First Pacific Advisors LLC v Boart Longyear Ltd

DAVIES J: 1 On 22 June 2021 I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) for the plaintiff (AuStar) to convene and hold meetings of its ordinary shareholders and listed optionholders to consider and, if thought fit, to approve a proposed share scheme of arrangement (share scheme) and a proposed option scheme of arrangement (option scheme) which, if approved, will effect the merger of AuStar with White Rock Minerals Limited (White Rock). These are my reasons. 2 AuStar is an Australian public company limited by shares, admitted to the official list of the ASX, trading under the security code "AUL". It is a gold exploration, mining and production company. As at 17 June 2021, AuStar has 67,810,691 fully paid ordinary shares on issue. It also has 7,847,115 options to subscribe for AuStar shares that are admitted to quotation on the ASX under the security code "AULOF". 3 White Rock is an Australian public company limited by shares. It is a minerals exploration and development company whose shares are quoted for trading on the ASX in Australia and the OTCQX market in the United States. It has significant projects in northern New South Wales and in Alaska. 4 On 3 February 2021, AuStar entered into a merger implementation deed with White Rock and announced the merger implementation deed to the ASX. On 30 April 2021, AuStar entered into an amended and restated merger implementation deed with White Rock and announced the revised merger implementation deed to the ASX the same day. If implemented, White Rock will acquire 100% of the ordinary shares in AuStar on issue and AuStar's shareholders will each receive 0.78 new White Rock shares for each AuStar share held as at the scheme record date (being 7.00 pm (Melbourne time) on the second business day following the date on which the share scheme becomes effective, or such time and date as AuStar and White Rock may agree in writing). Pursuant to the option scheme, White Rock will acquire 100% of the listed options in AuStar on issue and each of the optionholders in AuStar will receive one new White Rock option exercisable at $0.77 (which will be quoted for trading on the ASX and be otherwise on substantially the same terms as the terms of the AuStar listed options) for each AuStar listed option held as at the scheme record date. Ineligible foreign AuStar security holders, being scheme shareholders or scheme optionholders whose registered addresses are outside Australia or its or its external territories, New Zealand, Singapore and the United States will only be entitled to receive cash consideration under the proposed schemes. Ineligible foreign AuStar Gold security holders represent 3.47% of AuStar's share register. The two schemes are conditional upon each other. If either scheme is not approved, the schemes will not become effective and the merger will not proceed. If approved, the merged company will retain the White Rock name, while AuStar will become a wholly-owned subsidiary of White Rock and will be delisted from the ASX. 5 AuStar has obtained an independent expert report from RSM Corporate Australia Pty Ltd (RSM) that the schemes are fair and reasonable and in the best interests of AuStar's shareholders and optionholders, in the absence of any other relevant information and/or a superior proposal. RSM formed those opinions by assessing and comparing: the fair value of a share or listed option in AuStar on a controlling basis prior to the schemes; with the fair value of the consideration offered per AuStar share and option on a non-controlling basis immediately after the schemes; and considered whether the schemes are "reasonable" to shareholders and optionholders by undertaking an analysis of the other factors relating to the schemes, which are likely to be relevant to shareholders and optionholders in their decision whether or not to approve the schemes. 6 The AuStar directors also consider that the schemes are in the best interests of the scheme shareholders and scheme optionholders and have unanimously recommended that they vote in favour of the schemes, in the absence of a superior proposal and provided that the independent expert continues to conclude that the schemes are in the best interests of scheme shareholders and scheme optionholders. 7 A draft of the proposed scheme booklet was provided to the Australian Securities and Investments Commission (ASIC) on 24 May 2021. Amendments to that scheme booklet were subsequently made and the amended scheme booklet (which includes the explanatory statement required by s 412(1) of the Act) was provided to ASIC on 17 June 2021. The scheme booklet sets out a detailed description of the proposed schemes and their advantages and disadvantages. It also annexes the independent expert report of RSM. 8 On 1 June 2021, AuStar filed an application for orders pursuant to s 411(1) of the Act. By s 411(1) of the Act, the Court may make an order for the convening of a meeting for the purpose of considering and voting on a proposed scheme of arrangement if certain requirements are satisfied, namely: (a) an arrangement is proposed between a Pt 5.1 body and its members or any class of them; (b) 14 days' notice of the hearing of the application has been given to ASIC, or such lesser period as the Court or ASIC permits; and (c) the Court is satisfied that ASIC has had reasonable opportunity: (i) to examine the terms of the proposed arrangement to which the application relates and a draft explanatory statement relating to the proposed arrangement; and (ii) to make submissions to the Court in relation to the proposed arrangement and the draft explanatory statement. 9 These requirements were satisfied: (a) AuStar is a "Part 5.1 body" within the meaning of para (a) of that expression, as defined in s 9 of the Act, as it is a company registered under the Act; (b) the proposed schemes are "arrangements" for the purposes of s 411 of the Act, as both proposed schemes are a "takeover scheme of arrangement" of the kind common for non-hostile takeovers: Signature Gold Ltd [2018] FCA 688 at [21]; (c) ASIC was given the requisite notice of the hearing and advised AuStar by letter dated 21 June 2021 that it had reasonable opportunity to examine the terms of the schemes and did not intend to make submissions or oppose the schemes at the first hearing. 10 Other matters bearing on the exercise of the power under s 411 about which I was satisfied on the evidence before me were that : (a) appropriate steps were taken to verify the accuracy of the information contained in the scheme booklet, thus enabling the Court to have confidence that the scheme booklet does not contain information that is materially misleading or deceptive; (b) there has been adequate disclosure in the explanatory statement of the information that is material for the shareholders and optionholders to make an informed decision on whether or not to vote for or against the proposed schemes; (c) there is nothing to indicate that the directors are acting other than in good faith and in the interests of AuStar in putting the proposed schemes forward and recommending that shareholders and optionholders vote in favour; (d) there is no evidence to suggest that any of the AuStar directors are in a position of actual or potential conflict of interest or conflict of duty; (e) on their face, the proposed schemes, are fair and reasonable and the Court, on the second hearing, would be likely to approve the schemes if the statutory majority of shareholders and optionholders vote in favour; and (f) the procedural requirements of Division 3 of the Federal Court (Corporations) Rules 2000 (Cth) have been met. 11 The Court does not offer any view on whether the shareholders and optionholders should vote in favour of the proposed schemes. That is a commercial judgement for the scheme shareholders and scheme optionholders and it will be for them to assess the schemes. The Court's role on the application to order the convening of a meeting is supervisory and concerned essentially with whether there is adequate disclosure in the scheme booklet, whether the legal requirements otherwise have been complied with and whether the scheme, on its face, is sufficiently "fair and reasonable" to be capable of being put to shareholders for their approval or rejection. 12 The Court was taken to particular aspects of the schemes for consideration in determining whether to make an order for the convening of the meetings, namely: (a) performance risk; (b) deemed warranties; (c) exclusivity provisions; (d) break fees; (e) the interests of the directors; and (f) class issues.

Performance Risk 13 There is no material performance risk which justified not ordering the convening of the scheme meetings. Both proposed schemes are offering scrip consideration, being new securities in White Rock. Pursuant to cl 4.2 of the share scheme, if the share scheme is approved by the Court, the transfer of AuStar shares to White Rock under the share scheme is subject to the provision of scrip consideration to scheme shareholders, and White Rock having provided AuStar with written confirmation of the same. Correlatively, pursuant to cl 4.2 of the option scheme, if the option scheme is approved by the Court, the transfer of AuStar listed options to White Rock under the option scheme is subject to the provision of scrip consideration to scheme optionholders and White Rock having provided AuStar with written confirmation of the same. Moreover, White Rock has also entered into a deed poll in favour of scheme shareholders and scheme optionholders in which White Rock has covenanted to perform the actions attributed to it under the share scheme and the option scheme as if White Rock were a party to those schemes. Those mechanisms effectively mitigate any performance risk inherent in the proposed schemes.

Deemed Warranties 14 Clause 8.5 of the share scheme provides that each scheme shareholder is deemed to have warranted to White Rock that all their scheme shares (including any rights and entitlements attaching to those shares) will, at the date of their transfer to White Rock, be fully paid and free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind, and that each scheme shareholder has full power and capacity to sell and to transfer their scheme shares together with any rights and entitlements attaching to such shares. The equivalent for scheme optionholders is found in cl 8.5 of the option scheme. The authorities indicate that such clauses are acceptable provided that the attention of members have been drawn to them (Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [57]-[63]; Re Sino Gold Mining Ltd (ACN 093 518 579) (2009) 74 ACSR 647; [2009] FCA 1277 at [29]-[31]), which is the case here as the warranties are disclosed and drawn to the attention of scheme shareholders and scheme optionholders at section 2.12 of the scheme booklet.

Exclusivity Provisions 15 Clause 10 of the revised merger implementation deed contains exclusivity provisions including "no talk", "no shop" and "no due diligence" restrictions to the effect that AuStar must not do anything which may reasonably be expected to encourage or lead to any competing proposal to the proposed schemes. These restrictions are subject to a "fiduciary carve out" in cl 10.4 of the revised merger implementation deed. The exclusivity provisions apply during the period commencing on the date of the revised merger implementation deed (3 February 2021) and ending on the earliest of: the End Date (30 September 2021 or as otherwise agreed); the Implementation Date (the fifth business day following the scheme record date or as otherwise agreed); or when the revised merger implementation deed is terminated in accordance with its terms. 16 These clauses are standard form and have now been accepted in many schemes of arrangement: Re TPG Telecom Ltd [2020] NSWSC 772 at [22] per Black J. In Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9], Santow J cautioned that exclusivity provisions should: (a) exist for no more than a reasonable period capable of precise ascertainment; (b) be subject to the directors' fiduciary duties and not be otherwise unlawful; and (c) be given adequate prominence when disclosed in the scheme booklet. 17 I was satisfied of these requirements and accordingly the exclusivity arrangements were not a reason not to make orders under s 411 of the Act.

Break fees 18 AuStar must pay White Rock a break fee of $200,000 in the following circumstances: a change of recommendation by any AuStar director; the success of a competing proposal to the proposed schemes; a material breach of the revised merger implementation deed by AuStar resulting in termination by White Rock; or AuStar entering into an agreement, arrangement or understanding to implement a competing proposal. Correlatively, White Rock must pay AuStar a break fee of $200,000 if AuStar terminates the revised merger implementation deed for material breach by White Rock. 19 The break fee payable by AuStar is less than 1% of the value of the share scheme consideration at the time of the announcement of the proposal (3 February 2021). The amount of the AuStar break fee is unlikely to influence voting at the scheme meetings, given that the voting against either of the schemes will not trigger payment of the fee and the fee falls within the 1% limit advocated by the Takeover Panel in Guidance Note 7: Lock-Up Devices, which has been commonly applied as a reference point (Re Vocus Group Limited [2021] NSWSC 630 at [18]). Moreover, evidence was given by Ms Toni Griffith, the chief financial officer and company secretary of AuStar to the effect that the break fee represents a genuine fee estimate of the costs that AuStar has incurred, insofar as those costs can be quantified. Ms Griffith also deposed that the AuStar break fee was agreed voluntarily after robust negotiation between the parties. Accordingly, I was satisfied that I should not refrain from ordering the meeting because of the break fee.

Position of AuStar Directors 20 The interests of the directors in AuStar are disclosed in the Scheme Booklet. No AuStar director has a relevant interest (as defined in the Act) in any securities of White Rock. No payment or other benefit is proposed to be made or give in connection with either of the proposed schemes or to any director of AuStar. Nor is any payment or other benefit proposed to be made or given in connection with either of the proposed schemes to any director of AuStar as compensation for loss of, or as consideration for, or in connection with, his or her retirement from office in AuStar or in any related body corporate of AuStar. Moreover, it is intended that two AuStar directors will be appointed to the merged group board if the schemes are implemented. I accept that no AuStar director is in a position of conflict of interest or conflict of duties in relation to the proposed schemes.

Class Issues 21 I was also satisfied that no class rights issues arose for consideration. 22 First, the differentiation between the shareholders and the optionholders relates to their interests, not their rights: Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583; First Pacific Advisors LLC v Boart Longyear Ltd (2017) 320 FLR 78; [2017] NSWCA 116 at [80]. In any event, whilst the share scheme and the option scheme are separate schemes, the shareholders and the optionholders have a common interest in that the schemes are interrelated and neither will go ahead unless both schemes are approved. There are some shareholders who are also optionholders, but their position as having both does not prevent them from participating in both schemes and they will not receive additional or different consideration from the consideration other shareholders and optionholders will receive: Re Coventry Resources Limited [2012] FCA 1252 at [24]. 23 Secondly, whilst the option scheme applies only to the holders of listed options, it is a condition precedent to the proposed schemes that AuStar must take all steps necessary to ensure that all AuStar unlisted options are exercised, lapse or are cancelled; and all AuStar performance rights lapse in accordance with the terms of their grant and accordingly, no class issue arises in respect of AuStar's unlisted options or performance rights. 24 Thirdly, whilst ineligible foreign AuStar security holders are only entitled to receive cash consideration under the proposed schemes, that differentiation from other shareholders is based on their jurisdiction. In Re Citadel Group Limited (2020) 148 ACSR 598; [2020] FCA 1580 at [68], Beach J stated: It is common practice in schemes of arrangement where scrip comprises the proposed scheme consideration that identified foreign shareholders are not entitled to receive the scrip consideration but instead receive cash as consideration for their scheme shares. This is often achieved via the use of sale facility mechanism. In particular, the scrip to which foreign shareholders would otherwise have been entitled is instead issued to a sale agent on their behalf, who must subsequently sell those shares and remit the cash proceeds of the sale to the foreign shareholder. Such cases do not require the ineligible foreign shareholders to meet together as a separate class for the purposes of considering the proposed scheme of arrangement. The relevant authorities were discussed by me in [Re Amcor Ltd [2019] FCA 346] at [42] to [44]. For present purposes, in my view there is no material difference between the outcome achieved via the sale agent facility just discussed and the payment of cash consideration directly to the foreign shareholders instead of issuing scrip that is contemplated by the Scheme. This is particularly so where, as here, the amount of the cash consideration is the same as the paid up capital amount of the scrip consideration. As such, in relation to the proposed treatment of foreign scheme shareholders under the Scheme, no separate class arises. The same reasoning is apt in the present case. 25 Two other matters were addressed. First, whilst s 411(1) provides that, if the Court has made an order convening a meeting or meetings of members or creditors, the Court "may approve the explanatory statement", AuStar did not seek an order approving the explanatory statement and I did not make such an order. As O'Bryan J in Re DuluxGroup Ltd (2019) 136 ACSR 546; [2019] FCA 961 observed at [63]: The practice of courts varies in this respect. Orders approving the explanatory statement have been made in a number of cases: see for example Re Adelaide Bank Ltd [2007] FCA 1582; Re Marengo Mining Ltd [2012] FCA 1220; Re Opus Group Limited [2018] FCA 959; Re Ecosave Holdings Limited [2015] FCA 1121; and [Re Biosceptre International Limited [2013] FCA 1429]. In other cases the court has declined to make orders approving the explanatory statement: see for example Re IXLA Ltd [2007] VSC 573 at [38]. In declining to approve the explanatory statement in that case, Robson J said (at [38]) that, in view of the requirement for registration by ASIC and the criteria that ASIC must apply, it was more appropriate that the explanatory statement for a members' scheme be dealt with in that fashion. The same approach was recently taken by this Court in [Re Amcor Ltd [2019] FCA 346] at [114]- [115] per Beach J; Re Verdant Minerals Ltd [2019] FCA 556 at [84] per Moshinsky J; and in Re Healthscope Ltd [2019] FCA 542 at [189] per Beach J. I adopted the same approach. 26 Next, the share scheme and the option scheme are subject to various conditions precedent. In Re Legend Corporation Limited (No 2) [2019] FCA 1444, O'Bryan J at [28] noted there has been some discussion in the cases as to whether there is a need for primary evidence as to the satisfaction of the conditions precedent or whether it is sufficient for the parties to provide certificates confirming that the conditions have been satisfied or waived: see for example Re Fiducian Investment Management Services Limited (No 2) (2015) 228 FCR 587; [2015] FCA 95 (at [44] to [49]) and Re Wesfarmers Ltd [2018] WASC 308 (at [128] and [129]). His Honour's view was that the answer to that question depends upon the subject matter of the condition and the possible effect on members' interests if the condition is waived, rather than satisfied. If the failure of a condition precedent may adversely affect the interests of members, the Court may require primary evidence of satisfaction rather than a certificate stating that the condition has been "satisfied or waived" (an illustration is given by Re Spicers Ltd (No 2) (2019) 136 ACSR 659; [2019] FCA 1110 at [26]- [37]). On the other hand, the subject of a condition may be such that it is incapable, in a practical sense, of proof by primary evidence: for example, a condition that there has been no adverse change in the financial position of a company. 27 The question was raised as to whether the Court may require primary evidence in the present case, however apart from reference in the submissions to the conditions precedent, the Court was not addressed on whether there is a need for primary evidence. Absent submissions on that issue, I express no view as to the nature of the proof to be furnished at the second hearing, which will follow if the approval resolutions are passed at the meetings. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Davies.