Schemes of Arrangement - Merger - Meetings of shareholders and convertible note holders - Different classes - Approval of Explanatory Statement

Corporations Act 2001 (Cth), s 411, s 412, s 636, s 683

Corporations Regulations 2001 (Cth), reg 5.1.01(b)

Approval granted to convene meetings and for Explanatory Statement to accompany the Notice of Meetings

Amicus Curiae : Australian Securities & Investments Commission

F T Eastment and Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69

Re ACM Gold Ltd and Re Mount Leyshon Mines Ltd (1992) 34 FCR 530

Re Bank of Adelaide (1979) 22 SASR 481

Re Bond Corporation Holdings Ltd (1991) 5 WAR 143

Re Chevron (Sydney) Ltd [1963] VicRp 39; [1963] VR 249

Re Crusader Ltd [1996] Qd R 117

Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252

Re International Goldfields Ltd [2003] WASC 86

Re International Harvester Ltd (Receiver and Manager Appointed) [1953] VR 669

Re NRMA & Anor (No 1) [2000] NSWSC 82; (2000) 156 FLR 349

Re Stockbridge (1993) 9 ACSR 637

Sovereign Life Assurance Co v Dodd [1892] 2 QB 573

1 COMMISSIONER MCKERRACHER QC: This is an application under s 411 of the Corporations Act 2001 ("the CA"), by way of originating process made on 5 April 2005 by which the applicant, Crown Diamonds ("Crown"), seeks orders in respect of schemes of arrangement proposed to facilitate a merger of the plaintiff with Petra Diamonds Ltd, a company incorporated in Bermuda, ("Petra"), under which:

(a) the issued capital held by each of the members of the plaintiff will be transferred to Petra with each such member of Crown to receive, as consideration for the transfer, shares in Petra; and

(b) the terms of issue of convertible notes issued by the plaintiff be varied, that the security provided to secure performance to the issuer's obligations under such convertible notes will be replaced and the obligations of Crown in respect of such convertible notes will be assumed by Petra.

2 There is a supporting affidavit of John Alan Bailey of 4 April 2005. On the content of that affidavit and additional affidavits Crown seeks first an order that pursuant to s 411(1) of the CA Crown may convene a meeting of each person registered as a holder of ordinary shares issued by Crown, and a meeting of each person registered as a note holder of convertible notes issued by Crown, for the purpose of considering the Schemes.

3 Directions are sought as to the time, manner and place of convening and holding of the proposed meeting of the shareholders and note holders. An order is sought under s 411(4) of the CA that the shareholders meeting shall in all respects be convened, held and conducted in accordance with (a) such provisions of Pt 2G.2 of the CA that apply to the members of Crown and (b) to the extent that they are not inconsistent with Pt 2G.2 of the CA, the provisions of the plaintiff's constitution that apply to and in respect of meetings of members; but (c) on the basis that the Corporations Regulations 5.6.12 to 5.6.36A do not apply to that meeting.

4 Orders are sought that subject to s 411(4) of the CA the note holders meeting shall in all respects be convened, held and conducted (a) in accordance with such provisions of Pt 2G.2 of the CA applicable to members of Crown but (b) on the basis that the Corporations Regulations 5.6.12 to 5.6.36A do not apply to that meeting and (c) in accordance with and subject to the provisions of cl 21 of the trust deed, which is annexed to Mr Bailey's affidavit. An order is sought that Mr Denis Worrell or, failing him, Mr John Bailey be appointed to act as chairman of the shareholders meeting and of the note holders meeting. An order is sought that the chairman of each of the shareholders meeting and the note holders meeting shall report the results of the respective meetings to the court.

5 An order is sought that the plaintiff's draft explanatory statement under s 412(1) of the CA, annexed to the Bailey affidavit and subsequently amended, be approved under s 411(1) of the CA. Directions are sought in relation to the despatch to the shareholders and note holders of the notices convening the shareholders and note holders meetings, the proxy form to accompany the shareholders notice and the note holders notice and the explanatory statement.

6 Directions are sought as to the place, mode of delivery of and closing date for the lodgment of proxy forms for each of the shareholders meeting and the note holders meeting and, finally, approval of the form of proposed advertisement of each of the shareholders meeting and the note holders meeting and directions as to the mode of advertising of the same are also sought.

7 The originating process was served on the Australian Securities and Investments Commission ("ASIC") and the Australian Stock Exchange Ltd ("ASX").

8 The purpose of the proposed schemes has been described by Mr Bailey in his affidavit in the following way:

"Crown is a diamond mining and exploration company presently admitted to the official list of ASX. Each of its three current diamond-producing assets are situated in South Africa. Two of the mining operations are 100 per cent owned by Crown while the third is the subject of a joint venture in which Crown has a 74.5 per cent interest. Crown also has a joint venture interest in a diamond exploration project in Sierra Leone."

Further details of Crown's background and its mining assets are set out in the scheme booklet and in the independent expert's report of 18 March 2005 commenting on whether the schemes are in the best interests of the Crown shareholders and Crown note holders. The Expert's Report is contained in the schemes booklet and in particular there is a valuation of mineral assets of Crown by mining industry consultants.

9 Petra, which is listed on the London Stock Exchange's Alternative Investments Market ("AIM") is said to be the parent company of a mining group focused on the exploration and mining of diamonds in South Africa. Its primary operations are in Angola. It has other operations in South Africa. More detail about Petra is contained in the scheme booklet.

10 The objective of the proposed schemes Mr Bailey says is to effect the merger of the assets and businesses of Crown and Petra while at the same time keeping alive the rights pertaining to the Crown notes, albeit with some variation. Mr Bailey deposes to the fact that the merger is not a transaction designed to deliver control of one entity to another. Rather it is designed to achieve a merger of assets and a sharing of control.

11 In support of the application there have been a number of affidavits served and a reasonably extensive body of annexed material. Some of the affidavits were filed on and after the date of filing of the original affidavit and application. This was largely due to negotiations between Crown and ASIC in relation to some of the features of the proposed schemes and some of the aspects of the explanatory statement.

12 ASIC appeared by counsel on the first return of this application and indicated that it had no objection in principle to the schemes at this stage. As usual ASIC reserved its final position until a later date. The most current form of the schemes booklet and the explanatory statement bear various amendments which I will not refer to in detail, but these have resulted from ASIC's examination of the materials and negotiations with the plaintiff.

13 I am told that there are time constraints for the plaintiff and as a result I have delivered these reasons orally today, having indicated yesterday that it would be most unlikely that I would not grant relief substantially in the terms sought.

(a) order meetings of the members and creditors of an applicant (in this case Crown), to be convened in such manner and to be held in such place as the court directs; and

(b) where the court has made orders set out in (a) approve the explanatory statement required by s 412(1)(a) to accompany the notices of the meetings.

15 The present application is the first stage of a three-stage process involved in Pt 5.1. The second stage is the holding of the scheme and note holders' meetings and the third stage is an application for the court approval of the schemes as approved by members and note holders of the applicant.

16 Section 411 of the CA and its predecessors have been in force for a considerable period of time. A body of case law has been established, some of which I refer to below. It is clear from the statute and from the judicial interpretation of it, that the role of the court on an application of this nature is limited, but is by no means perfunctory. There are several procedural and substantive matters which at the outset of the first convening stage the court must be satisfied.

17 A summary of those matters appears in the judgment of Santo J in Re NRMA & Anor (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at 354 - 356. The matters there identified are:

(a) whether there has been "proper disclosure" for the purpose of s 412(1) of the CA;

(b) whether each of the schemes can properly be described as an arrangement or a compromise for the purpose of s 411(1) of the CA;

(c) whether the applicant is a Pt 5.1 body for the purposes of s 411(1);

(d) whether the schemes are properly proposed for the purposes of s 411; and

(e) whether ASIC has had a reasonable opportunity to examine the terms of the scheme and make any submissions to the court; that is for the purpose of s 411(2).

It is convenient to deal with each of these issues in the same sequence.

18 First, looking at the question of proper disclosure, s 412(1)(a) or s 411(3) relevantly for present purposes requires that the explanatory statement (or draft) presented for approval must, amongst other things,

(a) explain the effect of the proposed arrangement and disclose any material interests of directors as defined;

(b) set out the "prescribed information", that being a defined term; and

(c) give any other information that is material to the making of a decision by a creditor or member whether or not to agree to the arrangement but only to the extent that information is known by the directors but has not previously been disclosed to the creditors or memebers.

19 In relation to the effect of the proposed arrangement, proper disclosure requires that the main facts which would enable members and note holders to exercise their judgment on the proposed schemes are or have been previously placed before them, and all disclosure must be without material omission or misstatement and be conveyed in a way that is neither misleading nor deceptive (NRMA (supra) at 355).

20 In the case of a scheme which results in a takeover, proper disclosure entails no lesser level of disclosure required expressly or otherwise for a conventional takeover (NRMA at 354 - 355). In this regard, it has been submitted that Crown's explanatory statement contains the information which meets the requirement of ch 6 of the CA for a scrip or securities takeover scheme, thus ensuring that Crown's members and note holders will receive the treatment and protection they would have if the merger with Petra were effected under a takeover conducted pursuant to that chapter of the CA. In that respect I have been taken to the detail supporting that submission and I refer to it below under the heading "Detail".

21 In the context of other material information not previously disclosed, other material in these proposed schemes includes summaries of the businesses and capital structures of Crown and Petra, risk factors and tax implications, financial information of Crown and Petra and an independent expert's report giving a detailed analysis of the proposed schemes and its effect on shareholders and note holders.

22 There is no doubt, in my view, that the proposed schemes are arrangements giving the term "arrangement" a liberal meaning as suggest in Re ACM Gold Ltd and Re Mount Leyshon Mines Ltd (1992) 34 FCR 530, also adopted in NRMA (supra) at 356.

A Part 5.1 Body

23 It is equally clear that the applicant is a 5.1 body as defined in s 9 of the CA, namely it is a company or a registrable body that is registered under Div 1 or 2 of Pt 5B.2 of the CA.

24 The bona fides of those proposing the scheme is not generally a matter for the court at the approval stage of an application under s 411. Unless something improper emerges at the outset, the issue of bona fides, including issues such as whether a minority is being oppressed, fall for consideration at the subsequent or third stage (s 411(6)). (NRMA at 356 and 357.)

25 There is nothing at this stage which raises any doubts about the bona fides of those proposing the schemes or their content and there is nothing in the constitution of Crown which appears to conflict with the proposed schemes.

26 There is, in the circumstances of this application, only one class of Crown share on issue so there is only one possible class of member.

27 The convertible notes, however, are more complex. Convertible notes have been issued on four occasions. Although there have been issues on four occasions, nevertheless the convertible notes issued have the following common features: they all have the same issue price, they all bear the same maturity date, they are all at the same interest rate, they are governed by the terms of the trust deed and accordingly have the same security and, finally, were listed and traded on the ASX as one class of note.

28 It follows then that in all material respects each holder of a convertible note issued by the plaintiff is a member of the same class of creditor: Re Crusader Ltd [1996] Qd R 117 at 129 and Re Bond Corporation Holdings Ltd (1991) 5 WAR 143 at 152 - 155.

29 I am unable to discern on this application, any reason why all note holders would not have relevantly similar legal rights and obligations. There seems no reason why they would not be able to "consult together" with a view to their common interest: Re Chevron (Sydney) Ltd [1963] VicRp 39; [1963] VR 249 at 255; Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 per Bowen LJ at 582 - 583. See also Re International Harvester Ltd (Receiver and Manager Appointed) [1953] VR 669.

30 A further consideration is apparent from the evidence. As on-market transfers of Crown notes have occurred since their original issue on the ASX, that it is unlikely that Crown would be able to ascertain from which tranche of Crown notes a current holder's notes originated. Consequently, if more than one class of notes were to be declared, it could be impossible, or at least very difficult, to ensure that note holders were voting in the relevant class.

31 On this application ASIC did appear on the first return date and has indicated that other than the matters on which it has negotiated with Crown certain amendments to the explanatory statement, it has no objection in principle at this stage to the scheme. There has been no suggestion by ASIC that it has not had reasonable notice to examine the proposals.

32 I turn then to consider the detail of the disclosure requirements in the explanatory statement. As I have indicated, s 411(3) provides that the explanatory statement must, amongst other things, set out the prescribed information.

33 "Prescribed" information means the information required by the Corporations Regulations 2001 (Cth) ("the Regulations"). These regulations in turn by Reg 5.1.01 incorporate Sch 8 of the Regulations.

34 These are mandatory requirements and they are augmented by the views of ASIC as expressed in policy statement 75, which concerns independent experts' reports to shareholders, practice note 42 dealing with the independence of experts' reports, policy statement 60 dealing with schemes of arrangements and policy statement 142, dealing with schemes of arrangement and review by ASIC.

35 In the case of the share scheme, dealing with Crown members, the prescribed information is set out in Pt 3 of Sch 8 to the Regulations, whereas in the case of the note holders' scheme, being a creditors' scheme, the prescribed information is set out in Pt 2 of Sch 8.

36 To the extent that the explanatory statement omits any prescribed information required by Pt 2 or Pt 3, it is now apparent from supplementary affidavits that ASIC has waived those requirements and has produced letters to the court through Crown indicating that compliance with specific elements has been waived in the circumstances of these schemes.

37 I do not propose to deal with each aspect in detail in these short reasons. I have been taken in considerable detail by counsel for the applicant Mr Feutrill to each aspect of those details required under the Regulations and Sch 8 and to each aspect of the schemes which answers to and conforms with the requirements there set out.

38 For the note holders, in my view, the information disclosed in the explanatory statement is information that would permit the note holders and their professional advisers to make an informed assessment of the rights and liabilities attaching to the scheme convertible notes and the assets and liabilities, financial position, performance, profits and losses and prospects of Petra. In comparison I refer to s 710 of the CA dealing with takeovers as the yardstick by which such information can be measured.

39 As to the shareholders, given that the proposed share scheme will affect a merger of the plaintiff and Petra by which the plaintiff will become a wholly-owned subsidiary of Petra and the consideration paid to the shareholders will be shares in Petra, the information material to the shareholders is similar to that and, I accept for present purposes, no less than that which is required in a bidder and target statement under ch 6 of the CA.

40 In this instance the explanatory statement (by comparison with the relevant provisions of s 636 of the CA taken seriatim), identifies the notional bidder Petra; it will be dated; identifies the intentions concerning the continuation of, changes to and future employment of the present employees of the "target"; meets the prospectus requirements for a public offering of shares in Petra, and specifies the number of Crown shares included in the bid and the number of shares in which the bidder had a relevant interest prior to the bid.

41 Equally it appears to me that the relevant provisions of s 683 of the CA, a target statement, are also met, in this instance by Pt 3 of Sch 8 of the Regulations. The information disclosed in the explanatory statement is information that would permit the shareholders and their professional advisers to make an informed assessment of the rights and liabilities attaching to Petra's shares and the assets and liabilities, financial position and performance, profits and losses and prospects of Petra. Again, I refer to s 710 of the CA by comparison.

42 There have been different expressions as to the degree to which the court should exercise its supervisory role at the convening stage. There is discussion of this issue in NRMA at 359 - 361.

43 One approach is the passive approach advocated in Re Bank of Adelaide (1979) 22 SASR 481 at 494 - 495. That approach is that at the convening stage the court should primarily be concerned with whether sufficient information is being given in the explanatory statement and not be concerned with the merits or prospects of the proposed schemes.

44 Another approach involves closer consideration of the merits of the scheme, including whether there are any significant aspects of unfairness. This approach requires a determination of whether it is likely that the court will approve the arrangement when it comes back to the court for approval pursuant to s 411(6). This approach was taken by Street J, as he then was, in F T Eastment and Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 and was followed by Murray J in this Court in Re Stockbridge (1993) 9 ACSR 637.

45 Adopting the latter approach, as expressed by Murray J in Stockbridge (assuming for present purposes that there is any real disparity between the two), again it appears to me that there are no difficulties with fairness and reasonableness of the scheme in the manner examined in Re Stockbridge. I am conscious that there are mild reservations about the share scheme in the independent expert's report but only on one aspect of the scheme. I am also conscious that nevertheless the reservations are not such as to discourage the experts from recommending approval.

46 It appears to me that it can reasonably be said in each case that " ... persons within the class in question might well approve of the scheme" which is the test expressed by Murray J in Stockbridge. It is material that directors of both Crown and Petra consider the scheme to be commercially desirable, have stated that to be so and have recommended acceptance.

47 The purpose of the scheme is something that requires consideration under s 411(17)(a) of the CA in a limited fashion. The court must be satisfied that the proposed schemes are not designed " ... to enable any person to avoid the operation of the provisions of Chapter 6 of the CA". In that regard again I note that Murray J in Stockbridge followed what was said by O'Loughlin J in Re ACM Gold Ltd at 542, stating of s 411(17) that if there are two ways of achieving the same object and one of the entails the use of ch 6, the adoption of the second does not mean, without more, that the second was proposed for the purpose of enabling some person to avoid the operation of any of the provisions of ch 6.

48 Similarly in Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 French J also referred to the observations of O'Loughlin J in Re ACM Gold and said:

"The mixture of strong control in Chapter 6 on the one hand and coupled with the legislature's willingness to make exceptions and grant exemptions from the provisions of Chapter 6 call for a liberal and practical interpretation of section 411 subsection (17)."

In this application there is no evidence or inference I can draw that the schemes have been proposed for any purpose of enabling any person to avoid the operation of ch 6 of the CA. The directors of Crown and Petra have agreed on the merger and formed the opinion that the schemes are the most cost and time-efficient method of securing the consent of all concerned to the proposed merger.

49 I note also that if Petra were to make a takeover bid under ch 6 of the CA, which would have to be for both the shares and the Crown notes, it could not be guaranteed 100 per cent ownership of Crown or a sufficient number of acceptances of the bid by the new members, to allow Petra to acquire the remaining shares through compulsory acquisition provisions contained in ch 6A. The schemes provide a greater level of certainty at an earlier stage in ascertaining whether 100 per cent ownership of the issued capital of Crown, both present and potential is achievable.

50 Similarly, Petra would not agree to its obligations associated with the proposed merger if it could not be guaranteed of acquiring a 100 per cent interest within a shorter time frame than that achievable by way of bid under ch 6.

51 Reference to these considerations guided not only Murray J in Re Stockbridge but more recently and in similar circumstances for similar considerations Barker J in Re International Goldfields Ltd [2003] WASC 86.

52 Finally, I have been informed by an affidavit sworn by Mr Toby Hicks, solicitor for Crown, on the basis set out in the affidavit, that there are no impediments under s 411(7) of the CA.

53 In conclusion, I am satisfied that there is no good reason on the face of the materials filed in support of this application why members and note holders of the applicant should not meet and if they consider fit vote to support the schemes that the directors propose. Accordingly I give the necessary leave for that purpose and more specifically make orders in terms of the amended minute.