Ausam Resources Limited ABN 12 090 935 738 [2004] FCA 823

REASONS FOR JUDGMENT ON APPLICATION FOR ORDERS FOR MEETING TO CONSIDER SCHEME OF ARRANGEMENT AND FOR VALIDATION OF RESOLUTIONS 1 The purpose of the present application is that the Court order a meeting of members of Ausam Resources Ltd ('ARL') to be convened to consider a proposed scheme of arrangement under Part 5 of the Corporations Act 2001 (Cth) ('the Act') which if passed and finally approved by the Court will result in all shares in the plaintiff being acquired by a Canada-based company, Northlinks Ltd ('Northlinks'). The shareholders in ARL will be issued one share in Northlinks for every share held in ARL under the proposed arrangement. 2 The rationale of the proposed scheme is set out in a draft letter to shareholders which it is proposed will issue with the scheme booklet exhibited in draft form to the affidavit of Anthony Shepherd, a director and the company secretary of ARL. The letter explains that since being formed in 1999 to acquire and develop natural gas resources, ARL has assembled a portfolio of approximately 2.7 million gross acres of oil and gas prospective land under permit in Queensland, Victoria and Western Australia. It assembled these interests through acquisition, farm-in and state award. Since inception it has continuously high-graded its portfolio, had several third party studies performed in association with its capital-raising efforts, maintained its Perth operations and office and funded the drilling of three wells for approximately $A15 million. The vast majority of the funds invested by ARL is said to have been raised through private equity placements to it, its directors, their associates and private investors in the United States. It closed final placement on 17 May and the board has formed the view that it can no longer adequately be funded by private equity investors. 3 The board says that after exhaustive investigation it has determined that ARL must seek financing through the public market. Its ability to develop its portfolio is said to be dependent on how much additional capital it can raise from third party sources. Over the past four years its management has pursued funding from a variety of sources. This has included meeting with and presenting to over 90 different private equity investment funds, public funds, brokers, potential industry partners and exchanges located in a number of countries. None were willing to participate in, or provide an avenue for, its financing until now. 4 As recently as November 2003, ARL was advised by four well-known investment banks and brokerages in Australia that its prospect portfolio was not attractive enough to raise any meaningful amount of capital on the Australian Stock Exchange at a price or on terms that in the view of the directors would serve the best interests of its shareholders. ARL pursued a listing on the London Stock Exchange as an alternate investment market from July 2003 until December 2003 but after four months of encouragement was advised by its prospective nominated broker adviser that the listing was premature for that market. It was suggested that the listing would be well suited to the Canadian market. 5 In December 2003, the company engaged i3 Capital Partners Inc of Calgary, Canada, to assist it to raise between $A5 million and $A10 million dollars at a share price approximately equal to the average subscription price of shares already issued of 14 cents. i3 had pre-identified Northlinks as a low risk shell company listed on the Toronto Stock Exchange's Venture Exchange but which had voluntarily suspended trading. 6 On 16 January this year, ARL and Northlinks signed a letter of intent to enter into a transaction which would involve Northlinks acquiring all of the shares in ARL in exchange for shares in Northlinks and Northlinks raising capital in an amount of between $Can3 million and $Can5 million through a share issue. Over the next two months presentations on the transaction were made to investment banks and brokerages in Calgary, Canada. On 31 March 2004, ARL and Northlinks signed an engagement letter with a Calgary investment bank and brokerage house, First Associates Investments Inc ('First Associates'). 7 On 15 April 2004, Dundee Securities Corporation ('Dundee') signed an agreement with First Associates whereby it agreed to serve as co-agent. They have endeavoured to raise up to $Can7 million in conjunction with Northlinks acquiring ARL. Completion of the proposed scheme is conditional upon a minimum raising of $Can4 million. 8 In the directors' recommendation in relation to the scheme set out in the proposed booklet, the advantages of the scheme are described. It is said that absent the scheme, ARL is highly unlikely to be able to adequately fund its asset portfolio and to preserve shareholder value. The background to which I have already referred is mentioned by reference. Other advantages of the scheme and transaction are advanced: (a) ARL shareholders currently hold a relatively illiquid investment and do not have the ability to trade their shares on a public exchange; the post‑consolidation shares would be listed on TSX-V with no restrictions and may be traded as soon as listed, excluding those held by directors; (b) redomiciling ARL to Canada will provide access to the North American capital markets; implementation of the scheme will result in a significantly larger entity which should enhance the prospects of raising additional capital and attracting institutional investment. This would in turn facilitate the development of the current asset base and provide an opportunity to pursue the acquisition of additional assets; (c) ARL will be listed on a respected and more regulated exchange, enabling the pursuit of other transactions. The directors also referred to disadvantages of the scheme including the consequence that ARL shareholders will experience a dilution of their interest in ARL's existing assets if the scheme proceeds. Other disadvantages are said to include: 1. the cost of the transaction, expected to be approximately $Can1.5 million before warrants and options. The majority of those costs, it is said, will be incurred whether or not the transaction is completed; 2. scheme participants who are Australian residents will hold shares in the Canadian company and will be exposed to fluctuations in the Australian and Canadian dollar exchange rate. 9 Risks associated with the scheme are also mentioned. Under the scheme ARL will become a wholly owned subsidiary of Northlinks and all ARL shareholders will become shareholders of Northlinks. This would mean that ARL shareholders would continue to be exposed to the risks associated with having an interest in the ARL assets. Scheme participants will also be exposed to new risks associated with holding shares in Northlinks. 10 The claimed advantages and disadvantages referred to are asserted by the directors to the shareholders. The Court makes no judgment on them but they do offer a proper foundation in my opinion for submitting the scheme for consideration by members of the company. 11 The Australian Securities and Investment Commission ('ASIC') has been given a reasonable opportunity to examine the scheme. A copy of the draft scheme booklet was provided to ASIC on 23 April and it has been advised of all changes made to the booklet subsequently. On 24 May 2004, ASIC sent a letter to the plaintiff's solicitors in which it stated that it did not propose to appear to make submissions or intervene to oppose the scheme at the first hearing. This, of course, does not constitute a statement of non‑objection under subs 411(17)(b) of the Act. ASIC has reserved its position in that regard until it has had an opportunity to observe the entire scheme process. 12 I am also satisfied that the proposed information to shareholders of ARL complies with the requirements of the Act and the Regulations and that the requirements of the Corporations Rules have been met. 13 The order made by the Court at this point does not guarantee its final approval of the scheme if adopted by the proposed meeting. There may be opposition from interested parties including ASIC to final approval. At this stage, however, it is not apparent that there is any reason that the matter should not be referred to shareholders for their consideration. While there are some risks associated with the scheme, which are referred to in the draft booklet, there may also be benefits. The extent of those benefits is best assessed by the shareholders at this stage. 14 There is an issue about the validity of resolutions connected with the proposed scheme which were passed by the directors of ARL on 16 April and 10 May 2004. At the time that the resolutions were passed, the membership of the board of directors comprised Mark Avery, Chairman, Richard Lummis and Anthony Shepherd. Mr Shepherd is the only director ordinarily resident in Australia. Terrene Barr, another director, who was resident in Australia, resigned on 29 January 2004 and despite endeavours to secure a replacement for him, none has been found. Details of those efforts are set out in an affidavit of Leigh Alan Warnick sworn on 26 May 2004. It does appear, as Mr Avery has said in an earlier affidavit, that his inability to find a replacement is due at least in part to the complexity and uncertainty surrounding the affairs of ARL pending completion of the scheme. 15 Section 201A of the Act provides: '(1) A proprietary company must have at least 1 director. That director must ordinarily reside in Australia. (2) A public company must have at least 3 directors (not counting alternate directors). At least 2 directors must ordinarily reside in Australia.' 16 The resolutions which are the subject of the application for validation are set out in minutes of meetings of the board of directors held on 16 April and on 10 May 2004. The resolutions include in each case a resolution to take the necessary steps to proceed with the implementation of the scheme, subject to the approval of the members and to the final approval of the Court. 17 There are other associated or ancillary resolutions concerning the appointment of consultants in relation to the preparation of scheme documents which on their face are connected with the implementation of the scheme. There are resolutions not specifically addressed in the affidavits in support of the validation application which do not on their face appear to relate to the scheme. However, I am assured by counsel for the plaintiff that they each relate to matters which appear in the scheme documents and that an affidavit can be filed today verifying that relationship. 18 The validation of these resolutions is sought pursuant to subs 1322(4) of the Act which provides: Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation...' Subsection 1322(6) provides: 'The Court must not make an order under this section unless it is satisfied: (a) in the case of an order referred to in paragraph (4)(a): (i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature; (ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or (iii) that it is just and equitable that the order be made. ... (c) in every case - that no substantial injustice has been or is likely to be caused to any person.' 19 The conditions referred to in subs 1322(6) have been treated as disjunctive by Barrett J in a decision which he made which is referred to in the submissions. That was Re Continental Pacific Insurance Co [2002] NSWSC 789 and I am prepared to accept that that construction is a correct construction and that notwithstanding that the act, matter or thing is not necessarily of a procedural nature it may be validated when the person or persons concerned in or party to the contravention or failure have acted honestly or it is just and equitable that the order be made. 20 The circumstance that the company fell below the minimum requirement for Australian resident directors on its board was not evidently in the control of the company at the time the resolutions were passed. It is clear that reasonable efforts have been made to comply with that requirement although there might be some criticism that those efforts did not begin until perhaps a little later than they could have begun. 21 However, in my view, it is the case that the resolutions have been passed in good faith and that it would be quite contrary to the interests of the shareholders if their validity could be called into question at this stage and thus compromise the ability of the shareholders to give consideration to the proposed scheme of arrangement. I am prepared therefore to make the orders sought validating various resolutions subject in the case of the resolutions I have mentioned to the filing of an affidavit verifying their relationship to the proposed scheme. 22 I will make an order that: 1. Pursuant to subs1322(4)(a) of the Corporations Act 2001 (Cth) (Corporations Act), that the resolutions passed by the Plaintiff's board of directors on: (a) 16 April 2004; and (b) 10 May 2004, be declared valid subject to the Plaintiff filing by close of business tomorrow an affidavit verifying the relationship of all resolutions passed on 16 April 2004 to the proposed scheme. I will also make orders in terms of the replacement minute of proposed orders.

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