Uranium King Limited, in the matter of Uranium King Limited (ABN 34 119 187 816) (No 2) [2008] FCA 975

REASONS FOR JUDGMENT 1 This is an adjourned hearing of an application by the plaintiff (UKL) for the making of final orders approving a scheme arrangement (the Scheme) between UKL and its members under s 411 of the Corporations Act 2001 (Cth). 2 The Scheme provides, in essence, for the merger of UKL with a company, Monaro Mining NL (Monaro), whereby UKL would become a wholly owned subsidiary of Monaro and the UKL shareholders would acquire shares in Monaro. 3 The Scheme was approved by the requisite number at the meeting of members held for that purpose on12 June 2008. 4 At the Court hearing for the final approval of the UKL Scheme on 16 June 2008, UKL read an affidavit of Mr James Lewis Michael Malone, a director of UKL. Mr Malone deposed that on 16 June 2008 Mr Grigor, a director of Monaro, informed him that the Securities Exchange Commission in the United States (the SEC) had advised Monaro's lawyers in the United States on Friday, 13 June 2008 that UKL may have breached a provision of the Securities Exchange Act of 1934 (the Exchange Act). 5 Mr Malone also deposed that it was his understanding that this possible breach had occurred as a result of the issue by UKL of its shares in or about September 2006 to Mineral Energy and Technology Company (METCO), a United States company and now the major shareholder of UKL, whilst not registered under the Exchange Act as a foreign private issuer. 6 I interpose to say that, as a part of that transaction, exploration tenements in the United States were transferred by METCO to UKL, and that those exploration tenements are the major assets of UKL and will comprise important assets of the merged entity, if the merger proceeds. 7 Mr Malone then deposed that in his view the expression by the SEC of the view referred to above, was "not a relevant consideration for [UKL] shareholders in determining whether or not to approve the merger with Monaro". He did not explain the reasons for holding that view. He went on to say that he had been informed by Mr Mart Rampe, a director of Monaro, that notwithstanding this information, the Monaro board had that day determined that all the conditions in the control of Monaro had been satisfied or otherwise waived. Mr Rampe filed an affidavit which confirmed the statements made in Mr Malone's affidavit. 8 At the hearing of 16 June 2008, UKL submitted that I should on the basis of that evidence regard the latest development as no impediment to the approval of the Scheme. However, I was not satisfied that Mr Malone's and Mr Rampe's evidence was a sufficient basis on which to conclude that the new information was so trivial that I could approve the Scheme without further evidence as to possible consequences that the holding of that view by the SEC may have for the implementation of the Scheme. I adjourned the hearing to give UKL an opportunity to adduce further evidence as to the ramifications for the implementation of the Scheme that this new information may have. 9 UKL relies today upon an affidavit dated 17 June 2008 from Mr John E Schmeltzer who is a partner of a law firm in New York. 10 In summary, Mr Schmeltzer said the provision in question was s 12(g)(1) of the Exchange Act, and that SEC had the power to impose penalties in respect of a finding of wilful violation of the Exchange Act. However, he went on to say that based on the information which has been given to him by Mr Malone as to the circumstances in which UKL entered into the transaction with METCO in September 2006, it was unlikely that there would be a finding of a wilful or intentional violation of the Exchange Act by UKL. The information given by Mr Malone to Mr Schmeltzer was that UKL had acted on legal advice that all regulatory requirements had been complied with in relation to the METCO transaction. 11 Mr Schmeltzer also said that whilst, in the case of a wilful violation of the Exchange Act by a corporation, it was possible for a penalty to be imposed up to the limit set out in s 32 of the Exchange Act ($US25 million), he believed that even if any penalty was imposed, that it would not be significant "in the context of the Scheme and the combined balance sheets of Monaro and [UKL]". He based this view on the fact that it is unlikely that the SEC would take a view that the 2006 transaction with METCO had impacted on investors in the United States. 12 Thirdly, Mr Schmeltzer referred to an extract from an article in a journal, "International Lawyer" written in 1993 to the effect that SEC would be unlikely to initiate formal proceedings against a foreign issuer for an unknowing violation of the relevant section of the Exchange Act. 13 In addition, UKL also relied upon an affidavit of Ms Kellie Elizabeth Thornley deposing that Mr Schmeltzer's affidavit of 17 June 2008 had been served on ASIC. ASIC has written a letter dated 16 June 2008 under s 411(17)(b) of the Act stating that that they did not intend to appear to oppose the Scheme. ASIC did not appear today. 14 However, the evidence which has been adduced by UKL today does not satisfy me that this is a matter of such trivial consequence for the implementation of the Scheme that I should approve the Scheme without the matter first being disclosed to the members of UKL. 15 It seems to me that there are at least three areas where the fact that the SEC holds that view it has expressed, may affect a member's assessment of the risk of the Scheme being implemented in the manner as described in the Scheme booklet. 16 The first area is in relation to the listing of the American Depositary Receipts (the ADRs) referred to in the Scheme Booklet. The significance of the listing of the ADRs is demonstrated by the fact that Mr Gilmour of RSM Bird Cameron has mentioned his expert report that one of the key advantages of the Scheme is that Monaro is planning an ADR listing in the United States in respect of shares in the merged entity. In particular, in his report, Mr Gilmour said: The key advantages are: […] Ÿ Monaro provides greater access to capital through its planned (but not guaranteed) ADR listing in the USA, along with its existing contacts and Australian Financial Services License. This ADR, if the listing is granted, will provide important support towards raising the estimated US$20‑$25 million in additional funding that is required to advance the Apex/Lowboy project… . 17 The Apex-Lowboy project comprises the tenements formerly owned by METCO which were transferred to UKL in September 2006 as part of the transaction to which I have previously referred. 18 The proposed ADR listing is referred to in greater detail on p 76 of the Scheme booklet as follows: UKL Shareholders should also be aware that as at the date of this Scheme Booklet, Monaro is undertaking a proposed American Depositary Receipts (or ADR) listing in the United States. The requisite regulatory filings for such listing are expected to be made to the Securities and Exchange Commission (Washington, United States) and the necessary listing application will be delivered to the American Stock Exchange in the second quarter of 2008. If and when this ADR listing is completed (which cannot be guaranteed), some of the MRO Shares will be listed for trading on the American Stock Exchange in the form of ADR's. At the time of the proposed listing it is expected that, each ten (10) MRO Shares will constitute (or be the equivalent of) one (1) ADR and the depositary bank for the ADR's will be JP Morgan Chase. There will be no new MRO Shares issued (and therefore no funds raised) by Monaro in connection with the initial ADR listing. Investors wishing to receive ADR's will need to deposit the appropriate number of MRO Shares with the depository bank's custodian in Australia prior to receiving delivery of certified ADR's from the depositary bank, subject to the terms and conditions, including without limitation, payment of certain fees, costs and expenses set forth in the applicable deposit agreement among MRO, JP Morgan Chase and the holders of the ADR's thereunder. Initially, MRO will seek to have the ADR's quoted on the OTC Bulletin Board in New York. The OTC Bulletin Board is not a public stock exchange under US Securities laws but is a privately run quotations service which tends to be accessed primarily by brokers/institutions. Quotation on the OTC Bulletin Board will therefore provide limited exposure for the ADRs. As a second stage MRO proposes, as mentioned above, to make in the second quarter of 2008 further regulatory filings with the Securities and Exchange Commission and an application to the American Stock Exchange to have the ADRs listed for trading on the American Stock Exchange. The American Stock Exchange is a public stock exchange under US securities laws. 19 It is apparent from the statements in the report that part of the process of obtaining a listing for the ADRs will require "regulatory filings" to be made to the SEC, with the consequence that the SEC may have some control as to whether the proposed ADR listing occurs. 20 In those circumstances, it seems to me that the SEC's view that UKL has in the past not complied with securities legislation, may affect its attitude to the Monaro's application for a listing of the ADRs and may increases the risk of the listing of the ADRs not proceeding. As the possible listing of ADR's was mentioned as a key advantage of the Scheme, members should, in view, be advised of this information. 21 The second area where the new information may possibly impact on risk assessment, is in relation to the litigation in New Mexico by an aggrieved former minority shareholder in METCO. According to the description of the litigation in the Scheme booklet, the relief sought includes the rescission of the September 2006 METCO transaction and one of the grounds relied on is the failure to comply with regulatory requirements. 22 The third area is the risk of a penalty being imposed on UKL with the attendant possible diminution in of the assets of UKL and so, of the merged entity. 23 Members may have a view as to the risk posed by those three matters to the implementation of the Scheme which in turn may influence their decision as to whether to continue to support the Scheme. 24 I am, therefore, of the view that for the disclosure requirement to be satisfied, members should be advised of the new information. In those circumstances, I will adjourn this application to 24 July 2008 and will require that UKL write to each of the members, advising them of the new information. 25 In the letter to members, the directors of UKL should make disclosure of material facts relating to the risk that the SEC's view may pose to the implementation and operation of the Scheme. I would expect that the information disclosed would include, but would not be confined to, the views expressed by Mr Schmeltzer. However, I will leave it to the directors to make an assessment of what needs to be disclosed in order to fulfil their duty of disclosure to the members. 26 In addition, the members should be advised that the Court has required that they be apprised of the new information, and that they can obtain further information from UKL if they so wish. 27 Further, the letter should state that each member is at liberty to appear at the Court hearing on 24 July 2008 to oppose the making of the final orders approving the Scheme. The letter should also state that any member who intends to appear on that day to oppose the making of the final orders, should write to UKL to that effect stating the grounds of opposition. I certify that the preceding twenty‑seven (27) numbered paragraphs is a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis .