Real Energy Corporation Limited, in the matter of Real Energy Corporation Limited [2020] FCA 1634

Pursuant to s 411(1) and s 1319 of the Corporations Act 2001 (Cth) (the Act), the plaintiff convene a meeting (Scheme Meeting) of the holders of fully paid ordinary shares in the plaintiff (Scheme Shareholders) for the purpose of considering, and if thought fit approving (with or without modification), a scheme of arrangement (Scheme) proposed between the plaintiff and the Scheme Shareholders, being the scheme of arrangement set forth in Annexure B to Exhibit IBM-4, as amended by Exhibit A (Scheme Booklet).
The Scheme Meeting be held on Friday 11 December 2020 commencing at 11.00 am.
The Scheme Meeting be held in person and as a virtual meeting using audio or audio-visual technology in accordance with s 5 of the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Determination) and, to the extent that it is not displaced by the Determination or these orders, in accordance with r 3.3(2) of the Federal Court (Corporations) Rules 2000 (Cth) (Rules).
Scheme Shareholders and proxies, attorneys and corporate representatives validly appointed by Scheme Shareholders be given access to the Scheme Meeting online via a website or an application on their mobile device (Mobile App) using registration procedures, login procedures and passwords provided to them upon request as specified in Annexure E to the Scheme Booklet in such manner as the plaintiff thinks fit.
Scheme Shareholders and proxies, attorneys and corporate representatives validly appointed by Scheme Shareholders be permitted to participate in discussions and voting at the Scheme Meeting through the use of audio and audio-visual technology as follows: (a) Scheme Shareholders and proxies, attorneys and corporate representatives validly appointed by Scheme Shareholders are to be permitted during the course of the Scheme Meeting to submit questions or motions in writing to the moderator of the Scheme Meeting for consideration by the Chairperson during the Scheme Meeting, subject to the functions and powers of the Chairperson under the plaintiff's Constitution and the general law; (b) any procedural motions, if accepted by the Chairperson, are to be conducted by way of a poll and may be dealt with by vote of Scheme Shareholders, proxies, attorneys and corporate representatives using the voting procedures available through the website and Mobile App; (c) voting on the resolution to approve the Scheme is to be conducted by way of a poll; (d) all voting on a poll at the Scheme Meeting will occur by vote using the voting procedures on the website and Mobile App, and by the use of technology made available to the plaintiff to count the number of votes cast by Scheme Shareholders and proxies, attorneys and corporate representatives on behalf of Scheme Shareholders and the number of shares to which each vote relates, so that information will be available for the Chairperson to determine whether the voting requirements of s 411(4)(a)(ii) of the Act have been satisfied; (e) notwithstanding cl 30.7 of the plaintiff's Constitution and s 249Y(3) of the Act, the appointment of a proxy or attorney shall not be revoked or suspended by the appointing Scheme Shareholder (Appointor) attending and taking part in the Scheme Meeting, but if the Appointor votes on a resolution at the Scheme Meeting, the proxy or attorney is not entitled to vote as the Appointor's proxy or attorney on that resolution and any such vote must not be counted in the results of the relevant poll; (f) the plaintiff must use technology to exclude the counting of any vote by a proxy or attorney on a resolution where the relevant Appointor has also cast a vote on that resolution at the Scheme Meeting; and (g) the plaintiff must have available at all times during the Scheme Meeting a helpline to assist Scheme Shareholders, proxies, attorneys and corporate representatives who experience technical difficulties with voting or participation in the Scheme Meeting.

YATES J: 1 The plaintiff, Real Energy Corporation Limited, seeks orders for the convening of a meeting of its members pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) to consider, and if thought fit, approve a scheme of arrangement (the scheme) which will effect a merger with Strata-X Energy Limited (Strata). 2 The plaintiff is a public company listed on the Australian Securities Exchange (ASX). It was incorporated as a proprietary company on 2 October 2009; changed its status to a public company on 5 August 2011; and listed on the ASX in December 2013. It is engaged in gas field exploration and development. 3 The plaintiff has only one class of shares (fully paid ordinary shares). It has 1,742 members of whom 1,157 hold less than a marketable parcel of shares. The total number of these shares is 27,824,981. There are three substantial shareholders who hold between them 18% of the issued shares. Two of the substantial shareholders are related parties of the plaintiff. The plaintiff has also issued a number of options. 4 The plaintiff has four directors, three of whom are independent non-executive directors (including the Chairman). The other director is the plaintiff's full-time Managing Director. 5 Strata is an independent oil and gas exploration and production company. It is incorporated in British Columbia, Canada. It has a diversified portfolio of high growth potential petroleum projects. Its strategy is to discover and develop oil and gas prospects with relatively low entry costs, a meaningful acreage position and a large working interest to provide shareholders with the opportunity for substantial growth. It is listed on the TSX Venture Exchange and the ASX. 6 The plaintiff and Strata have formed a 50-50 joint venture in respect of Project Venus, a highly prospective coal seam gas tenement in the Surat Basin, Queensland. The plaintiff is the administrative and commercial operator of the venture. Strata is the technical operator. 7 On 15 July 2020, the plaintiff and Strata entered into a Scheme Implementation Agreement to implement the scheme which involves all the shares in the plaintiff, held by members at the Record Date (the date three business days after the scheme becomes effective), being transferred to Strata, with the members bound by the scheme (the scheme shareholders) receiving, as consideration for the transfer, one fully paid ordinary share in Strata for three shares in the plaintiff. Thus, if the scheme is approved and implemented, the plaintiff will become a wholly-owned subsidiary of Strata, with the two forming a merged group with Strata's other subsidiaries. 8 On 15 July 2020, the plaintiff announced to the ASX that it had entered into the Scheme Implementation Agreement. 9 The plaintiff read the following affidavits in support of its present application: (a) Affidavit of Ian Burnham Mitchell sworn 7 October 2020; (b) Affidavit of John Wardman sworn 16 October 2020; (c) Joint affidavit of Glyn Yates and Andrew Clifford sworn 20 October 2020; (d) Affidavit of Duncan Patrick Cornish sworn 27 October 2020; (e) Affidavit of Ian Burnham Mitchell sworn 29 October 2020; (f) Affidavit of Scott Andrew Brown sworn 29 October 2020; (g) Affidavit of John Wardman sworn 3 November 2020; (h) Affidavit of Ian Burnham Mitchell sworn 4 November 2020; (i) Affidavit of Duncan Patrick Cornish sworn 4 November 2020; (j) Joint affidavit of Glyn Yates and Andrew Clifford sworn 4 November 2020; (k) Affidavit of Scott Andrew Brown sworn 4 November 2020; (l) Further affidavit of Scott Andrew Brown sworn 4 November 2020; and (m) Affidavit of Ian Burnham Mitchell sworn 5 November 2020. 10 The following documents were tendered: (a) Exhibit IBM-4, being a draft scheme booklet; (b) Exhibit IBM-5, being a marked-up version of the draft scheme booklet that was exhibited to the affidavit of Ian Mitchell sworn on 4 November 2020; (c) Exhibit A, being replacement pages to Exhibit IBM-4; (d) Exhibit B, being a letter dated 5 November 2020 from the Australian Securities and Investments Commission (ASIC) to the Directors of the plaintiff; and (e) Exhibit C, being a letter dated 5 November 2020 from the plaintiff's solicitor to ASIC confirming that the plaintiff's intent to give an undertaking to the Court with regard to a Deed of Variation. 11 The plaintiff's directors unanimously recommend that members vote in favour of the scheme, in the absence of a superior proposal. Each director has represented that he will vote his shares, and the shares controlled by him, in favour of the scheme, in such circumstances. 12 The plaintiff has engaged RSM Corporate Australia Pty Ltd (RSM Corporate) to provide an opinion on whether the scheme is in the best interests of the members. RSM Corporate is beneficially owned by the partners in RSM Australia, a large national firm of chartered accountants and business advisers. 13 Two directors of RSM Corporate, who are also partners in RSM Australia, Glyn Yates and Andrew Clifford, have prepared a report dated 1 October 2020 in which they have expressed the opinion, based on the information provided to RSM Corporate, that, although the proposed scheme is not fair (for the reasons stated in the report), it is nevertheless reasonable, and because it is reasonable, the scheme is in the best interests of the members. 14 The opinion that the proposed scheme is not fair is based on the fact that RSM Corporate assessed the fair value of the scheme consideration per scheme share to be in the range $0.017 to $0.033, with a preferred value of $0.025. It assessed the fair value of the plaintiff's shares (pre-proposed scheme) in the range $0.022 to $0.042 per share, with a preferred value of $0.032. RSM Corporate considered the proposed scheme to be "not fair" because of the limited crossover in the two valuation ranges. However, it also said: 2.15 Depending on Shareholders' views as to the prospects and operations of both Real Energy and Strata-X, some shareholders may form the view that the Fair Value of Real Energy is approximately $0.024 or less per Share and that the Fair Value of Strata-X is at the higher end of our assessed valuation range. In these circumstances, the Real Energy shareholders would conclude the Proposed Transaction is fair. 15 The basis for this statement is explained in the report. 16 Despite RSM Corporate's conclusion on fairness, the plaintiff's directors also consider the scheme to be in the best interests of members - hence, their recommendation and the expression of their (the directors') voting intentions. 17 It will be for the members to assess the scheme, with the benefit of RSM Corporate's opinion, the information in the scheme booklet, the directors' recommendation and expressed voting intentions, and any other information they consider to be pertinent. RSM Corporate's report will be included in the scheme booklet, which is to be made available to members online and which is to stand as the explanatory statement required by s 412(1)(a) of the Act. 18 There are no unusual features of the scheme as such. I note that completion risk is managed by the scheme providing that the scheme shareholders' shares in the plaintiff will only be transferred to Strata once the scheme consideration (the shares in Strata) is issued to those shareholders. Further, Strata has executed a deed poll containing covenants in favour of the scheme shareholders that it will comply with its obligations under the Scheme Implementation Agreement and the steps attributed to it under the scheme, and do all acts necessary to give effect to the scheme, including providing the scheme consideration. I note that at the proposed second court hearing the plaintiff will adduce evidence that the deed poll has been properly executed according to the law of Strata's incorporation: Simavita Holdings Limited, in the matter of Simavita Holdings Limited [2013] FCA 1274 at [43]-[44]; Veda Group Limited, in the matter of Veda Group Limited [2015] FCA 1506 at [32]-[33]; Ecosave Holdings Limited, in the matter of Ecosave Holdings Limited [2015] FCA 1121 at [16]. 19 The scheme includes a warranty given by each scheme shareholder that its shares are fully-paid and free from encumbrances, and that it has the power and capacity to sell and transfer the shares, including any rights and entitlements attaching to them. This warranty has been brought to the attention of members in the scheme booklet. 20 The Scheme Implementation Agreement contains a number of exclusivity provisions under the headings "No existing discussions" (clause 9.1); "No-shop" (clause 9.2); "No-talk" (clause 9.3); "Due diligence information" (clause 9.4); "Notice of unsolicited approach" (clause 9.7); "Matching right" (clause 9.8); and "Buyer counterproposal" (clause 9.9). A number of these provisions contain constraints which apply during the Exclusivity Period, which is defined as the period from the date of the Scheme Implementation Agreement to the time when the agreement is terminated according to its terms or the End Date, whichever is earlier. The End Date is defined as the date that is nine months after the date of the Scheme Implementation Agreement, or such other date agreed to by the plaintiff and Strata. The "No-talk", the "Due diligence information" and the "Notice of unsolicited approach" provisions are among the constraints that apply during the Exclusivity Period. 21 In substance, the "No-talk" provision prohibits the plaintiff from negotiating, discussing or entering into a Competing Transaction (as defined) even if the transaction was not solicited, invited, encouraged or initiated by the plaintiff or its representatives, and even if the person proposing the Competing Transaction has announced it publicly. In substance, the "Due diligence Information" provision prohibits the plaintiff from enabling any person other than Strata to undertake due diligence investigations in respect of the plaintiff or its business or operations or from making available to any person any non-public information in respect of the plaintiff or its business or operations. In substance, the "Notice of unsolicited approach" provision requires that the plaintiff, amongst other things, inform Strata of any unsolicited approach it receives in respect of a Competing Transaction, including details of the price offered and the identity of the person making the proposal. 22 When the Scheme Implementation Agreement was originally entered into, these provisions were subject to a "fiduciary out" clause in the following terms: 9.5 Exceptions Clause 9.3 and clause 9.4 and the obligation under clause 9.7(a) to inform the Buyer or MergCo respectively, of the identity of a potential Third Party Buyer or acquirer do not apply to the extent that they restrict the MergCo or Buyer from taking or refusing to take any action with respect to a genuine potential Competing Transaction (which was not solicited, invited, encouraged or initiated by them in contravention of clause 9.2) provided that they, through the board has determined, in good faith and acting reasonably that: (a) after consultation with its financial advisors, such a genuine Competing Transaction is, or could reasonably be considered to become, a Superior Proposal; and (b) after receiving legal advice from its external legal advisers (who must be reputable advisers experienced in transactions of this nature) that failing to respond to such a genuine Competing Transaction would be reasonably likely to constitute a breach of the MergCo or Buyer Board's fiduciary or statutory obligations. 23 The reference in this clause to "MergCo" is to the plaintiff; the reference to "Buyer" is to Strata. 24 ASIC has expressed its concern about the inclusion of the words "and acting reasonably" that appear in the sixth and seventh lines of the clause. It regards these words as adding an inappropriate "reasonableness" requirement on the plaintiff's directors in determining their fiduciary and statutory duties: see Ross Human Directions Ltd [2010] ATP 8 at [34(c)]. 25 To satisfy ASIC's concern, the plaintiff and Strata have agreed to execute a Deed of Variation which will amend clause 9.5 to remove these words. The plaintiff has given an undertaking to the Court that the Deed of Variation will be executed within seven days of the Court making orders to convene the scheme meeting, and that a copy of the Deed of Variation will be made available to the members in the same way that the scheme booklet will be made available to them. 26 The Exclusivity Period to which I have referred is somewhat lengthy, but not so lengthy as to cause significant concern as to its possible anti-competitive consequences. 27 The plaintiff is liable to pay a "break fee" (referred to as the Seller Termination Fee in the Scheme Implementation Agreement) of $100,000 in certain circumstances. These circumstances do not include the members failing to approve the scheme at the proposed scheme meeting. Mr Brown, who is the plaintiff's Managing Director, has deposed that the fee is a genuine pre-estimate of the costs of due diligence undertaken and to be undertaken by Strata, which was negotiated between the plaintiff's directors and Strata's directors. I note that the amount of the fee is substantially in line with the guidance provided by the Takeovers Panel's Guidance Note 7 - Lock-up devices. 28 The exclusivity provisions, including the "fiduciary out" provision, and the existence of the break fee, have been brought to the attention of members in the scheme booklet. 29 The current Chairman of the plaintiff, Mr Wardman, has consented to act as chairperson of the proposed meeting. Mr Brown has consented to act as alternate chairperson. Each has provided an affidavit complying with r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth). 30 I note that the proposed scheme meeting is to be held in person and as a virtual meeting using audio or audio-visual technology as contemplated in s 5 of the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 (Cth) (the Determination). I am satisfied that the notice of the proposed scheme meeting is in accordance with s 5(3)(a) of the Determination. 31 ASIC has been provided with various versions of the scheme booklet (there have been a number of amendments along the way). It has signified, in respect of the latest version (which is the version now before the Court - Exhibit IBM-4) that it has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet (explanatory statement), and to make submissions: see s 411(2)(b) of the Act. Prior to the substantive hearing to which these reasons relate, ASIC stated that it did not propose to make submissions at the present time or to attend the hearing. During the course of the hearing I required some further, relatively minor, amendments to the scheme booklet to be made. These are set out in the replacement pages comprising Exhibit A. 32 I am satisfied that the plaintiff is a Pt 5.1 body and that the scheme is a "compromise or arrangement" within the meaning of s 411(1) of the Act. I am satisfied that, if approved by the required statutory majorities, the scheme is likely to be approved by the Court on an unopposed application for approval under s 411(6) of the Act. I am satisfied that the procedural requirements preliminary to making an order under s 411(1) have been satisfied. 33 Orders, substantially as sought, will be made. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Yates.

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