In the matter of Murchison Metals Limited [2014] NSWSC 951

Judgment (ex tempore) 1HIS HONOUR: This is the second hearing of an application pursuant to (Cth) Corporations Act 2001 s 411, for orders approving a proposed scheme of arrangement between Murchison Metals Pty Ltd and its ordinary shareholders (other than excluded shareholders, being Mercantile Investment Company Ltd (MVT) and its associates), pursuant to which it is proposed that the shares in the company other than those already held by MVT ("scheme shares") will be cancelled so that the company will become a wholly owned subsidiary of MVT, in return for which the holders of the scheme shares will receive consideration, either in the form of cash, or in the form of scrip in MVT, or half in cash and half in scrip. Those who do not make an election are, under the scheme, to receive half in cash and half in scrip. 2On 8 May 2014, the court made orders pursuant to s 411 (1) for the convening of a scheme meeting on 19 June 2014. At this hearing, the court's role in approving or not approving the scheme pursuant to s 411(4) involves the exercise of a supervisory jurisdiction, and, in particular, requires that it be satisfied, first, that there has been compliance with the statutory and procedural requirements in respect of the convening and conduct of the meeting, including that the requisite majorities referred to in s 411(4) are attained; secondly, that those proposing the scheme are acting in good faith and that the scheme is one that is sufficiently fair and reasonable that an intelligent and honest person acting alone in respect of his or her interest as a member might approve it; and, thirdly that the scheme deals fairly with minority interests and with the interests of others who may be affected without their consent. 3The evidence establishes that the scheme meeting held on 9 June 2014 was duly convened and that the explanatory statement, substantially in the form approved by the court on 8 May 2014, was distributed to shareholders or, in the case of those who had elected to receive notification, electronically made available to them. Notice of the second hearing was duly advertised. At the meeting, the requisite majorities of 50 per cent of shareholders by number and 75 per cent of shareholders by value were easily attained. Bearing in mind that, of the 277,500,000 shares on issue, approximately 77,500,000 are held by MVT and its associates and thus excluded from voting, approximately 124,000,000 shares were voted at the meeting, representing approximately62 per cent of the shareholding eligible to vote. 94.03 per cent by number and 99.77 per cent by value of those eligible present and voting, voted in favour of the resolution approving the scheme. At the same time, that indicates that some 38 per cent of those eligible did not participate. Certificates have been provided by both Murchison and MVT, that, so far as they are aware, all of the conditions precedent to the scheme taking effect (other than those dependent upon approval of the court) have been satisfied or waived. 4For the purposes of s 411(17)(b), a statement in writing by ASIC stating that ASIC has no objection to the scheme has been produced to the court. For the purposes of s 412(6), the explanatory statement was registered with ASIC prior to its distribution to shareholders. All legal and formal requirements, thus, appear to have been met. 5The question which has caused me some concern is whether the scheme can be said to deal fairly with the interests of those who do not elect between the three forms of consideration proposed and will be deemed to have elected in favour of the mixed 50 per cent cash and 50 per cent scrip consideration. 6My concerns arise from the circumstance that the independent expert has expressed the view that, while the cash consideration is fair and reasonable, the one hundred per cent scrip consideration option is neither fair nor reasonable, although admittedly, the expert has concluded that the mixed option is fair and reasonable. Those conclusions are reached by the independent expert on the basis of a valuation of Murchison on a net tangible assets basis of between 4.33 (low range) and 4.87 (high range) cents per share. The expert has formed the view that the cash offer, which equates to 4.87 cents in the share, being at the upper end of the valuation range, is manifestly fair and reasonable. On the other hand, the scrip option depends on a valuation of the scrip, being shares in MVT, and is said by the expert to be worth (only) 4.14 to 4.34 cents per share, and thus to fall below the range of valuation of shares in Murchison. 7Because the mixed consideration involves an element of both, it is valued between 4.47 and 4.58 cents per share, and thus within the range of valuation of Murchison, albeit not at the top end of that range, like the cash offer. Support for the valuation of Murchison at 4.33 to 4.87 cents can be derived also from market evidence: the shares appear to have traded over the last few months at between 4.2 and 4.9 cents per share. 8At first sight, it is difficult to think why shareholders, faced with a voluntary election between the cash and the scrip offers, would elect for the scrip offer which, on the independent expert's report, is clearly inferior. It therefore seemed to me dubious to attribute to non-electing shareholders an election in favour of the mixed option rather than in favour of the cash option. This conclusion is also supported by the circumstance that Murchison is, in effect, no more than a "cash box". On the other hand, there is evidence before the court of the elections received to date, which indicate that while of the elections so far received, in respect of one hundred and twenty-one thousand shares approximately from 580 shareholders, approximately, 138 shareholders, representing 82,000,000 shares, have elected for 100 per cent cash, which 412 shareholders, albeit representing a much smaller number of 9,000,000 shares, have elected for 100 per cent scrip, and 29 shareholders, in respect of 29,000,000 million shares, have elected for the 50/50 option. That seems to indicate that smaller shareholders may be attracted to maintaining an investment through scrip and taking a longer term view of the prospects of that investment than merely looking at current values. In addition, it needs to be borne in mind that while the figures give the impression of precision, one is talking about relatively small discrepancies between what is in the range and what is outside the range of the valuation of Murchison. For example, the high end of the scrip range at 4.34 cents per share is just within the low end of the range of valuation of Murchison, and is above the price of 4.3 cents at which many of the on-market transactions over the last few months appear to have taken place. 9Thus, although I have given serious consideration to imposing, pursuant to s 411(6), an alteration to the scheme requiring that the non-electing shareholders be deemed to have elected for a cash consideration rather than a mixed consideration, I am ultimately persuaded not to do so by the circumstance that some first, may have already decided not to make an election on the basis that they have been told that that will result in their being treated as having been elected for mixed consideration, and secondly that of those who have elected, it seems clear that some prefer to take the longer term view and elect for scrip, so that it is not unreasonable to deem those who have not made an election to, as it were, have one foot in each camp and elect for the mixed consideration. Accordingly, I am prepared to approve the scheme. 10An order is also sought pursuant to s 411(12) exempting Murchison from compliance with s 411(11), which requires that a copy of every order of the court approving a scheme must be annexed to every copy of the constitution of the body issued after the order has been made. Orders under s 411(12) are commonly made where the scheme does not involve any impact on or amendment to the constitution of the company that will have ongoing effect. The purpose of the provision as described by Heenan J in Re Equinox Resources Ltd (2004) 49 ASCR 692 (at [22]) as follows: The purpose of the provision is to ensure that any modification of the right of shareholders which is the subject of the scheme and which may affect the interests of persons dealing with the company, will be readily identifiable and ascertainable. 11This scheme does not involve any such modification of the rights of the shareholders and does not effect any change to the constitution, and in those circumstances there is no utility in having the court order annexed to the constitution. [See Re Anaconda Nickel Holdings Pty Ltd (2004) 44 ACSR 229 at 240; In the matter of Re1 Limited and Re2 Limited as responsible entitles for Westfield Retail Trust 1 and Westfield Retail Trust 2 (No 3) [2014] NSWSC 762]. 12Accordingly, the court orders that: (1)Pursuant to Corporations Act, s 411(4)(b), the scheme of arrangement between the plaintiff Murchison Metals Limited ACN 078 257 799 and the holders of ordinary shares in the plaintiff other than excluded shareholders, in the form contained in annexure C to the explanatory memorandum which is exhibit P1 in this proceeding, be approved. (2)Pursuant to s 411(12), the plaintiff is exempted from compliance with subs 411(11) in relation to order 1. (3)In these orders, "excluded shareholders" means Mercantile Investment Company Limited and its associates (within the meaning of the Corporations Act), nominees or custodians of Mercantile Investment Company Limited or its associates. (4)These orders are to be entered forthwith.