IMO Rand Mining Limited
[2019] VSC 529
•9 August 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 02527
IN THE MATTER of Rand Mining Limited (ACN 004 669 658)
| RAND MINING LIMITED (ACN 004 669 658) | Plaintiff |
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JUDGE: | Gardiner AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 26 July 2019 |
DATE OF JUDGMENT: | 9 August 2019 |
CASE MAY BE CITED AS: | IMO Rand Mining Limited |
MEDIUM NEUTRAL CITATION: | [2019] VSC 529 |
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CORPORATIONS – Corporations Act 2001 (Cth) ss 259C, 1322(4), 1322(6) – Shares and shareholders – Issue or transfer of shares to controlled entity – Validation of acquisition of shares otherwise void by operation of s 259C – Finding that no substantial injustice likely to be caused and that it was just and equitable that the order sought by the plaintiff be made.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Dr E J Boros | Baker McKenzie |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 1
Legal principles.................................................................................................................................. 5
Consideration...................................................................................................................................... 9
HIS HONOUR:
Introduction
This application by originating process filed 4 June 2019 seeks validation of acquisitions by the plaintiff Rand Mining Limited (‘Rand’) of shares in Tribune Resources Limited (‘Tribune’) that would otherwise be void by operation of s 259C of the Corporations Act 2001 (Cth) (‘the Act’) so as to enable Rand to dispose of the subject shares.
On 26 July 2019, I made orders pursuant to s 1322(4) of the Act for validation of share transfers that would otherwise be void under s 259C of the Act. I now publish reasons for making those orders.
The application is supported by an affidavit of Anthony Byron Billis, sworn 29 May 2019. ASIC are on notice of the application and are content for it to proceed subject to the inclusion of certain provisions in the order proposed by Rand. Mr Billis’ affidavit was supplemented at my request by an affidavit of Richard Lustig sworn 1 August 2019.
Section 259C of the Act is contained within Part 2J.2 of the Act which deals with self‑acquisition and control of shares. Section 259C deals with the issue or transfer of shares to a controlled entity. Section 259E makes provision for when a company is said to ‘control’ an entity for the purposes of Part 2J.2.
Section 259C(1) of the Act provides that the issue or transfer of shares of a company to an entity it controls within the meaning of s 259E is void, subject to certain exceptions which do not apply in this case. Section 259C(2) provides that ASIC may exempt a company from the operation of this section but the authorities dealing with this provision make clear that such an exemption can only be issued prospectively.
Rand and Tribune are both resources companies listed on the Australian Stock Exchange (‘ASX’). Rand has a current market capitalisation of approximately $144 million, and more than 500 shareholders. On 26 January 2010, Tribune held 8,317,364 shares in Rand. This represented approximately 20.51 percent of the total voting power in Rand.
On 27 January 2010 Tribune acquired a further 18,359,400 ordinary shares in Rand pursuant to a rights issue (‘Rand rights issue’). Tribune underwrote the Rand rights issue. The purpose of the Rand rights issue was to repay amounts owed by Rand to Tribune and to supplement Rand’s working capital. As a result of the acquisition of the shares pursuant to the Rand rights issue, Tribune attained approximately 43.85 percent of the total voting power in Rand and obtained ‘control’ of Rand.
On 8 January 2014, Rand held 11,923,904 shares in Tribune, approximately 23.70 percent of the voting power in Tribune.
Between 7 and 15 January 2014, Rand acquired a further 1,135,000 shares in Tribune (‘Relevant Shares’) from Ms Melanie Verheggen (who held 592,000 shares), and Mr Kim Parham (who held 543,000 shares) (collectively ‘the vendors’).
Mr Billis, who is a director of both Rand and Tribune, deposes that Ms Verheggen’s husband approached him on behalf of the vendors and requested that Rand purchase their shares in off‑market transactions. Mr Verheggen had previously been a shareholder in Rand and was known to Mr Billis by reason of his historical investment in Rand. He conducted negotiations with Mr Verheggen on behalf of the vendors for Rand to purchase the Relevant Shares.
During Mr Billis’ discussions with Mr Verheggen regarding the sale of the Relevant Shares, Mr Verheggen stated that the vendors were seeking to sell their shares as they were experiencing financial difficulties and, because the market for the stock in Tribune was illiquid, were unable to sell their shares on‑market.
The total number of shares on issue in Tribune in January 2014 was 60,841,207 shares, whilst the number of shares traded, (excluding the Relevant Shares) for the 1 January 2014 to 15 January 2014 period, was only 281,216 shares, representing a capital turnover of less than half of one percent.
Between 7 and 15 January 2014, Rand acquired the Relevant Shares in Tribune from the vendors in the following transactions:
(a) 7 January 2014, an off‑market acquisition of 1 million Tribune shares for a consideration of $2 million (i.e. $2 per share) by a contract of sale entered into on or about 2 January 2014; and
(b) 15 January 2014, an off‑market acquisition of 135,000 Tribune shares for a consideration $270,000 (i.e. $2 per share) by a contract of sale entered into on or about 10 January 2014.
As at the close of trading on 7 January and 15 January 2014 respectively, the market price of Tribune shares on the ASX was $2.40.
Mr Billis observes in his affidavit that the consideration paid for the shares ($2 per share) was below the then market price and that this reflected the fact that the vendors had been unable to sell their stock on-market and their need to sell the shares. At the close of trading on the date preceding the date of his affidavit, 28 May 2019, the market price of Tribune shares was $4.25.
The acquisitions of the Relevant Shares took place some five years ago and since then, the Relevant Shares have been treated as those of Rand. In particular, dividends have been paid by Tribune in relation to the Relevant Shares. This is detailed in Tribune’s 2018 Annual Report and is also reflected in Rand’s taxation return for the year ended 30 June 2018 which is in evidence.
On 26 October 2018, the Takeovers Panel made orders (‘the 26 October 2018 orders’) for the divestment of the shares held by Rand in Tribune, other than the Relevant Shares (‘Takeovers Panel shares’). In the present context, the Takeovers Panel ordered that:
(a) the Takeovers Panel shares be vested in the Commonwealth on trust for Rand; and
(b) ASIC was to sell the Takeovers Panel shares in accordance with orders made by it on 26 October 2018, including requiring ASIC to select an ‘Appointed Seller’ to dispose of the shares.[1]
[1]The 26 October 2018 orders did not require Rand to divest itself of the Relevant Shares.
In the reasons of the Takeovers Panel, it states relevantly that:
The transfers of the [Relevant Shares] were void under s 259C(1) [of the Corporations Act] and there was no material to suggest that the sellers were related to any of the relevant parties … [2]
[2]Reasons for Decision Tribune Resources Ltd [2018] ATP 18, [97] and footnote 38 (‘Reasons’).
On 26 November 2018, a Review Panel varied the 26 October 2018 orders (‘Variation of Orders’) by removing the requirement for the Appointed Seller as defined in the October 2018 Orders to notify ASIC in certain circumstances and clarifying the operation of the 26 October 2018 Orders, but otherwise affirming the 26 October 2018 orders.
Thus, following the Variation of Orders, Rand’s shares in Tribune (other than the Relevant Shares) were vested in the Commonwealth on trust for Rand to be sold. A Form 605 Notice noting that Rand ceased to be a substantial holder in Tribune was lodged with ASIC. Mr Lustig’s affidavit details the sale in a number of tranches of the Takeovers Panel shares between 23 February 2019 and 25 June 2019. The Takeover Panel Shares were sold on market for prices between $3.74 and $4.53 per share. As at close of trading of the day before the hearing of the application, Tribune’s share price was $7.20
The annexure to the Form 605 Notice refers to the fact that the Relevant Shares were not subject to the Takeovers Panel divestment orders and that Rand intended to seek a court order to clarify the position to enable the Relevant Shares to be sold and for the proceeds of sale to be distributed to Rand. In this regard, Rand’s solicitors, Baker McKenzie, provided the Form 605 Notice in draft form to ASIC and consulted with ASIC on it prior to lodging that form. The correspondence recording that consultation is exhibited to Mr Billis’ affidavit.
On 15 February 2019, Baker McKenzie wrote to ASIC, detailing the nature of this application. In that letter, Baker McKenzie inquired whether ASIC had any observations to make in relation to the application. Mr Billis also exhibits email correspondence between Baker McKenzie and ASIC between 15 February and 18 March 2019, including a letter of 18 March 2019 from Baker McKenzie to ASIC, annexing a proposed form of order.
ASIC responded to that letter in an email of 26 March 2019, in which ASIC stated that it required that a third party broker be appointed by Rand to undertake the sale of the Relevant Shares but that ASIC would be prepared to agree to a longer sale period. On 18 April 2019, Baker McKenzie responded, attaching an updated proposed order providing for the appointment of a third party broker and specifying a six month sale period. On 29 April 2019, ASIC replied, stating that the updated proposed orders were in a form acceptable to ASIC.
The Form 605 Notice states that Rand intended to apply to the Court for orders to permit it to sell the Relevant Shares.[3] This proceeding is the application contemplated in the Form 605 Notice.
[3]Paragraph 4 of the annexure to the notice stated ‘The [Relevant] shares are not in the current control of Rand, which intends to seek a court order to clarify the position to enable them to be sold and for the proceeds of sale to be distributed to Rand.’
Legal principles
In Ford, Austin and Ramsay’sPrinciples of Corporations Law, the authors observe in relation to s 259C(1):[4]
This is a very curious provision. It was introduced by the 1998 amendments, to replace the former ss 185 and 205(1)(b). The former s 185 stated that a subsidiary cannot be a member of its holding company. That proposition is no longer the law. If for example a holding company is a company limited by guarantee, there is no longer any provision which would prevent the subsidiary from having a membership by guarantee in its parent. The former s 185 also said that an allotment or transfer to the subsidiary of shares in the holding company was void, and a purported acquisition by the subsidiary of units of shares in the holding company was also void (subject, in each case, to exceptions).
[4]Robert P Austin and Ian M Ramsay, Ford, Austin and Ramsay’sPrinciples of Corporations Law (LexisNexis Butterworths, 17th ed, 2018) [24.400].
An ASIC policy proposal issued in October 1998 identifies what ASIC considers to be the ‘mischief’ which is sought to be addressed in s 259C.
In Re Australia and New Zealand Banking Group Limited& Ors[5], Edmonds J of the Federal Court of Australia made reference to that ASIC policy proposal. At [20], [21] and [22] he stated:
[5](2010) 272 ALR 400.
According to ASIC Policy Proposal: Indirect Self Acquisition by Investment Funds, October 1998, the rationale behind s 259C is that indirect acquisitions by a company of its own shares may result in:
– improper attempts to secure or consolidate corporate control;
– increased possibility of corporate failure;
–possible discrimination between shareholders as when a controlled entity buys the shares of a greenmailer in the controlling entity at an over-valuation;
– insider trading;
– market manipulation; and
–price opacity caused by the difficulty in valuing a consolidated group of companies where assets of the group include shares in the controlling company.
According to this ASIC Policy Proposal, ASIC’s view is that:
5.In [the] absence of relief, we consider that the following acquisitions would contravene s259C(1):
(a)Acquisitions in a company’s shares by a statutory fund of a controlled entity which is an insurance company.
(b)Where a trustee of a unit trust is a controlled entity, the trustee will not be able to rely on the exception in s259C(1)(b) if the company or any of its controlled entities hold units in the trust (as they would have a beneficial interest in the trust). In that case any acquisition by the trust in the company’s shares would contravene s259C(1).
6.In the absence of relief, we consider that there is some doubt as to whether or not the following acquisitions would be acquisitions of units of shares and so contravene s259C(1):
(a)The acquisition by a controlled entity of units in a managed investment scheme (or a prescribed interest scheme) which invests in the company’s shares.
(b)The acquisition by a controlled entity of warrants over the company’s shares.’
ASIC goes on to say in the ASIC Policy Proposal that:
11.In considering who we should give relief to we noted that paragraph 12.67 of the Explanatory Memorandum to the Company Law Review Bill 1997 states that:
“It is envisaged that [ASIC] would exercise this discretion to exempt investments by the statutory fund of a life insurance company in its holding company on conditions designed to provide appropriate safeguards including ensuring that the holding company is not able to inappropriately exercise control over its own shares.”
12.We do not consider that we are bound to give relief only in these circumstances. To date, however, the companies expressing an interest in this relief have been predominantly financial institutions.
13.At this stage we do not envisage giving s259C(2) relief to a company in relation to one of its controlled entities investing the entity’s own funds in the company’s shares (rather than investors’ funds)…
This application is made under s 1322(4) of the Act which provides:
(4)Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:
(a)an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation;
(b)an order directing the rectification of any register kept by ASIC under this Act;
(c)an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a);
(d)an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding;
and may make such consequential or ancillary orders as the Court thinks fit.
In Re Westpac Banking Corporation[6] Emmett J had to consider whether the reference in s 1322 of the Act to ‘a contravention of a provision of the Act’ extended to cover the operation of s 259C of the Act particularly in the context of the application of s 1322(4) and s 1322(6). Emmett J, in considering the exemption provisions of s 259C(2), noted that ASIC in that case had quite properly taken the view that an exemption could only be granted in futuro and could not be granted in respect of a transaction rendered void in the past by the operation of s 259C(1), as is the case in this proceeding.
[6](2004) 53 ACSR 288.
Emmett J concluded that even though there was no specific prohibition in s 259C of the Act, that section was intended to be a prohibition, with the sanction of invalidation for contravention, and that s 1322 could therefore apply.[7]
[7]Ibid [24].
His Honour observed at [24]:
The power conferred by s 1322 should be liberally construed. It is directed to removing technical objections that often arise under the Act. The provision is of a remedial character, and that therefore justifies a liberal interpretation. Notwithstanding that there is no express prohibition on the issue or transfer of shares of a company to an entity it controls, I consider that where such a purported issue or transfer occurs, there is a contravention of s 259C within the meaning of s 1322(4)(a) of the Act.[8]
[8]Ibid.
His Honour went on to consider whether the fact that s 259C used the word ‘void’ rather than ‘invalid’ was an obstacle to the application of s 1322 in this context. His Honour concluded that it was not, saying at [25]:
I do not see any concern in that regard. Invalidity and voidness are similar concepts. Section 1322(4)(a) clearly operates in relation to any act, matter or thing that might be invalid, by reason of a contravention. Whether an issue or transfer of shares is void or invalid does not seem to me to make any difference of substance in the circumstances. I consider that s 1322(4)(a) has application notwithstanding the use of the word ‘invalid’.[9]
[9]Ibid [25].
At [27], His Honour observed:
I consider that the syntax of s 1322(6)(a) is quite clear in contemplating that only one of the three paragraphs of s 1322(6)(a) needs to be satisfied in order to authorise the making of an order. That is to say, the Court must be satisfied that the act, matter or thing is of a procedural nature or that the person or persons acted honestly or that it is just and equitable that an order be made. In any of those cases of course, the Court must also be satisfied that no substantial injustice has been or is likely to be caused to any person. I am satisfied that it is just and equitable that an order be made in this case and that no substantial injustice has been or is likely to be caused to any person by the validation of the transactions in question. I am satisfied that the Court has power to make an order under s 1322(4)(a) in the circumstances of this case.[10]
[10]Ibid [27].
Subsequent cases have similarly treated s 1322 of the Act as being available to validate a breach of section 259C.[11]
[11]See Re Commonwealth Bank of Australia (2005) 57 ACSR 28; Re MLC Limited (2006) 60 ACSR 187; Re Australia and New Zealand Banking Group Limited (2010) 272 ALR 400; Re Macquarie Group Limited [2010] FCA 1507, [3] and Re Macquarie Securities (Australia) Limited [2014] FCA 455.
In order for the Court to make an order under s 1322(4)(a), s 1322(6)(a) of the Act requires that one of the following be satisfied:
(a) that the act, matter or thing, or the proceeding referred to is essentially of a procedural nature;
(b) that persons concerned in or party to the contravention or failure acted honestly; or
(c) that it is just and equitable that the order be made.
It seems clear that satisfaction of any one of those conditions will satisfy the Court that it may make an order under s 1322(4)(a).[12] Section 1322(6)(c) also requires that in every case no substantial injustice has been or is likely to be caused to any person.
[12]See Westpac Banking Corporation (2004) 53 ACSR 288 [26]-[27]; Weinstock v Beck (2013) 251 CLR 396 [64].
Consideration
Rand’s application is made on the basis that the jurisdiction of the Court to make the order was attracted by s 1322(6)(a)(iii), i.e. that it was just and equitable that the orders sought be made. Dr Boros, counsel for Rand, submitted that the factors that support that submission include:
(a) the acquisition of the Relevant Shares occurred more than five years ago, and for the last five years, the Relevant Shares have been treated as being those of Rand. In particular, dividends have been paid by Tribune in relation to the Relevant Shares, which have been reflected in taxation returns filed by Rand;
(b) the acquisitions were disclosed to the market at the time;
(c) the sellers of the Relevant Shares initiated the sales and received valuable consideration for the acquisition of their shares;
(d) there has been public disclosure by Rand in the Form 605 referred to in paragraphs 9 and 10 above of Rand’s intention to make this application;
(e) ASIC has confirmed that the undertakings that are proposed to be given by Rand are in a form acceptable to it. They include undertakings:
(i) to appoint an independent broker to sell the Relevant Shares;
(ii) to sell the Relevant Shares within six months of the order; and
(iii) excluding Rand’s directors and their associates from acquiring any of the Relevant Shares (other than via an anonymous on-market sale); and
(f) there is no way of regularising Rand’s holdings and enabling it to dispose of the Void Shares, other than with the assistance of the Court.[13]
[13]ASIC takes the view that its power under s 259C(2) to exempt a company from the operation of s 259C only applies in futuro.
Further, it was submitted that the validation order in this case is sought:
(a) for the limited purpose of enabling Rand to dispose of the Relevant Shares;
(b) for a limited period (nominated having regard to the difficulty experienced in selling the shares the subject of the 26 October 2018 orders);
(c) in circumstances where the intention to make the application has been the subject of disclosure to the market;
(d) where ASIC has been informed of the application and has indicated that the form of the orders that are proposed by Rand are acceptable to it; and
(e) where the sale process will be conducted by an independent broker and subject to oversight by ASIC.
As required by s 1322(6)(c), I am satisfied that no substantial injustice has been or is likely to be caused to any person by the transfer of the relevant shares or the orders sought by the plaintiffs.
I agree with Dr Boros’ submissions that, for the reasons and factors she describes in her submissions, this is an appropriate case for the exercise of the Court’s discretion under s 1322(4) and that it is just and equitable that the orders sought be made.
The orders I made on 26 July 2019 are as follows:
Upon the undertakings by the plaintiff:
(a)to dispose of the Void Shares within six months of the date of this order or a longer period approved by the Australian Securities and Investments Commission (ASIC);
(b)to retain an investment banker or stock broker (Broker) to conduct the sale of the Void Shares;
(c) to instruct the Broker:
(i)to use the most appropriate sale method to secure the best available sale price for the Void Shares that is reasonably available at that time, in the context of the stipulated timeframe for the sale and the requirement that none of the plaintiff, its directors including Mr Anthony Billis, Ms Phanatchakorn Wichaikul, Ms Buasong Wichaikul, Sierra Gold Ltd, Sierra Gold Pty Ltd, Trans Global Capital Ltd, Nimby WA Pty Ltd, Lake Grace Exploration Pty Ltd and Northwest Capital Pty Ltd (Relevant Parties) or their respective associates may acquire directly or indirectly, any of the Void Shares;
(ii)to provide to ASIC a statutory declaration that, having made proper inquiries, the Broker is not aware of any interest, past, present, or prospective which could conflict with the proper performance of the Broker’s functions in relation to the disposal of the Void Shares;
(iii)unless the Broker sells Void Shares on market (namely, in the ordinary course of trading on Australian Securities Exchange and not by crossing or special crossing), to obtain from any prospective purchaser of Void Shares a statutory declaration including:
A.a statement that the prospective purchaser is not associated with any of the Relevant Parties;
B.details of all historical relationships or connections (if any) between the prospective purchaser and any Relevant Party; and
C.details of all communications, agreements, arrangements or understandings (if any) between the prospective purchaser and any Relevant Party in the 12 months prior to the date of the statutory declaration:
(iv)to provide ASIC with a copy of each statutory declaration obtained under paragraph (c)(iii) within two business days of receipt and not sell any Void Shares to a prospective purchaser until 2 business days after providing ASIC with a copy of the statutory declaration from the prospective purchaser;
(v)unless the Broker sells the Void Shares on the market, not to sell any Void Shares to a prospective party:
A. who is a Relevant Party;
B.who does not provide a statutory declaration containing the statement and information required by paragraph (c)(iii); or
C.in circumstances where ASIC has informed the Broker that it has reason to believe or suspect, drawing inferences where necessary, that the prospective purchaser may be an associate of a Relevant Party, unless ASIC has subsequently advised the Broker that it has formed the view that, on the basis of the information available it is not likely that the prospective purchaser is an associate of a Relevant Party;
(d)to do all things necessary to ensure that Tribune Resources Limited (which is a related body corporate of the plaintiff) does not require any of the Void Shares under a share buy back;
THE COURT ORDERS:
1.Pursuant to section 1322(4) of the Corporations Act 2001 (Cth) (the Act) the transfers of 1,135,000 shares in Tribune Resources Limited (ACN 009 341 539) (Void Shares) to the plaintiff in January 2014 were not invalid by reason of the operation of section 259C of the Act.
2. There be liberty to apply.
3. There be no order as to costs.
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