Australian Education Union v Department of Education and Children's Services

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 255 of 2012

BETWEEN: ASTON RESOURCES LIMITED ABN 91 129 361 208

JUDGE: JACOBSON J DATE: 9 MARCH 2012 PLACE: SYDNEY

BACKGROUND 1 This is the first court hearing of an application to approve a scheme arrangement proposed between Aston Resources Limited ("Aston") and its ordinary shareholders. 2 Aston is a public company listed on the Australian Stock Exchange ("ASX") carrying on business in the coal mining industry. The company's principal asset comprises an 85 per cent interest in the Maules Creek coal mining project in the Gunnedah Basin, which is in the development stage. Aston has entered into a conditional agreement for the sale of part of its interest. Subject to the fulfilment of the conditions, Aston's interest in the project will reduce to 75 per cent on completion of the sale. 3 Production at the Maules Creek project is scheduled to commence in the middle of 2013. Aston's market capitalisation, as at 9 December 2011, when the proposed transaction was announced, was approximately $2.1 billion. 4 The purpose of the scheme of arrangement is to effect a merger between Aston and Whitehaven Coal Limited ("Whitehaven"), which is an ASX listed coal mining company with operations and development projects that are also situated in the Gunnedah Basin. The operations of Whitehaven include five operating mines. Whitehaven's market capitalisation, as at 9 December 2011, was approximately $2.9 billion. Under the proposed scheme, the shareholders of Aston will transfer all of their shares in that company to a wholly owned subsidiary of Whitehaven. 5 When I refer to Whitehaven, I will not, unless necessary, identify a particular entity in the Whitehaven group of companies. Rather, the name "Whitehaven" is used to refer to Whitehaven or one or more of its subsidiaries, as may be appropriate, including the subsidiary company that will acquire all of the Aston shares under the scheme if implemented. 6 The effect of the scheme will be that Aston will become a wholly owned subsidiary of Whitehaven. If the scheme becomes effective, Aston will delist from the ASX. The consideration payable to shareholders under the scheme will be 1.89 Whitehaven shares for every Aston share held on the record date. There is no option for any cash consideration. 7 An aspect of the proposed transaction, to which I will refer in more detail below, is that Whitehaven has agreed to acquire all of the issued securities in an unlisted coal exploration company called Boardwalk Resources Limited ("Boardwalk") in consideration for the issue of shares in Whitehaven. Two of Aston's directors, Mr Nathan Tinkler and Mr Philip Christensen, are shareholders in Boardwalk. The Boardwalk acquisition is not part of the scheme but it is conditional upon successful implementation of the scheme and it is also subject to the approval of Whitehaven shareholders. 8 Accordingly, if the scheme is implemented, the assets of Whitehaven may include the Boardwalk exploration assets. The independent directors of Aston, that is to say, the directors not associated with the Boardwalk transaction, unanimously recommend that shareholders vote in favour of the scheme, in the absence of a superior proposal. Mr Tinkler and Mr Christensen, noting their interests in the Boardwalk transaction, make the same recommendation.

PWC REPORT 9 Pricewaterhouse Coopers Securities Limited ("PwC"), which is the independent expert appointed by Aston to assess the scheme, has prepared a report which is contained in the scheme booklet. 10 I was taken, in some detail, to the PwC report this morning. PwC considers that the scheme should be evaluated as a merger rather than a control transaction and that, as such, the consideration offered and the securities given up should be assessed on an equivalent basis. 11 PwC is of the view that, after consideration of all of the issues set out in the report and the scheme booklet, the scheme is in the best interests of Aston shareholders. In summary, PwC assesses the relative value of Aston shares to Whitehaven shares at a range of 1.86 to 1.87 on a controlling interest basis, and in the range of 1.78 to 1.89 on a minority basis. Thus, as PwC observe, their assessment of the shares has been conducted on both a controlling interest and minority interest basis for each of Aston and Whitehaven. 12 Since the range of values assessed by PwC demonstrates that the valuation figures are less than or equal to the scheme consideration of 1.89 Whitehaven shares for each Aston share, the scheme is in the best interests of Aston shareholders. 13 PwC has also considered the value of Boardwalk because if the Boardwalk transaction proceeds, the Boardwalk assets may be part of Whitehaven and the value of those assets will be relevant to the value of Whitehaven shares received by shareholders under the scheme. PwC states that elements of the scheme and the proposed Boardwalk transaction are contemporaneous and accordingly, their evaluation of the scheme has involved an assessment of elements of the proposed Boardwalk transaction to the extent that PwC considers this to be relevant. 14 However, ultimately, PwC's assessment of the scheme is conducted upon an overall judgment as to whether Aston shareholders are likely to be better off if the scheme is implemented than if it is not, and not the specifics of the proposed Boardwalk transaction on a stand alone basis.

KEY ASPECTS OF THE PROPOSED SCHEME 15 Mr Wood, who appeared this morning for Aston, took me to four aspects of the proposed scheme, which required some detailed consideration.

Issue 1: Boardwalk transaction 16 The first issue to which I will refer is the Boardwalk transaction. The issue which arises is whether the effect of the Boardwalk transaction is to confer a collateral benefit on the shareholders of Aston who also hold shares in Boardwalk. 17 An issue also arises as to whether the terms of the Boardwalk transaction are such as to create a separate class of Aston shareholders for the purpose of convening separate scheme meetings. The effect of the proposed Boardwalk transaction, if approved, is that holders of Boardwalk securities will receive 85.89 million Whitehaven shares in consideration for the sale of their interest, as well as 34.02 million Whitehaven shares that will be subject to restrictions on voting, disposal and dividend rights under the terms of restriction deeds. 18 The restricted shares are referred to as "the Milestone Shares". Restrictions applying to the Milestone Shares will cease to apply if certain trigger events occur. These include the grant of mining leases and various approvals in relation to two of Boardwalk's exploration projects. 19 As indicated above, there is a degree of common ownership between Aston and Boardwalk. In particular, the commonality exists between two of Aston's directors, Mr Nathan Tinkler and Mr Philip Christensen. Mr Tinkler owns 84 per cent of the ordinary shares in Boardwalk, which equates to approximately 78.42 per cent of Boardwalk's issued capital on a fully diluted basis, taking into account certain unexercised warrants that are on issue. Both Mr Tinkler and Mr Christensen also have, through entities associated with them, shareholdings in Aston. 20 Mr Tinkler holds approximately 31.7 per cent of the ordinary shares in Aston, through an associated company. The overlap involving Mr Christensen's interests in Aston and Boardwalk are much less than those of Mr Tinkler. 21 It might, on one view, be thought that the shareholders of Aston who also hold shares in Boardwalk could receive a collateral benefit, that is to say a benefit not available to other Aston shareholders, in the form of the consideration received from Whitehaven for their Boardwalk shares. This question arises because the value of the consideration which Whitehaven has agreed to pay to Boardwalk shareholders exceeds the valuation range for Boardwalk, which was assessed by PwC. 22 The total value of the consideration which Whitehaven has agreed to pay to Boardwalk shareholders is $393 million but it increases if the Milestone Shares are also taken into account. 23 On any view, that valuation range exceeds the range of $200 million to $330 million, which is the value that PwC has placed on Boardwalk. The effect of the proposed transaction is therefore that, at least on the valuation range stated by PwC, Whitehaven would be paying a figure to acquire Boardwalk which exceeds the valuation made by PwC. Also, as PwC observes in its report, on the basis of these figures, the Boardwalk transaction is dilutive to Aston shareholders when compared to the scheme without the Boardwalk transaction. 24 Notwithstanding this, it does not appear from the matters to which I was taken this morning, that there is a collateral benefit conferred on the common shareholders of Aston and Boardwalk. Certainly, ASIC, which has had sufficient notice of the application, has not appeared this morning to contend otherwise and has provided the letter in the usual terms which it provides for the first court hearing. 25 What seems to be important is that, according to the material to which I was taken in the scheme booklet, the Boardwalk transaction was struck as a result of arms length negotiations. There is considerable detail in the scheme booklet addressing the Boardwalk transaction. In particular, this is dealt with on pages 12 to 14 and also at pages 67 to 68 of the scheme booklet. 26 The scheme booklet includes statements to the effect that the Whitehaven Board has considered the Boardwalk assets, their quality, location and proximity to existing mines and infrastructure and the overall benefits of adding a portfolio of exploration assets to the expanded, merged group. The effect of what is stated in the pages to which I have referred, is that the Whitehaven Board considers that there are synergies to be obtained by the expanded, merged group, by reason of the acquisition of both Aston and Boardwalk. 27 As I have said earlier, it appears, from the material to which I was taken, the Whitehaven directors unanimously recommended that Whitehaven shareholders vote in favour of Australian Securities Exchange listing rule 7.1, resolution that Whitehaven shareholders vote in favour of the Boardwalk transaction. 28 It also follows, from the material to which I was taken, that the directors of Whitehaven have taken the view that the price that Whitehaven has agreed to pay reflects the Board's view as to the value to Whitehaven of the Boardwalk assets, which is higher than the value determined by PwC. A similar question arose, although in a different context, in the matter of Re iSOFT Group Limited [2011] FCA 680. 29 In that case, one shareholder in the scheme company held convertible notes and an element of the transaction of which the scheme formed part was repayment of their notes at full value. The independent experts valued the convertible notes at 75 to 80 per cent of their face value. Accordingly, the convertible note holder was to receive a benefit that was not available to other scheme shareholders, in the form of repayment of its convertible notes at above market value. 30 The issue that arose in iSOFT was dealt with in a different way from the present scheme. There, the scheme company proposed that there be separate meetings of the convertible note holder and the remaining shareholders. This is referred to at [10] of the judgment of Emmett J. His Honour, therefore, did not need to consider whether the convertible note holders constituted a separate class from the other shareholders. 31 His Honour's judgment contains no consideration of the question - the approach taken in that case is therefore not authoritative. See, for example, Australian Education Union v Department of Education and Children's Services [2012] HCA 3 at [43]. In that passage, Heydon J cited a decision of Posner J in the United States of America and also an English authority in support of the proposition that a point of law that is assumed but not decided is not authoritative. 32 It seems to me that in the present case, the authorities establish that the common shareholders of Aston and Boardwalk do not represent a separate class. Their different interest is a commercial one flowing from their interest in a separate transaction which is not a condition of the scheme. The relevant test, which has been stated in authorities for over 100 years, is to determine whether the membership interests of those members that are affected by the scheme is such that it is impossible for them to consult together with other members with a view to their common interest. The authorities were considered in some detail by Santow J in Re NRMA Insurance Limited (No 1) (2000) 33 ACSR 595 at [76] to [82]. 33 The essential question is how the scheme affects the legal rights of all members. It does not involve an inquiry into the commercial motivations of members for voting in favour of or against the scheme. The test, that has been stated, of whether the interests of persons represented at a meeting of the class are not so dissimilar as to prevent those persons meeting and voting in one class involves an assessment of the legal character of the rights and obligations of the members against the company, and also how those rights will be affected by the implementation of the scheme. A similar approach was taken by Finkelstein J in Opes Prime Stockbroking Limited (No. 2) (2009) 179 FCR 20 at [64] and [71]. 34 His Honour there observed, at [66], that practical considerations are relevant; schemes of arrangement are propounded in a business context and a judge should adopt a practical businesslike approach to the issue of whether the difference in interests is such as to create separate classes. It seems to me that the issue in the present case should be resolved in that way. In particular, it is important to take account that the interests associated with Mr Tinkler and Mr Christensen, and also with a company known as Farallon Funds, have indicated that they will not vote at the scheme meeting. 35 Moreover, it is open to me, in the exercise of my discretion at the second court hearing, to take this issue into account. Finkelstein J observed in Opes Prime at [71], that the existence of different interests may be a factor that can be taken into account if the court comes to decide whether it should approve the schemes. I took a similar approach in Re Cashcard Australia Limited (2004) 48 ACSR 738 at [7] and [8].

Issue 2: Treatment of options and performance rights 36 Aston has on issue, in addition to its ordinary shares, certain performance rights and options. These securities were issued under a long term incentive plan for Aston executives and similar terms of grant were made to non-executive directors. It is not proposed that there be a scheme between Aston and the holders of the options and performance rights. Instead, Aston will procure the exercise or cancellation of those options and performance rights in accordance with the terms of their issue. 37 In relation to the performance rights, Aston proposes to exercise its discretion under the terms of the issue to vest all the performance rights following approval of the scheme. Upon vesting of those rights, the holders will be issued with Aston shares which will then be acquired under the scheme. A similar approach is to be taken in relation to the options. The effect of the exercise of Aston's discretion to vest the performance rights and options, following court approval of the scheme, is to free those performance rights and options of the performance hurdles otherwise applicable to them. 38 However, those consequences would flow, in any event, because the terms upon which they were issued include provisions, in particular, that in the event of a change of control of Aston, any performance rights and options vest in the holder. 39 The issue which arises is, therefore, similar to one which I considered in Cashcard at [7] and [8]. I came to the view that, in similar circumstances, rights such as these and the way in which they were to be treated did not constitute the creation of a separate class. The same view was reached by Ferguson J in Re Fosters Group Limited (No.2) (2011) VSC 547 at [38] to [43].

Issue 3: Exclusivity 40 The implementation agreement entered into between the parties contains a "no shop" and a "no talk" restriction, as well as a "no due diligence" restriction. There is also provision for a break fee of $20.6 million, potentially payable by Aston to Whitehaven, in the circumstances set out in clause 8 of the implementation agreement and summarised in section 13.4 of the scheme booklet. 41 Importantly, the break fee is not triggered by shareholders failing to approve the scheme. Also, the provisions with respect to the break fee and the other exclusivity provisions to which I have referred are disclosed in the explanatory statement which will be sent to shareholders. It seems to me that these provisions sufficiently comply with the approach taken by the courts to such provisions, as explained in some detail by Lindgren J in Re APN News & Media Limited (2007) 62 ACSR 400. The issue is fully discussed in the written submissions provided to me by counsel for Aston, which I will mark as MFI 1. 42 It is unnecessary to say anything further about this issue other than to say that I am satisfied, for the reasons referred to above and as more fully explained in MFI 1, that the clauses fall within those which have been approved in other schemes of this kind.

Issue 4: Call option agreement 43 A company known as Aston Resources Investments Pty Limited, which is associated with Mr Tinkler, is the largest shareholder in Aston. It entered into a call option agreement with Whitehaven on 11 December 2011, granting Whitehaven an option to acquire 40,913,305 Aston shares. That number represents 19.9 per cent of the Aston shares on issue. 44 Mr Wood took me to the terms of the agreement and in particular, to the option trigger events which are set forth in the agreement. The option trigger events include the announcement of a takeover by a third party, which would result in the acquisition of at least 50.1 per cent of Aston's shares. 45 The exercise price, payable under the call option agreement, is 1.978 Whitehaven shares for each Aston share. The exercise price is 15 per cent higher than the scheme consideration. The terms of the call option agreement are disclosed in section 14.5 of the scheme booklet and a copy of the agreement was lodged with the ASX. PwC has addressed the question of the call option agreement and notes that it is intended to increase the certainty that the scheme is approved and implemented. 46 It seems to me, therefore, that the call option agreement is a form of exclusivity provision akin to, in some respects, the forms of exclusivity discussed by Lindgren J in Re APN. No issue of fiduciary carve out arises but the question is one of disclosure. I have said above, the terms of the call option agreement are disclosed in the scheme booklet and are discussed in the independent expert report. A similar issue was addressed by Mansfield J in Re Hostworks Group Limited (2008) 26 ACLC 137 at [45]. 47 In that case, the exercise price was equivalent to the scheme consideration and his Honour came to the view that, in those circumstances, there was no sufficient reason to consider that the holder of the relevant shares should constitute a separate class for the purpose of the scheme meeting. 48 Although, in the present case, the exercise price is greater than the scheme consideration, I do not see any relevant difference to the reasoning adopted by Mansfield J in Re Hostworks Group.

CONCLUSION 49 The written submissions of counsel address a number of other issues, which commonly arise in relation to the convening of scheme meetings at the first court hearing. It is unnecessary to repeat what is set out in the written submissions. 50 I was satisfied, for the reasons contained in the written submissions and of course for the reasons referred to above, that I ought to make orders convening the scheme meeting and the other orders contained in the draft short minutes of order handed to me this morning by Mr Wood. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.