Anzon Australia Limited, in the matter of Anzon Australia Limited [2007] FCA 2079

Federal Court of Australia|2007-12-13|Before: Lindgren J

INTRODUCTION 1 On 13 December 2007 I made an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) on the application of the plaintiff (Anzon Australia) that Anzon Australia convene a meeting of its ordinary shareholders, other than holders of excluded shares, for the purpose of their considering and, if thought fit, agreeing (with or without qualification) to a scheme of arrangement between Anzon Australia and its shareholders (Scheme Meeting, Shareholders and Scheme respectively). An excluded share is a fully paid ordinary share in Anzon Australia held by ARC Energy Limited (ARC) or its Related Bodies Corporate as defined in s 50 of the Act. 2 I also made an order pursuant to s 411(1) of the Act approving the explanatory statement required by s 412(1)(a) of the Act to accompany the notice convening the Scheme Meeting for distribution to the Shareholders. 3 The following are the reasons why I made those orders.

OUTLINE OF SCHEME 4 Anzon Australia is a public company registered in Victoria. Its securities are listed on the Australian Stock Exchange (ASX). It carries on business as an oil and gas exploration company. 5 Under the proposed Scheme, the Shareholders will sell all of their shares, other than excluded shares, to ARC. ARC is a public company also listed on the ASX. 6 The consideration that the Shareholders will receive for each share in Anzon Australia is a value equal to 1.175 ARC shares for every Anzon Australia share (the Merger Ratio), subject to adjustment in certain circumstances under a reset mechanism (see para 12). 7 The Shareholders can elect to receive the consideration (Scheme Consideration) in one of the following three forms: (a) The All Shares Consideration Option, comprising 1.175 ARC Shares per ordinary share in Anzon Australia Share; (b) The Mixed Scheme Consideration Option, comprising $0.50 cash per ordinary share in Anzon Australia plus the number of ARC shares required to bring the value of the Scheme Consideration up to the value of the Merger Ratio; or (c) The Maximum Cash Consideration Option comprising: (i) $0.50 cash per ordinary share in Anzon Australia; (ii) a further cash sum being a proportionate share of the "Total Scheme Cash Pool Residual" (being $115 million less the amount of cash paid to Shareholders who elect the Mixed Scheme Consideration Option); plus (iii) the number (if any) of ARC shares required to bring the value of the Scheme Consideration up to the value of the Merger Ratio. 8 If a Shareholder does not make a valid election, that Shareholder is deemed to have elected the Maximum Cash Consideration Option for all shares held. 9 The Scheme will effect the acquisition of Anzon Australia by ARC and will result in Anzon Australia becoming a wholly owned subsidiary of ARC. Anzon Australia will then cease to the listed on the ASX. 10 Anzon Australia and ARC entered into a Merger Implementation Deed (MID) on 24 October 2007, as amended and restated on 12 December 2007. By the MID, they agreed to use their best endeavours to implement the Scheme, subject to satisfaction or waiver of various conditions precedent. The conditions precedent include Shareholder and Court approval. 11 The Scheme will be implemented as follows: (a) ARC will provide the cash component of the Scheme to Anzon Australia on the business day prior to the implementation date of the Scheme by depositing that sum into a trust account operated by Anzon Australia as trustee for the Shareholders as at the record date (being five business days prior to the implementation date); (b) On the implementation date, ARC will provide the scrip component of the Scheme Consideration to the Shareholders (other than "Ineligible Foreign Shareholders" and "Sale Facility Participants" - see respectively para 20 and para 14) by entering the shareholding details of the Shareholders in the register of members of ARC, and despatching (within five business days) to the Shareholders the relevant holding statements, share certificate or equivalent documentation representing the total number of ARC shares issued to the respective Shareholders; (c) The scrip component of the Scheme Consideration which would otherwise be required to be issued to "Ineligible Foreign Shareholders" and "Sale Facility Participants" will be issued to ABN Amro Equities Australia Limited (ABN Amro) as the entity appointed by ARC for the purposes of sale and remission of the proceeds of sale to ARC. ARC will hold the proceeds of sale on trust for such "Ineligible Foreign Shareholders" and "Sale Facility Participants" and ARC will pay the proceeds to them according to their entitlements; (d) On the implementation date, all of the shares in Anzon Australia will be transferred to ARC. 12 The reset mechanism works in the following way. ARC is entitled to reset the Merger Ratio during a "Reset Period" if: · during a "Drilling Period", a public announcement is made by ARC which provides confirmation of a "Material Discovery" having been made as a direct result of drilling on permits in which ARC holds an interest; · ARC's post-discovery share price is 15% greater than its pre-discovery share price; and · ARC's share price also outperforms the S&P/ASX Energy 200 index by a cumulative 15%. 13 The "Reset Period" is defined in the MID. Anzon Australia will notify the Shareholders of any amendment to the Merger Ratio in advance of the Scheme Meeting by making an announcement to the ASX and sending a separate communication to the Shareholders outlining the effect of the reset mechanism being triggered. 14 I have referred above to the "Sale Facility Participants". The reference is to Shareholders who, at their option, elect to dispose of the scrip component of the Scheme Consideration to which they are entitled, under a sale facility conducted by ABN Amro (Sale Facility).

DEEDS POLL 15 The obligations of ARC under the Scheme, and those of ABN Amro under the Sale Facility, are supported by separate deeds poll executed by ARC and ABN Amro in favour of the Shareholders.

A POSSIBLE TAKEOVER BID FOR THE SHARES IN ANZON AUSTRALIA 16 If the Scheme is not agreed to by the Shareholders, but a certain related scheme between Anzon Energy Limited (which holds approximately 53% of the shares in Anzon Australia) and its shareholders is approved both by the Court and the shareholders of Anzon Energy Limited, ARC must make a takeover bid under Ch 6 of the Act in respect of the ordinary shares in Anzon Australia. The consideration which ARC would offer under the takeover bid for each ordinary share in Anzon Australia would be the number of ARC shares equal to the Merger Ratio. There would be no cash consideration. However, Shareholders would be offered the opportunity to participate in a sale facility on terms similar to the Sale Facility that forms part of the Scheme.

RECOMMENDATION BY THE DIRECTORS OF ANZON AUSTRALIA 17 The board of directors of Anzon Australia unanimously recommends that, in the absence of a superior proposal, the Shareholders vote in favour of the Scheme.

INDEPENDENT EXPERT'S REPORT 18 Deloitte Corporate Finance Pty Ltd (Deloitte) was retained by the board of directors of Anzon Australia as an independent expert to assess the Scheme. Deloitte has prepared a report in which it concludes that the Scheme is in the best interests of the Shareholders in the absence of a superior proposal. Deloitte assesses the fair market value of each share in Anzon Australia to be between $1.40 and $1.60. Deloitte assesses the value of the Scheme Consideration by estimating the fair market value of a share in the proposed merged entity as being between $1.50 and $1.60. Deloitte estimates the value of the Scheme Consideration to be received by the Shareholders, that is to say, 1.175 ARC shares for every ordinary share in Anzon Australia, as being between $1.65 and $1.75 per ordinary share in Anzon Australia.

PERFORMANCE RISK 19 The provision for payment of the cash component of the Scheme Consideration to Anzon Australia prior to the transfer of the Shareholders' shares in that company (see para 11(a)) is a safeguard against the risk that the Shareholders will suffer delay or default in the provision of the Scheme Consideration after their shares have been transferred to ARC. They will not be relegated to the remedy of suing on the deed poll: see KAZ Group Ltd [2004] FCA 738; Re Tempo Services Ltd (2005) 53 ACSR 523 at 524; SFE Corporation Ltd (2006) 59 ACSR 82; Re Brambles Industries (2006) 59 ACSR 501; Re APN News & Media Ltd (2007) 62 ACSR 400 at 405, at [23]. The cash component of the Scheme Consideration will be held by Anzon Australia on trust for the Shareholders according to their respective entitlements.

INELIGIBLE FOREIGN SHAREHOLDERS 20 I have referred above to the "Ineligible Foreign Shareholders". This reference is to a small number of foreign shareholders in Anzon Australia in respect of whom it is proposed that the scrip component of the Scheme Consideration to which they will become entitled be issued to ABN Amro as the entity appointed by ARC for the purposes of sale and the payment of the proceeds of sale to the Shareholders.

EXCLUSIVITY ("NO SHOP" AND "NO TALK") RESTRICTIONS 21 Clause 9 of the MID is an exclusivity clause which contains "no shop" and "no talk" restrictions. The period of this exclusivity clause is from the date of the MID, being 24 October 2007, until the earlier of the end date of the MID, being 31 March 2008, or the termination of the MID in accordance with its terms. The maximum period of the exclusivity clause is therefore just over five months. 22 The exclusivity provisions are subject to the overriding obligations of the directors of Anzon Australia and ARC not to breach their fiduciary duties or statutory obligations. 23 The exclusivity provisions are given appropriate prominence in the Scheme Booklet. 24 I do not think that there is anything untoward or alarming in these provisions.

BREAK FEE 25 The MID provides in cl 10 for a break fee of $4 million. The break fee is reciprocal: it is payable by Anzon Australia to ARC and by ARC to Anzon Australia in the circumstances identified in the MID. 26 The break fee is not triggered merely by reason of the Shareholders voting not to agree to the Scheme. Accordingly, it is not a disincentive to the Shareholders in their consideration of the proposed merger. 27 The reasonableness and appropriateness of the break fee is supported by affidavit evidence of the kind to which I referred in Re APN News & Media Ltd (2007) 62 ACSR 400 at 411, at [55]. In particular, there is affidavit evidence of Steven Joseph Koroknay, a non-executive director and Chairman of the board of directors of Anzon Australia, to the following effect: · The break fee was agreed to as a result of normal commercial negotiations between Anzon Australia and ARC; · ARC required the break fee provision and the board of Anzon Australia was satisfied that the final form of the provision was acceptable; · The board of Anzon Australia negotiated a reverse break fee equal in amount; · Mr Koroknay believes that neither the break fee nor the exclusivity provisions mentioned above operate against the interests of the Shareholders and that it was in the interests of the Shareholders that those provisions be included in the MID; · The break fee of $4 million is approximately 0.88% of the total equity value of Anzon Australia, or 0.85% of the total equity value assuming that options to take up shares are exercised. Accordingly, the break fee is below the 1% "cap" referred to in para 7.14 of the Takeovers Panel's Guidance Note 7: Lock-up devices; and · The break fee of $4 million is approximately 0.64% of the value of the Scheme Consideration or 0.62% of the value of the Scheme Consideration assuming that options to take up shares are exercised. 28 In my view, the break fee provision should not stand in the way of the Shareholders having the opportunity to consider the Scheme.

OPTION HOLDERS 29 There are 18,750,000 options on issue to subscribe for ordinary shares in Anzon Australia. Under the MID, Anzon Australia is to use its best endeavours to procure that each option holder has entered into an "Option Purchase Agreement" with ARC or exercised all of their options prior to the date of the Scheme Meeting. 30 The number of new ARC shares that each option holder will receive for each option, in consideration for the transfer of the option to ARC, will be the number of new ARC shares equal to the All Shares Consideration Option value, less the exercise price of the option.

FINANCIAL ASSISTANCE 31 It is a condition precedent to the operation of the MID that Anzon Australia be "debt free" at 5 pm on the day prior to the second court hearing. 32 In so far as the repayment of debt by Anzon Australia would be likely to be financial assistance under Part 2J.3 of the Act, s 260C(5)(d) of the Act exempts "a discharge on ordinary terms of a liability that the company has incurred as a result of a transaction entered into on ordinary commercial terms" from the requirements of s 260A. 33 Moreover, s 260A(1) of the Act allows the giving of financial assistance to a person by a company for the acquisition of shares in the company or in its holding company, in the circumstances stated in paras (a), (b) or (c) of s 260A(1). The condition referred to in s 260A(1)(a) is that the giving of the financial assistance does not materially prejudice the interests of the company or its shareholders, or the company's ability to pay its creditors. 34 I accept Anzon Australia's submission that, on the evidence, the proposed discharge of Anzon Australia's liabilities would be exempt under s 260C(5)(d) of the Act and that, in any event, the giving of the financial assistance would not be prejudicial to the interests of Anzon Australia or the Shareholders or to Anzon Australia's ability to pay its creditors. I accept the submission because: (a) the Shareholders will be given the opportunity to vote on the proposed Scheme after full disclosure of the proposed repayment of debt; and (b) the proposed repayment of debt does not materially prejudice the ability of Anzon to pay its creditors, according to Mr Koroknay's affidavit evidence.

CONCLUSION 35 It was for the above reasons that I was of the opinion that the Shareholders should have the opportunity of voting on the Scheme and that I ordered Anzon Australia to convene the Scheme Meeting.

I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Counsel for the plaintiff: Mr F Gleeson SC and Mr N M Bender

Solicitor for ARC Energy Limited: Mallesons Stephen Jaques

Date of Hearing: 13 December 2007

Date of Judgment: 13 December 2007

Date of Publication of Reasons 27 December 2007

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