Australian Securities Commission v Marlborough Gold Mines Ltd

Federal Court of Australia|2023-07-19|Before: Feutrill J

Counsel for the Plaintiff: Mr SK Dharmananda SC

ORDERS WAD 129 of 2023 IN THE MATTER OF CHESSER RESOURCES LIMITED ACN 118 619 042 CHESSER RESOURCES LIMITED ADN 118 619 042 Plaintiff

order made by: FEUTRILL J DATE OF ORDER: 19 JULY 2023

Introduction 1 Section 411 of the Corporations Act 2001 (Cth) provides a mechanism for, amongst other things, a binding arrangement to be made between a company and its members (commonly referred to as a members' scheme or members' scheme of arrangement). The arrangement is binding if the Court convenes a meeting of the company's members, the arrangement is agreed to by a majority of members voting at the meeting (50% headcount) and a special majority of votes cast at the meeting (75% voting power), and the Court approves the arrangement. Therefore, it is a mechanism for a company to make a binding arrangement with all members even those members in a minority which does not agree to the arrangement. 2 Due to the nature of an originating process brought under s 411 of the Act there are typically two court hearings. The first court hearing is an interlocutory hearing at which orders are made for the purpose of convening a meeting of a company's members. Subject to the members voting in favour of the arrangement by required statutory majorities, there is a second court hearing for final orders to approve the arrangement. 3 The plaintiff (Chesser) filed an originating process on 6 June 2023 by which, amongst other things, it sought an order for the Court to order a meeting of the company's members (shareholders) to be convened. On 19 July 2023 I made orders for the convening of such a meeting. These are the reasons for those orders.

Evidence 4 Chesser's application for orders to convene a meeting of the shareholders was supported by a number of affidavits. Chesser read and relied on each of these affidavits at the first court hearing. The affidavits were as follows. 5 A short affidavit of Mr David Samuel Church sworn 6 June 2023 filed with the originating process that provided a brief description of the proposed arrangement (Scheme) between Chesser and its members (shareholders) and exhibited a company search of Chesser from the records maintained by the Australian Securities and Investments Commission (ASIC). Mr Church is a solicitor and partner of Thomson Geer Lawyers, Chesser's solicitors. 6 I made an order pursuant to r 1.3 of the Federal Court (Corporations) Rules 2000 (Cth) read with r 1.34 of the Federal Court Rules 2011 (Cth) dispensing with the requirement of r 2.4(1) of the Corporations Rules that the originating process be supported by an affidavit stating the facts in support of that process. That order was made because, in my view, it was not necessary for the purpose of commencing proceedings for orders under s 411 of the Act for the originating and (or) interlocutory process to be supported by an affidavit filed, at that time, stating the facts in support of the process. A short affidavit identifying the nature of the Scheme was sufficient for the purpose of case managing the proceedings and to allocate dates for the first and second court hearings. 7 A substantial affidavit of Mr Andrew Dean Grove sworn 14 July 2023. Mr Grove is the managing director of Chesser. His affidavit exhibited a copy of the then current draft Scheme booklet (including the draft explanatory statement required by s 412(1) of the Act) and other documents relevant to the application. The documents included copies of a draft independent expert report (IER), a scheme implementation deed made between Chesser and Fortuna Silver Mines Inc dated 9 May 2023 (SID) and the proposed Scheme. Amongst other things, Mr Grove also deposed facts relating to the process Chesser has undertaken to verify the accuracy of the information contained in the proposed Scheme booklet. 8 An affidavit of Mr Charles Henry Ashton sworn 17 July 2023. Mr Ashton is a solicitor and partner of Allens who act as Fortuna's Australian solicitors with respect to the Scheme. Mr Ashton deposed facts and exhibited documents relating to the process Fortuna has undertaken to verify the accuracy of the information contained in the draft explanatory statement or Scheme booklet as it relates to Fortuna. Mr Ashton's affidavit also exhibited a copy of a deed poll that, on its face, Fortuna executed on 14 July 2023 (Deed Poll). 9 A second affidavit of Mr Church sworn 18 July 2023. It exhibited a further draft of the explanatory statement or Scheme booklet that resulted from edits made as a result of communications with ASIC. Mr Church deposed facts relating to the final stages of the verification process referred to in the affidavits of Mr Grove and Mr Ashton. He also deposed facts, on information and belief, satisfying the requirements of r 3.2 of the Corporations Rules as these related to the proposed Chair of the meeting, Mr Scott Gibson, and from his own knowledge, as these related to Mr Church as alternate chair. The affidavit also exhibited the usual letter that ASIC provides before the first court hearing.

Overview of the proposed Scheme 10 Chesser is a company registered in Victoria. It is public company limited by shares and is listed on the Australian Securities Exchange (ASX). It is a resources exploration company. Its principal assets are exploration mining tenements in Senegal, West Africa, that are prospective for gold mining operations. These are at varying stages of exploration and development, but its main asset is the Diamba Sud Project, which covers an area of 53.4km2 and has a mineral resource estimate of 14.7Mt at a grade of 1.8g/t for 860,000 oz of gold. It had a market capitalisation of approximately AUD 63.2 million as at 26 June 2023. 11 Chesser has proposed the Scheme by which Fortuna would acquire 100 percent of Chesser's issued share capital. Under the Scheme, for each ordinary fully paid share in Chesser's issued share capital held, shareholders would receive 0.0248 of a fully paid and non-assessable common share in the capital of Fortuna. Fortuna is a precious metals mining company based in Vancouver, Canada, with operating mines and mining projects primarily in Latin America and West Africa. It is a public company limited by shares and is listed on the Toronto Stock Exchange (TSX) and New York Stock Exchange (NYSE). It had a market capitalisation of CAD 1.2 billion (AUD 1.4 billion) as at 26 June 2023. Fortuna filed a notice of appearance and appeared on the hearing of Chesser's application for orders to convene a meeting of its shareholders. 12 If the Scheme were implemented, Chesser would become a wholly owned subsidiary of Fortuna, Chesser would be delisted from the ASX and Chesser's shareholders would hold approximately 5% of the issued share capital of Fortuna. Those shares would be tradeable on the TSX and NYSE, but not on the ASX. 13 On 9 May 2023, Chesser and Fortuna made the SID. Minor variations were made to the SID by a letter agreement of 28 June 2023. Under the terms of the SID Chesser and Fortuna agreed to implement the Scheme subject to certain conditions precedent. The SID also contains typical commercial terms of a non-hostile transaction between one company (bidder) and another company (target) involving a change of control of the target, including provisions for exclusivity and break-fees, described later in these reasons.

Power to convene meetings 14 The mechanism within s 411 contemplates a three-stage process. (1) The court making orders to convene a meeting or meetings (s 411(1)). (2) The holding of a meeting and vote on the proposal (s 411(4)(a)). (3) The court making orders approving the arrangement (scheme) (ss 411(4)(b) and 411(6)). 15 The principles applicable to the exercise of the Court's power under s 411(1) to convene a meeting between a company and its members are well settled and have been summarised and set out in numerous judgments of this and other courts. In short, s 411(1) confers a discretion on the Court to make appropriate orders to convene a meeting of a company's members where the following pre-conditions, drawn from s 411, are met. (a) A compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them) (s 411(1)). (b) An application is made in a summary way for an order by the body or a member of the body (s 411(1)). (c) Fourteen days' notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits (s 411(2)(a)). (d) The Court is satisfied that ASIC has had a reasonable opportunity (s 411(2)(b)): (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. See, e.g., Kidman Resources Ltd, in the matter of Kidman Resources Ltd [2019] FCA 1226; (2019) 375 ALR 760 at [22] (O'Callaghan J). 16 Plainly, a summary application has been made and, for the reasons given later, I am satisfied that each of the other pre-conditions has been met. 17 In addition to the pre-conditions within s 411, the Court should also be satisfied that all applicable procedural requirements have been or will be met or otherwise that it is appropriate to modify or dispense with one or more of them. In this case, I am satisfied that the procedural requirements have been met or, to the extent these have not or will not be met, I am satisfied that the Court should exercise its power to modify or dispense with compliance with them as is reflected in the orders made on the application. The reasons for such modification or dispensation is either obvious from the nature of the orders made or explained elsewhere in these reasons. All modifications or disposal of procedural requirements were based on the nature of the evidence and submissions on Chesser's application. 18 As to the exercise of the Court's discretion, in this respect the Court should be satisfied of two matters. First, that the Scheme is 'fit for consideration by the proposed meeting in the sense that it is "of such a nature and cast in such terms that, if it achieves the statutory majority at the […] meeting, the court would be likely to approve it on the hearing of a petition which is unopposed". Second, that "the members [are to be] properly informed of the nature of the Scheme before the meeting"': see, DuluxGroup Ltd, in the matter of DuluxGroup Ltd [2019] FCA 961; (2019) 136 ACSR 546 at [19] (O'Bryan J) and the authorities there cited. 19 The question of whether or not to accept the consideration for shares in an arrangement such as the Scheme is a commercial matter for the shareholders to assess. In general, members should not be prevented from having the opportunity to do so provided that they are adequately informed and have sufficient time to consider the proposed compromise or arrangement: see, e.g., Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 at [50] (Beach J). 20 The Court's role under s 411 is supervisory. In general, at the first court hearing the Court should confine itself to ensuring that the applicable procedural and substantive requirements are met (including that there will be adequate disclosure), with limited consideration of issues of fairness. The Court should only consider the merits or fairness of a proposed compromise or arrangement at such a hearing if the issue is such as would unquestionably lead to a refusal to approve it at the approval hearing (second court hearing): Kidman Resources at [26] citing Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [74], [76]; see, also, Amcor at [47].

Compromise or arrangement and Part 5.1 body 21 Chesser is a Part 5.1 body. It is a company and the definition of 'Part 5.1 body' in s 9 of the Act includes a company. There is also no doubt that the proposed Scheme involving a change of ownership and control of all the issued share capital in Chesser is an 'arrangement' within the meaning of that term in s 411(1).

Explanatory statement 22 Pursuant to s 412(1) of the Act, where a meeting is convened under s 411, the body must send an explanatory statement containing certain information with every notice convening the meeting that is sent to a member. Pursuant to s 411(1), where the Court makes an order convening a meeting it may approve the explanatory statement. Typically, the Court will not make an order convening a meeting without also approving the explanatory statement. 23 In this case, the proposed Scheme booklet contains the explanatory statement. The contents of that document is considered later in the context of considering if the members (shareholders) are to be properly informed on the nature of the Scheme.

Notice to and role of ASIC 24 On 30 June 2023, Chesser provided ASIC with copies of the originating process and Mr Church's first affidavit, which, as noted earlier, included as an exhibit a draft of the Scheme booklet (including the explanatory statement) and a letter notifying ASIC that the first court hearing would be held on 19 July 2023. 25 The draft Scheme booklet has been reviewed by ASIC. On 18 July 2023, ASIC provided Chesser's solicitors with a letter in which ASIC expresses the view that there has been compliance with the requirements of s 411(2) of the Act and ASIC's policy contained in Regulatory Guide 60: Schemes of Arrangement (RG). ASIC also indicated that it did not intend to appear or oppose the Scheme at the first court hearing. 26 Bearing in mind that in most circumstances applications to convene meetings and to approve arrangements are heard in the absence of a contradictor, the role and function ASIC performs under s 411 and s 1330 of the Act is quite important. The High Court observed that in light of these responsibilities the Australian Securities Commission (the forerunner of ASIC) 'had an obligation to assist the Court by presenting argument if it deemed that course to be necessary or desirable': Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 506. 27 RG 60.4 provides a statement of ASIC's approach to its obligation to assist the Court as follows: Our role is to assist the court by: (a) reviewing the content of scheme documents; (b) reviewing the nature and function of the scheme; (c) representing the interests of investors and creditors (where in many cases we may be the only party before the court other than the applicant); (d) helping to ensure that all matters that are relevant to the court's decision are properly brought to the court's attention before it orders meetings or before it confirms a scheme; and (e) registering scheme documents. 28 Having regard to these matters, where ASIC has provided its usual letter to a scheme proponent before the first court hearing and has indicated that it does not wish to appear and make submissions at that hearing, the Court is entitled to infer that ASIC has discharged its obligation to assist the Court as set out in RG 60.4. See, e.g., Seven Network Limited (ACN 052 816 789), in the matter of Seven Network Limited (No 3) [2010] FCA 400; (2010) 267 ALR 583 at [43]; Seven Network Limited (ACN 052 816 789), in the matter of Seven Network Limited [2010] FCA 220 at [15] (Jacobson J).

Duty and responsibility of scheme proponent 29 As already mentioned, typically the hearings proceed ex-parte or, as in this case, with the appearance of the proponent company (target) and the counterparty (bidder), being both parties interested in obtaining the requested orders and without a contradictor. It has been observed, correctly in my view, that 'the absence of a contradictor sharpens the duty of an applicant and imposes a heavy responsibility of bringing to the court's attention all matters that could be considered relevant to the exercise of the court's discretion'. As a consequence, the Court is 'entitled to be confident that all relevant material is before the court': Seven Network Limited at [9]; Re Permanent Trustee Co Ltd [2002] NSWSC 1177; (2002) 43 ACSR 601 at [7]. The extent of the duty and responsibility imposed upon a party seeking an ex-parte order was explained by Isaacs J in Thomas A Edison Ltd v Bullock [1912] HCA 72; (1912) 15 CLR 679 at 681-682. The same duty and responsibility should be taken to apply to an applicant for orders under s 411 of the Act.

Scheme terms 30 Chesser requested Grant Thornton Corporate Finance Pty Ltd to prepare an IER stating whether the Scheme was in the best interests of shareholders for the purposes of s 411 of the Act. The proposed Scheme booklet includes the IER. The author(s) of that report record that it was prepared in accordance with ASIC Regulatory Guide 111 (Contents of expert reports) and Regulatory Guide 112 (Independence of experts). Grant Thornton CF engaged Valuation & Resource Management Pty Ltd to prepare a valuation report for Chesser's exploration assets. That valuation report is included as an annexure to the IER. The author(s) of the IER opine(s) that the proposed Scheme is fair and reasonable and in the best interests of the shareholders. 31 Otherwise, I have considered the terms of the Scheme and I am satisfied that there is no obvious aspect or feature of the terms of the Scheme that would result in refusal to approve the Scheme if it came before the Court for approval. 32 The proposed Scheme will apply to the shareholders and it includes deemed warranties and no encumbrance clauses in standard terms (cll 8.2(b) and 8.3). The prevailing view is that such provisions are not objectionable provided that the attention of shareholders has been drawn to them: see, e.g., Atlassian Corporation Pty Limited, in the matter of Atlassian Corporation Pty Limited [2013] FCA 1451 at [36] (and the authorities there cited). The warranties and no encumbrance clauses are specifically and clearly drawn to shareholders attention in the proposed Scheme booklet. 33 The SID contains provisions for exclusivity (cl 13), payment of a break fee (cl 14) and termination where there is a competing proposal (cl 15). Provisions of this nature are standard commercial terms of agreement involving non-hostile change of control transactions. Australian Takeovers Panel Guidance Note 7: Lock-up devices provides guidance on provisions of this nature and the circumstances in which they are not likely to involve 'unacceptable circumstances'. There is no obvious unfairness to shareholders or potential to coerce shareholders into voting in favour of the Scheme arising from these provisions. 34 The circumstances in which the break fee is payable do not depart from standard practice: see, e.g., Asaleo Care Limited, in the matter of Asaleo Care Limited [2021] FCA 406 at [52] (and the authorities there cited). The break fee is approximately 1% of the implied equity value of Chesser (based on the Scheme consideration as at 9 May 2023), which accords with the Panel GN 7. A break fee clause within the parameters of Panel GN7 is generally not considered coercive. It is not payable merely because shareholders do not vote in favour of the Scheme. There is full and clear disclosure of the break fee and the circumstances in which it would be payable in the proposed Scheme booklet. 35 The exclusivity provisions: no current discussions (cl 13.1); no shop (cl 13.2(a); no talk (cl 13.2(b)); no due diligence (cll 13.2(c), 13.3); notification of approaches (cl 13.4); and, in effect, matching rights (cl 13.5) are also in relatively standard commercial form. These provisions are subject to the directors' fiduciary duties (cll 13.3, 13.6). These provisions are acceptable having regard to the following. (a) The exclusivity period and coverage are capable of ascertainment. The clauses were publicly announced so that potential rival bidders can understand how to make an approach or competing bid. (b) The provisions are subject to directors' fiduciary duties or that they are otherwise lawful. (c) The exclusivity period, although capable of extension by agreement, will end no later than 9 February 2024 (approximately 8 months) which is not an excessive period. (d) The provisions are explained and given prominence in the proposed Scheme booklet. See, e.g., Asaleo at [55] (and the authorities there cited). 36 In my view, the Scheme is fit for consideration by the proposed meeting. 37 Nonetheless, in keeping with the Scheme proponent's duty and responsibility referred to earlier in these reasons, Chesser has drawn the Court's attention to the following features of the Scheme and SID transaction as a whole that may have a bearing on the question of fitness for consideration of the Scheme by shareholders. (a) The terms of a loan facility agreement made between Chesser and Fortuna. (b) Arrangements to forfeit, acquire, vest or execute certain securities issued to directors and other employees of Chesser (Chesser Equity Incentives). (c) Performance risk associated with Fortuna, a foreign company, in general, and regarding execution of the Deed Poll, in particular.

Loan facility agreement 38 On 9 May 2023 Chesser and Fortuna made a loan facility agreement for a secured loan of up to AUD 3 million. The purpose of the loan is to assist Chesser with the transaction costs associated with the proposed Scheme and to provide working capital during the transaction implementation. The loan is interest-bearing and secured. If shareholders vote against the proposed Scheme the loan is repayable within 4 months. That is, it is not immediately repayable and Chesser would have time to refinance or raise capital. 39 The loan facility agreement and its terms are disclosed in the proposed Scheme booklet. Loans on commercial terms with security and a reasonable repayment period if shareholders vote against the proposed Scheme are not generally coercive or operate as an impermissible 'lock up' device. Shareholders may vote against the Scheme and opt to retain their shares with the view that it is in their interest for the company to refinance or recapitalise: see, e.g., In the matter of iCar Asia Limited [2021] NSWSC 1713 at [26]; Black Range Minerals Limited, in the matter of Black Range Minerals Limited [2015] FCA 1162 at [17]-[18]; Peak Coal Limited (ACN 125 884 031), In the matter of Peak Coal Limited (ACN 125 884 031) [2010] FCA 6 at [7].

Chesser Equity Incentives 40 Chesser has issued certain securities to directors and other employees under an equity incentive plan (Chesser Equity Incentive Plan). The Chesser Equity Incentive Plan permits Chesser to offer a range of different equity interests to Chesser's directors, key management personnel, employees, contractors and consultants. It has also issued a number of unlisted options. 41 Chesser has 2,600,000 Chesser unlisted options on issue comprised of: (a) 600,000 Chesser unlisted options which are 'out-of-the-money', meaning that the exercise price of the option is greater than the implied value of the Scheme consideration; and (b) 2 million Chesser unlisted options which are 'in-the-money', meaning the exercise price is less than the implied value of the Scheme consideration. 42 Under the Chesser Equity Incentive Plan, Chesser has issued: (a) 37,214,03 Chesser ZEPOs (zero exercise priced options), comprising of 10,533,338 Chesser vested ZEPOs and 26,680,665 Chesser unvested ZEPOs. The ZEPOs vest in accordance with the terms upon which they issued at different times and based on different performance-based conditions. If the ZEPO has vested, the holder may exercise the option (for no consideration) and thereby have a Chesser share issued to the holder. If the ZEPO has not vested, the holder cannot, at this time, exercise the option; and (b) 1,026,685 Chesser SSRs (salary sacrifice rights to acquire fully paid ordinary shares in the capital of Chesser). 43 In accordance with cl 4.10 of the SID, Chesser must act to ensure that, by no later than the Record Date (as defined), there are no outstanding Chesser Equity Incentives on issue as at that date. Chesser must cause either some or all of the outstanding Chesser Equity Incentives to vest and issue or transfer the applicable Chesser shares or cancel (for no consideration) any outstanding unvested Chesser Equity Incentives. Chesser Equity Incentive holders who receive Chesser shares prior to their Record Date are entitled to participate in the Scheme as Scheme participants. 44 Chesser has entered into option cancellation deeds with holders of unlisted options in Chesser pursuant to which the unlisted options will be cancelled for consideration if a waiver of ASX listing r 6.23.2 is obtained, or, if no waiver is obtained, for no consideration. 45 In the case of unvested ZEPOs, the terms of the Chesser ZEPOs provide that if a change of control event occurs, or the Chesser Board resolves for the purposes of the Chesser Equity Incentive Plan that a change control event is likely to occur, the Chesser Board may in its absolute discretion determine the manner in which any or all of the ZEPOs (whether vested or unvested) will be dealt with. In so doing, the Chesser Board may have regard to, amongst other factors, Chesser's performance against the target and the vesting conditions at that time, the period of time that elapsed between the Grant Date and the date of the change of control event and the circumstances of the change control event. The Board of Chesser resolved to accelerate the vesting of all Chesser unvested ZEPOs on issue subject to the Scheme becoming effective. That resolution and the basis for it is disclosed in the proposed Scheme booklet. 46 The underlying rationale for the decision to accelerate the vesting is that in accordance with cl 4.10 of the SID, Chesser must act to ensure that there are no outstanding Chesser Equity Incentives. The holders of unvested ZEPOs would, otherwise, continue to enjoy the rights accrued under them if they remained on issue as at the Record Date. Chesser could have entered into cancellation deeds for cancellation of unvested ZEPOs as it did in respect of unlisted options. However, a simpler and more efficient means of ensuring that the Chesser Equity Incentives are not in issue was to accelerate the vesting of them, subject to the Scheme becoming effective, such that the holders of the unvested ZEPOs will be able to participate in the Scheme. The assumption relating to all ZEPOs and SSRs is that the holders will exercise the rights under these securities so as to participate in the Scheme. 47 Any consideration paid for cancellation of Chesser options is dealt with separately from the Scheme and is disclosed in the proposed Scheme booklet. Consideration paid for cancellation of options does not result in the holder of those options receiving any additional consideration, where they are also a shareholder, as compared to other Scheme participants. The consideration they receive is for cancellation of one right (unlisted option) for another right (payment of a sum of money). The consideration for cancellation of unlisted options was a market-based value determined in accordance with a Black and Shoales pricing tool or the intrinsic option pricing tool. Pursuant to the option cancellation deeds, the aggregate cash payment for all cancelled Chesser unlisted options will be AUD 126,143. Likewise, in the case of holders of Chesser ZEPOs and Chesser SSRs that have vested or will vest and are exercised the holders will not receive additional consideration to the Scheme consideration as part of the Scheme. The issue of the shares will be in accordance with the existing terms upon which the ZEPOs and SSRs have been issued: see, e.g., DuluxGroup at [46]-[47]; Re Fosters Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Cashcard Australia Ltd [2004] FCA 223; [2004] 48 ACSR 738 at [5]-[13]. 48 It follows that consideration for cancellation of options, accelerated vesting of unvested ZEPOs and exercise of vested ZEPOs and SSRs will not involve the provision of benefits to the holders of those Chesser Equity Incentives collateral to Scheme consideration. These benefits are also not class-creating for the purposes of the Scheme meeting.

Deed Poll and performance risk 49 The affidavit of Mr Ashton exhibited a copy of the Deed Poll which, on the face of that document, appears to have been executed by Fortuna. Chesser has not led evidence of foreign law (Canadian law) for the purpose of proving that the Deed Poll has been executed in accordance with the applicable Canadian law. In the absence of evidence of foreign law, it might be considered that there is a risk that the Deed Poll is unenforceable if it has not, in fact, been executed in accordance with the applicable Canadian law. 50 As explained later in these reasons, Chesser (and Fortuna) have undertaken a process of verifying that the information contained in the proposed Scheme booklet is accurate and not misleading. I infer from the absence of any evidence to the contrary that part of the due diligence process included ensuring that the Deed Poll was, in fact, executed in accordance with the applicable Canadian law. Further, that Chesser was so satisfied and failing which, in keeping with its duty and responsibility as Scheme proponent on an ex-parte application, the Court is entitled to be confident that the Deed Poll has, in fact, been executed in accordance with the applicable Canadian law. If there were any doubt about that or risk that it had not been so executed, Chesser would be duty bound to bring that to the Court's attention on the application. 51 Otherwise, the Scheme consideration for the proposed Scheme involves the issue of shares in Fortuna to Scheme participants. By cl 4.2 of the Scheme, the transfer of all Scheme shares to Fortuna is subject to Fortuna first issuing to each Scheme shareholder the Scheme consideration in accordance with the Scheme and Deed Poll. 52 By cll 4 and 5.2(g) of the Deed Poll, Fortuna has: (a) undertaken in favour of each Scheme shareholder to procure, or procure provision of, the Scheme consideration according to the terms set out in that clause and subject to, and in accordance with, the terms of the Scheme; and (b) warranted in favour of each Scheme shareholder that the new Fortuna shares will be issued in accordance with the terms of the Scheme rank equally in all respects with all existing Fortuna shares on issue as at the Implementation Date. 53 The Scheme and Deed Poll are governed by the law of New South Wales and Fortuna submits to the non-exclusive jurisdiction of the courts of that State: cll 9.4(b)(i), 18.7. 54 The risk to Chesser shareholders that Fortuna may acquire their shares but not perform the obligations to issue and transfer the Scheme consideration is almost entirely, if not completely, theoretical by reason of the mechanism for transfer of the Scheme shares to Fortuna. Namely: (a) Fortuna is required to procure, or procure the provision of, the Scheme consideration in accordance with the terms set out in cl 4 of the Deed Poll and cl 4.2 of the Scheme; and (b) that mechanism addresses performance risks by preventing the transfer of any Scheme shares to Fortuna before the Scheme consideration has been provided in full by Fortuna. 55 There is, of course, a residual, theoretical, risk that if Fortuna were not to complete the Scheme in breach of the Deed Poll, the Scheme shareholders may suffer loss and may wish to commence proceedings against Fortuna to recover that loss. As noted above, any proceedings would need to be commenced and prosecuted in a court of New South Wales and Fortuna has submitted to the jurisdiction of those courts. 56 A remote and theoretical performance risk is not a reason to refuse shareholders the opportunity of voting in favour of the Scheme at a scheme meeting.

Are shareholders properly informed? 57 Section 412(1) of the Act provides that where a meeting is convened under s 411 the body must, with every notice convening the meeting that is sent to a member, send the explanatory statement and it must contain information of the following character. (1) Explaining the effect of the arrangement and, in particular, stating the material interests of the directors, whether as directors, as members, or otherwise. (2) Explaining the effect on those interests of the arrangement insofar as it is different from the effect on the like interests of other persons. (3) Setting out such information as is prescribed. (4) Setting out any other information that is material to the making of a decision by a member whether or not to agree to the arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the members. 58 The prescribed information is described in reg 5.1.01 and Sch 8 (Part 3) of the Corporations Regulations 2001 (Cth). Schedule 8, reg 8301(a) provides that the explanatory statement must set out in relation to each director: (i) whether the director recommends acceptance of the Scheme or recommends against and, in either case, the reasons for so recommending; (ii) if the director is not available to consider the Scheme that the director is not so available and the cause of not being so available; and (iii) in any other case, that the director does not desire to make, or does not consider justified in making a recommendation and, if the director so requires, the reason for not wishing to do so. Schedule 8, reg 8302(b) provides that the explanatory statement must also set out for each director by whom or on whose behalf shares are held whether the director intends to vote in favour of or against the Scheme or is undecided. 59 The proposed Scheme booklet (including the draft explanatory statement) explains the effect of the proposed Scheme and states that any material interest of the directors and the effect of those interests on the proposed Scheme insofar as it is different from the effect of the like interests of other persons. The effect of the proposed Scheme on the directors' interests is the same as on the like interests of others. As has been already noted, the directors hold Chesser Equity Incentives and to the extent that these are unvested the Board has resolved to accelerate the vesting of them. The reason for that acceleration is in the terms of the SID and the basis for it is explained in the proposed Scheme booklet. The directors will not receive a benefit collateral to the Scheme. 60 The proposed Scheme booklet states that the directors have unanimously recommended that shareholders vote 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 the shareholders. Subject to the same qualifications, each Chesser director intends to vote on all Chesser shares held or controlled by them, in favour of the Scheme. 61 As Moshinsky J observed in Japara Healthcare Limited, in the matter of Japara Healthcare Limited [2021] FCA 1150; (2021) 156 ACSR 695 at [71], differing views have been expressed on the question of whether a director who is entitled to receive an additional benefit in connection with the Scheme should make a voting recommendation. That is, a benefit in addition to a scheme consideration received as a shareholder. However, it has also been observed that a divergence in the authorities on this question 'may be more apparent than real': Japara at [71]; Wellcom Group Limited, in the matter of Wellcom Group Limited [2019] FCA 1655 at [51], [59]. 62 Having regard to the nature of the 'financial benefits' the directors will receive and that they are fully and prominently disclosed in the proposed Scheme booklet, in this case, there is no reason in principle that the directors should decline to make a recommendation to shareholders as to how the shareholders should vote at any scheme meeting. In reaching this view, I take account that none of s 412(1)(a) of the Act, reg 5.1.01(b) of the Corporations Regulations, reg 8301(a) of Sch 8 and reg 8302 of Sch 8, in its terms, disqualify a director from making a recommendation to shareholders about a scheme in circumstances in which the director may receive a substantial financial benefit if a Scheme is approved. 63 In the context of the facts of this case, the following observation of O'Bryan J in Kidman Resources (at [111]) is apposite: … shareholders, absent an explanation as to why any director is not "available", does not "desire" or is not "justified" in making a recommendation' (reg 8301(a)), or 'has not decided' whether he or she will vote in favour or against the scheme (reg 8302), would ordinarily expect directors to make such a recommendation, even when they may receive a substantial financial benefit. And, in my view, the statutory and regulatory regime applicable ordinarily requires them to make a recommendation, one way or the other, when they stand to gain if the scheme is approved or not. (Emphasis original). 64 The proposed Scheme booklet appears to contain the required information and no apparent omission was drawn to the Court's attention. Again, in keeping with the Scheme proponents' duty and responsibility and the due diligence process undertaken, the Court is entitled to expect that any deficiency in the contents of the explanatory statement would be drawn to the Court's attention. 65 Otherwise, the facts deposed in the affidavits of Mr Grove and Mr Ashton explain that a thorough verification process was undertaken for the purpose of identifying if there were any errors or misleading statements contained in the proposed Scheme booklet. Having regard to that evidence and that process, I am satisfied that reasonable endeavours have been undertaken to ensure that the information contained in the proposed Scheme booklet is accurate and not misleading in any material respect.

Conclusion 66 Orders should be made substantially in terms of Chesser's minute of proposed orders. I certify that the preceding sixty-six (66) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Feutrill.

Corporations Act 2001(Cth)ss 9, 411,411(1), 411(2), 411(2)(a), 411(2)(b), 411(4)(a), 411(4)(b), 411(6), 412(1), 412(1)(a), 1319, 1330, Ptt

At a glance

Court

Decision date

Before

Source

Judgment (18 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (23)

Cited By (6)