Horizon Oil Limited, in the matter of Horizon Oil Limited [2014] FCA 733

JUDGE: FARRELL J DATE: 8 July 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 By originating process filed on 16 May 2014 the plaintiff (Horizon) seeks orders under s 411(1) of the Corporations Act 2001 (Cth) (Corporations Act) and directions under s 1319 for convening a meeting of its members (being the holders of fully paid ordinary shares) to consider a proposed scheme of arrangement (Scheme) (Scheme Meeting). These are my reasons for making those orders following a hearing on 3 July 2014. The detailed explanatory information and notice in relation to the scheme meeting scheduled for 7 August 2014 is set out in Exhibit SVL-1 at tab 13 (Scheme Booklet). Unless otherwise defined, words used in these reasons have the same meaning as in the Scheme Booklet. 2 The proposed Scheme is an "acquisition" scheme under which each registered holder of fully paid Horizon shares will receive 0.724 fully paid shares in Roc Oil Company Limited (Roc) for each fully paid Horizon share on issue on the Record Date (Scheme Consideration). The entitlement of Ineligible Foreign Shareholders is treated in what has become a typical manner: their Share Consideration will be sold in a share sale facility and they will receive the net proceeds proportionately. As at 27 June 2014, there were 20 Ineligible Foreign Shareholders holding 640,640 Horizon shares. 3 Horizon's capital structure has some complexity. As at 2 July 2014, there were 1,301,981,265 fully paid ordinary shares. In addition, there are partly paid ordinary shares and other rights convertible to ordinary shares: 1,500,000 partly paid ordinary shares; 14,941,667 options; 31,281,639 share appreciation rights (SARs); and 400 convertible bonds. The manner in which these other equity interests will be addressed is set out at [14]-[21] below.

BACKGROUND 4 Horizon is a mid-cap oil and gas company engaged in petroleum exploration, development and production. It has petroleum interests in China, Papua New Guinea, and New Zealand. Its headquarters are in Sydney and its shares are traded on markets operated by the Australian Securities Exchange Limited (ASX). 5 Roc is an Australian registered company, shares in which are traded on markets of the ASX. Roc is an upstream oil and gas company with a presence in China, South East Asia, Australia and the United Kingdom. Roc operates across the full range of upstream business activities from exploration and appraisal to development and production delivery. Roc's headquarters are in Sydney. 6 On 29 April 2014, Horizon and Roc announced the proposed Scheme (Scheme Announcement) and entered into a Merger Implementation Deed (Implementation Deed). The Scheme Announcement describes the proposed Scheme as an "all scrip merger of equals". 7 Upon implementation of the Scheme, Roc's board will comprise three of its current non-executive directors and Roc's chairman who will remain as chairman. Four of the current non-executive directors of Horizon will become non-executive directors of Roc and the current chief executive officer of Horizon will become the managing director and chief executive officer of Roc. 8 Based on the ratio of the Scheme Consideration, former Horizon shareholders will hold 58% of the issued share capital of Roc. The Scheme Consideration reflects the ratio implied by the volume weighted average price (VWAP) of Horizon and Roc shares in the ten day period which ended on 23 April 2014, the last day on which those shares traded before the Scheme Announcement. Section 7.2E of the Scheme Booklet notes the stability of the implied trading prices of Horizon and Roc shares over the 12 month period before the announcement. Section 7.3D of the Scheme Booklet acknowledges that the value of the Scheme Consideration is uncertain and will depend on the trading price of Roc shares following the implementation of the Scheme.

Directors' recommendation 9 The directors of Horizon unanimously recommend approval of the Scheme and have indicated that they intend to vote Horizon shares they control in favour of the Scheme in the absence of a Superior Proposal.

Independent Expert's Report 10 The independent expert, Deloitte Corporate Finance Pty Limited (Deloitte) provided a report dated 1 July 2014 and concluded that the proposed Scheme is fair and reasonable and therefore in the best interests of Horizon Shareholders. Mr Stephen Reid affirmed an affidavit on 2 July 2014 in which, as a representative of Deloitte, he confirmed Deloitte's independence and that he holds the opinions expressed in the report. 11 Deloitte's view is summarised at Section 7.2 of the Scheme Booklet as follows: The Independent Expert's view is that: i) the Scheme will assist Horizon Oil to fund its substantial development programs; ii) the Merged Group will have greater geographic diversification, increased scale and a potentially elongated production profile than Horizon Oil on a standalone basis; and iii) the Merged Group may enjoy enhanced liquidity, greater broker coverage and potentially improved access to debt and equity capital markets compared to Horizon Oil on a standalone basis. The Independent Expert has concluded that the Scheme does not appear to have any significant disadvantages for Horizon Oil Shareholders, when weighed against the associated advantages. The Independent Expert observed that Horizon Oil Shareholders will dilute their participation in the future growth of Horizon Oil's gas prospects in PNG, however it also noted that it may be difficult for Horizon Oil to realise the underlying value of the PNG assets without the diversification benefits and portfolio of cash generating assets which would result from the Scheme. The Independent Expert has stated that its estimate of the implied value of the Scheme Consideration on a control basis is in the range of A$0.46 to A$0.53 per Horizon Oil Share as a result of the Scheme. This compares with the Independent Expert's valuation of each Horizon Oil Share on a control basis of A$0.41 to A$0.50. Given that the value of the interest in the Merged Group is above the value of a Horizon Oil Share, the Independent Expert has concluded that the Scheme is fair.

Independent Technical Specialist Report 12 Deloitte's independent expert's report is supported by an Independent Technical Specialist Report on the Petroleum Properties of Roc Oil and Horizon by RISC Operations Pty Ltd (RISC) of June 2014 which is included in the Scheme Booklet. Mr Geoffrey Barker affirmed an affidavit on 26 June 2014 in which, as an employee of RISC with responsibility for preparation of the report, he confirms that the opinions expressed in the report are held by him.

Investigating Accountant's Report 13 Attachment B of the Scheme Booklet is a report entitled "Investigating Accountant's Report - Independent Limited Assurance Report on the Merged Group Pro Forma Financial Information" prepared by PricewaterhouseCoopers Securities Ltd (PwCS) dated 1 July 2014. This provides the usual negative assurance comfort in relation to the preparation of the pro forma consolidated statement of financial position as at 31 December 2013 described in Section 12.6 of the Scheme Booklet. Mr Wilhelmus Blom affirmed an affidavit on 1 July 2014 in which, as a representative of PwCS, he deposed that PricewaterhouseCoopers is the external auditor of Horizon. He confirmed that the opinions expressed in the Investigating Accountant's Report are opinions which he holds.

PARTLY PAID SHARES AND OTHER EQUITY INTERESTS 14 Matters related to equity interests held by employees are dealt with in Section 13.3 of the Scheme Booklet and the treatment of convertible bonds is addressed at Section 13.4.

Partly paid shares 15 Mr Michael Sheridan swore an affidavit on 2 July 2014 in which he deposed that he is the holder of all 1,500,000 partly paid Horizon shares. Mr Sheridan is the Chief Financial Officer and Company Secretary of Horizon. As the proposed Scheme is between Horizon and the holders of fully paid ordinary shares, Mr Sheridan will not be eligible to vote at the Scheme Meeting even though partly paid shares would generally be considered to be of the same class. 16 Mr Sheridan deposed that an agreement is being negotiated with Horizon and Roc whereby, if the Scheme is implemented, he will receive consideration equivalent to the Scheme Consideration of 0.724 fully paid Roc shares for each partly paid Horizon share; Mr Sheridan will remain liable to Roc for the residual payments owing on the partly paid shares in Horizon. No interest will be payable on this debt obligation, which is consistent with the position he would be in as the holder of partly paid shares. This arrangement is disclosed in Section 13.3 of the Scheme Booklet. 17 It is intended that this arrangement will be in place before the Scheme Meeting. As Mr Sheridan is a senior executive of Horizon who clearly understands the arrangement, at this stage, this treatment does not appear to be unfair to a person who might otherwise expect to be dealt with as part of the Scheme.

Options and SARs 18 Options and SARs were issued to Horizon employees as part of equity-based incentive plans. Under the Implementation Deed, Horizon and Roc agreed to use their best endeavours to determine the treatment of these interests before the date of the Scheme Booklet by: transferring to Roc or cancelling Options and SARs before the Record Date; or providing consideration to the holders of Options and SARs on a basis that is reasonably acceptable to Roc, Horizon and the holders; and acting on the principle that holders of Options and SARs will be put in a commercially equivalent position. 19 If agreement is not reached before the Scheme Meeting, and the Scheme becomes Effective, negotiations will continue between Horizon, the Merged Group and the holders with the guidance and involvement of a remuneration expert.

Convertible bonds 20 Horizon issued 400 convertible bonds for US$80 million and they were listed on the Singapore Securities Exchange on 20 June 2011. As at 3 July 2014, no bonds had been converted. 21 If the Scheme becomes unconditional, an adjustment event will occur under the terms of issue of the convertible bonds which will result in a reduced conversion price and redemption right becoming available to bondholders. If a bondholder elects to convert and Horizon shares are issued before the Record Date, they will participate in the Scheme. In addition, Horizon has offered an early redemption right (involving a 625 basis points premium above the amount they are entitled to receive for early redemption under the terms of issue). The Scheme Booklet notes that if the Scheme is implemented, Roc (or Horizon) may seek to compulsorily acquire outstanding convertible bonds either under their terms of issue or the Corporations Act.

EVENTS SINCE SCHEME ANNOUNCEMENT 22 Since the Scheme Announcement, there have been two notable events.

Roc Extraordinary General Meeting 23 On 15 May 2014, Roc notified ASX that it had received a notice under s 249D of the Corporations Act from shareholders holding 6.6% of Roc shares requisitioning a meeting of shareholders of Roc to consider a resolution to amend Roc's constitution. The proposed amendment would insert a new clause into the constitution whereby Roc must first obtain the approval of Roc shareholders before it issues any securities or any convertible securities which, when converted, would exceed 30% of the Roc shares on issue at the time. 24 On 5 June 2014, Roc released a notice of extraordinary general meeting and explanatory statement in relation to a meeting of Roc shareholders scheduled for 11 July 2014. The Roc directors have unanimously recommended that shareholders vote against the resolution. 25 If Roc shareholders pass the resolution, it would be a "Roc Oil Prescribed Event" and it is a condition precedent to the implementation of the Scheme that no such event should occur before 8am on the second court date. The condition is for the benefit of Horizon. These matters are explained at Section 13.1 of the Scheme Booklet. Horizon says that it has not formed an intention about the course it would take should this occur.

25 June 2014 Roc announcement and exclusivity arrangements 26 The Implementation Deed contains exclusivity arrangements in a form which has become common in acquisition schemes: they include "no shop", "no talk" and "notification" provisions in relation to Competing Transactions which may be proposed as alternatives to the Scheme. These are summarised at Section 16.1 of the Scheme Booklet. They are also set out in the copy of the Implementation Deed in Attachment C in the Scheme Booklet. Reflecting the "merger of equals" nature of the proposed transaction, the exclusivity arrangements relate to both Horizon and Roc. 27 The "no talk" and "notification" obligations are subject to a fiduciary exception. In summary terms, to rely on the fiduciary exceptions the directors of Roc or Horizon (as appropriate) must form the view that: (1) the proposal is a genuine Competing Transaction which they have not solicited and, based on the advice of financial advisors, could reasonably become a Superior Proposal, and (2) based on external legal advice, a failure to respond to the Competing Transaction or to provide details of the Competing Transaction to the other party to the Implementation Deed would be reasonably likely to constitute a breach of the directors' fiduciary duty or be otherwise unlawful. 28 On 25 June 2014, Horizon announced that Roc had advised it in accordance with its obligation under the Implementation Deed that Roc had received an indicative, non-binding and confidential approach by a third party and Roc was relying on the fiduciary exception to the "no talk" and "notification" provisions of the Implementation Deed. 29 There is no break fee specified in the Implementation Deed. However, the Implementation Deed provides that where there is no appropriate remedy for breach of the Deed other than termination, the defaulting party will be liable for the other's loss and expenses, capped at $5 million; material breach occurs if, taken in the context of the merger as a whole, the loss flowing from the breach might be expected to exceed $5 million: clauses 14.1(c) and 14.4 of the Implementation Deed. 30 I do not consider that the effect of clause 14.4 should be an impediment to making orders under s 411(1). It is not a breach of the Implementation Deed if holders of fully paid Horizon shares vote against the Scheme. As the directors of either of Horizon or Roc may, having regard to the fiduciary carve-out, engage with a Competing Transaction which they have not solicited and which may lead to a Superior Proposal, the exclusivity provisions do not preclude a genuine Superior Proposal from emerging. The period in which the directors of Horizon and Roc are precluded from soliciting or assisting other arrangements is confined to a reasonable period calculated to allow the Scheme to be considered by Horizon shareholders.

CHAIRMAN OF SCHEME MEETING 31 Mr Fraser Ainsworth AM, Horizon's Chairman, has consented to act as Chairman of the Scheme Meeting: see Mr Ainsworth's affidavit affirmed on 30 June 2013. He disclosed that he holds 4,010,374 Horizon shares and no Roc shares. 32 Mr Andrew Stock, a director of Horizon, has agreed to act as Chairman of the Scheme Meeting if Mr Ainsworth does not act as Chairman: see Mr Stock's affidavit affirmed on 30 June 2014. Mr Stock has 160,000 Horizon Shares and no Roc Shares. If the Scheme is implemented, both will be non-executive directors of Roc for which they will receive a fee which is yet to be determined. Neither has a pre-existing relationship with Roc. 33 I am satisfied that neither Mr Ainsworth nor Mr Stock has an interest which would make it inappropriate for either of them to act as Chairman of the Scheme Meeting.

Formal matters 34 I am satisfied that the formal requirements for making orders under ss 411(1) and (2) have been met: a. Horizon is a Part 5.1 body and it was registered in Queensland on 28 November 1969: see affidavit of Mr Alexander Morris sworn on 14 May 2014 and exhibit ABM-1. Mr Morris is a partner in King & Wood Mallesons, solicitors to Horizon. b. ASIC provided its "usual letter" confirming that it did not intend to attend the hearing; the letter was dated 2 July 2014. Mr Stefan Luke swore an affidavit of 3 July 2014. Exhibit SVL-1 to Mr Luke's affidavit contained a copy of correspondence with ASIC demonstrating that it had been given notice of Horizon's application and versions of the Scheme Booklet.

Verification 35 Mr Sheridan's affidavit and Mr Luke's affidavit attest to the due diligence and verification process undertaken by Horizon designed to ensure that all information requirements have been met in relation to the Scheme Booklet (other than Roc information). Ms Leanne Nolan swore an affidavit on 2 July 2014. Ms Nolan is the general counsel for Roc, and she attests to the verification process undertaken by Roc in relation to information Roc provided for inclusion in the Scheme Booklet.

Performance Risk 36 Attachment D of the Scheme Booklet sets out a Deed Poll in the usual form and annexes to it the Scheme of Arrangement, which forms Annexure B to the Merger Implementation Deed. Clause 5.2 of the Scheme of Arrangement provides for the transfer of Scheme Shares to Roc after Roc has confirmed that it has issued the Scheme Consideration.

Deemed warranty and encumbrances 37 Sections 16.2 and 16.3 of the Scheme Booklet mentions the provisions of the Scheme of Arrangement which deal with transfer of the Horizon shares to Roc on the basis that they are free of encumbrances. These provisions are in the usual form.

Consequences of Roc EGM and possible Competing Transaction for Roc 38 In its letter of 2 July 2014 ASIC noted that it may be necessary for Horizon to provide supplementary disclosure to its members in connection with the resolution to be put to the Roc extraordinary general meeting on 11 July 2014. It may also be necessary for Horizon shareholders to be advised of the status of the possible Competing Transaction for Roc. 39 As discussed in Re Associated Advisory Practices Limited (No 2) (Re Associated Advisory Practices) [2013] FCA 979 at [8] and the cases there cited, only information approved by the Court for despatch to shareholders should be provided to members once a scheme meeting has been convened under s 411(1); s 1319 provides a ready means for the Court to perform this function. Further, as also mentioned in Re Associated Advisory Practices at [30], should it become necessary to postpose the Scheme Meeting (as opposed to adjourning the meeting after it has commenced at the scheduled time), it is desirable that Horizon approach the Court for appropriate orders even if there is power under Horizon's constitution to do so. Aside from any other consideration, it avoids issues as to the date by which proxies must be lodged to be effective at any postponed meeting having regard to order 9 which specifies the time and date for receipt of proxies.

Practice comment 40 At the hearing, I commented that the Scheme Booklet had been well compiled and is set out in accordance with practice. However, I also noted that the Scheme Booklet was very long taking into account the three reports which are set out in full and the inclusion of the Implementation Deed. This factor may deter Horizon shareholders from doing that which the directors properly recommend: reading the Scheme Booklet in full. 41 It has become common practice for the Implementation Deed to be attached to the announcement of a proposed scheme when it is lodged with ASX; that occurred in this case with the Scheme Announcement. This is a good practice because it makes the Implementation Deed available on the ASX platform often some months in advance of the Scheme Booklet being completed for despatch to shareholders. If the Implementation Deed contains exclusivity provisions or conditions of the proposed Scheme, it is important that the market for securities in the scheme company is properly informed by the early exposure of the Implementation Deed. 42 It is also usual and appropriate for the Scheme Booklet to contain a summary of the Implementation Deed such as that in Section 16.1 of the Scheme Booklet. In the context of a listed public company, therefore, it is difficult to see the need for the Scheme Booklet to contain the complete Implementation Deed, although it would remain important for the Court to be provided with it and that it be publicly disclosed and accessible. 43 Similarly, if a complete Independent Expert's Report and any associated information such as the Independent Technical Specialist Report are readily available on the ASX platform or the scheme company's website, it may be that it is desirable that these documents not be set out in full in a Scheme Booklet where that is possible consistent with any legislative requirements. It has become common practice for the Independent Expert's Report to contain a letter summarising his or her opinion and material matters which they took into account. Provided that the summary information does refer to the matters which the expert considered material in forming his or her opinion, if there is ready access to the full report it may be that the shorter material in the letter would be more inviting to read and informative to the great bulk of shareholders. It is, of course, critical that shareholders are informed of the website at which the full report can be freely accessed and that a full copy is provided to the Court in connection with an application under s 411(1).

CONCLUSION 44 Having regard to the principles set out in Re Associated Advisory Practices Limited [2013] FCA 761 at [19]-[22] I was satisfied that it was appropriate to make orders convening the Scheme Meeting and with regard to ancillary matters. It was also appropriate to make the notation that the Court has been advised that Horizon would request the Court at the second court hearing to make statements in its reasons for orders which may be made at the hearing to secure exemptions from the Securities Act 1933 (US) regulation requirements. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.