FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd

MARKOVIC J: 1 On 1 November 2017 I made orders, including orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act), after a first court hearing in relation to a scheme of arrangement. These are my reasons for making those orders.

Signature Gold Ltd 2 Signature Gold Ltd (Signature) is an Australian public company limited by shares. Its issued share capital comprises 88,185,409 fully paid ordinary shares issued for a total consideration of $5,122,049.05. There are currently 205 registered shareholders in Signature and no options over unissued shares. Signature has not been admitted to the official list of any stock exchange and its shares are not quoted for trading in any stock market. 3 The primary objective of Signature has been exploration for precious metals, particularly gold, and subsequent development of economic deposits in Australia. Signature is currently conducting gold exploration and development projects at nine project sites.

StratMin Global Resources PLC 4 StratMin Global Resources PLC (StratMin) was incorporated in England and Wales on 7 July 2004. In about December 2004 it was admitted to the Alternative Investment Market (AIM) operated by the London Stock Exchange (LSE). According to Kieren Mildwaters, a solicitor and partner at Mildwaters Consulting LLP, the AIM is a market aimed at small and mid-capital growth companies, usually used as an exchange for companies seeking access to capital to realise their growth and innovation potential. Companies whose securities are admitted to trading on the AIM are subject to and must comply with the AIM Rules for Companies published by the LSE (AIM Rules). 5 In or about September 2016, following the completion of a fundamental divestment, StratMin became a cash shell company pursuant to rule 15 of the AIM Rules. Under the AIM Rules, StratMin was required to make an acquisition that would constitute a "reverse takeover" within six months of becoming a cash shell company or its shares would be suspended from trading on the AIM. Because no such transaction took place within that time period, trading of StratMin's shares was suspended. 6 On 3 August 2017, pursuant to rule 41 of the AIM Rules, StratMin's shares were cancelled from trading on the AIM because the announcement and publication of an admission document had not been made within six months of its suspension from trading on the AIM.

Previous scheme 7 From approximately December 2016 Signature entered into discussions with StratMin following which, on 2 February 2017, it announced a proposal for StratMin to acquire all of the issued shares in Signature by way of a scheme of arrangement under Pt 5.1 of the Act (Previous Scheme). 8 On 16 March 2017 Signature entered into a scheme implementation agreement with StratMin under which, subject to the satisfaction or waiver of a number of conditions, Signature agreed to propose the Previous Scheme to Signature shareholders. Signature made an application to this Court for approval of the Previous Scheme and, on 21 June 2017, orders were made to convene a meeting of the Signature shareholders: see Signature Gold Ltd, in the matter of Signature Gold Ltd [2017] FCA 766. That application was discontinued with the leave of the Court after third-party funding anticipated by StratMin did not eventuate.

proposed scheme 9 On 19 October 2017 Signature announced a proposal for StratMin to acquire all of the issued shares in Signature by way of a scheme of arrangement under Pt 5.1 of the Act. On that day Signature also entered into a scheme implementation agreement with StratMin under which, subject to the satisfaction or waiver of a number of conditions, Signature agreed to propose the scheme to Signature shareholders. 10 Under the proposed scheme Signature shareholders, other than Ineligible Scheme Participants (see [47]-[48] below), will exchange their shares in Signature for shares in StratMin, which will acquire all of the issued shares in Signature (Scheme Shares) such that Signature will become its wholly owned subsidiary. Except in the case of Ineligible Scheme Participants the transaction is a share swap without any cash consideration. 11 If the proposed scheme becomes effective then on the Implementation Date, as that term is defined in the scheme: (1) the Scheme Shares must be transferred to StratMin; (2) in consideration for the transfer of the Scheme Shares, StratMin must issue or procure the issue of StratMin shares (Consideration Shares) to each Signature shareholder (Scheme Participants); and (3) the Consideration Shares, being 450 million StratMin shares with a total value of GBP9 million issued at a price of two pence per share, will be allocated to Scheme Participants on a pro-rata basis. 12 Clause 5.4 of the scheme booklet provides that, in addition to the Consideration Shares to be issued to Scheme Participants, StratMin will offer up to 100 million StratMin shares for subscription at a subscription price equal to the price of the Consideration Shares to raise up to GBP2 million. StratMin intends to promote the offer in November 2017 and to give effect to it in December 2017. 13 Following the proposed scheme StratMin will apply for its enlarged share capital, including the Consideration Shares, to be admitted to trading on the AIM in accordance with the AIM Rules. Admission will allow the shareholders of StratMin to trade the enlarged share capital on the AIM.

debt to equity conversion 14 Immediately prior to the scheme meeting Signature will hold a shareholders meeting seeking approval for the conversion from debt to equity of certain amounts which are currently owed by Signature to four individuals on account of unpaid director and consulting fees and director's loans. Signature will propose to repay those debts by issuing Signature shares to each of those individuals' nominees so as to strengthen its balance sheet and to facilitate the potential raising of further funds. The meeting of Signature shareholders will be convened and conducted in accordance with Pt 2E.1 of the Act. This debt to equity conversion is drawn to shareholders' attention in cl 8.12 of the scheme booklet.

The scheme is recommended by signature directors (excluding Mr boynton) 15 The directors of Signature, excluding Robert Boynton, unanimously recommend that the shareholders of Signature vote in favour of the scheme in the absence of a superior proposal. 16 Mr Boynton is both a shareholder and director of Signature and of StratMin. In light of that, Mr Boynton has not: (1) participated in, or voted on, any decision of the Signature directors that was identified as having any relationship to the proposed scheme; (2) attended any meeting of the Signature board that related to matters concerning the proposed scheme; (3) been provided with any minutes relating to meetings referred to in the preceding subparagraph; or (4) participated on behalf of Signature in any discussions with respect to the proposed scheme or any negotiations regarding any rival third-party proposals.

Relevant legal principles 17 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. 18 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. 19 Section 411(2) provides that the Court must not make an order under s 411(1) unless the Australian Securities and Investments Commission (ASIC) has been given 14 days' notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, and the Court is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and the draft explanatory statement and to make submissions to the Court regarding the arrangement and the statement. 20 In EcoBiotics Limited, in the matter of EcoBiotics Limited [2017] FCA 643 (EcoBiotics) Gleeson J identified at [19] three stages to an application under s 411 of the Act for approval of a members' scheme of arrangement: (1) the application to the Court to approve the convening of a scheme meeting and the explanatory statement to be sent to members concerning the scheme; (2) the holding of the scheme meeting at which members, or a relevant class of members, vote on the proposed scheme; and (3) the application to the Court to approve the proposed scheme. 21 At [20] Gleeson J identified six matters to be proved at the first stage: (1) the plaintiff is a Pt 5.1 body; (2) the proposed scheme is an "arrangement" within the meaning of s 411 of the Act; (3) the explanatory statement will provide proper disclosure to members; (4) the scheme is bona fide and properly proposed; (5) ASIC has had reasonable opportunity to examine the proposed scheme and the explanatory statement, has had reasonable opportunity to make submissions and has had 14 days' notice of the hearing date of the first court hearing; and (6) any other procedural requirements have been met, such as r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules) as to the nomination of a chairperson for the scheme meeting. 22 The Court's approach at the first court hearing is that it will not ordinarily summon a scheme meeting unless the scheme is of such a nature and cast in such terms that, if it receives the support of the statutory majority at the scheme meeting, the Court would be likely to approve it on the hearing of an unopposed application: see EcoBiotics at [21], citing FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72. 23 The Court does not substitute its commercial judgment for that of the members to whom the scheme is directed but will consider whether the scheme is one that sensible businesspeople might conclude is of benefit to members: In the matter of DUET Finance Limited [2017] NSWSC 415 at [14] (per Black J). 24 Given the ex parte nature of such an application, there is a duty of disclosure which falls on the plaintiff to bring to the Court's attention all matters that could be considered relevant to the exercise of its discretion: see Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; [2002] NSWSC 1177 at [7] (per Barrett J).

Part 5.1 body 25 The evidence confirmed that Signature is a "Part 5.1 body". It is a company registered under the Act and therefore comes within paragraph (a) of the definition of that expression in s 9 of the Act.

Arrangement 26 I was satisfied that the proposed scheme is an "arrangement" within the meaning of s 411 of the Act. The proposed scheme is an arrangement between Signature and all of its members. It is a "takeover scheme of arrangement", the only unusual features of which are that the bidder is a company registered in the United Kingdom and the Consideration Shares will become tradeable on the AIM market.

Explanatory statement 27 Bruce Fulton, who is a director of Signature, gave evidence of the process undertaken to verify the information contained in the scheme booklet on behalf of Signature. 28 Each statement in the scheme booklet was verified by a designated person who was qualified to do so pursuant to a verification memorandum outlining the methodology to be adopted. Each of those persons was then required to sign a verification certificate confirming that they had read the whole of the scheme booklet; that they were competent to verify the relevant statements assigned to them; that each such statement was true and accurate; and that each statement was not misleading or deceptive. Copies of the verification certificates signed by each of the designated persons were tendered in evidence. They demonstrate, taken together, that the persons responsible for verification have certified that each statement in the scheme booklet is true and accurate and is not misleading or deceptive. 29 Each of the directors of Signature has also confirmed in writing that they have read and understood the final draft of, among other things, the scheme booklet and that, having made due inquiry, nothing has come to their attention that caused them to believe, nor did they believe, that the scheme booklet contained any statement that is misleading or deceptive; that there was any omission from the scheme booklet of material required by the Act to be included; or that the scheme booklet involves information or statements that are misleading or deceptive or likely to mislead or deceive. 30 Mr Boynton provided evidence about verification of the StratMin information. He too has signed a verification certificate dated 19 October 2017 certifying that he has read the whole of the scheme booklet; that he was competent to verify the relevant statements assigned to him; that each relevant statement was true and accurate; and that each such statement was not misleading or deceptive. After ASIC requested some amendments to the scheme booklet, Mr Boynton undertook the same verification process for the amended version of the scheme booklet and signed a further verification certificate on 30 October 2017.

Scheme is bona fide and properly proposed 31 Based on the evidence before the Court I was satisfied that the negotiations leading to the formulation of the proposed scheme were at arm's length and that the directors of Signature properly exercised their powers to enter into the scheme implementation agreement and to recommend the scheme to members in good faith in the best interests of the company.

Notice to ASIC 32 A notice of hearing in relation to the proposed scheme was lodged with ASIC on 19 October 2017, which was less than 14 days before the first court hearing. Accordingly, on 19 October 2017 Signature also submitted to ASIC an application pursuant to s 411(2)(a) of the Act requesting an abridgement of time to provide notice of the first hearing date of the scheme. 33 A copy of the draft scheme booklet was lodged with ASIC late on 20 October 2017. ASIC provided its comments on the draft scheme booklet and the notice of meeting and amendments have been made by Signature addressing those comments. 34 On 31 October 2017 ASIC sent two letters to Signature. In its first letter ASIC informed Signature, among other things, that: it had had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement and to make submissions to the Court in relation to those documents; it did not currently propose to appear to make submissions or intervene to oppose the scheme at the first hearing under s 411(1) of the Act; and s 411(2)(a) of the Act required it to be given at least 14 days' notice of a hearing of an application under s 411(1) unless, relevantly, it permitted a shorter period. ASIC stated that it permitted the lesser period of notice of the hearing under s 411(2)(a) of the Act. 35 In its second letter ASIC informed Signature that, under cl 8305 of Pt 3 of Sch 8 to the Corporations Regulations 2001 (Cth) (Corporations Regulations), it consented to the expert's report accompanying the explanatory statement containing asset valuations "that differ from amounts at which the value of the asset or assets are shown in the books of [Signature] or a related body corporate". 36 I was satisfied that ASIC had had a reasonable opportunity to examine the proposed scheme and the draft explanatory statement.

Other procedural requirements have been met 37 Consents to act as chairperson and alternative chairperson at the scheme meeting were in evidence before me. I was satisfied that the procedural requirements for making the orders sought had been met.

Independent expert report 38 The directors of Signature engaged HLB Mann Judd Corporate (NSW) Pty Limited (HLB Mann Judd) to prepare a report expressing an opinion as to whether the scheme is fair and reasonable and in the best interests of Signature shareholders. 39 In their report, HLB Mann Judd express the opinion that the scheme is not fair but is reasonable and is in the best interests of Signature shareholders in the absence of a superior proposal. 40 In HLB Mann Judd's opinion, the scheme is not fair because the assessed value of the scheme consideration, being shares in the post-scheme merged entity on a minority basis, is less than their assessed value range for a Signature share on a 100% controlling interest basis. 41 Notwithstanding that, HLB Mann Judd is of the opinion that the scheme is reasonable having regard to its advantages, disadvantages and other factors such as the position of shareholders should the scheme not proceed. HLB Mann Judd is of the opinion that the position of shareholders, should the scheme be approved, is more advantageous than the position if the scheme is not approved. In particular, HLB Mann Judd had regard to the following benefits of the scheme for Signature shareholders: (1) the proposed scheme provides the Signature shareholders the opportunity to gain increased liquidity in their investment. Currently there is no active market for Signature shareholders to trade their securities but, following implementation of the scheme, Signature shareholders will hold shares in an entity listed on the AIM market; (2) the proposed scheme will provide access to funding to further develop and expand existing Signature exploration assets in Australia and another project in the Czech Republic; and (3) the merged entity following the proposed scheme will be larger in size and scale and will be listed on a public market, providing an increased opportunity for Signature shareholders to participate in future increases in the value of traded securities. 42 Regulation 5.1.01 and cl 8303 of Sch 8 to the Corporations Regulations require an independent expert's report to be provided where, relevantly, the other party to the proposed scheme has one or more directors in common with the company the subject of the scheme. That is the case here because Mr Boynton is a director of both Signature and StratMin. 43 The independent expert is required to give an opinion, with reasons, on whether the proposed scheme is in the "best interest of the members of the company". In its Regulatory Guide 111 (RG 111) ASIC states that, when an expert's report is required in a scheme of arrangement involving a change of control, ASIC expects the expert to express an opinion on whether the scheme is "fair and reasonable" as if the transaction were a Ch 6 takeover. It expresses the opinion that the phrase "fair and reasonable" should be interpreted as two distinct criteria, contemplating the possibility that an offer may not be fair but may be reasonable. At paragraph 111.21 of RG 111 ASIC states: If an expert would conclude that the proposal was 'not fair but reasonable' if it was in the form of a takeover bid using the analysis described in RG 111.10-RG 111.17, it is still open to the expert to also conclude that the scheme is 'in the best interests of the members of the company'. The expert should clearly say that the consideration is not equal to or greater than the value of the securities the subject of the scheme, but there are sufficient reasons for security holders to vote in favour of the scheme in the absence of a higher offer. 44 In Renard I A and Santamaria J G, Takeovers and Reconstructions in Australia (LexisNexis, subscription service) at [2012] (update 108) the authors state that: The onus is on the expert to properly establish and explain its framework for evaluating a scheme under s 411. Such a framework should incorporate and possibly extend the fair and reasonable concepts. 45 On its face HLB Mann Judd's opinion conforms to ASIC's guidance. Their report unambiguously asserts that the scheme is in the best interests of Signature shareholders, which is the sole criterion prescribed for a member's scheme of arrangement by the Corporations Regulations. 46 Signature submitted that HLB Mann Judd had met the standard set out by the authors of Takeovers and Reconstructions in Australia and that the apparently qualified nature of the report did not provide any ground for the Court to decide, at the first hearing, that it would not approve the scheme even if the requisite majority of shareholders vote in favour of it and there is no opposition at the second court hearing. Signature submitted and I accepted that, on the contrary, the matters raised in the expert's report were appropriate matters to place before the shareholders so that they could make an informed decision on the proposal.

Ineligible Scheme Participants 47 Pursuant to cl 5.3 of the scheme, StratMin shares to which Signature shareholders whose registered addresses are outside Australia, New Zealand or the United Kingdom would otherwise be entitled will be sold through a nominee of StratMin and those shareholders will receive the net proceeds of sale. 48 This provision is designed to avoid issuing shares to residents of a country whose securities regulation laws either prevent the offer of shares without a local disclosure document or prevent a resident's acceptance of an offshore offer. Signature submitted that the sale procedure was fair in the circumstances.

Performance risk 49 As Signature submitted, the Court is properly concerned to ensure that the members of a scheme company whose shares are automatically divested under the scheme will receive the consideration to which the scheme entitles them. Signature further submitted that performance risk may be partly addressed by the acquirer entering into a deed poll for the benefit of the shareholders of the scheme company and promising to perform its obligations under the scheme, but that in some cases additional protections have been created. 50 StratMin has entered into a deed poll in which it has covenanted in favour of each Scheme Participant to perform the obligations contemplated of it under the scheme, including those relating to the provision of the scheme consideration in accordance with the terms of the scheme. 51 Where the consideration for a scheme is the issue of shares in the acquiring company, courts have accepted arrangements under which the scheme provides that shares in the acquirer or a new holding company will be issued to the shareholders of the scheme company on the same day as their existing holdings are transferred to the acquirer: see, for example, Brambles Industries Ltd, in the matter of Brambles Industries Ltd and the Corporations Act 2001 (Cth) [2006] FCA 1273 at [9]. 52 In the present case cl 5.2.1 of the scheme provides that StratMin must procure that the Consideration Shares are allocated and issued to the Scheme Participants on a pro-rata basis on or before the Implementation Date. Clause 4.2.1 of the scheme provides that the transfer of the Scheme Shares to StratMin is subject to StratMin discharging its obligations under cll 5.2.2(a) and 5.2.2(b), which concern the issue of the Consideration Shares. 53 The only performance risk that may arise in the proposed scheme is the possibility that the StratMin shares, though issued to the Scheme Participants, may not be admitted to trading on the AIM market. That risk is addressed by the provisions of the scheme implementation agreement. A condition of the scheme is that StratMin's nominated advisor under the AIM Rules has confirmed to StratMin by no later than 8.00 am on the second court date that AIM admission forms have been lodged with the AIM and that the AIM has advertised StratMin's announcement to be admitted. The intended effect is that, from the Implementation Date, StratMin will be admitted to the AIM and StratMin's enlarged share capital will be admitted to trading. StratMin must obtain written confirmation from its nominated advisor satisfying this condition before 8.00 am on the second court date, which confirmation will be available to the Court. 54 Mr Mildwaters, who has expertise in all aspects of compliance with the AIM Rules, gave evidence that if an admission document, the AIM admission forms and a declaration by the nominated advisor are submitted to the LSE, he knows of no reason why StratMin would not be permitted to have its enlarged share capital, including the Consideration Shares, admitted to trading on the AIM.

other orders 55 Signature also sought orders in relation to the electronic despatch of the notice of scheme meeting and the scheme booklet to those Signature shareholders who have nominated an electronic address for the purpose of receiving notices of meeting and proxy forms; a direction under s 1319 of the Act that, other than reg 5.6.13 of the Corporations Regulations, the provisions of the Corporations Regulations referred to in r 2.15 of the Corporations Rules would not apply to the scheme meeting; and an order dispensing with the requirements of r 3.4 of the Corporations Rules. I was satisfied that those orders should be made.

conclusion 56 For the reasons set out above I made the orders sought by Signature. I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.