F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2085 of 2012

IN THE MATTER OF ENDOCOAL LIMITED (ACN 132 183 281)

JUDGE: YATES J DATE: 8 FEBRUARY 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 On 25 January 2013, I made orders pursuant to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (the Act) which provided for the convening of a meeting of all shareholders in Endocoal Limited (Endocoal) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed between Endocoal and its shareholders. The terms of the scheme of arrangement are set out in an attachment to a scheme booklet, the draft of which is Exhibit 1 in the proceeding (the proposed scheme). The scheme booklet is to stand as the explanatory statement in relation to the scheme, which is required by s 412 of the Act. 2 These are my reasons for making the orders.

background 3 Endocoal is a coal mining exploration and development company whose interests are focussed on Queensland's Bowen Basin. It holds a suite of tenement interests, covering an area of approximately 3,867 kilometres2. Its most advanced project is Meteor Downs South, a planned open cut, thermal coal operation in its Orion Downs tenement. Endocoal completed an evaluation study in respect of this project in March 2012. Endocoal also has a portfolio of prospective exploration tenements in other areas of the Bowen Basin, including Rockwood, Talwood and Stockyard Creek. 4 Endocoal was registered as a public company limited by shares on 16 July 2008. It was listed on the Australian Securities Exchange (ASX) on 30 April 2010, raising $17 million at an issue price of $0.60 per share. The proceeds of the initial public offering were used to fund Endocoal's Bowen Basin exploration program. 5 As at 22 January 2013, there were 186,929,401 shares in Endocoal quoted on the ASX. Endocoal has 1,101 shareholders. As at 22 January 2013, Endocoal had also granted (or had agreed to grant) 20,450,000 options to subscribe for Endocoal shares (Endocoal options) and rights to acquire those options (Endocoal rights). Neither the Endocoal options nor the Endocoal rights are quoted on the ASX. 6 On 26 October 2012, Endocoal entered into a scheme implementation agreement (SIA) with U & D Mining Industry (Australia) Pty Ltd (UDMI) under which it was proposed that UDMI would acquire, by way of the proposed scheme, all of the issued capital of Endocoal for a total cash consideration of $0.38 per share (the scheme consideration). UDMI is a joint venture between Australia Kunquian International Energy Co. Pty Ltd (Kunquian) and Daton Group Australia Ltd (Daton). Kunquian is a wholly-owned subsidiary of Yemar Coal Industry Group Co. Ltd. Daton is a public company listed on the ASX. The parties to the proposed scheme are Endocoal and its shareholders (the scheme shareholders). If the scheme is implemented, Endocoal will become a wholly-owned subsidiary of UDMI and will cease to be listed on the ASX.

Aspects of the scheme 7 The acquisition, by way of the proposed scheme, is relatively straightforward. There are, however, some aspects of the proposed scheme, and of the transaction more generally, to which I should make brief mention. 8 First, if the proposed scheme is agreed to and approved, the scheme consideration will be paid prior to the transfer of the scheme shares to UDMI. Payment of the scheme consideration will be made by depositing cleared funds into an account established in Endocoal's name, to be held on trust for the scheme shareholders. UDMI will only become beneficially entitled to the scheme shares after payment of the scheme consideration has been made. UDMI has entered into a deed poll in favour of the scheme shareholders to secure its obligations in this regard. Kunquian has also entered into a deed poll in favour of the scheme shareholders under which it has covenanted to procure UDMI to perform its payment obligation. By these means, any reasonable concerns about "performance risk" in relation to the payment of the scheme consideration have been overcome. 9 Secondly, the proposed scheme, if approved, will impose warranty obligations on the scheme shareholders. Specifically, the proposed scheme provides for warranties that are deemed to have been given by the scheme shareholders to the effect that all the shares to be transferred to UDMI under the scheme will, on the date that they are transferred, be fully paid and free from encumbrances and third party rights or interests of any kind, and that the scheme shareholders have full power and capacity to sell and transfer the scheme shares under the scheme. These warranties are satisfactorily disclosed in the explanatory statement: see Re APN News & Media Ltd (2007) 62 ACSR 400 at [57]-[63]; ABB Grain Ltd, in the matter of ABB Grain Ltd [2010] FCA 1309 at [34]-[39]. 10 Thirdly, the SIA contains a number of "deal protection" clauses. Endocoal has agreed to pay a "break fee" of 1% of the scheme consideration if the scheme does not proceed in the circumstances contemplated in cl 11.2 thereof. Importantly, however, the break fee will not be payable if the scheme shareholders do not approve the proposed scheme. The existence of this fee and the particular circumstances under which it would be payable have been satisfactorily disclosed in the explanatory statement. I also note that the fee does not exceed 1% of the equity value of Endocoal. This meets the guideline set out in the Takeovers Panel's Guidance Note 7, 4th issue, 11 February 2010 at [9]. 11 Furthermore, there is evidence before me, which I accept, to the following effect: The inclusion of the break fee and, in particular, the circumstances and conditions triggering its payment were robustly negotiated. The requirement of the break fee was one of the final issues to be agreed between the parties to the SIA. Endocoal's directors consider that it is unlikely that the break fee will be triggered, except in circumstances of a superior proposal for the scheme shareholders. In that event, the payment of the break fee would ultimately be funded by the proponent of the superior proposal. Endocoal's directors do not consider that the quantum of the break fee would act as a deterrent to the making of a superior proposal. When negotiating the break fee, Endocoal's directors were conscious of and guided by the Takeovers Panel's Guidance Note 7. Endocoal's directors agreed to the break fee following extensive arm's length commercial negotiations that were conducted over a period of approximately three months, throughout which Endocoal and UDMI were separately advised and represented by external legal advisers. Endocoal was also advised and represented by external financial advisers with extensive experience in these transactions. Both parties were conscious of the Takeovers Panel's Guidance Note. It was explicitly referred to during the course of negotiations. 12 The SIA also contains deal protection clauses in the form of "no shop", "no talk" and "notification" provisions. I note that the no talk provision contains the usual "fiduciary carve-out": In the matter of Hostworks Group Ltd (2008) 26 ACLC 137 at [34]; Macquarie Private Capital A Limited (2008) 26 ACLC 366 at [19]; In the matter of Healthscope Limited [2010] VSC 367 at [19]-[22]; In the matter of AXA Asia Pacific Holdings Limited [2011] VSC 4 at [29]. These provisions are satisfactorily disclosed in the explanatory statement. I also note that the SIA is an attachment to the scheme booklet. 13 Fourthly, the proposed scheme is expressed to be conditional on, amongst other things, all the conditions precedent in cl 3.1 of the SIA being satisfied or waived. One of the conditions precedent is that holders of 50% in aggregate of all the Endocoal options and Endocoal rights execute cancellation deeds with Endocoal prior to the scheme meeting. I note that this condition precedent has been brought to the attention of the scheme shareholders in the explanatory statement. I also note, however, that this condition precedent has already been satisfied.

Expert's report 14 Endocoal has engaged Ernst & Young Transaction Advisory Services Ltd (Ernst & Young) to prepare an independent report on the valuation of the scheme consideration and to express an opinion on whether the proposed scheme is fair and reasonable and in the best interests of Endocoal's shareholders. Ernst & Young has expressed the opinion that the scheme consideration of $0.38 per share offered under the proposed scheme is within the range of values assessed for an Endocoal share, being between $0.24 and $0.44 on a 100% interest basis. This assessed range of values is relatively wide, but Ernst & Young has commented that this reflects the nature of the assets involved, including the sensitivity of the valuation of Endocoal's Meteor Downs South asset to changes in coal prices, and the uncertainties regarding access to rail and port infrastructure. Ernst & Young has concluded that the scheme consideration is fair to the scheme shareholders. 15 In its report, Ernst & Young has also canvassed the potential advantages and disadvantages to the scheme shareholders if the proposed scheme is approved and implemented. Its analysis of these factors has led it to conclude that the proposed scheme is fair and reasonable and, therefore, in the best interests of the scheme shareholders. 16 A copy of Ernst & Young's report is an attachment to the scheme booklet. I also note that the opinions expressed in the report have been verified by Mr Bright, the authorised representative of Ernst & Young with overall responsibility for the preparation of the report. 17 The last trading day before the announcement on the ASX of the execution of the SIA was 26 October 2012. The scheme consideration for each scheme share represents the following: a 65.2% premium to Endocoal's closing share price of $0.23; a 70.6% premium to the one month VWAP to 26 October 2012 of $0.223; and a 62.8% premium to the three month VWAP to 26 October 2012 of $0.233.

The recommendation of directors 18 Endocoal's directors have unanimously recommended that the scheme shareholders vote in favour of the proposed scheme in the absence of a superior proposal.

ASIC's position 19 Section 411(2)(a) of the Act requires the Australian Securities & Investments Commission (ASIC) to be given at least 14 days' notice of the hearing of an application under s 411(1) of the Act unless ASIC or the Court permits a shorter period. The requisite period of notice has been satisfied in the present case. 20 Section 411(2)(b) of the Act requires the Court to be satisfied that ASIC has also had a reasonable opportunity to examine the terms of the proposed scheme of arrangement and the draft explanatory statement, and to make submissions to the Court in relation thereto. ASIC has expressed the view that it has had a reasonable opportunity to examine the terms of the proposed scheme and the draft explanatory statement. It has made no submissions to the Court for the purposes of the present application.

Chairman 21 I note that Phillip James McCarthy, a non-executive director and Chairman of the Board of Directors of Endocoal, has agreed to act as chairman of the proposed scheme meeting and that Herbert Gavin Solomon, a director of Endocoal, has agreed to act as chairman in the event that Mr McCarthy is either unwilling or unable to act in that capacity.

conclusion 22 I am satisfied that Endocoal is a Part 5.1 body and that the proposed scheme is an "arrangement" for the purposes of s 411(1) of the Act. 23 On the basis of the evidence currently before me, I am satisfied that there has been proper disclosure to the scheme shareholders of the proposed scheme and that the scheme is bona fide and has been properly proposed. 24 More generally, I am satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the requisite statutory majority at the scheme meeting, the Court would be likely to approve it on the hearing of an unopposed application: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72; Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [8]-[10]; Centrebet International Limited, in the matter of Centrebet International Limited [2011] FCA 870 at [29]. 25 I have been assisted in my consideration of this application by written submissions prepared by Endocoal's senior counsel, who also addressed me orally at the hearing of the application. I have marked those submissions for identification as "MFI 1". 26 In all the circumstances, I am satisfied that it is appropriate that the orders, as sought, be made. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.