- Australian Securities Commission v Marlborough Gold Mines Ltd

Supreme Court of NSW|2024-11-12|Before: Black J, Mr J

Solicitors: Hamilton Locke (Plaintiff) Hogan Lovells (Bidder) File Number(s): 2024/289709

Judgment

By Originating Process filed on 7 August 2024, Southern Cross Gold Ltd ("SXG") applies under s 411 of the Corporations Act 2001 (Cth) ("Act") for orders relating to a proposed scheme of arrangement and associated orders.
By way of background, SXG is a natural resources company engaged in the exploration of precious and base mineral interests. It is listed on the Australian Securities Exchange ("ASX") and has approximately 2,567 shareholders and net assets of $38.8 million (as shown in its audited financial statements at 31 May 2024). The acquirer, Mawson Gold Limited ("Mawson"), is a natural resources company listed on the TSX Venture Exchange (which is the Canadian venture stock exchange) ("TSXV"). Mawson already owns 96,590,910 ordinary shares in SXG. representing 48.67% of SXG's share capital). These SXG shares represent almost all of Mawson's current assets by value. The proposed transaction contemplates that, prior to acquiring the SXG shares it does not already own under the scheme, Mawson will distribute its only other material investment, an interest in Euro Canna, to its shareholders; will reduce its number of shares on issue from 306,138,320 shares to 96,590,910 shares, which will match the number of shares it holds currently in SXG and will change its name to "Southern Cross Gold Consolidated Ltd"; and Mawson will list on ASX, where its shares will be quoted in CHESS Depository Interest ("CDI") form. Mawson will also remain listed on the TSXV and its shares and CDIs can be freely interchanged by a shareholder or CDI holder respectively. The scheme provides that Mawson will acquire the shares in SXG that it does not already own in exchange for one Mawson CDI or, if an SXG shareholder elects, a Mawson share quoted on the TSXV. CDIs that would be issued to Ineligible Foreign Shareholders (as defined) will be sold and the proceeds after sales costs distributed to those shareholders. SXG has also entered into an agreement to purchase a private company, Sparr Nominees Pty Ltd ("Sparr") and the purchase price for that transaction includes SXG shares representing around 10% of its current shares on issue, and these new SXG shares will participate in the scheme. The effect of this share issue is disclosed in the scheme booklet. Following implementation of the scheme, the current directors of SXG will become the directors of Mawson and the current senior executive team of SXG will become the senior executive team of Mawson.

Affidavit evidence

SXG reads an affidavit dated 13 August 2024 of its solicitor, Mr Guy Sanderson, which refers to the elements of the proposed scheme and exhibits, relevantly, a company search for SXG. By a second affidavit dated 11 November 2024, Mr Sanderson addresses the lodgement of the draft scheme booklet with ASIC and communications with ASIC and the independent expert report in respect of the scheme.
SXG also reads the affidavit dated 11 November 2024 of its director, Mr Ernest Eadie, who provides a history of SXG and an overview of its operations and outlines the proposed scheme. He refers to the scheme documents including the scheme booklet and addresses the conditions precedent to the scheme and exclusivity and break fee arrangements in respect of the scheme, which I address below. He refers to the role of an Independent SXG Board Committee, comprising all of SXG's directors other than a director who is also the Executive Chairman and interim CEO of Mawson. He identifies the recommendations of the independent directors in favour of the scheme and addresses the consent of the chair and alternate chair in respect of the scheme meeting and the treatment of SXG options and SXG performance tights in respect of the scheme.
SXG also reads an affidavit dated 11 November 2024 of Mr Justin Mouchacca, who is the company secretary of SXG and addresses the verification process adopted in respect of the scheme booklet.
By an affidavit dated 10 November 2024, Ms Mariana Bermudez, who is the company secretary of Mawson, addresses Mawson's entry into a Scheme Implementation Agreement dated 30 July 2024 ("SIA") with SXG and the verification of information concerning Mawson in the scheme booklet, and also refers to the position as to the proposed disposal of Mawson's Euro Canna interest.
SXG also tenders a letter dated 12 November 2024 from the Australian Securities and Investments Commission ("ASIC") indicating, in the usual way, that it will defer a determination under s 411(17)(b) of the Act to the second Court hearing; it considers the requirements of s 411(2) of the Act have been satisfied in respect of notice to it of the scheme; and it did not currently propose to appear to make submissions or intervene to oppose the scheme at the first Court hearing.

Applicable principles and submissions

The Court's role at the first Court hearing in respect of a scheme is to determine, in the exercise of its discretion, whether to approve the convening of a scheme meeting and the explanatory statement if it is satisfied of several matters, namely that the plaintiff is a Pt 5.1 body; the proposed scheme is an "arrangement" within the meaning of s 411 of the Act; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the proposed scheme and explanatory statement, to make submissions and has had 14 days' notice of the proposed hearing date of the first Court hearing; the procedural requirements under the Supreme Court (Corporations) Rules 1999 (NSW) ("Rules") have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Orion Telecommunications Limited [2007] FCA 1389 at [5]; Re Staging Connections Group Ltd [2015] FCA 1012 at [19]; Re Wridgways Australia Ltd [2010] FCA 1187 at [30]; Re Ellerston Global Investments Ltd [2020] NSWSC 879 ("Ellerston") at [25]; Re Vocus Group Ltd [2021] NSWSC 630 at [12].
I am satisfied that each of the preconditions to the exercise of the Court's discretion in s 411 of the Act is satisfied in this case. SXG is a company registered under the Act and a Pt 5.1 body. The proposed scheme is an "arrangement" within the scope of s 411 of the Act where it involves acquisition of the SXG shares it does not already own. Mr Lockhart points out that the commercial purpose of the scheme is described in the scheme booklet, including in the letter from the chair of the independent board of directors of SXG. He submits and I accept that there is no reason to consider that the scheme is for any purpose other than one which is proper and bona fide.
ASIC has here had a reasonable opportunity to examine the proposed scheme and scheme booklet, to make submissions and has had the necessary notice of this hearing and has indicated that it does not currently propose to appear to make submissions or intervene to oppose the scheme at this hearing. The procedural requirements under the Rules have been met, where the company search required by r 2.4(2) has been tendered; the draft orders for the convening of the scheme meeting identify the proposed scheme as required by r 3.3 of the Rules; and I will dispense with the requirement for compliance with r 3.4 of the Rules to publish a notice of the second Court hearing in a national newspaper, where SXG will publish that notice on ASX in accordance with current scheme practice.
At the first Court hearing, the Court will consider whether the proposed scheme is fit for consideration at the proposed scheme 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; and that members are to be properly informed as to the nature of the scheme before the scheme meeting: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44], cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34 at [58]; Re InvoCare Ltd [2023] NSWSC 1180 ("InvoCare") at [16]-[17].
I have summarised the principles which apply to the exercise of the Court's discretion whether to convene a scheme meeting in, among many cases, Re Villa World Ltd [2019] NSWSC 1207 ("Villa World") at [15]-[19] and, in Re Absolute Equity Performance Fund Ltd [2022] FCA 933 at [18]-[22], Halley J summarised these principles as follows: "The Court will not ordinarily make orders for the convening of a scheme meeting unless the scheme is of such a nature and cast on such terms that if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application that was not opposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72 (Street CJ, with whom Hutley and Samuels JJA agreed); approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; [1993] HCA 15 at 504; Re Central Pacific Minerals NL [2002] FCA 239 at [8] ; CSR Ltd, Re CSR Ltd (2010) 183 FCR 358; [2010] FCAFC 34 at [12] . At the first court hearing, the Court exercises its supervisory jurisdiction in order to review the scheme and the explanatory statement and to raise any queries that it might have with the plaintiff: Alstom Signalling Solutions Pty Ltd, Re Alstom Signalling Solutions Pty Ltd v Alstom Transport Australia Pty Ltd [2016] FCA 838 at [21] (Gleeson J). The Court needs to be satisfied that there are no obvious flaws in the scheme and that there is an adequate explanation provided to persons who have a financial interest in the proposed scheme: Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [13] (Black J) (Coca-Cola Amatil). The Court should consider at the first court hearing whether the proposed scheme is not inappropriate and whether it is one that sensible business people might consider is of benefit to its members: Australian Leaders Fund Ltd v Equity Trustees Ltd, Re Australian Leaders Fund Ltd [2021] FCA 88 (Leaders Fund) at [15] citing Re Sonodyne International Ltd (1994) 15 ACSR 494 at 499 (Hayne J); Integra Mining at [11] (McKerracher J); and Amcom at [10] (McKerracher J). The Court does not need to be satisfied that no better scheme could have been proposed and ultimately that is a question for the members themselves to determine at the scheme meeting: Associated Advisory Practices Ltd, Re Associated Advisory Practices Ltd [2013] FCA 761 at [22] (Farrell J); Coca-Cola Amatil at [13]; and Leaders Fund at [15]. Although the second court hearing is when the Court makes its final determination, in practice, the first court hearing is where the Court will typically intervene if it has concerns. A reason that has been advanced for this is that the market views the approval by the Court of the convening of scheme meetings as providing assurance that the scheme, at least in form and substance, has received a preliminary clearance by the Court and that trading in the company's securities thereafter will proceed on that basis: Re Archaean Gold NL (1997) 23 ACSR 143 at 147; and Leaders Fund at [15]."
Mr Lockhart points out that the independent experts, Messrs De Cian and Butterfield of Grant Thornton, have expressed the opinion that the advantages of the scheme outweigh its disadvantages and accordingly that the scheme is in the best interests of SXG shareholders who are participating in the scheme. Mr Lockhart notes that the independent experts have provided an opinion as to whether or not the scheme is in the best interests of SXG shareholders (other than Mawson), and not an opinion as to whether the scheme is fair and reasonable, where they consider that the "economic interests of the SXG Non-Associated Shareholders do not change", rather the scheme being a change of control transaction. Mr Lockhart also points out that SXG established a committee of independent directors and that the independent directors unanimously recommend that shareholders vote in favour of the scheme, in the absence of a superior proposal and subject to the independent experts continuing to conclude that the scheme is in the best interests of shareholders. He submits and I accept that their interests in the scheme are sufficiently disclosed in the scheme booklet.
I accept that, subject to several further matters noted by Mr Lockhart that I address below, there is nothing in the terms of the scheme, or in its effect on SXG shareholders, that would otherwise warrant the Court declining to approve the scheme at the second Court hearing, if it receives the statutory majorities required by s 411(4)(a)(ii) of the Act at the scheme meeting.

Further matters

Mr Lockhart also addresses several further matters. First, Mr Lockhart points out that the scheme involves Mawson acquiring all of the shares in SXG which it does not own and the consolidated entity being listed on the ASX and remaining listed on TSXV. He points out that, as I noted above, Mawson will consolidate the number of Mawson shares on issue to be equal to the number of SXG shares that it owns, and SXG shareholders will be issued with a Mawson CDI quoted on the ASX (as default consideration) or, if they have made a valid election, new Mawson shares on a one-for-one basis. He submits and I accept that the use of CDIs in schemes is not uncommon. He points out that the effect is that SXG shareholders will own approximately 51.33% of the shares in the consolidated entity based on their current holdings, or approximately 56.20% as a result of the completion of the Sparr acquisition. These matters are disclosed in the scheme booklet, which also discloses the differences between CDIs and shares.
Mr Lockhart points out that Beach J considered a similar scheme in Re Amcor Ltd [2019] FCA 346 at [20]-[32], where the proposed scheme would result in a transfer of all of Amcor's shares to a newly incorporated holding company, Amcor plc, incorporated in the Bailiwick of Jersey, which would have a primary listing on the New York Stock Exchange and a foreign exempt listing on the ASX with CDIs. Beach J there recognised the apparent complexity of the arrangements, but convened the scheme meeting where they had been adequately disclosed in the scheme booklet. I accept that these matters give rise to no reason not to convene the scheme meeting.
Second, Mr Lockhart points out that performance risk is addressed by Mawson's entry into a deed poll binding it to comply with its obligations under the SIA and to do all acts and things necessary or desirable on its part to give full effect to the scheme, and by the fact that the transfer of SXG shares to Mawson is conditional upon the scheme consideration having been provided to SXG. I accept that this is an accepted manner of managing performance risk in respect of a scheme of this kind: Ellerston at [29].
Third, Mr Lockhart addresses Mawson's proposed divestment of Euro Canna prior to implementation of the scheme, which I noted above. Mr Lockhart points out that the independent experts have given their opinion as to the proposed scheme on the basis that this divestment occurs and have expressed the view that, if it does not, the existing SXG shareholders (other than Ineligible Overseas Investors) will have the benefit of those existing investments or any distribution of them. I noted above that the status of this transaction was addressed in Ms Bermudez's affidavit. Mr Lockhart also notes that Mawson may retain its interest in the Skelleftea North Gold Project in Northern Sweden when the scheme is implemented, but this has a book value of only C$351,738 and will otherwise bring approximately C$2.45 million cash to the consolidated group, and liabilities of approximately C$366,000 as at 31 October 2024. These matters are sufficiently disclosed in the scheme booklet and do not give rise to any reason not to convene the scheme meeting.
Fourth, Mr Lockhart notes that a break fee of $1 million payable by SXG to Mawson (in the circumstances set out at cl 15.2 of the SIA) represents approximately 0.18% of the implied equity value of the scheme and that this is consistent with the Takeovers Panel's guidance that a break fee not exceeding 1% of the equity value of the target is generally not unacceptable. There is also a break fee of $2 million payable by Mawson in the circumstances set out at SIA cl 15.4. I accept that break fees are also common features in schemes of arrangement and will be permitted unless the amount of the break fee is such that it could influence voting at the meeting to be convened or if there are some unusual circumstances: Villa World at [24]. This matter also gives rise to no reason not to convene the scheme meeting.
Fifth, Mr Lockhart point out that the SIA contains 'no shop' (cl 13.2), 'no talk' (cl 13.3) and 'no due diligence' (cl 13.4) restrictions upon SXG. The 'no talk' and 'no due diligence' clauses are subject to a fiduciary carve out in cl 13.8. Each restriction applies for the "Exclusivity Period" which is relevantly the earlier of the termination of the SIA, the implementation of the scheme, and the end date (which is 5 months after the date of the SIA). These provisions are disclosed in the scheme booklet. I accept that exclusivity provisions in this form are now commonplace in schemes of arrangement and are not inconsistent with the Takeovers Panel's guidance as to "deal protection": Villa World at [23]. The Court is concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative proposal should be subject to a fiduciary carve out; and the provisions should be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9]; Re TPG Telecom Ltd [2020] NSWSC 772 at [22]; Re Isentia Group Ltd [2021] NSWSC 910 at [23]; Re Asaleo Care Ltd [2021] FCA 406 at [55]. I also recognise that there was correspondence between ASIC and SXG as to the form of the 'no shop' provision, and the case law has accepted that a 'no shop' clause need not be subject to a fiduciary carve out: Re DUET Management Company 1 Ltd [2013] NSWSC 817 at [24]; Re Aveo Group Ltd and Aveo Funds Management Ltd [2019] NSWSC 1348 at [44]. These matters give rise to no reason not to convene the scheme meeting.
Sixth, Mr Lockhart points out that the SIA contains conditions precedent that there has been no "SXG Material Adverse Change" and no "Mawson Material Adverse Change" between when that Agreement was executed and 8.00am on the second Court date. These conditions precedent are disclosed in the scheme booklet and provisions of this kind have been accepted in Re Vimy Resources Ltd [2022] WASC 233 at [97]ff and Re Kyckr Ltd [2022] NSWSC 1316 at [21]. This matter also gives rise to no reason not to convene the scheme meeting.
Seventh, Mr Lockhart points out that it is a condition precedent to the scheme that, before 8am on the second Court date, each holder of SXG options or SXG performance rights has either exercised their options or performance rights or entered into an "Options and Rights Exchange Agreement", which will provide for those options or performance rights to be cancelled in exchange for the "Option Exchange Consideration" or "Performance Right Consideration" (as defined) (in each case conditional upon the scheme becoming effective). Broadly, existing SXG options and performance rights are to be replaced with equivalent Mawson options and performance rights. The directors' interests in respect of such rights are disclosed in the scheme booklet. Mr Eadie's affidavit addresses the several forms of options issued by SXG and notes that the performance rights are issued to employees of SXG who are not considered key management personnel. The process by which these options and performance rights are to be dealt with is also disclosed in the scheme booklet.
I accept that this matter also gives rise to no reason not to convene the scheme meeting, and holders of SXG options and performance rights who are also SXG shareholders are not in a separate class of members by reason only that they also hold such rights: Re Cashcard Australia Ltd (2004) 48 ACSR 738; Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re A2B Australia Ltd [2024] NSWSC 185 at [13].
In oral submissions, Mr Lockhart also addressed SXG's proposed communications with shareholders, in addition to the scheme booklet and scheme meeting materials. Mr Lockhart notes that SXG draws these matters to the Court's attention, although in accordance with recent practice, no orders are sought approving the form of these communications: InvoCare at [26]; Practice Note SC Eq 4 [26(k)].

Exemption under US Securities Act

If the scheme is approved by the Court, SXG seeks to rely upon s 3(a)(10) of the Securities Act 1933 (US) for its US shareholders who are scheme participants. Mr Lockhart recognises that there are several requirements to come within that exemption, including that the issuer of securities advises the Court before the hearing that it will rely on the exemption in the event the Court approves the scheme: Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [11]-[20]; Re Telstra Corporations Ltd (No 2) (2022) 163 ACSR 543 at [55]-[57]. I note this matter which may otherwise be deferred to the second Court hearing.

Determination and orders

For these reasons, I made the orders sought by SXG at the conclusion of the first Court hearing on 12 November 2024.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 November 2024

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