REASONS FOR JUDGMENT
1 Gloucester Coal Limited (the Company) has applied to the Court for orders under s 411 of the Corporations Act 2001 (Cth) for a meeting of its members to be convened for the purpose of considering and, if thought fit, agreeing to a proposed scheme of arrangement between the Company and its members.
2 The effect of the scheme will be that all of the issued shares in the capital of the Company that are not already held by Helios Australia Pty Limited (Xstrata) will be vested in Xstrata for a consideration of $4.75 for each scheme share. The proposal for the acquisition of the Company by Xstrata was announced on 10 April 2007. If approved, the scheme will result in the Company being delisted from Australian Securities Exchange Limited (ASX) and becoming a wholly owned subsidiary of Xstrata.
3 The Company is a coal producing company, which was first listed on ASX on 27 June 1985. As at 31 May 2007 the Company had approximately 3500 shareholders. While the Company is registered in Western Australia, its administrative headquarters are in Sydney. It has a mine site and offices at the mine site in the Gloucester geological basin of New South Wales.
4 The Company has two mining operations at Stratford and Duralie in the Gloucester geological basin. The Company also holds coal exploration licences that cover a large proportion of the basis and include a number of known coal deposits. The Company produces both coking and thermal coal products. The coal reserves at the two mines are processed at the Stratford Coal preparation plant. Coals from both mines are blended to produce a marketable suite of coal products.
5 Xstrata is a member of the Xstrata Group, the holding company of which is Xstrata Plc, a company listed on the London Stock Exchange and the Swiss Exchange. The Xstrata Group is an international resources group based in Zug, Switzerland, with approximately 43,000 employees worldwide. The Xstrata Group is the world's fifth largest diversified mining group.
6 The Companys, Xstrata and Xstrata Coal Pty Limited have entered into a merger implementation agreement to give effect to the proposal. By Clause 2(a) of the merger implementation agreement the Company agrees to propose and implement a scheme of arrangement in the form annexed to the merger implementation agreement. Xstrata agrees with the Company to assist the Company to propose the scheme.
7 Under clause 3.1, the scheme is to be conditional upon the satisfaction or waiver of a number of conditions precedent including approval by the members of the Company and approval of the scheme by the Court. Clause 4.1 provides that on the implementation date, as defined in Clause 1, all of the scheme, shares being those shares that are not owned by Xstrata or any related company, will be transferred to Xstrata. Each scheme participant will be entitled to receive the scheme consideration of $4.75.
8 Xstrata covenants with the Company that, in consideration of the transfer of the scheme shares, Xstrata will pay to the Company, as agent for the scheme participants, the amount of the scheme consideration. The Company agrees to receive the amount so paid in trust as agent for each scheme participant and to pay to each scheme participant such monies as the scheme participant is entitled to receive under the scheme.
9 At present there are a number of optionholders in the Company. By Clause 4.4 of the scheme implementation agreement, the Company agrees to use its best endeavours to ensure either that each optionholder enters into a cancellation deed by no later than the business day immediately before the proposed second court date under which they agree to cancel their options for a consideration of $4.75 less the amount equal to the exercise price under the option or that each option holder exercise the options by that day. Of course, if the options are exercised the optionholders will become members and will be entitled to participate in the scheme. Under Clause 4.5 Xstrata covenants in favour of the Company that, in consideration of the entry into a cancellation deed by an optionholder, Xstrata will pay to the optionholder $4.75 less the amount of any exercise price.
10 Under clause 6.1 the Company must take all reasonable steps to implement the scheme and do all things necessary to give effect to the scheme and the orders of the Court approving the scheme if they are made.
11 Clause 11 of the merger implementation agreement provides that, in certain circumstances, the Company must pay Xstrata a break fee of $3,910,000. Clause 11 recites that that arrangement has been agreed in circumstances where:
(a) Xstrata and the Company believe that the implementation of the scheme will provide significant benefits to Xstrata and the Company and their respective shareholders, and Xstrata and the Company acknowledge that, if they enter into the scheme implementation agreement and the scheme is subsequently not implemented, Xstrata will incur significant costs;
(b) Xstrata requested that provision be made for the payment of a break fee without which Xstrata would not have entered into the scheme implementation agreement;
(c) the boards of both Xstrata and the company believe that it is appropriate for both parties to agree to the payment contemplated by clause 11 to secure Xstrata's entry into the scheme implementation agreement; and
(d) both parties to receive legal advice on the operation of the provision for the payment of the break fee.
12 The proposed scheme is in a relatively common form. It provides that on the implementation date, as defined, subject to the Company paying the scheme consideration to each scheme participant, the scheme shares will be transferred to Xstrata, without the need for any further act by any member of the Company, by the Company, delivering to Xstrata a duly completed and executed share scheme transfer (the Transfer) for registration and Xstrata duly executing that transfer and delivering it to the Company for registration. The Company will also on the implementation date immediately after receipt of the Transfer, enter the name of Xstrata in its register of members. Clause 3.3 of the scheme provides that, from the implementation date, Xstrata will be beneficially entitled to the shares pending registration.
13 Clause 4.1 provides that the Company must procure that, on the implementation date, Xstrata pays the scheme consideration to the scheme participants in accordance with Clause 4.3. Clause 4.3 provides that, no later than two business days prior to the implementation date, the Company must procure that Xstrata deposits, in cleared funds, an amount equal to the aggregate amount of the scheme consideration payable to each scheme participant into an Australian dollar denominated trust account operated by the Company as trustee for the scheme participants. On the implementation date, and subject to those funds having been paid, the Company is to pay the scheme consideration. The obligations of the Company to do so are to be satisfied by the Company dispatching or procuring the dispatch of a cheque to each scheme participant.
14 In addition, Xstrata has executed a deed poll for the purposes of covenanting, in favour of scheme participants and option participants, to perform its obligations under the merger implementation agreement. By Clause 1.4 of the deed poll, Xstrata acknowledges that the deed poll may be relied on and enforced by any scheme participant, or option participant as applicable, in accordance with its terms even though they are not party to it. By Clause 3 of the deed poll, Xstrata covenants to comply with its obligations under the scheme's implementation agreement and to do all things necessary and expedient on its part to implement the scheme. Clause 4 contains an undertaking by Xstrata to pay the scheme consideration in accordance with the scheme. The provisions of Clause 4 mirror the provisions of the scheme for the payment of funds into an Australian dollar denominated trust account operated by the Company.
15 The Company proposes to dispatch to members a scheme booklet describing the scheme and furnishing relevant information for members as to the nature of the proposals and the financial consequences of acceptance of the scheme. The scheme booklet contains information both about the Company and about Xstrata. I have evidence verifying the accuracy of the factual statements made about both companies.
16 In the scheme booklet, the directors of the Company indicate that they unanimously recommend that, in the absence of a superior proposal, the Company's shareholders should vote in favour of the scheme. A superior proposal is defined as a publicly announced bona fide competing transaction which the Company's board, acting in good faith, and after taking advice from its legal and financial advisors, determines is reasonably capable of being completed and is more favourable to scheme participants than the scheme, taking into account all terms and conditions of the competing transaction. A competing transaction is defined as one which, if completed, would mean that a person (other than Xstrata and its associates) would directly or indirectly acquire an interest or relevant interest in becoming the holder of 50% or more of the Company's shares, or a substantial part or a material part of the business conducted by the Company or would acquire control of the Company within the meaning of the Corporations Act, or would otherwise acquire or merge with the Company.
17 The scheme booklet includes reports by several independent experts. A report from Greenwoods and Freehills Pty Limited (Greenwoods) contains a general statement of the Australian income tax and Goods and Services Tax implications for Australian resident scheme participants who hold shares in the Company as capital assets. The report does not, however, apply to scheme participants who hold their shares in the Company as revenue assets or as trading stock. The report warns that the Australian tax consequences for optionholders may be different from those applicable to scheme participants and that optionholders should seek specific tax advice in relation to the scheme.
18 In addition, the directors of the Company engaged Grant Samuel and Associates Pty Limited (Grant Samuel) to prepare an independent expert's report setting out whether in its opinion the scheme is in the best interests of the Company's shareholders. Grant Samuel have valued the Company in the range of $4.22 to $4.89 per share. Because the Xstrata proposal of $4.75 falls within that range, Grant Samuel consider that it is fair and reasonable and in the best interests of the Company's shareholders. The range of values of $4.22 to $4.89 per share includes a premium for control and exceeds the price at which the Company's shares could be expected to trade in the absence of a takeover offer.
19 Grant Samuel say that the valuation reflects two key factors. First, the Company has coal reserves of 21.9 Mt, which at current production levels would support operations for only a further seven years. However, there is the potential to extend the life of mining operations significantly by exploiting substantial coal resources and other coal inventory in the Gloucester basin not included in reserves. Secondly, material marketing synergies could be available to a range of coal producers and trading houses that have the ability to market the Company's coal with their own coal products. Those marketing synergies have been taken into account in the valuation of the Company although they are not available to the Company on a standalone basis.
20 The Grant Samuel report states that Xstrata's proposal represents a premium of approximately 32.4% over the Company's share price in the month leading up to the announcement of the proposal. In Grant Samuel's view, the Company's share price would fall in the absence of the Xstrata proposal or an alternative comparable transaction. Accordingly, Grant Samuel has concluded that, in the absence of a superior proposal, the Xstrata proposal is in the best interests of the Company's shareholders and, in the absence of a superior proposal, the Company's shareholders would be better off voting in favour of the scheme.
21 In a detailed report, Grant Samuel refer to the fact that they appointed technical specialists Minarco Asia Pacific Pty Ltd (Minarco) to review the coal operations of the Company. Minarco reviewed the resources, reserves, life-of-mine plans, production schedules, operating costs, capital costs, potential reserve extensions and exploration interests of the Company. Minarco also prepared valuations of the Company's exploration interests. The Minarco report is included in the scheme booklet.
22 I have seen evidence from the authors of the three expert reports confirming that the opinions expressed in them are opinions held by the authors at the time of their preparation.
23 The scheme booklet draws specific attention to the break fee, which represents 1% of the Company's diluted equity value at the time of the merger implementation agreement. The booklet records that the Company and Xstrata have agreed that the break fee is a genuine and reasonable pre-estimate of the loss that would actually be suffered by Xstrata if the scheme does not proceed. If an event occurs such that the break fee is payable, the break fee is Xstrata's sole remedy in connection with the arrangements. Further, the Company will only be obliged to pay the break fee to the extent that such payment would not breach the fiduciary or statutory duties of the Company's directors, would not constitute unacceptable circumstances as declared by the Takeovers Panel or would not be unlawful.
24 It is proposed that the meeting of members to consider the scheme be held on 5 July 2007. The notice of meeting will be dispatched as soon as possible after today, but no later than 5 June. Rule 3.3(2) of the Federal Court Corporations Rules 2000 provides that, unless the Court otherwise orders, a meeting of members ordered under s 411 of the Corporations Act must be convened, held and conducted in accordance with the provisions of Part 2G.2 of the Corporations Act that apply to the members of the relevant company and the provisions of the company's constitution that apply in relation to meetings of the members.
25 Clause 27.1 of the Company's constitution relevantly provides that the Company may serve a notice on any member by sending it by post (or airmail for members residing outside Australia) to the address for the member in the register. Under Clause 27.2, notice is treated as being effectively served by the Company, relevantly, where sent by post on the day after its date of posting and, where sent by airmail, on the seventh day after its date of posting. Section 249HA(1) of the Corporations Act which is within Part 2G.2, relevantly provides that at least 28 days notice must be given of a meeting of a company's members. Under s 249J(4), a notice of meeting sent by post is taken to be given three days after it is posted. However, that provision is replaceable and has in fact been replaced in the Company's constitution.
26 Having regard to the timetable that I have briefly described, it is likely that overseas members may not receive 28 days notice of the proposed meeting as is effectively required by the operation of rule 3.3(2). In the circumstances I would be prepared to order otherwise as is contemplated by rule 3.3(2). On the other hand, I have indicated that, if the scheme is agreed to by the members, I would expect there to be evidence at the second hearing to indicate that the failure to give 28 days notice to overseas shareholders is shown to be immaterial.
27 The Company's solicitors have provided to Australian Securities and Investments Commission (the Commission) a draft of the proposed scheme booklet. By letter of 30 May 2007 the Commission has indicated that it does not currently propose to appear to intervene to oppose the proposed scheme at the hearing today. The Commission's letter states that that intention is based on the information provided by the Company to date in relation to whether the scheme has been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of the takeover chapter of the Corporations Act.
28 I am satisfied that the proposed scheme booklet fairly represents the effect of the scheme. I am satisfied that the scheme is one that the members of the Company properly informed could reasonably agree to. I am also satisfied that the scheme is one that the Court would be likely to approve in the absence of any opposition, assuming the members otherwise agree to the scheme at the proposed meeting.
I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.