Australian Securities Commission v Marlborough Gold Mines Ltd [2022] FCA 1292 | Case summary

Australian Securities Commission v Marlborough Gold Mines Ltd [2022] FCA 1292 | Case summary | Zoe

Pursuant to ss 411(1) and 1319 of the Act, the Scheme Meeting be convened by sending the following documents on or before Monday, 31 October 2022 to each Shareholder whose name is recorded in the Plaintiff's register of members as being a Shareholder as at 7.00pm (Brisbane time) on 27 October 2022: (a) those Shareholders who have provided an email address to the Plaintiff for shareholder communications (Email Shareholders) are to be sent an email broadcast substantially in the form of Annexure A to these orders (Email Broadcast) providing electronic links by email to their nominated email address of the following: (i) the Scheme Booklet (substantially in the form of Exhibit 2 tendered on 28 October 2022); and (ii) a proxy form substantially in the form appearing in annexure DEA-2 to the Affidavit of Deborah Elsie Austin sworn on 26 October 2022 (Proxy Form); (b) those Shareholders who have not provided an email address to the Plaintiff for shareholder communications, who have a postal address shown on the register of members of the Plaintiff as being within Australia are to be sent, by prepaid ordinary post to their postal address, a letter substantially in the form of Annexure B to these orders (Letter Notification) providing instructions on how to access the Scheme Booklet electronically, a Proxy Form and a reply-paid envelope; (c) those Shareholders who have not provided an email address to the Plaintiff for shareholder communications and whose postal address is shown on the register of members of the Plaintiff as being outside Australia are to be sent the Letter Notification, a Proxy Form and an unstamped envelope return addressed to the Plaintiff's company registry by prepaid airmail to their postal address; and (d) if the Plaintiff, through its share registry services provider, receives a notification that the Email Broadcast was unable to be delivered to the nominated email address of any of the Shareholders (Undelivered Email Recipients), the following are to be sent to the Undelivered Email Recipients' respective postal addresses: (i) the Letter Notification, the Proxy Form and a reply-paid envelope are to be sent by pre-paid ordinary post (in the case of Shareholders within Australia); or (ii) the Letter Notification, the Proxy Form and an unstamped envelope return addressed to the Plaintiff's company registry by pre-paid airmail (in the case of Shareholders outside Australia);

[15]

Top-hatting arrangement 6 As mentioned above, the Scheme has been developed for the purpose of redomiciling the CTR Group to Delaware. Schedule 2 to these reasons is a diagram depicting the structure of the CTR Group post implementation of the proposed scheme. 7 The reasons advanced by CTR for seeking to redomicile the CTR Group include: (1) to align CTR Group's corporate structure with its business operations, given the majority of its assets, operational headquarters, management, staff, strategic partners and customer base are situated in North America; (2) to better position CTR Group in a more appropriate capital market for continuing international growth, allowing existing CTR shareholders to benefit to the maximum extent possible from that growth and to be in a position to more clearly evaluate the performance and future prospects of CTR Group; (3) in the event of an initial public offering (IPO) on a US securities exchange, to potentially increase demand for CTR Group's shares due to the possible inclusion of CTR Group in important US stock market indices such as the Russell 2000, Nasdaq Composite and the S&P Total Market; (4) to provide access to a broader US investor pool that previously could not, or were unlikely to, invest in non-US securities; and (5) to draw upon a securities market which is familiar with, and has a stronger interest in, early to mid-stage lithium exploration and development companies, which may lead to a stronger valuation of CTR Group over time and improve liquidity in CTR share trading. 8 The evidence of Mr Colwell, CTR Chief Executive Officer and Executive Director, demonstrates that: (1) the majority of the CTR Group's assets, headquarters, management, staff, strategic partners and customer base are situated in North America; (2) a majority of the CTR's employees reside in the USA; (3) the CTR's key assets are situated in California; and (4) the CTR's key off-takers of lithium (respectively, Stellantis N.V. and General Motors Company) have substantial operations in the USA. 9 In their Independent Expert Report, the independent experts, Mr Adam Myers and Mr Sherif Andrawes, of BDO Corporate Finance (WA) Pty Ltd conclude that to redomicile the CTR Group to the USA is in the best interest of shareholders for the reasons substantially the same as those advanced by CTR. First, that implementation of the Scheme could potentially allow CTR access to new funds. Secondly, that political and economic conditions in the USA are favourable for lithium and renewable energy production. Thirdly, that redomiciling in the USA could increase the profile of CTR, better align its corporate structure with CTR's key stakeholders and operating model, and make it generally easier to conduct business in the USA. Fourthly, the prospect of an IPO on a US securities exchange may result in a more favourable liquidation event for shareholders as compared to an Australian securities exchange. Against this, the experts weighed the implementations costs, potential exposure to increased litigation risk, changes to shareholder protections in Delaware as compared to under Australian law, and that any ineligible foreign holders would be cashed out and not receive shares in CTR US HoldCo as factors weighing against the Scheme. However, the experts concluded that the implementation of the Scheme is, on balance, in the interests of shareholders and that the advantages of the Scheme outweigh its disadvantages.

[16]

Scrip consideration 10 The Scheme is a scrip for scrip swap at an exchange rate of 1:1. Save for Ineligible Foreign Holders, CTR shareholders will be issued one common stock in CTR US HoldCo for each ordinary share they hold in CTR in consideration for the transfer of their ordinary shares to CTR US HoldCo. Ineligible Foreign Holders will receive monetary consideration for the transfer of their ordinary shares to CTR US HoldCo and not scrip consideration. 11 The reason for the different treatment of Ineligible Foreign Holders is that legal restrictions in some foreign countries may make it impractical or unlawful for CTR US HoldCo shares to be issued to the CTR shareholders in those countries. Scheme Participants whose address is shown in the CTR share register on the relevant date as being in a jurisdiction outside Australia, the United States, New Zealand, Switzerland and the United Kingdom, or from within a jurisdiction which CTR US HoldCo has determined, acting reasonably, is a place that it is unlawful or unduly onerous to issue the CTR US HoldCo Shares, or who are otherwise determined to be an Ineligible Foreign Holder, will be regarded as Ineligible Foreign Holders for the purposes of the Scheme, unless CTR US HoldCo determines that it is lawful and not duly onerous or impracticable to issue CTR US HoldCo Shares in that jurisdiction if the Scheme becomes effective. 12 The SID provides in relation to Ineligible Foreign Holders that CTR US HoldCo will: (1) issue shares that Ineligible Foreign Holders would otherwise be entitled to (but for their status as Ineligible Foreign Holders) to a Sale Agent appointed by CTR US HoldCo; (2) instruct the Sale Agent to act on behalf of all Ineligible Foreign Holders, and to sell all CTR US HoldCo shares issued to the Sale Agent as soon as reasonably practicable after the implementation date of the Scheme at such price and on such terms as the Sale Agent determines in good faith; and (3) remit to the Ineligible Foreign Holders the proceeds from the sale of the Sale Agent's CTR US HoldCo shares in Australian dollars pari passu on the basis of each Ineligible Foreign Holders' proportionate entitlement. 13 In the present case, there may not be any Ineligible Foreign Holders in any event. As at close of business on 24 October 2022, of the 117 shareholders noted on CTR's share registry as being outside Australia, they were all noted in the share registry to be situated in the USA, New Zealand, Switzerland or the United Kingdom and accordingly, they are not Ineligible Foreign Holders. The Scheme Booklet includes a statement that as at the date of the Scheme Booklet, there are no Ineligible Foreign Holders.

[21]

APPLICABLE PRINCIPLES 24 Part 5.1 of the Act provides a procedure whereby an arrangement between a company and its members can be made binding on all members. Section 411 is the principal provision. The procedure involves three main steps: (1) an application to the Court for an order to convene a scheme meeting; (2) if such an order is made, the convening of a meeting at which a resolution to agree to the scheme is considered, and perhaps passed; and (3) if the resolution is passed by the necessary majorities, an application to the Court for approval of the scheme. 25 This application concerns the first stage, being an application to the Court for an order to convene the Scheme meeting. 26 Courts have commonly applied the approach described by Street J (with whom Hutley and Samuels JJA agreed) in FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 in deciding whether to convene a scheme meeting (including in respect of a scheme between a company and its members): …The approach taken upon a summons is that the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the creditors' meeting the court would be likely to approve it on the hearing of a petition which is unopposed… 27 Section 411 of the Act does not state the criteria that must be satisfied before a scheme meeting is ordered, but it is clear that, if certain statutory pre-requisites are met, s 411(1) confers a discretion on the court in relation to whether the scheme meeting should be ordered: see, for example, Re Healthscope Limited [2019] FCA 542; 139 ACSR 608 at [43]; Re Amcor Limited [2019] FCA 346 at [45]; Re DuluxGroup Limited [2019] FCA 961; 136 ACSR 546 at [15]; Re Legend Corporation Limited [2019] FCA 1249 at [17]; Re Wellcom Group Limited [2019] FCA 1655 at [24]; Re Verdant Minerals Limited [2019] FCA 556 at [28], citing Re CSR Limited [2010] FCAFC 34; 183 FCR 358 at [8]; and Re Sienna Cancer Diagnostics Limited [2020] FCA 899 at [43]. 28 The principles which apply at this first stage of the scheme of arrangement procedure are well-known and have recently been summarised by Beach J in a number of decisions including Re PM Capital Asian Opportunities Fund Limited [2021] FCA 1380 at [39] to [40]: 39 …my function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, but with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is, the proposed scheme appears now to be on its face "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further" (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J). 40 Clearly, my role is not to usurp the shareholders' decision whether to agree to a scheme by attempting to intrude my own commercial judgment. The question whether to accept particular consideration for shares is a commercial matter for the members to assess, and they ought not to be prevented from having the opportunity to do so provided that I am satisfied that they are acting on sufficient information and with time to consider what they are voting on. If the arrangement is one that seems fit for consideration by the meeting of members and is a commercial proposition likely to gain my approval if passed by the requisite majorities, then orders should be made to convene the meeting. 29 The relevant discretionary considerations are primarily whether the scheme is fit for consideration by the members (such that if agreed to at the scheme meeting, it would be likely to be approved if unopposed at the second court hearing) and whether the members are properly informed of the nature of the scheme: Re PM Capital at [43]. 30 In considering whether the Scheme is fit for consideration by shareholders, it is not necessary for the Court to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd [2002] FCA 742; 42 ACSR 252 at [44]. By granting leave, the Court does not give its imprimatur to the proposed scheme: Re Capilano Honey Ltd [2018] FCA 1568; 131 ACSR 9 at [33].

[22]

Statutory conditions 31 I turn first to consider whether CTR has met the statutory conditions necessary to enliven the discretion under s 411(1) of the Act. 32 On the evidence before me, I am satisfied that each of the necessary statutory conditions has been met by CTR. 33 First, the proposed Scheme is an arrangement in respect of which the Court may order a meeting of the members pursuant to s 411(1) of the Act. I am satisfied that the Scheme is an arrangement - it is well accepted that the use of a members' scheme of arrangement to effect redomiciliation is within the scope of an 'arrangement' within the meaning of s 411 of the Act: Re Avita Medical Limited, in the matter of Avita Medical Limited (No 2) [2020] FCA 674 at [7]. CTR is a company registered under the Act and is within the definition of a Part 5.1 body. The Scheme participants are members of CTR. Details of CTR's corporate constitution, and its issued share capital, number of shareholders and location of shareholders are in evidence. In accordance with r 2.4(2) of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules), CTR has in its evidence included an ASIC company extract recording search results carried out no earlier than 7 days before the originating process was filed. 34 Secondly, ASIC has had a reasonable opportunity to examine the terms of the Scheme and the Scheme Booklet and make submissions to the Court in relation to those matters as required by s 411(2)(b) of the Act. A draft of the Scheme Booklet was lodged with ASIC on 30 September 2022. On 13 October 2022, ASIC advised that it had no further comments in relation to the Scheme Booklet, but requested that CTR provide further information in relation to material to be relied upon at the first court hearing before it would be in a position to consider issuing a preliminary letter as to its intention under s 411(17)(b) of the Act. At the first hearing, counsel for CTR tendered a letter from ASIC dated 27 October 2022 in which ASIC confirmed that it does not propose to appear at the first court hearing. On the basis of the evidence before me, I am satisfied that ss 411(2)(a) and (b) of the Act have been met. 35 Thirdly, the Scheme Booklet provides disclosure in accordance with s 412(1)(a)(i) of the Act and contains the prescribed information in s 412(1)(a)(ii) of the Act, regulation 5.1.01 and clauses 8301 to 8310 of Schedule 8 to the Corporations Regulations 2001 (Cth). I am satisfied that the Scheme Booklet is presented in a form that is intelligible to reasonable shareholders to whom it is directed, and contains information that is realistically useful relative to the complexity of the proposal: Re HIH Casualty and General Insurance Ltd [2006] NSWSC 485; 200 FLR 243 at [81] to[83]. 36 The Scheme Booklet explains the effect of, relevantly, the arrangement, and in particular states the material interests of the directors, and the effect on those interests of the Scheme so far as it is different from the effect on the like interests of other persons. The effect of the Scheme on CTR shareholders is addressed in section 2.6, and the interest of CTR's directors is addressed in section 13.1 of the Scheme Booklet. 37 The process by which the statements in the Scheme Booklet have been verified by CTR's due diligence committee indicates that reasonable steps have been taken to confirm that the statements in the Scheme Booklet are accurate, not misleading or deceptive, and that material information has not been omitted, see regulation 5.1.01 and Schedule 8 of the Regulations. The Scheme Booklet includes information relevant to deciding whether or not to agree to, relevantly, the arrangement in sections 3, 4, 7, 10, 11, and Annexure A (being the Independent Expert Report). 38 It is necessary for the Scheme Booklet to be registered by ASIC before being sent to CTR shareholders: s 412(6) of the Act. Before registering the Scheme Booklet, ASIC must conclude that it appears to comply with the requirements of the Act, and must form the opinion that the Scheme Booklet does not contain any matter that is false in a material particular or materially misleading in the form and context where it appears: ss 412(7) and 412(8) of the Act. These requirements in relation to registration of the Scheme Booklet provide protection in relation to the adequacy of disclosure contained therein. 39 The procedural requirements of the Corporations Rules have been met. In accordance with r 3.2 of the Corporations Rules, evidence about the proposed chair and alternate chair has been provided. The proposed chair is David Jackson, the current chairperson and an independent non-executive director of CTR. The alternate chair is Kemsley John Cross, the chief executive officer and an executive director of CTR. 40 On the evidence before me on this application, there is no apparent reason why the Scheme should not receive the Court's approval at the second court hearing, if unopposed and subject to the necessary majorities being achieved at the shareholders' meeting. 41 At the first court hearing, a submission was made that the assets supporting the value of CTR shares are the same assets that will support the value of the shares in CTR US HoldCo and the value of the original shares and the replacement shares is constant before and after the Scheme implementation. However, if any capital or debt raising is undertaken before the Implementation Date which impacts on the correspondence of value in the scrip for scrip consideration, that is a matter which will be addressed at the second court hearing.

[25]

The CTR shareholders form a single class 45 The first issue raised is whether the CTR shareholders form a single class for the purpose of convening and holding the Scheme meeting to consider the Scheme. The particular issue that CTR raises is whether the CTR Rights give rise to a separate class of CTR shareholders for the purpose of the Scheme meeting. 46 CTR proposes orders for the convening of a single meeting of CTR shareholders. 47 In URB Investments Limited, in the matter of URB Investments Limited [2019] FCA 1977 at [44] to [46], Markovic J summarised the applicable principles in relation to the identification of separate classes as follows: 44 In David Jones (No 2) at [33] Farrell J noted that the second court hearing is the time for the court to determine whether or not a collateral benefit has been received and, if so, its relevance to the court's discretion to approve the scheme, having regard to the voting at the scheme meeting and the disclosure provided. However, where one or more members of a target receive a net benefit, in addition to full and frank disclosure of the benefit, a related issue arises as to whether it is appropriate for those members to be placed into a separate class. That is an issue properly addressed at the first court hearing: see First Pacific Advisors LLC v Boart Longyear Ltd (2017) 320 FCR 78; [2017] NSWCA 116 at [40]-[41]. 45 In Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583 Bowen LJ set out the test for identifying a class for scheme of arrangement purposes as follows: It seems plain that we must give such a meaning to the term 'class' as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. 46 In Perpetual Custodians Ltd (as custodian for Tamoran Pty Ltd as trustee for Crivelli) v IOOF Investment Management Ltd (2013) 304 ALR 436; [2013] NSWCA 231 at [51], Leeming JA (with whom McColl and Gleeson JJA agreed) said: Fourth, the legislation has long contemplated meetings of classes of members. The point of requiring members to vote in separate classes is to ensure that members can consult so as to determine their common interest. That is what drives class definition. Where the interests of members are so different as to make it impossible for them to consult with other shareholders, separate classes may be required: Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583 (Sovereign Life Assurance) per Bowen LJ; Re NRMA Ltd (2000) 33 ACSR 595 ; [2000] NSWSC 82 at [76] per Santow J; Re Cashcard Australia Ltd (2004) 48 ACSR 738 ; [2004] FCA 223 at [5] per Jacobson J; Re Sino Gold Mining Ltd (2009) 74 ACSR 647 ; [2009] FCA 1277 at [52]-[57] per Lindgren J. As Barrett J said in Hills Motorway at [12] after referring to the statements by Lord Esher MR and Bowen LJ in Sovereign Life Assurance: [12] The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail. 48 The test must be applied with some rigour to avoid too readily identifying separate classes and thereby creating unfairness by giving one group an effective veto: Re Opes Prime Stockbroking Ltd (No 2) [2009] FCA 813; 179 FCR 20 at [66]. As Santow J observed in Re NRMA Ltd (No 1)[2000] NSWSC 82; 33 ACSR 595 at [80]: The 'shifting' or 'fracturing' of classes into smaller groups can undermine the objective of obtaining decision by a large majority, by giving one group an effective veto over the wishes of the majority. That itself can be oppressive… 49 CTR submits that it is appropriate to treat all CTR shareholders as one class for the Scheme meeting and voting purposes, and there is no reason for the Court to intervene in respect of the contractual arrangements that have been made in respect of the CTR Rights. The holders of CTR Rights have entered into contractual arrangements contingent on implementation of the Scheme, which have the effect of transferring those rights to the new environment produced by redomiciling the ultimate holding company of the CTR Group. The holders of the CTR Rights do not seek any orders in respect of those rights. An undertaking has been given not to exercise the Performance Rights prior to the implementation of the Scheme. The Indeterminate Rights have not vested. The holders of the Performance Rights and the Indeterminate Rights do not presently have rights as members of CTR as a result of the CTR Rights. The contractual arrangements put in place to, in effect, roll-over the CTR Rights to CTR US HoldCo are subject to the Scheme being implemented and are disclosed in the Scheme Booklet. In circumstances where the holders of CTR Rights do not exercise any voting rights in respect of those rights and their pre-existing contractual rights are being rolled over to the new environment if, and only if, the Scheme is implemented, I do not see that there is any need for the creation of a separate class in respect of such rights holders to the extent that they may also be shareholders.

[30]

Securities Act 1933 (US) 54 CTR and CTR US Inc intend to rely on the Court's approval of the Scheme (if given at the second hearing) for the purposes of qualifying for the exemption under s 3(a)(10) of the Securities Act of 1933 (US) (US Securities Act) from US registration/prospectus requirements in connection with the implementation of the Scheme. This issue is addressed in the Scheme Booklet as follows: The CTR US HoldCo Shares have not been registered under the US Securities Act or the securities laws of any state or other jurisdiction of the United States. Instead, CTR US HoldCo intends to rely on an exemption from the registration requirements of the US Securities Act provided by Section 3(a)(10) of the US Securities Act in connection with the consummation of the Scheme and the issuance of CTR US HoldCo Shares. Section 3(a)(10) exempts securities issued in exchange for other securities from the general requirement of registration where the terms and conditions of the issuance and exchange have been approved by any court of competent jurisdiction, after a hearing upon the fairness of the terms and conditions of the issuance at which all persons to whom the securities will be issued have the right to appear. Approval of the Scheme by the Court will be relied upon by the Company and CTR US HoldCo for purposes of qualifying for the section 3(a)(10) exemption. 55 An issue along similar lines was considered by Beach J in Re Amcor Limited (No 2) [2019] FCA 842 at [32] to [38] and described (at [33]) as "common practice in schemes of arrangement". It is an issue which the Court will consider at the second court hearing. 56 For present purposes, it is sufficient to note that CTR and CTR US HoldCo intend to rely on the second court hearing as the relevant hearing at which the fairness and reasonableness of the Scheme was considered by a court for the purposes of applying for an exemption under s 3(a)(10) of the US Securities Act and that this has been disclosed in the Scheme Booklet. At the second court hearing, the Court must be sufficiently informed of the manner in which the scheme consideration will be calculated in order to determine the value of the securities to be offered and surrendered. The second court hearing will be open to everyone to whom the securities would be issued so that those to whom the new securities are to be issued have had opportunity to oppose or otherwise raise any objection to the Scheme. The matter, having been raised, will be deferred for consideration at the second court hearing.

Australian Securities Commission v Marlborough Gold Mines Ltd

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Judgment (34 paragraphs)

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Legislation Cited (3)

Cases Cited (31)

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