Texon Petroleum Limited, in the matter of Texon Petroleum Limited (No 2) [2013] FCA 147

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION

IN THE MATTER OF TEXON PETROLEUM Limited (abn 24 119 737 772) TEXON PETROLEUM LIMITED (ABN 24 119 737 772) NSD 2228 of 2012

TEXON PETROLEUM LIMITED (ABN 24 119 737 772) NSD 2230 of 2012

JUDGE: FARRELL J DATE: 27 FEBRUARY 2013 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This is the second hearing of two applications to approve two separate but related schemes of arrangement, the details of which I described in Texon Petroleum Limited, in the matter of Texon Petroleum Limited [2013] FCA 29. At this hearing, the plaintiff seeks orders pursuant to s 411(4)(b) of the Corporations Act 2001 (Cth) in relation to both schemes. 2 I will adopt the same definitions for words and expressions used in these reasons as I did in my earlier reasons in these proceedings. For convenience, I will deal with those issues common to both Schemes without distinguishing between them. Counsel for the plaintiff has provided useful written submissions and they have been placed on the Court file. The plaintiff also provided a document entitled "Road Map for the Second Court Hearing" which sets out the matters to be proved and the affidavit or other evidence which supported it for each of the Schemes. All of the affidavits referred to in that document were read and all documents referred to in the "road map" were tendered. 3 No creditor or shareholder of Texon appeared at the hearing to oppose the Scheme. Sundance was represented by Counsel at the hearing.

Formal and structural matters 4 The formal matters about which I need to be satisfied include: whether the statutory majority required for a members scheme by s 411(4)(a)(ii) of the Act has been obtained, whether the orders made at the first hearing have been complied with, whether ASIC has indicated that it has no objections to the Schemes under s 411(17) and, for the efficacy of the Demerger Scheme, whether the reduction of capital resolution proposed at the Extraordinary General Meeting has been passed. In addition, there are a number of structural issues which include the separation of EFS and non-EFS Assets, whether Talon and Sundance are effectively bound to perform their part as described in the Scheme booklets and whether all conditions of the Schemes have been satisfied or waived. 5 I am satisfied that: (a) the orders I made on 22 January 2013 and the scheme booklets were provided to ASIC. This was demonstrated by both correspondence and an ASIC search extract for Texon. (b) Scheme booklets (with immaterial changes from the document tendered at the first court hearing) and proxy forms were printed and served on members of Texon. As new members came on the register, copies of the booklet and proxy forms were sent to them. (c) Proxy forms for each of the Scheme meetings and the Extraordinary General Meeting were received by Computershare Investor Services Pty Limited (Computershare), which provides share registry services to Texon. An employee of Computershare collated the proxy forms which were returned. There were a small number of invalid proxy forms for each of the Scheme meetings and the Extraordinary General Meeting. All invalid forms were either in favour of the resolutions or undirected. (d) John Dennis Armstrong chaired the Scheme meetings which were held on 25 February 2012 at the time and place specified in the Scheme booklets. An employee of Computershare was appointed to act as returning officer for each of the meetings. (e) The resolutions to approve the Scheme were passed by majorities in excess of 99% of both votes cast and people present at the Scheme meetings. These results exceed the majorities required for approval of the Schemes by shareholders under s 411(4)(a)(ii) of the Act. Votes cast by Mr David Mason and his family were tagged because of Mr Mason's interest as both a director of Texon and a shareholder of Wandoo - a company with an interest in the performance of the Wandoo Interest Acquisition Agreement. Performance of this agreement by Texon was dependent on the outcome of the Scheme meetings. When the tagged votes are excluded, there is a negligible affect on the majorities by which the Scheme resolutions were passed. (f) Although there is a slight difference in the number of votes cast at the two Scheme meetings, votes were cast in respect of approximately 55% of all Texon shares and approximately 30% of all shareholders. (g) The resolution to reduce Texon's capital, an integral part of the Demerger Scheme, was passed by a majority exceeding 99% of votes cast. The resolution was amended from the form contained in the booklet for the Demerger Scheme by changing "Effective Date" to "Implementation Date". The proposal to make this change was advised to both the Court and to the Australian Securities Exchange on 18 February 2013. (h) The date of the second court hearing was advertised in The Australian newspaper on 18 February 2013. (i) By letter dated 26 February 2013, ASIC advised that it had no objection to either of the Schemes pursuant to s 411(17)(b) of the Act and no representative of ASIC appeared at the second court hearing. (j) By email dated 17 January 2013, ASIC advised that it had made an in-principle decision to grant relief pursuant to s 741 of the Act with respect to the on-sale of Talon shares transferred as consideration in the Demerger Scheme. ASIC indicated it would process the formal instrument when it became clear that the Demerger Scheme would be implemented. (k) The Australian Securities Exchange has agreed to admit Talon to the official list of the ASX subject to the Demerger Scheme becoming effective and other customary pre-quotation disclosure conditions. (l) Talon and Sundance have respectively agreed to perform their obligations under the Schemes pursuant to the Demerger Scheme Deed Poll executed by Talon on 15 January 2013 and a Deed Poll executed on 16 January 2013 by Sundance. Neither of those deed polls nor the Scheme Implementation Agreement between Texon and Sundance dated 13 November 2012 or the Demerger Deed between Texon and Talon dated 14 January 2013 has been terminated. (m) All conditions precedent (other than court approval of the Schemes) have been either satisfied or waived. The conditions of the Scheme Implementation Agreement and the Demerger Deed that the Australian Taxation Office issue a ruling in relation to the Demerger Scheme and its impact on the Texon group by the time the Demerger Scheme comes into effect has been waived because the ATO will not publish such a ruling until the Scheme becomes effective. The possibility that the tax ruling would not be obtained before the Demerger Scheme becomes effective was disclosed in a number of places in the Scheme booklet and attempts to obtain the ruling were in evidence before me. (n) No options were exercised between the date of the first court hearing and the date of the Scheme meetings. In accordance with the terms of agreements executed by all of the option holders before the first court hearing, the options will be cancelled to the extent that they have not been exercised at the end of the day on which the Schemes become effective. (o) Sale agents have been appointed in relation to the consideration under each of the Schemes to sell the shares to which ineligible foreign shareholders would otherwise be entitled under the Schemes.

General principles 6 The general principles which guide the Court's discretion at the second court hearing are very well established and Counsel for the plaintiff has referred to the summary of Jacobson J in Re Seven Network Ltd (ACN 052 816 789) (No 3) (2010) 267 ALR 583 at [35]-[40] who in turn took note of the Corporations and Markets Advisory Committee summary of relevant considerations in its December 2009 Report Members' Schemes of Arrangements at [3.5.2].

Have the shareholders voted in good faith and not for an improper purpose? 7 This is an uncontested proposal and those shareholders who attended the meeting voted overwhelmingly in its favour. There is no evidence of any bad faith motivation or illegitimate purpose.

Are the proposals fair and reasonable? 8 The test to be met here is whether an intelligent, honest person who is a member of the relevant class of shareholders, properly informed and acting alone, might approve the Scheme. My view that this test is satisfied is supported by the following matters: (a) No one has come forward to Texon or the Court to oppose the Schemes. There were no contentious issues raised by members at the Scheme meetings. No regulator has raised an objection to the Schemes. (b) The Schemes have been overwhelmingly supported by those shareholders who attended the meetings and there was substantial attendance at the meeting. (c) Although the fact that there are two proposed schemes adds a level of complexity, each scheme is not unusual in itself. (d) BDO has not changed its recommendation (contained in the Independent Expert's Report which was included in the Demerger Scheme booklet) that the advantages of the Demerger Scheme outweigh its disadvantages and in the absence of any other information or a superior proposal, the Demerger Scheme is in the best interests of Texon shareholders. (e) BDO has not changed its recommendation (similarly contained in the Independent Expert's Report which was included in the Acquisition Scheme booklet) that, in the absence of any other information or a superior proposal, the Acquisition Scheme is fair and reasonable and therefore in the best interests of Texon shareholders. (f) Texon's directors have not changed their recommendation. (g) To the extent that a director (through his interest in Wandoo) potentially benefits from the proposal, this fact has been fully disclosed and has been approved overwhelming by shareholders (in circumstances where there is a voting exclusion statement in relation to votes associated with Wandoo/Mr Mason) at the Extraordinary General Meeting. There is also a report by BDO which indicates that the consideration to be received by Wandoo is less valuable than the interest which is being sold to a subsidiary of Texon. This is not a case where those voting at the meeting may be regarded as having a special interest to be taken into account and even when the votes of Mr Mason and his family are excluded, more than 99% of those voting at the meeting approved entry into the Schemes.

Has the plaintiff brought to the attention of the Court all matters that could be considered relevant to the exercise of the Court's jurisdiction? 9 This test reflects the statement of Barrett J in Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [7] in which he stressed the obligation of parties in ex parte proceedings to bring all relevant matters to the attention of the Court. 10 At the first court hearing, I asked Counsel for the plaintiff about how intercompany balances were to be dealt with as part of the demerger. In an affidavit sworn by Mr Gary Goldman, a partner of the firm of solicitors acting for the plaintiff, the steps taken to identify loan balances and capitalise debt resulting in the issue of Talon shares for the purpose of paying the consideration under the Demerger Scheme were explained and I accept those explanations. 11 I deal with the interests of creditors in the context of the reduction of capital later in these reasons at [14]-[16].

Has there been full and fair disclosure to shareholders of all information material to their decision to approve or reject the Schemes? 12 Nothing has been brought to my attention which would lead me to think that Texon shareholders have been provided with inadequate information. Before the first court hearing, ASIC required additional disclosures in relation to the Wandoo issue, including the need for an expert valuation of that interest which was ultimately included in the Demerger Scheme booklet as Appendix 8. ASIC has provided a letter advising that it has no objection under s 411(17) of the Act in relation to the Schemes and it has not raised any issue with the Court at this hearing. I note that it is the policy of ASIC to issue that letter if the requirements of Regulatory Guide 60: Schemes of Arrangement at [60.104] are satisfied: see also [60.103].

Would minority shareholders be oppressed under the Schemes? 13 Counsel for the plaintiff drew to the attention of the Court the fact that shareholders who hold only 1 or 2 Texon shares (69 shareholders in relation to an aggregate of 73 shares) will get no consideration because the entitlement to consideration under the Demerger Scheme is rounded down. Counsel submitted that because the value of each Texon share is 55 cents, this issue should be treated as de minimis and I accept that approach.

Have groups who are not parties to the Schemes whose interests are affected by the Schemes been dealt with appropriately? 14 Counsel for the plaintiff also drew my attention to the reduction of capital approved at the Extraordinary General Meeting - which was a condition of the Demerger Scheme. While there is no requirement that court approval be sought in relation to reductions of capital, where the reduction of capital is an integral part of the Demerger Scheme, the question as to whether the reduction would materially prejudice the capacity of the company to pay its creditors is a relevant consideration and the Court is entitled to take it into account: Re CSR Ltd (2010) 183 FCR 358. 15 Counsel's written submissions noted: 27. The Texon directors have considered the matter and the following disclosure appears in Section 8.9(b) on page 67 of the Demerger Scheme Booklet "The Texon Directors consider that the Capital Reduction will not materially prejudice Texon's ability to pay its creditors". There is further disclosure in Sections 5.6 and 5.7 on page 47 of the Demerger Scheme Booklet, including in Section 5.7 that even if the Acquisition Scheme is not implemented Texon is expected to have cash reserves of approximately $8.7 million. The pro forma balance sheet on page 49 of the Demerger Scheme Booklet shows net assets in Texon after demerger of $47.6 million. As noted, the disclosures are verified. 28. Assuming for argument that there was a failure to comply with s 256B(1), and considering the matter from the position of shareholders, by operation of s 256D(2), a contravention of s 256B(1) does not result in invalidity of the reduction of capital. 16 Counsel for the plaintiff submitted that there is nothing in this step which should be of concern to the Court. In this case, I am satisfied that the reduction does not give rise to undue prejudice to Texon's creditors and, from the perspective that both Schemes have been approved by shareholders (in addition to the matters in [27] of the plaintiff's submissions), I note that Texon will now become part of the Sundance group. While Sundance has no legal obligation to those creditors - the commercial efficacy of this acquisition is likely to be compromised if it were to disregard their interests.

Do either of the Schemes offend public policy? 17 Nothing has been brought to my attention which suggests that the Schemes may offend public policy in any way.

US Securities Act of 1933 18 At the first court hearing, Counsel for the plaintiff advised the Court that Texon proposes to transfer Talon shares under the Demerger Scheme and Sundance intends to issue Sundance shares under the Acquisition Scheme to Texon shareholders who are US residents relying on the exemption from registration requirements under section 3(a)(10) of the United States of America's Securities Act of 1933 (Securities Act). At this hearing, Counsel for the plaintiff and Counsel for Sundance requested that this matter be raised in the Court's reasons. 19 This has become relatively common in schemes of arrangement and Counsel brought a number of cases to my attention including the judgments of Jacobson J in Aston Resources Limited, in the matter of Aston Resources Limited (No 2) [2012] FCA 401. I have also considered the reasons of Barrett J in Re Permanent Trustee Co Ltd, Emmett J in Central Pacific Minerals NL [2002] FCA 239 and Lander J in Re Simeon Wines Ltd (2002) 42 ACSR 454. 20 One of the requirements of the Securities Act is that notice must be given to the Court that the order of the Court will be relied upon by the issuer. That requirement has been satisfied by Texon, Talon and Sundance. Sundance has asked that I note this matter in my orders in relation to the Acquisition Scheme, and I have done so. Counsel for the plaintiff was content to rely on an acknowledgement to this effect in my reasons in relation to the Demerger Scheme. 21 A further requirement is that the Court consider the fairness and reasonableness of the proposed scheme of arrangement. The authorities I have referred to suggest that it is the practice of the Court on applications such as these to note that the Court does not act as a valuer. Rather, the Court receives assistance from the reports of the independent experts (in this case, BDO) in relation to the Schemes. There is an affidavit of Mr Stephen Sorbello of BDO that was read at the first court hearing that deposed, specifically, that as the writer of the report he "… genuinely [held] the opinions expressed in the Report" in relation to each Scheme. As noted earlier, I am satisfied that the Schemes appear to be fair and reasonable for the reasons given. As I have already mentioned above, notice of the date of this hearing was published in The Australian, a daily newspaper circulating throughout Australia, and this hearing was open to members of the public. The proposed date of the hearing also appeared in the Scheme booklets sent to all Texon shareholders. 22 For these reasons I will make orders approving the Schemes and in each case to exempt Texon from compliance with s 411(11). I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.