders, representing $0.033 per share of Class A common stock. This allows Lionheart to extend the period of time it has to consummate its previously announced initial business combination with Security Matters Limited by (i) one month initially from 8 November 8 2022 to 8 December 2022 and (ii) from 8 December 2022 to 8 January 2023 (the “Extension”). The Extension is the first and second of six one-month extensions permitted under Lionheart’s governing documents. Lionheart has provided an assurance that it will exercise a further extension for the 8 January period and to facilitate the holding of the Scheme Meeting, Optionolders [sic] Meeting and General Meeting.

Lionheart is required to repay any extension payments that are loaned to the Sponsor for purposes of making such extension payments. If Lionheart completes its initial Business Combination, it will, at the option of the Sponsor, repay any amounts loaned under the promissory note(s) out of the proceeds of the Trust Account released to it or convert a portion or all of the amounts loaned under such promissory note(s) into shares of Class A Common Stock. If Lionheart does not complete an initial Business Combination by the extension deadline, the loans will be repaid only from funds held outside of the Trust Account.

39    It can be seen from the foregoing that, in each month commencing on and after 8 November 2022, Lionheart has been required to deposit US$412,500 into Lionheart’s Trust Account for its public stockholders. The Scheme Booklet discloses that Lionheart has made such deposits for the months of November and December, and I infer that the same payment was made for the month of January 2023. Counsel for Lionheart informed the Court that, if the Scheme Meetings were postponed, with the necessary consequences that the second Court hearing could not occur on 6 February 2023 and the Scheme and Business Combination could not be effected by 8 February 2023, it will be necessary for Lionheart to deposit a further US$412,500 in respect of the month of February. I understand from the disclosures made that, if the Business Combination is completed, that will be a cost borne by the merged group. Accordingly, on the basis of the above evidence, I accept that a postponement of the Scheme Meetings will result in the merged group incurring a further cost of US$412,000, which weighs as a prejudice to the Scheme Securityholders.

40    Weighing the above considerations, I consider that the interests of Scheme Securityholders is best served by postponing the Scheme Meetings to allow sufficient time for the supplementary disclosure booklet to be provided to them by email and by post, thereby ensuring that all Securityholders have a proper opportunity to consider the additional disclosures before voting at the Scheme Meetings.

41    For those reasons, I did not make the orders sought by SMX at the hearing on 23 January 2023.

Further hearing on 27 January 2023

42    SMX did not make a further application to the Court with respect to the supplementary disclosure booklet until 27 January 2023. At that time, SMX applied for orders that:

(a)    the Scheme Meetings be postponed from 1 February until 7 February 2023;

(b)    SMX dispatch a revised supplementary disclosure booklet to Scheme Securityholders on 30 January 2023 by email only, and also publish a copy on the company’s website and the ASX announcements platform; and

(c)    SMX dispatch any further supplementary disclosure relating to the Lionheart redemption rate by the same method.

43    SMX’s further application was supported by the following affidavits and documents:

(a)    an affidavit of Doron Afik affirmed 25 January 2023;

(b)    an affidavit of Nadav Prawer affirmed 26 January 2023;

(c)    an affidavit of Haggai Alon affirmed 26 January 2023;

(d)    an affidavit of Simon Quodling affirmed 27 January 2023;

(e)    the revised proposed supplementary disclosure booklet;

(f)    an email dated 27 January 2023 sent by ASIC to SMX’s lawyers; and

(g)    an outline of submissions dated 27 January 2023.

44    The additional evidence was directed to two principal matters.

45    First, the affidavits disclosed that, during the period from 23 to 27 January 2023, SMX had undertaken further analysis of its share and option registers and the information maintained by the company with respect to postal and email addresses. The evidence attempted to establish that SMX would be able to communicate with a large majority of the Scheme Securityholders by email. However, the evidence fell well short of establishing that fact. It only established that the company had email addresses for a large majority of Scheme Securityholders (in terms of percentage of securities held) and that the company had “successfully” sent a test email to those Securityholders, in the sense that the company received “bounceback” emails from a small number of addresses. The fact that no “bounceback” email is received only establishes that the email address in the possession of SMX is operative; it does not establish that the address is regularly used by the owner of the address. Further, and in any event, the evidence showed that there remained a significant minority of Scheme Securityholders for whom no email addresses were held. SMX’s share registry provider, Boardroom, stated that it could seek to obtain email addresses from Securityholders, but it had not done so to date. The evidence did not satisfy me that all Scheme Securityholders would be likely to receive the supplementary disclosure booklet if it were emailed to Securityholders at addresses held by SMX and published on SMX’s website and the ASX announcement platform.

46    Second, SMX adduced in evidence a letter dated 25 January 2023 from the Chairman and Chief Executive Officer of Lionheart, Ophir Sternberg, to the Chief Executive of SMX, Mr Alon. The letter referred to the hearing held on 23 January 2023 and stated (in part):

It is extremely important to Lionheart that the two scheme meetings occur prior to the next date on which Lionheart is required to make an extension payment to extend the time period in which Lionheart is required to close the Business Combination, which is date is February 8, 2023. Having the scheme meetings prior to the next extension payment would provide certainty to Lionheart that the SMX shareholders and optionholders have approved the Business Combination and that the extension payment is warranted, as there is increased certainty that the transaction will close. It is important that there be a window between the notification to us of the results of the scheme meetings and the timing of the payment; two days is adequate, and hence our preference is that the meetings occur no later than the 6th.

Lionheart respectfully requests that SMX obtain as expedited a calendar to completion as is possible, to ensure that completion occurs substantially before the end of February 2023 to avoid a potential scenario where Lionheart needs to fund another extension payment on March 8, 2023. At this time, and as previously indicated, there are no assurances that Lionheart would agree to any further extension.

47    The letter adds little to the material before the Court. The second paragraph quoted above confirms that Lionheart intends to make the requisite extension payment on 8 February 2023. The letter does not state that the payment is conditional on the Scheme Meetings occurring before that date, and counsel for SMX and Lionheart appearing before me on 27 January 2023 did not suggest that the payment was conditional. It is understandable that Lionheart desires that the SMX meeting occur at the earliest possible date for reasons of commercial certainty, and that is a factor that is generally taken into account by the Court.

48    As noted above, SMX’s original position on the further application was to seek orders that the supplementary disclosure booklet be dispatched to Scheme Securityholders by electronic means only, by being sent to email addresses of Securityholders held by SMX and by being published on SMX’s website and the ASX announcements platform. In that respect, SMX submitted that numerous provisions of the Act contemplate that notices may be given by a company to shareholders by way of electronic communication, referring to Div 2 of Pt 1.2AA, ss 249J and 600G of the Act.

49    There is no doubt that the Court has power under ss 411 and 1319 of the Act to determine the method of notification of information to a company’s securityholders in connection with a scheme of arrangement, including that notice be given by way of electronic communication. It can also be said that Div 2 of Pt 1.2AA of the Act was introduced in recognition of the widespread use of electronic forms of communication in Australian society, including in corporate affairs. In the present case, however, there are powerful reasons for rejecting SMX’s application for orders based on electronic communication only.

50    First and foremost, the evidence shows that there are a significant minority of Scheme Securityholders in respect of whom SMX does not have an email address. As stated above, the evidence did not satisfy me that all Scheme Securityholders would be likely to receive the supplementary disclosure booklet if it were communicated only by electronic means.

51    Second, there is no substantial impediment to the supplementary disclosure booklet being sent to Scheme Securityholders by post. The evidence showed that the likely cost of communicating with Scheme Securityholders by post was relatively modest (as the number of Securityholders is not large). The only difficulty with postal notices is the delay in Securityholders receiving the communication. However, that can largely be addressed by using express post. While express post has an increased cost, it is still relatively modest having regard to the number of Securityholders involved. In circumstances where SMX wishes to hold the Scheme Meetings no later than 7 February 2023, the supplementary disclosure booklet is able to be sent on 30 January 2023 by express post and received in sufficient time before the meeting to enable Securityholders to make an informed decision at the meeting.

52    Third and conversely, there is no compelling commercial reason that requires the supplementary disclosure booklet to be sent by electronic means only (with the consequence that some shareholders may not receive the booklet).

53    At the hearing, SMX indicated that it did not resist orders being made requiring it to send the supplementary disclosure booklet to relevant Scheme Securityholders by express post. In those circumstances, it was unnecessary for the Court to reach any view about the effect of the provisions of the Act concerning electronic communication between companies and their members (particularly the provisions of Div 2 of Pt 1.2AA and ss 249J and 600G) and the relationship of those provisions with contractual requirements expressed in a company’s constitution or the terms of issue of options. No submissions were addressed to the Court with respect to cl 35.3 of SMX’s Constitution which permits the company to give a document to a member personally, by post to the member’s address on the share register or other postal address nominated by the member and to an electronic address nominated by the member. The terms on which the Scheme Options were issued by SMX were not in evidence, and therefore the Court was not in a position to consider any contractual obligations binding on SMX with respect to notices given to optionholders.

54    In passing, it can be observed that Div 2 of Pt 1.2AA contemplates that documents may be sent by a company to its members by electronic communications. Section 110E enables a member to elect to receive documents in physical form or in electronic form by notifying the company of the election and s 110F requires the company to comply with the election made by a member. Division 2 does not expressly address the circumstance where a member has made no election, but s 110D relevantly provides as follows:

110D Technology neutral sending of documents

(1)     The document may be sent to the recipient:

(a)     by sending the document in a physical form; or

(b)     if subsection (2) is satisfied – by sending the recipient sufficient information in physical form to allow the recipient to access the document electronically; or

(c)     if subsection (2) is satisfied – by sending the document in electronic form by means of an electronic communication; or

(d)     if subsection (2) is satisfied – by sending the recipient sufficient information in electronic form, by means of an electronic communication, to allow the recipient to access the document electronically; or

(e)     if subsection (2) is satisfied and the document is covered by subsection (3) – by making the document readily available in electronic form on a website.

Note: A requirement for the sender to send a document to which this Division applies is met if the document is sent in accordance with this section and in accordance with any timing requirements under this Act.

(2)     This subsection is satisfied if, at the time the document is sent, it is reasonable to expect that the document would be readily accessible so as to be useable for subsequent reference.

Documents that may be sent by publication on a website

(3)     This subsection covers a document that:

(a)     is a report mentioned in section 314 (annual financial reporting by companies, registered schemes and disclosing entities to members); or

(b)     is in a class of documents specified in regulations made for the purpose of this paragraph.

Other ways of sending documents not limited

(4)     Subsection (1) does not limit the ways in which a person may send a document.

Note: For example, a company’s constitution may set out other ways in which a document may be sent.

55    Ignoring s 110D(1)(e) and (3) (which relate to financial reports and categories of documents prescribed by regulation), s 110D(1) and (2) empower a company to send documents to members by post, by posting a letter with a link to a website where the document can be obtained or by way of electronic communication. Although not addressed expressly, it would appear to be implicit in the section that a company could only send a document to a member by way of electronic communication if the company had an address (such as an email address) to which the communication could be sent. In contrast to s 110D(1), the requirement for the company to hold an electronic address in order to send an electronic communication is expressly addressed in s 600G which applies to documents required to be sent under Chapter 5 of the Act. The section stipulates that (emphasis added):

(2)     The document may be given to the recipient by means of an electronic communication.

(3)     The document may be given by giving the recipient (by means of an electronic communication or otherwise) sufficient information to allow the recipient to access the document electronically.

(4)     However, an electronic communication or electronic access may only be used if, at the time the electronic communication is used or information about the electronic access is given:

(a)      it is reasonable to expect that the document would be readily accessible so as to be useable for subsequent reference; and

(b)     there is a nominated electronic address in relation to the recipient.

56    The phrase “nominated electronic address” is defined in s 9 of the Act as follows:

nominated electronic address, in relation to the addressee of an electronic communication, means:

(a)     the most recent electronic address nominated by the addressee to the originator of the electronic communication as the electronic address for receiving electronic communications; or

(b)     if:

(i)     the addressee has nominated an electronic address as mentioned in paragraph (a) and the originator knows, or there are reasonable grounds to believe, that the address is not a current electronic address for the addressee; or

(ii)     the addressee has not nominated an electronic address as mentioned in paragraph (a);

an electronic address that the originator believes on reasonable grounds to be a current electronic address for the addressee for receiving electronic communications.

57    It can be seen that s 110D(2) replicates the requirement in s 600G(4)(a), but ss 110D(1) and (2) do not contain an express requirement that is equivalent to s 600G(4)(b). It is unclear whether that omission is deliberate or an oversight. It is relevant, though, to note s 105A(4) which stipulates that: “An electronic communication is received when the electronic communication becomes capable of being retrieved by the addressee at the addressee’s nominated electronic address”.

58    Although it is unnecessary to express any concluded views about the operation of the above statutory provisions, the above survey fortifies me in the view that, generally, the Court ought not to make orders permitting scheme documents to be sent to a company’s members by way of electronic communication where the member has not nominated an electronic address for receiving electronic communications.

59    In the circumstances, I made orders postponing the Scheme Meetings to 7 February 2023 and requiring the supplementary disclosure booklet to be sent to Scheme Securityholders by the three methods stated in the orders of the Court made on 9 January 2023, save that SMX would be required to use express post rather than ordinary pre-paid post. By an email to SMX dated 27 January 2023, ASIC advised that it had no objection that form of notification of the supplementary disclosure document. I also made consequential orders relating to proxy forms and the advertisement of the second court hearing date.

60    As noted earlier in these reasons, the maximum level of redemption of Lionheart shares would be known by Lionheart at 5.00pm (Eastern Standard Time, GMT-5) on 26 January 2023 (being 9.00am Australian Eastern Daylight Time on 27 January 2023), and the actual level of redemption of Lionheart shares would be known by Lionheart at 1.00pm (Eastern Standard Time, GMT-5) on 30 January 2023 (being 5.00am Australian Eastern Daylight Time on 31 January 2023). The letter from Mr Sternberg of Lionheart to Mr Alon of SMX adduced at the hearing on 27 January 2023 (and referred to earlier) stated that:

Lionheart expects to know the maximum number of redemptions the morning of January 27, 2023 (US time) and will provide this number and percentage to the independent expert and Federal Court of Australia under confidentiality, with public disclosure of the information to follow after 4:00 p.m. Eastern Time (U.S. market close) on January 30, 2023, following the [meeting of Lionheart stockholders].

61    At the hearing on 27 January 2023, SMX acknowledged that, if the redemption rate is greater than 85%, it will be necessary for Mr Goldman to provide a further report to Scheme Securityholders concerning the fairness and reasonableness of the Schemes. Evidence was adduced that, if Mr Goldman were provided with the Lionheart redemption rates on 27 January 2023 (Sydney time), he expected to be able to provide any updated report to SMX by midday on 30 January 2023 (Sydney time).

62    A further issue addressed at the hearing on 27 January 2023 was, if a further report from Mr Goldman becomes necessary, how should that report be communicated to Scheme Secuirtyholders? At the hearing, SMX again submitted that it would be sufficient to communicate the further report by way of electronic communication.

63    By email sent to the Court at 4.26pm on 27 January 2023, ASIC expressed the following view with respect to any further report from Mr Goldman (emphasis in original):

ASIC’s position is that if the expert were to change its opinion following confirmation of redemptions, the Second Supplementary Booklet should be dispatched in the same manner as contemplated for the First Supplementary Booklet including hardcopy dispatch for shareholders who have elected hardcopy dispatch and all non-electing shareholders (by full copy or ‘postcard’) as relevant.

If that approach is not taken where the expert changes its opinion, ASIC reserves its position in regard to the final hearing on the provision of the Second Supplementary Booklet by way of a link to a website contained in the First Supplementary Booklet. ASIC will consider the appropriateness of the Company’s disclosure, and manner and time in which SMX Securityholders were provided disclosure in light of the redemption amounts, in formulating ASIC’s position at the final court hearing. In particular, ASIC may raise concerns regarding whether SMX Securityholders have been adequately informed prior to voting by proxy or at the Scheme Meeting where, for example, the expert’s opinion changes or there is a material difference in the expert’s valuation in the Second Supplementary Booklet as a result of the level of redemptions and that updated disclosure has been ‘dispatched’ only by way of link in the First Supplementary Booklet.

64    Again, ASIC did not appear at the hearing on 27 January 2023 to make submissions with respect to the above matters. It would have been more helpful to the Court if ASIC had done so.

65    Notwithstanding ASIC’s position as reflected above and the usual requirements for providing notice to securityholders as discussed in these reasons, I reached the conclusion at the hearing that, in the circumstances of the present schemes, it is likely to be sufficient for SMX to notify Scheme Securityholders of the Lionheart redemption rate and any further report from Mr Goldman (if it becomes necessary) by publishing such information on SMX’s website and the ASX announcements platform provided that SMX gives adequate notice to Scheme Securityholders of that method of notification by way of prominent disclosure in the supplementary disclosure booklet. I consider that the Court can take judicial notice of the fact that it would be very rare for a securityholder in a publicly listed company not to have the knowledge and means to access the company’s website and the ASX’s announcement platform.

66    Following the hearing on 27 January 2023, SMX revised the supplementary disclosure booklet to include prominent disclosures to the following effect:

Further supplementary expert’s report

As the supplementary report explains, a material assumption of Nexia Australia's analysis is that redemptions from the Lionheart SPAC will be a maximum of 85%. If redemptions are higher than 85%, a further supplementary expert’s report will be required (unless Nexia Australia decides that such a report is not required).

SMX expects that information about the final rate of redemption from the Lionheart SPAC will be known before the day of Scheme Meeting and the Option Scheme Meeting. Further, it expects to publish that information – on its website and on its ASX announcement page – at or after 9.00am (AEDT) on 31 January 2023.

Further, if Nexia Australia does issue a further supplementary report, SMX expects to publish the report – at the same time and on the same websites – as the information about Lionheart’s final rate of redemption.

If the final redemption rate is below 85%, or if Nexia Australia decides that a further supplementary report is not required, then only information about the final rate of redemption will be provided.

67    Having received and reviewed the form and content of the revised supplementary disclosure booklet, I made orders on 27 January 2023 permitting it to be sent to Scheme Securityholders by the methods referred to earlier.

68    The orders made on 27 January 2023 should not be understood as expressing any final conclusion about the adequacy of notice to be given to Scheme Securityholders about the redemption rate and any further report from Mr Goldman (should it become necessary). The orders were made on the basis of the evidence before the Court and the submissions made by SMX and Lionheart. At the second court hearing, it remains open for any Scheme Securityholder or ASIC to object to approval of the Schemes on the basis that Scheme Securityholders did not receive adequate notice of the redemption rate and any further report from Mr Goldman (should it become necessary). Any such objection will be considered by the Court in light of these reasons and all relevant evidence at the time of the second court hearing.

Further application on 30 January 2023

69    On 30 January 2023, SMX applied for a further order varying the orders made on 27 January 2023. In effect, SMX sought an order permitting it to send the supplementary disclosure booklet to Scheme Securityholders who have not elected to receive electronic communications and whose postal addresses are located in Israel via Israeli Express Post from within Israel, instead of via International Express Post from Australia as contemplated by the orders made on 27 January 2023.

70    The application was supported by an affidavit of Dr Nadar Prawer affirmed on 30 January 2023. Dr Prawer deposed that:

(a)    of the SMX shareholders who have not elected to receive communications by email, there are 59 shareholders who have listed an address in Israel; and

(b)    of the SMX optionholders who have not elected to receive communications by email, there are 14 optionholders who have listed an address in Israel.

71    Dr Prawer further deposed that:

(a)    the estimated delivery time for sending communications to Scheme Securityholders located in Israel via Australia Post international express post is between 8-18 business days, and that the estimated cost of postage is approximately $3,000 (excluding printing costs); and

(b)    the estimated delivery time for sending communications to Scheme Securityholders located in Israel via Israel priority post is between 1-2 business days, and that the estimated cost of postage is approximately $231.

72    Dr Prawer deposed that he was, at the time of affirming his affidavit, located in Israel and would be able to effect the printing and postage by local priority post with Israel Post by 5:00 pm on 30 January 2023. Dr Prawer expressed the view that, if he were able to do so, the Scheme Securityholders located in Israel who had not elected to receive electronic communications would receive further disclosure documentation in better time.

73    By email to the Court dated 30 January 2023, ASIC stated that it did not object to the proposed orders.

74    I made the orders sought by SMX on 30 January 2023 on the papers. The evidence supported the conclusion that the supplementary disclosure booklet would likely reach the relevant Scheme Securityholders located in Israel in a more expeditious and cost-effective manner if local priority post in Israel were relied upon to post the materials. In those circumstances, and in view of ASIC’s non-opposition, I was satisfied that the orders sought were appropriate.

Associate:

Dated:    1 February 2023