Sovereign Life Assurance Company v Dod

Affidavit read by Objectors 4 The objections are supported by an affidavit by Mr Van Blitterswyk sworn 22 May 2013 (the Van Blitterswyk affidavit). 5 The Scheme would effect a merger by the acquisition of all of the fully paid ordinary shares in Kumarina by Zeta Resources Limited (Zeta). If implemented, Kumarina's Shareholders would receive one Zeta share for every four shares in Kumarina plus one Zeta option for every five Zeta shares issued. If the Scheme were implemented Kumarina would become a wholly owned subsidiary of Zeta and would be delisted from the ASX. Zeta will apply for quotation of the Zeta shares and Zeta options on the ASX. 6 I am satisfied on the evidence that: (a) The Meeting Orders were lodged with ASIC. (b) The Scheme Booklet was registered with ASIC. (c) The Scheme Booklet was dispatched to members in accordance with order 3 of the Meeting Orders. (d) The Scheme Meeting was convened and held in accordance with orders 1 and 4 to 8 of the Meeting Orders. 7 Subject to the resolution of the objections, I am also satisfied that the statutory majorities were obtained at the Scheme Meeting. Notice of the second court hearing was given in accordance with order 2(c) and 10 of the Meeting Orders. 8 The Scheme Meeting was held on 16 May 2013 in Applecross, Western Australia. 9 Section 411(4)(a)(ii) of the Corporations Act requires that, at the Scheme Meeting, a resolution in favour of the Scheme is: (a) unless the Court orders otherwise - passed by a majority in number of the members, or members in that class, present and voting (either in person or by proxy); and (b) if the body has a share capital - passed by 75% of the votes cast on the resolution. 10 A poll was taken at the Scheme Meeting. Ms Rachel Crane was the relevant officer of Security Transfer Registrars Pty Ltd which conducted the poll. She was the client manager appointed to Kumarina's account and was the returning officer for the poll. 11 In terms of s 411(4)(a)(ii)(B) of the Corporations Act, the resolution in favour of the Scheme was passed by 79.07% of the votes cast on the resolution. 12 The total number of votes cast on the resolution was 60,847,079 (85.58% of the total number of voting shares). 13 The total number of votes cast in favour of the resolution was 48,111,385 (79.07% of votes cast). 14 The total number of votes cast against the resolution was 12,735,694 (20.93% of votes cast). 15 Clause 3.1 of the Scheme Implementation Agreement and cl 3.1 of the Scheme set out various conditions precedent to the Scheme becoming effective. 16 The Scheme is conditional on: (a) all the conditions in cl 3.1 of the Scheme Implementation Agreement, other than the condition relating to approval by the Court, having been satisfied or waived by 8.00 am on the second court date; (b) approval of the Scheme by the Court pursuant to s 411(4)(b) of the Corporations Act; and (c) the Scheme Implementation Agreement not having been terminated by either party to that agreement before 8.00 am on the second court date. 17 Clause 3.1 of the Scheme Implementation Agreement contains the following conditions precedent: (a) the Court approves the Scheme in accordance with s 411(4)(b) of the Corporations Act; (b) Shareholders approve the Scheme at the Scheme Meeting by the requisite majorities as may be modified by the Court in accordance with s 411(4)(a)(ii)(A) of the Corporations Act; (c) approval for listing of Zeta shares and Zeta options on the ASX is obtained subject only to the Scheme taking effect and such other conditions as are acceptable to Zeta and the plaintiff; (d) all approvals of any Authority which the plaintiff and Zeta agree are necessary or desirable to implement the Proposal for the Scheme are obtained and no authority takes any action, or imposes any legal restraint or prohibition, to prevent implementation of the Proposal; (e) completion has occurred under the Share Purchase Agreement and Zeta has unencumbered legal and beneficial ownership of the Utilico Minority Interests to the satisfaction of Zeta, no later than two business days prior to the second court date; (f) BDO, as independent expert, does not change its conclusion to not fair and not reasonable to Shareholders or withdraw the independent expert's report prior to the Scheme Meeting; and (g) any additional conditions that may be imposed by the Court are satisfied and considered to be acceptable by each of the parties. 18 The affidavit of Peter Sullivan sworn 22 May 2013 establishes the satisfaction or waiver of all conditions precedent. 19 The letter from ASIC dated 22 May 2013, confirms that it has no objection to the Scheme, and does not propose to appear at the second court hearing. 20 ASIC's Regulatory Guide 60: Schemes of arrangement at RG 60.104 indicates that ASIC issues a "no objection letter" if it is satisfied that: (a) all material information has been disclosed; (b) the standard of disclosure meets the requirements of the relevant Corporations Regulations; (c) the standard of disclosure is equivalent to the standard that would be required by the disclosure obligations and principles in s 602 of the Corporations Act relating to takeover bids; and (d) there are no other reasons to oppose the scheme, such as public policy grounds. 21 At the approval stage, the Court considers matters that do not precisely correlate to those considered at the first meeting approval stage. 22 At the approval stage, the Court must be satisfied that: (a) the meetings convened by the company were convened and held in accordance with the Meeting Orders; (b) with every notice of such meeting the explanatory memorandum and Scheme Booklet was sent; (c) the resolutions were passed at a meeting by the majority required by s 411(4)(a)(ii) of the Corporations Act; (d) Kumarina has otherwise complied with the Meeting Orders; and (e) ASIC has had a reasonable opportunity to examine the explanatory statement and to make submissions to the Court in relation thereto as required by s 412(7) of the Corporations Act. 23 The opportunity to be accorded to ASIC under s 412(7) of the Corporations Act, to examine the explanatory statement, is in addition to that provided for, prior to the first meeting approval stage, by s 411(2). 24 The Court retains, in exercising its power of approval, a residual discretion to withhold approval if not satisfied that the Scheme is "at least so far fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such member, might approve it" or as is often put - that the scheme is "not oppressive and that the scheme is one capable of being accepted by the shareholders": see Re Challenge Bank Ltd (1995) 19 ACSR 421 at 422. Recognition of this residual discretion is of long standing upon established authority and it is unnecessary to set those out here. It is nevertheless clear that the Court must form a favourable view as to the reasonableness of the arrangement. Subject to the resolution of the objections, I am satisfied that the arrangement is a reasonable one. I am satisfied that the formal requirements of Pt 5.1 have been satisfied. The Scheme has been overwhelmingly approved by members. ASIC has been kept fully and thoroughly informed at all stages of the process. The evidence discloses that the shareholders will receive substantial benefits from the Scheme. The independent expert has concluded that the Scheme is in the best interests of Shareholders and is fair and reasonable.

The objections 25 The Objectors each hold fully paid ordinary shares in the capital of Kumarina and oppose orders approving the Scheme. They submit that when properly considered, the requirement that 75% of votes cast be in favour of the Scheme has not been satisfied. 26 The Objectors contend that the Court at this hearing ought to disregard the fact that Utilico, ICM and Peter Sullivan voted their Kumarina shares at the Scheme Meeting; and that if this is disregarded, the 75% requirement of s 411(4)(a)(ii)(B) of the Corporations Act will not have been not satisfied. 27 There is no dispute that if these shares were not voted that the 75% requirement would not have been met. The issue is whether the Court could or should disregard the shares voted by Utilico, ICM and Peter Sullivan. 28 The Objectors additionally contend that the Court ought, in the exercise of its discretion under s 411(4), refuse to approve the Scheme, even if the Scheme has been approved by shareholders in terms of s 411(4)(a)(ii)(A) and (B). The foundation for this contention is obscure. 29 A summary of the Scheme is set out at pp 7 to 13 of the Scheme Booklet. The following is taken from that summary. The matters upon which they rely are that, as disclosed in the Scheme booklet at the pages indicated: (a) Prior to implementation of the Scheme, Zeta will conduct a capital raising to raise up to A$25 million, by issuing up to 25,000,000 Zeta shares at an issue price of A$1.00 for each Zeta share. In addition, subscribers under the Capital Raising will receive one free attaching Zeta option for every five Zeta shares issued to them. There is no minimum subscription for the Capital Raising. (b) Kumarina has agreed to use all reasonable endeavours to procure that by no later than five business days before the second court date, the holder of the Kumarina options enters into a binding agreement with Kumarina and Zeta, conditional on the Scheme becoming effective, under which the holder agrees to the cancellation of those Kumarina options in consideration for the grant by Zeta of one Zeta consideration option for every four Kumarina options cancelled. If the Scheme is implemented then, to the extent it is permitted to do so, Zeta intends to use the general compulsory acquisition provisions of the Corporations Act to acquire any Kumarina options not cancelled under these arrangements. (c) Zeta is currently a wholly owned subsidiary of Utilico: pp 3, 7, 8, 97. (d) Utilico and Zeta have agreed, separately from the Scheme, that Utilico will vend into Zeta what are described as the 'Utilico Minority Interests' (the Sale Agreement). These are described at pp 34 and 171 of the Scheme Booklet. As consideration for the vending in of these assets, Zeta will, separately from the Scheme, issue Zeta shares to Utilico. The number of shares to be issued is determined by a formula set out at pp 34-35 of the Scheme Booklet. As explained by the independent expert, the formulae sets a market value of the assets calculated on a 30 day volume weighted average price of the assets as at the date of completion of the sale and then provides that Utilico will receive one Zeta share and one fifth of a listed Zeta option for every dollar of this set market value. Completion of the sale by Utilico to Zeta of the Utilico Minority Interests is a condition precedent to the Scheme. (e) As at the date of the Scheme Booklet, Utilico owned 7,199,366 Kumarina shares, which represents 10.13% of Kumarina's issued capital : pp 8, 17, 96, 97. It acquired 1,245,694 of these shares within the 4 months prior to the Scheme Booklet being issued: p 97. (f) As at the date of the Scheme Booklet, ICM owned 7,000,000 Kumarina shares, which represents 9.84% of Kumarina's issued capital: pp 8, 96, 97. It is envisaged that ICM under the Investment Management Agreement will be actively involved in the management of Zeta for at least 5 years, following implementation of the Scheme whereby ICM is appointed investment manager of Utilico: p 52. ICM also owns approximately 3.84% of Utilico's issued capital: p 8. (g) Utilico and ICM consider themselves to be "associates", within the meaning of the s 12 of the Corporations Act: p 8. (h) Given the relationship between Utilico and Zeta, votes cast by Utilico were "tagged" at the Scheme Meeting and the results produced to the Court at the second court date: pp 5, 83. (i) At the Scheme Meeting Utilico voted the whole of its 7,199,366 shares in Kumarina (10.13%) in favour of the Scheme as did ICM in respect of its 7,000,000 shares in Kumarina (9.84%). (j) Pursuant to an on-market purchase on 6 May 2013, Peter Sullivan acquired 9,056,265 Kumarina shares and as a result of that on-market purchase, on 9 May 2013, he owned 13,226,265 Kumarina shares, which represents 18.60% of Kumarina's issued capital. (k) Peter Sullivan who is presently the chairman and non executive director of Kumarina on an annual salary of $48,000 will become a director and non-executive chairman of Zeta on an annual salary of $50,000. He will then cease to be paid any remuneration by the plaintiff, irrespective of whether he continues to act as non-executive chairman of the plaintiff: pp 3, 9, 14, 33, 43, 44, 99-100. (l) Kumarina's non-Utilico shareholders' effective "interest in" the Ilgarari and Murrin Murrin Projects will reduce from 89.87% to a minority interest of about 19.71% - 28.50% (depending on the Capital Raising): pp 17, 46. (m) Utilico's effective "interest in" the Ilgarari and Murrin Murrin Projects will increase significantly from 10.13% to about 49.45% - 71.5% (depending on the Capital Raising): pp 4, 17, 46. 30 The Sale Agreement has been performed and Utilico has had issued to it the shares in Zeta as provided for in the Sale Agreement by which Zeta purchased the Utilico Minority Interests. Of course, if the Scheme is approved, Utilico and ICM will receive further shares and options in Zeta, in accordance with the Scheme; that is 1 Zeta share for every 4 Kumarina shares and 1 Zeta option in respect of every 5 Zeta shares. 31 Peter Sullivan's acquisition, which increased his shareholding in Kumarina from 4,170,000 shares to 13,226,265 shares, was made between dispatch of the Scheme Booklet and the Scheme meeting. This was disclosed publicly and drawn to the attention of Shareholders at the Scheme Meeting. He voted in favour of the Scheme at the Scheme Meeting. Peter Sullivan is also managing director of Resolute Mining Ltd and a director of GME Resources Ltd (GME). He also holds 6.27% of GME's issued share capital. He, I accept, is also, by virtue of ss 12(2)(c) and 15(1)(c) of the Corporations Act, an associate of Zeta.

Utilico and ICM 32 The Objectors submit that in these circumstances each of Utilico and ICM should be treated as being in a separate class to those members of Kumarina not associated with Zeta, and whether or not each is treated as being in a separate class, the Kumarina shares voted by each should not be counted when considering whether the Scheme has been approved by 75% of the votes cast. 33 Further, the Objectors submit that because ICM holds 29% of GME's issued share capital the matters set out at [19] of the Van Blitterswyk affidavit would provide a further reason why the Kumarina shares voted by it should not be counted when considering whether the Scheme has been approved by 75% of the votes cast. 34 Paragraph [19] of the Van Blitterswyk affidavit is in the following terms: On 11 May 2013 Peter Sullivan advised that it was his intention for funds from Zeta to be directed towards GME and future Heap Leach Trials. He also advised, that nothing or next to nothing would be raised by the ZETA IPO. With no funds coming from the IPO for Zeta, the only cash funds Zeta have will be Kumarina's current cash of approximately A$6 million. In the circumstances Kumarina's existing funds are intended for use by GME. This gives a significant advantage to the Kumarina/GME Directors. In the first place they do not have to keep funding GME as they will be able to utilise Kumarina's cash and further as significant shareholders of GME they will stand to benefit directly from any advantage bought to GME by the use of Kumarina's funds.

Peter Sullivan 35 The Objectors submit that in these circumstances and given the matters described in [19] of the Van Blitterswyk affidavit, Peter Sullivan should be treated as being in a separate class to those members of Kumarina not associated with Zeta, and whether or not he is treated as being in a separate class, the Kumarina shares voted by him should not be counted when considering whether the Scheme has been approved by 75% of the votes cast. 36 Accordingly, the Objectors submit first that at the meeting of Shareholders there should have been 2 or more classes of shareholder and approval in terms of s 411(4)(a)(ii)(B) in all classes: Utilico, ICM and Peter Sullivan each should have been in a different class from the other Shareholders. Their second submission is that the Court, exercising its residual discretion, should not count these three sets of shares in considering approval of the Scheme.

Consideration 37 The Scheme Meeting was convened on the basis that all Shareholders were members of a single class for the purposes of s 411(1) and (4). 38 Section 411 does not define "class". In Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583, Bowen LJ observed that the term ought to be given such a meaning: … as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest. 39 The Objectors' submission is that members who are affected differently by a scheme form separate classes. They contend that in a scheme that produces a take-over, members related to or associated with the bidder have interests that are different to other members and, therefore, either must form a separate meeting class or the votes of those members should not be counted when considering if the scheme has been approved by a majority of 75% of the votes cast. 40 They point to Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 for the proposition that, even though a proposed scheme according to its terms may operate the same with respect to all scheme shareholders, if some of them will, in reality, be affected differently then they should form a different class. As is evident from Re Opes Prime at [64], it is differences in rights and not interests which are relevant to determining if separate classes exist and the extent of that difference will determine if separate classes are required. Separate classes were called for in that case because, although the proposed scheme treated all creditors in the same manner, the scheme affected the existing rights of different types of creditor differently. One type stood to recover 100% of their claims, the other type would recover significantly less than 100% of their claims, but both types were to receive the same rights under the proposed scheme, 37% of their claims: Re Opes Prime at [67]-[69]. 41 As Finkelstein J said in Re Opes Prime at [66]: Third, practical considerations are relevant. If a judge is too assiduous in identifying classes, it is possible to end up with any number of classes. In the end, schemes of arrangement are propounded in a business context. The judge should adopt a practical business-like approach to the issue, as would the creditors if they were to decide the matter. 42 This admonition extends to the present context, in my opinion, although it does not concern classes of creditors. 43 The Objectors contend that the following cases demonstrate that the practice of scheme shareholders related to or associated with the offeror voting separately to other scheme shareholders remains common. However, the cases of Re Archaean Gold NL (1997) 23 ACSR 143; Aston Resources Limited [2012] FCA 229; Re oOh!Media Group Limited, in the matter of oOh!Media Group Limited [2012] FCA 26 and Re Talison Lithium Ltd, in the matter of Talison Lithium Ltd [2013] FCA 194 each turn on their own facts. The principle applicable was described by Jacobson J in Aston Resources in this way at [33]: The essential question is how the scheme affects the legal rights of all members. It does not involve an inquiry into the commercial motivations of members for voting in favour of or against the scheme. The test, that has been stated, of whether the interests of persons represented at a meeting of the class are not so dissimilar as to prevent those persons meeting and voting in one class involves an assessment of the legal character of the rights and obligations of the members against the company, and also how those rights will be affected by the implementation of the scheme. A similar approach was taken by Finkelstein J in Opes Prime Stockbroking Limited (No 2) (2009) 179 FCR 20 at [64] and [71]. 44 Re Hellenic & General Trust Ltd [1976] 1 WLR 123 falls into a different category. In that case under the proposed scheme all shares in the target company were to be cancelled and new shares issued to the bidder which was to pay the shareholders of the target 48 pence per share cancelled. The bidders wholly owned subsidiary owned 53.01% of the shares in the target and it voted in favour of the scheme in a single class scheme meeting. Templeman J considered that the subsidiary should have voted in a separate class and refused approval of the scheme. That is not this case. Here the Scheme is not a buy-out and transfer of Kumarina shares from the other shareholders to Utilico through Zeta. The Scheme will effect a merger with Zeta in which all existing shareholders will participate equally and will continue as shareholders of Zeta. Separately, Utilico will obtain additional shares in Zeta and will obtain control of Zeta through that transaction. However, the rights and commercial effect of the Scheme are the same for all of Kumarina's shareholders. 45 Re Landmark Corporation Ltd [1968] 1 NSWR 759 at 766-767 was also cited by the Objectors. It involved a creditors' scheme. Landmark's creditors included a number of Landmark's subsidiaries who voted in favour of the scheme. However, a majority both in number and value of creditors who were not Landmark subsidiaries opposed the scheme which was highly speculative in nature. Those creditors were, however, in the minority of the creditors viewed as a whole. Street J found that the subsidiary companies were correctly included in the same class as all other creditors as their rights were affected by the scheme in the same manner. However, when considering whether to approve the scheme, although the statutory majorities had been obtained, Street J attached little weight to the votes of the subsidiary companies as evidence of what was best in the interests of the class of ordinary unsecured creditors. As the opposition of the non-subsidiary creditors was not unreasonable, the Court, in its discretion, declined to approve the scheme. This too is a very different factual situation from that in the present case. 46 Moreover, I do not regard the issue to Utilico of Zeta shares pursuant to the Sale Agreement between Zeta and Utilico as constituting a collateral benefit in the relevant sense. Utilico does not, by reason of the Sale Agreement, receive any benefit as a result of the Scheme proceeding or not. This agreement has been fully performed. Utilico has received the Zeta shares pursuant to the agreement and will hold these shares whether the Scheme is approved or not. It is not receiving something that other shareholders do not if the Scheme proceeds. There is no question of a contingent benefit that other shareholders will not receive. Moreover, the consideration received by Utilico under the Sale Agreement has been determined by the independent expert to be on arm's length terms: Aston Resources at [25]. 47 As Utilico is not in a separate class ICM cannot be in a separate class merely on the ground that it is associated with Utilico. Moreover, whilst the Investment Management Agreement which was disclosed in the Scheme Booklet to be entered into by ICM is a contingent interest, the independent expert has expressed an opinion in the Independent Expert's Report to the effect that the terms of this agreement are arm's-length. 48 It may be seen that the consideration received by Utilico under the Sale Agreement and to be received by ICM under the Investment Management Agreement is non-Scheme consideration. The receipt of non-scheme consideration does not, however, result in either of Utilico or ICM receiving a right or benefit under the Scheme that is different to other Shareholders. 49 The non-scheme consideration will not be received as a Shareholder. In the case of Utilico, the non-scheme consideration will be received as a holder of and in exchange for shares in the various companies Utilico will transfer to Zeta. In the case of ICM, the non-scheme consideration will be received as a service provider in exchange for services performed for Zeta. Thus, in each case, the non-scheme consideration will be received in exchange for a right that arises independently from Utilico's or ICM's rights as members. 50 There is no basis for treating Utilico or ICM as in a different class of shareholders. 51 If the Scheme is approved Peter Sullivan will be appointed as the non-executive chairman of Zeta and will cease to be paid any remuneration by the Kumarina. The net result of this is increased payment of $2,000. Although this benefit is contingent in the relevant sense, it is immaterial: Re Normandy Mining Ltd (No 4) (2002) 40 ACSR 474 at [37]. This does not occasion his shareholding being treated as a separate class. Neither does the fact, quite common in such merger type arrangements, that he will become a Director of Zeta, constitute his shareholding as a different class. 52 The rights of all shareholders in Kumarina are identical as are their rights in the proposed Scheme.

The Court's discretion 53 It is appropriate to consider whether the Scheme is fair and reasonable from the viewpoint of an intelligent and honest person. 54 The evidence discloses that the Objectors raised a number of concerns about the Scheme through their solicitors. Kumarina responded through its solicitors. Peter Sullivan met with Mr Van Blitterswyk, who informed him that the Objectors would support the Scheme, although, for reasons unknown, they changed their minds. 55 The Objectors had a legal representative available to give them advice at the Scheme Meeting. When given the opportunity to address the Scheme Meeting, the Objectors failed to raise any concern other than that James and Peter Sullivan should not be entitled to vote in the meeting. The objection concerning James Sullivan was not pressed before the Court. 56 The independent expert has expressed the opinion that the Scheme is fair and reasonable and in the best interests of Kumarina's shareholders. There is no expert evidence before the Court to the contrary. 57 A large majority of Kumarina's shareholders voted in favour of the Scheme. This is so even were the votes of Utilico and ICM to be excluded. There is no reason for considering that the votes cast at the Scheme Meeting are not representative of the views of Kumarina's shareholders. Moreover, of the few shareholders who voted against the Scheme, four had relatively small shareholdings. The Objectors who had larger parcels are very much in the minority. 58 I make no finding, one way or the other, as to the reasonableness of what is foreshadowed, in [19] of the Van Blitterswyk affidavit. The shareholders are plainly the best judges of whether the Scheme is fair and reasonable from the viewpoint of an intelligent and honest person: In the Matter of Chevron (Sydney) Ltd [1963] VR 249 at 255. 59 There is no reasonable basis, in the exercise of the Court's residual discretion, to refuse to approve the Schemes.

Section 411(11) Exemption 60 Section 411(11) of the Corporations Act requires a copy of every order of the Court made for the purposes of s 411(4)(b) to be annexed to every copy of the relevant company's Constitution issued after the order was made. An exemption from this requirement may be granted under section 411(12). 61 An order approving the Scheme will not effect any alteration of Kumarina's constitution and will not affect its true construction. Further, Kumarina will, from implementation of the Scheme, be a wholly owned subsidiary of Zeta, so there is no purpose to be served in having the order annexed to Kumarina's constitution.

Orders 62 For the reasons set out above, I will, in substance, make the orders set out in the Minute of Proposed Orders filed by Kumarina. I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.