Cobalt One Limited, in the matter of Cobalt One Limited [2017] FCA 1228

SIOPIS J: 1 This is an application under s 411(1) of the Corporations Act 2001 (Cth) to convene a meeting of the members of the plaintiff, Cobalt One Limited (Cobalt One), for the purpose of considering and, if thought fit, passing a resolution in favour of a proposed scheme of arrangement between the company and its members. 2 Cobalt One is a public company which has its shares listed on the Australian Securities Exchange. The company is the holder of tenements for the exploration for cobalt in Canada. It has approximately 682 million fully paid ordinary shares on issue. There are also a number of options, but the options are to be dealt with outside of the scheme. Mr Nicholas Rowley, a non-executive director of Cobalt One, has deposed in some detail as to how the options are to be dealt with. 3 Under the scheme of arrangement, First Cobalt Corporation (First Cobalt), a Canadian company, will acquire all of the issued shares in Cobalt One. The shares in First Cobalt are quoted on the TSX-Venture Exchange. The scheme consideration will be 0.145 new First Cobalt shares or 0.145 new First Cobalt CHESS Depository Interests, for each Cobalt One share. The new First Cobalt CDIs will be quoted on the Australian Securities Exchange. 4 First Cobalt also operates in the cobalt exploration industry, and it has cobalt exploration tenements in the same area in Canada where the Cobalt One tenements are located. First Cobalt is contemplating, or in the process of effecting, a merger with another Canadian company which is also in the cobalt exploration industry. The object of the acquisition of Cobalt One and the acquisition of the other company in Canada is to consolidate the three companies into a single effective operation, "to create the largest pure-play cobalt exploration and development company in the world". 5 When an application under s 411(1) of the Corporations Act comes before a court at the first hearing, the court has regard to a number of matters. 6 The first is whether the scheme is an arrangement within the terms of the Corporations Act. In this case the scheme clearly qualifies. 7 The next question is whether the Australian Securities and Investments Commission (ASIC) has been given sufficient notice of the hearing. The affidavit material before the Court shows that there has been compliance with this condition. The material also shows that ASIC has provided to the solicitors for Cobalt One a letter dated 12 October 2017 stating that ASIC does not propose to attend the hearing today and does not intend to oppose the making of the orders sought by Cobalt One today. 8 Then there is a question as to whether the provisions of the Corporations Act and Corporations Regulations 2001 (Cth) have been complied with. In that regard, I have been supplied with a helpful chart which sets out the relevant provisions in the Act and Regulations and identifies those parts of the affidavit material which evidence such compliance with those provisions. 9 In relation to the question of the sufficiency of disclosure regarding the scheme of arrangement in the scheme booklet, there is affidavit evidence from Ms Sarah Turner, a partner in Gilbert + Tobin, the law firm advising Cobalt One, which shows that the solicitors acting for Cobalt One and ASIC have engaged in correspondence over a period of time as to the content of the proposed scheme booklet and that amendments have been made to accommodate ASIC's concerns. In this regard, it should be observed that ASIC has the view that there are some shareholders who may, perhaps, be regarded as having an interest over and above that of the ordinary shareholders in the outcome of the vote at the scheme meeting. ASIC has asked Cobalt One to tag the votes of those shareholders, and Cobalt One has agreed to do so. 10 There is also an affidavit from Mr Rowley in which he deposes that the information about Cobalt One in the scheme booklet has been the subject of scrutiny by a working group and that to the best of his knowledge, after making reasonable inquiries, the statements regarding Cobalt One in the scheme booklet are true; and there has been no omission of material information. First Cobalt has issued a certificate to similar effect in relation to the statements in the scheme booklet about First Cobalt. This certificate has been verified in an affidavit by Mr Trent Mell, president and chief executive officer of First Cobalt. 11 I also note that the scheme booklet contains a statement which complies with the Federal Court's Commercial and Corporations Practice Note (C&C-1). 12 I am satisfied that the scheme booklet provides sufficient information to the members of Cobalt One such that they will have a fair opportunity to assess the merits and the demerits of the scheme. 13 Then there is a question of whether there is any material before the Court which indicates that if sufficient votes were cast at the meeting to approve the scheme, the Court might, at the second hearing, nevertheless, decline to make orders approving the scheme. 14 In this regard counsel for Cobalt One has referred me to a number of issues. 15 The first issue relates to the expert report. This report has been has been prepared by Mr Ken Pendergast and Mr Stuart Bright of Ernst & Young. The report states that in the opinion of the experts the scheme of arrangement is not fair, but is reasonable and is in the best interests of the Cobalt One shareholders. 16 By reference to the ASIC Regulatory Guide 111 - Content of expert reports, the experts have compared the share price of Cobalt One and the pro forma value of a merged First Cobalt share (adjusted to reflect the scheme consideration of 0.145 of a First Cobalt share for each Cobalt One share) over a period prior to the announcement of the scheme of arrangement. The analysis states that over the period Cobalt One's share price ranged between 9.3 cents and 14.5 cents, whereas the adjusted pro forma First Cobalt share value ranged between 7.8 cents and 13.9 cents. It is on this basis that the experts expressed the opinion that the scheme is not fair. 17 However, the expert report then goes on to consider the advantages and disadvantages of the scheme, and essentially finds that there are material advantages which render the scheme reasonable, and in the best interests of the Cobalt One shareholders. 18 In the case of Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44], French J (as his Honour then was) observed in relation to the role of a court at the first hearing: 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 similar circumstances to this, where an expert report had opined that the scheme was not fair but reasonable, Brereton J observed in In the matter of CIC Australia Limited [2015] NSWSC 557 at [17]: Ultimately, so long as they are properly appraised that the independent expert considers the scheme not to be fair and why, it is for the scheme shareholders to decide whether it is an offer that they should accept. 20 I am satisfied that the expert report is expressed in terms which will afford the members an opportunity to understand, and assess, the basis of the experts' opinion and also the advantages and disadvantages of the scheme. 21 The expert report will be available for the shareholders to consider in deciding whether to approve the scheme. The content of that report does not constitute a reason why the orders should not be made for the convening of the meeting (Blackgold International Holdings Limited, in the matter of Blackgold International Holdings Limited [2017] FCA 601 at [19]). 22 Counsel for Cobalt One also referred to the question of performance risk. Mr Mell has deposed that First Cobalt has entered into a deed poll for the benefit of the shareholders of Cobalt One promising that First Cobalt will issue the scheme consideration. I have seen a copy of the deed poll and am satisfied that performance risk has been dealt with. 23 The last matter to which my attention was drawn, was the fact that the scheme implementation agreement contains exclusivity provisions and a break fee. In relation to the exclusivity provisions, there is a fiduciary carve-out which mitigates the prohibitions on "no shop" and "no talk". I am satisfied that there is also nothing objectionable in relation to that issue. 24 There is also provision for a break fee which is equal to 1% of the equity value of Cobalt One and falls within the ambit of the Takeovers Panel Guidance Note 7: Lock-up devices. I am satisfied that there is nothing objectionable arising from the break fee provision. 25 In this regard, I would also observe that there is evidence that these clauses are the product of arm's length negotiations between the two firms of solicitors, Jackson McDonald representing First Cobalt and Gilbert + Tobin representing Cobalt One. 26 Accordingly, I am content to make the orders that are contained in the minute of proposed orders, other than order 11. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis.