Australian Securities Commission v Marlborough Gold Mines Ltd

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 173 of 2012

IN THE MATTER OF LITTLE WORLD BEVERAGES LIMITED (ACN 081 128 225) BETWEEN: LITTLE WORLD BEVERAGES LIMITED (ACN 081 128 225)

JUDGE: MCKERRACHER J DATE: 26 SEPTEMBER 2012 PLACE: PERTH

INTRODUCTION 1 By originating process filed on 27 July 2012, the plaintiff, Little World Beverages Limited (LWB) applied for an order under s 411(1) of the Corporations Act 2001 (Cth) (CA) that it convene a meeting of its members (Scheme Meeting) to consider a proposed scheme of arrangement (the Scheme) which, when implemented, would result in Anglo-Gaelic Investments Pty Ltd (AGI), a wholly-owned subsidiary of Lion Pty Ltd (Lion), acquiring all shares in LWB other than those the Lion Group (being AGI and its related bodies corporate) already held. 2 On 13 August 2012 I made orders (the orders) in favour of LWB in terms essentially as it sought. On 16 August 2012 they were varied as follows: 1. Order 1(e) of the Orders of the Honourable Justice McKerracher dated 13 August 2012 be varied by excising the words "5:00pm WST on Friday, 28 September 2012" and replacing them with the words "4:30pm WST on 15 September 2012". The orders were unopposed. These are short reasons for making those orders.

OUTLINE OF THE PROPOSED SCHEME 3 The Scheme was proposed between LWB and its ordinary shareholders other than AGI and its related bodies corporate (Scheme Participants). LWB is a registered public company and listed on the Australian Securities Exchange Limited (ASX). It is a craft brewing company. 4 At the date of making the orders, there were on issue 68,241,176 ordinary shares and 146,479 'achievement rights'. These were rights to ordinary shares granted to eligible LWB employees under an 'achievement rights plan'. 5 There was affidavit material going to the usual statutory requirements under s 411 CA as well as the detailed specifics of the proposed scheme. The facts below were set out in the affidavits and LWB's supporting submissions, both written and oral. 6 The LWB Board of Directors intended to resolve that the achievement rights would vest in their holders on the Effective Date (being the date on which an office copy of the Court order approving the Scheme is lodged with ASIC). As such, they would then be converted to LWB Shares by the Scheme Record Date (being the date seven business days after the Effective Date). At the date of making the orders, the Lion Group had a relevant interest, as defined in s 608 and s 609 CA, in 23,650,123 fully-paid ordinary shares on issue. It therefore had voting power, as defined in s 610 CA, in approximately 34.66% of the ordinary shares on issue. The effect of the proposed Scheme was that the Scheme Participants would transfer all of their shares to AGI. This would increase Lion's 34.66% holding in LWB to 100%. On the Scheme becoming effective, LWB would de-list from the ASX so as to become a wholly-owned subsidiary of AGI. 7 In return for this benefit, the consideration which the Scheme Participants were to receive was $5.30 for every LWB share held on the record date (Total Payment). The Total Payment was expected to comprise: (a) a cash payment of $5.10 for each ordinary share held in LWB; and (b) subject to LWB receiving a favourable Class Ruling from the Australian Taxation Office (ATO), a fully franked special dividend of $0.20 for each ordinary share held in LWB. 8 (If LWB did not receive a favourable Class Ruling from the ATO (or a draft of it which was reasonably satisfactory to LWB and AGI) by on or about the date of the Scheme Meeting, the Total Payment was to be a cash payment equal to the fully franked dividend at $5.30 per share held by Scheme Participants). 9 On 18 June 2012, LWB announced to the ASX that it had entered into a Scheme Implementation Agreement with AGI (Implementation Agreement), by which LWB and AGI agreed to implement the Scheme (cl 2.1) and to procure the various conditions precedent (cl 3.4), including various regulatory approvals, approval by the Scheme Participants and Court approval.

POWER TO MAKE ORDERS UNDER SECTION 411(1) OF THE ACT 10 Section 411(1) and s 411(2) CA relevantly provide as follows: 411 Administration of compromises etc. (1) Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings. … (2) The Court must not make an order pursuant to an application under subsection (1) or (1A) unless: (a) 14 days notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and (b) the Court is satisfied that ASIC has had a reasonable opportunity: (i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement. 11 It follows, as LWB submits, that the Court has a discretion which is enlivened where: (a) a compromise or arrangement is proposed between a Pt 5.1 body and its members or any part of them (s 411(1)); (b) application for the order is made in a summary way by the body or a creditor or member of the body (s 411(1)); and (c) 14 days notice of the hearing of the application has been given to the Australian Securities and Investments Commission (ASIC), or such less period of notice as the Court or ASIC permits (s 411(2)(a)); and (d) the Court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed compromise or arrangement to which the application relates and a draft of the explanatory statement relating to the proposed compromise or arrangement and to make submissions to the Court in relation thereto (s 411(2)(b). 12 Those matters were all established on the evidence. Specifically: (a) from the company extract, LWB is a Pt 5.1 body as defined in s 9 CA; (b) a scheme designed to effect the acquisition of shares of one company by another is a 'compromise or arrangement' within the meaning of s 411(1) CA; (c) LWB filed the originating process seeking, among other things, an order pursuant to s 411(1) CA; (d) the originating process was served on ASIC on 30 July 2012. More than 14 days notice of the hearing of this application was given to ASIC; (e) a draft of the Scheme Booklet was provided to ASIC on 25 July 2012, 19 days before the hearing of the application; and (f) LWB received written confirmation from ASIC, dated 10 August 2012, that it did not propose to appear at the hearing to make submissions or to intervene or oppose the Scheme at the hearing of this application.

THE PRINCIPLES 13 The application to the Court to convene a meeting is the first of the 'three stages involved in the promulgation and giving effect to a scheme of arrangement, such that the scheme will be binding on the parties to it': see Re Central Pacific Minerals NL [2002] FCA 239 (at [6]) per Emmett J. The first hearing is interlocutory in nature and is preliminary to the final approval of the Court in relation to a scheme at the second hearing. At the first hearing, the Court exercises a supervisory jurisdiction to review the scheme and raise any issues with the plaintiff: Central Pacific Minerals (at [13]). The standard of review amounts to a consideration of whether it is reasonable to suppose that sensible business people might consider that the arrangement proposed is of benefit to members: Re Sonodyne International Ltd (1994) 15 ACSR 494 (at 499) per Hayne J. As I noted in Re Aldridge Uranium Ltd [2010] FCA 1263 (at [24] to [31]): The word 'arrangement' is of wide import and covers the proposed 'acquisition' and 'implementation' arrangements (s 9 CA; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 (at 501)). In Re Hostworks Group Ltd (2008) 26 ACLC 137 (at [26]), Mansfield J observed that 'an arrangement may extend to any subject matter which is something which a company is able to agree with its members, and is likened to a contract between a company and its members'. … There is a clear distinction between the Court's role upon an application to convene meetings and its role upon an application for approval of the scheme after those meetings. If the arrangement is one that seems fit for consideration by the meeting of members and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then leave will ordinarily be given (Re Foundation Healthcare Ltd (2002) 42 ACSR 252; Re ACM Gold Ltd (1992) 34 FCR 530 per O'Loughlin J). The Court is not required to analyse the effects of the scheme upon individual members (Re Foundation Healthcare Ltd (at [36]) per French J, as his Honour then was). In determining whether orders should be made convening a scheme meeting, a threshold requirement is the Court's satisfaction that the explanatory statement contains all the prescribed information in the Act and Regulations. A scheme of arrangement typically has elements that are compulsory for members, even those who may not vote in favour of the scheme (see Re Victorian Grain Services Ltd (2000) 35 ACSR 198; Re Investa Properties Ltd (2007) 25 ACLC 1,186).

DEED POLL 14 AGI's obligation to Scheme Participants in respect of the Scheme was secured by its entry into a deed poll. By cl 5.4 of the Implementation Agreement, the Deed Poll was to be executed by AGI prior to the Scheme Booklet being sent to Scheme Participants, under which AGI, subject to the Scheme becoming effective, agreed to deposit an amount equal to the aggregate Scheme consideration (being $237,108,920) payable to all Scheme Participants in a trust account operated by LWB as trustee for the Scheme Participants.

INDEPENDENT DIRECTORS OF LWB 15 The independent directors of LWB (i.e., the directors not associated with the Lion Group) unanimously recommended that Scheme Participants vote in favour of the Scheme, in the absence of a superior proposal.

INDEPENDENT EXPERT REPORT 16 Ernst & Young Transaction Advisory Services Limited (Ernst & Young), the independent expert appointed by LWB to assess the Scheme, prepared a report that was included in the Scheme Booklet (Independent Expert Report). 17 Ernst & Young concluded that the Scheme was in the best interests of Scheme Participants in the absence of a superior proposal, and that the Scheme was fair. In part, the reasoning behind this was that Ernst & Young assessed the full underlying value of LWB at between $4.32 and $5.05 per share, with a midpoint value of $4.68 per LWB share. The Total Payment of $5.30 per LWB share therefore implied a premium to the assessed fair value of a LWB Share of between 4.9% and 22.7%, with a midpoint of 13.1%.

EXCLUSIVITY PROVISION 18 Clause 9 of the Implementation Agreement is an exclusivity provision which includes 'no-shop', 'no-talk' and 'due diligence information' sub-clauses. It provides as follows: 9 Exclusivity 9.1 No existing discussions LWB represents and warrants that, other than the discussions with Lion in respect of the Scheme, it is not currently in negotiations or discussions in respect of any Competing Transaction with any person. 9.2 No-shop During the Exclusivity Period, LWB must ensure that neither it nor any of its Related Bodies Corporate or Representatives directly or indirectly: (a) solicits, invites, encourages or initiates any enquiries, negotiations or discussions; or (b) communicates any intention to do any of these things, with a view to obtaining any offer, proposal or expression of interest from any person in relation to, or which may be reasonably expected to lead to, a Competing Transaction. Nothing in this clause 9.2 prevents the LWB from continuing to make normal presentations to, and to respond to enquiries from, brokers, portfolio investors and analysts in the ordinary course in relation to the Scheme or its business generally. 9.3 No-talk Subject to clause 9.6, during the Exclusivity Period, LWB must ensure that neither it nor any of its Related Bodies Corporate or Representatives: (a) negotiates or enters into; or (b) participates in negotiations or discussions with any other person regarding, a Competing Transaction, even if that person's Competing Transaction was not directly or indirectly solicited, invited, encouraged or initiated by LWB or any of its Related Bodies Corporate or Representatives or the person has publicly announced the Competing Transaction. 9.4 Due Diligence information During the Exclusivity Period, LWB must ensure that neither it nor its Representatives in relation to a Competing Transaction: (a) solicits, invites, initiates, encourages or, subject to clause 9.6, facilitates any other party other than Lion to undertake due diligence investigations on any member of the LWB Group or their businesses or operations, or (b) subject to clause 9.6, makes available to any other person or permits any other person to receive (in the course of due diligence investigations or otherwise) any non-public information relating to any member of the LWB Group or their businesses or operations. 9.5 Notice of unsolicited approach During the Exclusivity Period, LWB must promptly inform Lion if it or any of its Related Bodies Corporate or Representatives: (a) receives any unsolicited approach with respect to any Competing Transaction and subject to clause 9.6 must disclose to Lion all material details of the Competing Transaction, including details of the proposed bidder or acquirer; (b) receives any request for information relating to LWB or any of its Related Bodies Corporate or any of their businesses or operations or any request for access to the books or records of LWB or any of its Related Bodies Corporate, which LWB has reasonable grounds to suspect may relate to a current or future Competing Transaction; and (c) provides any information relating to LWB or any of its Related Bodies Corporate or any of their businesses or operations to any person in connection with or for the purposes of a current or future Competing Transaction. 9.6 Exceptions Clause 9.3 and, where relevant, clauses 9.4 and 9.5(a) do not apply to the extent that they restrict LWB or the LWB Board from taking or refusing to take any action with respect to a bona fide Competing Transaction (which was not solicited, invited, facilitated, encouraged or initiated by LWB in contravention of clause 9.2) provided that the LWB Board has determined, in good faith and acting reasonably that: (a) after consultation with its financial advisors, such a bona fide Competing Transaction could reasonably be considered to become a Superior Proposal; and (b) after receiving written legal advice from its external advisers, that failing to respond to such a bona fide Competing Transaction would be likely to constitute a breach of the LWB Board's fiduciary or statutory obligations. 9.7 Legal advice LWB acknowledges that it has received legal advice on this agreement and the operation of this clause 9. 19 In respect of such provisions, Santow J in Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 (at [9]) held that exclusivity clauses must satisfy the following concerns: (a) any exclusivity period should be for no more than a reasonable period capable of precise ascertainment and must be properly defined; (b) an exclusivity clause directed either at dealing with actively soliciting an alternative merger proposal or an unsolicited alternative merger proposal should be framed so that it is subject to the overriding obligation not to breach the directors' fiduciary duties or be otherwise unlawful; and (c) the provision must be clearly disclosed in the explanatory memorandum sent to shareholders. 20 LWB contended, and I accepted, that in applying these principles to the proposed Scheme: (a) The exclusivity clause is capable of precise ascertainment. It is restricted to he 'Exclusivity Period' which is defined as the period from the date of the Implementation Agreement (i.e., 17 June 2012) until its termination or the 'End Date', being the date that is six months from the Implementation Agreement (i.e., 17 December 2012) (cll 9.2, 9.3 and 9.4). This is a reasonable period, being a similar period to the exclusivity periods in other schemes of arrangements: see Re Talent2 International Ltd [2012] FCA 771 (at [41]) and the cases cited therein where Yates J said: First, the SID contains "no talk" and "no shop" provisions. The exclusivity period in relation to these provisions is seven months from 25 May 2012 (if the SID is not terminated earlier) or such other date that is agreed in writing. I am satisfied that this period is comparable to the exclusivity period in respect of the same kinds of provisions in other schemes of arrangement: Sino Gold at [20] and [23]-[25]; Straits Resources Limited, in the matter of Straits Resources Limited [2010] FCA 1467 at [22]; In the matter of Axa Asia Pacific Holdings Limited [2011] VSC 4 at [30]; In the matter of Strategic Energy Resources Limited [2011] VSC 645 at [15]; Tower Australia Group Limited, in the matter of Tower Australia Group Limited [2011] FCA 224 at [22]-[23]. I note that the "no talk" provision is subject to an overriding obligation not to breach the fiduciary or statutory duties of the directors. I am satisfied that the "no talk" and "no shop" provisions are clearly disclosed in the scheme booklet. I am satisfied that the requirements referred to by Santow J in Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9] have been met. (b) The exclusivity clause is subject to the overriding obligation not to breach the directors' fiduciary or statutory obligations (cl 9.6); as to which see Re United Minerals Corporation NL [2010] FCA 7 (at [13]) and Re Peak Coal Ltd [2010] FCA 6 (at [6]) where I have previously recognized such clauses. (c) The exclusivity clause is clearly disclosed in the Scheme Booklet.

SECTION 411(17) OF THE ACT 21 Section 411(17) CA provides that the Court must not approve a compromise or arrangement unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Ch 6 CA; or (b) there is produced to the Court a written statement by ASIC that it has no objection to the compromise or arrangement. 22 It is settled that the appropriate occasion on which the Court is required to address the question posed by s 411(17) CA is on an application to approve the scheme at the second hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 (at [23]-[27]) per Barrett J. It is not therefore incumbent upon the Court, at the convening stage, to canvass the question of avoidance of the operation of Ch 6 CA. Notwithstanding this, there was no suggestion that the Scheme was proposed so as to avoid the takeover provisions CA. Rather, LWB contended that a scheme of arrangement provides greater structural flexibility. The Scheme allows LWB to pay a special dividend (and provide franking credits to Scheme Participants) as part of a relatively certain timetable, and further allows LWB flexibility in deciding how to deal with the achievement rights on issue. 23 As to the comparative requirement under Ch 6, I have previously noted that the Court does not have a preference for Ch 6 takeovers over s 411 schemes. O'Loughlin J in Re ACM Gold Ltd stated (at 542-543) that: The subsection [s 411(17)] requires the court to have regard to that which has been proposed - not to that which might have been proposed. If there are two ways of achieving the same object and one of them entails the use of Ch 6, the adoption of the second does not mean, without more, that the second was proposed for the purpose of enabling some person to avoid the operation of any of the provisions of Ch 6. … If [the] transaction carries the hallmarks of a commercial enterprise - if there is no issue present that points to a contrivance or to an element that is unreal or unnecessary - one is entitled to assess the transaction at face value. 24 Similar sentiments were expressed by Murray J in Re Stockbridge Ltd (1993) 9 ACSR 637 (at 653). As explained by O'Loughlin J in Re ACM Ltd, and applied by Murray J in Re Stockbridge Ltd, in considering s 411(17)(a), the Court has regard to the purpose and not the effect of the Scheme. The purpose of the Scheme is to effect an orderly acquisition of all of the issued capital of LWB by AGI in return for the Scheme Consideration.

DEEMED WARRANTY 25 By cl 8.2(b) of the Scheme it is provided: 8.2 Scheme Participants' agreements and warranties … (b) Each Scheme Participant is taken to have warranted to LWB and Lion, and appointed and authorised LWB as its attorney and agent to warrant to Lion, that all their LWB Shares (including any rights and entitlements attaching to those shares other than the right to receive the Special Dividend, to the extent that the Special Dividend is determined by the LWB Board) which are transferred under this Scheme will, at the date of transfer, be fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests (including any 'security interests' within the meaning of section 12 of the Personal Property Securities Act 2009 (Cth)) and interest of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind, and that they have full power and capacity to transfer their LWB Shares to Lion together with any rights attaching to those shares (other than the right to receive the Special Dividend, to the extent that the Special Dividend is determined by the LWB Board). LWB undertakes that it will provide such warranty to Lion as agent and attorney of each Scheme Participant. 26 The terms of this deemed warranty are in substantially similar terms to those in Re APN News & Media Ltd (2007) 62 ACSR 400 and Re ABB Grain Ltd [2010] FCA 1309. 27 In Re APN News & Media Ltd (at [57]-[63]), Lindgren J stated that a deemed warranty must be no more than a device directed to ensuring that a scheme participant whose shares are subject to an encumbrance is not unfairly disadvantaged. Secondly, the attention of scheme participants must be drawn to the existence of the deemed warranty in the scheme. This approach was subsequently approved in Re ABB Grain Ltd (at [34]-[39]) and in Re oOh!Media Group Ltd [2012] FCA 26 (at [27]). 28 I was satisfied that appropriate prominence was given to the deemed warranty in the Scheme Booklet.

PRESCRIBED DISCLOSURE 29 A table setting out the prescribed disclosure requirements of Pt 3 of Sch 8 of the Corporations Regulations 2001 (Cth) and the relevant parts of the Scheme Booklet is in evidence.

CONCLUSION 30 In the circumstances I was satisfied at the first hearing that it was proper and appropriate to make orders. Therefore orders were made in the terms as sought on 13 August 2012. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

Associate: Dated: 26 September 2012 ANNEXURE A NOTICE OF HEARING TO APPROVE ARRANGEMENT TO ALL the creditors and members of Little World Beverages Limited ACN 081 128 225 TAKE NOTICE that at 10:15am on 19 September 2012 the Federal Court of Australia at the Peter Durack Commonwealth Law Courts Building, 1 Victoria Avenue, Perth will hear an application by Little World Beverages Limited seeking the approval of a compromise or arrangement between the above-named company and its members (other than Anglo-Gaelic Investments Pty Ltd or any of its related bodies corporate and persons holding shares in Little World Beverages Limited for, or on behalf of, Anglo-Gaelic Investments Pty Ltd or any of its related bodies corporate to the extent of that holding) if agreed to by resolution to be considered, and, if thought fit, passed by the meeting of the members of the company to be held at the Little Creatures Loft, 42 Mews Road, Fremantle on 17 September 2012 at 4:30pm. If you wish to oppose the approval of the compromise or arrangement, you must file and serve on the plaintiff a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on the plaintiff at its address for service at least 1 day before the date fixed for the hearing of the application. The address for service on the plaintiff is care of Freehills, Level 36 QV1 Building, 250 St Georges Terrace, Perth, Western Australia. This notice is given by Freehills on behalf of Little World Beverages Limited.