Eastern Star Gas Limited; in the matter of Eastern Star Gas Limited [2011] FCA 1225

REASONS FOR JUDGMENT 1 This is the first court hearing of an application to approve a scheme of arrangement in which Santos Limited ("Santos") will acquire all of the issued shares in Eastern Star Gas Limited ("Eastern Star") with the possible exception of shares held by TRUenergy Investments Pty Limited ("TRUenergy") and shares already held by Santos. 2 Eastern Star is a company formed for the purpose of exploring for or developing and producing conventional petroleum in Eastern Australia. It is a public listed company whose shares are listed on the Australian Stock Exchange. Eastern Star's main activity is the Narrabri Gas project, a joint venture in the Gunnedah Basin in which it holds a 65 per cent interest and of which it is the operator. 3 Santos presently holds the remaining 35 per cent interest in the project. Santos is a well-known public company whose shares are also quoted on the Australian Stock Exchange. It is currently the holder of a 20.92 per cent interest in Eastern Star. 4 If the proposed scheme is approved by Eastern Share shareholders and all the conditions precedent are satisfied Eastern Star, other than shareholders described as excluded shareholders, will have their shares in Easter Star transferred to Santos. They will receive in return 0.06881 new Santos shares for each share in Eastern Star. 5 Contemporaneously with the announcement of the entry into the scheme implementation deed on 18 July 2011, Santos and TRUenergy entered into a memorandum of understanding. The effect of this is that, on approval of the scheme of arrangement, TRU will acquire, through a subsidiary, approximately 30.8 per cent of Eastern Star's interest in the Narrabri Gas project joint venture. This is described in the scheme documentation as the "TRU on-sale". The TRU on-sale will give TRUenergy 20 per cent interest in the joint venture. The effect of the memorandum of understanding, therefore, is that, upon the completion of the relevant arrangements, Santos will own 80 per cent of the Narrabri Gas joint venture and become the operator. TRUenergy will hold a 20 per cent interest in the joint venture, which it will acquire under the arrangements referred to as the TRU on-sale. 6 TRUenergy is presently the holder of approximately 3.8 per cent of the issued shares in Eastern Star Gas. The memorandum of understanding provides for Santos to acquire TRUenergy's shareholding in Eastern Star Gas for 90 cents per share cash with completion to occur on implementation of the scheme. The sale is subject to an obligation on the part of Eastern Star to propose and recommend a resolution under item 7 of s 611 of the Corporations Act 2001 (Cth) ("the Act") and to the resolution being passed. The implementation of the scheme is not conditional on the resolution under s 611 being passed but, importantly, if it is not then TRUs shares in Eastern Star will be covered by and dealt with under the scheme. 7 Mr Oakes has taken me to the relevant clauses in the agreement in the scheme which address this question. Mr Oakes has also taken me through the terms of the draft scheme booklet in some detail. The matters which arise are sufficiently covered by the outline of submissions prepared by Mr Oakes and Mr Izzo which I will mark as MFI-1 and place with the court papers. I am satisfied that all of the matters to which I was taken this morning are in accordance with the usual practice and with the authorities that are cited in the written submissions. 8 The only issue to which I should refer is what might be called the somewhat nuanced terms of the report of the independent expert. The independent expert, Grant Samuel, considers that the scheme is in the best interests of Eastern Star shareholders, in the absence of a superior proposal. The report acknowledges the difficulties in evaluating the scheme consideration. The difficulties arise from market movements in the price of Santos shares. The value attributed to the scrip consideration is 79 cents to 89 cents per share. It falls within Grant Samuel's estimate of the underlying value of Eastern Star which was assessed at 77 cents to $1 but, as is noted in the report, the value of the scrip consideration is in the lower half. Nevertheless, as I have said, the difficulties which the independent expert found in carrying out the exercise are acknowledged. 9 As is noted in the report, the extent of the uncertainties involved in judgments regarding the value of Eastern Star and of the scrip consideration are such that conclusions relating to the fairness of the scheme are subjective. Importantly, however, the independent expert states that even if the scheme is not fair it would still clearly be reasonable and, therefore, in the best interests of shareholders. 10 The independent expert also addresses the question of the cash consideration payable under the TRUenergy acquisition which is, as I have said, in the amount of 90 cents per share. This figure was struck at a time when Santos shares were trading at a price in excess of the current market price. The fall in the listed price of Santos shares is noted by the independent expert who comments upon the effect of this upon the fairness of the TRU acquisition. However, the independent expert points to the approach taken by the directors who consider that the difference between the current value of TRU shares and 90 cent per share cash consideration is not material in the overall transaction. The significance of this, it seems to me, is that, in my opinion, there is adequate disclosure of these issues in the scheme documentation. 11 The only other issue which may have called for consideration this morning was the question of whether the TRU acquisition or the TRU on-sale would give TRUenergy an interest that places it in a different class to other shareholders such that there ought to be a separate class meeting under s 411 of the Act. The issue is fully addressed at [33]ff of the written submissions, but the short answer to the question is that it does not arise. This is because TRUenergy has indicated it will not exercise its entitlement to vote at the scheme meeting. 12 I am satisfied that all of the necessary procedural steps have been taken and that the evidence which is necessary for me to make orders convening the scheme meeting have been addressed. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.