Bell IXL Investments Ltd v Life Therapeutics Ltd

Introduction 1 This proceeding concerns whether an allotment of shares was issued for an improper purpose and is a rehearing of a trial heard by another Judge of this Court as ordered by the Full Court on 15 August 2008. For the reasons which follow, after a consideration of the evidence before me on this rehearing, I have come to the view that the allotment was not for an improper purpose and was made bona fide in the best interests of Life Therapeutics Limited ('LFE'). Contrary to the contention of the plaintiff, I do not accept that the allotment of shares was done to defeat any perceived predator or to consolidate the collective position of the directors of LFE.

Background 2 LFE is a public company whose shares are listed on the Australian Securities Exchange ('ASX'). Before the allotment of the shares in issue in this proceeding, LFE had issued 123,223,857 shares with voting rights. 3 Between 14 May and 4 June 2008 Bell IXL Investments Limited ('Bell IXL') acquired 9,517,734 shares in LFE. Bell IXL's shares in LFE together with those of its associate, K Pagnin Pty Limited (3,018,000 shares) ('K Pagnin'), comprised approximately 10.17% of the issued capital of LFE. 4 On 23 May 2008 Bell IXL requisitioned LFE to convene an extraordinary general meeting of shareholders to consider resolutions to remove the current board and replace it with three persons nominated by Bell IXL. On 12 June 2008 LFE convened that meeting for 23 July 2008. The meeting has been adjourned as a result of orders of this Court. 5 On 9 June 2008 Aegis Partners Limited ('Aegis') agreed to accept a placement of 15% of LFE's issued shares at 7 cents per share. Aegis informed LFE that clients of Aegis would take 18,483,578 shares at 7 cents per share. On 16 June 2008 LFE announced to the ASX that it had agreed to issue to Aegis 18,483,578 fully paid ordinary shares (representing 15% of its total issued capital) at 7 cents per share. At a board meeting of LFE on 17 June 2008, the directors noted that a subscription application for 18,483,578 shares (to raise $1,293,850.46) had been received from Aegis on 12 June 2008 and resolved to approve that issue and placement. Under the subscription agreement between LFE and Aegis, Aegis could nominate nominees to whom the shares were to be issued. On 4 July 2008 LFE received the subscription amount for the shares and announced to the ASX that the placement to Aegis had been completed. The shares were not allotted to Aegis but rather, in accordance with instructions from Aegis, were allotted to Bell Potter who allocated them to various nominee account holders. On 10 July 2008 LFE announced to the ASX that Aegis had directed Bell Potter to place the shares directly with various beneficial owners. 6 This allotment represented approximately 13.04% of the voting shares in LFE and reduced Bell IXL's interest in LFE's capital to approximately 8.85% (at least as at 4 June 2008). 7 Before the month of May 2008 the directors of LFE had considered a capital raising by the company for a sum between $5 million and $20 million. On a date which was contested between the parties, two of LFE's directors, Messrs Bellman and Milne, met with Mr Booth of Asandas, a licensed stockbroker, to discuss a capital raising by LFE ('the Booth meeting'). Neither Mr Booth nor Asandas was retained as a broker by LFE. The Booth meeting led to a chain of events which resulted in the allotment of the shares in issue on 4 July 2008. 8 Some further background facts about LFE are important to record. LFE is a holding company whose subsidiaries in the United States of America collect and sell blood plasma. LFE's operations became unprofitable during 2006 and 2007, and in the early part of 2008 its financial position was precarious. This historical financial position is important in understanding the approach of the directors, to which I will later return. 9 In or about March 2008 LFE entered into an arrangement with its largest customer, Octapharma AG, a Swiss company, whereby: · A management agreement was entered into pursuant to which Octapharma was appointed to manage LFE's US operations; · A loan agreement was entered into under which Octapharma was to provide a US$37.1 million loan facility to be used to pay LFE's existing debts and under which Octapharma was to lend LFE an amount equal to the operating costs of its US subsidiaries less the revenue received; and · Octapharma was granted a put and call option which, subject to shareholder approval, gave Octapharma the option to purchase the shares in LFE's US subsidiaries at an exercise price of around US$47.1 million. 10 The result of the arrangement was that, before any sale of LFE's US subsidiaries to Octapharma, LFE would have funds to pay out its creditors leaving it with a balance of loan funds of approximately US$16 million which it could draw down. If the sale of the US subsidiaries were completed, LFE would be required to repay its loan to Octapharma which would leave it with a balance of the order of $17 million or $18 million in cash. However, if the sale of the US subsidiaries were not to proceed because, for example, shareholder approval were not given, then LFE would be required to repay the loan to Octapharma. 11 At the time this arrangement was entered into, the directors of LFE were Mr Wayne Bellman (having been appointed on 14 February 2008), who later became Chairman, and Mr Michael Milne (having been appointed on 13 February 2008). Subsequently, on 5 May 2008, Ms Dale Calhoun was appointed a director of LFE. During the period that these directors were on the board they had few or no staff to assist in the management in Australia, and most of the executive and administrative work had to be done by the directors. Having regard to the financial position of LFE and the nature of the Octapharma transaction, I accept that such work as undertaken by the directors was extensive and I view the evidence in this case against this background. I also accept that the directors in carrying out the executive and administrative tasks did not have a practice of keeping documentation or recording discussions or considerations, otherwise than at board meetings to record the resolutions made by LFE. I also view the evidence in this case against this general practice of the directors. 12 Nevertheless, the directors of LFE did engage a financial adviser, Mr Riddell, who brought about the arrangement with Octapharma. Prior to this arrangement, there had been discussions by the directors about the need to raise finance for working capital in the region of $5-20 million. After the arrangement with Octapharma was entered into, Messrs Bellman and Milne discussed with Mr Riddell the desire of LFE to raise further capital which would allow it to pursue other ventures as an investment vehicle. However, the financial adviser's retainer was effectively terminated in late April 2008, as was LFE's focus on the need for a significant amount of additional capital. 13 Octapharma exercised its call option on 11 April 2008 which required LFE to convene a meeting of shareholders to consider whether they would approve the sale. That meeting has not yet been held.