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[2023] FCA 1101
Federal Court of Australia
2023-09-14
Mr AJ, Jackson J
Original judgment source is linked above.
Counsel for the Plaintiff: Mr AJ Papamatheos
Solicitor for the Plaintiff: HopgoodGanim Lawyers
Solicitor for the Interested Party: Gilbert + Tobin
ORDERS WAD 212 of 2023 IN THE MATTER OF ESSENTIAL METALS LIMITED (ABN 44 103 423 981) ESSENTIAL METALS LIMITED (ABN 44 103 423 981) Plaintiff
DEVELOP GLOBAL LIMITED (ACN 122 180 205) Interested Party
order made by: JACKSON J DATE OF ORDER: 14 SEPTEMBER 2023
JACKSON J: 1 The plaintiff, Essential Metals Limited, is proposing a scheme of arrangement (Scheme) which requires the Court's approval under Part 5.1 of the Corporations Act 2001 (Cth). On 14 September 2023 I made orders convening a meeting of the shareholders of Essential to vote on whether to approve the Scheme. These are my reasons for those orders. 2 On 3 July 2023, Essential announced that it had entered into a Scheme Implementation Deed (SID) with Develop Global Limited under which it is proposed that Develop will acquire all of the shares in Essential. The proposed consideration to be provided to Essential shareholders pursuant to the Scheme is one fully paid ordinary share in Develop for each 6.18 Essential shares held (scheme consideration). A draft independent experts' report provided by Mr Sherif Andrawes and Mr Adam Myers of BDO Corporate Finance (WA) Pty Ltd (BDO Report) indicates that the expert is going to say that the Scheme is not fair, but that it is reasonable and is in the best interests of shareholders. Essential's directors will unanimously recommend that shareholders approve the Scheme in the absence of a superior proposal and subject to the independent expert continuing to conclude that it is in their best interests. 3 Essential is a public company limited by shares, registered in Western Australia. Its shares are listed on the Australian Stock Exchange (ASX). It is a minerals explorer. Its flagship project is the Pioneer Dome Lithium Project in the Eastern Goldfields region in Western Australia. Essential also holds an early-stage lithium project, two early-stage gold exploration projects and interests in joint ventures exploring for gold and nickel. 4 Develop is a public company limited by shares which are also listed on the ASX. It owns and operates two flagship base metal projects in Western Australia and New South Wales. It also provides complementary, specialist underground mining services, in some cases to its own projects but in one case under contract to a third party, Bellevue Gold Limited. 5 The draft scheme booklet Essential has provided (in various iterations since the commencement of the proceeding) suggests that Develop will be able to continue with Pioneer Dome in a timely and efficient manner given its operational team and funding capabilities. If the Scheme is approved and implemented, Essential shareholders will become Develop shareholders and so retain ongoing exposure to the upside potential of Pioneer Dome. 6 It is proposed that after the Scheme becomes effective, Essential will apply for termination of the official quotation of Essential shares on the ASX.
Materials relied on 7 In support of its application for orders under s 411(1) of the Corporations Act, Essential has relied on the following affidavits: (a) affidavit of Essential's Managing Director, Timothy Gerard Spencer, sworn 29 August 2023; (b) affidavit of Essential's solicitor, Nino Anthony Odorisio, sworn 6 September 2023; (c) affidavit of Essential's Company Secretary, Gregory William Fitzgerald sworn 6 September 2023; (d) affidavit of Develop's Chief Financial Officer, Ben Nicholas MacKinnon, affirmed 8 September 2023; (e) second affidavit of Mr Odorisio sworn 11 September 2023; and (f) third affidavit of Mr Odorisio sworn 13 September 2023.
Legislation governing schemes of arrangement 8 Section 411(4) of the Corporations Act provides that a scheme of arrangement is binding on members if: (a) a resolution in favour of it is passed by a majority of the number of members (unless the court otherwise orders) and by 75% of the votes cast on the resolution; and (b) it is approved by order of the Court. 9 The section envisages three steps in the process of approving a scheme and the making of orders under s 413: first, (in this case) the calling of a meeting of members; second, a vote by those persons; and third, a further application to the court for approval of the arrangement: see Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [7] (Keane CJ and Jacobson J, Finkelstein J agreeing). 10 For the purposes of the first of those steps, s 411(1) empowers the court to order the necessary meetings to be convened and to approve the explanatory statement (scheme booklet) to shareholders that is required by s 412(1)(a). 11 In Re Xplore Wealth Limited [2020] FCA 1868 at [23]-[24], Markovic J summarised the requirements that must be satisfied before those orders will be made: At the first court hearing, the Court will order the convening of a scheme meeting and approve a draft explanatory statement to be sent to scheme members if it is satisfied of the following matters: (1) the plaintiff is a Pt 5.1 body; (2) the proposed scheme is a compromise or (relevantly) an arrangement within the meaning of s 411(1) of the Act; (3) the scheme booklet will provide proper disclosure to shareholders; (4) the scheme is bona fide and properly proposed; (5) the Australian Securities and Investments Commission (ASIC) has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions to the Court, and has had 14 days' notice of the date of the first court hearing; and (6) the procedural requirements of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules) have been met. … In addition, 'the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the … meeting the court would be likely to approve it on the hearing of a petition which is unopposed': F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. 12 Section 411(2) of the Corporations Act provides that the court must not make an order convening scheme meetings or approving a scheme booklet unless 14 days' notice of the first hearing has been given to the ASIC and the court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed scheme and a draft explanatory statement, and to make submissions to the Court. 13 Section 412(1)(a) provides that where a meeting is convened under s 411, the Part 5.1 body must: with every notice convening the meeting that is sent to a creditor or member, send a statement (in this section called the explanatory statement): (i) explaining the effect of the compromise or arrangement and, in particular, stating any material interests of the directors, whether as directors, as members or creditors of the body or otherwise, and the effect on those interests of the compromise or arrangement in so far as that effect is different from the effect on the like interests of other persons; and (ii) setting out such information as is prescribed and any other information that is material to the making of a decision by a creditor or member whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the creditors or members[.]
Are the prerequisites for convening a meeting satisfied? 14 I will now consider each of the prerequisites for making the necessary orders, as identified above.
The Scheme is within the scope of Part 5.1 15 Essential is a Part 5.1 body, since in s 9 of the Corporations Act that is relevantly defined as a company, and an ASIC search verifies that Essential is an Australian public company.
The Scheme is an arrangement within the meaning of s 411(1) 16 As to the requirement that there be a compromise or arrangement, the scope of the latter word is wide. In Re NRMA Insurance Ltd [2000] NSWSC 82 at [20] Santow J said: … Generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or to evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed, may come under s 411; compare Re International Harvester Co of Australia Pty Ltd [1953] VLR 669 at 672 per Lowe ACJ. 17 The present Scheme is essentially one for the acquisition of all the shares in Essential in return for shares in Develop. It is plainly an arrangement within the meaning of s 411(1).
The scheme booklet 18 The scheme booklet must provide proper disclosure and contain the information prescribed to be included by the Corporations Act and Corporations Regulations 2001 (Cth). The Court must be prima facie satisfied that there has been proper disclosure with nothing misleading or deceptive in any material sense. The extent of the disclosure required is a question of fact and degree dependent on the nature of the scheme and the context in which it is advanced for consideration. It must be considered in a practical and commercially realistic way having regard to the complexity of the proposed scheme: Re Wesfarmers Ltd [2018] WASC 308 at [54]-[55] (Vaughan J). 19 Specifically, the draft explanatory statement must comply with s 411(3) and s 412 of the Corporations Act, and reg 5.1.01(1)(b) and Part 3 of Schedule 8 of the Regulations. The primary requirements are those in s 411(3)(b) and s 412(1)(a) which require the scheme booklet to include an explanation of the effect of the compromise or arrangement, in particular, material interests of directors, and any other information that is material to the making of a decision by members as to whether or not to agree to the compromise or arrangement (if within the knowledge of the directors and not previously disclosed to the members). 20 As has been said, Essential has provided various iterations of a draft scheme booklet, initially annexed to Mr Spencer's affidavit and the final version of the draft scheme booklet was annexed to Mr Odorisio's third affidavit. Prior to the first Court hearing, Essential's solicitors provided my Chambers with an extract of pages of the scheme booklet with appropriate amendments proposed as a result of queries from the Court about further disclosure to shareholders. Mr Spencer's affidavit confirms that the draft scheme booklet was filed with ASIC on 28 August 2023. 21 The draft scheme booklet is a detailed document. It outlines the effect of the Scheme, explains advantages and disadvantages of the Scheme for current shareholders, details business information about both Essential and Develop, and describes the implications if the Scheme does not become effective. It describes the material interests of directors and provides voting information and key considerations for the members, including the recommendations of Essential's directors. The draft scheme booklet also sets out taxation consequences and numerous other relevant matters. 22 The draft scheme booklet annexes the terms of the Scheme itself, a deed poll executed by Develop on 6 September 2023, and the proposed notice of court ordered Scheme meeting. Under the deed poll, Develop effectively promises in favour of all of Essential's shareholders that it will fulfil its obligations under the SID and provide the scheme consideration as set out in the Scheme. The draft scheme booklet also annexes the BDO Report, dated 13 September 2023, in relation to whether the Scheme is in the best interests of the shareholders of Essential for the purpose of s 411 of the Corporations Act. 23 Part 3 sets out a number of categories of information which must be included in an explanatory statement, some of which are only required in certain circumstances. Subject to the effect of an ASIC waiver, it appears that the draft scheme booklet contains the necessary prescribed information. ASIC has the power under reg 5.1.01 of the Regulations to waive certain requirements found in cl 8302(h) of Part 3. That clause requires a statement about whether, within the knowledge of the directors of Essential, the financial position of the company has materially changed since the date of the last balance sheet laid before the company in general meeting or sent to shareholders in accordance with s 314 or s 317 of the Corporations Act and, if so, full particulars of any change. ASIC has given a waiver in relation to this requirement and so, subject to certain conditions, Essential need only state in the Scheme Booklet whether, within the knowledge of the Essential directors, the financial position has materially changed since the date of the final statements of Essential for the half year ending 31 December 2022, rather than for the full year ended 30 June 2022. 24 As for the veracity of the information in the draft scheme booklet, Essential has provided affidavit evidence as to detailed processes that employees and external solicitors of Essential undertook to verify the relevant details to ensure they were accurate and not misleading or deceptive, and that there has been no material omission. 25 Having regard to the above matters, it would appear at a prima facie level that the scheme booklet, when dispatched, will provide adequate disclosure to Essential shareholders.
The Scheme is bona fide and properly proposed 26 The Scheme must be bona fide and properly proposed. On the evidence, it is proposed for an intelligible commercial purpose in order to facilitate the development of Pioneer Dome while allowing Essential shareholders to retain ongoing exposure to that project. The directors of Essential have recommended that its shareholders vote in favour of the Scheme and it is a type of acquisition that the courts have frequently recognised can be facilitated by a scheme of arrangement pursuant to s 411. There is no reason to think that it has been proposed otherwise than in good faith.
Notice to ASIC 27 The draft scheme booklet and the terms of the proposed arrangement were provided to ASIC on 28 August 2023, so the requirement in s 411(2)(a) for 14 days' notice appears to be satisfied. ASIC has provided a letter saying that it is of the view that it has had a reasonable opportunity to examine the terms of the Scheme and the draft scheme booklet (explanatory statement) and to make submissions to the Court in relation to those matters. ASIC did not appear at the first hearing or seek to make any submissions to the Court. One query raised by ASIC in correspondence is addressed below.
Procedural requirements 28 Relevant procedural matters are addressed at the end of these reasons.
Is there any apparent reason not to give Court approval if members approve the Scheme? 29 As Markovic J noted in Re Xplore Wealth, the court will ordinarily not convene a scheme meeting unless it is satisfied that it would be likely to approve the scheme on the hearing of a petition that is unopposed. If the arrangement seems fit for consideration by the meeting of members and is a commercial proposition likely to gain the court's approval, then leave should be given. But the court may still intervene in circumstances in which the scheme appears on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks: Re Foundation Healthcare Limited [2002] FCA 742 at [36], [44] (French J). At the stage of the first court hearing the court should be alive to any difficulties that may arise subsequently when it is called upon to decide whether the arrangement should be approved: Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504 (Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ).
The independent experts' opinion 30 As indicated above, the BDO Report concludes that the proposed Scheme is not fair but is reasonable and in the best interests of members. The assessment in the BDO Report of whether the proposed Scheme is fair notes that at each of BDO's low, preferred and high valuation points, the value of a share in the proposed merged entity, on a minority interest and diluted basis, is lower than the value of 6.18 Essential shares prior to the Scheme, valued however on a controlling and diluted basis. That is why the BDO Report concludes that the Scheme is not fair. However, Mr Andrawes and Mr Myers consider that the Scheme is reasonable on the basis of the balancing of several advantages and disadvantages, where they conclude that the former outweigh the latter. In particular, the shareholders will retain exposure to Pioneer Dome while 'also benefitting from being part of a larger, more diversified entity'. See also, recently, Re Carbon Revolution Limited [2023] FCA 1081 at [54]-[55] (Moshinsky J). 31 Re Blackgold International Holdings Limited [2017] FCA 601 involved an independent expert's report which concluded, as in this case, that the scheme consideration in question was not fair but was reasonable. Justice Siopis considered, at the first hearing, whether such a conclusion would preclude the court from making final orders at the second hearing. At [18]-[19], his Honour said: The shareholders will make of the expert report what they make. However, in my view, this is a case where the observations of French J (as he then was) in [Re Foundation Healthcare] are pertinent. At [44], French J observed: The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court: [Re NRMA]. That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. The court is not required to be satisfied either at the convening or approval stage that no better scheme could have been devised. The scheme, on the face of it, is not obviously unfair or otherwise inappropriate. If there are interests adversely and unfairly affected then the probability is that the question will arise at either or both the scheme meetings or the final approval stage. In my view, the expert report does not warrant the Court coming to the view that the scheme is so obviously unfair or unreasonable that it should not be allowed to go to a meeting. It will always be open to an objecting shareholder, or group of shareholders, to make submissions opposing the approval of the scheme at the second hearing. 32 In Re AIRR Holdings Ltd [2019] FCA 2180, in similar circumstances where an independent expert's report had also concluded that a scheme was not fair but was reasonable, Besanko J (after quoting from Re Blackgold) stated that the proposed scheme was 'not so obviously unfair or unreasonable that it should not be allowed to go to the Scheme Meeting for consideration by AIRR Members' (at [78]). 33 In Re Beadell Resources Ltd [2018] WASC 410, Vaughan J explained that fairness is 'concerned with a comparison of the scheme consideration and the true value of the shares' (at [59]). His Honour said that a scheme is reasonable if it is fair but may also be reasonable if there are other factors making it reasonable to accept an offer that is less than fair in the absence of a higher bid. In that case, Vaughan J said that the independent expert's conclusion that the proposed scheme was not fair but reasonable was not fatal to the plaintiff's application, and cited numerous examples of cases where courts have approved schemes in these circumstances (at [60]). 34 The approach generally taken is that, provided the scheme participants are properly informed as to the independent expert's conclusion, it is ultimately a matter for the members to decide whether to accept the offer: Re Beadell at [62]. As O'Bryan J explained in Re Australia and New Zealand Banking Group Ltd [2022] FCA 1378 at [37], it is not the role of the court to usurp the shareholders' decision whether or not to accept particular consideration for shares. It is quintessentially a commercial matter for members to decide for themselves. 35 In the present case, I am satisfied that the independent experts' conclusion and the reasons for it are sufficiently highlighted and explained in the Chairman's letter at the beginning of the scheme booklet, elsewhere in the scheme booklet and in the BDO Report itself. That conclusion is not a reason to refuse to convene the scheme meeting. The fairness or otherwise of the Scheme is a matter to be addressed at the second hearing. 36 Other than the matter just discussed, there is no suggestion in the evidence as it presently stands that the proposed Scheme is wholly unfair or otherwise inappropriate. It is one that sensible business people might consider is of benefit to its members and appears fit for consideration by the meeting of members. 37 However, it is necessary to consider certain specific matters that counsel for Essential appropriately drew to the Court's attention in what was essentially an ex parte hearing, which could be relevant to the exercise of discretion: Re Permanent Trustee Company Limited [2002] NSWSC 1177 at [7] (Barrett J). Essential's written and oral submissions drew the Court's attention to the following matters.
Capital raising 38 Counsel for Essential highlighted Develop's completion in July 2023 of a fully underwritten $50 million capital raising, comprising a share placement raising $30 million and an entitlement offer raising $20 million. Counsel acknowledged this may have had some dilutionary impact on shares that are to be issued to Essential shareholders but said that this has been disclosed in the scheme booklet and considered in the BDO Report and taken into account in calculating the figure of 18.4% for the Develop shares which, it is projected, Essential shareholders will come to hold if the Scheme is implemented. I am satisfied that there is sufficient disclosure and consideration of the capital raising in the scheme booklet and BDO Report and that it is not an impediment to convening the Scheme meeting.
Conditions precedent 39 The proposed Scheme provides that it cannot come into effect until the conditions precedent set out in the SID are met: Scheme cl 3.5. There are several such conditions in cl 3.1 of the SID. The conditions precedent are disclosed in the scheme booklet and seem standard and unremarkable for a transaction of this kind. On the evidence as adduced at the first hearing, there was no reason to think that any of them could not be achieved. Whether they are in fact achieved will be a matter to be established at the second hearing.
Ineligible shareholders 40 Ineligible shareholders are defined in the Scheme Booklet as ineligible foreign holders (essentially, shareholders outside Australia and New Zealand) and non-electing small shareholders. The proposed approach is for the shares of ineligible foreign holders to be issued to a nominee. Once issued, those shares will be sold and the proceeds disbursed to the foreign holders. The same approach is proposed for non-electing small shareholders (those who would, on implementation of the Scheme, be entitled to receive less than a marketable parcel of Essential shares, that is, valued at $500 or less, and who do not elect to receive Develop shares). If those shareholders elect to opt-in to the Scheme, they will receive the scheme consideration, that is, one Develop share for every 6.18 Essential shares, the same as all other Essential shareholders. These proposals for dealing with shareholders in overseas jurisdictions and shareholders with unmarketable parcels are appropriate to put to Essential shareholders.
Performance risk 41 If the Scheme is implemented in accordance with its terms, Develop will receive all the issued shares in Essential on the implementation date. However, the Court may still be concerned that shareholders may be left in the position that their shares have been transferred but there is a delay in the provision of the scheme consideration, if their only remedy is to sue Develop on the deed poll: Re APN News & Media Limited [2007] FCA 770 at [23] (Lindgren J); Re Kangaroo Resources Ltd [2018] WASC 327 at [48]-[49] (Vaughan J). 42 In its submissions, Essential has directed the Court's attention to several clauses in the SID and deed poll that provide for Develop to issue or cause to be issued the scheme consideration to each eligible Scheme shareholder. It submits that the text, structure and mechanisms of the various transaction documents require that Develop must have provided the total scheme consideration on the implementation date and no shares will transfer to it until that is done. Accordingly, it says, no beneficial title can be obtained to the Scheme shares until that transfer is initiated. Essential submits that this reflects the modern practice that has developed to address performance risk, citing Re Creso Pharma Limited [2019] WASC 472 at [75]-[76] (Hill J), Re Link Administration Holdings Limited [2022] NSWSC 650 at [36] (Black J), and Re Essential Metals Ltd [2023] FCA 240 at [52] (Banks-Smith J). Re Essential Metals concerned the application for the convening of a meeting of Essential shareholders for the approval of a different scheme earlier this year. That scheme was not approved by shareholders. 43 Essential further submits that Develop has already executed the deed poll and confirmed its obligations. Given the executed deed poll will be distributed in the Scheme Booklet, shareholders will have access to that executed copy should the need arise to sue upon it. In addition, under the Scheme, each Essential shareholder will appoint Essential as its agent and attorney to enforce the deed poll against Develop should that become necessary. 44 As such, Essential submits that the performance risk in this proposed Scheme is minimal. I agree that the risk presents no impediment to convening the Scheme meeting.
Exclusivity provisions 45 The SID, in cl 9, contains exclusivity provisions, namely 'no shop', 'no talk' and 'no due diligence' provisions. 46 Exclusivity provisions should: (a) exist for no more than a reasonable period, which is properly defined; (b) be subject to the directors' fiduciary and other duties; and (c) be given adequate prominence when disclosed in the scheme booklet. See Re Asaleo Care Limited [2021] FCA 406 at [55] (Banks-Smith J); Re APN News at [29]. 47 The exclusivity period here is from the date of the SID (3 July 2023) to 30 November 2023 and so runs for just under five months. In Re Asaleo Care, Banks-Smith J considered a seven month exclusivity period to be at the upper end of the range of acceptable periods, but within that range: see also Re ThinkSmart Limited [2022] FCA 1314 at [60]. An exclusivity period of just under five months is acceptable here. 48 Essential also submits that the exclusivity period and arrangements are capable of precise ascertainment and are publicly announced such that any rival bidder can understand how they may make any approach or a competing bid. It also says that the 'no talk' obligations do not apply to bona fide competing proposals not solicited by Essential. It submits that these limitations are ordinary and acceptable. 49 Relying on Re Vita Group Ltd [2023] FCA 400 at [24]-[26] (Jackman J), Essential has not provided evidence as to the negotiations of exclusivity provisions or calculations of break fees of the kind identified by Lindgren J in Re APN News at [55]. For the reasons given by Jackman J in Re Vita Group, I agree that such evidence is not necessary. That will, however, always be subject to the obligation of a scheme proponent appearing essentially ex parte before the Court to determine whether any aspect of the terms of or negotiations for the provisions should be brought to the attention of the Court. 50 In any event, Essential submits that the exclusivity provision has been adequately disclosed in s 10.11(d) of the scheme booklet. Essential also draws to the Court's attention to its right under cl 14.3 of the SID to terminate the transaction if, among other things, a majority of its directors recommend a competing proposal. This, it says, preserves the capacity of the directors of Essential to accept a better proposal if there is an unsolicited approach. However, cl 14.2 of the SID does not confer on Develop a symmetrical right to terminate if it is provided with any transaction inconsistent with the proposed Scheme. 51 I accept that the exclusivity provisions are standard and appropriate, with suitable carve outs to permit the directors of Essential to fulfil their fiduciary duties to the company.
Reimbursement of costs (break fee provisions) 52 Clause 10 of the SID provides for a 'target payment', that is, a break fee, of $1,530,000 to Develop by Essential if certain events occur, as set out in cl 10.2. An example is the completion of a competing proposal or a change in the recommendation of the directors of Essential. This is covered in the scheme booklet. Such provisions are common in schemes of this kind and are no obstacle to the making of orders to convene meetings under s 411(1) of the Corporations Act. 53 The break fee exceeds by a negligible amount only the threshold identified by the Takeovers Panel in its Australian Takeovers Panel Guidance Note GN7, paragraphs 48-49; as appropriate, of 1% of the total equity value of Essential (based on the bid consideration when announced), calculated at approximately $152.6 million. Essential further submits that the break fee is acceptable because: (1) it is not payable if the Scheme is not approved by Essential shareholders; (2) it is not payable if any court or regulatory authority so prohibits; (3) it is not payable if one or more Essential directors changes or withdraws its support or recommendation as a result of a requirement of a court or regulatory authority or because the independent expert opines that is not in the best interests of Essential shareholders, or because Essential is entitled to terminate the SID; (4) the amount was negotiated, after advice, at arms' length (although no evidence of the negotiations were before the Court) and represents a fair and reasonable pre-estimate of the transaction costs Develop would likely incur should the Scheme not proceed; and (5) Develop has its own obligations under the SID to pay a break fee for certain reasons, so the potential requirement for Essential to pay a break fee is not one sided. 54 In some circumstances, a break fee may be considered excessive or coercive in nature: Re Asaleo Care at [52] (Banks-Smith J); Re Rusina Mining NL [2010] FCA 517 at [51] (Barker J); and see also Re APN News at [55]. But in view of the matters just set out, this is not such a case and the 'target payment' here is unlikely to be an impediment to approval of the Scheme.
Voting intention statement 55 Mineral Resources Ltd (MinRes) has provided a voting intention statement confirming its intention to vote its shareholding in Essential in favour of the Scheme in the absence of a superior proposal, and subject to the independent expert continuing to conclude that the Scheme is in the best interests of Essential shareholders. 56 MinRes acquired 19.45% of the shares in Essential in the lead up to the meeting for the approval of the different scheme for Essential earlier this year. MinRes also holds approximately 12.78% of Develop shares. These percentages are below the 20% limit on the acquisition of relevant interests in shares in public companies imposed under Chapter 6 of the Corporations Act (Takeovers) and are unlikely to raise any concerns about oppression or coercion: cf. Re NTM Gold Ltd [2021] WASC 22 at [70]-[75] (Vaughan J). 57 In Re Tawana Resources NL [2018] FCA 1456, Banks-Smith J was satisfied at the first hearing that the shareholders who provided a voting intention statement did not comprise a separate class and that there was no suggestion of any collateral benefit to them (at [55]). In Re Vimy Resources Ltd [2022] WASC 233 (Strk J), as in this case, the shareholder who had provided a voting intention statement had made it subject to the absence of a superior proposal and to the independent expert continuing to conclude that the scheme was in the shareholders' best interests. The shareholder had also confirmed that the statement had not been secured by inducement or promise. Justice Strk accepted that, in and of itself, a public statement of voting intention is not class creating, and proceeded on the basis that there was no collateral benefit or inducement offer to the maker of the statement (at [159]). 58 Mr Spencer and Mr MacKinnon (on behalf of Develop) have each confirmed that they are not aware of any person offering any inducement or promise of benefit to MinRes for its voting intention statement. 59 I am satisfied that MinRes's voting intention statement is not class creating and is appropriate in its terms and appropriately disclosed.
How options held by Essential's directors will be dealt with 60 ASIC has raised with Essential queries arising from the manner in which options for the acquisition of shares in Essential will be dealt with if the Scheme is implemented. Those options are held by each of the directors, and in number they total 3,700,002. They are not listed. 61 Each of the directors has entered into an Option Cancellation Deed under which, if the Scheme becomes effective, the options will be cancelled. In return, the directors will receive shares in Develop equivalent to the 'Intrinsic Value' of the options. The calculations for this in the Option Cancellation Deed are complicated, but notionally they work in the following way. For each option the Intrinsic Value is, in effect, an implied price for the Essential Share that would be received if the option were exercised, less the exercise price. The implied price is calculated on the basis of the closing price of shares in Develop on the day on which trading resumed after announcement of the Scheme, which is multiplied by the ratio to be effected by the Scheme (0.1618, being 1 divided by 6.18). The exercise price of the options is deducted from that implied value, and the cash Intrinsic Value is converted to Develop shares, once again at the closing price on the day on which trading resumed after the announcement of the Scheme. 62 For illustrative purposes only, shares in Develop closed at a price of $3.45 on the day when trading resumed after announcement of the Scheme. If a director holds 500,000 options over shares in Essential with an exercise price of $0.25, then the Intrinsic Value of each of those options will be calculated at $3.45 x 0.1618, giving an implied price for Essential Shares of $0.56 (being the tranche value), less the exercise price of $0.25, leading to an Intrinsic Value of $0.31 per option. Calculated over a tranche of 500,000 options that gives an Intrinsic Value for the tranche of $155,000. On cancellation the director will receive 44,927 shares in Develop, being the $155,000 divided by the $3.45 Develop share price (actual figures may differ due to differences in rounding in this illustrative calculation). 63 As a result, the number of Develop shares that the directors will receive in return for the cancellation of their options is pegged to a fixed number, being the price at which Develop Shares traded immediately after the announcement of the Scheme. If the calculation was instead based on Develop's fluctuating share price, and the shares dropped in price between the date of the announcement of the Scheme and the date of its implementation, the directors will be comparatively worse off, because the Intrinsic Value of their options will be calculated at a lower Develop share price. So if shares in Develop drop below the price at which they closed on the day after the announcement it will, perhaps, arguably, be in the interests of the directors qua option holders to see that the Scheme goes ahead with their options notionally valued on the basis of a higher price for Develop shares. However, the directors are not locked in to this cancellation consideration until the second court date. Under the Option Cancellation Deed, they are free to exercise their options in the usual way at any time before 8.00 am on that date. 64 ASIC has asked Essential whether these arrangements give rise to a collateral benefit to directors which may mean that the directors should vote in a separate class to the rest of the shareholders. It has also suggested that the value provided to the directors under the option cancellation arrangements is different to the scheme consideration provided to shareholders, so that the option holders may be protected from any adverse movements in Develop's share price. 65 As to the first of these points, Essential submits, and I accept, that the existence of the options or any particular arrangements for their cancellation does not create a separate class. That is because voting classes are to be identified by reference to the rights they have as shareholders, not by reference to other rights they may also have in other capacities, such as because they also hold options. The fact that the directors hold options will not lead to them being treated differently in relation to the shares they also hold: see Re Excelsior Gold Limited [2018] FCA 2064 at [36] (McKerracher J); Re Firefly Resources Ltd [2021] WASC 376 at [66] (Strk J). Nor do they give rise to a collateral benefit: Re Firefly Resources at [68]. Of course, the Scheme is not going to operate on the options as such, for example by providing for their transfer to Develop; the point of the cancellation arrangements is that there will be no more options at the time at which the Scheme becomes effective, so there is no question of a separate vote by option holders in that capacity. 66 There are also performance rights on issue which, for the same reasons, are not class-creating: Re Firefly Resources at [68]. 67 As to ASIC's query as to whether the option cancellation arrangements give the directors the benefit of a 'floor price' on their options, I infer that the concern is that this might be an incentive to vote in favour of and to recommend the Scheme, given that this protection will only apply if the Scheme goes ahead: see Re Firefly Resources at [64]. And according to the BDO Report, since the announcement of the Scheme the price of Develop shares has fluctuated between a low of $2.80 and a high of $3.47. But whether the price will be lower than $3.45 when the directors come to vote is not known. Also, the directors have in any event committed to vote their shares in favour, as is common in schemes of arrangement. Further, the number of shares held by the directors is relatively small and unlikely to make any difference to the outcome of the vote. 68 In relation to the directors' recommendations, they unanimously recommended the Scheme at the time at which it was announced, without knowledge of where Develop's share price would go. And there is no basis in the evidence to suggest that they might have changed that recommendation since then but for the incentive provided by the cancellation of the options. 69 So the option cancellation arrangements are not, in my view, an impediment to convening the Scheme meeting. If the Scheme is approved, and if ASIC or any person wishes to submit at the second hearing that the arrangements materially influenced the vote or recommendation of any director, that can be considered then. 70 Counsel for Essential also appropriately brought to the Court's attention the approval by the Board of the payment of special exertion fees for each non-executive director in recognition of the increased and sustained workload and time commitment resulting from this period of heightened activity. The fees are relatively modest in light of the undoubted additional work that the Scheme has required of non-executive directors and they do not provide a reason not to convene the Scheme meeting.
Directors' recommendations 71 The Essential directors have unanimously recommended that shareholders vote in favour of the Scheme, in the absence of a superior proposal and where the independent expert continues to conclude that it is in the best interests of shareholders. Essential submits that the directors do not have any interest in the Scheme other than the interests they hold in Essential shares, options or performance rights as applicable. These interests are disclosed in the scheme booklet. Essential submits that these holdings do not make it appropriate for the directors to refrain from making a recommendation, given the full and prominent disclosure of their interests in the scheme booklet. On the basis of authorities and principles canvassed in Re ThinkSmart at [50]-[54], I accept that submission.
Financial results - intended ASX announcement prior to Scheme meeting 72 The financial results for the financial year ending 30 June 2023 are in the process of being prepared and audited for both Essential and Develop. They are set to be released on or about 26 September and 27 September respectively. Shareholders have been informed of the impending results and know to look for them on the ASX platform. 73 Essential submits that given the Scheme meeting is to be held on 18 October 2023, there is ample time for the Mr Andrawes and Mr Myers to change their opinion, if the results motivate them to do so. However, if the experts' opinion is not changed then Essential intends to make an announcement to this effect. 74 Counsel for Essential confirmed that if the independent experts' conclusion does alter as a result of the release of financial results later this month, then it will be required to seek the Court's approval afresh and there would need to be supplementary disclosure. 75 I accept that all of these arrangements to deal with the impending announcement of the financial results are appropriate.
Shareholder communications 76 Counsel for Essential noted that the matter of court supervision of shareholder communications in the context of schemes of arrangement is one of 'ongoing development' in the case law. That may be so, especially in relation to telephone communications: see the authorities canvassed in Re Essential Metals at [88]-[100]; cf. Re Vita Group at [27]-[34]. 77 However, Mr Odorisio states in his second affidavit that Essential is not instructing any shareholder engagement firm to deal with inbound or outbound calls and there will be no outbound calls. Its share registry, Automic, will address inbound calls only on administrative matters. If any shareholder asks a question going to the substance of the Scheme, they will simply be told to read the scheme booklet. If any communications with shareholders go beyond those parameters or give rise to anything that should be brought to the Court's attention, Essential will do so at the second hearing. 78 I accept that these arrangements are appropriate and that, on any view, it is not necessary in these circumstances for the Court to approve the precise terms in which Automic will communicate with shareholders in this way. 79 Whether or not it was required to do so, Essential has provided evidence of other communications it has had or intends to have with shareholders, including market announcements and covering letters and emails. I have reviewed the terms of these and accept that they are appropriate.
Procedural matters - Scheme meeting and notice of second court hearing 80 Essential intends to conduct the Scheme meeting in person. It sought orders pursuant to s 1319 of the Corporations Act for the dispatch of the scheme booklet and associated materials via email or hard copy for those who have elected to receive communications in those ways and in all other cases by a hard copy letter with relevant forms and links to the scheme booklet. It also sought, and I made, an order that the evidence of the fact of dispatch in that way can be adduced at the second court hearing on information and belief. 81 As required by r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth), Essential filed affidavits nominating a chairperson and alternate chairperson of the proposed Scheme meeting, which were also affidavits of those persons (Mr Odorisio and Mr Fitzgerald) disclosing their interests in and relationships with Essential and other relevant bodies as required by the rule. 82 Essential proposes to advertise the second court hearing in The Australian newspaper as required by r 3.4 of the Corporations Rules, so there was no need to consider whether it was appropriate to dispense with that requirement: see Re Vita Group at [23]; Re Tesserent Limited [2023] FCA 969 at [14]-[18] (Perram J). I certify that the preceding eighty-two (82) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackson.
Australian Securities Commission
Marlborough Gold Mines Limited
[2018] WASC 410
[2019] WASC 472
[2021] WASC 376
[2018] WASC 327
[2021] WASC 22
[2022] WASC 233
[2018] WASC 308
(1993) 177 CLR 485
(2010) 183 FCR 358