Sovereign Life Assurance Company v Dodd

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 298 of 2012

BETWEEN: CORTONA RESOURCES LIMITED (ACN 117 848 790)

JUDGE: BARKER J DATE: 14 NOVEMBER 2012 PLACE: PERTH

order to convene meeting pursuant to s 411(1) corporations act 1 On 14 November 2012, on the application of the plaintiff by originating process dated 30 October 2012, I made orders pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Corporations Act) convening a meeting to consider a proposed share scheme of arrangement between the plaintiff and its shareholders. These are the reasons for so doing.

the nature of the scheme 2 Cortona is an Australian Securities Exchange (ASX) listed public company with issued share capital of 268,048,097 ordinary fully paid shares (as at 9 November 2012). 3 The scheme would effect a merger by the acquisition of all of the fully paid ordinary shares in Cortona (scheme shares) by Unity Mining Ltd (Unity), an ASX listed public company, with an exchange of 0.734 New Unity shares for each Cortona share (scheme consideration). 4 Cortona has issued 9,250,000 options to acquire fully paid ordinary shares (options), which if exercised, equates to approximately 3.34% of the fully diluted share capital of Cortona. The majority of the options are held by Cortona directors, management and external advisors. None of the options are listed on the ASX. The options are currently out of the money and have been valued at only $50,110. Cortona will procure the cancellation of the options prior to the Record Date in return for a cash payment based on the Black-Scholes valuation methodology. The cancellation of the options, and the cash payment in consideration for the cancellation of those options, is conditional upon the scheme being implemented. 5 One optionholder (being Zenix Nominees Pty Ltd, a related body corporate of Hartleys Ltd, the corporate advisor to Cortona) has agreed to receive no cash payment for the cancellation of their options. 6 If the scheme were implemented Cortona would become a wholly owned subsidiary of Unity and would be delisted from the ASX.

satisfaction of formal requirements 7 I am satisfied that the formal requirements of s 411 are met. 8 In particular, the proposal before the Court is an arrangement. 9 The term "Part 5.1 body" is defined in s 9 of the Act to mean, relevantly, a company. Cortona is a company. 10 The term "member" is defined in s 9 to mean, in relation to a company, a person who is a member under s 231. Broadly, a person is a member of a company if they are a member of the company on its registration, or agree to become a member of the company after its registration and their name is entered on the register of members. The shareholders are members. 11 An arrangement to which s 411(1) applies is one between a company and its members or creditors or any class of them. It is only such an arrangement to which the Court may grant its approval pursuant to s 411(6). 12 Section 411 does not define the term "class". However, in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573, Bowen LJ said (at 583) 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. 13 In this case all shareholders have the same rights in the scheme. That is, the right to receive the scheme consideration. 14 There is no separate scheme of arrangement to deal with Cortona's optionholders as contingent creditors. 15 The scheme booklet at sections 2.13, 4.6 and 10.6 details the manner in which Cortona options will be cancelled in return for a cash payment and the method of valuation. The total anticipated amount payable for the cancellation of the options as determined using the valuation methodology is said to be around $50,000 at section 10.6. 16 The scheme implementation agreement at cl 5.8 requires each of Cortona and Unity to use reasonable endeavours to procure cancellation of the options by the record date. Cortona will seek to enter into a deed with each optionholder for the payment of a cash sum under cl 5.8(c) of the scheme implementation agreement. 17 The Australian Securities and Investments Commission (ASIC) has been given appropriate notice of the hearing and has agreed to the shortening of the usual 14 day period by one day. 18 ASIC has also had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement and to make submissions to the Court: s 411(2)(b). ASIC has provided the standard letter indicating that it does not wish to be heard on the first court hearing.

Draft Explanatory Statement 19 The scheme booklet containing the draft explanatory statement is in my view adequate. It comprises: (a) the body of the text (pages 1-99); (b) Annexure A, the independent expert's report; (c) Annexure B, the scheme of arrangement; (d) Annexure C, the deed poll; (e) Annexure D, the notice of meeting; (f) the proxy form (page 107); and (g) the corporate directory (page 108). 20 In an effort to avoid over-whelming members with information and a larger explanatory statement, the key provisions of the scheme implementation agreement have been summarised in section 9 of the scheme booklet. Shareholders who are interested in reading the scheme implementation agreement are directed to the complete ASX announcement with the scheme implementation agreement attached on the Cortona website: section 9.1. A copy of the complete ASX announcement is also available from the ASX website, by searching either Cortona or Unity announcements. This Court has accepted this approach before: see, for example, Adamus Resources Limited, in the matter of Adamus Resources Limited [2011] FCA 1324 at [7] (per Siopis J). This is satisfactory in the circumstances of this case. 21 The front of the scheme booklet includes the words "Vote Yes" in large font followed by a statement that the Cortona directors unanimously recommend that shareholders vote in favour of the scheme in the absence of a superior proposal. This has recently been considered as an acceptable cover page for an explanatory statement by Jagot J in Industrea Limited, in the matter of Industrea Limited [2012] FCA 1090 at [6]. In the circumstances of this proposal I do not consider this inclusion in the booklet presents a reason to withhold the convening order. 22 The Court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the members' meeting, the Court would be likely to approve it on the hearing of the petition which is unopposed. However, the role of the Court at this stage of the process of a company propounding and implementing a scheme of arrangement is not to scrutinise finally whether the scheme should be approved. That decision must await the expression of the will of the members at the meeting and any argument that may be advanced on behalf of dissenting members or other interested parties at the time of the application for approval. 23 The scheme proposed by Cortona is not so obviously unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. 24 The conclusion of the independent expert that the scheme is in the best interests of the members, confirms that the scheme is such that sensible business people would consider it to be of benefit to the shareholders. 25 There is no suggestion of an improper purpose on the material before the Court. Cortona's constitution does not prevent the scheme. There is nothing in the material before the Court that suggests the scheme has not been properly proposed. 26 The scheme booklet meets the disclosure requirements of s 411(3) and s 412, ASIC Guidance Note GN60, the takeover and prospectus provisions of the Corporations Act and Sch 8 of the Corporations Regulations 2001 (Cth). There is nothing apparently misleading or deceptive in the scheme booklet: (1) Cortona's directors consider the contents of the scheme booklet to be accurate insofar as statements of fact relate to Cortona and there is no reason to believe that statements of fact relating to Cortona are inaccurate. (2) Cortona has undertaken a process for the purpose of verifying the accuracy of the statements in the scheme booklet. (3) Unity has undertaken a process for the purpose of verifying the accuracy of the statements in the scheme booklet. (4) Unity's directors consider the contents of the scheme booklet to be accurate insofar as statements of fact relate to Unity and there is no reason to believe that statements of fact relating to Unity are inaccurate. (5) Amendments required by ASIC have been seen by the Managing Director of Unity. 27 Pursuant to the terms of the deed poll, scheme and scheme implementation agreement, Unity is required, on or prior to the date of transfer of the Cortona shares, to: (1) ensure that each scheme participant (other than ineligible foreign shareholders) is entered into the Unity register for the total number of new Unity shares to which that scheme participant is entitled; and (2) ensure that the sale facility agent, in accordance with the scheme, is entered into the Unity register for the total number of new Unity shares to which ineligible foreign shareholders will be entitled. 28 Cortona is not obliged to transfer any shares to Unity until the scheme consideration has been provided. The scheme consideration also does not involve the payment of money. 29 In these circumstances that there is no significant performance or credit risk in this case: see, for example, Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 (Re APN News & Media Ltd) at [23]. 30 The scheme implementation agreement contains usual "no shop", "no talk", "competing proposal disclosure" and "matching right" provisions. 31 The exclusivity provisions contained in the agreement do not, in my view, adversely impact competition and directors' duties: (1) The exclusivity period is around 6 months (27 September 2012 to approximately 27 March 2013) and capable of precise ascertainment from the terms of the scheme implementation agreement. Periods of a similar length have been regarded as reasonable in other cases. (2) The exclusivity provisions contain directors' fiduciary and statutory duty qualifications. (3) The "lock up" device that is the matching right given to Unity when a competing proposal is made should work to the benefit of Cortona shareholders. (4) Prominence is given to the exclusivity provisions. 32 The provisions were negotiated at arm's-length and appear to have been included as commercial terms. The directors consider these provisions of the scheme operate in the interests of the Cortona shareholders. 33 The scheme implementation agreement contains break fee provisions: see cl 7. Prominence is given to them in the scheme booklet at sections 1.4(c), 2.7, 7.4(l) and 9.5. 34 The break fee provisions do not appear to operate unfairly or unduly fetter competition. Under these provisions Cortona may become liable to pay Unity a break fee of $220,000 in certain circumstances (break fee): cl 7.2(a)(i), (ii) and (iii) of the scheme implementation agreement. Cortona's potential liability to pay the break fee does not provide a basis for refusing to allow the shareholders to vote on the merits of the scheme for the following reasons: (1) The break fee is not payable if the shareholders simply do not vote in favour of the scheme. The break fee is only payable if: (a) any Cortona director changes their recommendation to shareholders to vote in favour of the scheme in circumstances other than where the independent expert has concluded that the scheme is not in the best interests of shareholders; or (b) a competing proposal is announced or made before the expiry of the exclusivity period and: (i) is publicly recommended, promoted or endorsed by any Cortona director at any time during the exclusivity period; or (ii) that competing proposal (for 50% or more of the Cortona shares) is completed within a year of the date of the scheme implementation agreement. Accordingly, the break fee provisions do not appear to operate wholly in a manner that would coerce the members to vote in favour of this scheme. (2) The break fee is less than 1% of Cortona's equity value. That is, it is not unduly anti-competitive. (3) The break fee is reciprocal in respect of material breach by the counter-party. Cortona may become liable to pay the break fee if it commits a material breach. Unity may become liable to pay Cortona the break fee if Unity commits a material breach. Cortona will not be liable if Cortona is entitled to terminate the scheme implementation agreement for a material breach by Unity. (4) The break fee was negotiated at arm's-length with the benefit of legal and commercial advice. (5) Cortona and Unity have agreed that neither of them would have entered into the scheme implementation agreement without the break fee agreed. Both companies acknowledge the break fee as a reasonable amount having regard to advisory costs, costs of management and directors' time, out of pocket expenses and reasonable opportunity costs. Hence, the break fee provisions affecting Cortona can be regarded as the price for securing a valuable commercial opportunity (being the scheme). 35 The scheme contains a "deemed warranty" provision in which the shareholders warrant that their shares are fully paid and unencumbered. The existence of the provision is drawn to the attention of the shareholders in section 2.10 of the scheme booklet. Shareholders are also told to have regard to their own financial circumstances and to take any necessary advice at section 1.1 of the scheme booklet. 36 I accept deemed warranties in these terms have previously considered acceptable, see for example: Re APN News & Media Ltd at [57]-[63]. 37 Any question arising under s 411(17) will arise on the second approval hearing. 38 Shareholders in the United Kingdom (UK) and New Zealand (NZ) will receive scheme consideration. As at 8 November 2012, these shareholders form 2.10% of Cortona shareholders. Enquiries have been made to the satisfaction of the directors of Unity that new Unity shares can be issued to the shareholders in the UK and NZ. 39 New Unity shares will not be issued to foreign ineligible shareholders (being those outside Australia, the United Kingdom or New Zealand). As at 8 November 2012, these shareholders form 1.30% of Cortona shareholders. A process exists for them to receive the proceeds from a sale of new Unity shares issued to a sale facility agent, who will sell those shares on behalf of those shareholders (scheme implementation agreement (cl 4.3) and scheme (cl 5.3)). These types of processes are not typically considered to be "class-creating": oOh!Media Group Limited, in the matter of oOh! Media Group Limited [2012] FCA 26 at [30] (Yates J); Aston Resources Limited, in the matter of Aston Resources Limited [2012] FCA 229 at [32]-[33]. 40 At the hearing, counsel for the plaintiff drew two recent transactions that had occurred within the previous 48 hours to the attention of the Court. The first was the issue by Unity of performance rights, which were now the subject of marked up amendments to the scheme booklet that ASIC had seen. They are in total about 13 million shares if they are exercised or approximately 2.66% of the current shares of Unity, or 1.91% of the total shares in the merged entity. The independent expert has given consideration to them. 41 I accept there is uncertainty as to the performance hurdles being met in relation to these performance rights and note that the independent expert has not considered them in the evaluation of the proposed merger entity. In all the circumstances the matter having been brought to the attention of the Court, I do not see it as a reason not to convene a meeting of members and it is a matter for the members to consider at that meeting in light of the reasonable disclosure made. 42 The second recent matter counsel for the plaintiff brought to the attention of the Court was a term sheet entered into between the plaintiff and Unity on the morning of the hearing for a term loan of $1 million. It too is the subject of marked up amendments to the scheme booklet. Unity has agreed to provide the plaintiff with a facility of up to $1 million in respect of a development proposal. The marked up scheme booklet explains the purpose. 43 I accept that on the face of the transaction the term sheet reflects an arm's length commercial loan at commercial rates. I understand each party has taken legal advice in respect of it. On the face of it, the plaintiff could have gone to the market to receive such financing but the parties have chose to make that agreement. There is nothing obvious in that transaction, in my view, to suggest that it is a "lock up" device or in the nature of a break fee by a side wind, which might prevent the free consideration by members of the scheme proposal. 44 As counsel for the plaintiff says if the plaintiff draws down on the facility it is simply a facility that has to be repaid within one year. No security needs to be given by it unless the scheme is not implemented, in which case it would then be required to give security over some freehold property in the State of New South Wales. It is not a transaction capable of being terminated at the convenience of Unity and it is not repayable on demand. 45 I do not consider that the term sheet transaction identified is a reason not to make the orders convening a meeting of members. It too is a matter that the members may properly consider at the meeting in light of the disclosure made. 46 I also note that at the hearing, the further affidavit of Peter Jonathan van der Borgh was tendered indicating an additional range of interests between him and the company from those initially disclosed but I do not consider that this disclosure should result in the orders not being made. 47 Counsel for the plaintiff also drew to the Court's attention a point raised by ASIC that the date of the proposed meeting is the Friday before Christmas and whether or not this is a reasonable time. In my view, there is no particular reason why the meeting of members should not occur on the Friday before Christmas. It is a usual business day. Members who might possibly be inconvenienced no doubt can operate through a proxy. In all the circumstances of the case that present themselves to the Court on this occasion, I do not see the proposed meeting date as problematical. 48 For these reasons the orders convening the meeting of creditors was made. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker.