Felix Resources Pty Ltd; in the matter of Felix Resources Pty Ltd (No 2) [2009] FCA 1337

REASONS FOR JUDGMENT 1 Felix Resources Limited (Felix Resources) applies for an order approving the sending of a supplementary explanatory memorandum to shareholders in connection with a proposed scheme of arrangement and for directions for the sending of that memorandum to shareholders. The application is a sequel to orders which were made by Dowsett J on 28 September 2009 pursuant to s 411 of the Corporations Act 2001 (Cth) (Corporations Act) in respect of the convening of a meeting of the members of Felix Resources to consider and, if thought fit, approve, with or without modification, a scheme of arrangement between Felix Resources and the holders of ordinary shares issued in it, rather than the holders of excluded shares being a scheme of arrangement set out in s 11 of a scheme booklet to be found in exhibit "CRS14" to an affidavit of Mr Craig Rothwell Smith, sworn on the 28 September 2009. 2 His Honour's reasons for making those orders are to be found in the reasons for judgment which he gave that day: see Re Felix Resources Pty Ltd [2009] FCA 1182. 3 These reasons for judgment should be read in conjunction with those given by his Honour on 28 September 2009. The proposed scheme is more particularly described in his Honour's reasons for judgement. I do not, therefore, take time to recite again the nature of the scheme as proposed. 4 Since 28 September 2009 there has been a further development. 5 The explanatory memorandum, to which I have already referred, has been sent. Section 412 of the Corporations Act requires, inter alia, that the explanatory memorandum sent to shareholders contain: Any other information that is material to the making of a decision by a member whether or not to agree to the arrangement. 6 Felix Resources apprehends, in light of a further development, that it is appropriate to seek court approval for the sending of a supplementary memorandum. There is no doubt that it is a prudent and appropriate course for Felix Resources to have taken to seek such approval, note the criticism voiced in Re Coates Hire (No 2) [2007] FCA 2105 at [7] in respect of a corporation that sent such material without first obtaining court approval. 7 The original explanatory memorandum disclosed that Felix Resources would be declaring a second 50 cent dividend. What that memorandum did not disclose was the timing of the dividend and the circumstances relating to the way in which the company would pay that dividend. As it transpires, the directors of Felix Resources propose to fund that dividend with the use of funds borrowed from particular shareholders. It is that development and that proposal which has provided the occasion for the making of this application. On 10 November 2009, the board of directors of Felix Resources declared a fully franked 50 cent dividend payable to each share in the company. That dividend is payable on 9 December 2009. It is on the day after members met to vote on the scheme and the day before the hearing of the application for court approval. 8 The material before me discloses, candidly, that Felix Resources does not presently have sufficient cash resources to meet the second 50 cent dividend payment on 9 December 2009 while at the same time complying with financing arrangements which it has with the Commonwealth Bank of Australia. It is against that background that Felix Resources proposes to borrow the full amount needed for the payment of the second dividend from its three largest shareholders. It has entered into loan agreements with each of those shareholders to that end. Pursuant to cl 4.3 of an implementation agreement in cl 6 of the deed poll Yanzhou Coal Mining Company Limited (Yanzhou), which I note is represented today by leave by its solicitors, and its subsidiary, Austar, have agreed to put in a place a letter of credit from the Bank of China's Sydney branch which will guarantee repayment of amounts outstanding under the shareholder loans to which I have referred. 9 It is this particular arrangement which Felix Resources' directors conceive properly ought to be the subject of a supplementary memorandum to shareholders who are to vote at the meeting in December. 10 It was submitted on behalf of Felix Resources that the Court's authority to make orders of an ancillary nature to those originally made on 28 September 2009 pursuant to s 411 is to be found in s 1319 of the Corporations Act. I agree. It seems to me that the powers conferred upon the Court by the latter section are designed for just such a situation as this, amongst others. 11 Felix Resources has very properly raised for consideration a question germane to the approval of the despatch of the memorandum. Implicit in any such approval would be a recognition that the proposal was one which did not impermissibly constitute those shareholders who will make loans to Felix Resources a separate shareholder class. 12 In his helpfully comprehensive submissions, Mr O'Donnell QC, who appears for Felix Resources on the application, has set out by reference to pertinent authority principles which are relevant to deciding whether or not and when shareholders come to form separate classes. Those principles, as distilled from the authorities, may be summarised as follows: (a) the essence of answering a question as to whether members of a corporation need to meet in separate classes and, if so, in what classes is an assessment of the similarity of the legal character of their rights and obligations as members and whether the impact of a scheme as proposed will affect those rights and obligations in a similar way; (b) in answering such a question, attention must necessarily be given to the effect of the proposed scheme on legal rights and entitlements, not on commercial interests; (c) it is to be remembered that the scheme is one between a company and its members. Thus, that some members might have divergent commercial interests which are strictly separate from their share membership is, at least in the ordinary course of events, nothing to the point insofar as any differentiation of member classes is concerned; (d) there is no requirement that there be identical interests as opposed to a similarity of interests as members. The question is one of the degree or rather the nature and extent of similarity rather than of the differences between members; and (e) if there is a sufficient similarity of legal interests in the way in which the members' interests will be affected by a scheme, it is not an impediment to those persons meeting in one class that many of them may have additional interests, in other words, interests which are over and above those which qualify them as members. 13 Against this background Felix Resources submits that the effect of the shareholders' loans as proposed will not be such as to constitute those shareholders as a separate class. Rather, it submits that there is a sufficient commonality of interest such that all shareholder should vote together in the one meeting. 14 Felix Resources advances two reasons for this submission. The first, and in my opinion the telling one, is that the essence of the scheme as proposed is one which would remove each member's shares and substitute for that a cash payment. Each of the shareholders, including those who propose to make the loans in question would receive such a cash payment and a payment not differentiated in any way by virtue of the separate status of particular shareholders as creditors of Felix Resources. 15 In that sense, and that, in my opinion, essential and telling sense, there is no differentiation between shareholders. Rather, what will transpire is that at the time when the vote is taken three of those shareholders will by virtue of separate agreement have an interest as creditors of the company. That has rightly been submitted to be a commercial interest rather than an interest in their capacity as a shareholder. That being so, and in accordance with the principles to which I have referred in a summary way, there is no preclusion on the part of those shareholders from voting with the other shareholders as the one class. 16 Out of an abundance of caution, the other ground upon which reliance is placed on behalf of Felix Resources is that there is sufficient residual community of interest amongst shareholders to make it nonetheless appropriate that all of the shareholders vote together on the scheme. In this regard, the submission focuses upon one of the principles to which I have referred, which is that attention ought to be given to the degree of community of interest rather than particular differences. The submission is that, in effect, there remains a sufficient community of interest amongst the shareholders for them to vote as a single class. That sufficiency is said to be found in that all of them have a community of interest in the sale of their shares for the price offered. There is much to be said, in my opinion, in favour of that second basis of contention. However, in light of the conclusion which I have reached in respect of the first ground, it is unnecessary to decide the same. 17 I note that Felix Resources has given notice of the application and the proposed supplementary memorandum to the Australian Securities and Investments Commission. The material before me discloses that the Commission has no particular concern in respect of the proposed supplementary memorandum. Neither has it sought to appear today. I further note that Yanzhou has, in appearing today by leave, sought, so to do so as to support the granting of the approval which is the subject of Felix Resources application. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.