GRD Ltd, In the matter of GRD Ltd [2009] FCA 1595

Federal Court of Australia|2009-11-16|Before: Gilmour J

REASONS FOR JUDGMENT 1 I made orders on 16 November 2009 approving the proposed scheme of arrangement (Scheme) and exempting the plaintiff, GRD Limited (GRD), from compliance with the provisions of s 411(11) of the Corporations Act 2001 (Cth) (Corporations Act). I indicated then that I would deliver written reasons in due course. These are my reasons. 2 On 1 October 2009 (the First Court Hearing) the Court granted approval to GRD for the convening of a meeting (Scheme Meeting) to consider the Scheme. 3 The Scheme, if approved and implemented, will result in GRD becoming a wholly owned subsidiary of AMEC Australia Finance Company Limited (AMEC). 4 GRD now seeks an order approving of the Scheme pursuant to s 411(4)(b) of the Corporations Act and an order exempting it pursuant to s 411(12) of the Corporations Act from compliance with s 411(11) of the Corporations Act. 5 The application is supported by the following affidavits: Affidavits before the Court at the First Hearing on 1 October 2009 (a) Mark Clifford Lawrenson sworn 8 September 2009 (the First Lawrenson Affidavit); (b) Garrick John Archer sworn 30 September 2009 (the First Archer Affidavit). Affidavits before the Court since the First Hearing on 1 October 2009 (c) Garrick John Archer sworn 11 November 2009 (the Second Archer Affidavit); (d) Melissa Stevens sworn 12 November 2009 (the Stevens Affidavit); (e) Richard Fairfax Court sworn 11 November 2009 (the Chairman's Affidavit); (f) Mark Clifford Lawrenson sworn 12 November 2009 (the Second Lawrenson Affidavit); (g) Desmond John Barrie sworn 12 November 2009; and (h) Garrick John Archer sworn 16 November 2009. 6 On 1 October 2009, by Order 1, I approved, pursuant to s 411(1), the explanatory memorandum and Scheme Booklet in its final form.

Legal principles 17 Section 411(4)(b) provides a discretion to the Court. 18 At the approval stage, the Court considers matters that do not precisely correlate to those considered at the first meeting approval stage. 19 At the approval stage, the Court, in this case, must be satisfied that: (a) the meeting convened by GRD was convened and held in accordance with the orders made on 1 October 2009; (b) the explanatory memorandum and Scheme Booklet was sent with every notice of such meeting; (c) the resolutions were passed at the meeting by the majority required by s 411(4)(a)(ii) of the Corporations Act; (d) GRD has otherwise complied with the orders made on 1 October 2009; and (e) ASIC has had a reasonable opportunity to examine the explanatory statement and to make submissions to the Court in relation thereto as required by s 412(7) of the Corporations Act. 20 The opportunity to be accorded to ASIC under s 412(7) of the Corporations Act is in addition to that provided for prior to the first meeting approval stage by s 411(2). 21 The Court has additionally a residual discretion to withhold approval which is a long standing and recognised power: Re Alabama, New Orleans, Texas & Pacific Junction Railway Company [1891] 1 Ch 213 at 243. It has more recently been confirmed in Re NRMA Ltd (2000) 156 FLR 412 at [21]-[24], Re Hudson Conway Ltd (2000) 33 ACSR 657: Re Kalgoorlie Lake View Pty Ltd (2005) 56 ACSR 144. 22 A passage from the judgment of Santow J in Re NRMA Ltd 156 FLR 412 at [21]-[24] is frequently cited: [21] Finally, I should record again what I said in my earlier judgment regarding the Court's task at the approval stage. First, the Court must be satisfied that there has been no misleading or deceptive conduct in contravention of s 995 of the Corporations Law which is of such materiality as to vitiate the vote. The Court's discretion to give or withhold approval at the approval hearing remains unfettered by what has occurred at the convening hearing. That approval may be given or withheld, or given on conditions. It will take account of what has been revealed or transpired since the convening hearing, as well as any matters properly raised at the approval hearing. As regards the scheme proxy, my earlier provisional conclusion not precluding its use needs now to be reviewed following the scheme meetings and in light of the voting at those meetings on the scheme and on those associated resolutions already passed. The intention is for the demutualisation special resolution to be held reasonably soon after the scheme, this having, as my earlier judgment makes clear, direct relevance to the legitimacy of the scheme proxy. So too does the very strong support for the scheme at around 80% or more assuming reliable voting figures: see paras 72 and 73 of my earlier judgment. [22] At [41] of my earlier judgment I conclude: Once the approval stage is reached, the court's task is well settled, and accurately set out in I A Renard and J G Santamaria "Takeovers and ReconstructionsG9 in Australia", Butterworths (looseleaf) at 15,061: ... the court will determine: (1) whether all the conditions required by CL s 411 have been complied with; (2) whether the majority of members or creditors, though acting regularly, have acted in good faith and not in pursuit of some illegitimate purpose; and (3) whether the proposal was `at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such member, might approve it' (Per Fry LJ in Re Alabama, New Orleans, Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 247). Fundamentally, the jurisdiction is supervisory; the court is concerned to be satisfied that there has been an absence of oppression and that the compromise or arrangement is one which is capable of being accepted: see Re Dorman Long & Co Ltd [1934] Ch 635; Scottish Insurance Corp Ltd v Wilsons and Clyde Coal Co Ltd [1949] AC 462 at 486. [23] When it comes to appraising the fairness of a scheme, the Court does not determine that the scheme is intrinsically in the members' interest or otherwise. As White J said in Re Pheon Pty Ltd (1987) 47 SASR 427 at 435 in dealing with a creditors' scheme of arrangement but equally applicable to a members' scheme: "The court must leave it to the commercial sense of the creditors to judge what is reasonable in their interests. After all, it is their money which is at stake." [24] That limited supervisory role of the court in a share scheme was again affirmed in a recent Victorian case: Re Hudson Conway Limited (2000) 33 ACSR 657. 23 Apposite also is the observation of Warren J in Re Timor Sea Petroleum NL (2000) 35 ACSR 186 at [37]: The principle applied on an application for approval of a scheme to which no objection has been made is that if the court is satisfied that there has been an absence of oppression and that the relevant scheme is one capable of being accepted by the shareholders it should be approved… On the basis of the principles expressed in Re Hudson Conway Ltd (2000) 22 ACSR 657 by Beach J at 662, 665, 667, it is appropriate to regard the shareholders as the best judges of whether these schemes are to their commercial advantage. In light of the passing of the resolutions and, in particular, the majorities achieved, it is apparent that the shareholders have resolved that the schemes are to their commercial advantage.

Application to this matter 24 I am satisfied that the formal requirements of Part 5.1 have been met. 25 The Scheme has been overwhelmingly approved by members. 26 No member or creditor has provided any indication to GRD that it proposes to oppose the orders sought. 27 ASIC has been kept fully and thoroughly informed at all stages of the process. 28 I do not see any basis for the Court to exercise its residual power to withhold approval of the Scheme. Shareholders will receive substantial benefits from the Scheme. The independent expert has concluded that the Scheme is in the best interests of GRD Shareholders. Although, the independent expert concluded that the scheme consideration was not fair but reasonable, the basis of this conclusion was expressed clearly and openly in the Independent Experts' Report. 29 The Independent Expert's opinion was broadly that the Scheme (being the offer of 55c per GRD Share) is "in the best interests of GRD shareholders", and though not fair it was reasonable. It was explained, in summary, in the amended Independent Expert's Report this way: Opinion In Grant Samuels's opinion, the Proposal is in the best interests of GRD shareholders. The Proposal does not deliver a full premium for control. However, unless a superior alternative proposal emerges before the Scheme meeting, GRD shareholders are likely to be better off voting in favour of the Proposal. Valuation of GRD is subject to considerable uncertainty given the range of valuation conclusions that could be reached in relation to the Lancashire Waste Project. Accordingly, other factors need to be taken account as to whether the Proposal is in the best interests of GRD shareholders. The assessment of the Proposal is an overall conclusion having regard to all these factors. Grant Samuel has valued GRD in the range of $133.7-185.1 million, or 69.5-96.2 cents per share. The valuation reflects the estimated full underlying value for GRD and exceeds the price at which Grant Samuel would expect GRD shares to trade in the absence of the Proposal or speculation regarding some alternative corporate transaction. The consideration under the Proposal of 55 cents per share is less than Grant Samuel's estimate of the full underlying value of GRD. Accordingly, the Proposal is not in the fair value range. This suggests that GRD shareholders have not been offered a full premium for control. It can be argued that GRD shareholders need not accept an offer that is not "fair": · alternative proposals could emerge. There are no impediments to an alternative proposal and there is ample time for an alternative proposal to be made before the Scheme meeting; · if the Proposal is rejected, AMEC may improve its offer; · GRD could ultimately deliver value above 55 cents through the sale of its interest in Global Renewables following commissioning of the Lancashire Waste Project, albeit in the medium term; and · the Proposal has been put forward in a period of adverse market conditions for GRD Minproc and during the construction phase of the Lancashire Waste Project. It may not be the optimal time for shareholders to sell. On the other hand: · given the uncertainty of judgements regarding GRD's valuation (particularly in relation to the Lancashire Waste Project), the conclusion that the Proposal is not "fair" needs to be treated with some caution. It should be recognised that there remains significant risk associated with the Lancashire Waste Project. If no value is attributed to Global Renewables (i.e. the gross value for the Lancashire Waste Project is less than the project senior debt) the value range for GRD would be $96.7-122.1 million (50.3-63.5 cents per share) and the consideration under the Proposal would be within the fair value range; · GRD Minproc and Global Renewables are entirely different businesses and it is difficult to envisage buyers equally interested in both. Inevitably an offeror for GRD would discount the value of one of the businesses; · The Proposal is the only firm offer that has been received. The scheme process establishes a clear value benchmark and a defined timetable within which alternative interested parties could act. If no superior proposal is received prior to the Scheme meeting it could be argued that the Proposal represents fair value; and · there is no evidence to suggest that AMEC would improve its offer. Furthermore, in considering whether the Proposal is reasonable, the following factors have been taken into account: · GRD is relatively highly geared and is required to repay $55.3 million of deferred purchase consideration by 30 June 2010. In the absence of the Proposal and given the continuation of current market conditions, GRD faces significant refinancing risk over the next 12 months and is likely to need to raise equity; · if the Proposal is approved, shareholders will receive 55 cents cash. GRD shares have not traded above 55 cents since October 2008 despite improving equity markets and the Proposal; and · if the Proposal is rejected, under current market conditions GRD shares are likely to trade below 55 cents for the foreseeable future, particularly in view of the risk associated with the Lancashire Waste Project and the refinancing risk facing GRD. It is Grant Samuel's judgement that, if no superior proposal emerges prior to the Scheme meeting, there are sufficient reasons for shareholders to vote for the Proposal notwithstanding that it is not in the fair range value. Therefore, in Grant Samuel's opinion, the Proposal is not fair but reasonable and, accordingly, the Proposal is in the best interests of shareholders. 30 The Court at the First Court Hearing was referred to the decision of Dodds-Streeton J in Zenyth Therapeutics Ltd v Smith (2006) 60 ACSR 548 and, in particular, at [109] - [114]: 109 In Re Rancoo Ltd, Hayne J referred to ASIC Policy Statement 75 and expressed reservations about the attribution of different meanings to the concepts "fair" and "reasonable". He acknowledged the difficulty in accepting that an offer which was not fair could still be reasonable. 110 Hayne J stated: "Policy statement 75 expresses the views of the commission about the expression "fair and reasonable". It does so in a way that seeks to attribute different meanings to the words "fair and reasonable". The policy statement does not treat the expression "fair and reasonable" as a single portmanteau statement conveying a meaning to the listener but, rather, seeks to take each element of the expression and attribute a different meaning to it. Thus, the policy statement expressly contemplates the circumstance that an expert might conclude that a particular offer is not fair but nevertheless is reasonable. I must say that, for myself, I find the proposition that an offer may be 'not fair' and yet still 'reasonable' one which presents some difficulty. Perhaps that view stems from the impression I have that the expression 'fair and reasonable' is but a single expression intended to convey a single overall meaning which is not to be identified by reference to particular constituent elements." 111 Hayne J observed that "the net effect of the two transactions is thus, an effect which leads to the overall benefit of the remaining shareholders of Rancoo by a considerable sum, and it is on that basis that the expert concluded that the selective capital reduction is reasonable". 112 Despite his reservations, Hayne J confirmed the reduction of capital, which was unopposed. He stated that "Thus the reduction that has been proposed is a step that is to be taken, as a part of that overall transaction". 113 There is great force in Hayne J's reservations about an offer which, although not fair, is nevertheless reasonable. Although Re Rancoo Ltd constitutes an example of a reduction of capital which was recognised to be such, persuasive applications of the distinction are likely to be rare. 114 Courts should adopt a cautious approach to the approval of any scheme which the independent expert considers "not fair", particularly when it may involve expropriation at an undervalue. In my opinion, a scheme involving an offer of an undervalue, which is not fair, should generally not be considered reasonable unless it is accompanied by some positive compensatory feature. The fact that the security holders are unable to exact fair, or better, consideration through any avenue alternative to the scheme would not necessarily render an unfair scheme reasonable in the relevant sense. (footnotes omitted) 31 I accepted at the First Court Hearing that the content of the amended Independent Expert's Report, a summary of which I have set out above, accommodated the type of concerns expressed by Hayne J in Re Rancoo (1995) 17 ACSR 206 and Dodds-Streeton J in Zenyth Therapeutics 60 ACSR 548. I remain of that opinion. 32 It was disclosed at the First Court Hearing that ASIC was content with the Independent Expert's Report and the form of the Scheme Booklet (as amended). 33 There is no evidence that the Scheme is not being proposed in good faith or that it is commercially immoral in any respect. The reasons underlying the Scheme have been clearly stated and put to all GRD members. 34 All conditions to the Scheme will on the making of the orders sought in the minute of proposed orders either have been satisfied or waived, or in the case of 'negative conditions' will not have occurred.

The GRD Options 35 All the holders of GRD Options have entered into cancellation deeds under which their GRD Options will be cancelled upon the Scheme becoming effective.

Exemption from section 411(11) of the Corporations Act 36 Section 411(11) requires, subject to s 411(12), that a copy of the Court's order approving the Scheme be annexed to every copy of the relevant Company's Constitution issued after the order is made. Section 411(12) allows the Court to exempt a body from compliance with this provision or to determine the period during which it shall comply. 37 Orders under s 411(12) have been made in a number of cases, including Re Hudson Conway Ltd 33 ACSR 657 at 668, Re Amcor Ltd 34 ACSR 199 at 209, Re Glencore Nickel Pty Ltd (2003) 44 ACSR 210 at 225 and Re Anaconda Nickel Holdings Pty Ltd (2003) 44 ACSR 229 at 240. 38 In my opinion, exemption from compliance with s 411(11) is appropriate for the following reasons. The current GRD Shareholders are fully informed of the Scheme. Once the Scheme becomes binding on GRD Shareholders any purported transfers of GRD Shares will not be accepted for registration, other than a transfer to AMEC in accordance with the Scheme. Accordingly, new shareholders (apart from GRD) will not be entered into GRD's register of members once the Scheme becomes binding. Upon full implementation of the Scheme, GRD will become a wholly owned subsidiary of AMEC. Further, the Court order approving the Scheme would effect no alteration to GRD's Constitution.

Orders 39 For these reasons there will be orders approving the Scheme and exempting GRD from compliance with s 411(11) of the Corporations Act. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.

Associate: Dated: 24 December 2009 Counsel for the Plaintiff: Mr G Donaldson SC

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