Mosaic Oil NL, in the matter of Mosaic Oil NL [2010] FCA 985

In these orders, an "Excluded Shareholder" is any Mosiac Shareholder who is a member of the AGL Group, Meaning AGL Energy Limited and each of its subsidiaries.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

GENERAL DIVISION NSD 1064 of 2010

REASONS FOR JUDGMENT 1 The plaintiff, Mosaic Oil NL (Mosaic) is a registered no liability public company registered under the Corporations Act 2001 (Cth). Its principal activities are the exploration, production and development of oil and gas. It has interests in New Zealand, Queensland and off the coast of Western Australia. It is listed on both the Australian Securities Exchange (ASX) and the Port Moresby Stock Exchange. 2 On 14 July 2010 Mosaic entered into a Scheme Implementation Deed with AGL Energy Limited (AGL), a public company listed on the ASX. The deed was amended on 18 August 2010 and subsequent reference to the deed in these reasons is to the amended deed. Under the deed the parties agreed to use their best endeavours to implement a scheme whereby all of Mosaic's issued shares will be acquired by AGL. 3 Pursuant to s 411(1) of the Corporations Act Mosaic now seeks orders for the convening of a meeting of its shareholders (Scheme Meeting) for the purpose of considering, and if thought fit, agreeing (with or without modification) to a Scheme of Arrangement (Scheme). Directions as to conduct of the meeting are also sought. At the conclusion of the first court hearing on 3 September 2010, I made the orders sought by the plaintiff. These are my reasons for those orders. 4 The details of the scheme were established by evidence tendered at the hearing including by the following affidavits and the exhibits to them, which were read in support of the application: · Affidavit of Alexander Bevan Parks, the chief executive officer of Mosaic, affirmed 1 September 2010; · Affidavit of David John Herlihy, a non-executive director and Chairman of Mosaic, sworn 27 August 2010; · Affidavit of Scott Andrew Brown, the chief financial officer of Mosaic, sworn 30 August 2010; · Affidavit of Sally Anne Highducheck, the Investor Relations Manager of Mosaic, sworn 31 August 2010; · Affidavit of Andrew John Rigg, a director and Deputy Chairman of Mosaic, affirmed 1 September 2010; · Affidavit of Paul John Hennessy, an actuary and partner in the valuations practice of PricewaterhouseCoopers, sworn 1 September 2010; · Affidavit of Jonathan Arnold Salomon, a Geoscience Manager of RISC Pty Limited sworn on 1 September 2010; · Affidavit of Bradley Joel Pollock, a partner of Deloitte Touche Tohmatsu, sworn 1 September 2010; · Affidavit of Michael Patrick Moraza, Group General Manager Upstream Gas of AGL, sworn 1 September 2010; · Two affidavits of Elizabeth Louise Humphry, a solicitor employed by the solicitors for Mosaic, affirmed 2 September 2010 and 3 September 2010 respectively.

Outline of Scheme 5 The Scheme Booklet is exhibited to the affidavit of Mr Parks. Annexures to the Scheme Booklet include copies of the Scheme, the Scheme Implementation Deed, the Independent Expert's Report and the Investigating Accountants' Report. The Scheme Booklet lists possible reasons to vote in favour of the Scheme as well as reasons to vote against it. It contains a list of frequently asked questions with brief answers which include references to those sections of the document which describe the relevant aspect of the Scheme in more detail. It provides information about AGL (which was verified by Mr Moraza) and sets out very clearly key dates in the approval process and what Shareholders must do if they wish to vote by proxy. 6 The Scheme is explained in detail in the Scheme Booklet and in Mr Parks' affidavit. Mr Parks described the issued capital of Mosaic as at the date of his affidavit as comprising: (a) 821,710,775 fully paid ordinary shares ("Fully Paid Mosaic Share") (b) 19,235,000 partly paid ordinary shares issued under the Mosaic Employee Share Scheme ("Mosaic Ordinary Contributing Share") …; and (c) 1,707,818 options to subscribe for Fully Paid Mosaic Shares issued under the Mosaic Employee Incentive Plan ("Mosaic Employee Option") … Under the Scheme AGL will acquire all the issued shares in Moasic. Shares held by AGL or its subsidiaries are excluded from participation in the Scheme. 7 Mr Parks also explained that, subject to certain conditions being met, an additional 45,000,000 Fully Paid Mosaic Shares (Taipan Farmin Scrip) were to be issued under an agreement between Mosaic, Continental Oil Pty Limited, Discovery Geo Corporation, Tamark Pty Limited and CG Operating Inc dated 19 April 2010. Mosaic expects those conditions to be met or waived by Mosaic before the Scheme Meeting and the extraordinary general meeting of Mosaic that is to follow the Scheme Meeting so that the holders will be able to vote at those meetings to enable the Scrip to be transferred to AGL. Voluntary escrow arrangement that restrict dealing with the Taipan Farmin Scrip will be lifted if the Scheme is approved by the Court under s 411(4) of the Corporations Act. 8 The shareholders eligible to participate in the Scheme, namely those holding Mosaic fully or partly paid shares (Shareholder), will receive either $0.15 cash per share or, at the election of the Shareholder, 1.01 AGL shares for every 100 fully paid Mosaic shares. Partly paid shares will attract a lesser amount calculated with respect to the amount unpaid as set out in the Scheme Booklet. A Shareholder who elects to receive AGL shares and would be entitled only to a fraction of an AGL share, will receive a cash amount calculated in accordance with the formula set out in clause 5.6 of the Scheme. 9 The Scheme provides for the sale of the shares of Ineligible Foreign Shareholders, (those whose address is shown in the Mosaic share register as outside Australia and New Zealand) and for the proceeds of sale to be distributed to them on a pro rata basis. A similar provision is made for shareholders who elect to receive scrip rather than shares, but whose share form an unmarketable parcel of less than $500 in value. Ineligible Foreign Shareholders and Unmarketable Parcel Shareholders will not be entitled to fractional entitlements as referred to in [8] above.

Partly paid shares 10 One of the preconditions to the Scheme relates to the partly paid Mosaic Ordinary Contributing Shares, namely, the requirement that, if the Scheme is approved by Shareholders at the Scheme Meeting, restrictions on the transfer of these shares be lifted by resolution of an extraordinary general meeting to be held immediately following the Scheme Meeting. The Chairman's letter in the Scheme Booklet states that the Mosaic Board has determined that the proposal for lifting these restrictions and the Scheme are in the best interests of all Mosaic Shareholders and that the Board unanimously recommends that Shareholders vote in favour of the Scheme and the proposal. 11 It was submitted for Mosaic that the holders of the partly paid Mosaic Ordinary Contributing Shares do not form a separate class for the purposes of approving the Scheme. I have recently considered this issue in Wattyl Limited, in the matter of Wattyl Limited [2010] FCA 854 at [15]-[16]. For the reasons given there I am satisfied that the partly paid shareholders in Mosaic are being treated fairly and that the community of interest between them and the fully paid shareholders is such that they do not form a separate class; see also Re Hills Motorway Management Ltd (2001) 43 ACSR 101 at 104 per Barrett J. I note also that this conclusion is consistent with the view expressed in the Independent Expert's Report that the partly paid shareholders are being treated equally with fully paid shareholders and that the Scheme is fair and reasonable to them. Consequently, I am satisfied that a single meeting of Shareholders is appropriate.

Option holders 12 Options were issued to ten Mosaic employees under an Employee Option Scheme. Clause 5.1(p) of the Implementation Deed requires Mosaic to use reasonable endeavours to procure that each option holder enter into an agreement with Mosaic for the cancellation of the options in return for payment of an amount equal to the "intrinsic value of those options (to be paid or funded by AGL)". Mr Parks deposed that at the date of his affidavit Mosaic had entered into cancellation deeds with each holder of Mosaic Employee Options for an aggregate consideration of $80,579.53. 13 I accept the plaintiff's submission that "the additional benefit to be received by such shareholders qua option holder does not entail that they are to be treated as a separate class from shareholders who do not occupy that additional position". In accordance with the views expressed in Re Equinox Resources Ltd [2004] WASC 114 at [20]-[21], however, the plaintiff has undertaken to record the votes of these shareholders separately from the votes of other shareholders. This will not preclude these votes from being included in the final tally of votes for and against the Scheme, but will enable the Court at the second hearing in this matter to see whether any material effect on the outcome results from those option holders' votes.

Employee retention payments 14 The plaintiff drew the Court's attention to retention payments to be paid to certain officer and employees of Mosaic. The payments are fully disclosed in the Scheme Booklet. In part the motivation for these retention payments is said to be to ensure that "the business interests of Mosaic and its employees will be better aligned to promote the success of Mosaic's business objectives". I accept for the reasons given by Jacobson J in Re Cashcard Australia Ltd [2004] FCA 223 that these employees do not form a separate class. That being so and given that the details are fully disclosed to Shareholders I do not see that the payments are a reason for refusing the orders sought by the plaintiff.

Proxy voting deeds 15 The Scheme Booklet discloses that Shareholders having 12.8% of the fully paid shares in Mosaic have appointed the Chairman, Mr Herlihy, as their proxy to vote at the Scheme Meeting. The proxies have been granted by deed pursuant to agreements with AGL however the Shareholders have not received any consideration for the grant of their proxies.

No risk 16 The arrangements for payment of the cash consideration under the Scheme are such that Shareholders are not exposed to risk of non-payment. Firstly, AGL has ample resources to meet its commitment. As at 3 September 2010 its market capitalisation was approximately $6.6 billion with consolidated net assets at 30 June 2010 of $5.799 billion. Secondly, the transfer of shares to AGL is subject to the cash component being deposited into a trust account operated by Mosaic as trustee for the Mosaic Shareholders before the share transfer is effected. The provisions of the Scheme give similar security to those who elect to receive AGL shares. Thirdly, AGL's obligations to Shareholders under the Scheme are secured by a deed poll in the Shareholders' favour given by AGL. The executed deed poll was tendered at the hearing as Exhibit 1.

Shareholder warranty 17 Clause 8.3(c) of the Scheme provides that each shareholder is to give the usual warranty to the effect that all of the shares transferred under the Scheme are free from any interest of third parties and that, subject to the removal of restrictions referred to in [10] above, the shareholder has full power and capacity to sell and to transfer its shares to AGL. This warranty is common to schemes such as this and provided it has been drawn to the shareholders' attention it is not an obstacle to approval of the Scheme. Details of the warranty are given in clause 9.9 of the Scheme Booklet.

Break fee 18 The Scheme Implementation Deed provides for a break fee of $1.3 million payable by Mosaic to AGL if the Scheme does not proceed. This amount is under 1% of the equity value of Mosaic calculated in accordance with paragraph 9 of the Takeovers Panel Guidance Note 7 - Lock-up Devices. The circumstances in which the break fee is payable are set out in clause 11.2 of the Implementation Deed and is described in the Scheme Booklet at clause 10.4. The circumstances do not include the Scheme not proceeding merely because the Shareholders vote against it. Mr Parks accurately summarised the circumstances in which the break fee would be payable as follows: In summary, the Break Fee must be paid to AGL if at any time prior to the 30 November 2010 a Competing Proposal of any kind is announced or a third party, who at 14 July 2010 did not have voting power of 10% or more in Mosaic comes to have such voting power, and within six months after that occurring, the third party or an associate of that third party in all material respects acquires control of Mosaic, acquires or has a right to acquire or have an economical [sic] interest in all or a substantial part of the assets or business of the Mosaic Group, otherwise acquires or merges with Mosaic or has a relevant interest in at least 35% of Mosaic Shares. 19 A break fee of this magnitude and on these terms is quite usual in such schemes as this. It does not operate to discourage Shareholders from rejecting the Scheme if they are otherwise so inclined. The plaintiff's evidence shows that it was negotiated on a normal commercial basis and that the Board of Mosaic was satisfied that the final terms of the provision were acceptable.

Exclusivity 20 The Scheme Implementation Agreement provides, in clause 10.2, for an exclusivity period during which Mosaic undertakes not to "directly or indirectly solicit, invite, facilitate, encourage or initiate any Competing Proposal, or any enquiries, negotiations or discussions with any Third Party in relation to, or that may reasonably be expected to lead to, a Competing Proposal or communicate any intention to do any of those things" except with AGL's consent. 21 The Agreement does not contain the common "no talk" clause which would prevent Mosaic dealing with an unsolicited proposal. The exclusivity period is a period that expires on the earlier of 30 November 2010 and the termination of the Scheme Implementation Agreement, a period of just under 4 months. It is prominently disclosed in the Scheme Booklet in the section on Questions and Answers and the section on key terms. In my view the exclusivity period is not unreasonably long and the disclosure of it in the Scheme Booklet is adequate; see Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [9] per Santow J. 22 Annexed to the Scheme booklet is the draft report of PricewaterhouseCoopers (PWC), the independent expert commissioned by the directors of Mosaic to review the Scheme. The expert report contains, inter alia, a valuation of Mosaic shares and of the consideration offered. It annexes an independent technical specialist report prepared by RISC on the petroleum assets of Mosaic. The letter dated 1 September 2010 from PWC attached to the expert report states that in PWC's view the Scheme is in the best interests of the fully and partly paid Shareholders and that the consideration offered under the Scheme is fair and reasonable. 23 Other evidence before the Court at the first hearing established that the plaintiff is a "Part 5.1 body"; that the proposed Scheme is an "arrangement" within s 411; that Mr Herlihy has consented to act as Chairperson of the meetings and Mr Andrew Rigghas consented to act in his absence. I am satisfied that the information in the Scheme Booklet and annexed documents will result in proper disclosure to the shareholders. I am also satisfied that the Scheme is bona fide and properly proposed: and that ASIC has been given an opportunity to examine the proposal and adequate notice of the first Court hearing date. The plaintiff has tendered a letter dated 2 September 2010 from ASIC stating that it does not propose to appear at the first Court hearing, or intervene to oppose the Scheme at that time. On the basis of the evidence tendered and for the reasons given above, I made the order sought by the plaintiff. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.