F.T. Eastment & Sons Pty Limited v Metal Roof Decking Supplies Pty Limited

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1653 of 2010

IN THE MATTER OF STRAITS RESOURCES LIMITED (ACN 056 601 417) STRAITS RESOURCES LIMITED (ACN 056 601 417)

JUDGE: JACOBSON J DATE: 20 DECEMBER 2010 PLACE: SYDNEY

Two Schemes of Arrangement 1 I had before me on Friday 17 December 2010 the first court hearing of two schemes of arrangement proposed by Straits Resources Limited ("Straits"). The first scheme is described in the documentation as the "Demerger Scheme". The second is described as the "Acquisition Scheme". 2 The two schemes are separate in the sense that the Demerger Scheme is not conditional upon approval of the Acquisition Scheme and may therefore proceed even if the Acquisition Scheme does not. But they are related because the Acquisition Scheme is conditional upon the Demerger Scheme proceeding.

The Demerger Scheme 3 The Demerger Scheme is known by that name because it provides for the separation of one arm of the business of Straits from the other. The two arms are "the Coal Business" and "the Metals Business." Under the Demerger Scheme the assets of Straits referable to the Metals Business will be transferred to a wholly owned subsidiary of Straits known as Straits Metals Limited ("Straits Metals"). The Coal Business will remain in Straits. 4 Shareholders of Straits will receive one share in Straits Metals for each existing share in Straits, but they will retain their existing shareholding in Straits, thus the effect of the Demerger Scheme may be said to be that shareholders of Straits will receive one share in the Metals Business (through Straits Metals) and one share in the Coal Business (through Straits) for each share they presently hold in the conglomerate business of coal and metals presently conducts by Straits.

The Acquisition Scheme 5 The Acquisition Scheme provides for the acquisition by a company known as PTT Mining Limited ("PTT Mining") of all of the shares in Straits after the demerger for $1.72 per share, but this is subject to a possible reduction to $1.56 if there is an adverse event which I will explain further in my judgment on the Acquisition Scheme (see Straits Resources Limited, in the matter of Straits Resources Limited [2010] FCA 1467).

Interrelationship of the Schemes 6 If both the Demerger Scheme and the Acquisition Scheme proceed, shareholders will receive $1.72 per share, together with one share in Straits Metals for each existing share in Straits, that is to say, they will hold a share in the Metals Business and they will receive $1.72 per share in place of their previous investment in the division of Straits represented by the Coal Business. 7 If the Demerger Scheme is approved but the Acquisition Scheme is not, the existing shareholders of Straits will have their investments split into two separate businesses in place of their present investment in the conglomerate.

Orders Made 8 I made orders on Friday convening meetings of shareholders to consider each of the proposed Schemes. These are my reasons for the orders made in the Demerger Scheme.

Straits 9 The operational structure of Straits is conveniently described in a graph which is set out at page 6 of the report of the independent expert, Ernst & Young Transaction Advisory Services Limited ("E&Y") on the Acquisition Scheme. The graph shows the structure of the Coal Business and the Metals Business prior to the proposed Demerger Scheme. 10 The Coal Business is conducted by a joint venture company owned as to 40% by Straits and as to the remaining 60% by PTT Mining.

PTT Asia Pacific 11 The joint venture company is known as PTT Asia Pacific Mining Pty Limited ("PTT Asia Pacific"). PTT Asia Pacific has a substantial interest in coal exploration prospects in Brunei and Madagascar. It also has an interest in a project in Western Australia and a 45.6% shareholding interest in Straits Asia Resources Limited ("SAR"), which is a company incorporated in Singapore and listed on the Singapore Stock Exchange. SAR conducts the Sebuku and Jembayan coal mines in Indonesia.

Straits Metals Business 12 The Metals Business of Straits consists of, inter alia, 100% interest in the Tritton Copper Mine in New South Wales, 100% interest in the Mount Muro Gold Mine in Central Kalimantan in Indonesia, and various other non-coal related assets and liabilities.

How the Demerger will be Effected 13 It is proposed that the demerger will be effected by Straits through: A reduction of the share capital of Straits equal to the market capitalisation of Straits Metals (when that company is listed) less the demerger dividend (if any). This is explained below. This is subject to a proviso that in each case the amount does not exceed the maximum capital return permitted by law, applied equally against each share in Straits held by Straits shareholders on the Demerger Scheme record date in accordance with a proposed capital reduction resolution. If declared by the Straits Board, a special dividend of an amount per Straits share determined by the Straits Board and announced on the ASX prior to the demerger date; By applying the amount of the capital reduction and the demerger dividend as consideration for the transfer to Straits shareholders of one ordinary share in Straits Metals for every Straits share they hold pursuant to the Demerger Scheme. No amount of cash will be paid to Straits shareholders as a result of the capital reduction or the demerger dividend. 14 The market capitalisation is the amount which is the market value multiplied by the number of Straits Metals shares on issue on the Demerger Scheme record date. 15 The market value is the volume weighted average price of Straits Metals shares as traded on the ASX (whether on a deferred or normal settlement basis) over the first five trading days after the Demerger Scheme effective date. It is not possible to make this calculation before the approval of the Demerger Scheme because Straits Metals will not be listed until after that occurs. 16 It is estimated that the market value of Straits Metals shares may be in the range of $0.4695 to $0.49 and the market capitalisation in the range of $148.52 million to $155.01 million. Straits shareholders as at the Demerger Scheme record date other than foreign shareholders (who will be referred to below) do not need to pay any money for the Straits Metals shares they receive under the Demerger Scheme. Their distribution entitlement will be applied as consideration for the transfer of the Straits Metal shares under the Demerger Scheme.

Legal Principles Applicable to the First Court Hearing 17 The principles which apply to the first court hearing have been referred to in a number of authorities. I do not need to refer to them in detail. 18 It is sufficient to say that the court's approach is that it will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that if it receives the statutory majority at the meeting, the court would be likely to approve it on the hearing of an application that is unopposed: see F.T. Eastment & Sons Pty Limited v Metal Roof Decking Supplies Pty Limited (1977) 3 ACLR 69 at 72; Re Central Pacific Minerals NL [2002] FCA 239 at [8]; and Re CSR Limited (2010) 77 ACSR 592 at [12]. In addition, I endeavoured to state the principles in Re Seven Network Limited (No 3) (2010) 267 ALR 583 ("Seven Network") at [31]ff. 19 The principles were recently restated by Davies J in Re Orica Limited [2010] VSC 231 at [7] and [8]. Those passages were cited with approval by Barrett J in MAC Services Group Limited [2010] NSWSC 1316 at [5]. It is unnecessary to repeat what was said in those authorities.

Deed Poll 20 The obligations of Straits Metals under the Demerger Scheme are supported by a Deed Poll given by Straits Metals in favour of Straits shareholders. This appears in the Demerger Scheme Booklet at Annexure F. The Deed Poll has been executed by Straits Metals.

Recommendation by Straits Directors 21 The directors of Straits unanimously recommend that in the absence of a superior proposal, Straits shareholders vote in favour of the Demerger Scheme at the Demerger Scheme Meeting. 22 The Straits directors believe that the demerger and, in particular, the reduction of capital will not materially prejudice the ability of Straits to pay its creditors.

Independent Expert Report 23 E&Y has prepared a report which is included as Annexure A in the Demerger Scheme Booklet. E&Y has concluded that the advantages of the demerger outweigh its disadvantages and has concluded that the proposed demerger is in the best interests of Straits shareholders. 24 E&Y have also concluded that the reduction of capital will not materially prejudice Straits' ability to pay its creditors.

Ineligible Foreign Shareholders 25 The position of ineligible foreign shareholders is dealt with in a manner which is common to schemes of this type. 26 If the demerger proceeds, ineligible foreign shareholders will retain their existing shares in Straits, which will be renamed as Straits ICH Limited, and the shares to be issued to them in Straits Metals under the Demerger Scheme will be transferred to a nominee appointed by Straits in order for those shares to be sold on their behalf. The net proceeds of sale will then be dealt with as described in section 1.8 of the Demerger Scheme Booklet. 27 There are only a very small number of ineligible foreign shareholders. The total number as at 30 November 2010 was 14, which represented 0.29% of the shareholders of Straits. 28 I do not consider that the ineligible foreign shareholders constitute a separate class of shareholders. 29 The position in relation to the ineligible foreign shareholders not constituting a separate class was explained by Barrett J in Re Hills Motorway Limited (2003) 43 ACSR 101 ("Re Hills Motorway"), in particular at [10] - [13]. 30 There is also authority to support the proposition that a two-step demerger structure such as that which is proposed in the present case, that is to say, a capital reduction followed by the distribution of Straits Metals shares to the existing shareholders of Straits, is not to be regarded as a selective reduction of capital, even though shareholders in certain jurisdictions receive a cash amount rather than shares in the demerged entity; see Re ETRADE Australia Limited (1999) 30 ACSR 516 at 517 per Santow J.

Conversion and Voting Agreements 31 Standard Chartered Private Equity Limited ("Standard Chartered PE") holds 55 million 4% convertible notes issued by Straits with an aggregate face value of $79.8 million. The convertible notes are convertible into shares in Straits. The effect of the conversion rights is that upon conversion Standard Chartered PE will receive approximately 61 million shares in Straits, which is equal to a 19.4% shareholding in that company. 32 Straits has entered into a conversion agreement with Standard Chartered PE (the "Straits-Standard Chartered PE Conversion Agreement") to ensure that all of the Straits convertible notes will be converted to Straits shares: in sufficient time to enable Standard Chartered PE to vote the Straits shares received upon conversion of the convertible notes at the Demerger Scheme Meeting and the Acquisition Scheme Meeting; and in any event before the Demerger Scheme record date. 33 As a result, the Straits convertible notes are expected to be extinguished, and the Straits shares issued as a result of their conversion will participate with all other Straits shares in the Demerger Scheme and the Acquisition Scheme. 34 PTT Mining Limited has entered into a separate PTT Mining Limited-Standard Chartered PE Conversion Agreement to the same effect as the other conversion agreement described above. 35 Upon Standard Chartered PE converting the convertible notes before the record date for entitlements to vote at the Demerger Scheme Meeting and the Acquisition Scheme Meeting, Standard Chartered PE is required to vote in favour of each of the Demerger Scheme and the Acquisition Scheme. 36 It follows from what I have said above that the rights attaching to the convertible notes held by Standard Chartered PE and the voting arrangements which it has entered into are material matters to be disclosed to shareholders. What emerges from the Scheme Booklet in each of the Schemes is that: On conversion of the convertible notes, Standard Chartered PE will be issued with approximately 61 million shares in Straits which will equal about 19.4% of the issued share capital of Straits. If the Demerger Scheme is approved, Standard Chartered will then hold approximately 19.4% shareholding in each of Straits and Straits Metals. If the Acquisition Scheme is approved, Standard Chartered PE will receive approximately $105 million for its shares in Straits (subject to reduction in the event of an adverse adjustment event) as a consequence of a conversion of the convertible notes which were acquired by Standard Chartered PE for nearly $80 million. Also upon the approval of the Acquisition Scheme, shareholders who presently hold shares in the "conglomerate" Straits will only own shares in the Metals Business, through their holdings in Straits Metals, with that company being owned as to 19.4% by Standard Chartered PE. Shareholders will of course in addition receive $1.72 per share (or $1.56) for their coal interest. Standard Chartered PE is committed to voting in favour of the Demerger Scheme and the Acquisition Scheme.

Votes at the Scheme Meeting 37 Straits seeks an order that a single meeting of Straits shareholders be convened to consider and, if thought fit, agree to each of the Schemes. 38 I do not consider the conversion rights or the voting rights entered into with Standard Chartered PE create separate classes of shares within the principles stated in the authorities. 39 The relevant question in such cases is governed by the principle stated over 100 years ago in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 579 - 580 and 583. Barrett J referred to that principle in his decision in Re Hills Motorway. See also the observations of Stone J in Re Wattyl Limited [2010] FCA 854 at [15] - [17]. 40 Barrett J in Re Hills Motorway summed up the test by saying that it is not one of identical treatment, it is one of community of interest. The court is to ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest. That is to say, to come together at a single meeting and to debate the question of what is good or bad for the constituency as a whole. 41 In the present matter Standard Chartered PE will receive the same consideration for its equity as the other groups of shareholders in each of the Schemes, albeit that it will receive its consideration as a result of the conversion of the convertible notes. This will be so even though if the Acquisition Scheme proceeds it will effectively hold its 19.4% interest in Straits as what might loosely be called "a free carried interest" after receipt of the consideration for the Acquisition Scheme. 42 Whilst I do not consider these matters to be class-creating, I think it is appropriate for the votes of Standard Chartered PE to be separately tagged. I indicated on Friday that I would then be in a position to look at the separate allocation of the votes at the second court hearing on the question of fairness. That was the approach that was adopted by Emmett J, although in a different context, in CCI Holdings Limited [2007] FCA 832 at [19]. 43 As to the position in relation to the voting arrangements, this seems to me to be covered by a number of authorities so that the view that has been taken is that it is not class-creating. What is important is that Standard Chartered PE is not being provided with any collateral benefit by agreeing to exercise its right to convert the Straits convertible notes. 44 I dealt with the position in relation to proxy voting deeds in Re People Telecom Limited [2009] FCA 180 at [7] - [8], although in that case the proxy deeds were given in favour of a person other than the acquirer of the shares. Here the voting agreements are with the company that will acquire the shares if the Acquisition Scheme is approved. 45 A similar approach was also taken by Stone J in Re Mosaic Oil NL [2010] FCA 985 at [15]. There is a useful explanation of the rationale for this approach to be found in the observations of David Richards J in Re Telewest Communications Plc [2004] EWCH 924 (CH) at [52] - [55]. That authority was referred to by Barrett J in MAC Services Group Limited [2010] NSWSC 1316 at [18]. The context in the MAC case was different but analogous because the issue concerned whether an option agreement with a significant shareholder was class creating. 46 The other matters which Mr F. Gleeson SC brought to my attention on Friday are sufficiently set out in Mr Gleeson's outline of submissions which I will mark as MFI 1.

Exemption under s 3(a)(10) Securities Act 1933 (US) 47 One matter to which I should draw to attention is that if the court grants approval to the Scheme, Straits Metals intends to rely upon the court's approval of the Scheme for the purposes of the exemption under section 3(a)(10) of the Securities Act 1933 of the United States. 48 That is a matter which has been dealt with in various authorities. It is well established that it is an issue to be dealt with at the second court hearing but the approach is that it is necessary for the court to be informed prior to the hearing that the plaintiff or the relevant company will rely on the exemption. That has been done in the present case.

Disclosure in Scheme Booklet 49 In conclusion, the authorities to which I have referred above emphasise the importance of the object of disclosure in the Scheme Booklet. 50 The detail and effect of this Scheme must be sufficiently disclosed so as to enable shareholders to make an informed decision. 51 In the course of the application on Friday, I pointed out a number of areas where in my opinion disclosure was not made with sufficient clarity in the Scheme Booklet. That observation is not intended as a criticism of those who have the ultimate carriage of drafting the Scheme documentation. It may well be that the approach which is adopted as a matter of course in modern scheme documentation tends to detract from a clear and concise statement of the essential details and effect of the scheme. 52 Nevertheless, as I said in Seven Network, the court relies heavily on counsel to bring to the court's attention those features of the scheme which would require attention, and that has been done in the present matter.

Conclusion 53 In accordance with the principles to which I have referred, I made orders on Friday convening the Scheme Meeting. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.