Elyard Corporation Pty Ltd v DDB Needham Sydney Pty Ltd

BANKS-SMITH J: 1 On 18 January 2019 I heard an urgent application with respect to the scheme of arrangement (scheme) between the plaintiff, Tawana Resources NL (ACN 085 166 721) (Tawana) and its ordinary shareholders. 2 The scheme first came before the Court in August 2018: Tawana Resources NL, in the matter of Tawana Resources NL [2018] FCA 1456. On that occasion I made orders for Tawana to convene a meeting of shareholders for the purpose of considering the proposed scheme and ancillary orders including as to the despatch of documents. 3 In summary, by the scheme Alliance Minerals Assets Limited (AMAL) was to acquire Tawana's shares on the basis of providing 1.1 fully paid shares in AMAL for each share in Tawana held at the record date. In this manner Tawana was to become a fully owned subsidiary of AMAL. 4 Importantly, as noted in the reasons at the time (at [24]-[27]), there was one category of shareholders who would receive cash, rather than shares. This category, referred to as the Ineligible Shareholders, were those Tawana shareholders whose address was outside Australia and its external territories, New Zealand, Hong Kong or Singapore. Under the scheme, the AMAL shares to which they would otherwise have been entitled were to be sold and the proceeds of those sales were to be paid to them on a proportionate basis. This is explained more fully below. 5 On 8 November 2018 I made orders facilitating the despatch of supplementary materials: Tawana Resources NL, in the matter of Tawana Resources NL (No 2) [2018] FCA 1724. 6 The scheme was approved by the Court on 3 December 2018: Tawana Resources NL, in the matter of Tawana Resources NL (No 3) [2018] FCA 1952. 7 Under the scheme, the date for the transfer of the shares in Tawana to AMAL was 14 December 2018. Tawana has been delisted from the ASX.

Reason for the application 8 In short, under the scheme, those AMAL shares that were to be sold with the proceeds being distributed to the Ineligible Shareholders were to be sold within a specified time window. Due to an unexpected intervention of a trading halt and suspension of AMAL shares, some of the shares were not sold in that period. 9 Although the Court has broad powers to amend the terms of a proposed scheme prior to its approval (under s 411(6) of the Corporations Act 2001 (Cth) (Act), the Court does not have any specific power to make an order amending a scheme once it has become effective: Re Challenger Group Holdings Ltd [2003] FCA 1356; (2002) 48 ACSR 498 at [18] (Conti J). 10 One option available to members after a scheme has become effective is that a new scheme of arrangement can be proposed and approved by members to terminate or vary the scheme: Re Challenger at [19]. Such a course would be significant in terms of costs and delay. 11 Another option is that, depending upon the circumstances, it might be possible to invoke the slip rule or other provisions of the rules of a court or the Act to amend the terms of the scheme despite the fact it has become effective. 12 The potential for such amendments was explored by Santow J in the leading case on this issue: Re AGL Gas Networks Ltd [2001] NSWSC 165. In summary, Santow J found that in the circumstances of the case it was open to the Court to vary the orders by application of the slip rule (at that time incorporated in Pt 20 r 10 of the New South Wales Supreme Court Rules), the inherent jurisdiction of the Supreme Court, s 413(1) of the Corporations Law (as it then was) and Pt 2 r 3 of the NSW Supreme Court Rules, which provided that 'The court may, on terms, by order, extend or abridge any time fixed by the rules or by any judgment or order'. 13 His Honour declined to reach a conclusion as to whether there was power under s 1322(4)(d) of the Corporations Law (now s 1322(4)(d) of the Act) to amend the orders, and also declined to reach a conclusion as to whether it was open to him to make orders under s 1322(2) of the Corporations Law (now s 1322(2) of the Act), although in the latter case his Honour was inclined to the view that the relevant issues were not merely procedural and the section could not be called in aid. 14 Although Tawana's application relied upon a range of heads of relief, at the hearing counsel refined the application such that Tawana sought to rely on the slip rule as incorporated by r 39.05(h) of the Federal Court Rules 2011 (Cth) (Rules), s 413(1) of the Act (which provides in summary that where an application is made for the approval of a compromise or arrangement, then a court may make orders for consequential or supplemental matters to ensure that the reconstruction or amalgamation is fully and effectively carried out), r 1.39 of the Rules (which permits the Court to shorten or extend a time fixed by the Rules or by an order of the Court) and s 1322(4)(d) of the Act.

The difficulty in selling the Ineligible Shareholder Shares 15 Under the scheme, the AMAL shares that would otherwise have been issued to the Ineligible Shareholders (Ineligible Shareholder Shares) were to be issued to a sale agent. The sale agent was then to sell the Ineligible Shareholder Shares on financial markets within a certain timeframe and pay the aggregate net proceeds to the Ineligible Shareholders on a pro rata basis. 16 AMAL appointed Canaccord Genuity (Australia) Ltd (Canaccord) as the sale agent. 17 The sale process to be undertaken by Canaccord was also set out in the scheme. Relevantly, cl 6.8(b) provides that: AMAL would procure that, as soon as reasonably practicable and in any event not more than 15 Business Days after the Implementation Date, the sale agent sells all of the AMAL shares issued to the sale agent … in such manner on such financial market at such price and on such other terms as the sale agent determines in good faith and at the risk of the Ineligible Shareholders. 18 'Business Day' was defined in the scheme to mean a business day as defined in the ASX Listing Rules. The ASX Listing Rules define 'Business Day' as 'Monday to Friday inclusive except New Year's Day, Good Friday, Easter Monday, Christmas Day, Boxing Day and any other day that the ASX declares is not a business day'. 19 The Implementation Date as defined by the scheme was Friday 14 December 2018, meaning that the time period within which Canaccord was to sell the shares expired on 9 January 2019, being 15 Business Days after 14 December 2018. 20 Canaccord was unable to sell the Ineligible Shareholder Shares on the ASX by 9 January 2019. The evidence relied upon by Tawana explained that the reasons were as follows: (a) Canaccord did not attempt to start selling the shares in the first two ASX trading days after 14 December 2018, because it wished to observe 'normalised trading volumes' and institutional demand after implementation of the scheme; (b) there was a low daily trading volume of AMAL shares between Monday 17 December 2018 and Thursday 20 December 2018; (c) the securities of AMAL were placed in a trading halt between Friday 21 December 2018 and Wednesday 26 December 2018; (d) the securities of AMAL were suspended from quotation from Thursday 27 December 2018 until Tuesday 15 January 2019; and (e) Canaccord refused to sell the shares from Wednesday 16 January 2019 without a court order. 21 AMAL commenced trading on the ASX on 5 December 2018. The trading halt and suspension in trading were a direct result of an ASX market announcement about pending changes to AMAL's lithium offtake arrangements. The suspension of trading was lifted once AMAL made an announcement about those changes on 15 January 2019. 22 According to Mr Alexei Fedotov, the general manager and legal and company secretary of Tawana, when the scheme was being negotiated and prepared, the parties did not contemplate that the AMAL shares would not trade in an ordinary fashion or would be subject to any trading halt or suspension. Based on disclosure from other similar transactions, Tawana considered that 15 business days was a reasonable period for Canaccord to sell the relevant shares. However, Mr Fedotov deposed to there being extenuating circumstances that arose due to a dispute between AMAL and one of its counterparties to a lithium offtake agreement, and in order to comply with its continuous disclosure obligations, AMAL requested the trading halt and then suspension, pending appropriate information being provided to the market. Mr Fedotov also deposed to the fact that during the trading halt and suspension period, Tawana and AMAL received inquiries from Ineligible Shareholders asking when the Ineligible Shareholder Shares would be sold. 23 There is no doubt that taking into account the trading halt and suspension from quotation of the AMAL shares, the time period during which Canaccord was able to facilitate sales of the Ineligible Shareholder Shares was severely truncated. As a matter of fact, the time period was reduced from the anticipated 15 days to some seven days. Further, one can well understand Canaccord's reluctance to sell the remaining Ineligible Shareholder Shares outside the specific period provided for by the scheme, absent disclosure to the Court. 24 The intervention of the trading halt and suspension is, in my view, the principal reason why Canaccord found itself in a position where it was unable to sell the shares within the window provided by the scheme. 25 I accept that the trading halt and suspension was unanticipated. 26 I do not accept that the other difficulties referred to (the desire to observe trading patterns, potential low volume sales) were matters that could or would not have been considered at the time. The terms of the scheme had been carefully considered both for the purpose of the circulation of the first scheme booklet and then again at the time of supplementary disclosure by the supplementary scheme booklet. The period of 15 business days had been actively considered by Tawana, as Mr Fedotov's evidence disclosed. Further, as Mr Fedotov stated, the period of 15 business days for a sale of shares by a selling agent was not unusual in such schemes. 27 Counsel referred to other examples of selling periods, said to have been ascertained by reference to relevant ASX announcements available on the ASX website and the Morningstar DatAnalysis databases. Counsel noted that in each of Re Wesfarmers Ltd; ex parte Wesfarmers Ltd [No 2] [2018] WASC 357 (Vaughan J), Excelsior Gold Limited, in the matter of Excelsior Gold Limited [2018] FCA 2064 (McKerracher J), and Aphrodite Gold Limited, in the matter of Aphrodite Gold Limited (No 2) [2017] FCA 1625 (Siopis J) the prescribed time period was 15 business days. In Re Westfield Corporation Ltd (No 2) [2018] NSWSC 921 (Black J) and Fairfax Media Limited, in the matter of Fairfax Media Limited (No 2) [2017] FCA 1313 (Yates J) the prescribed time period was 20 business days. In Altona Mining Limited, in the matter of Altona Mining Limited [2018] FCA 614 (McKerracher J) and Cobalt One Limited, in the matter of Cobalt One Limited (No 2) [2017] FCA 1407 (Siopis J) the prescribed time period was 30 business days. In Fairfax Media Limited, in the matter of Fairfax Media Limited (No 2) [2018] FCA 1930 (Gleeson J) the prescribed time period was 30 days. In SRG Limited, in the matter of SRG Limited (No 2) [2018] FCA 1424 the prescribed time period was as soon as reasonably practicable (with no fixed maximum time period). The schemes the subject of Re Wesfarmers and Fairfax Media Limited (Yates J) provided for a longer period of time if determined necessary by the company proposing the scheme and the sale agent, subject to obtaining any necessary Australian Securities and Investment Commission (ASIC) exemptions or waivers. 28 These examples confirm that there is nothing unusual of itself in a 15 business day selling period.

This application and the relief sought 29 As counsel submitted, important questions of construction potentially arise as to any power of Canaccord to sell the Ineligible Shareholder Shares despite the expiry of the prescribed 15 Business Day period. However, in light of the urgent need to resolve the positon practically, Tawana took the course of approaching the Court for an amendment of the orders approving the scheme in a manner which reflected that the selling window as prescribed by the scheme was inserted at a time when the parties had not anticipated that there might be Business Days upon which it was not possible for AMAL shares to be traded. 30 The position in which Tawana finds itself is indeed difficult. 31 As noted above, once a court approves a scheme of arrangement pursuant to s 411(4)(b) of the Corporations Act and the order has been lodged with ASIC, the scheme becomes effective under s 411(10). 32 The power of the Court in s 411(6) to alter or vary a scheme is no doubt broad and is expressed without limitation: Snowside Pty Ltd (as trustee for the Snowside Trust) v Boart Longyear Ltd [2017] NSWCA 215; (2017) 122 ACSR 291 at [16], [26] (Bathurst CJ, Beazley P and Leeming JA). However, s 411(6) can only be exercised at the hearing when the scheme is to be approved, as the terms of the provision clearly provide. Further, attempts to approve so-called self-amendment clauses for schemes that have already become effective have not been accepted: Re Homemaker Retail Management Ltd [2001] NSWSC 1058; (2001) 187 ALR 520 (Barrett J). 33 An outcome that involves propounding a further and new scheme of arrangement is far from ideal. The prejudice by way of likely costs thrown away and delay are obvious. Further, such costs are likely to fall upon new shareholders. 34 Tawana seeks a range of orders. It seeks an order that the reference to '15' in cl 6.8(b) of the scheme be deleted and the number '40' be substituted, such that the period for Canaccord to sell the Ineligible Shareholder Shares is extended to 40 Business Days. It seeks an amendment to the definition of 'Business Day' so that the definition refers also to days being days on which the AMAL shares are capable of being traded on the ASX. Further or alternatively, it seeks an order that the date for compliance with cl 6.8(b) of the scheme be extended to a date to be determined.

Resolution - the slip rule 35 There was no contradictor in this matter. The time constraints and urgency of the application were such that although ASIC was served with the papers (and some were served the morning of the hearing) it did not appear at the hearing, an outcome that was unsurprising in the circumstances. 36 Having said that, I consider that this is a clear case for the operation of the slip rule but in a more limited manner than that sought by Tawana. 37 I recently endeavoured to summarise the relevant principles with respect to the application of the slip rule in Owen-Pearse v Lander Land Company Pty Ltd [2018] FCA 2077 at [137]-[149]. 38 To my mind, the proposed amendment to the definition of 'Business Days' is one upon which no real difference of opinion can exist. It is not a matter of controversy. It seems to me that all parties would have expected at the time the scheme was approved that the inclusion of a selling window of 15 Business Days was premised on those Business Days being days upon which the AMAL shares actually could be traded. Accordingly, the circumstances fall within the ambit of those cases where the slip rule may be invoked: in particular see Elyard Corporation Pty Ltd v DDB Needham Sydney Pty Ltd [1995] FCA 943; (1995) 61 FCR 385 at 390-391 (Lockhart J, Black CJ agreeing). Inevitably, I would have made such an amendment under s 411(6) at the approval hearing had the prospect of such a halt/suspension been exposed and brought to my attention. 39 I note that in Re AGL Gas Networks, the amendment the subject of the application was very confined, in effect extending the time for compliance by some 10 minutes. In summary, Santow J was satisfied that the slip rule applied and that it was appropriate to exercise the Court's discretion to rectify orders made in 1994, such that the scheme was deemed to have become operative notwithstanding that a particular notice was furnished just after midnight on 30 June 1994. The orders approving the scheme were amended to the effect that the relevant clause in the scheme read '30 June 1994 or within 10 minutes thereafter'. His Honour considered the authorities with respect to the application of the slip rule, including, relevantly, Elyard Corporation Pty Ltd v DDB Needham Sydney Pty Ltd and the oft-cited statement that 'it is well settled that the application of the slip rule is not confined to giving effect to the intention of the judge at the time when the Court's order was made or judgment given. It extends to the intention which the Court would have had, but for the failure that caused the accidental slip or omission'. His Honour found that if the parties or the Court had been aware of the true state of affairs it is inevitable that the Court would have made an order altering the terms of the order and the scheme under s 411(6) of the Corporations Law (now s 411(6) of the Act). Having been persuaded that the slip rule empowered the exercise of discretion to amend the orders approving the scheme, Santow J then also considered the other powers in some detail. 40 In this case, and as I expressed at the hearing, I had reservations about any exercise of the Court's discretion to extend the time from 15 days to 40 days or for any indefinite period. Such an amendment would be (at least potentially) a substantial change and not anticipated by the scheme booklet or supplementary scheme booklet. Further, it seemed to me that potential difficulties in the sale of the Ineligible Shareholder Shares relating to volume or a slow market were matters that could properly have been anticipated, but the scheme, even when supplementary disclosure was made close to Christmas, only provided for the limited 15 Business Day window. The fact that some of the Ineligible Shareholders have made contact with Tawana or AMAL inquiring as to the likely date of sales suggests that they proceeded on the basis that the length of the selling window was of some importance. Counsel suggested that my discretion under other provisions may be broader than under the slip rule and would permit a longer extension. That submission may well be right, but I did not consider it appropriate to make orders on the first return of the urgent hearing to extend the time from 15 days to 40 days or for any indefinite period, and without any contradictor or the opportunity for ASIC or interested shareholders to comment.

Orders 41 In the circumstances, I made orders utilising the slip rule power to amend the orders that I made on 3 December 2018, amending the definition of Business Days such that a component of its definition was that such days were days on which the AMAL shares were capable of being traded on the ASX. I also extended the time period for compliance with cl 6.8(b) to 5 February 2019. That date took into account the trading days lost due to the halt/suspension and an additional three days during which Canaccord refused to sell shares and during which Tawana was preparing its application and arranging an urgent hearing. I made those orders on the basis that it was open to Tawana to come back before me on short notice to argue that the period of the selling window should be extended further, and a provisional date was set in case Tawana (or any other interested person) wished to seek further orders.

A postscript 42 As it happens, after the hearing I was informed by way of email exchange with my Associate that Canaccord had been able to effect a sale of all of the outstanding Ineligible Shareholder Shares within the time period provided for by the 18 January 2018 orders, and accordingly it has not been necessary for me to consider whether any greater time period should be allowed. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.