A-CAP Resources Ltd, An application [2007] VSC 223 (22 June 2007)

2 The plaintiff also seeks an order under s.1322(2) or (3) of the Act that the holding or convening of the scheme meeting held on 15 May 2007 was not invalid by reason of the failure to despatch the scheme documents and notice of the meeting to certain members registered on the Botswana Register of the company, or an order under s.1322(4)(a) or s.1322(2) of the Act that the meeting was not invalid by reason of non-compliance with the order of 30 March 2007.

3 A-CAP is a public company. Its shares are listed for quotation on the ASX and the Botswana Stock Exchange. It has 109,895,078 shares on issue.

4 The proposed scheme is a "demerger", pursuant to which the existing uranium and non-uranium tenements of A-CAP will be split and held in separate corporate divisions. To that end, under the scheme, all 54,947,539 fully paid shares which A-CAP owns in its wholly-owned subsidiary, Botswana Metals Ltd ("BML") will be distributed to A-CAP members (save for foreign shareholders) in specie, in accordance with the demerger provisions of the Income Tax Assessment Act, by way of a capital reduction pursuant to s.256C of the Act.

5 A-CAP acquired its shares in BML (which was incorporated on 19 January 2007 with one issued share held by A-CAP) under an acquisition agreement, independent of the scheme, whereby a subsidiary of BML acquired certain non-uranium tenements in Botswana from another A-CAP subsidiary, in consideration for the issue and allotment to A-CAP of the BML shares.

6 Upon implementation of the scheme, the A-CAP shareholders will receive A-CAP's shares in BML and BML will cease to be a subsidiary of A-CAP. A-CAP (directly or indirectly) will retain the uranium tenements. BML will hold the non-uranium tenements.

7 The directors unanimously recommended the scheme because, inter alia, it would extend the opportunity for different companies holding the uranium and non-uranium assets respectively to develop separately and the aggregate market value of the shares owned by A-CAP members both before and after the scheme would have substantially the same market value.

8 The independent expert, DMR Corporate Pty Ltd, also concluded that the scheme was fair and reasonable and in the best interests of A-CAP shareholders.

9 The independent expert concluded that because the value of the BML shares exactly mirrored the value of what BML had acquired from A-CAP, the value of the A-CAP shareholders' interests would be the same before and after the scheme.

10 The independent expert identified, inter alia, the following advantages of the scheme:

a) The consideration was fair - the value of the shareholders' interests would be the same before and after the scheme;

b) The scheme will leave A-Cap as a specialised uranium mining company which could attract more investors;

c) BML would become a gold mining and base metals specialist;

d) BML would raise a minimum of $5 million to permit more detailed exploration;

e) Shareholders would have interests in two ASX listed companies;

f) The demerger would prevent conflicts of interest in relation to priorities, as both companies would be separately funded.

11 The principal disadvantages of the proposed scheme identified by the independent expert were that:

a) The combined price of the A-CAP and BML shares may be less than the price of A-Cap shares if the scheme were not implemented;

b) A-CAP shareholders would receive proportionate allocations in BML, but that could be diluted if they did not apply for or accept allocations in the capital raising proposed by BML.

12 By order made on 30 March 2007, the plaintiff was ordered to convene a scheme meeting of any person registered as the holder of ordinary shares in A-CAP, to be held on 15 May 2007. The explanatory statement to accompany notices of meeting pursuant to s.412(1) was ordered to be substantially in the form of a document exhibited to the affidavit of Graham Menzies sworn 30 March 2007.

13 The scheme meeting was held on 15 May 2007. A total of 174 members voted at the meeting in person or by proxy. One hundred and seventy members (representing 97.7% of the members present and voting) voted in favour of, and four members (representing 2.3% of the members present and voting) voted against, the resolution for the approval of the scheme.

14 The members voting in favour of the scheme voted 29,403,139 shares (representing 99.7% of the votes cast), while those voting against the scheme held only 86,750 shares (being 0.3% of the votes cast).

15 The statutory majorities of 50% of the members present and voting and 75% of the votes cast required by s.411(4)(a)(ii) of the Act, were thus overwhelmingly obtained at the scheme meeting.

16 At a hearing on 12 June 2007 held pursuant to Rule 16.6 of the Supreme Court (Corporations) Rules 2003, however, Master Efthim noted not only some minor disparities between the proxy form despatched to members and that exhibited to the affidavit in support of the application for the order convening the meeting, but also a potentially significant omission to notify a group of members registered in Botswana of the proposed scheme and scheme meeting.

17 By an affidavit sworn on 5 June 2007, Ms Claire Lorena of Computershare deposed to the inadvertent failure to notify the 148 members of A-CAP resident in the Republic of Botswana, who held 494,500 ordinary shares and who were registered on the company's separate Botswana Register, of the scheme meeting (and the associated general meeting) until, at the earliest, 15 May 2007, the day of the scheme meeting.

18 By an affidavit sworn on 15 June 2007, Mr Stephen Pezarro, the director of a corporate registry in the Republic of Botswana ("the Registry") which maintained the company's Botswana Register, deposed to steps taken to provide the Botswana members with the scheme documents and an explanatory letter, and to contact them to ascertain their attitude to the scheme, after the initial failure to despatch the documents was discovered. Mr Pezarro deposed that the approval of the Botswana Stock Exchange was required for the despatch of the materials to the Botswana members and was obtained only on 31 May 2007 (that is, two weeks after the scheme meeting). By an affidavit sworn 15 June 2007, Ms Henriette Cotze, a manager of Mailing Services (Proprietary) Limited of Botswana, deposed to the despatch to the 148 Botswana members on 31 May 2007 of the scheme documents, including the explanatory memorandum and proxy form and a letter and form for the approval or rejection of the scheme and the associated reduction of capital. Mr Pezarro deposed that subsequently, 54 of the Botswana members, holding 213,775 of the 494,500 shares, responded to the Registry, indicating that they were in favour of the scheme.

19 Mr Pezarro, in paragraph 8(b) of his affidavit, also deposed that 37 other Botswana members, holding 199,129 shares, were contacted by Registry staff in conjunction with a stockbroking firm, Capital Securities (Proprietary) Ltd ("Capital"), "to ensure that they had received the documents despatched to them ... and to request them to reply to the request to either agree to the proposed scheme or indicate their opposition to it". Mr Pezarro deposed that those 37 persons contacted did not express any intention to oppose the scheme, or indicate any disapproval of it. It does not appear that they expressed approval either. Those 37 members are not specifically identified in any exhibit.

20 In paragraph 10(c) of his affidavit, Mr Pezarro referred to 46 other remaining Botswana shareholders, holding 66,740 shares, and representing 13.496% of the Botswana shares and who were not contacted by telephone, about whom the affidavit material is vague. It is not clear whether those 46 Botswana members are the same members as those referred to in paragraph 4 of Mr Pezarro's affidavit, or listed in an exhibited letter of Mr Matsake of Capital dated 13 July 2007 (an obviously incorrect date). Mr Matsake's letter does not state a date of contact. Mr Pezarro deposed that none of those 46 shareholders has indicated to the Registry any intention to oppose the scheme or any disapproval of the scheme.

21 Mr Pezarro deposed, in paragraph 10 of his affidavit, that 54 members, representing over 36% of the Botswana members holding 43% of the Botswana shares, have indicated approval, and that an aggregate number of 48 members representing approximately 32% of the Botswana shareholders holding 43% of the Botswana shares who have been directly contacted and know of the scheme have failed to indicate that they either approve or disapprove, although they have not indicated an intention to oppose.

22 It is not clear from Mr Pezarro's affidavit whether the 46 members were followed up or why they are in a different position from the 37 shareholders. The precise composition of the groups of 54, 37, 48 and 46 Botswana members variously referred to in Mr Pezarro's affidavit is not immediately apparent.

23 Mr Pezarro deposed that Mr Menzies informed him that 170 members voted in favour of the scheme. Thus, only about 10% of the 1,738 members on the principal register, holding about 26% of the shares, voted. The vote was almost entirely in favour of the scheme. Mr Pezarro thus reasoned that a higher percentage of the Botswana Register members have already responded favourably to the scheme.

24 Mr Pezarro further deposed that on 14 June 2007, he caused an advertisement giving notice of the hearing of the approval hearing on 22 June 2007 to be placed in a Botswana newspaper and the next day, caused a copy of the advertisement to be posted to each Botswana member.

25 Mr Merralls, senior counsel for the plaintiff, submitted that the failure to notify the Botswana members was inadvertent and a mere procedural irregularity which should not invalidate the meeting and would cause no substantial injustice.

26 Further, he submitted that even if all Botswana members had cast votes against the resolution, it would still have been adopted by a substantial majority.

27 In terms of percentage of votes cast, the Botswana shareholders collectively held less than 500,000 shares, compared to over 29 million shares voted in favour of the scheme. However, only 170 members voted in favour of the scheme, and had 148 or even 100 Botswana members voted against it, the percentage of members voting in favour of the scheme would have been far from overwhelming.

28 Moreover, members have the right not only to vote but to attend and participate in the scheme meeting and to ask questions. Where there has been a total failure to notify certain members of a scheme meeting, even if the exercise of their voting power would not have outweighed that actually exercised in favour of the scheme, it cannot be assumed that the vote in relation to the scheme may not have been influenced by their presence. One or more of them may have chosen to attend and ask questions or make comments which may have influenced the vote, so that the statutory majority would not have been obtained.

29 Due to the potentially draconian effect of a scheme, which may alter the rights and interests of dissentients on the basis of the statutory majorities, any non-compliance with the statutory preconditions of notice and the despatch of the explanatory statement to members may properly be regarded as a serious matter. All members are entitled to be informed of the nature and details of the scheme by the receipt of the explanatory statement required to be despatched pursuant to s.412(1) of the Act, to attend the meeting, to ask questions and speak at the meeting, to vote and to oppose the Court's approval of the scheme. Further, the Court should not readily disregard the failure, even if inadvertent, to notify a particular body of shareholders simply because their voting in opposition to a proposed scheme would apparently not have affected the outcome of the vote, given the vote in favour of the scheme which was in fact obtained.

30 In the present case, Mr Merralls submitted and I accept, that practically speaking, given the nature of the scheme and their residence in Botswana, there was little prospect that the unnotified Botswana members would have attended a meeting in Melbourne and negatively influenced the vote on the scheme.

31 The question then arises whether, in the present case, the Court can be satisfied that sufficient steps have been taken to rectify the failure to notify the 148 Botswana shareholders of the scheme, the application for approval and their entitlement to object to it, and to ascertain their attitude to the scheme, in order to exclude substantial injustice and to justify the Court's consequent exercise of its discretion to approve the scheme.

32 The affidavit of Mr Pezarro and the associated exhibits in relation to the despatch of material to, and contact with, the Botswana members in relation to the scheme are, in my opinion, somewhat lacking in clarity. There is no comprehensive list of the Botswana members, clearly identifying which members fall into the various numerical categories referred to by Mr Pezarro, or stating the dates of direct contact. There is no explanation of why 46 members were not directly contacted and no information on when material despatched by mail in Botswana would be received in the ordinary course.

33 I am satisfied that 54 of the 148 Botswana shareholders have expressed approval of the scheme. The evidence permits me to conclude that a further 37 (or 48) Botswana shareholders received the materials, know of the scheme, were directly contacted and are aware of their entitlement to oppose the scheme, although they cannot have received the documents until after 31 May 2007.

34 The material justifies an assumption that the 37 (or 48) Botswana members who were directly contacted, are, at worst, passive or indifferent to the scheme. The same assumption may be less surely based in relation to the remaining 46 Botswana shareholders who, it is acknowledged, have not been directly contacted. Mr Pezarro's affidavit does not make clear whether there were attempts to contact the 46 members directly, which were unsuccessful. It may, however, reasonably be inferred that the schedule attached to the letter of Mr Matsake (incorrectly dated 13 July 2007), which is exhibited to Mr Pezarro's affidavit, sets out a record of attempts to contact directly all Botswana members, some of which were unsuccessful. Further, the approval hearing has been advertised in a Botswana newspaper and the advertisement was then posted to all Botswana members.

35 Although initially of the view that approval of the scheme should not be granted in the absence of clarification, I was, on hearing the submissions of senior counsel, satisfied that the despatch of materials, the newspaper advertisements published and mailed to members and the attempts (largely successful) to contact directly the Botswana members, justified the conclusion that no substantial injustice will be caused by reason of the initial inadvertent failure to despatch the scheme documents and related material to the Botswana members.

36 Although the Court must be vigilant to safeguard the interests of members in the context of schemes of arrangement, given the nature of the present scheme, the overwhelming vote in favour of it, the unanimous recommendation of the directors, the independent expert's conclusion that it is in the best interests of shareholders, the steps taken to rectify the omission to notify the Botswana members, the strong probability that the omission was immaterial to the outcome and the absence of opposition by ASIC, I propose to approve the scheme of arrangement and to make the orders sought.