Re MOD Resources Ltd - [2019] WASC 326

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   RE MOD RESOURCES LTD; EX PARTE MOD RESOURCES LTD [2019] WASC 326
CORAM:   VAUGHAN J
HEARD:   20 AUGUST 2019
DELIVERED          :   10 SEPTEMBER 2019
FILE NO/S:   COR 156 of 2019

EX PARTE
MOD RESOURCES LTD
Plaintiff
SANDFIRE RESOURCES NL
Interested Party

Catchwords:

Corporations law - Scheme of arrangement - Proposed share acquisition - Application for orders convening scheme meeting under s 411(1) of the Corporations Act 2001 (Cth)

Legislation:

Corporations Act 2001 (Cth), s 411, s 412
Supreme Court (Corporations) (WA) Rules 2004 (WA)

Result:

Application granted

Category: B

Representation:

Counsel:

Plaintiff	:	S K Dharmananda SC & H J Roost
Interested Party	:	P Tydde

Solicitors:

Plaintiff	:	DLA Piper Australia - Perth
Interested Party	:	Gilbert + Tobin

Case(s) referred to in decision(s):

Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400
Re Gazal Corporation Ltd [2019] FCA 701
Re Kidman Resources Ltd [2019] FCA 1226
Re Navitas Ltd; Ex parte Navitas Ltd [No 2] [2019] WASC 218
Re Nzuri Copper Ltd; Ex parte Nzuri Copper Ltd [2019] WASC 189
Re Ruralco Holdings Ltd [2019] FCA 878
Re Tawana Resources NL [2018] FCA 1456
Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd [2018] WASC 308

VAUGHAN J:

Summary

The plaintiff, MOD Resources Ltd (MOD), is an Australian public company listed on the official list as conducted by the ASX Ltd (ASX) and the London Stock Exchange (LSE).
On 25 June 2019 MOD made an ASX announcement that it had entered into a scheme implementation deed (SID) with Sandfire Resources NL (Sandfire). Sandfire is also an Australian public company listed on the ASX. Under the SID it was proposed that Sandfire would acquire 100% of the issued and to be issued share capital of MOD by way of a scheme of arrangement.
By originating process dated 2 August 2019 MOD sought orders under s 411(1) of the Corporations Act 2001 (Cth) (Act) in relation to the proposed scheme of arrangement. The application came before me for hearing on 20 August 2019. After hearing from senior counsel for MOD and counsel for Sandfire (who appeared as an interested party) I made orders pursuant to s 411(1) of the Act to convene a meeting of MOD's members to consider and vote on the proposed scheme. Ancillary orders were made as to the convening and conduct of the scheme meeting. Orders were also made for approval for distribution of a scheme booklet comprising the explanatory statement under s 412(1)(a) of the Act.
I said that I would prepare written reasons for my orders. These are my reasons for the orders made 20 August 2019.

Evidence and background facts

MOD relied on nine affidavits from 5 deponents. Annexure 'A' summarises the deponents, their relationship with MOD or Sandfire and the nature of the evidence in the affidavits. Based on that affidavit evidence I record the following matters.
MOD was incorporated on 15 May 1986 and was admitted to the official list of the ASX in January 1997. Initially involved in healthcare and medical products, MOD moved into the resources sector in late 2010. MOD was admitted and commenced trading on the main market of the LSE on 26 November 2018. As at 31 July 2019 MOD had 304,286,230 shares on issue, 58,378,566 options and 3,050,000 performance rights.
MOD is presently a Perth based mineral exploration company with activities that centre around the exploration of copper and silver in Botswana, Africa. MOD's primary focus is said to be the development of its wholly owned T3 Project, a copper project located in the Kalahari copper belt in Botswana. The project is scheduled to commence construction in 2020 with production expected to commence in 2021.
Sandfire is an Australian mid-tier mining company listed on the ASX. It is an explorer for, and producer of, copper and gold. Sandfire is said to be expanding its operations globally. Its major activity is the conduct of the DeGrussa copper-gold mine in Western Australia.
On 25 June 2019 MOD and Sandfire entered into the SID (attachment 'MAC-1' to the First Clements Affidavit). The SID provides for the terms and conditions on which MOD and Sandfire agree to merge through the acquisition by Sandfire of all of the shares in MOD. The proposed consideration to be provided to MOD shareholders is either 0.0664 of a fully paid ordinary share in Sandfire for every MOD share held (ie a scrip consideration) or 45 cents for each MOD share (ie a cash consideration). However, the total cash consideration payable by Sandfire is limited to a maximum of $41.6 million. If, based on the number of shares for which a cash election is received, the total cash election amount would notionally exceed the $41.6 million, the MOD shareholders electing to receive the cash consideration will instead receive a partial cash and partial scrip consideration. The amount to be paid by way of cash will be scaled-back on a pro-rata basis.
Based on the closing price of Sandfire shares as at 24 June 2019 the scheme consideration represents an implied value of 45 cents per MOD share. On that basis the total value of the proposed transaction is in the order of $167 million. I note, however, that there is evidence to suggest that Sandfire's share price has fallen since 24 June 2019.
If effectuated the proposed scheme will result in MOD shareholders holding between 10.4 per cent to 13.4 per cent of the merged group comprising Sandfire and MOD.
MOD's directors unanimously recommend that its shareholders vote in favour of the scheme in the absence of a superior proposal. No superior proposal has emerged. The directors' recommendation is, however, subject to an independent expert opining that the scheme is in the best interests of the MOD shareholders. As will be seen, that has occurred.
In recommending that shareholders approve the proposed scheme the chairperson of MOD, Mark Clements, directs attention to Sandfire's balance sheet and operating cash flows. Mr Clements says that these will enable MOD to optimise and de-risk the development of the T3 Project. Importantly, materials within the draft scheme booklet disclose that:
MOD currently does not have the capital to fully develop its T3 Project, and would require significant funding to develop the T3 Project and other exploration assets …
Any additional equity funding may be dilutive to MOD Shareholders, may be undertaken at lower prices than the current market price or may involve restrictive covenants which limit MOD's operations and business strategy. Whilst progress has been made to attain funding, no assurances can be given that appropriate capital or funding, if and when needed, will be available on terms favourable to MOD or at all. Development capital expenditure required to fund the T3 Project is US$182 million (excluding sustaining capital expenditure) compared to MOD's group cash balance of A$8.3 million as at 30 June 2019.[1]
[1] Scheme Booklet, s 2.1.
The evidence suggests MOD considered numerous alternatives to fund the T3 Project and maximise value for its shareholders before reaching an agreement with Sandfire. The board received a number of alternative proposals and concluded that none were likely to realise greater value for shareholders than the proposed scheme.
It is said that the implementation of the proposed scheme offers benefits to both sets of shareholders.

Nature of the proposed scheme

By the proposed scheme of arrangement Sandfire will acquire all of the ordinary shares in MOD. The proposed scheme allows for MOD shareholders to elect to receive consideration of either: (1) 0.0664 fully paid ordinary shares in Sandfire for every one MOD share held (scrip consideration); or (2) 45 cents per share up to a maximum aggregate of $41.6 million (cash consideration) (Scheme, Recitals D, cl 5.2, cl 6.1, cl 6.11, cl 6.12).
Should cash elections exceed the $41.6 million maximum, the amount of cash paid per share to MOD shareholders electing cash will be reduced pro rata and Sandfire shares will be issued in respect of the shortfall (Scheme, cl 6.5). Shareholders who make no election will receive the scrip consideration (Scheme, cl 6.4(a)). Any fractional entitlement will be rounded up or down to the nearest whole number of Sandfire shares (Scheme, cl 6.9(a)).
There are three relevant exceptions to the proposed scheme consideration:
•'European Shareholders' (this includes shareholders who are residents in the European Economic Area) may not make an election for cash consideration. They will receive scrip consideration for each share held at the record date (Scheme, cl 6.4(b), cl 6.7(b)).
•'Ineligible Foreign Shareholders' (this includes shareholders whose address is in an ineligible jurisdiction outside Australia, New Zealand, the United Kingdom, Hong Kong or Singapore) will have their MOD shares dealt with in accordance with a sale facility under the scheme and the net sale proceeds remitted to them (Scheme, cl 6.6, cl 6.8).
•'Unmarketable Parcel Shareholders' (those who would on implementation of the scheme be entitled to receive less than a marketable parcel of Sandfire shares, ie shares in an amount equating to a value of $500 or less) may, if entitled to receive at least one whole Sandfire share, elect to receive scrip consideration. Otherwise, their shares will be dealt with in accordance with the sale facility under the scheme. The non-electing Unmarketable Parcel Shareholders will also receive remittance of the net proceeds applicable to their shares (Scheme, cl 6.8).
Accordingly, Ineligible Foreign Shareholders and Unmarketable Parcel Shareholders will receive a cash amount. The cash so received will be the net proceeds of the sale of their scheme consideration (Scheme, cl 6.8). In contrast, European Shareholders will receive shares in Sandfire.
There are 28 Ineligible Foreign Shareholders holding 5,344,728 ordinary shares (1.25 per cent of the issued shares). There are many more Unmarketable Parcel Shareholders; they number 446 shareholders. However, the Unmarketable Parcel Shareholders only hold 225,084 shares (0.074 per cent of the issued shares).
On effectuation of the proposed scheme MOD will become a wholly owned subsidiary of Sandfire. MOD will then be delisted from the ASX and cancelled from the LSE. The new Sandfire shares as issued to the former MOD shareholders will be listed on the ASX.
The scheme will not become effective unless and until a number of conditions precedent are satisfied (Scheme, cl 3.1). This includes the satisfaction or waiver of numerous conditions precedent in cl 3.1 of the SID. Those conditions, among other things, include MOD shareholder approval of certain extraordinary general meeting resolutions and Australian and Botswanan regulatory approvals (SID, cl 3.1(b), (g) and (h)). Also, the MOD options are to be exercised or cancelled (SID, cl 3.1(d)). That condition has been satisfied: option cancellation deeds have been executed. The nature of the various conditions precedent remaining to be satisfied are fully disclosed in the scheme booklet (Scheme Booklet, s 12.14(a)).
Messrs Clements and Klug have deposed that they are not aware of any basis to believe that any condition precedent will not be satisfied by the necessary time.[2]
[2] Third Clements Affidavit, pars 12 - 13; First Klug Affidavit, par 28.
The scheme is proposed pursuant to the SID. The SID provides for comprehensive terms as to the implementation of the transaction contemplated by the proposed scheme of arrangement. Among other things the SID makes provision for the steps MOD is to take in relation to the options and performance rights (SID, cl 3.1(d). cl 4.13, cl 4.14). The performance rights are to vest and convert so that the holders of performance rights participate in the scheme (SID, cl 4.14). The SID also provides for the execution of a deed poll (SID, cl 4.12) and certain exclusivity provisions (SID, cl 9, cl 10). I will deal with these separately.
The SID was amended by a deed of amendment and restatement executed 8 August 2019 (attachment 'MAC-15' to the Second Clements Affidavit). The deed of amendment and restatement ensured that the transfer of the MOD shareholders' shares was 'subject to' the provision of the scheme consideration. A further side letter to the SID and scheme was then executed on 19 August 2019 (attachment 'CJS-1' to the affidavit of Mr Seotis sworn 20 August 2019). The side letter provides for two amendments. First, it varies the definition of 'election date' in the SID and scheme (Side Letter, cl 2.1(a)). Second, it corrects an error in the scale back formula (Side Letter, cl 2.1(b)).
The SID contemplates that MOD will obtain an independent expert report (IER). The IER has been prepared by Deloitte Corporate Finance Pty Ltd and authorised by Nicki Ivory and Stephen Reid. In part the IER relies on an independent technical assessment and valuation report prepared by Deloitte Technical Mining Advisory and authorised by Chris De Vries in respect of MOD's mineral assets.
The independent experts opine that the proposed scheme is fair and reasonable to MOD shareholders. Therefore, the independent experts conclude that the scheme is in the best interests of MOD shareholders. In coming to that conclusion the independent experts determine the range for a MOD share on a control basis as follows:

The basis of the valuations, and the methodology employed, are set out comprehensively in the IER. The IER employs a 'Sum-of-Parts' methodology for the MOD share value. The scrip consideration is assessed on a 'minority interest basis'. The consideration offered by Sandfire is within the range of the independent experts' assessment of the value of a MOD share, albeit at the lower end. However, the independent experts state that they consider the value of a MOD share will likely fall at the lower end of the valuation range anyway. The independent experts note that the MOD valuation is highly sensitive to copper price assumptions used in the valuation of the T3 Project.
Ms Ivory and Mr De Vries have since confirmed the opinions expressed in the IER (attachment 'CJS-4' to the affidavit of Mr Seotis sworn 20 August 2019) and the independent technical assessment and valuation report (attachment 'CJS-5' to the affidavit of Mr Seotis sworn 20 August 2019).
I was provided with the draft scheme booklet as submitted to the Australian Securities and Investment Commission (ASIC) on 2 August 2019 (attachment 'MAC-1' to the First Clements Affidavit) and the various amendments that have been made to the document since then (attachment 'HJR-6' to the Second Roost Affidavit and attachment 'CJS-3' to Mr Seotis' affidavit sworn 20 August 2019). At the hearing MOD relied on a final version of the draft scheme booklet as filed on 20 August 2019.
The scheme booklet itself comprises sections as follows:
•Letter from the chairman of MOD.
•Joint letter from the chairman and CEO of Sandfire.
•Important notices.
•Important dates and times for the scheme.
•Summary of the scheme.
•Reasons to vote in favour of or against the scheme.
•Frequently asked questions.
•Scheme meeting and voting information.
•Key considerations.
•Information about MOD.
•Information about Sandfire.
•Information about the merged group.
•Risk factors.
•Metal Tiger Plc (Metal Tiger) arrangements.
•Australian taxation considerations.
•Information about the scheme.
•Additional information.
•Glossary.
•Corporate directory.
The scheme booklet will be accompanied by substantial attachments which form part of the scheme booklet. These will include the final IER, the terms of the scheme of arrangement, a copy of the executed SID and deed poll and the notice of meeting to MOD shareholders.

Legal framework

I described the applicable legal framework for an application of the nature brought by MOD in Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd.[3] I do not intend to repeat what I stated in Re Wesfarmers Ltd. I adopt and will apply what I stated in Re Wesfarmers Ltd.
[3] Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd [2018] WASC 308 [46] ‑ [78] (Re Wesfarmers Ltd).
There is usually said to be six matters to be proved at this first stage of the process under s 411 of the Act. Those matters are that:
(1)The plaintiff is a part 5.1 body.
(2)The proposed scheme is a compromise or arrangement within the meaning of s 411 of the Act. Here, relevantly, the question is whether the proposed scheme is an 'arrangement'.
(3)The proposed scheme booklet will provide proper disclosure.
(4)The scheme is bona fide and properly proposed.
(5)The ASIC has had at least 14 days' notice of the proposed hearing date and has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and to make submissions.
(6)The various procedural requirements of the Act and the Supreme Court (Corporations) (WA) Rules 2004 (WA) have been met.
It is also necessary that the court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives a statutory majority at the scheme meeting, the court would be likely to approve the scheme at a hearing of an application which is unopposed. This does not require me to descend into the commercial merits or demerits of MOD's proposed scheme. It is enough if the scheme is such that it would be open to the members of MOD to adopt. I need only consider whether the proposed scheme is one that sensible business people might consider to be of benefit to the members.

Disposition: standard matters

Formal matters

The formal matters that MOD had to prove were satisfied.
MOD is a company; it is therefore a pt 5.1 body. The proposed scheme constitutes an 'arrangement'. This type of share acquisition scheme has been approved by courts as an arrangement on numerous occasions.
By letter dated 20 August 2019 (handed up during the hearing) the ASIC confirmed satisfaction of the service requirement and that it had been provided with the reasonable opportunity required under s 411(2). The ASIC also gave notice that it did not propose to appear to make submissions or intervene to oppose the scheme at the first hearing.
The various procedural requirements for making the orders were all attended to in the evidence; for example, there was the necessary consent and disclosure by the proposed chairperson of the meeting and his alternate.

Properly proposed

On the materials there was nothing to suggest that the proposed scheme is unlawful or not properly proposed. There were no obvious flaws in the scheme such that it would have been inappropriate for it to be submitted to MOD's shareholders for their consideration. I note in this regard that MOD adopted a suggestion by the ASIC providing for shareholders to make the cash election well before the scheme meeting. MOD is to announce details of the number of shareholders opting for the cash consideration - and what this means for any potential scale-back of the cash consideration - by 25 September 2019. This will allow shareholders to exercise their vote at the scheme meeting with knowledge of the actual proportion of cash and script consideration that will be provided. The draft scheme booklet and shareholder election form were amended to provide for more prominent disclosure as to the timing of the election and the intended pre-scheme meeting announcement of the number of MOD shareholders electing for the cash consideration and the implications for the scale-back provisions.
I accept that the ASIC's suggestion, as adopted by MOD, was sensible and prudent. Where a cash consideration is subject to potential scale-back an uncertainty is created as to exactly what will be received under the scheme. The amendment proposed and accepted provides for greater certainty for those MOD members electing the cash consideration. The members will know, in advance of the scheme meeting, what they will be receiving and be in a better position to make decisions about their individual circumstances. The alteration as suggested and adopted was positive in terms of assessing the fairness and reasonableness of the scheme.

That is all the more so in circumstances where there was some evidence that Sandfire's share price had decreased since the announcement of the SID.
As to the fact that there was proposed to be a single class of member, senior counsel for MOD drew my attention to the differential treatment proposed for European Shareholders, Ineligible Foreign Shareholders, Unmarketable Parcel Shareholders, the directors Julian Hanna and Steve McGhee and Metal Tiger.
There is, as previously described, differential treatment for the European Shareholders, the Ineligible Foreign Shareholders and the Unmarketable Parcel Shareholders. However, differential treatment of this sort is commonplace in schemes of arrangement. It is not class creating as there is sufficient community of interest between the shareholders for them to consider whether the proposed scheme is in their collective interest.[4]
[4] Re Wesfarmers Ltd [91] - [98].
It will be seen that Messrs Hanna and McGee will potentially receive a further benefit if the proposed scheme of arrangement is effectuated (see pars 84 to 92). To the extent that Messrs Hanna and McGhee obtain a collateral benefit should the members approve the scheme that is not class creating. The benefit arises outside their rights and entitlements as members and does not, in my view, mean those two directors comprise a separate class qua shareholders.
It is convenient to defer discussion of Metal Tiger until later in these reasons. It suffices at this point to say that the circumstance that Metal Tiger has agreed to exercise 19.9 per cent of its voting power in support of the proposed scheme is not class creating. Further, MOD agreed that the votes of Metal Tiger would be 'tagged'. I can therefore consider and address any question of unfairness at the second court hearing.

Disclosure and scheme booklet

I have read through the initial draft of the scheme booklet (as provided to the ASIC on 2 August 2019) and considered the various amendments made to the draft which are now reflected in the final scheme booklet. I was and am satisfied, to the necessary prima facie level given the interlocutory nature of the application, that there will be proper disclosure as to the effect of the proposed scheme and the material considerations to which shareholders ought to have regard.
Importantly, the scheme booklet gives disclosure as to the reasons a shareholder may wish to vote against approval of the proposed scheme. These include:
•Disagreement with the directors' recommendation and the independent experts' conclusion.
•The uncertain value of the scrip consideration.
•A belief that there is potential for increased value should MOD remain a standalone entity.
There is also a comprehensive section on the risk factors, both general and specific, associated with the proposed scheme (Scheme Booklet, s 9).
I have been provided with the communications between the ASIC and MOD's legal representatives consequential upon the ASIC's review of the draft scheme booklet. This resulted in a number of changes to the scheme booklet to enhance disclosure.
In particular, the ASIC sought, and MOD and the independent experts made, amendments to:
•the content of the IER;
•the description of the scale-back mechanism; and
•the description of the Metal Tiger transactions.
Additionally, following my initial review of the draft scheme booklet, I raised - through my chambers - other disclosure issues with respect to the scheme terms, scheme booklet, SID, notice of scheme meeting and election form. This too resulted in further disclosure. While the contents of the scheme booklet remain a matter for MOD, I am satisfied that MOD has sought to supplement, and provide full disclosure, of matters within the scheme booklet that were of concern to me following my initial review of the draft scheme booklet.
As to the due diligence and verification process undertaken by MOD and Sandfire, I had regard to, and accept, the evidence given by Mr Clements (at pars 42 to 54 of the First Clements Affidavit and at pars 4 to 8 of the Third Clements Affidavit) and Mr Klug (at pars 13 to 23 of the First Klug Affidavit and pars 5 to 12 of the Second Klug Affidavit). In substance:
(1)MOD established a due diligence committee which has undertaken a process of due diligence and verification to verify the accuracy of statements attributable to MOD in the scheme booklet.
(2)A similar verification process was undertaken by Sandfire to verify the accuracy of statements attributable to Sandfire in the scheme booklet.
(3)Steps have been taken to satisfy MOD and Sandfire that the scheme booklet does not omit any material information.
The directors of MOD have resolved to approve the scheme booklet in its final form.[5]
[5] Third Clements Affidavit, pars 9 - 11.
Otherwise, as to disclosure, based on the checklist provided by senior counsel for MOD I was satisfied that the scheme booklet contained the prescribed information in accordance with s 412(1)(a)(ii) of the Act and sch 8 of the Corporations Regulations 2001 (Cth).

Disposition: specific matters

In written and oral submissions senior counsel for MOD drew a number of matters to my attention. These are addressed below.

Performance risk

Senior counsel for MOD submitted that the nature and terms of the proposed scheme are such that the members are adequately protected against the risk that Sandfire will not perform its obligations under the scheme. I accept that submission.
The main matter for consideration is assurance that the members' shares will not be transferred until the members have received the scheme consideration. The scheme itself is predicated on provision of the scheme consideration (Scheme, Recitals D). The scheme terms contemplate that the transfer of the members' shares to Sandfire is first subject to the provision of the scheme consideration in accordance with the scheme and deed poll (Scheme, cl 5.2(a); SID, cl 4.1(c)). To that end cl 6.1 identifies the members' entitlement and cl 6.12 specifies Sandfire's obligations to issue the new Sandfire shares by way of the scheme consideration. So too Sandfire's beneficial entitlement to the MOD shares is dependent on provision of the scheme consideration (Scheme, cl 9.6(a)).
Insofar as the scheme consideration is to be paid in cash, provision is made to ensure payment. The scheme provides for the creation of a trust account of which MOD, or its registry, is to be the trustee (Scheme, cl 6.11(a)). The total of the aggregate cash consideration is to be paid into the trust account by no later than two business days before the implementation date (Scheme, cl 6.11(a)). MOD is to pay out the cash consideration on the implementation date (Scheme, cl 6.11(b)).
The proposed arrangements for the Ineligible Foreign Holders and Unmarketable Parcel Shareholders also provide for appropriate action on the part of Sandfire (Scheme, cl 6.6, cl 6.8) which is prima facie acceptable in terms of averting performance risk.
The SID also provides for obligations, as between MOD and Sandfire, for Sandfire to provide the scheme consideration (SID, cl 4.1(c), cl 4.7(a), cl 5.3(h)). The covenants in cl 4.1(c) and cl 4.7(a) are expressed to be in favour of MOD in its own right and on behalf of the scheme participants.
Of more significance is the deed poll that has been executed in accordance with Sandfire's obligations under the SID (attachment 'RGK-3' to the First Klug Affidavit). By the deed poll Sandfire covenants in favour of each MOD shareholder to perform all its obligations under, and otherwise comply with, the proposed scheme (Deed Poll, cl 1(B), cl 5). There is an acknowledgement that the deed poll may be relied on and enforced by any scheme shareholder (Deed Poll, cl 2.3(a)) and that MOD and each of its directors may act as agent and attorney to enforce the deed poll on behalf of the shareholders (Deed Poll, cl 2.3(b)).
The deed poll will be enforceable by the MOD members as they are sufficiently identified within the deed poll.

Exclusivity provisions and break fee

The SID contains various standard exclusivity terms (SID, cl 9). These include 'no-shop' and 'no-talk' provisions (SID, cl 9.1 to 9.3), a 'no-due-diligence' clause (SID, cl 9.4), a 'notification' obligation (SID, cl 9.5) and a 'matching' right (SID, cl 9.7). Provision is also made for a 'break fee' of $1.66 million (SID, cl 10).
The 'no-talk' and 'no-due-diligence' provisions are subject to a standard directors' duty carve-out (SID, cl 9.8).
In considering the propriety of exclusivity arrangements the authorities suggest that:
•The exclusivity period should be certain and of reasonable duration.
•The exclusivity arrangements should be subject to a directors' duty carve-out, ie the directors should be able to consider an alternative proposal if it may result in a potentially superior transaction that will better serve the members' interests.
•The arrangements should be adequately disclosed in the explanatory statement.
•Appropriate affidavit evidence should be adduced to justify the exclusivity arrangements.
The exclusivity period under the SID potentially extends to 25 December 2019, ie a duration of 6 months. Given the need to address regulatory approvals in Botswana, I am satisfied that the exclusivity period is not unreasonable.
There is an appropriate directors' duty exception to the exclusivity arrangements.
The scheme booklet specifically discloses that failure to approve the scheme will not trigger an obligation to the pay the break fee (Scheme Booklet, s 2.3(c)). There is otherwise adequate disclosure of the exclusivity arrangements and the break fee as a whole (Scheme Booklet, s 12.15, s 12.17).
Mr Clements provides commercial justification for the exclusivity provisions and break fee (at pars 66 to 74 of the First Clements Affidavit). Mr Clements' evidence, which I accept, is that he believes that the break fee does not operate against the interests of MOD shareholders. The provisions followed negotiations in which both parties received separate legal and financial advice. The amount of the break fee represents approximately one per cent of MOD's equity value based on the implied value of the scheme consideration as at 25 June 2019. It is thus within generally accepted commercial parameters.
In approving the convening of the scheme meeting I was satisfied, necessarily on a provisional basis given the nature of the first court hearing, that the presence of the exclusivity provisions and the break fee were unlikely to be coercive.

Metal Tiger

Metal Tiger is a company incorporated in the United Kingdom. It is listed on the Alternative Investment Market of the LSE. Metal Tiger invests in the mineral exploration and development sector. As at 15 August 2019 Metal Tiger held 31,838,393 shares and 40,673,566 options in MOD (10.46 per cent of the MOD shares as on issue).
The arrangements between MOD and Metal Tiger, and Sandfire and Metal Tiger, are of considerable importance to the proposed scheme. They are covered in detail in s 10 of the scheme booklet. Before describing and considering those arrangements it is necessary to understand the background to the relationship between MOD and Metal Tiger.
In 2015 MOD and Metal Tiger acquired a number of prospecting licences and subsequently formed a joint venture owned in proportions of 70 per cent and 30 per cent respectively. Among other things the joint venture concerned the T3 Project in Botswana.
In 2018 MOD and Metal Tiger executed a sale and demerger agreement for MOD to acquire Metal Tiger's 30 per cent interest in the T3 Project. As part of the sale and demerger agreement certain prospecting licences associated with the T3 Project were transferred to Metal Capital Exploration Ltd. The shares in that company are owned in the same proportions as the 2015 joint venture. Accordingly, Metal Tiger retains an economic interest in the underlying prospecting licences. Shares in MOD were issued to Metal Tiger as part of the consideration to purchase Metal Tiger's interest in the T3 Project. Metal Tiger's current 40,673,566 options were issued as further consideration for the acquisition of Metal Tiger's interest in the T3 project.
Under the terms of the sale and demerger agreement MOD has the option to purchase Metal Tiger's 30 per cent interest in Metal Capital Exploration Ltd should a board endorsed MOD change of control event occur. The proposed scheme is such an event. Pursuant to the SID MOD is now exercising its right to acquire Metal Tiger's 30 per cent interest in the 2018 joint venture by purchasing Metal Tiger's shares in Metal Capital Exploration Ltd.
The consideration for the acquisition will be the subject of resolutions to be proposed at an extraordinary general meeting of MOD's shareholders. That meeting is scheduled to be held immediately before the scheme meeting. MOD will seek shareholder approval for:
•the issue of 22,322,222 MOD shares and the grant of a 2 per cent net smelter royalty to Metal Tiger as consideration for the acquisition of Metal Tiger's 30 per cent interest in the 2018 joint venture exploration assets;
•the issue of up to 4,825,168 MOD shares to Metal Tiger upon the exercise of existing options (part of the consideration in relation to the 2015 joint venture acquisition); and
•an increase in voting power of Metal Tiger in MOD from 19.9 per cent to a maximum of 25.6 per cent,
(together the 'EGM Resolutions').
As discussed at par 22 above, approval of the EGM Resolutions is a condition precedent to the scheme (Scheme, cl 3.1(b)). It would see Metal Tiger's shareholding increase to 25.6 per cent of the issued shares in MOD. However, the 22,322,222 additional shares by way of consideration will not be issued prior to the scheme meeting. As such, Metal Tiger will be unable to vote them at the scheme meeting.
As I have already stated, no class issue arises as to Metal Tiger. Metal Tiger will receive the same consideration as other MOD shareholders on the same terms. Moreover, Metal Tiger's votes will be tagged. Accordingly, if - contrary to my provisional view - an issue arises, I can address that issue at the second court hearing.
Separately, Metal Tiger and Sandfire have entered into a support agreement (attachment 'RGK-11' to the First Klug Affidavit) whereby Metal Tiger effectively agrees to exercise its 19.9 per cent shareholding in MOD (as at the time of the scheme meeting) in favour of the proposed scheme. Metal Tiger has also agreed with Sandfire that it (Metal Tiger) will elect to receive the scrip consideration rather than elect to receive the cash consideration.
On 12 August 2019 the ASIC sought from MOD, among other things, an explanation as to the purpose of the support agreement. In particular the ASIC questioned whether the support agreement should be considered a lock-up device.
MOD responded to the ASIC on 13 August 2019 contending that the support agreement was not a lock-up device. I agree. Relevantly:
•the support agreement applies to 19.9 per cent of Metal Tiger shares (Support Agreement, cl 1);
•Metal Tiger did not, and will not, receive any collateral benefit in respect of the support agreement;
•the support agreement between Metal Tiger and Sandfire is disclosed in the scheme booklet (Scheme Booklet, s 10.3);
•the support agreement provides that Metal Tiger is not obliged to vote in favour of the proposed scheme should a superior proposal emerge (Support Agreement, cl 2); and
•termination of the SID will result in termination of the support agreement (Support Agreement, cl 5(a)).
If a superior proposal emerges Metal Tiger is not obliged by reason of the support agreement to support the scheme as proposed. Metal Tiger can consider the superior proposal on its merits. Accordingly, the support agreement should not hinder or restrict a competing proposal coming forward. Prima facie the support agreement does not have a coercive effect as a lock-up device. In any case, should an issue emerge, the Metal Tiger votes will be tagged and the issue may be addressed at the second hearing.

Employment retention bonus payable to executive directors

Having regard to a series of recent decisions in this court and the Federal Court of Australia (see par 86 below) senior counsel for MOD drew my attention to the fact that two of MOD's executive directors, Messrs Hanna and McGhee, may receive an additional benefit if the scheme is implemented. That potential additional benefit is a payment by way of an employment retention bonus. The bonus is payable on the date that is 12 months after the implementation of the scheme. The maximum amounts so payable are $95,813 and $82,500 respectively.
The bonuses are not simply payable on the implementation of the scheme: payment is dependent on the executive director continuing in his employment with MOD. The longer the employment continues the greater the retention benefit that will be paid.
Senior counsel for MOD also directed my attention to the recent decision of O'Callaghan J in Re Kidman Resources Ltd.[6] In that decision[7] O'Callaghan J expressed disagreement with recent decisions of Farrell J in Re Gazal Corporation Ltd[8] and Re Ruralco Holdings Ltd.[9] It is apparent that there is now a divergence of views as to the appropriateness of an individual director joining in a unanimous board resolution to support a scheme in circumstances where, by reason of a bonus or similar benefit, the director has an additional and different interest to the members in the approval of the scheme. This is not an appropriate occasion to enlarge or seek to reconcile that debate. To the extent necessary I have already described my views in Re Nzuri Copper Ltd; Ex parte Nzuri Copper Ltd[10] and Re Navitas Ltd; Ex parte Navitas Ltd [No 2].[11] In my view the issue is fact sensitive. There were three reasons why, in the particular circumstances of the present case, I was satisfied that no difficulty arose for the purpose of orders under s 411(1) of the Act by reason of Messrs Hanna and McGhee having joined in a unanimous directors' recommendation that the shareholders approve the scheme in the absence of a superior proposal.
[6] Re Kidman Resources Ltd [2019] FCA 1226.
[7] Re Kidman Resources Ltd [105].
[8] Re Gazal Corporation Ltd [2019] FCA 701 [29] - [32].
[9] Re Ruralco Holdings Ltd [2019] FCA 878 [26].
[10] Re Nzuri Copper Ltd; Ex parte Nzuri Copper Ltd [2019] WASC 189 [83] - [89].
[11] Re Navitas Ltd; Ex parte Navitas Ltd [No 2] [2019] WASC 218 [31] - [38].
First, the bonuses potentially payable to the executive directors are relatively modest and not simply based on approval of the scheme. While effectuation of the scheme is a necessary pre-condition for the bonuses, Messrs Hanna and McGhee do not stand to receive a bonus or benefit only if the scheme proceeds: the bonus is also dependent on continuing in employment. There are good commercial reasons why an employment retention benefit might be offered to key executives of a target company following a change of control. Indeed, the introduction of an unnecessary fetter or obstacle to the ability to offer appropriate incentives to retain key executives may be disadvantageous to shareholders of an intended target company. There was nothing in the present case to suggest that the potential payments were any more than a genuine employment retention benefit designed to ensure that, following the implementation of the scheme, the merged entities retain the services of Messrs Hanna and McGhee for a reasonable period.
Second, informed, no doubt, by the recent authorities, MOD negotiated for clauses within the SID that dealt with the form of recommendation to be provided by the directors. Clause 5.5 of the SID provides:
Clauses 3.1(n), 5.2(a), 8.1 and 8.2 [each dealing with the MOD board recommendation] are qualified to the extent that, due only to any change in fact or law (or application of any law or policy by any Government Agency) occurring after the date of this deed, after first obtaining written advice from independent Senior Counsel, a MOD Director reasonably determines that he or she should not provide or continue to maintain any recommendation because that MOD Director has an interest in the Scheme that renders it inappropriate for him or her to maintain any such recommendation.

Clause 5.2(a) of the SID is also prefaced on MOD taking steps to ensure that, before an initial public announcement that the board intends to unanimously recommend the scheme in the absence of a superior proposal, the MOD directors obtain independent advice as to their ability to join in any recommendation of the board as to voting in favour of the scheme.
The affidavit evidence confirmed that the directors each took independent legal advice as to the relevant factors to be considered in relation to the scheme based on recent judicial guidance regarding material personal interests and conflicts of interest. Only on receipt of the advice did the directors resolve to recommend that the shareholders vote in favour of the scheme at the scheme meeting.
Accordingly, this is not an occasion where the directors are joining in a unanimous resolution to recommend the scheme without adequate consideration of whether they have a material personal interest or conflict of interest which would make it inappropriate to join in a recommendation of the board. The issue has been considered and independent advice taken. Had it been the case that, following such advice and giving due consideration to it, one or more directors considered that there were issues that ought to be further investigated, steps could have been taken. The SID permitted the director to decline to join in the recommendation if, after receiving advice from independent senior counsel, the director reasonably determined that he or she should not provide or continue to maintain any recommendation because he or she had an interest in the scheme that made it inappropriate to provide or maintain a recommendation.
Third, there has been fulsome disclosure of Messrs Hanna's and McGhee's interest in the form of the potential employment retention bonus. Wherever the scheme booklet refers to MOD's board's unanimous resolution there is an asterisk that directs attention to a disclosure that is prominently highlighted as 'MOD Directors Recommendation - Important Disclosure' in the contents page at the commencement of the scheme booklet. A further description of the issue appears at other parts of the scheme booklet (eg Scheme Booklet, s 5.10).
The nature and extent of the potential benefit that the executive directors stand to receive if the scheme is approved is properly disclosed. The disclosure is such that I am confident that shareholders will be able to come to an informed view as to whether the weight to be given to the directors' unanimous recommendation is affected by the additional interest that Messrs Hanna and McGhee have in the approval of the scheme.

Other matters

Senior counsel for MOD drew my attention to the 'deemed warranty' provision in the proposed scheme of arrangement (Scheme, cl 9.5). The presence of the warranty provision is disclosed in the scheme booklet (Scheme Booklet, s 3). Such deemed warranty clauses are not unusual and are acceptable provided that, as here, their presence is adequately disclosed.[12]
[12] Re Tawana Resources NL [2018] FCA 1456 [28] - [29] (referring to Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400).
Additionally, MOD sought orders for electronic dispatch of the scheme booklet. Such orders are now commonplace.[13] I was satisfied that an order for electronic dispatch of the scheme booklet was appropriate to MOD's proposed scheme.
[13] Re Wesfarmers Ltd; Ex parte Wesfarmers Ltd [145] - [152].

Conclusion and orders

On the evidence presented, and after hearing from senior counsel for MOD and counsel for Sandfire, I was satisfied that it was appropriate to make orders convening a scheme meeting to consider whether to approve the proposed scheme. The scheme is one that is fit for consideration by MOD's members in the sense that sensible business people might consider the scheme will be of benefit to those members. That is particularly the case given the opinion expressed in the IER.
Given the matters I have mentioned as to being satisfied that the scheme booklet prima facie provides proper disclosure to MOD's members, I also considered it appropriate to approve the final scheme booklet for distribution.
Accordingly, for these reasons, I made orders in the following terms:
1. Pursuant to section 411(1) of the Corporations Act 2001 (Cth) (Act) the Plaintiff convene a meeting of holders of fully paid ordinary shares in the capital of the Plaintiff (Shareholders), to be held at 1304 Hay Street, West Perth, Western Australia, on 1 October 2019 at 11:00 am (Perth time) (Scheme Meeting) for the purpose of considering and, if thought fit, agreeing to (with or without amendment) a scheme of arrangement proposed to be made between the Plaintiff and its Shareholders (Scheme), being the Scheme substantially in the form set out in Annexure 3 of the scheme booklet filed with the Supreme Court on 20 August 2019 (Scheme Booklet).
2.Subject to these orders and pursuant to section 1319 of the Corporations Act 2001 (Cth) (Corporations Act), the Scheme Meeting is to be:
(a)convened, held and conducted in accordance with the provisions of Part 2G.2 of the Corporations Act that apply to members of a company, and the provisions of the Plaintiff's constitution that are not inconsistent therewith and that apply to meetings of members;
(b)convened using the notice of meeting substantially in the form of the notice contained in Annexure 5 of the Scheme Booklet; and
(c)convened, held and conducted as if rule 2.15 of the Supreme Court (Corporations) (WA) Rules 2004 (WA) does not apply.
3.Scott Douglas Gibson or, failing him, Michael Phillip Bowen, is to be appointed to act as chairperson of the Scheme Meeting (Chairperson) and report the result of the Scheme Meeting to this Court.
4.Two Shareholders present in person or by proxy, corporate representative or attorney under power and entitled to vote shall constitute a quorum for the Scheme Meeting.
5.Voting on the resolution to approve the Scheme is to be conducted by way of poll.
6.At the Scheme Meeting each Shareholder present and entitled to vote will be entitled to one vote for each fully paid ordinary share in the capital of the Plaintiff that the Shareholder is registered as holding at 5:00 pm (Perth time) on 29 September 2019.
7.The Scheme Booklet with the explanatory statement required by section 412(1)(a) of the Corporations Act, be and is approved for distribution to members, subject to:
(a)the correction of any minor typographical errors or grammatical errors and final typesetting and formatting;
(b)any minor amendments required or approved by the Australian Securities and Investments Commission (ASIC); and
(c)correction or update of any relevant date references or last trading prices.
8.Subject to registration of the Scheme Booklet with ASIC pursuant to section 412(6) of the Corporations Act, the Plaintiff is to dispatch on or before 29 August 2019 the Scheme Booklet, substantially in the form of the document referred to in paragraph 7 above, and the applicable proxy, cash election and scrip election forms to the Shareholders who appear on the register of members by:
(a)in the case of each Shareholder who has nominated an electronic address for the purposes of receiving notifications of notices of any meeting, by email (on the first day on which dispatch of the Scheme Booklet is initiated, or such other date as directed by the Court) to the nominated email address, with such email to contain a link to a website at which those Shareholders can access the relevant documents, and lodge a proxy form on the Scheme;
(b)in the case of each other Shareholder who has a registered address in Australia, ordinary pre-paid post; or
(c)in the case of each other Shareholder who has a registered address outside Australia, pre-paid airmail or air courier,
and dispatch on or before 29 August 2019 is to be taken to be sufficient notice of the Scheme Meeting.
9.Shareholders must return their proxy forms for the Scheme Meeting by 11:00 am on 29 September 2019.
10.The matter be relisted at 9:00 am on 8 October 2019 following the Scheme Meeting for any application under section 411(4) and 411(6) of the Corporations Act for approval of the Scheme.
11.If the matter is relisted, the Plaintiff is to give notice of the hearing of the application pursuant to section 411(4)(b) of the Corporations Act by placing an advertisement in the "The Australian" and "The West Australian" newspapers, substantially in the form annexed to these orders and marked 'A', such advertisement to be published on or by 3 October 2019, and the Plaintiff is otherwise exempted from compliance with rule 3.4 of the Rules.
12.There be liberty to the Plaintiff to apply upon the giving of 24 hours' notice to ASIC.
13.These orders be entered forthwith.
14.An office copy of these orders shall be lodged with ASIC as soon as practicable after these orders are made.

Annexure 'A'
Notice of hearing to approve arrangement
TO all members of MOD Resources Limited (ACN 003 103 544).
TAKE NOTICE that at 9:00 am (Perth time) on 8 October 2019 at the Supreme Court of Western Australia, 28 Barrack Street, Perth, Western Australia, the Supreme Court of Western Australia will hear an application by MOD Resources Limited seeking the approval of an arrangement between the abovenamed company and its members as agreed to by a resolution considered and passed by a meeting of the members of the company held on 1 October 2019.
If you wish to oppose the approval of the arrangement, you must file and serve on the plaintiff a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on the plaintiff at its address for service at least one day before the date fixed for the hearing of the application.
The address for service of the plaintiff is DLA Piper Australia, Level 31, 152-158 St Georges Terrace, Perth, Western Australia.

Annexure 'A'

AFFIDAVITS RELIED ON BY MOD RESOURCES LTD

Deponent	Date	Deponent's role	Summary of affidavit
M A Clements (First Clements Affidavit)	Sworn 02/08/19	Executive chairperson and company secretary of MOD	Description of the nature of MOD and its business; Description of the nature of the proposed scheme, the SID, deed poll, key provisions of the scheme of arrangement; Independent expert's report; Board consideration of scheme; Preparation and verification of the draft scheme booklet.
R G Klug (First Klug Affidavit)	Affirmed 15/08/19	Chief commercial officer of Sandfire	Description of Sandfire; Execution of the SID; Deed of amendment and restatement; Deed poll; Verification of the draft scheme booklet; Description of the arrangements between Sandfire and Metal Tiger.
H J Roost (First Roost Affidavit)	Sworn 15/08/19	Solicitor at DLA Piper Australia, solicitors for the plaintiff	Description of conferral with the ASIC and provision of scheme documents to the ASIC.
S D Gibson	Sworn 15/08/19	Partner at DLA Piper Australia, solicitors for the plaintiff, with conduct of the proposed transaction	Consent to act as chair of the scheme meeting; Disclosure of interests; Consent of Mr Bowen to act as chair of the scheme meeting if Mr Gibson is unable to do so; Disclosure of interests.
M A Clements (Second Clements Affidavit)	Sworn 15/08/19	Executive chairperson and company secretary of MOD	Description of the arrangements between MOD, Sandfire and Metal Tiger; Initial board consideration of scheme; Description of deed of amendment and restatement.
M A Clements (Third Clements Affidavit)	Sworn 19/08/19	Executive chairperson and company secretary of MOD	Description of further verification of the draft scheme booklet; Description of further board consideration of scheme.
R A Klug (Second Klug Affidavit)	Affirmed 19/08/19	Chief commercial officer of Sandfire	Description of further verification of the draft scheme booklet.
H J Roost (Second Roost Affidavit)	Sworn 19/08/19	Solicitor at DLA Piper Australia, solicitors for the plaintiff	Description of further conferral with the ASIC and provision of amended scheme documents to the ASIC; Description of the side letter; Attaches amended notice of meeting.
C J G Seotis	Sworn 20/08/19	Solicitor at DLA Piper Australia, solicitors for the plaintiff	Executed copy of the side letter; Description of further conferral with the ASIC and provision of amended scheme documents to the ASIC; Conferral with the independent and technical experts; Amended proxy, cash and scrip election forms; Satisfaction of a condition precedent, namely approvals from the Botswana Competition Authority.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
EP
Research Associate to Justice Vaughan
10 SEPTEMBER 2019