First Pacific Advisors LLC v Boart Longyear Ltd

BANKS-SMITH J: 1 On 17 August 2018 I heard an application under s 411 of the Corporations Act 2001 (Cth) (Act) to approve the convening of a scheme and the explanatory statement to be sent to members concerning the scheme. I made orders on that date, and these are my reasons.

Proposed scheme 2 Tawana is a public company with shares listed on the Australian Securities Exchange (ASX) and the Johannesburg Stock Exchange (JSE). Its business is the development and operation of the Bald Hill lithium and tantalum mine in Western Australia. That project is owned 50% by each of Tawana (through a wholly owned subsidiary) and Alliance Minerals Assets Limited (AMAL). 3 AMAL is listed on the Singapore Exchange Securities Trading Limited (SGX-ST). 4 By the proposed scheme, AMAL is 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 would become a fully owned subsidiary of AMAL and Tawana would be delisted.

Materials relied upon 5 Tawana relies upon the following affidavits: (a) affidavit of Heath Lewis (of Tawana's legal advisors King & Wood Mallesons) annexing the scheme implementation agreement (SIA), ASX announcement and company searches; (b) second affidavit of Mr Lewis annexing lodgement correspondence with the Australian Securities and Investments Commission (ASIC), election forms, copy draft scheme booklet and independent expert report; (c) affidavit of Robert Benussi, non-executive chairman and director of Tawana deposing to his willingness to act as the chairperson of the scheme meeting and confirming an alternative chairperson; (d) affidavit of Alexi Fedotov, general manager and company secretary deposing to the verification process undertaken by Tawana with respect to the scheme booklet and status of the share register; (e) affidavit of Pauline Gately, executive chairperson of AMAL, deposing to various conditions precedent, the execution of a deed poll by AMAL binding it to provide the scheme consideration (Deed Poll) and deposing as to the verification process undertaken by AMAL with respect to the scheme booklet; (f) second affidavit of Mr Fedotov deposing to the appointment of Computershare, the due diligence undertaken, and the completion of the verification process; (g) third affidavit of Mr Lewis deposing to the valuation of options and correspondence with ASIC; (h) fourth affidavit of Mr Lewis deposing to further correspondence with ASIC, due diligence sign-off and attaching an updated scheme booklet incorporating changes resulting from communications with ASIC and a signed independent expert report; and (i) fifth affidavit of Mr Lewis addressing final amendments to the scheme booklet and attaching the requisite correspondence from ASIC indicating that it did not intend to appear at the hearing. 6 Tawana's solicitors also provided a useful checklist identifying where in the affidavits the matters prescribed by each of s 411 of the Act, the Corporation Regulations 2001 (Cth) and the ASIC Regulatory Guide 60 are dealt with in the materials.

Principles 7 Section 411(1) of the Act relevantly provides that, where an arrangement is proposed between a Pt 5.1 body and its members, the Court may, on the application of the body in a summary way, order a meeting of the members to be convened in such manner and to be held in such place as the Court directs. Where the Court makes such an order, the Court may approve the explanatory statement required by s 412(1)(a) to accompany the notice of such a meeting. 8 Section 412(1)(a) of the Act relevantly provides that, where a meeting is convened under s 411, the Pt 5.1 body must, with every notice convening the meeting, send a statement explaining the effect of the arrangement. That statement must state any material interests of the directors and the effect of the proposed arrangement on those interests insofar as they may differ from the effect on the like interests of other persons. The statement must also set out such information as is prescribed and any other information that is material to a member's decision to agree or not agree to the arrangement. 9 The authorities refer generally to six matters to be proved at the first stage: (a) the applicant is a Pt 5.1 body; (b) the proposed scheme is an 'arrangement' within the meaning of s 411 of the Act; (c) the explanatory statement will provide proper disclosure to members; (d) the scheme is bona fide and properly proposed; (e) ASIC has had a reasonable opportunity to examine the proposed scheme and the explanatory statement, has had a reasonable opportunity to make submissions and has had 14 days notice of the hearing date of the first Court hearing; and (f) any other procedural requirements have been met. 10 There are many cases to similar effect but I note in particular the collection of matters in Amcom Telecommunications Limited, in the matter of Amcom Telecommunications Limited [2015] FCA 341 at [9] (McKerracher J) and EcoBiotics Limited, in the matter of EcoBiotics Limited [2017] FCA 643 at [20] (Gleeson J). 11 The principles as to the nature of the review at the first Court hearing are also summarised elsewhere: for recent examples, see Programmed Maintenance Services Limited, in the matter of Programmed Maintenance Services Limited [2017] FCA 1265 at [11]-[14] (McKerracher J); Signature Gold Ltd, in the matter of Signature Gold Ltd [2017] FCA 1481 at [22]-[23] (Markovic J). 12 In summary, the standard of review is whether the proposed scheme is not inappropriate and is one that sensible business people might consider is of benefit to its members. If the proposed arrangement is one that seems fit for consideration by a meeting of members and is a commercial proposition likely to gain the Court's approval if passed by the necessary majority, then leave should be given to convene the meeting.

Part 5.1 body 13 A review of the historical records of Tawana as evidenced by copies of the extracts from the ASIC registry indicate that Tawana is a Pt 5.1 body within the meaning of the Act.

Arrangement 14 I am satisfied on the basis of the SIA and scheme booklet contents that the scheme is an arrangement between Tawana and its members. The type of arrangement proposed has been approved on many occasions.

Disclosure and verification of scheme booklet 15 The draft scheme booklet includes an independent expert's report, the proposed scheme, Deed Poll and notice of meeting. 16 The explanatory statement must provide proper disclosure as required by s 411(3) of the Act. The evidence indicates that the matters that must be disclosed in the case of a bidder's statement for a takeover have been disclosed in the scheme booklet, having regard to ASIC Regulatory Guide 60. The matters prescribed by Pt 3 of schedule 8 of the Corporations Regulations are also addressed by the evidence. The checklist conveniently lists the appropriate cross references to the evidence. 17 Taking into account the specific matters addressed below, I consider the proposed scheme booklet makes appropriate disclosure to the Tawana shareholders. 18 Further, verification of the relevant parts of the scheme booklet by each of Tawana and AMAL is evidenced by the affidavits, and the Board of Tawana had approved the release of the final draft.

A single class 19 There is a single class of shareholders and all members have the same rights under the scheme. For reasons addressed further below, I do not consider that the proposed treatment of ineligible foreign shareholders under the scheme or the provision of voting intention statements creates any separate class.

Independent expert report 20 The independent expert (BDO Corporate Finance (WA) Pty Ltd) concluded that the scheme had a number of advantages and disadvantages. As to advantages it noted the scheme: (a) is fair; (b) will streamline the ownership structure and operational management of the Bald Hill project which may result in cost synergies and efficiency benefits; (c) would create a combined group with a stronger financial position; (d) would result in larger market presence, which may result in improved liquidity and an increased ability to raise capital; and (e) would result in broader expertise and increased experience of the board of directors. 21 As to disadvantages, the independent expert noted: (a) the scheme will result in a dilution of existing shareholders' interests; and (b) the ineligible shareholders (see below) may not be able to receive shares in the proposed merged entity. 22 Having considered those matters and the scheme generally, the independent expert concluded that the scheme is reasonable for shareholders.

Particular matters 23 Taking into account the ex parte nature of such proceedings, counsel for Tawana properly disclosed a number of relevant matters. For the reasons set out below, I formed the view that none of those matters provided a reason to prevent the scheme being considered by the shareholders.

Ineligible shareholders 24 A Tawana shareholder whose address is in a place outside Australia and its external territories, New Zealand, Hong Kong or Singapore is an 'ineligible shareholder' for the purposes of the scheme. Under the scheme, the AMAL shares to which the ineligible shareholders would otherwise become entitled will be sold and the proceeds of those sales will be paid to the ineligible shareholders on a proportionate basis. 25 According to the evidence of Mr Fedotov, the percentage of shareholders (by number) in Tawana who are ineligible shareholders is 0.61 % (as at 10 August 2018). 26 The treatment of a relatively small section of shareholders in a members' scheme in this manner by reason of their overseas residence is not unusual and in my view, does not mean they are to be treated as a separate class of shareholders. There remains a sufficient 'community of interest' between the ineligible foreign shareholders and the Tawana shareholders: CSR Limited [2003] FCA 82; (2003) 45 ACSR 34 at [5] (Conti J). 27 The reason specified foreign shareholders are treated differently under some schemes is that it avoids the costs and logistics to the company of assessing and complying with the securities law in all relevant countries: Brambles Industries Ltd, in the matter of Brambles Industries Ltd and the Corporations Act 2001 (Cth) [2006] FCA 1273 at [23]-[24] (Lindgren J); OPUS Group Limited, in the matter of OPUS Group Limited [2018] FCA 959.

Deemed warranty 28 The scheme provides that each of the Tawana shareholders is deemed to have warranted to AMAL that all of their shares transferred under the scheme are fully paid and free of encumbrances at the date of the transfer. Such deemed warranties are not unusual and despite some views to the contrary, the courts have generally held that the warranty is a device directed to ensuring that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: see for example APN News & Media Limited, in the matter of APN News & Media Limited [2007] FCA 770; (2007) 62 ACSR 400 at [60] (Lindgren J); Hostworks Group Limited, in the matter of Hostworks Group Limited [2008] FCA 64; (2008) 26 ACLC 137 at [41] (Mansfield J). 29 The scheme booklet (at cl 3.15) clearly discloses that shareholders should be aware that to the extent the warranty is untrue, then they may be liable to compensate AMAL for any damage caused resulting from such encumbrance. In APN News & Media Limited it was said that damages were limited to the amount of the payment required to satisfy the encumbrance. In this case there is no such explanation but I am satisfied that the scheme booklet provides adequate disclosure of the risk to shareholders.

Performance risk/Deed Poll 30 The risk that consideration will not pass for the shares is addressed by the manner in which the scheme is structured and the Deed Poll executed by AMAL. By reason of s 11 of the Property Law Act 1969 (WA) and cl 8.6 of the Deed Poll, each shareholder has the benefit of the Deed Poll and Tawana is appointed as agent to pursue and enforce the Deed Poll. In those circumstances, performance risk is minimised: APN News & Media Limited at [23].

Exclusivity (no shop, no talk, no due diligence) 31 The SIA contains exclusivity or lock-up provisions by way of no shop, no talk and no due diligence agreements on the part of the target directors. The terms of such provisions must be viewed against the duties of the directors more generally. 32 In general, and as discussed in APN News & Media Limited at [29] and Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 at [9] (Santow J), exclusivity provisions should: (a) exist for no more than a reasonable period which is properly defined; (b) be subject to the directors' fiduciary and other duties; and (c) be given adequate prominence when disclosed in the scheme booklet. 33 In this case, the relevant period was defined (a period of up to nine months), the exclusivity provisions were subject to an overriding obligation not to breach directors' fiduciary and statutory duties, and there was clear disclosure of the provision in the scheme booklet. 34 Tawana notes that the nine month period is at the upper end but not outside periods that have been approved, referring to Re Dyno Nobel Ltd [2008] VSC 154 at [26]-[27] (Robson J) (nine months but could be implemented in less) and Ludowici Limited, in the matter of Ludowici Limited [2012] FCA 489 at [8] (Emmett J) (10 months considered reasonable taking into account the need to obtain regulatory approvals in South Africa). In Re Tatts Group Ltd [2017] VSC 552 at [36] (Sifris J), a period of 14 months was found to be acceptable in the circumstances of the case. 35 This transaction also requires regulatory approvals from the JSE and SGX-ST and taking those matters into account, I do not consider the time period is unreasonable. 36 The exclusivity provisions have been disclosed in the scheme booklet. Clause 15.6 of the SIA provides to the effect that the no talk and due diligence obligations are subject to the directors' respective fiduciary duties.

Break fee 37 Clause 16 and cl 17 of the SIA contain reciprocal break fees of $2,000,000. In certain circumstances, a break fee may be considered excessive or otherwise coercive in nature: see generally Rusina Mining NL, in the matter of Rusina Mining [2010] FCA 517 at [52] (Barker J); APN News & Media Limited at [55]; Amcom at [35]. 38 Tawana submitted that the break fee in this case was not excessive because: (a) under the SIA the break fee will not be payable where the scheme becomes effective or where it is simply rejected by the shareholders; (b) the break fee is less than the 1% guideline given by the Australian Takeovers Panel Guidance Note 7 (as at the date of the announcement of the SIA the break fee was approximately 0.87% of the equity value of Tawana based on shares on issue); (c) AMAL is also subject to the break fees in certain circumstances; (d) the break fee has been negotiated at arm's length; and (e) there has been full disclosure of the break fee in the scheme booklet. 39 I accept Tawana's submissions as to the break fee.

Options 40 There are 18,693,880 unlisted options on issue. However, each option holder has executed a deed poll in favour of Tawana and AMAL by which they agree to have the options cancelled, and Tawana has obtained the requisite ASX listing rule waiver in this regard (ASX Listing Rule 6.23.2). 41 If an option holder exercises their options prior to the scheme's record date then they receive scheme consideration in the usual manner. 42 Therefore, Tawana contends that by the scheme shareholders will not be treated differently if they have options and that there is no collateral benefit created by the options. 43 I do not consider there is any evidence of a collateral benefit so as to constitute a separate class or otherwise give rise to any reason the scheme ought not be considered by the members. I note that the independent expert took the options into account in its report.

Cannacord 44 Cannacord is financial advisor to Tawana with respect to the scheme. It will receive fees for such advice and also underwriting and management fees for capital raisings for Tawana and AMAL following announcement of the transaction. Cannacord has also provided other financial services to AMAL, but not with respect to the scheme. 45 Cannacord is also a shareholder of Tawana. 46 These matters are disclosed in the scheme booklet. 47 I accept Tawana's submission that there is nothing in Cannacord's involvement or position as shareholder that prevents the scheme going forward for consideration by the shareholders. 48 The issue of 'special treatment' of financial advisors was considered in First Pacific Advisors LLC v Boart Longyear Ltd [2017] NSWCA 116; (2017) 320 FLR 78 at [77]-[81] (Bathurst CJ, Beazley P & Leeming JA agreeing). Consistent with the discussion in that case, Cannacord does not obtain special treatment under the terms of the proposed scheme and there is still equality of rights as between shareholders and Cannacord.

Voting intention statement 49 A matter that arose out of communications with ASIC prior to the hearing before me was that of voting intention statements. 50 As a result of those communications, Tawana amended parts of the proposed scheme booklet and I have considered those amendments. 51 The scheme booklet now makes it clear that voting intention statements have been received from disclosed identified entities, and also that such statements do not prevent a sale of shares held by those entities prior to the scheme meeting. In aggregate, shareholders holding approximately 39.5% of Tawana issued shares have given voting intention statements, confirming their intention to vote in favour of the scheme (five shareholders in number). 52 ASIC has reserved its position as to whether by way of the voting intention statements there may be a suggestion of an arrangement whereby AMAL in effect acquires a relevant interest in more than 20% of Tawana, which in turn could comprise a breach of s 606 of the Act (a concern raised but that did not prevent approval of a scheme in Re Unity Mining Ltd (No 3) [2016] VSC 831 at [21]-[25] (Robson J)). ASIC suggested this may be an issue that needs to be addressed further in the context of whether any resolutions are properly passed at the scheme meeting. On that basis Tawana has agreed to 'tag' the votes of the shareholders who have provided voting intention statements. Again, these matters are disclosed in the scheme booklet (in contrast to the position in Re Unity Mining Ltd). 53 Counsel for Tawana made submissions before me as to whether the voting intention statements gave rise to an issue of creating a class. Counsel referred to the compilation of cases in which the courts have considered whether pre-scheme voting agreements are class-creating in Schemes, Takeovers and Himalayan Peaks (Damian and Richard Ed, 2012) at [7.4.2]. In none of those cases has it been found that a separate class is created. The key issue remains whether there is any suggestion of collateral benefit as a result of the provision of the voting intention statement. In most of the cases collected, the percentage of votes effected is in the range of 19%. However, there are examples where the percentage of votes the subject of a voting intention statement (or proxies or deed polls) was of a similar or greater percentage than the 39.5% applicable in this case; see for example People Telecom Limited, in the matter of People Telecom Limited [2009] FCA 180 (Jacobson J) (aggregate representing over 50% of shares). 54 Another more recent example where votes were tagged so that the effect of the votes of a shareholder who had undertaken to vote in a particular way could be considered at the second court hearing is Re Pulse Health Ltd [2017] NSWSC 651 at [13] (Black J). Black J did not consider any issue of a separate class arose. 55 I am satisfied that at this stage of the scheme process those shareholders who have provided voting intention statements do not comprise a separate class. There is no suggestion of any collateral benefit to them and no reason is disclosed as to why they cannot consult together in the one meeting. 56 I accept the voting issue may need to be addressed again at any hearing to approve the scheme. 57 For completion, I note that the managing director of Tawana, Mark Calderwood, holds approximately 3.8% of shares. He stands to potentially receive a bonus of some $180,000: he is one of the shareholders who has provided a voting intention statement. His votes are to be tagged and any issue that arises can be addressed further at any second court hearing.

Other procedural matters 58 The requisite consents to act as chairperson and alternative chairperson were provided by way of the affidavits of Mr Benussi. I am otherwise satisfied that the procedural requirements for making the orders sought were met.

Distribution of scheme booklet 59 Tawana seeks an order pursuant to s 1319 of the Act for the despatch of the scheme booklet and proxy form by electronic means to those members who have nominated an electronic address for the purpose of receiving notices of meetings from Tawana. 60 Tawana proposes to send an email to each nominated electronic address, to inform the member concerned of the convening of the scheme meeting. The email would include a link to the scheme booklet. The email would also include instructions on voting procedure, including on how to appoint a proxy. 61 The Court may make orders that provide for the electronic despatch of a scheme booklet: MDA National Limited v Medical Defence Australia Limited [2014] FCA 954 at [105] (Yates J); Amcom at [45]. 62 Members who did not elect to receive notices of meetings by electronic means were to be sent a copy of the scheme booklet, notice of meeting and a proxy form to their addresses recorded in the register of members and by the manner set out in the draft orders. 63 I am satisfied that it is an appropriate matter where electronic despatch should be authorised as requested.

ASIC 64 Section 411(2) requires that the Court be satisfied that ASIC has been given notice of the hearing and that it has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement, and has had the opportunity to make submissions to the Court. 65 I am satisfied on the basis of Mr Lewis' evidence that there has been proper notice provided. It is also apparent from the correspondence referred to above that ASIC has actively engaged in consultation with Tawana's solicitors with respect to the scheme. ASIC indicated that it did not wish to make submissions to the Court.

Conclusion 66 For the reasons set out above, I was satisfied at the first court hearing that each of the matters relevant to an order convening a scheme meeting under s 411 was addressed and that it was appropriate to make the orders sought by Tawana, including those relating to the convening of the meeting, approving the scheme booklet for distribution and the conduct of the scheme meeting. I certify that the preceding sixty-six (66) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Banks-Smith.