Solicitors:
Corrs Chambers Westgarth (Plaintiff)
Herbert Smith Freehills (Bidder)
File Number(s): 2024/106764
[2]
Judgment
By Originating Process filed on 20 March 2024, the Plaintiff, Silver Lake Resources Ltd ("SLR") applies for orders under ss 411 and 1319 of the Corporations Act 2001 (Cth) ("Act") that it convene a meeting of its members in respect of a proposed scheme of arrangement and ancillary orders.
By way of background, SLR is an Australian public company limited by shares; is admitted to the official list of the securities exchange conducted by Australian Securities Exchange Limited ("ASX"); and is a gold producer with operations in the eastern goldfields and mid-west regions of Western Australia. On 5 February 2024, SLR announced to the ASX that it had entered into a scheme implementation deed ("SID") with Red 5 Limited ("Red 5") which is a mid-tier Australian gold producer that has been listed on ASX since October 1996. The proposed scheme provides for Red 5 or its wholly owned nominee to acquire all of the issued shares in SLR (other than those held by Excluded Shareholders being Red 5 and its controlled entities) in consideration of the issue of 3.434 fully paid ordinary shares in the capital of Red 5 for each SLR share, subject to the treatment of Ineligible Shareholders (as defined) as set out in the scheme booklet. There are currently no Excluded Shareholders.
I made the orders sought by SLR at the conclusion of the hearing on 24 April 2024. These are my reasons for doing so. I have drawn on the helpful submissions of Mr Izzo, who appeared for SLR, in this judgment.
[3]
Affidavit and other evidence
SLR reads the affidavit dated 20 March 2024 of its solicitor, Ms Sleiman who refers to an announcement made by SLR to ASX on 5 February 2024 concerning SLR's entry into the SID. Ms Sleiman's affidavit annexes a company search for SLR and a copy of the announcement made by SLR to ASX in respect of the proposed scheme.
SLR also reads the affidavit dated 22 April 2024 of Mr Berg, who is its General Counsel and Company Secretary. Mr Berg addresses the scheme consideration which is, as I noted above, made up of fully paid ordinary shares in Red 5 and also refers to the treatment of Ineligible Shareholders, comprising Ineligible Overseas Shareholders who are resident outside Australia other than in specified jurisdictions in which the share issue can proceed, and Relevant Small Parcel Shareholders (as defined). The proposed scheme contemplates that Red 5 will issue the Red 5 shares that would otherwise have been issued to the Ineligible Shareholder to a sale agent appointed by Red 5 which will sell those shares on ASX at a price which it determines in good faith, and provide to SLR the proceeds of sale (after deducting expenses) which SLR will then pay or cause to be paid to each Ineligible Shareholder on a pro rata basis.
Mr Berg also refers to the consideration of the proposed scheme by the SLR board, to the conditions precedent to the scheme, to exclusivity and break fee provisions which are in conventional form and to the treatment of SLR performance rights under the scheme. Mr Berg also refers to a shareholding held by SLR in Red 5, comprising approximately 11.7% of the total issued share capital of Red 5 and to the manner in which those shares will be treated. Mr Berg refers to SLR's appointment of BDO Corporate Finance (WA) Pty Ltd ("BDO") to prepare an independent expert's report in respect of the scheme, to the proposed conduct of the scheme meeting as an in person meeting to be held in Perth, and to the proposed chair and alternate chair of the scheme meeting, who each consent to act in those roles. He also notes that Red 5 has executed a deed poll in favour of the scheme shareholders in respect of the scheme and refers to the verification process undertaken by SLR in respect of the scheme booklet which was in conventional form. He outlines the process proposed for the dispatch of scheme documents and to SLR's proposal to conduct an inbound information line for shareholders and an outbound call campaign directed to all SLR shareholders with at least a specified holding of SLR shares. In accordance with current scheme practice, SLR did not seek the Court's approval of the scripts for those communications, although they were put before the Court. I will address those matters below. Mr Berg also referred to reminder to vote communications which would be sent to shareholders which were uncontroversial and to SLR's intent, consistent with current scheme practice, to give notice of the second Court hearing by an announcement made on ASX.
By an affidavit dated 23 April 2024, Mr Coyne, who is the Chief Financial Officer and joint company secretary of Red 5, outlined the verification process which had been undertaken by Red 5 in respect of information concerning it which was contained in the scheme booklet, which was in conventional form.
By a second affidavit dated 23 April 2024, Ms Sleiman referred to correspondence with the Australian Securities and Investments Commission ("ASIC") in respect of the scheme. By a third affidavit dated 23 April 2024, Ms Sleiman referred to a further amendment which had been made to the letter from the chair of Red 5 contained in the scheme booklet, to amendments to the script to the outbound call program which had been made following comments from ASIC, which preceded further amendments to that script to which I refer below, and she annexed a letter dated 23 April 2024 from ASIC which, in accordance with its usual practice reserved its position as to s 411(17) of the Act to the second Court hearing, and noted that ASIC did not then intend to make submissions to intervene or oppose the scheme at the first Court hearing.
[4]
Applicable principles
The principles which apply to the exercise of the Court's discretion at a first Court hearing in respect of a scheme of arrangement are well established. I am satisfied of several matters that are necessary to convene a scheme meeting, namely that SLR is a "Part 5.1 body" and the proposed scheme is an "arrangement" within the meaning of s 411 of the Act. As Mr Izzo points out, the concept of an "arrangement" contemplates a wide class of arrangements that are within a company's power and are not contrary to law and which touch or concern the company's rights: Re Orion Telecommunications Ltd [2007] FCA 1389 at [5]; Re Staging Connections Group Ltd [2015] FCA 1012 at [19]. A proposal for the acquisition of the shares in a company in return for consideration being paid to shareholders falls within that concept. Mr Izzo also notes that a verification process in customary form has been undertaken in relation to the draft scheme booklet, as outlined in paragraphs 70-80 of Mr Berg's affidavit and, in respect of the information in the scheme booklet for which Red 5 was responsible, in paragraphs 11 - 19 of Mr Coyne's affidavit, and I accept that there appears to be proper disclosure to members, supported by the evidence of those verification processes. ASIC has had reasonable opportunity to examine the proposed scheme and scheme booklet, to make submissions and has had 14 days' notice of the proposed hearing date of the first Court hearing and I have referred above to its letter tendered at this hearing.
The Court will wish to be satisfied that the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) ("Rules") have been met. Mr Izzo submits and I accept that the procedural requirements in relation to the scheme have been met, including the requirements under r 3.2 of the Rules in relation to the nomination of the chair and alternate chair of the scheme meeting, and the proposed short minutes provide for the distribution of the scheme documents in a conventional manner, depending on shareholders election as to the form in which they prefer to receive such documents. The orders also address the convening and conduct of the proposed scheme meeting and seek relief that is customary and consistent with Practice Note SC Eq 4 in that regard.
In order to convene a scheme meeting, the Court must also be satisfied that the scheme is fit for consideration by SLR's shareholders 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; [1993] HCA 15; 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], where French J observed that:
"It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J).
… The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
I have adopted the same approach in many cases including Re InvoCare Ltd [2023] NSWSC 1180 at [16]-[17].
Mr Izzo here points out that SLR's directors have unanimously recommended that SLR 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 SLR shareholders. Each SLR director indicates that he or she intends to vote, or procure the voting of, all SLR shares held by them or on their behalf in favour of the scheme at the scheme meeting, subject to the same qualifications. There is adequate disclosure of directors' interests in respect of that recommendation. Mr Izzo points out that the scheme booklet also contains a report from BDO, which expresses the opinion that the proposed scheme is fair and reasonable and in the best interests of SLR's shareholders, where BDO has provided a valuation range for SLR shares of between $1.050 and $1.250 with a preferred value of $1.150, and the value of 3.434 shares in the merged group of between $1.099 and $1.271 with a preferred value of $1.185, calculated on a minority interest basis. Subject to the several matters that I address below, the proposed scheme is an orthodox acquisition scheme and there is nothing in the terms of the scheme that would warrant the Court declining to permit its consideration by members.
[5]
Other aspects of the proposed scheme
Mr Izzo also refers to several other aspects of the proposed scheme. First, Mr Izzo notes that the SID contains certain exclusivity and reimbursement fee provisions, including "no existing discussions", "no-shop", "no-talk" and "no due diligence" obligations on SLR and also requires SLR to notify Red 5 if SLR receives any approach with respect to a Silver Lake Competing Proposal (as defined in the SID) and to provide Red 5 with any information provided to a third party in connection with a Silver Lake Competing Proposal, and allows Red 5 a "matching right" in respect of any Silver Lake Competing Proposal. Clause 12.8 of the SID contains a fiduciary exception to the "no talk" and "no due diligence" obligations on SLR. I accept that provisions of this character are now commonplace in schemes of arrangement and generally accepted by the case law, if sufficiently disclosed in the scheme booklet: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9] ; Re Villa World Ltd (2019) 139 ACSR 550; [2019] NSWSC 1207 at [23]; Re Aveo Group Ltd and Aveo Funds Management Ltd [2019] NSWSC 1348 at [44]. These provisions are adequately disclosed in the scheme booklet. Mr Izzo also points out that the exclusivity provisions referred to above operate during an exclusivity period commencing on 4 February 2024 and ending on the earliest of an End Date of 9 months after that date, the Implementation Date or termination of the SID in accordance with its terms. I accept that exclusivity periods of up to 9 months have previously been accepted in relatively complex transactions and this transaction is of that character: Re ELMO Software Pty Ltd [2023] NSWSC 12 at [29]. These provisions give rise to no reason not to convene the scheme meeting.
Second, Mr Izzo notes that the SID also provides a reimbursement fee arrangement, which requires SLR to pay an amount of $9.6 million to Red 5 in specified circumstances, which do not include SLR's shareholders not voting in favour of the proposed scheme. The amount of the reimbursement fee is less than 1% of the equity value of SLR as implied by the implied scheme consideration of $1.133 per SLR share and the total issued capital of SLR (on a fully diluted basis) at the trading day prior to the announcement of the scheme on 5 February 2024, and this level of reimbursement fee is consistent with the Takeovers Panel's guidance. A broadly reciprocal obligation required Red 5 to pay the same amount to SLR in certain circumstances. I accept that a break fee of this character is also commonplace in schemes of arrangement and accepted by the case law, and these provisions give rise to no reason not to convene the scheme meeting.
Third, Mr Izzo also addresses the position in respect of SLR performance rights, which are described in Mr Berg's affidavit at paragraphs 42 - 48, and other interests of the directors in the proposed scheme. Mr Izzo notes that SLR performance rights were issued under the SLR Employee Incentive Plan to Mr Tonkin, SLR's Managing Director, and to SLR senior executives and employees in accordance with specified vesting terms as determined by the SLR Board. The SLR performance rights have a nil exercise price and varying expiry dates and conditions for vesting in tranches as determined by the SLR board. Each SLR performance right entitles the holder to receive one SLR share upon vesting and exercise. Under the terms of the SLR Employee Incentive Plan, SLR performance rights will vest and be exercised upon the scheme being approved by SLR shareholders at the scheme meeting. Pursuant to cl 4.1 of the scheme, it is a condition precedent to the scheme that all SLR performance rights are cancelled, or vest and are exercised (if applicable), and the resulting new SLR shares issued, in accordance with their terms on or prior to the delivery time on the date of the second Court hearing.
Mr Izzo also notes that Mr Tonkin has entered into voluntary escrow arrangements in respect to approximately 50% of the new SLR shares that will be issued to him upon vesting and exercise of his SLR performance rights with a vesting date of 30 June 2025 and 30 June 2026, being approximately 1,063,420 SLR shares, and extending to the 3,651,785 shares in Red 5 that will be issued in respect of those SLR shares upon the implementation of the scheme, subject to the scheme becoming effective and applying until 30 June 2025. The remaining SLR shares issued to Mr Tonkin upon the vesting and exercise of his SLR performance rights with a vesting date of 30 June 2025 and 30 June 2026, extending to the Red 5 shares that will be issued to Mr Tonkin in respect of those SLR shares on implementation of the scheme are not subject to any escrow restrictions. No escrow applies to any of the new SLR shares that will be issued to Mr Tonkin upon vesting and exercise of SLR performance rights with a vesting date of 30 June 2024 and the Red 5 shares that will be issued to Mr Tonkin in respect of those SLR shares on implementation of the scheme. Mr Izzo also notes that several other senior executives of SLR have entered into voluntary escrow arrangements in respect of approximately 50% of the new SLR shares that will be issued to them upon vesting and exercise of their SLR performance rights with a vesting date of 30 June 2025 and 30 June 2026 and the Red 5 shares that will be issued in respect of those SLR shares upon the implementation of the scheme and those voluntary escrow restrictions are also subject to the scheme becoming effective and apply until 30 June 2025. Mr Izzo also notes that it is proposed that Mr Tonkin and three non-executive directors of SLR will be appointed directors of the merged group; Mr Tonkin will be Managing Director and Chief Executive Officer of the group; and the directors and Mr Tonkin will receive remuneration in that capacity.
Mr Izzo submits and I accept that benefits of this kind do not preclude the relevant directors making a recommendation to SLR shareholders, where sufficiently disclosed in the scheme booklet: Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd (2019) 375 ALR 760; (2019) 139 ACSR 122; [2019] FCA 1226; Re BINGO Industries Ltd [2021] NSWSC 798; Re RXP Services Ltd [2021] FCA 38; Re Mainstream Group Holdings Ltd [2021] FCA 948; Re Pendal Group Ltd (No 2) [2022] NSWSC 1648 at [25]; Re Probiotec Ltd [2024] FCA 298 at [67]. I also accept that information relating to the interests of SLR directors including Mr Tonkin in the outcome of the scheme is prominently disclosed at sections 4.4, 4.10, 6.7 and 8.4 of the scheme booklet and in the "SRL Chairperson Letter" contained in the scheme booklet.
I also accept that holders of the SLR performance rights 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 ELMO Software Pty Ltd [2023] NSWSC 12 at [25]; Re Link Administration Holdings Ltd [2024] NSWSC 331 at [13]; Re Ansararda Group Ltd [2024] NSWSC 411 at [20].
Fourth, Mr Izzo also addresses SLR's proposed communications with shareholders, which are addressed in paragraphs 94 to 100 of Mr Berg's affidavit. These communications will take the form of the establishment of a shareholder information line to answer shareholder queries, an outbound call campaign in respect of large shareholders and the dispatch of reminder to vote emails. I had no concerns with SLR's proposed script for the inbound information line, which provided information responding to shareholder questions in a manner that reflected the content of the scheme booklet. However, a potential difficulty arose from the script for SLR's proposed outbound campaign which, in its original version, provided limited information to scheme shareholders but strongly advocated that they vote in favour of the scheme, and raised a real risk that, at the second Court hearing, it would be impossible to know the extent to which the outcome of the scheme meeting had reflected votes cast by shareholders who had been urged to vote in favour of the scheme in outbound calls without being provided with substantial information about it, and had taken that course rather than reading the scheme booklet of nearly 700 pages. In accordance with the procedure now contemplated by the Harmonised Practice Note in respect of schemes, reflected in Equity Practice Note 4 in this Court, I would have treated that matter as one which did not prevent the convening of the scheme meeting, but it would have been relevant to the question whether the scheme should be approved at the second Court hearing. In the event, SLR sensibly undertook a revision of the script for the outbound call campaign, so as to introduce greater informational content in it and reduce the level of advocacy contained in it, and further emphasised the desirability of shareholders reading the scheme booklet. No issues arise with that script in its revised version which are likely to cause difficulty at the second Court hearing.
Fifth, as I noted above, Mr Izzo points out certain SLR shareholders (being Ineligible Overseas Shareholders and Relevant Small Parcel Shareholders) will not receive Red 5 shares and the shares that would otherwise be issued to them will be issued to a sale agent and the proceeds of the sale of those shares will be remitted to them. Mr Izzo submits and I accept that sale facilities of this kind do not require that these shareholders vote in a separate class and, even if there is a formal difference in terms of respective shareholders rights under the scheme, it does not destroy their ability to consult together with other shareholders in their common interest: Re Wesfarmers Ltd [2018] WASC 308 at [96], [98]; Re Amcor Ltd [2019] FCA 346 at [41]-[44]; Re Sundance Energy Australia Ltd [2019] FCA 1944 at [14].
Sixth, Mr Izzo also addresses the position as to deemed warranties. He points out that the scheme provides for a warranty by which SLR shareholders warrant that their SLR shares are fully paid and free from all security interests of third parties, and that they have full power to sell and to transfer their shares. He submits and I accept that the case law has permitted deemed warranties of this kind provided they are adequately disclosed: Re Intega Group Ltd [2021] NSWSC 1434 at [24]. I accept that SLR shareholders are informed of this warranty in the scheme booklet.
Seventh, Mr Izzo points out that, if the Court approves the scheme, SLR and Red 5 intend to rely on s 3(a)(10) of the Securities Act 1933 (US), which provides an exemption from the registration requirements of that statute and on the Court's approval of the scheme, among other things, to qualify for that exemption, in relation to SLR shareholders with a registered address in the United States of America. I recognise that this intention is drawn to the attention of SLR shareholders under the heading 'United States' in section 12.8(i) of the scheme booklet. A condition of the exemption under this section is that the Court consider the fairness of the scheme of arrangement; that consideration will be undertaken at the second Court hearing; and I now need only note that that SLR and Red 5 do intend to rely on this exemption and that this matter will be raised again with the Court at the second Court hearing: Re Amcor Ltd (No 2) [2019] FCA 842.
[6]
Orders
For these reasons, I made the orders sought by SLR at the conclusion of the first Court hearing on 24 April 2024.
[7]
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: 28 May 2024