Aurox Resources Ltd (ABN 32 106 793 560), in the matter of Aurox Resources Ltd (ABN 32 106 793 560) [2010] FCA 853

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

GENERAL DIVISION WAD 81 of 2010

IN THE MATTER OF AUROX RESOURCES LTD (ABN 32 106 793 560) AUROX RESOURCES LTD (ABN 32 106 793 560)

REASONS FOR JUDGMENT 1 This is an application under s 411(1) of the Corporations Act 2001 (Cth) for orders for the convening of a meeting of the plaintiff's members holding ordinary shares in the plaintiff (Aurox), for the purpose of considering, and if thought fit, approving a scheme of arrangement. The scheme of arrangement is referred to in the affidavit of Mr Craig Ferrier, sworn on 16 April 2010. 2 Aurox is a company whose shares are listed on the Australian Stock Exchange (ASX) and carries on mining activities. The scheme of arrangement between Aurox and its members, proposes that there be, in effect, a merger of Aurox with another mining company whose shares are also listed on the ASX, Atlas Iron Limited (Atlas). 3 The scheme consideration which is proposed by the scheme arrangement is that the members of Aurox will receive one Atlas share for every three Aurox shares, and that Aurox will then become a wholly owned subsidiary of Atlas. There is only one class of members. However, there are a number of persons who hold options to acquire shares in Aurox, but there is evidence before the Court that Atlas will make an offer to each of the option holders, to issue shares in Atlas to them, in exchange for the cancellation of the options. The completion of this process is a condition precedent under the scheme implementation agreement. 4 It is also proposed that Atlas will make a loan of $7.7 million to Aurox for the purpose of Aurox redeeming a number of convertible notes which were issued by Aurox and are maturing on 30 June 2010. 5 There is before the Court an independent expert's report by BDO Corporate Finance (WA) Pty Ltd (BDO), which will be sent to the Aurox members as part of the scheme booklet. BDO has undertaken an exercise to value the shares of each of the companies in order to determine whether, in their opinion, the scheme is fair. 6 BDO has valued one Aurox share at between 33 cents and 46 cents. On that basis, the value, therefore, of three Aurox shares ranges between 99 cents and $1.38. The expert's report values an Atlas share is between $2.18 and $2.30. The expert's report concludes that, on the basis of the figures referred to above, the scheme is fair. 7 The expert's report has also had regard to the advantages of approving the scheme, as opposed to not approving the scheme, and also the disadvantages of approving the scheme. One of the disadvantages of approving the scheme would be that, whilst the Aurox shareholders currently own 100 per cent of the company, once Aurox becomes part of the merged entity, they will hold 12.3 per cent of Atlas. 8 However, among the advantages mentioned by the expert's report, are that the scheme is fair, that Atlas has currently iron ore assets in production with a number of other projects nearing production, that Atlas's shares demonstrate a greater liquidity than the Aurox shares, and that Atlas is in the S&P ASX 200, and is well-covered by analysts, which means that Atlas's shares should attract a higher number of institutional investors. There are also other synergies. 9 There is, therefore, expert evidence before the Court that the scheme is both fair and reasonable. 10 I would also mention that the proposed scheme and scheme booklet have been the subject of considerable scrutiny by the Australian Securities and Investments Commission (ASIC). That documentation has been amended by Aurox in accordance with the comments which have been made by ASIC. Primarily, ASIC has been concerned with the way in which some of the exploration targets have been described in the scheme booklet, and have been concerned to ensure that the conceptual nature of the quantity and grades of those targets is sufficiently drawn to the attention of the members of Aurox. 11 The Court received evidence today from Mr Setori which annexed a letter from ASIC, which is in the usual form, saying that ASIC would not be appearing today to intervene or to oppose orders for the convening of meetings. 12 The scheme booklet will have to be amended to accommodate the proposed change to the taxation regime, previously referred to as the Resources Super Profits Tax, which has been announced this morning. I have been handed a proposed amendment to that part of the scheme booklet directed to that end. The Court's approval of the scheme booklet is premised upon the proposed amendment being made to the scheme booklet. 13 Counsel for Aurox has drawn my attention to certain provisions in the scheme implementation agreement, commonly referred to as the "no talk, no shop" provisions, which impose an exclusivity period in favour of Atlas in relation to any competing offers which may be made for the acquisition of shares in Aurox. 14 The courts have concerns regarding the impact of clauses of this nature upon the fiduciary duties of directors in dealing with alternative bidding proposals. However, the terms of this scheme implementation agreement incorporate, what is sometimes referred to as, the fiduciary obligations carve out (Re Hostworks Group Ltd [2008] FCA 64 at [33]-[34]). I am satisfied that the presence of the "no talk, no shop" provisions would not preclude the Court from approving the scheme of arrangement, if the requisite majorities are obtained. 15 In addition, there is provision in the scheme implementation agreement for a break fee. The break fee is payable in certain prescribed events, including the failure of the directors to recommend the scheme, and also the termination of the scheme consequent upon a breach by Aurox. The courts are generally content to approve a scheme which has a scheme implementation agreement providing for a break fee, on the basis that the fee constitutes a genuine pre-estimate of the damage that might be suffered by, in this case, the acquiring party. In relation to such a clause, the courts often have regard to the percentage that the break fee constitutes to the equity of the company to be acquired. In this case, it is approximately one per cent. This accords with the Takeovers Panel "Guidance Note 7: Lockup Devices". However, the courts are also often assisted by evidence as to how the figure is derived. In this case, I would be assisted by evidence at the final hearing, as to how the amount of the break fee is derived. However, I do not see this matter as an impediment to the making of orders today for the convening of the meetings, nor do I anticipate that this would preclude the making of final orders should appropriate majorities be obtained. 16 I also observe that the existence and nature of the break fee is well described in the scheme booklet. I also would note that the break fee is not payable simply on the basis that the members do not approve the scheme, and, therefore, will not act as a coercive factor in influencing the Aurox members on that score in their votes. 17 Mr Ferrier has also referred in his affidavit to the fact that there will be three officers of the company who will be engaged on consultancy agreements by the merged entity. I am also satisfied that those arrangements are sufficiently disclosed in the scheme booklet. 18 I am satisfied that, on the basis of the existing evidence, there is no reason why the Court would not approve the scheme, should the appropriate majorities be obtained at the proposed meeting of members. The Court will, therefore, make orders in terms of the amended minute which has been handed to me. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.