Re Bolnisi Gold NL (No 2)

Case [2007] FCA 2078

FEDERAL COURT OF AUSTRALIA

Bolnisi Gold NL, in the matter of Bolnisi Gold NL (No 2) [2007] FCA 2078

CORPORATIONS – scheme of arrangement – reciprocal break fee arrangement between target company and acquiring company – break fee payable if members of target company voted against proposal even in absence of any competing proposal – whether presence of such a “naked no vote” provision should prevent scheme being considered by shareholders and, if agreed to by them, being approved by Court.
Held:  naked no vote break fee provision did not stand in the way of order for convening scheme meeting or approval of scheme.

Corporations Act 2001 (Cth) s 411

Re APN News & Media Ltd (2007) 62 ACSR 400 referred to
Re Ausdoc Group Ltd (2002) 42 ACSR 629 cited

Brazen v Bell Atlantic Corp 695 A2d 43 (Del Supr 1997) cited

CW Shareholdings Inc v WIC Western International Communications Ltd (1998) 38 BLR (2d) 196 cited

Emerson Radio Corp v International Jensen Inc 1996 WL 483086 (Del Ch 1996) cited
HF Ahmanson & Co v Great Western Financial Corp CA 15650 (Del Ch 1997) cited
Hills Stores Co v Bozic 769 A2d 88 (Del Ch 2000) cited

Idameneo (No 123) Pty Ltd v Symbion Health Limited [2007] FCA 1832 cited
Re Investa Properties Ltd (2007) 25 ACLC 1186 cited

McMillan v Intercargo Corp 768 A2d 492 (Del Ch 2000) cited

Re National Can Industries (No 1) (2003) 48 ACSR 409 cited

Paramount Communications Inc v  QVC Network Inc 637 A2d 34 (Del Supr 1993) cited
Revlon Inc v MacAndrews & Forbes Holdings Inc 506 A2d 173 (Del 1986) cited
In re Toys “R” Us Inc Shareholder Litigation 877 A2d 975 (Del Ch 2005) cited

IN THE MATTER OF BOLNISI GOLD NL (ABN 14 008 587 086)

NSD 2007 OF 2007

LINDGREN J
10 DECEMBER 2007
SYDNEY


IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 2007 OF 2007

IN THE MATTER OF BOLNISI GOLD NL (ABN 14 008 587 086)

BOLNISI GOLD NL (ABN 14 008 587 086)
Plaintiff

JUDGE:

LINDGREN J

DATE OF ORDER:

10 DECEMBER 2007

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.Pursuant to section 1322(4)(a) of the Corporations Act 2001 (Cth), the resolution passed by the Plaintiff’s ordinary shareholders in relation to the scheme of arrangement between the Plaintiff and its ordinary shareholders at the scheme meeting held on 4 December 2007 was not invalid by reason of the Plaintiff’s contravention of its constitution in respect of its failure to give 9 of its shareholders the required notice of the scheme meeting in accordance with cl 94(2)(b) of its constitution.

2.Pursuant to section 411(4)(b) of the Corporations Act 2001 (Cth), the scheme of arrangement between the plaintiff and its ordinary shareholders a copy of which is annexed to this document and marked ‘BG1’ is approved.

3.Pursuant to section 411(12) of the Corporations Act 2001 (Cth), the Plaintiff is exempted from compliance with section 411(11) of the Corporations Act

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AGLC
Re Bolnisi Gold NL (No 2) [2007] FCA 2078
Case
[2007] FCA 2078
Decision Date

CaseChat Overview and Summary

In the case of Re Bolnisi Gold NL (No 2), the court considered the validity of a scheme of arrangement proposed by Bolnisi Gold NL (Bolnisi) and its shareholders. The primary issue was whether the scheme, which included a "naked no vote" break fee provision, was objectionable under the Corporations Act 2001 (Cth). The court also had to determine if Bolnisi's failure to give certain shareholders the required notice of the scheme meeting rendered the scheme invalid. The court examined the nature of the break fee, its reasonableness, and whether it was negotiated in good faith. It also considered the necessity of the break fee for the reciprocal protection of both parties and whether it could be seen as coercive.

The court found that the naked no vote break fee was not objectionable because it did not exceed the costs that would be wasted if the scheme was not implemented. The directors of Bolnisi believed they were acting in the best interests of their shareholders by agreeing to the break fee. The break fee was reciprocal, meaning both parties were subject to the same terms, and it was less than the one percent ceiling considered excessive by the Takeovers Panel. The court also noted that the break fee provisions were the result of arm's length negotiations, with both parties represented by experienced advisors. Furthermore, the court ruled that Bolnisi's failure to give nine shareholders the required notice did not invalidate the scheme, as the error was promptly rectified.

In summary, the court approved the scheme of arrangement, finding that the break fee provision was reasonable and in the best interests of Bolnisi's shareholders. The court also granted relief from the notice requirement, determining that the scheme was not invalidated by the oversight. The final orders included approving the scheme, exempting Bolnisi from certain compliance requirements, and mandating that Bolnisi lodge a copy of the orders with the Australian Securities and Investments Commission following the scheme's implementation.

Orders

Orders of the court

1. Pursuant to section 1322(4)(a) of the Corporations Act 2001 (Cth), the resolution passed by the Plaintiff’s ordinary shareholders in relation to the scheme of arrangement between the Plaintiff and its ordinary shareholders at the scheme meeting held on 4 December 2007 was not invalid by reason of the Plaintiff’s contravention of its constitution in respect of its failure to give 9 of its shareholders the required notice of the scheme meeting in accordance with cl 94(2)(b) of its constitution.

2. Pursuant to section 411(4)(b) of the Corporations Act 2001 (Cth), the scheme of arrangement between the plaintiff and its ordinary shareholders a copy of which is annexed to this document and marked ‘BG1’ is approved.

3. Pursuant to section 411(12) of the Corporations Act 2001 (Cth), the Plaintiff is exempted from compliance with section 411(11) of the Corporations Act 2001 (Cth) in relation to the scheme.

4. The Plaintiff lodge with the Australian Securities and Investments Commission pursuant to section 411(10) of the Corporations Act 2001 (Cth) a copy of these orders following the time at which the plan of arrangement between Palmarejo Gold and Silver Corporation (a company incorporated in Canada) and its ordinary shareholders becomes effective and not before that plan of arrangement becomes so effective.

5. The orders be entered forthwith.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

As in the US, judicial consideration of break fees by Canadian courts often occurs in the context of contested litigation. Canadian courts have upheld break fees generally: see CW Shareholdings Inc v WIC Western International Communications Ltd (1998) 38 BLR (2d) 196. I was informed that counsel for Bolnisi’s Canadian subsidiary company, Palmarejo, conducted a survey of plans of arrangement undertaken in Canada in 2007 and found that many included a naked no vote break fee.The evidence before the Court relevant to the naked no vote break fee in the present case Bolnisi relies on the following three affidavits. The first is an affidavit of Norman Alfred Seckold, Chairman and a Director of Bolnisi, sworn 25 October 2007, paras 22–27 of which were set out in my earlier reasons for judgment (at [25]) and are summarised at [39] below. The second affidavit is a further affidavit of Mr Seckold sworn 13 November 2007 in which Mr Seckold states that the terms of the MIA were negotiated at meetings on 4 April 2007 and 2 May 2007, and that at one of those meetings a partner from Freehills, representing Coeur, told him that Coeur would not enter into a transaction with Bolnisi unless Bolnisi agreed to pay a break fee triggered by a failure of its shareholders to vote to agree to the proposed Scheme. Mr Seckold stated that he agreed subject, inter alia, to Coeur’s agreeing to a reciprocal break fee provision, because without it, it would be open to Coeur shareholders to frustrate implementation of the Scheme by not passing the resolution to increase the number of the authorised shares in the capital of Coeur. Mr Seckold states that he took the view that without the provision for the Coeur break fee, the Coeur shareholders would have “a free option over the scheme”. The third affidavit is that of Mitchell John Krebs, Senior Vice President – Corporate Development at Coeur, sworn 15 November 2007. Mr Krebs’s affidavit dealt with two topics: first, quantification of the losses that Coeur would sustain if Bolnisi shareholders did not agree to the Scheme, and, second, Coeur’s negotiating position vis-a-vis Bolnisi. In relation to the former, Mr Krebs’s affidavit shows that:· the amount of the break fee of US$7.78 million was to be compared with Coeur’s external costs in relation to the proposed Scheme down to 12 November 2007 of US$7,127,442. Most of those costs were incurred after the MIA was signed. In fact and in summary, Coeur incurred costs in the order of US$1,338,835 before entering into the MIA, being approximately 20 percent of the external costs incurred down to 12 November 2007, and costs in the order of US$5,788,606 after entering into the MIA (being approximately 80 percent of the external costs incurred down to 12 November 2007);· Coeur’s projected total external costs in relation to the Scheme if it should not be implemented were expected to be in the order of US$10,781,756. If the Scheme should be implemented, the costs were estimated to be approximately a further US$5,086,262;· the external costs incurred down to 12 November 2007 and the estimated total costs did not include Coeur’s internal time and costs. For a period of approximately six months prior to signing the MIA, in addition to the external costs incurred, approximately 20 percent of Coeur’s total management time was spent on this transaction, and after the execution of the MIA, approximately 50 percent of Coeur’s total management time was spent on it; and· based on the above figures, Coeur’s actual costs to 12 November 2007 were only 8 percent less than the amount of the break fee, and Coeur’s estimated total costs were expected to be 39 percent more than the break fee.

Decision

Reasons for decision

LINDGREN J
I accept that if Bolnisi’s directors had not agreed to the Bolnisi naked no vote break fee provision, Coeur’s directors would not have agreed that Coeur should accept a liability to pay Bolnisi a break fee if the Coeur shareholders failed to pass a resolution increasing the number of Coeur’s authorised shares.Conclusion on the naked no vote break fee provision In concluding that the naked no vote break fee provision was not objectionable for the purposes of the application under s 411 of the Act, I had particular regard to the following considerations:·the affidavit evidence referred to earlier showed that the amount of the break fee would not exceed the amount of the costs and expenses of Coeur that would have been wasted if the Scheme was not agreed to by the Bolnisi shareholders;·the affidavit evidence demonstrated that the directors of Bolnisi had believed that they were acting in the best interests of the shareholders of Bolnisi in agreeing that the break fee should be payable in the naked no vote situation;·the break fee was a reciprocal one, in the sense that an identical amount was payable by Bolnisi and Coeur and that it was payable by Bolnisi and by Coeur if the Bolnisi shareholders or the Coeur shareholders respectively should fail to pass a resolution on which implementation of the Scheme depended;·it was important for Bolnisi to have the benefit of the Coeur break fee provision and it could do so only if it agreed to the Bolnisi break fee provision;·the amount of the break fee was less than the one percent “ceiling” referred to by the Takeovers Panel in its Guidance Note 7: Lock-up Devices and could not be regarded as so large as to be likely to coerce shareholders into agreeing to the Scheme; and·the affidavit evidence of Mr Seckold, which I set out in my earlier reasons for judgment ([2007] FCA 1668 at [25]), was to the effect that the no shop, no talk and break fee provisions were agreed following arm’s length commercial negotiations over a period of one month in which both Bolnisi and Coeur were separately advised and represented by external legal advisers and financial advisers with extensive experience in transactions of the present kind; and that Mr Seckold believed that it was in the interests of Bolnisi’s shareholders that Bolnisi’s directors agreed to the inclusion of the provisions.Relief pursuant to s 1322(4)(a) of the Act Section 249HA of the Act requires that at least 28 days’ notice of the Scheme Meeting be given to Bolnisi’s shareholders. Clause 94.2(b) of Bolnisi’s constitution provided that a notice sent by post was taken to be served three days after the day on which it was posted. Consequently, on the basis that the Scheme Booklet and the notices of the meeting were despatched by post, Bolnisi needed to post them at least 31 days before the date fixed for the Scheme Meeting, 4 December 2007. Affidavit evidence established that on 2 November 2007, a total of 3061 copies of the Scheme Booklet were lodged with Australian Post and posted to Bolnisi’s shareholders. Of these, 2880 were addressed to domestic addresses and 181 to overseas addresses. Unfortunately, it was discovered that a further nine copies were required to be sent but had not been sent. They were lodged with Australia Post on 5 November 2007 and so dispatched to the relevant Bolnisi shareholders, who, apparently, all resided in New Zealand.

Ratio Decidendi

Legal Principle Established

Established by: LINDGREN J

The evidence before the Court on the second court hearing included that which had previously been before the Court. The present reasons and my earlier reasons for directing the convening of the Scheme Meeting constitute my reasons for approving the Scheme at the second court hearing.CONSIDERATIONThe break fee provisionGeneral I discussed break fees and other “deal protection” measures, notably “no shop” or exclusivity period provisions, in Re APN News & Media Ltd (2007) 62 ACSR 400 (APN) at [25]–[55] and to a lesser extent in Re Investa Properties Ltd (2007) 25 ACLC 1186 at [31]–[35], and will not repeat what I said in those cases. Generally, a break fee is a fee payable by the target company to the acquiring company in certain circumstances in which the acquisition is not implemented. Such provisions form part of a merger implementation agreement to which the directors of the target company commit their company prior to a scheme of arrangement being considered by the target company’s shareholders. When deciding whether to order that a meeting be convened or that a scheme be approved, the Court is not in a position to decide whether a merger implementation agreement was entered into in breach of the duties owed by the target company’s directors. The Court could do so only on a contested hearing in which it is alleged, and sought to be proved, that by committing the target company to the merger implementation agreement, the directors breached their statutory and general law duties: see eg, Idameneo (No 123) Pty Ltd v Symbion Health Limited [2007] FCA 1832. In what circumstances should the Court decline to order that a scheme meeting be convened, that is to say, deny the shareholders of the target company the opportunity of considering a scheme under s 411 of the Act recommended by their company’s directors, and deny the acquiring company the possibility provided by that section of having all of the target’s shareholders bound? In Brazen v Bell Atlantic Corp 695 A2d 43 (Del Supr 1997) (Brazen v Bell) the Supreme Court of Delaware made (at 49–50) the following observations that are pertinent to this question (the case concerned a stock for stock merger of equals, with reciprocal identical break fees):Plaintiff further argues that the termination fee provision was coercive. Plaintiff contends that (a) the stockholders never had an option to consider the merger agreement without the fee, and (b) regardless of what the stockholders thought of the merits of the transaction, the stockholders knew that if they voted against the transaction, they might well be imposing a $550 million penalty on their company. Plaintiff contends that the termination fee was so enormous that it “influenced” the vote. Finally, plaintiff argues that the fee provision was meant to be coercive because the drafters deliberately crafted the termination fees to make them applicable when Bell Atlantic’s stockholders decline to approve the transaction as opposed to a termination resulting from causes other than the non-approval of the Bell Atlantic stockholders. We find plaintiff’s arguments unpersuasive.First, the Court of Chancery properly found that the termination fee was not egregiously large. Second, the mere fact that the stockholders knew that voting to disapprove the merger may result in activation of the termination fee does not by itself constitute stockholder coercion. Third, we find no authority to support plaintiff’s proposition that a fee is coercive because it can be triggered upon stockholder disapproval of the merger agreement, but not upon the occurrence of other events resulting in termination of the agreement.In Williams v Geier, this Court enunciated the test for stockholder coercion. Wrongful coercion that nullifies a stockholder vote may exist “where the board or some other party takes actions which have the effect of causing the stockholders to vote in favor of the proposed transaction for some reason other than the merits of that transaction [Williams v Geier 671 A.2d 1368 (Del Supr 1996), 1382-83]. But we also stated in Williams v Geier that “[i]n the final analysis ... the determination of whether a particular stockholder vote has been robbed of its effectiveness by impermissible coercion depends on the facts of the case” [Id at 1383].