Avocet Resources Limited, in the matter of Avocet Resources Limited [2013] FCA 496

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 96 of 2013

IN THE MATTER OF AVOCET RESOURCES LIMITED ACN 113 446 352 BETWEEN: AVOCET RESOURCES LIMITED ACN 113 446 352

JUDGE: MCKERRACHER J DATE: 23 MAY 2013 PLACE: PERTH

INTRODUCTION 1 These are reasons for orders made after a first hearing in relation to a proposed scheme of arrangement on 19 April 2013. The plaintiff (Avocet) sought orders in terms of its amended minute of proposed orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (CA) that it convene a meeting of its ordinary shareholders to consider a proposed scheme of arrangement and orders approving the draft explanatory statement for distribution to Avocet shareholders in the form of a scheme booklet.

EVIDENCE IN SUPPORT 2 In support of its application, Avocet relied upon the following affidavits: affidavit of Stephen John Mann sworn 5 April 2013; affidavit of Philip Andrew Lucas sworn 9 April 2013; affidavit of Simon Gerard Cunningham Rear sworn 18 April 2013; affidavit of Justin Peter Sims sworn 18 April 2013; and an additional affidavit sworn by Simon Gerard Cunningham Rear on 19 April 2013.

THE PROPOSED SCHEME 3 As explained in Avocet's outline of submissions dated 18 April 2013, the scheme is proposed between Avocet and its members. If implemented, the scheme will result in the following: Avocet becoming a wholly owned subsidiary of Lion One Metals Limited (Lion One); Avocet being delisted from the Australian Securities Exchange (ASX); Lion One being admitted to the official list of the ASX; and Lion One CHESS Depository Instruments (CDIs) being approved for quotation on the ASX. 4 Avocet is a company listed on the ASX. It carries on the business of uranium, precious metal and iron ore exploration in Australia and Argentina. As at 19 April 2013, it had 105,513,653 ordinary shares on issue. 5 Lion One is incorporated in British Columbia, Canada. It is listed on the TSX Venture Exchange and carries on the business of acquiring, exploring and developing mineral resource properties. It is currently focussed on the acquisition, exploration and development of mineral resource properties in the Fijian islands and in particular the Tuvatu Gold Project. 6 Avocet and Lion One announced to the ASX that they had entered into a scheme implementation agreement on 21 December 2012. Under the proposed scheme, Lion One would acquire all of the issued shares in Avocet and in return, each Avocet shareholder would receive one Lion One share (in the form of a CDI) for every 9.5 Avocet shares they hold.

Ineligible Foreign Shareholders 7 A small percentage of Avocet shares (approximately 0.8% of issued shares) are held by persons whose registered address is located outside Australia, Canada, New Zealand and the United Kingdom, and who may not be able to be issued CDIs as consideration due to their local securities law (ineligible foreign shareholders). In those circumstances, the CDIs will be issued to a nominated agent, who will then sell the CDIs following the implementation of the proposed scheme and pay the sale proceeds to the ineligible foreign shareholders.

Small Shareholders 8 Additionally, Avocet shareholders who hold 4,750 shares or less are classified as 'small shareholders' under the proposed scheme. Those small shareholders may elect to have their Lion One CDIs allotted to a nominated agent, who would sell those CDIs and pay the small shareholders the sale proceeds.

Options 9 Avocet's issued securities include 500,000 unlisted options to acquire fully paid ordinary shares in Avocet exercisable at 25 cents before 18 November 2013. Mr Mann's affidavit reveals that the options will not be dealt with as part of the proposed scheme. Rather, the options, which are all held by Mr Walter Berukoff, a former Director and Non-executive Chairman of Avocet, and the current Chairman and Chief Executive Officer of Lion One, are due to expire on 18 November 2013. Avocet has entered into a separate agreement with Mr Berukoff under which he has agreed to the cancellation of the options for nil consideration, from and conditional upon the proposed scheme being implemented.

RELEVANT PRINCIPLES 10 As I have noted previously in Sundance Resources Limited, in the matter of Sundance Resources Limited [2012] FCA 1290 (at [6]) and Integra Mining Limited, in the matter of Integra Mining Limited [2012] FCA 1414 (at [9]), there are three stages to a successful application under s 411 CA. First, the Court approves the convening a scheme meeting and approves the draft explanatory statement to be sent to the members. Second, members vote on the proposed scheme. Third, the Court approves the scheme: Re CSR Ltd (2010) 183 FCR 358 (at [7]) and Re Foundation Healthcare Ltd (2002) 42 ACSR 252 (at [36]). 11 There are five questions relevant to first stage, which are as follows: Is there a compromise or arrangement? Is there a Pt 5.1 body? Are there members of a company? Are there classes of members? Should the Court make orders to convene a meeting? 12 I will deal with each of those questions in turn. However, first it is important to note the standard of review relevant to the first hearing. At this stage, I am required to consider whether the proposed scheme is not inappropriate and is one that sensible business people might consider is of benefit to members: Re Sonodyne International Ltd (1994) 15 ACSR 494 (at 499); Integra Mining Limited (at [11]). In other words, the jurisdiction of the Court is supervisory in nature: Little World Beverages Limited, in the matter of Little World Beverages Limited [2012] FCA 1057 (at [13]). If the proposed arrangement is one that seems fit for consideration by a meeting of members and is a commercial proposition likely to gain the Court's approval if passed by the necessary majorities, then leave should be given to convene the meeting: Re ACM Gold Ltd (1992) 34 FCR 530 (at 535) per O'Loughlin J. The Court does not need to be satisfied that no better scheme could have been devised: Re Foundation Healthcare Ltd (at 265) per French J, as his Honour then was. 13 I should order the convening of the scheme meeting and approve the explanatory statement if Avocet can satisfy me of the following matters: The proposed scheme is an arrangement in respect of which the Court may order a meeting of members: s 411(1) CA. That is, the scheme is an arrangement; Avocet is a Pt 5.1 Body; the scheme participants are members of Avocet; and the scheme meeting will be convened between members of the same class. The Australian Securities and Investments Commission (ASIC) has had a reasonable opportunity to examine the terms of the proposed scheme and explanatory statement and make submissions to the Court in relation to those matters: s 411(2)(b) CA. The explanatory statement provides adequate disclosure (s 412(1)(a)(i) CA) and contains the prescribed information: s 12(1)(a)(ii) CA and Sch 8 cl 8301-8310 of the Corporations Regulations 2001 (Cth) (the Regulations). The procedural requirements of the Federal Court (Corporations) Rules 2000 (the Rules) have been met. 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: Integra Mining Limited (at [12]).

Arrangement 14 As observed by Santow J in Re NRMA Insurance (No 1) (2000) FLR 349 (at [20]), the word 'arrangement' has a wide definition. The proposed scheme is clearly an arrangement that touches or concerns the legal rights of Avocet and its members and falls within the power of s 411 CA. Moreover, as evidenced in Mr Mann's affidavit, the proposed scheme is not prevented by Avocet's constitution.

Part 5.1 body 15 Section 9 CA defines 'Part 5.1 body' to mean, inter alia, a company. Avocet is a company.

Members 16 Section 9 CA also defines 'member' to mean, in relation to a company, a person who is a member under s 231 CA. A person is a member of a company if they are a member upon registration or if they agree to become a member after the company is registered and their name is added to the register of members.

Classes of members 17 Section 411(1) CA only applies to arrangements between a company and its members or any class of them. The Court only has power to approve such arrangements pursuant to s 411(6) CA. In the present proposed scheme, there is only one class of shares issued in Avocet and all members have the same rights against the company. As outlined above, all Avocet shareholders will receive the same consideration under the proposed scheme in that they will receive, either directly or via a nominee, one Lion One CDI for every 9.5 Avocet shares they hold. In relation to the ineligible foreign shareholders and small shareholders who choose to have their Lion One CDIs issued to a nominated agent for sale, the nominated agent will arrange for the sale of their Lion One CDIs and distribution of proceeds. Avocet therefore submits, and I accept, that the rights of all members under the Scheme are not so different as to require more than one class of members to be constituted for the purpose of the scheme meeting.

ASIC Consideration 18 On the day of the hearing, Avocet exhibited a letter from ASIC to the Court dated 18 April 2013 which stated as follows: ASIC was given at least 14 days notice of the hearing of the application, satisfying s 411(2)(a) CA; ASIC was provided with a reasonable opportunity to examine the terms of the proposed scheme and to make submissions to the Court in relation to the proposed scheme, consistent with s 411(2)(b) CA; and ASIC did not intend to make submissions or intervene to oppose the proposed scheme at the first hearing.

Explanatory Statement 19 The explanatory statement must provide proper disclosure as required by s 411(3) CA. It must set out all the salient facts so as to allow shareholders to make an informed judgment about the proposed scheme: Re Dorman Long & Co Ltd, South Durham Steel & Iron Co Ltd [1934] Ch 635 (at 665-666) per Maugham J; applied by Santow J in Re NRMA Ltd (No 1) (at 354) and French J in Re Foundation Healthcare Ltd (at 263). Avocet submits, and I accept, that the explanatory statement - which includes an independent expert report prepared by RSM Bird Cameron, an independent technical specialist's report, an investigative accountant's report prepared by KPMG Transactions Services, a summary of the merger implementation agreement between Avocet and Lion One, the scheme, the draft share scheme poll, a comparison of relevant laws in the relevant jurisdiction and the proposed notice of the scheme meeting - provides proper disclosure. 20 At the first hearing, counsel for Avocet drew my attention to some minor revisions to the final draft of the scheme booklet, as exhibited to Mr Rear's second affidavit. For example, up to date information about the new premium proposed by scheme was included, being 13.9% on the closing price of Avocet shares on 16 April 2013. 21 Counsel also drew to my attention to various changes to the independent technical expert's report about the valuation of the reserves and resources, following discussions between Avocet and ASIC. It was evident from this disclosure that ASIC has paid close attention to the materials. For example, an asterisk was added to the table at ASIC's request to make clear ownership relating to various tenements. A table entitled 'Historical Resource Estimate' was also deleted in its entirety after ASIC commented that the table was deficient because it did not indicate the extent to which each of the four named resources had been mined. ASIC's view was that unless that information was provided, the named resources would not be comparable and the table would be liable to mislead. 22 Based on the final draft scheme booklet before me, I am satisfied that it meets the disclosure requirements prescribed in: ASIC Regulatory Guides 60, 111 and 112; the takeover provisions of the CA; the prospectus provisions of the CA; section 411(3) and s 412 CA; and Schedule 8 of the Regulations.

Recommendations by Independent Directors and Independent Expert 23 I note that the independent directors of Avocet have all recommended that members vote in favour of the proposed scheme in the absence of a superior proposal. The independent expert, RSM Bird Cameron, has also concluded that in the absence of a superior proposal, the proposed scheme is fair and reasonable to Avocet shareholders and in their best interests. As noted above, the premium proposed by the scheme is 13.9% on the close price of Avocet shares on 16 April 2013. On the face of the evidence before me, there is no suggestion that the scheme has been proposed for an improper purpose.

Other matters 24 By its submissions and consistent with the ex parte nature of the application and the disclosure principle expounded by Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 (at [7]), Avocet has also brought to my attention various aspects of the scheme.

Performance Risk 25 First, in relation to performance risk, the transfer of Avocet shares to Lion One under the scheme is conditional upon Lion One issuing to each Avocet shareholder the required number of Lion One CDIs as consideration. Clause 8.2 of the scheme provides that Avocet is authorised and required to enforce the Deed Poll against Lion One on behalf of Avocet shareholders. Avocet submits, and I accept, that there is no significant performance risk in this case.

Encumbrance Provisions 26 Second, cl 8.5 of the scheme provides that Avocet shareholders are deemed to warrant that their shares are fully paid and unencumbered as at the date of transfer to Lion One. This has been drawn to the attention of Avocet shareholders in section 12.16 of the scheme booklet.

Break Fee 27 Third, the merger implementation agreement between Avocet and Lion One provides that a $150,000 break fee is payable by one party to the other in certain circumstances set out in cl 10 of the merger implementation agreement. In relation to break fees, the Court must be satisfied that the break fee does not operate unfairly or unreasonably restrict competition. 28 In particular, the question is whether the break fee operates to force shareholders into agreeing to the scheme or to prevent companies from making a competing offer. Here, while the break fee exceeds 1% of the equity value of Avocet, which is more than the maximum amount recommended by the Takeovers Panel Guidance Note 7 on 'Lock-up devices', Avocet makes the following points about the break fee. The evidence shows that: it does not operate in a way that would force Avocet shareholders to vote in favour of the scheme because it is not payable if Avocet shareholders do not vote in favour of the scheme or if the Court or ASIC prohibits the scheme; it is partly reciprocal; it was negotiated at arm's length in commercial negotiations in which both Avocet and Lion One were separately advised and represented; it is the sole remedy for any breach by Avocet of the merger implementation agreement; it is a genuine preliminary estimate of costs and expenses incurred in relation to the proposed scheme; there are express contractual acknowledgements between Avocet and Lion One found in cl 10.1 of the merger implementation agreement that they would not have entered into the agreement without the break fee and that the break fee is reasonable and appropriate; and it has been referred to prominently in the scheme booklet. 29 Taking those matters into account, the break fee in this instance is reasonable.

Exclusivity Provisions 30 Fourth, cl 9 of the merger implementation agreement contains 'no-talk' and 'no-shop' provisions. I accept Avocet's submission that the exclusivity provisions are reasonable, fixed for a precise period of time (6 months), and framed in such a way as to ensure they are subject to directors' duties requirements.

Notice of Second Hearing 31 Finally, rule 3.4 of the Rules requires that notice of the second court hearing be published in a newspaper at least 5 days before the date fixed for the hearing. In this case, Avocet sought to publish its notice 5 business days before the second hearing date, which is currently listed for 31 May 2013, but also prior to the scheme meeting. I accept Avocet's submission that it is appropriate for the notice to be published on or before 24 May 2013 to provide sufficient notice of the second hearing and that similar orders were recently made in Westgold Resources Ltd (No 2) [2012] WASC 395 and Re Sundance Resources Ltd (at [23]-[24]).

CONCLUSION 32 There was no order sought by Avocet that went beyond existing practice. I was satisfied that orders should be made in terms of its amended minute of proposed orders dated 19 April 2013 pursuant to s 411(1) CA. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.