Re Azure Minerals Ltd
[2024] WASC 58
•6 MARCH 2024
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: AZURE MINERALS LIMITED [2024] WASC 58
CORAM: LUNDBERG J
HEARD: 1 MARCH 2024
DELIVERED : 6 MARCH 2024
FILE NO/S: COR 192 of 2023
BETWEEN: AZURE MINERALS LIMITED
Plaintiff
S H MINING PTY LTD
Interested Party
Catchwords:
Corporations Law - Scheme of arrangement under s 411 of the Corporations Act 2001 (Cth) - Plaintiff lithium mining company to be wholly acquired by vehicle jointly owned by two large mining groups - Scheme forms part of a dual scheme and takeover process - First court hearing - Voting intention statements received from the plaintiff's major shareholders in favour of proposed Scheme - Independent expert of the opinion that proposed scheme is fair and reasonable and in the best interests of the shareholders - Whether appropriate for orders to be made convening scheme meeting and for dispatch of scheme booklet - Turns on own facts
Legislation:
ASIC Regulatory Guide 111
Corporations Act 2001 (Cth), s 411 and s 1319
Corporations Regulations 2001 (Cth), sch 8
Supreme Court (Corporations) (WA) Rules 2004, r 3.2
Takeovers Panel Guidance Note 23: Shareholder Intention Statements
Result:
Orders made in terms of plaintiff's minute of proposed orders dated 1 March 2024 to convene scheme meeting and authorise dispatch of scheme booklet
Category: B
Representation:
Counsel:
| Plaintiff | : | A J Papamatheos and K A Sleiman |
| Interested Party | : | S K Dharmananda SC |
Solicitors:
| Plaintiff | : | Corrs Chambers Westgarth |
| Interested Party | : | King & Wood Mallesons and Herbert Smith Freehills |
Case(s) referred to in decision(s):
FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69
Re Anatolia Energy Limited [2015] FCA 1134
Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252
Re Healthscope Ltd [2019] FCA 542; (2019) 139 ACSR 608
Re Huon Aquaculture Group Limited [2021] FCA 1170
Re Nitro Software Limited [2023] NSWSC 13
Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349
Re Programmed Maintenance Services Ltd [2017] FCA 1265
Re SRG Ltd [2018] FCA 1092
Re Village Roadshow Limited (No 2) [2020] FCA 1857
Re Virtus Health Ltd [2022] NSWSC 597
Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd [2018] WASC 308
Re Zenith Energy Ltd [2020] WASC 266
Technology Metals Australia Limited v Australian Vanadium Limited [2024] WASC 26
Table of Contents
A. Introduction and overview
B. Framework of the Scheme
C. Materials relied upon by the plaintiff
D. Legislative Framework
E. Issues for determination
F. Statutory and procedural requirements
Statutory requirements
ASIC's reasonable opportunity
Adequacy of the Transaction Booklet
Procedural requirements
G. Court's discretion
Dual scheme and takeover process
Independent expert's opinion
Director's interests and recommendations
Shareholder voting intention statements
Shareholder communications
Performance risk
Common scheme features
H. Conclusion and orders
ATTACHMENT A Orders made on 1 March 2024
LUNDBERG J:
A. Introduction and overview
The plaintiff to this proceeding, Azure Minerals Limited (Azure), is an ASX listed entity which controls various mineral projects in Western Australia, including the Andover Lithium Project which is located in the mineral-rich Pilbara region of this State.
This proceeding was initially commenced by originating process filed on 6 December 2023, seeking orders to initiate, and ultimately approve, a particular scheme of arrangement between the plaintiff and its members (other than certain excluded members).[1] That scheme process was adjourned in mid-December 2023 following an announcement that Azure had entered into a new arrangement for the acquisition of the plaintiff's shares, as a consequence of which the initial scheme transaction was cancelled.
[1] Originating process dated 6 December 2023, referring to a scheme between the plaintiff and its members by which the shares in the plaintiff would be acquired by SQM Australia Pty Ltd.
The new arrangement involves two alternative transaction structures, intended to run concurrently, being a scheme of arrangement process under Chapter 5 of the Corporations Act 2001 (Cth) (the Act),[2] and an off-market takeover offer under Chapter 6. In essence, both structures involve the proposed joint acquisition of Azure by, in effect, the group of companies headed by Sociedad Quimica y Minera de Chile S.A. (SQM) and the group of companies headed by Hancock Prospecting Pty Ltd (Hancock). SQM is a Chilean diversified chemical and mining company listed on the Santiago and New York Stock Exchanges. Hancock is a large privately held Australian mining company.
[2] References to statutory provisions in these reasons are to the Act unless stated otherwise.
On 19 January 2024, the court made orders to allow the originating process to be amended to reflect the new scheme of arrangement which has been proposed.
The plaintiff has now applied for orders pursuant to s 411(1) and s 1319 to convene a meeting (Scheme Meeting) of the holders of the fully paid ordinary shares (Shares) in the capital of the plaintiff (Scheme Shareholders), other than the excluded shareholders, to consider a proposed scheme of arrangement (Scheme)[3] between the plaintiff and the Scheme Shareholders.[4]
[3] Such applications are now subject to the harmonised practice direction which has been adopted in this court: see Consolidated Practice Directions PD 9.5.2.
[4] Scheme, cl 5.2, 6.1, 1.1 with Schedule 1; and Sleiman Affidavit, Attachment KS-2, page 239.
At this first hearing, the plaintiff sought orders to have the Scheme Meeting convened (to occur on 8 April 2024), to have the Transaction Booklet dispatched to Shareholders,[5] and for associated orders.
[5] The draft Transaction Booklet which contains the explanatory statement required by s 412(1)(a) is found in the Dickson Affidavit at Attachment BD-18. The final Transaction Booklet is attached to the Third Sleiman Affidavit.
For the reasons set out below, I was satisfied the orders sought by the plaintiff should be made. The orders which I made on Friday, 1 March 2024 are set out in Attachment A to these reasons.
It is important that I emphasise at the point, as is also noted later in these reasons, that the orders made by the Court at the first hearing do not reflect the grant of the Court's approval to the Scheme, nor do they represent an assessment of the commercial merits of the Scheme. It remains necessary for the statutory majorities to be obtained from the shareholders of Azure at the Scheme Meeting to be held on Monday, 8 April 2024. There remain other relevant approvals to be obtained, together with the satisfaction or waiver of applicable conditions precedent. Approval of the Scheme must then wait to be addressed at the final hearing, which is scheduled for Wednesday, 10 April 2024, at which time ASIC and any interested persons may be heard.
B. Framework of the Scheme
On 19 December 2023, Azure and the acquiring party's parent companies entered into a Transaction Implementation Deed (TID) pursuant to which it is proposed that two alternative transaction structures, to run concurrently, will be offered to the shareholders of Azure.[6]
[6] Second Sleiman Affidavit, pages 12 – 137. This is the instrument which replaced the initial transaction instrument.
As explained in the supporting affidavit of the plaintiff's solicitor, the first transaction structure is the Scheme itself, pursuant to which Shareholders will be offered cash consideration for each Share they own.
The second transaction structure is an off-market takeover offer under Chapter 6 of the Act, pursuant to which Shareholders will be offered a slightly lower cash consideration for each Share they own.[7] The bid is conditional, amongst other matters, on the Scheme not becoming effective.
[7] Second Sleiman Affidavit, [7] – [9].
As submitted by the plaintiff, the terms of the TID facilitate the processes by which these two change of control mechanisms under the Act can be simultaneously engaged.
The proposed Scheme is relatively straightforward, putting to one side for now the dual nature of the transaction. If ultimately implemented, the Scheme will involve the acquisition of all of the Shares in the plaintiff (other than those which are excluded) by another entity.
The acquiring company is to be SH Mining Pty Ltd (SH Mining), which has been joined as an interested party in these proceedings. SH Mining is a newly incorporated company which is ultimately 50% owned by each of the SQM group and the Hancock group.
The consideration for the acquisition (the Scheme Consideration) is $3.70 cash for each Share. Accordingly, for an overall transaction price of around $1.061 billion in cash, SH Mining would wholly acquire the plaintiff. The cash consideration under the off-market takeover transaction is slightly less, at $3.65 per share.
The principal transaction instruments to which my attention has been drawn consist of the TID,[8] the Scheme Deed Poll,[9] the Joint Bidding Deed,[10] and the Scheme itself.[11]
[8] Second Sleiman Affidavit, pages 12 – 137. This is the instrument which replaced the initial transaction instrument.
[9] Second Sleiman Affidavit, pages 123 – 134; Third Sleiman Affidavit, pages 394 – 395 (execution pages).
[10] Dickson Affidavit, page 309.
[11] Third Sleiman Affidavit, pages 377 – 393.
By cll 5.2, 6.1, 9.3, 9.5, 9.6, and 10.2 of the Scheme, if it is made effective, all the ordinary shares in Azure (other than the defined Excluded Shares) will be transferred to SH Mining for the Scheme Consideration, irrespective of whether a Scheme Shareholder did not attend the Scheme Meeting, did not vote at that meeting, or voted against the Scheme at that meeting.
By cl 3.1 of the Scheme Deed Poll, SH Mining undertakes in favour of each Scheme Shareholder to pay the Scheme Consideration, and undertake all other actions attributed to it under the Scheme. Further by cl 3.2, each of SQM and Hancock provide a guarantee of SH Mining's obligations.
As to the takeover offer which forms part of the dual transaction structure, counsel for the plaintiff noted that relief has been obtained from ASIC by SH Mining in relation to the requirement under s 631 to make an offer within two months of a proposal being made.[12] Counsel also noted that the plaintiff requires an approval from its shareholders under s 611 (item 7) which is a matter to be the subject of a separate general meeting which will be held on the same day as the Scheme Meeting. The general meeting will be held immediately prior to the Scheme Meeting.[13]
C. Materials relied upon by the plaintiff
[12] Dickson Affidavit, Attachment BD-11 and Attachment BD-18.
[13] Third Sleiman Affidavit, page 397 (Notice of EGM) and page 401 (Notice of Scheme Meeting).
For the purposes of the first hearing, the plaintiff relied on the following affidavits:
(a)the affidavit of Katrina Anne Sleiman affirmed on 6 December 2023 (First Sleiman Affidavit);
(b)the affidavit of Katrina Anne Sleiman affirmed 19 February 2024 (Second Sleiman Affidavit);
(c)the affidavit of Brett Douglas Dickson affirmed 26 February 2024 (Dickson Affidavit);
(d)the affidavit of Thomas David Gray sworn on 1 March 2024 (Gray Affidavit);
(e)the affidavit of Simeon Giles Flanagan sworn on 29 February 2024 (Flanagan Affidavit); and
(f)the affidavit of Katrina Anne Sleiman affirmed 1 March 2024 (Third Sleiman Affidavit).
Ms Sleiman is a partner with the law firm which is on the record for the plaintiff (Corrs Chambers Westgarth). Mr Dickson is the Chief Financial Officer and Company Secretary of the plaintiff. Mr Gray is a partner of one of the law firms (Herbert Smith Freehills) jointly acting for the interested party. Mr Flanagan is a solicitor with the other law firm (King & Wood Mallesons) which jointly acts for the interested party.
The court was also provided with a detailed and helpful outline of submissions incorporating a compliance checklist, together with a minute of proposed orders.
D. Legislative Framework
The relevant legislative framework for the consideration of a scheme of arrangement is found in s 411. The principal requirements which must be satisfied for a proposal to come within the legislative framework are set out in s 411(1), which is in the following terms:
Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings.
The legislation thus requires that the court be satisfied the scheme is an arrangement, and that it is between a Part 5.1 body and its members. Further, an issue may arise as to whether the arrangement has properly characterised the class or classes of members to be bound by the Scheme.
E. Issues for determination
It is well settled that the court should order the convening of a scheme meeting and approve the dispatch of an explanatory statement if satisfied of the following matters:
(a)the scheme is an arrangement in respect of which the court may order a meeting of the members or creditors: s 411(1). That is, the scheme is an arrangement, the company is a Part 5.1 Body, the scheme participants are members of the scheme company, and the scheme meeting will be convened between members of the same class;
(b)ASIC has had a reasonable opportunity to: (i) examine the terms of the scheme and explanatory statement; and (ii) make submissions to the court in relation thereto: s 411(2)(b);
(c)the explanatory statement provides adequate disclosure (s 412(1)(a)(i)) and contains the prescribed information as required by s 412(1)(a)(ii), reg 5.1.01 and Schedule 8 cl 8301 to cl 8310 of the Corporations Regulations 2001 (Cth) (Corporations Regulations);
(d)the procedural requirements of the Rules have been met and an independent person will chair the scheme meeting;
(e)the proposed scheme is bona fide and properly proposed; and
(f)that there is no apparent reason why the scheme should not, in due course, receive the court's approval if the necessary majority of members' votes is achieved.
If the statutory and procedural requirements are satisfied, the court has a discretion to convene the Scheme Meeting and approve the dispatch of the Transaction Booklet. That will require that I consider whether the Scheme was properly proposed (that is, bona fide) and within power (intra vires),[14] and the Scheme is of such a nature and cast in such terms that, if agreed to by the requisite majorities at the Scheme Meeting, the court will be likely to approve it on the hearing of an application which is unopposed.[15]
[14] Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349[24]; Re Programmed Maintenance Services Ltd [2017] FCA 1265 [48]; Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd [2018] WASC 308 [63(1)].
[15] Re Wesfarmers Ltd [63(2)]; Re Zenith Energy Ltd [2020] WASC 266 [28(g)].
The standard of review at the first stage of the scheme process is well settled, and may be explained by reference to the following propositions:
(a)It is uncontroversial that, at the first stage of the scheme process, the standard of review is whether the scheme is not inappropriate and is one that sensible businesspeople might consider of benefit to the scheme's members. If the proposed arrangement is one that seems fit for consideration by a meeting of members and is a commercial proposition likely to gain the court's approval if passed by the necessary majority, leave should be given to convene the meeting.[16]
(b)Put another way, and to further contextualise the nature of the first hearing, the role of the court at the first stage of the process of a company propounding and implementing a scheme of arrangement is not to scrutinise the commercial merits (or demerits) of whether the scheme should be approved.[17] The approval 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.[18]
(c)The court's grant of leave at the first hearing thus does not involve the court giving its approval to the proposed scheme.[19]
F. Statutory and procedural requirements
Statutory requirements
[16] FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 72; Re SRG Ltd [2018] FCA 1092 12]; Re Wesfarmers Ltd [63] - [65], [72] - [76].
[17] Re Wesfarmers Ltd [72] - [75].
[18] Re Anatolia Energy Limited [2015] FCA 1134 [28] and Re Wesfarmers Ltd [73].
[19] Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 [36] and [44].
I was satisfied that the statutory and procedural requirements had been demonstrated by the plaintiff.
As to the statutory requirements, identified at [24] above, I was satisfied the proposal before the court was an 'arrangement'. It concerns a change in the rights of members in their capacity as members. The plaintiff is a Part 5.1 body, being a company registered under the CA. The scheme participants are members of the plaintiff, and the proposed scheme meeting will be convened between members of the same class as all of the shareholders have the same rights under the Scheme, namely the right to receive the Scheme Consideration for their shares.[20]
ASIC's reasonable opportunity
[20] In this regard, I have had regard to, and accept, the submissions made by the plaintiff at [12] – [15] of the Plaintiff's submissions.
I was satisfied that ASIC has been afforded a reasonable opportunity to examine the Transaction Booklet and the Scheme. The relevant materials were provided to ASIC on 14 February 2024.[21]
[21] Dickson Affidavit, [74] – [76], and Attachments BD-21 and BD-22.
Further, a letter from ASIC dated 1 March 2024 was provided to the court confirming these matters and indicating that ASIC does not propose to appear to make submissions or intervene to oppose the Scheme at this first hearing.[22]
Adequacy of the Transaction Booklet
[22] Third Sleiman Affidavit, Attachment KS-6.
An important feature of the scheme approval process is that shareholders are to be provided with proper and adequate disclosure of matters relevant to the decision they are asked to make. That is, whether to vote for or against the scheme being proposed by the plaintiff company. Where the transaction being proposed is complex, the scheme booklet must be scrutinized to ensure it provides the broad church of shareholders, which typically stretches from sophisticated institutional investors to retail investors, sufficient information in a clear manner to enable an informed assessment to be undertaken. In the present case, the presence of a dual transaction structure further emphasizes the importance of this requirement.
To put the matter simply, at the first hearing stage, the court should be satisfied, prima facie, that there has been proper disclosure with nothing misleading or deceptive in any material sense
As to the adequacy of disclosure and compliance with the regulatory requirements, I have reviewed the Transaction Booklet and I also had regard to the detailed compliance checklist which has been provided to the court by the plaintiff's solicitors as an attachment to the submissions.
The checklist confirms the Transaction Booklet meets the requirements of Schedule 8 to the Corporations Regulations as well as the requirements set out in ASIC Regulatory Guide 60.[23] The Scheme Booklet is of course required to essentially set out 'all the main facts as will enable shareholders to exercise their judgement on the proposed scheme'.[24]
[23] Plaintiff's submissions, pages 17 - 21.
[24] Re NRMA Insurance Ltd (No 1) [16].
On my assessment, the Transaction Booklet, while understandably voluminous given the complexity of the transactions, is structured in such a way as to provide members with a fair and proper ability to understand the transactions, the advantages and disadvantages, and risks of the voting options which are available to them. I note, in particular, the inclusion of the overview section at the commencement of the Transaction Booklet, which incorporates a visual aid to assist shareholders to understand the process.[25] An additional visual aid is included later in the Transaction Booklet, which identifies the key decisions to be made by the Azure shareholders.[26]
[25] Transaction Booklet, pages 1 – 3.
[26] Transaction Booklet, page 29.
The overview incorporates the following explanatory text for the shareholders:[27]
• Azure has entered into a transaction implementation deed with SQM Parent and Hancock Parent under which it is proposed that those two entities (via SH Mining, a joint bid vehicle) will seek to acquire 100% of the shares in Azure that the Joint Bidder Group does not already own (Transaction). SQM and Hancock (among others) have entered into a joint bidding deed which governs how the Transaction will be managed as between them.
• The Transaction replaces the previous proposal by SQM announced on 26 October 2023, which has now been terminated.
• The Transaction involves a scheme of arrangement and a fall-back takeover offer. They are each subject to certain conditions summarised in detail in this Transaction Booklet.
• The consideration offered under the Scheme is $3.70 per Azure Share and the consideration offered under the Takeover Offer is $3.65 per Azure Share. There is a difference in the consideration because, amongst other reasons, under the Takeover Offer SQM and Hancock might not obtain 100% control of Azure (whereas, under the Scheme, if implemented, they would).
• Both the Scheme and Takeover Offer are conditional on Azure shareholders approving a resolution for the purposes of item 7 of section 611 of the Corporations Act. This approval is required because the joint bidding arrangements between SQM and Hancock technically result in SQM, Hancock and SH Mining acquiring a Relevant Interest in each other's Azure Shares and exceeding the 20% takeover threshold under the Corporations Act.
• The Takeover Offer is conditional on the Takeover (Scheme) Condition being satisfied (which will happen if, for example, the Scheme is not approved by Azure Shareholders or the Court, or if the Scheme is terminated in certain circumstances) or waived.
[27] Transaction Booklet, page 1.
The overview is followed, in the usual way, by letters from the Chairperson of Azure and from the joint bidders, which provide readers with digestible summaries of the transactions.[28]
[28] Transaction Booklet, pages 4 – 11.
Thereafter, salient aspects of the Transaction Booklet worth noting, but which are relatively usual in such booklets, include the Frequently Asked Questions section, a summary of the Actions required by shareholders (which includes the visual aid referred to above), followed by summaries of the key considerations concerning the transactions, as well as key features of the Scheme and of the Takeover Offer.
At the hearing on 1 March 2024, counsel drew my attention to changes which had been made to the terms of the Transaction Booklet in the lead up to the hearing, following conferral with ASIC and following the further consideration of the Transaction Booklet by Azure and its advisers.[29]
[29] Third Sleiman Affidavit, Attachment KS-4.
These changes included additional statements concerning the sensitivity of lithium asset valuations,[30] which were incorporated into the letter from the joint bidders and in section 3 which is headed 'Key considerations in relation to the Transaction'. By way of example, under the heading addressing the conclusion of the independent expert, the plaintiff Board updated the Transaction Booklet to emphasise the following matters: [31]
(a)that any valuation of the Azure shares is subjective and the lithium asset valuations are highly sensitive;
(b)that the independent expert used the long-term lithium carbonate equivalent price (the LCE price) in undertaking the discounted cash-flow analysis, but did not use that price when normalizing transaction multiples;
(c)that the Azure Board undertook its own calculation of the expected value range, using the same basis applied by the independent technical specialist, but also calculated the normalization factor (or NF) using the long-term LCE price of US$20,000/t;
(d)that the valuation range for Azure based on the Board's own calculation was between $2.40 and $3.50 per share; and
(e)finally, to affirm that the Azure Board continue to recommend the Transaction to its shareholders regardless of the commodity price which was assumed in the calculations or valuations, and to affirm that the Board agreed with the independent expert's conclusion that the Scheme is fair and reasonable to Azure shareholders and so in the best interests of those shareholders, in the absence of a superior proposal.
[30] Transaction Booklet, page 42.
[31] Third Sleiman Affidavit, Attachment KS-4 at page 31.
The foregoing changes were appropriate in my view.
I was also satisfied that Azure and the respective parent companies of SH Mining (the SQM Group and the Hancock Group) had each undertaken a process to verify the accuracy of the contents of the information for which they were responsible in the Transaction Booklet, including to ensure that the information did not contain any false, misleading or deceptive statement (including by omission) and did not omit any required or material information.
I will turn first to Azure's verification. Mr Dickson, in his capacity as Chief Financial Officer and Company Secretary of the company, was a member of the due diligence committee established by Azure to verify the statements in the Transaction Booklet. Mr Dickson has deposed to his belief, based on the comprehensive process undertaken by the company and its legal and financial advisers (Corrs Chambers Westgarth and Barrenjoey Advisory) that all reasonable steps have been taken to verify the statements in the Transaction Booklet which relate to Azure and that those statements are true and complete, are not misleading or deceptive, and that the Azure Information does not omit any material information.[32]
[32] Dickson Affidavit, [73].
The board of directors of Azure approved the submission to ASIC of the draft Transaction Booklet.[33]
[33] Dickson Affidavit, [66].
Turning next to the parent groups of SH Mining, I have reviewed the affidavits of Mr Gray and Mr Flanagan which were filed on the morning of the hearing. Those affidavits provided a thorough exposition of the comprehensive due diligence processes undertaken by the parent groups, with the support of their legal and financial advisers. I refer in this regard to the matters deposed to in the Gray Affidavit at [12] to [25], and in the Flanagan Affidavit at [10] to [19].
Procedural requirements
As to the procedural matters to be satisfied, the plaintiff has dealt with the requirements concerning the nomination of the chairperson for the Scheme Meeting through the Dickson Affidavit.[34] I refer to Rule 3.2 of the Corporations Rules in this regard, and also note that Practice Direction 9.5.2.3(d) provides that the consent of the chairperson and alternate chairperson of the Scheme Meeting can permissibly be provided by evidence led on information and belief.
[34] Dickson Affidavit, [39] – [40].
Mr Brian Thomas, the non‑executive chairperson of Azure, was nominated to be the chairperson of the Scheme Meeting.[35] Mr Anthony Rovira, the managing director of Azure, is the alternative nominated chairperson for the Scheme Meeting. I am satisfied the requirements of the Corporations Rules have been met on this application.
G. Court's discretion
[35] Affidavit of Ian Prentice affirmed 15 November 2023, [52] - [53].
I will now deal with some broader matters, relevant to the exercise of the court's discretion whether to grant the orders sought, with a particular focus on the specific issues which were highlighted by counsel for the plaintiff at the hearing. These are matters which may impact on the assessment whether the proposed scheme is bona fide and properly proposed, and whether there is any apparent reason why the scheme should not, in due course, receive the court's approval if the necessary majorities are achieved.
Dual scheme and takeover process
Counsel for the plaintiff drew my attention to several authorities in which the use of a dual scheme and takeover process have been considered. As counsel observed, in none of those authorities did the Federal Court or Supreme Court of New South Wales identify any impediment or prohibitive concern with these procedures being simultaneously pursued.
Counsel drew my attention in particular to Re Healthscope Ltd,[36] Re Virtus Health Ltd,[37] Re Nitro Software Limited,[38] Re Village Roadshow Limited (No 2)[39] and Re Huon Aquaculture Group Limited.[40] In the last two authorities mentioned, two alternative schemes had been proposed at one time. Indeed, in the last of the authorities, two alternative and concurrent schemes of arrangement and a simultaneous takeover bid were proposed
[36] Re Healthscope Ltd [2019] FCA 542; (2019) 139 ACSR 608.
[37] Re Virtus Health Ltd [2022] NSWSC 597.
[38] Re Nitro Software Limited [2023] NSWSC 13.
[39] Re Village Roadshow Limited (No 2) [2020] FCA 1857.
[40] Re Huon Aquaculture Group Limited [2021] FCA 1170.
At the first hearing stage of the matter, it is unnecessary for the court to opine at length on the effect and implications of the dual transaction approach which the plaintiff has proposed. No party has appeared to act as a contradictor on the issue and in those circumstances it would be unwise to embark on a detailed assessment as to the validity of a concurrent scheme/takeover structure. Further, it is apparent that ASIC has been given adequate notice of the nature of these transactions and has not raised an issue, albeit at this early stage. ASIC has naturally reserved the right to raise issues at the second hearing. Finally, I am conscious of the importance of consistency in judicial decisions in relation to scheme applications brought pursuant to s 411 and recognise that similar transactions have been assessed as being amenable to the scheme of arrangement process. This consideration was, indeed, emphasised by Black in Re Nitro Software Limited.[41]
[41] Re Nitro Software Limited [31].
To the extent that any shareholder, or the regulator, wishes to raise any issue of public policy, fairness or legislative interaction between Chapters 5 and 6 of the Act (and as to any issue thought to arise under s 411(17)), that can be accommodated and dealt with at the second hearing of the application.
Independent expert's opinion
The Transaction Booklet incorporates a report prepared by the independent expert, Deloitte (the Independent Expert), authored by Mr Nick Ivery and Mr Stephen Reid (the IER).[42] The IER is necessarily lengthy, and includes appendices which provide an overview of the valuation methodologies, the lithium industry, comparable companies, and a technical expert's report (which itself runs for over 50 pages).[43]
[42] Transaction Booklet, Annexure 1.
[43] The independent technical specialist is Behre Dolbear Australia Pty Ltd (BDA), being a subsidiary of an international minerals industry consulting group (Technical Expert).
Before I address the IER, I should confirm the purpose of the report provided by the Technical Expert. That report provides an independent assessment of the technical aspects of the projects, exploration potential and the potential risks. It is apparent that the Independent Expert relied on the Technical Expert's report to assess the technical issues, associated risks, and in undertaking the valuation of the Azure shares in the context of the proposed Transactions the subject of the Transaction Booklet.
As to the IER, the covering letter to the report provides a concise overview of their opinion. Specifically, the Independent Expert opines that 'the Scheme is fair and reasonable and therefore in the best interests of the Non-Associated Shareholders' and, additionally, 'the Takeover is fair and reasonable to the Non-Associated Shareholders'. The Independent Expert notes that the Non-Associated Shareholders are required to pass the s 611 item 7 resolution in order for the Scheme or the Takeover to proceed and, in their opinion, that resolution is also 'fair and reasonable on the basis that both the Scheme and the Takeover are fair and reasonable'.[44]
[44] Third Sleiman Affidavit, page 248 (IER).
The Independent Expert first addressed whether the consideration offered under both the Scheme and the Takeover was fair. This was done by comparing the fair market value of a share in Azure on a control basis with the consideration offered by SH Mining under the transactions. The Independent Expert has included a simple table to demonstrate the comparison between the estimated fair market value of an Azure share relative to the consideration offered by SH Mining, as follows:[45]
[45] Third Sleiman Affidavit, page 248 (IER).
The IER then provides an overview of the valuation process undertaken to reach the estimate of the fair market value of the Azure shares. That process incorporates reliance on the Technical Expert's report, mentioned earlier in these reasons. The expert's approach is conveniently summarised on page 5 of the report:[46]
We have estimated the fair market value of Azure by applying the sum-of-the-parts methodology. Behre Dolbear Australia Pty Limited (BDA) was engaged to provide an independent valuation of Azure's assets, given their early stage of exploration. The most significant asset is the Andover Project which, while hosting JORC Code-compliant nickel Mineral Resources, is primarily valued by the market for its significant lithium prospectivity.
BDA used a market-based methodology, with reference to transactions in comparable assets, to value the Andover Project. This approach requires the determination of an appropriate multiple to apply to the attributable resources of the subject asset. Although a JORC Code-compliant lithium Mineral Resource is yet to be reported for the Andover Project, BDA considers a willing and knowledgeable buyer would incorporate the Company's lithium exploration target in its assessment of value, given the work completed to date on the Andover lithium prospect (referred to as the Andover Lithium Project to distinguish from the nickel component of the project). BDA has assessed the work done by the Company and considers 240 million tonnes (Mt), reflecting the high end of the Company's exploration target range, to be an acceptable basis for valuation. BDA considers the midpoint of the exploration target grade, being 1.25%, is appropriate to apply to this resource base assumption, based on recent drilling results.
We also considered the value of the Andover Lithium Project in the context of recent share trading in comparable listed companies. The use of share trading evidence can provide a more current benchmark of value compared to historical transactions that formed the basis of BDA's work. However, while trading in listed companies' shares may reflect the market's current expectations of the medium to long-term demand and supply for lithium, there continue to be significantly divergent views on the point at which lithium supply will outstrip demand. This uncertainty can create speculative share trading behaviour, including short-selling, and share price volatility. As a result, we have relied on BDA's technical valuation of Azure's portfolio of exploration assets. BDA's valuation incorporates the change in lithium prices between the date of the announcement of the underlying transactions included in their benchmarking peer set and the period leading up to the date of this report.
[46] Third Sleiman Affidavit, page 249 (IER).
The expert's valuation was then summarised in a table, which I have extracted below:[47]
[47] Third Sleiman Affidavit, page 248 (IER)..
Some further points warrant mention at this stage. The Independent Expert's valuation range for Azure's shares is relatively wide, as seen above,. The explanation provided for the breadth of the valuation range is that the Andover Lithium Project is described by the Independent Expert as an early stage project meaning there is a wide range of possible outcomes which may eventuate as the project progresses through the mining cycle. The Independent Expert opined as follows:[48]
This progression is expected to take at least six years and will likely take longer, exposing the asset to cyclical and/or long-term structural price volatility.
[48] Expert Report, page 5.
Turning to the reasonableness of the Scheme (and Takeover), the Independent Expert opined that the offers would be reasonable if they were fair, having regard to ASIC Regulatory Guide 111. Additionally, the Independent Expert noted three additional factors relevant to the assessment of reasonableness, which warrant brief mention:[49]
(a)that the proposed Transaction provides Non-Associated Shareholders with the certainty of cash consideration;
(b)that Non-Associated Shareholders may not be able to sell their shares at current prices due to low trading liquidity; and
(c)that, in the event SH Mining did not acquire at least 90% of outstanding shares, Azure shares were likely to trade below current levels.
Director's interests and recommendations
[49] Expert Report, page 6 – 7.
The directors of the plaintiff have given recommendations to vote in favour of the proposed Scheme, having given consideration to whether they should make a recommendation. Counsel for the plaintiff noted that the directors' interests in Azure shares has been prominently disclosed in the Transaction Booklet in the Chairman's letter and also in section 6.7 of the Transaction Booklet.[50]
[50] Third Sleiman Affidavit, page 105 (footnote 3) and pages 181 – 183.
As counsel noted, the fact that directors hold interests in the ordinary shares of the plaintiff company is not, by itself, a concern. This is because their interests are aligned with Shareholders. Further, the plaintiff submitted that the recommendation of the directors was contingent upon the Independent Expert continuing to conclude the Scheme was in the best interests of Shareholders, which serves as an important cross-check. The plaintiff correctly submitted that it is appropriate for the directors to have made these recommendations. I accept such recommendations are expected of directors in transactions such as the present, provided there has been full and prominent disclosure of their interests.
I was accordingly satisfied the directors' interests had been appropriately disclosed in the Transaction Booklet.
Shareholder voting intention statements
Counsel noted that voting intention statements to vote in favour of the proposed Scheme had been received by the plaintiff. Those statements were expressly subject to no superior proposal emerging. The statements were given by each of the Delphi Group (which in effect holds 10.15% of the Azure Shares) and by the Creasy Group (12.84% of the Azure Shares).[51]
[51] Third Sleiman Affidavit, page 107 (under the heading 'Major shareholder support' in the Chairperson's letter).
I was satisfied these statements were appropriately (and prominently) disclosed in the Transaction Booklet, consistent with the Takeovers Panel Guidance Note 23: Shareholder Intention Statements, and in line with the authorities which have addressed this issue.[52] I have also been provided with evidence to the effect that the voting intention statements were provided to the plaintiff without any inducement or benefit being offered to the shareholders in question, or obtained by them.[53]
Shareholder communications
[52] Which I recently discussed in Technology Metals Australia Limited v Australian Vanadium Limited [2024] WASC 26 [53] – [74].
[53] Dickson Affidavit, [85].
Counsel also drew my attention to the anticipated steps to be taken by the plaintiff in terms of shareholder communications outside the circulation of the Transaction Booklet.[54]
[54] Plaintiff's submissions [60] – [62].
The plaintiff's proposals do not present at this stage as undermining the disclosure in the Transaction Booklet, in respect of which approval is sought. Accordingly, I need not dwell further on the issue at this stage, but I will expect to hear from the plaintiff at the final hearing as to whether any issues have arisen in this regard.
Performance risk
Submissions were made by the plaintiff directed to the performance risk associated with the Scheme, which I consider adequately dealt with that matter.[55]
[55] Plaintiff's submissions [41] – [47].
As explained by counsel, the transaction is structured to ensure that SH Mining will pay the aggregate amount of Scheme Consideration into an Australian dollar denominated trust account with an ADI operated by Azure by no later than the 'Business Day' before the 'Implementation Date'.[56] Further:
(a)SH Mining does not obtain a transfer of the Scheme Shares unless it has first deposited the aggregate Scheme Consideration into the trust account and then paid the Scheme Consideration;[57]
(b)SH Mining only obtains beneficial entitlement to the Scheme Shares upon the provision of the Scheme Consideration in the manner contemplated by cl 6.1(b) and 6.1(c);[58] and
(c)by the operation of the Deed Poll, SH Mining has covenanted to the Scheme Shareholders that it will comply with the foregoing obligations.[59]
[56] Scheme, cl 6.1(a).
[57] Scheme, cl 5.2(a) and cl 6.1(b).
[58] Scheme, cl 6.1(b), cl 6.1(c) and cl 9.3(b).
[59] Deed Poll, cl 3.1.
I therefore accepted the submission made on behalf of the plaintiff that this Scheme is structured in such a way as to minimise performance or credit risk in the ordinary course and is in line with established authority on the issue.
Common scheme features
For completeness, I note that counsel drew my attention to the exclusivity provisions, reimbursement fee and certain other features of the Scheme which are common in contemporary schemes of arrangement, in the course of his written submissions and oral address. Those features of the Scheme were all consistent with established authority.[60]
[60] Plaintiff's submissions, [48] – [53] and [58].
The reimbursement fee agreed as part of the overall transaction is a rather large amount, $16.9m, but it nonetheless falls within the 1% guide identified in the applicable Takeover Panel Guidance Note and is, in any event, reciprocal.
Having regard to the matters set out at [49] to [73] above of these reasons, I was accordingly satisfied it was appropriate to exercise the Court's discretion to order the dispatch of the Transaction Booklet and to convene the Scheme Meeting.
H. Conclusion and orders
For all the foregoing reasons, I was satisfied that the orders set out in the plaintiff's minute of proposed orders dated 1 March 2024 should be made. The final orders are attached to these reasons.
ATTACHMENT A
Orders made on 1 March 2024
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
TL
Associate to the Honourable Justice Lundberg
6 MARCH 2024
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