Gas2Grid Limited, in the matter of Gas2Grid Limited (No 2) [2010] FCA 1006

Federal Court of Australia|2010-09-16|Before: Stone J

REASONS FOR JUDGMENT 1 By a Merger Implementation Agreement dated 5 November 2009 the plaintiff, Gas2Grid, and Orion Petroleum Ltd (Orion) agreed to a merger under which the proposed acquirer was Orion. Octanex NL (Octanex), a shareholder of Gas2Grid objected to the merger. Octanex now seeks to recover its costs as objector.

Background 2 On 17 December 2009 I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) that the plaintiff convene a meeting of its shareholders and a meeting of its option holders to consider the proposed merger scheme Orion Petroleum Limited (Orion); [2010] FCA 10. Those meetings were to be held on 28 January 2010 in Sydney. The Scheme Booklet approved by the Court on 17 December was sent to shareholders on 22 December 2009. 3 Annexed to the Scheme Booklet was a report prepared by Grant Thornton Corporate Finance Pty Ltd (Grant Thornton) which was appointed as the independent expert to assess the proposal. An independent expert's report concerning the Scheme was also commissioned from BDO Securities (NSW-Vic) Pty Ltd (BDO report) and was sent, with explanatory notes, to Orion shareholders. Both the Grant Thornton report and the BDO report relied in part on a specialist report by Mulready Consulting Services Pty Ltd (Mulready) which contained a valuation of the plaintiff's petroleum interests. Both expert reports concluded that the proposed Scheme was fair and reasonable to the relevant shareholders. 4 After the Scheme Booklet was issued Octanex, a shareholder of Gas2Grid and Orion raised a number of questions about the valuations made by Grant Thornton. To enable these questions to be addressed the meetings on 28 January were adjourned to 24 February 2010. The issues raised by Octanex were referred to Grant Thornton, Mulready and BDO. After consideration none of these experts changed its opinion and both Grant Thornton and BDO prepared supplementary reports. The Court was advised of these developments at a hearing on 9 February 2010 at which Mr Menzies, a director of Octanex, sought leave to appear. Mr Menzies was granted leave for the purposes of that hearing only. Following that hearing supplementary disclosure including supplementary reports prepared by Grant Thornton and BDO, with the approval of the Court, were sent to the Gas2Grid shareholders on 9 February 2010. 5 On 18 February Octanex announced that it intended to make a conditional offer to acquire all of the ordinary shares in Orion. The bid was conditional on the merger with Gas2Grid not proceeding. The announcement stated, inter alia: If Orion shareholders want to have the opportunity to accept Octanex's offer, they should vote against the resolutions to be put to the meeting of Orion's shareholders being held on Tuesday, 23 February 2010 at 11 am …

6 On 24 February 2010, at the adjourned meetings the Scheme was approved by the statutory majority. Only three shareholders voted against it, namely, Octanex, Gascorp Australia Pty Ltd, a related party of Octanex, and an independent shareholder. Two days later, on 26 February, Orion Shareholders approved the Scheme. 7 Despite approval by the shareholders of Gas2Grid and Orion, Octanex continued to oppose the Scheme. The second hearing, at which the Court was to be asked to confirm the Scheme, was listed for 3 March 2010. On 24 February, Octanex's solicitors advised Gas2Grid's solicitors that Octanex intended to appear at the hearing on 3 March and oppose the Scheme's confirmation. On 25 February, Mr Menzies wrote to Mulready (as well as to Grant Thornton, BDO ASIC and the ASX) expressing concerns about the proposed merger and the supplementary disclosure referred to in [4] above. On 9 March Octanex filed an application seeking leave to be joined as a party to the proceedings as well as leave to issue subpoenas requiring Orion, BDO Grant Thornton and Mulready to produce documents. In view of the continuing controversy, at Gas2Grid's request, the hearing on 3 March was adjourned to 10 March 2010. 8 In the event Octanex's application to be joined as a party was not pursued because Gas2Grid and Orion decided not to proceed with the merger. The circumstances leading to that decision were described by Mr Patrick Yue a director of Gas2Grid in his affidavit of 7 April 2010: On 9 March 2010, Russell Langusch, Managing Director of [Orion] told me that the Independent Technical Expert engaged on behalf of each of the Independent Experts engaged by Gas2Grid and [Orion] respectively had revised his valuation, and that as a result it appeared likely that [Orion's] independent expert would change its assessment of the merger proposal. After receiving this information I wrote to the ASX requesting a trading halt.

9 In his letter to the ASX, which was dated 9 March 2010, Mr Yue commented that as a result of the revised valuation "Gas2Grid Limited and Orion Petroleum Limited are reconsidering the position of the merger". On 10 March 2010 Gas2Grid received from Orion a revised Mulready valuation which reduced the valuation of Gas2Grid's Permit EP 453 by $700,000. As a result of the revised valuation BDO notified Orion that it would need to revise the conclusion previously expressed and that its revised conclusion would be that the proposal was not attractive for Orion shareholders. 10 On 11 March Gas2Grid and Orion agreed to terminate their Merger Implementation Agreement. They jointly announced to the Australian Securities Commission that the merger would not proceed. On the same day the solicitors for Octanex advised the solicitors for Gas2Grid that they would be asserting an entitlement to costs in the Scheme proceeding.

Costs claim 11 Octanex seeks an order that Gas2Grid pay its costs as an objector in these proceedings. It submits that the principles applicable to its claim are to be found in Re NRMA Ltd (2000) 33 ACSR 595 and were articulated by Santow J at 608 as follows: (i) The ordinary rule is that the scheme companies pay the objector's costs and do not suffer costs orders against them. (ii) However, this is subject to the objections not being frivolous or without substance but rather such as to be properly and justifiably advanced, even if unsuccessfully. I would add that even sensible objections should be capable of being advanced with reasonable economy of time, consistent with the summary nature of a s 411(1) application. (iii) These principles reflect the fact that the scheme procedure unavoidably must provide an independent court forum on two separate occasions - for convening and then to approve the scheme. The court will often be assisted by having a contradictor at either stage. It must not be forgotten that the end point of most schemes, if adjudged sufficiently fair and achieving the statutory majorities, is compulsory acquisition of the member's property and the court is no rubber stamp in that process. (iv) Where there is a clear indication that objectors are using the tactics of technical and artificial objection so as to stall a scheme of arrangement for their own purposes, the courts will not hesitate to make costs orders against objectors to the extent warranted; those cost orders may even be indemnity cost orders in appropriate cases. (v) Since assessment of the objections cannot be made in advance, cost orders should not be made in advance either. 12 Octanex submits that its objections were neither frivolous nor without substance nor were they "technical or artificial" and urges the Court to apply the "ordinary rule". It notes that if, as Santow J, indicates, an objector's costs should be paid even where the Scheme is approved it should also be the case "where the scheme, as here, is not going ahead following the making of the objections". 13 It is important to note, however, that in NRMA Santow J refused to consider the objectors' costs applications before the substantive hearing. His Honour held that such an order should not be made in advance of a consideration of the objections and other relevant considerations. He observed at [45] that, "The principles which emerge from the cases show why that must be so". 14 The circumstances here are unusual in that Octanex's intervention was, as far as the Court is concerned, behind the scenes. Although Octanex had indicated its intention to appear at the second court hearing and had filed an application to be joined as a party, because the agreement between Gas2Grid and Orion was terminated, that hearing did not take place. Nevertheless Octanex equates its position to that of a successful objector at a Court hearing. In its written submissions it claims: Octanex's objections led to changes in [the Mulready] valuation reports and to the issuing of supplementary independent expert reports. As a result, Octanex's objections led to further and better disclosure to the shareholders of Orion and Gas2Grid. Ultimately this led to Orion's independent expert changing its opinion that the scheme was fair and reasonable for Orion's shareholders. It cannot be said that Octanex's objections were not properly and justifiably advanced or that Octanex has acted unreasonably.

Gas2Grid has not identified any circumstances taking this matter outside the general rule that Octanex should have its costs of the proceedings.

15 Octanex's reference to a "general rule" requires some comment. I do not understand Santow J to be suggesting that the question of costs was governed by a 'rule'. His Honour's use of the word, "principles" indicates that he was articulating guidelines. In fact, at the hearing counsel for Octanex, Mr D'Arcy, accepted that pursuant to s 43 Federal Court of Australia Act 1976 (Cth), the Court has an unfettered discretion to award costs. Each application for costs must be considered by the Court, acting judicially, taking into account the facts and all relevant circumstances. 16 Gas2Grid denies the causal connection asserted by Octanex and asserts, moreover, that Octanex's "commercial purpose has been to achieve the takeover of Orion, without the merger between Orion and Gas2Grid taking place". In addition, Gas2Grid points to the fact that, apart from leave granted to Mr Menzies for the limited purpose of the directions hearing on 9 February, Octanex has never been granted leave to appear in the proceeding. It submits that to grant leave now would be futile because Gas2Grid no longer seeks to propound the Scheme. In addition Gas2Grid submits that objectors should not be allowed costs for case preparation for a second court hearing until it is clear that such a hearing is going to proceed. It states: The appropriate course where the proceeding becomes contested is that there should be a directions hearing after the scheme meeting … at which time appropriate directions can be made as to determining particulars of the objector's claims and making case management directions for a contested hearing. To do otherwise is to incur unnecessary costs and place a 'blank cheque' costs risk on the scheme company.

17 Were I to be satisfied that there is a causal link between Octanex's objections and the termination of the merger agreement I would be positively disposed to award a measure of costs to Octanex and, if necessary for that purpose, to grant it leave to be joined as a party. As I have concluded that the causal link has not been made out it is not necessary for me to consider the issue further.

Octanex's submissions on causal link 18 Octanex argued that Gas2Grid and Orion decided not to proceed with the scheme as a consequence of objections made by Mr Menzies in the letter of 25 February 2010 referred to in [7] above; (the Menzies letter). The Menzies letter makes a raft of criticisms about the valuation methodology adopted in Mulready's initial report dated 28 November 2009 ('the first Mulready report'). At the hearing, when Mr D'Arcy was pressed to point to evidence of this causal relationship, he submitted that "the clearest evidence" of this was the extract from the letter written by BDO dated 10 March 2010 ('the BDO letter'). 19 The BDO letter states that on 8 March 2010 Mulready provided BDO with an updated Valuation Report which altered the valuations given in the first Mulready report. The letter goes on to state that as a result of the revised valuations made by Mulready "it should be assumed that BDO will be required to amend the conclusion previously advised to Orion Shareholders …(ie that the Proposal was fair and reasonable to Orion Shareholders…)". The BDO letter includes two tables which summarise the changes in Mulready valuations for the exploration assets of Gas2Grid and Orion. Footnoted to Mulready's updated valuation of Orion's assets is the following statement: Mulready's Valuation Report of 8 March incorporates actual well costs in relation to the valuation of PEL 427 and 428, rather than estimated well costs that have been previously adopted by Mulready as set out in Mulready's letter of 5 March 2010 in response to a letter from Menzies Partners dated 25 February 2010.

20 This footnote is said to be "the clearest evidence" of the fact that the Menzies letter caused Mulready to alter its valuation of Orion's assets which in turn caused BDO to revise its opinion to Orion regarding whether the merger was fair and reasonable to the shareholders of Orion. Octanex submitted that it was significant that Gas2Grid had not put on any evidence to challenge this evidence.

Gas2Grid's submissions on causal link 21 Gas2Grid disputed that there was a direct causal link between the objections made in the Menzies letter and the decision by Gas2Grid and Orion to terminate the scheme. Gas2Grid accepts that expert opinion reports were reviewed as a result of the "continual barrage of correspondence" sent by Mr Menzies but Gas2Grid did not accept that the changes made were those suggested by Mr Menzies. According to Gas2Grid, the proximate cause of the termination was the decision by BDO, which was Orion's expert, that it would be required to amend its advice to Orion's shareholders. As that would be material information in relation to the vote by Orion's shareholders it would have been necessary for Orion to have a new listing rule 10.10 resolution, which would not be possible before 31 March 2010, the end date under the Scheme Implementation Agreement. For this reason the parties decided to terminate the agreement and not proceed with the merger. 22 Senior counsel for Gas2Grid, Mr Oakes, referred to the part of the Menzies letter which details Menzies' criticisms of the manner in which Mulready valued EP453 in its first report. Gas2Grid submitted that although Mulready's valuations of other assets owned by Gas2Grid and Orion were altered, the only material changes were in relation to the optimum value attributed to EP453, an asset owned by Gas2Grid. Mulready's original valuation was revised down from $1.8 million to $1.1 million. Gas2Grid argued that no material change was made to the value of assets owned by Orion and that there is no evidence to support the contention that criticisms in the Menzies' letter caused Mulready to alter its valuation of EP453. Octanex, however, pointed to the absence of evidence from Mr Mulready on the point.

Consideration 23 At the outset of the hearing, Mr D'Arcy placed particular emphasis upon the footnote in the BDO letter which is set out at [19] above. It was argued that this footnote provided evidence of the fact that Mr Menzies' letter directly led to the termination of the scheme. However, although the valuations of PEL 427 and PEL 428 were revised by Mulready the revisions were minor (PEL 427 was originally regarded as having an optimal value of $0.24 million which was revised up to $0.25 million and the optimal value of PEL 428 was revised down from $0.195 million to $0.19 million - both are assets of Orion, not Gas2Grid). In the absence of evidence on the point, I do not accept that such comparatively minor changes to the valuations of these Orion assets would have had a material impact on the decision made by Gas2Grid and Orion to terminate the proposed merger. 24 I was invited to infer that the scheme was terminated because of the reduction in the valuation of EP453, which was initially valued at between $1.26 million and $2.25 million and assessed as having an optimal value of $1.8 million. Following the revaluation the optimal value was reduced to $1.1 million. This reduction in the optimal value was due to an application by Mulready of 10% to take into account the payment of a royalty. It appears that one aspect of Mr Menzies' critique of the methodology employed by Mulready in relation to EP453 is that its valuation of that asset fails to apply a discount reflecting royalty payments. However, at the heart Mr Menzies' criticism of Mulready's valuation of EP453 is that the maximum value of that asser is $750,000 (minus a discount for the payment of a royalty - no quantum of discount is propounded). Conversely, Mulready's revised report valued Gas2Grid's interest in EP453 at between $0.9 million and $1.26 million which was arrived after applying a 10% discount to take into account the payment of a royalty. 25 The only link between Mr Menzies' criticisms of the methodology employed by Mulready in its original valuation of EP453, and the methodology employed in its revised opinion, is that the Menzies letter and the revised opinion of Mulready both refer to the concept of discounting to take into account the payment of a royalty. There is no evidence as to what caused Mr Mulready to apply a discount to this asset. Without such evidence, there is no basis for the inference that it was the Menzies letter which prompted Mulready's revision of the valuation of EP453. The fact that the Menzies letter refers to the concept of discounting for royalties paid and that the material change in Mulready's valuation of EP453 is due to the application of a discount is merely circumstantial evidence. 26 Mr D'Arcy appeared to attach some significance to the absence of evidence adduced by Gas2Grid as to the state of mind of Mr Mulready. However, it is exactly this type of evidence which is necessary for Octanex to establish the causal link upon which its claim for costs rests. As mentioned above, at [22], Mulready's revised valuation of EP453 is completely at odds with the valuation advanced by Mr Menzies. In light of the circumstantial nature of the evidence linking the Menzies letter and the only material change made in the valuation of the assets of Gas2Grid and Orion in the revised Mulready report, Octanex has not established the nexus that it claims exists between the Menzies letter and the termination of the scheme. 27 Octanex has submitted that Gas2Grid's allegation that it was motivated by its desire to effect a takeover of Orion should not be accepted in the absence of a trial on the merits. I agree with that submission however something of the same reasoning applies to Octanex's claim with the decision not to proceed with the merger was a result of Octanex's objections was a result of its criticism of the expert reports. Ultimately, in the absence of a case made at the second court hearing it is not possible for me to be satisfied that Octanex's objection had been made out. While an unsuccessful objector at the second hearing may be awarded its costs for the reasons indicated by Santow J, prior to that point it is more difficult for the claim to be substantiated. In this case Octanex has not convinced me that my discretion in relation to costs should be exercised in its favour. 28 For these reasons Octanex's application must be dismissed. As Gas2Grid does not seek costs of the application, there will be no order as to costs. I certify that the preceding twenty eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Legislation Cited (2)

Cases Cited (1)

Cited By (2)