Blackgold International Holdings Limited, in the matter of Blackgold International Holdings Limited [2017] FCA 601

Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act), the plaintiff be given leave to convene a meeting of holders of fully paid ordinary shares in the capital of the plaintiff (Shareholders) to be held at 38 Station Street, Subiaco, in Perth, Western Australia on 26 June 2017 at 11 am (Perth time) or on such other date and such other time as the Court may approve (Scheme Meeting) for the purpose of considering and, if thought fit, approving with or without modifications, the scheme of arrangement proposed between the plaintiff and the Shareholders (Scheme), being the document at Annexure B of the scheme booklet and explanatory statement, annexed at Exhibit RGM-3 to the Second Affidavit of Richard McMullan sworn on 13 May 2017 and filed herein, subject to the following: (a) as detailed in the Third Affidavit of Richard McMullan sworn on 19 May 2017: (i) amendment to Section 7.4 of the Scheme Booklet from "602,509,395" shares, to "601,499,495" shares; (b) as detailed in the Fourth Affidavit of Richard McMullan sworn on 23 May 2017: (i) amendment to page 31 of the Scheme Booklet, by amending the statutory reserve for 31 October 2016 from "4,154" to "4,368"; (ii) amendment to page 32 of the Scheme Booklet, by amending the share of loss in an associate using equity method for 31.10.2015 from "(39)" to "39"; (iii) amendment to page 32 of the Scheme Booklet, by amending "Share of loss in an associate using equity method" to "Share of profit and loss in an associate using equity method"; (iv) correcting formatting issues in the Al Maynard & Associates Report, at page 27 and 28 (page 231 and 232 of Richard McMullan's Second Affidavit); (v) correcting table cross-referencing numbering issues in the Resource & Reserve Update Report as follows:- (A) at the Executive Summary page 2 being page 245 of Richard McMullan's Second Affidavit; (B) page 252 of Richard McMullan's Second Affidavit; and (C) page 288 of Richard McMullan's Second Affidavit; (vi) deleting the first-appearing Table 27 in the Al Maynard & Associates Resource & Reserve Update report (page 284 of Richard McMullan's Second Affidavit); and (c) the addition of a proxy form being Exhibit RGM-1 to the Third Affidavit of Richard McMullan sworn on 19 May 2017, (with those amendments being the Scheme Booklet).

SIOPIS J: 1 This is an application under s 411(1) of the Corporations Act 2001 (Cth) to convene a meeting of members of the plaintiff company, Blackgold International Holdings Limited (Blackgold), to consider, and if thought fit, to approve a proposed scheme of arrangement between Blackgold and its shareholders. 2 Blackgold is listed on the Australian Stock Exchange. It has an issued share capital of in excess of 888,003,622 fully paid ordinary shares. Blackgold is a closely held public company. The top 20 shareholders account for 96.7% of the shareholding, and one particular shareholder holds 61.3%. 3 Under the proposed scheme of arrangement, the acquiring company, Vibrant Group Limited (Vibrant), proposes to acquire all of the shares in Blackgold. The scheme consideration which Vibrant proposes to pay each shareholder in Blackgold is four and a half cents per share. The total value of the aggregate scheme consideration is AUD37.6 million. Immediately prior to the announcement of the proposed scheme of arrangement, the shares were trading at about two cents per share. 4 Vibrant is a Singaporean domiciled company. It carries out business in real estate and financial services. 5 At this first stage in the approval by the Court of a scheme of arrangement, there are four main considerations to which the Court will have regard. 6 The first consideration is whether the arrangement falls within the statutory concept of an arrangement. There is no issue in this respect because the proposed scheme falls within that concept. 7 The second consideration is whether there has been compliance with the Corporations Act and the Corporations Regulations 2001 (Cth); and also whether there has been a sufficient disclosure made, such that the shareholders would be properly informed in relation to the content of the scheme. 8 In the last mentioned respect, I would mention that there has, over the last three months, been considerable discussion between the Australian Securities and Investments Commission (ASIC) and the proponents of the scheme in relation to the content of the scheme booklet, and also in relation to the manner in which the experts' opinion was expressed. Those discussions have culminated in the production of a revised scheme booklet which has been attached to an affidavit of Mr Richard McMullan, dated 13 May 2017. 9 As to the content of the scheme booklet, I might also add that there is evidence from a director of Blackgold, Dr Chi Ho Tong, to the effect that the statements which are contained in the scheme booklet about Blackgold are true and not misleading. There is evidence from Mr Eric Khua, a director of Vibrant, to the same effect in respect of the statements in the scheme booklet about Vibrant. 10 There is also helpfully annexed to Mr McMullan's affidavit a schedule which lists the Corporations Regulations which are required to be complied with, and identifies those parts of the materials which demonstrate compliance. I might also add that the scheme booklet does also contain the notice which is required under the Court's Commercial and Corporations Practice Note (C&C-1), to the effect that the approval of the scheme to go to the meeting does not infer any approval by the Court as to the merits. 11 I am satisfied that there has been sufficient compliance with the Corporations Act and Corporations Regulations and that the scheme booklet gives sufficient information to permit the shareholders to understand and make an informed decision about the scheme. 12 The third consideration is whether ASIC has had a reasonable opportunity to examine the scheme, and has also been given notice of the hearing today. 13 As I have previously mentioned, ASIC has had a considerable involvement in the scrutiny of the scheme documents, and has recommended changes to Blackgold which have been adopted. In addition, there is evidence from Mr McMullan that Blackgold's solicitors received a letter from ASIC yesterday stating that ASIC had been properly served, given sufficient opportunity to examine, and did not intend on this occasion to make submissions against the orders proposed by Blackgold. Accordingly, there has, in my view, been compliance with s 411(2) of the Corporations Act. 14 The next consideration is whether there is anything obvious about the scheme which would, if the requisite majorities were obtained, preclude the Court from making final orders at the second hearing. 15 In this regard, there is an unusual feature of this particular scheme. This is because the expert report from BDO Corporate Finance (WA) Pty Ltd, which is attached to the scheme booklet, states that in the experts' opinion the scheme is reasonable but not fair. 16 The report observes that Blackgold's share price has been, prior to the announcement, at about two cents per share. However, the experts have observed that the trading in Blackgold's shares has been and was, at the relevant time, very thin. The experts have also undertaken an assessment of the underlying value of the assets of Blackgold by reference to discounted cash flow analysis and the attendant assumptions and projections. On that basis, it is the experts' view that the lowest value for Blackgold's shares would be 7.4 cents a share and the highest would be 36.7 cents a share. It is on this basis that the experts have based their opinion that the proposed scheme is not fair. 17 However, the experts also refer to the risks associated with the carrying on of coal mining in China. One such risk identified is the manner in which China is now seeking to regulate coal mining, and that the licence of at least one of Blackgold's mines might not be renewed. Also, the experts have pointed out that because the shares in Blackgold are so thinly traded, there may be advantages to be obtained from the acceptance of the scheme offer in this case, because it provides an opportunity for shareholders to realise cash which they might not otherwise be able to do. The experts have taken these factors, among others, into account in opining that the scheme is reasonable and that the scheme is in the best interests of the shareholders. 18 The shareholders will make of the expert report what they make. However, in my view, this is a case where the observations of French J (as he then was) in Re Foundation Healthcare (2002) 42 ACSR 252 at 265 are pertinent. At [44], French J observed: 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: Re NRMA Ltd at FLR 359; ACSR 605. 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. The court is not required to be satisfied either at the convening or approval stage that no better scheme could have been devised. The scheme, on the face of it, is not obviously unfair or otherwise inappropriate. If there are interests adversely and unfairly affected then the probability is that the question will arise at either or both the scheme meetings or the final approval stage. 19 In my view, the expert report does not warrant the Court coming to the view that the scheme is so obviously unfair or unreasonable that it should not be allowed to go to a meeting. It will always be open to an objecting shareholder, or group of shareholders, to make submissions opposing the approval of the scheme at the second hearing. 20 There are other matters which have been pointed to in the helpful submissions by Mr Healy, counsel for Blackgold. One of these matters was the question of performance risk. The scheme of arrangement provides that two days prior to the date of the payment to each of the shareholders, the full amount of the aggregate scheme consideration was to be deposited with Blackgold and held in trust to be paid to the shareholders. In the deed poll, Vibrant has undertaken to comply with its obligations under the scheme of arrangement. The deed poll is subject to Western Australian law and can be enforced by shareholders. There is also evidence that Vibrant has cash or assets which are easily convertible to cash in excess of the aggregate scheme consideration. Accordingly, in my view, the performance risk is sufficiently low to not constitute an obstacle to the making of the orders. 21 The implementation deed provides for the payment of a break fee. The implementation deed is not annexed to the scheme booklet, but the break fee provisions are identified in detail in the scheme booklet provisions. Those provisions for the payment of the break fee are unexceptional. The break fee has to be paid by each party in certain circumstances. The circumstances in which a break fee is payable, do not include simply the fact that the shareholders do not vote to approve the scheme. Further, the amount of the break fee is also within the guidelines referred to in the Takeovers Panel Guidance Note 7: Lock-up devices. Accordingly, I do not consider those provisions constitute an obstacle to the making of the orders. 22 Further, there are exclusivity provisions which limit Blackgold from soliciting or promoting any competing offers. However, there is the fiduciary carve-out, which, in my view, ameliorates the harshness of the exclusivity provisions. I am satisfied that those provisions are not an obstacle to the making of the orders. 23 In those circumstances, I am content to make the orders proposed. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.

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