Sino Gas & Energy Holdings Limited, in the matter of Sino Gas & Energy Holdings Limited [2018] FCA 1183

GLEESON J: 1 On 27 July 2018, I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) ("Act") after a first hearing in relation to a proposed scheme of arrangement. These included orders that the proposed scheme meeting be convened and the scheme booklet, that is, the explanatory statement required by s 412(1)(a) to accompany notices of the scheme meeting, be approved. 2 These are my reasons for making those orders.

BACKGROUND 3 Sino Gas & Energy Holdings Limited ("Sino Gas") is an Australian public company limited on the Australian Stock Exchange ("ASX.") Sino Gas is an energy company focused on developing natural gas assets in the People's Republic of China ("PRC"). 4 Sino Gas's principal asset is a 49% shareholding in Sino Gas & Energy Limited (ACN 115 316 588) ("SGE"), an Australian incorporated company which holds interests in two Production Sharing Contracts ("PSCs") in the PRC, which are named Linxing and Sanjiaobei. Each of the PSCs is a contractual arrangement between SGE, as the "foreign contractor" (a foreign investor in a PSC) and operator, and the relevant state-owned enterprise participant in the PSC, which governs the exploration, development and production of gas resources on the relevant PSC project area. 5 As at 25 July 2018, Sino Gas had a market capitalisation of approximately $487,336,486, based on a closing price of $0.23 per Sino Gas share. 6 As at the date of the scheme booklet, Sino Gas had the following securities on issue: (1) 2,118,854,285 ordinary shares; (2) 30,000,000 options; (3) 27,238,984 performance rights; and (4) 1,744,744 deferred share entitlements. 7 Section 4.10 of the scheme booklet discussed the impact of the proposed scheme on the options, performance rights and deferred share entitlements.

Proposed scheme 8 On 31 May 2018, Sino Gas entered into a scheme implementation agreement with LSF10 Summertime Holdings, Ltd ("LS BidCo") under which Sino Gas agreed to propose the scheme to Sino Gas shareholders. 9 The same day, Sino Gas announced the proposal by private equity firm Lone Star Funds ("Lone Star") to acquire 100% of the issued share capital in Sino Gas in an all cash transaction by which Sino Gas shareholders would receive $0.25 for each fully paid ordinary share on issue as at the record date (currently scheduled for 14 September 2018). 10 Lone Star invests globally in a range of different asset classes and industry sectors, including the oil and gas industry. Lone Star Fund X is Lone Star's most recently established opportunity fund. Lone Star Fund X comprises: (1) LSF X U.S. Holdings, L.P., a Bermuda exempted limited partnership; and (2) Lone Star Fund X (Bermuda), L.P., a Bermuda exempted limited partnership. 11 LS BidCo is a Bermuda special purpose vehicle and wholly owned subsidiary of Lone Star Fund X (Bermuda), L.P. that was established for the purpose of indirectly acquiring the target shares under the scheme and holding the interests in LS BidCo. 12 By letter dated 26 July 2018, the Australian Securities and Investments Commission ("ASIC") confirmed compliance with s 411(2)(a) and expressed the view that ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet for the purposes of s 411(2)(b)(i). 13 The Chairman's letter in the scheme booklet states that the scheme consideration of $0.25 per Sino Gas share represents an attractive premium to recent historical trading prices of the shares. 14 The independent expert appointed by the directors, Grant Thornton, has prepared a draft report concluding that the proposed scheme is fair and reasonable and hence in the best interests of Sino Gas shareholders. Grant Thornton's authorised representative, Andrea De Cian, affirmed an affidavit stating his intention (subject to any matters raised by the Court) to sign a copy of the report in the form of the draft report for inclusion in the scheme booklet. 15 Grant Thornton's comparison of the market value of a share in Sino Gas on a control basis with the cash consideration of $0.25 shows that the consideration is within Grant Thornton's estimate of the market value of a Sino Gas share. Grant Thornton values a Sino Gas share between $0.228 and $0.321. The report expresses the view that, while the valuation range is wide, this is not unreasonable considering the early stage in the PSCs' development, the size of the reservoir and the risks attached to the changes of the plateau rates, potential delays and the total production during the PSCs. 16 The directors have unanimously recommended that shareholders vote in favour of the scheme at the proposed scheme meeting, in the absence of a superior proposal and subject to the independent expert continuing to conclude that the scheme is in the best interests of Sino Gas shareholders. 17 It is proposed to hold a single scheme meeting on Wednesday, 5 September 2018 at 10.00 am.

EVIDENCE AND SUBMISSIONS 18 Sino Gas relied on the following evidence in support of the application: (1) an affidavit of Ian Weatherdon, chief financial officer of Sino Gas, affirmed 27 July 2018, together with exhibits marked "IW-1" to "IW-5"; (2) an affidavit of Philip Bainbridge, non-executive director of Sino Gas, chairman of Sino Gas and proposed chairperson for scheme meeting, affirmed 23 July 2018; (3) an affidavit of Bernard Ridgeway, non-executive director of Sino Gas and proposed alternate chairperson, affirmed 20 July 2018; (4) an affidavit of Andrea De Cian, authorised representative of Grant Thornton, affirmed 26 July 2018; (5) an affidavit of Chris Blane, partner of Allens, Sino Gas's solicitors, affirmed 27 July 2018; (6) an affidavit of Paul Schroder, partner of King & Wood Mallesons, LS BidCo's solicitors, affirmed 26 July 2018; and (7) an affidavit of Charles Collis, Bermudan barrister and attorney-at-law sworn 25 July 2018. 19 The scheme booklet is exhibit "IW-2" to the affidavit of Ian Weatherdon. 20 Sino Gas filed written submissions dated 27 July 2018. The written submissions set out the relevant legal principles and identified the evidence in support of the various matters about which the Court was required to be satisfied. 21 In addition to the written submissions, senior counsel for Sino Gas, Mr Ian Jackman SC, made oral submissions and identified important aspects of the evidence. 22 Senior counsel for LS BidCo, Mr Scott Nixon SC, did not make any submissions.

ISSUE FOR DECISION 23 At the first hearing, the Court's task is to decide whether to approve both the convening of the proposed scheme meeting pursuant to s 411(1) and the scheme booklet. 24 The relevant legal framework is set out in the submissions filed by Sino Gas. It is also explained in Re Staging Connections Group Limited [2015] FCA 1012, particularly at [18] to [31].

Part 5.1 body 25 The term "Part 5.1 body" is defined in s 9 of the Act to mean, relevantly, a company. The evidence confirmed that Sino Gas is a company and therefore a Pt 5.1 body.

Proposed scheme is an "arrangement" 26 Generally, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members, and which is properly proposed, is an "arrangement" within the meaning of s 411: see Re NRMA Insurance Limited (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [20] per Santow J. The text of the scheme (annexed to the scheme booklet) provides prima facie evidence that the proposed scheme is such an "arrangement". Sino Gas committed itself to propounding the scheme by the scheme implementation agreement, and the directors have unanimously recommended the scheme on the basis set out above. I accepted that these matters also provide prima facie evidence that the scheme is bona fide and has been properly proposed.

Scheme booklet will provide proper disclosure to members 27 A draft scheme booklet was provided to ASIC on 12 July 2018 and amended drafts were provided on 19, 24 and 26 July 2018 following correspondence between ASIC and Allens. 28 On 26 July 2018, the directors resolved to approve the scheme booklet in its then current form, subject to any non-material amendments which may be required or amendments required for alignment with the final form of the operations update announcement approved by Sino Gas's board of directors. The scheme booklet was also approved for submission to the Court, for registration by ASIC and for dispatch to shareholders. 29 The minutes of the 26 July 2018 record Mr Blane's explanation to the board of the verification process in relation to the scheme booklet, which provides evidence that reasonable steps have been taken to confirm that the statements in the scheme booklet are accurate, not misleading or deceptive and that no material information has been omitted in respect of those statements. 30 On the basis of the evidence and submissions set out above, I was satisfied that there is prima facie evidence that the scheme booklet will provide proper disclosure to members.

Other procedural requirements have been met 31 Division 3 of the Federal Court (Corporations) Rules 2000 (Cth) ("Corporations Rules") applies relevantly to an application for approval of an arrangement between a Pt 5.1 body and its members (r 3.1). 32 The affidavits of Mr Bainbridge and Mr Ridgeway met the requirements in r 3.2 of the Corporations Rules (concerning nomination of the chairperson for the scheme meeting). 33 The proposed orders were in a form that met the requirements of r 3.3 and provided for publication of a notice that is appropriate and justified the order dispensing with compliance with r 3.4.

Proposed electronic notification of shareholders 34 Sino Gas proposed to email those shareholders who have elected to receive notices by email with links to the scheme booklet. 35 Sections 249J(3)(c) and (ca) of the Act contemplate sending notices of meetings to members. Rule 3.3(2) of the Corporations Rules requires, in the absence of Court orders to the contrary, that a meeting of members ordered under s 411 must be convened, held and conducted in accordance with the provisions of Pt 2G.2 of the Act (in which s 249J appears) and Sino Gas's constitution (to the extent that it is not inconsistent with Pt 2G.2). 36 Article 11.1(a)(iii) of Sino Gas's constitution provides for the giving of notice to a member by communication to the electronic address (if any) nominated by the member. 37 Electronic mail-out orders are now commonly made in relation to scheme meetings: see, for example, Re David Jones Limited [2014] FCA 530 at [34]-[37]; Re Staging Connections at [49]-[52]; Re Signature Gold Limited [2017] FCA 1481 at [55]; and Re Intecq Limited [2016] NSWSC 1429 at [21].

No reason apparent why the scheme should not receive the Court's approval if the necessary number of votes are achieved 38 I was satisfied that there was no order sought which goes beyond current accepted practice. 39 I was also satisfied that the proposed scheme is of such a nature and is cast in such terms that, if it were to receive the requisite statutory majority, the Court would be likely to approve the scheme on the hearing of an unopposed application. 40 Mr Jackman SC drew the following four matters to the Court's attention which, I accepted, are not of concern to the Court.

1. Performance risk 41 In some cases, there is an issue about whether the bidder will comply with its primary obligation to pay the scheme consideration to scheme members. 42 The issue does not arise in the present case. 43 The scheme requires that the scheme consideration be paid by LS BidCo into a trust account, with payment to be effected no later than two business days before the implementation date. Sino Gas will then make or procure the payment of the relevant funds in the trust account to scheme participants. The transfers of the target shares will not occur until the funds have been received by Sino Gas (as trustee for scheme participants). Accordingly, the scheme participants will not be relegated to suing on the Deed Poll to be executed by LS Bidco.

2. Exclusivity provisions 44 Clauses 9.2, 9.3 and 9.4 of the scheme implementation agreement, respectively, "no-shop", "no-talk" and "no due diligence" restrictions on Sino Gas, while cl 9.7 obliges Sino Gas to notify LS BidCo of third party "competing proposals" (as defined in the scheme implementation agreement) and cl 9.8 confers on LS BidCo a matching right in respect of any such competing proposal. Clauses 9.5 and 9.8 of the scheme implementation agreement contain a carve-out to the "no talk" and "due diligence information" restrictions, and a matching right, for action that would likely be inconsistent with the fiduciary and statutory duties owed by Sino Gas's directors under applicable law. 45 Exclusivity provisions in the form just summarised are now commonplace in s 411 schemes. The restrictions are consistent with the terms of the Takeovers Panel's Guidance Note: 7 Lock-up Devices. Neither the Guidance Note (see [7.37]) nor prior authority requires a fiduciary carve-out with respect to "no-shop" provisions: see, for example, Re Macquarie Private Capital A Limited [2008] NSWSC 323; (2008) 26 ACLC 366 ("Re Macquarie Private") at [18]-[19]; Re Coles Group Limited [2007] VSC 389; (2007) 25 ACLC 1380 ("Re Coles") at [62]-[63]; Re Hostworks Group Limited [2008] FCA 64; (2008) 26 ACLC 137 ("Re Hostworks") at [34]-[37]. 46 Further the Court is concerned to ensure that such exclusivity restrictions are in effect for no more than a reasonable period capable of precise ascertainment, and that they be clearly disclosed in the explanatory statement sent to shareholders: see Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 at [9] per Santow J. Both those concerns are satisfied here as: (1) the "Exclusivity Period" is clearly defined in cl 1.1 of the scheme implementation agreement and at most lasts for five months from the date of the scheme implementation agreement (unless a later date is agreed by the parties); and (2) the exclusivity provisions are given considerable prominence in the scheme booklet -in particular, they are described in section 8.1(b) of the booklet.

3. Break fee 47 Clause 10.2 of the scheme implementation agreement provides for the payment by Sino Gas of a break fee in certain circumstances. If payable, the break fee is $4,500,000.00, which represents approximately 0.85% of the equity value of Sino Gas. The fee is disclosed in the scheme booklet at section 8.1(c). 48 Break fees are common features in schemes of arrangement and have not been an obstacle to the making of orders under s 411(1) of the Act: see Re APN News & Media Limited [2007] FCA 770; (2007) 62 ACSR 400 ("Re APN") at [43]-[55]. A break fee will be permitted unless "the amount of the break fee was such that it could influence voting at the meeting to be convened or if there are some other unusual circumstances": Re SFE Corporation Pty Limited [2006] FCA 670; (2006) 59 ACSR 82 at [6]-[7]. 49 In this case, the break fee is not payable if the meeting of scheme participants does not approve the scheme: cf. Re Bolnisi Gold NL (No 2) [2007] FCA 2078; (2007) 165 FCR 45 at [2]. The existence of the fee can therefore have no influence on voting at the meeting. As Lander J noted in Re Adelaide Bank Limited [2007] FCA 1582 ("Re Adelaide Bank") at [31]: [T]he break fee is not payable in circumstances where the members vote not to implement the scheme. In those circumstances, the break fee is not a disincentive to the shareholders in their consideration of the proposed merger. 50 The quantum of the fee is consistent with the Takeovers Panel's guideline of 1% of equity value: Guidance Note 7: Lock-up Devices at [7.18]. The 1% yardstick is commonly adopted: see, for example, Re Triausmin Limited [2014] FCA 611 at [27] and Re David Jones Ltd [2014] FCA 530 at [22].

4. Deemed warranty 51 Clause 3.3 of the scheme contains a 'deemed warranty', by which scheme participants are deemed to have warranted to Sino Gas and LS BidCo, that the target shares are transferred fully paid and free from all mortgages, charges, liens, encumbrances and third party interests. 52 Clauses in these terms are permissible and now common-place: see, for example Re APN at [62]; Re Hostworks at [41]; Re Coles at [45]; Re Adelaide Bank at [33]; Re Orion Telecommunications Limited [2007] FCA 1389 at [9]; Re Macquarie Private at [14]; and Re Mitchell Communication Group [2010] VSC 423 at [10]-[12]. 53 Consistently with the observations of Lindgren J in Re APN News & Media Ltd at [63], the existence of the deemed warranties are disclosed in section 3.3 of the scheme booklet.

CONCLUSION 54 Accordingly, I made the orders sought by Sino Gold. I certify that the preceding fifty-four (54) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.