Sovereign Life Assurance Co v Dodd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 601 of 2014

IN THE MATTER OF ATLANTIC GOLD NL ACN 062 091 909 BETWEEN: ATLANTIC GOLD NL ACN 062 091 909

JUDGE: JACOBSON J DATE: 26 JUNE 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This is the first court hearing of an application to approve a scheme of arrangement between the plaintiff (Atlantic) and its shareholders pursuant to s 411 of the Corporations Act 2001 (Cth) (the Act). Orders are sought today to convene a meeting of the shareholders of Atlantic to consider the scheme. 2 The scheme which is proposed is commonly described as a merger scheme. In substance, Atlantic holds interests in gold exploration projects in Nova Scotia, Canada. Those interests are held through Atlantic's subsidiary DDV Gold Limited, a company incorporated in Canada. 3 The venture requires capital for development, and the effect of the scheme is to provide development capital which will be provided by the acquirer, Spur Ventures Inc (Spur). Spur is a Canadian company listed on the TSX Ventures Exchange. It may be described as a cash box company, its only asset being approximately $28.7 million in cash. Atlantic has fully paid and partly paid shares on issue. The scheme proposal provides that Spur will acquire all of the fully paid and partly paid shares. The scheme consideration for the acquisition is (other than for shareholders described as excluded shareholders and ineligible foreign shareholders) as follows: 1. For each fully paid Atlantic share, 0.5564 new Spur common shares and 0.2782 of a new Spur share purchase warrant; and 2. For each partly paid Atlantic share, 10 per cent of the consideration otherwise payable to the holder of Atlantic fully paid shares for each Atlantic fully paid share held. 4 Thus Atlantic shareholders will, if the scheme is implemented, cease to hold shares in Atlantic and will instead hold shares and share purchase warrants in Spur. Atlantic will become a wholly owned subsidiary of Spur and will cease to be listed on the ASX. 5 The effect of the scheme, if implemented, will be that Atlantic shareholders will hold approximately a 43.4% interest in Spur. That is to say their shareholding will be diluted through what is in effect a capital raising but the issue of the warrants, if they are ultimately exercised, would give the Atlantic shareholders a 51.2% interest on a fully diluted basis. 6 The present corporate structure of the Atlantic group and the structure which would ensue following the implementation of the proposed scheme is well explained in the independent expert report of DMR Corporate Pty Ltd which commences on page 126 of the draft scheme booklet. 7 The scheme and its rationale are explained in the sections appearing under subheadings 1 and 2 commencing on page 126 of the scheme booklet. If the scheme is approved Spur intends to list on the ASX so that shareholders may elect to hold shares and share purchase warrants which can be traded on the TSX Venture exchange in Canada or hold CDIs which can be traded on the ASX. 8 The default form of scheme consideration is CDIs. It would be necessary for scheme shareholders to take the active step of electing to receive the shares and warrants if they wish to hold that form of security which could then be traded in Canada. There are a number of options on issue in Atlantic. They will be contractually cancelled in exchange for options having the same expiry date to acquire unissued Spur common shares. 9 Against the possibility that the scheme is not approved, the directors of Atlantic have proposed an alternative transaction which is fully explained in the scheme booklet. 10 The alternative transaction is referred to as the DDV Gold Alternative Transaction. The substance of it is that Atlantic would sell all of the shares in its wholly-owned subsidiary, DDV Gold, to Spur and receive in exchange Spur shares and warrants. Those securities could then be distributed to Atlantic shareholders by an equal access buyback. That arrangement is subject to the approval of the Atlantic shareholders for the purposes of the ASX listing rules, which will be sought at an extraordinary general meeting of Atlantic to be held immediately following the scheme meeting. 11 Importantly, the alternative proposal would require only a 50.1% majority vote rather than the higher statutory requirements contained in s 411 of the Act for the approval of a scheme of arrangement. The Atlantic directors have unanimously recommended that Atlantic shareholders vote in favour of the scheme at the scheme meeting. They also unanimously recommend approval of the DDV Gold Alternative Transaction at the extraordinary general meeting in the absence of a superior proposal. 12 I should add that in the event that the alternative transaction were to proceed, the effect of it would be almost identical to the proposal which is the subject of the scheme because Atlantic shareholders would obtain, pursuant to the buyback arrangement, shares and warrants which would provide them with approximately 43% of the issued capital of Spur. Thus the dilution of their shareholding would be equivalent to that which would occur under the scheme but it also would contain a provision which would enable the former Atlantic shareholders to increase their effective interest in Spur to 51.2% upon the exercise of the warrants. 13 The independent expert report to which I have been taken this morning expresses the opinion that the proposed scheme is in the best interests of Atlantic shareholders. The independent experts have valued the Atlantic shareholder interests in a range which is equivalent to $0.0356 to $0.0362 per share. The independent experts value the scheme consideration in a range of $0.034 to $0.037 cents per share. 14 The independent experts observe in their summary opinion that as the underlying value of holders of fully paid ordinary shares interests after the implementation of the scheme is equal to or greater than the value of their interests before the scheme is implemented, they consider that the scheme is fair. 15 The principles which govern the exercise of the jurisdiction to convene a scheme meeting are well-established and I do not need to refer to or discuss those principles this morning. My attention has been drawn to a number of aspects of the transaction which are fully addressed in the written submissions prepared by senior counsel for Atlantic, Mr Oakes SC. The issues which are developed in the written submissions have also been debated with counsel this morning.

One class for voting purposes 16 One issue which arises is whether the holders of fully paid shares and partly paid shares constitute separate classes. The partly paid shareholders have voting rights pro rata to the amount paid up on their share, that is to say, they have nine-twentieths of a vote per partly paid share. The partly paid shareholders, as I have said, will receive, if the scheme is approved, 10% of the scheme consideration payable to the holders of the fully paid shares. This arises in circumstances in which the independent expert places a nil value on the partly paid shares. Mr Oakes submits that this is not a class creating event and Mr Williams of counsel who appears for Spur supports that approach. 17 The question of whether there are separate classes of shareholders has been considered in a large number of cases commencing with the seminal authority of Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. That is a passage in the judgment of Bowen LJ which has been cited on very many occasions. The essential test is that persons whose rights are so dissimilar that they cannot sensibly consult together with a view to their common interest must be given separate meetings. However, persons whose rights are sufficiently similar, if they can consult together with a view to their common interest, should be summoned to a single meeting. 18 In Re Opes Prime Stockbroking Limited (2009) 73 ACSR 385 at [63]ff Finkelstein J reviewed and synthesised the leading authorities. It is unnecessary to repeat what his Honour said, save to say that the test is based on similarity or dissimilarity of legal rights against the company, not on similarity or dissimilarity of interest not derived from those legal rights. The distinction emphasises the importance of approaching the matter by reference to the nature of the rights in question rather than to commercial considerations independent of those rights. It is also to be borne in mind that the more recent authorities have expressed a disinclination to break up shareholders into separate classes, thereby giving a power of veto of the scheme. 19 As Finkelstein J observed at [66], practical considerations are relevant and the fact that schemes of arrangement are propounded in a business context is an important test. As his Honour said, the judge should adopt a practical businesslike approach to the issue in deciding that matter. 20 It seems to me in the present case that the better view here is that the legal rights of the parties are not so dissimilar that they cannot sensibly consult together. It is true that the holders of the partly paid shares would appear to obtain a windfall if the scheme is approved. But each of the groups of shareholders should be able to consult together on the essential matters raised for consideration at the scheme meeting. 21 The holders of the partly paid shares have legal rights which are contingent upon the payment of a call if met. However, Atlantic is a no liability company so that the shareholders would not have an obligation to pay the call. It would be open to them not to pay it and to thereby relinquish their shareholding but without any monetary obligation to meet the call on their shares. 22 What seems to me to be critical in the present case is that the consequence of the holders of the partly paid shares determining to vote in favour of the scheme is minimal. They hold a very small fraction of the number of issued shares. The total consideration which would pass to them is I think correctly described in the written submissions as de minimis. The amount is between approximately $103,000 and $112,000 and this is to be compared with the aggregate valuation range of the Atlantic shareholder interests of between $29.5 million and $30 million. 23 The observation of Barrett J in Re Hills Motorway Limited (2002) 43 ACSR 101 at [12], that the focus is not on the fact of differentiation but upon its effects, is an important consideration. As his Honour said, the extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest. It is only if the differentiation destroys that ability that the class distinction comes to prevail. 24 Nevertheless, for more abundant precaution, I suggested that the appropriate course is for the votes of holders of the partly paid shares to be tagged at the meeting. Mr Oakes and Mr Williams accepted that that was an appropriate course to be followed.

Reimbursement fee 25 Under clause 13.2 of the merger implementation deed Atlantic would be required to pay Spur a reimbursement fee in certain prescribed circumstances. The amount of the reimbursement fee is fixed at $750,000 (exclusive of GST). Based on the independent expert's valuation of Atlantic, the reimbursement fee as a percentage of equity is between 2.5% and 2.54%. It is therefore well in excess of the one per cent figure which has been traditionally applied in the analogous circumstances of considering whether a break fee is an acceptable figure. 26 The evidence before me in the present application satisfies me that the reimbursement fee was negotiated by Spur and Atlantic at arms' length and that Spur's transaction costs associated with the proposed transaction exceed $900,000. Indeed, there will be further transaction costs amounting to approximately $600,000. It therefore seems to me that the amount of the reimbursement fee is indeed less than a genuine estimate of the costs and expenses that would be wasted by Spur if the transaction does not proceed. 27 The evidence indicates that Spur made it clear that it would not proceed with the transaction in the absence of the reimbursement fee. It seems to me to follow that, although the reimbursement fee is substantially in excess of the usual one per cent figure, the amount of the fee is one which falls within the considerations that have been adopted in other cases where a fee in this range has been considered to be a matter which does not preclude the Court from exercising the jurisdiction to approve the scheme. 28 A recent example is the matter of Re David Jones Limited [2014] FCA 530 at [22]-[28]. There is also a very useful statement of the approach adopted in cases such as the present in Re Facilitate Digital Holdings Limited [2013] QSC 301. In that case, Philip McMurdo J made the following observations at p 4: But mention should be made of the break fee agreed in this case which is an amount of $300,000. This well exceeds the threshold of 1 per cent of the total consideration under the proposed scheme or, in the present case amounting to the same thing, the assessed value of the company's equity. In effect, the break fee represents about 3.9 per cent of that consideration or value. The concern then is that a fee of that size might unduly influence the members' consideration of the merits of the scheme. But I am persuaded that the size of the fee in the context of this company should not have that effect and that the fee can be seen to be not unreasonable, having regard to the following circumstances. The first is that the size of this transaction is relatively small. Any transaction of this kind is likely to involve substantial expense to the company in the position of Adslot here regardless of the relative size of the consideration. There is evidence from Mr Dixon, an executive director and acting CEO of the applicant, to the effect that he believes that the fee is reasonable when assessed against what he understands to be the expense to Adslot. Further, he says that Adslot has resisted a lower fee. Therefore, I am prepared to allow the scheme to go forward, notwithstanding the size of that fee.

Naked no vote break fee 29 The scheme documentation provides for the payment of a break fee of $250,000. The fee is payable if the scheme is not approved by Atlantic's shareholders at the scheme meeting. This is explained in section 7.22 of the scheme booklet. The break fee is a separate fee from the reimbursement fee and would only be payable in circumstances in which the reimbursement fee is not applicable. The break fees payable in circumstances such as this are colloquially known as "naked no vote" break fees. They are explained by Lindgren J in Re Bolnisi Gold NL (No 2) (2007) 165 FCR 45, in particular at [2] and [10]. His Honour's approach has been referred to in other authorities and is fully explained by Barker J in Re Rusina Mining NL [2010] FCA 517 at [50]-[53]. 30 The principle which is to be applied is that the fee should not be so high as to influence materially the decision of the shareholders. As Lindgren J observed in Re Bolnisi at [12], it should not have an impermissible coercive effect on the company's shareholders. It seems to me that in the present case, where the fee is less than the traditional one per cent guideline, and is in any event not a very large figure, the approach in the present case is one which is within the principles stated in the authorities to which I have referred, and other authorities referred to in the submissions.

Malaysian shareholders 31 There are five fully paid shareholders who have registered addresses in Malaysia. They hold approximately 20.4% of the issued fully paid shares in Atlantic. Advice from Malaysian lawyers indicates that, due to Malaysian security law issues, the scheme booklet cannot be posted into Malaysia. This is fully explained in the written submissions commencing at paragraph 34. The solution which is proposed to be adopted is that, instead of sending a copy of the scheme booklet to shareholders in Malaysia, they will be sent a letter informing them of the scheme and informing them that the documents can be viewed on the relevant website. 32 The approach which has been adopted is one that was considered and accepted by Black J in Re DUET Management Company 1 Limited [2013] NSWSC 817 and Re DUET Management Company 1 Limited (No 2) [2013] NSWSC 1060: see particularly [2013] NSWSC 817 at [15]ff. 33 It is proposed that at the final court hearing that Atlantic will seek an order under s 1322(4) of the Act to validate its advertent failure to comply with the obligation in s 412(1) of the Act to send the scheme booklet to all Atlantic shareholders. Such an order was sought and obtained in Re DUET Management Company 1 Limited (No 2).

Execution of the deed poll 34 Spur is not a company within the meaning of the Corporations Act because it is a Canadian corporation. The approach which has been adopted in order to satisfy the necessary performance risk considerations is one which was followed by Farrell J in Re Simavita Holdings Limited [2013] FCA 1274 at [44]. There is evidence before me that the deed poll has been executed by Spur under, and in accordance with Canadian law, the applicable law being the law of British Columbia, where Spur is incorporated. The deed poll provides that it is to be governed by the laws of New South Wales and that Spur submits to the non-inclusive jurisdiction of the courts of New South Wales.

US Securities Act of 1933 section 3(a)(10) 35 Spur will seek to rely on the exemption to the US securities registration and prospectus requirements provided by s 3(a)(10) of the US Securities Act 1933. I propose to follow the approach adopted by Jagot J in Re Amcor Limited [2013] FCA 1183 at [8]. In that case her Honour noted that she had been informed that if a second court hearing approval is granted to the scheme, the scheme, company and the acquirer intend to rely upon the approval under the above mentioned provision in accordance with the implementation of the scheme and the issue of the relevant shares in accordance with the scheme. In the present matter, I will make the appropriate note in the orders. 36 I am satisfied that all of the other requirements to be satisfied at the first court hearing have been properly addressed. All of the matters are dealt with in the written submissions which I will mark as "MFI3". 37 For the reasons set out above, I will make orders in terms of the short minutes of order submitted by counsel and which I will sign and date. The notation in respect of the US Securities Act is set out at paragraph 8 of the orders. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.