Re Octagonal Resources Ltd (No 1)
[2015] VSC 806
•18 December 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2015 00434
IN THE MATTER OF OCTAGONAL RESOURCES LIMITED (ABN 38 147 300 418)
BETWEEN
| OCTAGONAL RESOURCES LIMITED (ABN 38 147 300 418) | Plaintiff |
EX TEMPORE
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JUDGE: | Robson J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18 December 2015 |
DATE OF RULING: | 18 December 2015 |
CASE MAY BE CITED AS: | Re Octagonal Resources Ltd (No 1) |
MEDIUM NEUTRAL CITATION: | [2015] VSC 806 |
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CORPORATIONS – Scheme of arrangement – Corporations Act 2001 (Cth) s 411 – Approval of the convening of meeting of members to consider the proposed scheme – Consideration of related party transactions – Whether scheme offer ‘fair’ where on upper range of valuation the scheme consideration value is less than the target share value – Whether independent expert report discloses all relevant matters – Orders made approving the convening of meetings.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Dr O Bigos | HWL Ebsworth |
HIS HONOUR:
I have before me an application under s 411(1) of the Corporations Act (Cth) (the Act) for orders to convene and hold a meeting or meetings with the members of the plaintiff (other than excluded shareholders, (the scheme participants)), Octagonal Resources Ltd (Octagonal), for the purpose of those members considering and, if thought fit, approving a proposed scheme of arrangement between Octagonal and its members.
The scheme is a relatively complicated scheme, which has been fully explained to me by Dr Bigos of counsel, on behalf of Octagonal.
The scheme is also fully explained in the scheme booklet, which contains the explanatory statement required under s 412(1) of the Act, as well as in the independent director’s letter and the independent expert’s report. An explanation of the scheme follows.
The scheme is proposed with Abbotsleigh Proprietary Limited (Abbotsleigh), an entity associated with Octagonal’s non-executive chairman, Mr Ian Gandel. The excluded shareholders in Octagonal are described as the ‘Gandel shareholders’, which comprise Abbotsleigh and its associated shareholders, including Mr Gandel, who collectively hold 41.24 per cent of the ordinary shares in Octagonal. The other shareholders, being the scheme participants, are also described as the ‘non-Gandel shareholders’, comprising 58.76 per cent of the ordinary shares in Octagonal.
If the scheme takes effect, the Gandel shareholders will obtain complete ownership of Octagonal.
Octagonal holds shares in A1 Gold. Octagonal’s shareholding in A1 Gold is its key asset. A1 Gold is developing a gold mine in north-east Victoria, and another mine in central Victoria. (It also has a shareholding in a wholly-owned subsidiary with a book value less than $250,000). Octagonal’s shareholding (about 38 per cent), and associated options in A1 Gold, was valued at $6.6 million as at 30 June 2015.[1] Octagonal acquired those shares and options on 25 June 2015, in exchange for selling to A1 Gold its Maldon gold operation.[2]
[1]First Gray affidavit, [44].
[2]First Gray affidavit, [30].
Octagonal’s submissions also explained that A1 Gold is in the process of offering an underwritten share purchase plan. Octagonal will not apply for A1 Gold shares under the purchase plan and, as such, its shareholding (which is to be distributed to scheme participants) will be diluted (from 38 per cent to 34 per cent). However, Octagonal submits that the independent expert’s report has taken the share purchase plan into account in reaching a conclusion about the fairness of the scheme.
Terms of the scheme
Under the terms of the scheme (which comprises annexure C of the scheme booklet):
(a) all ordinary shares in Octagonal on issue at the relevant record date held by scheme participants (scheme shares) will be cancelled under the selective capital reduction;
(b) the result will be that all the shares in Octagonal will be owned by the Gandel shareholders; and
(c) in consideration for the cancellation of shares, the scheme participants will receive the scheme consideration, being:
(i) a cash payment of $0.0055 per cancelled Octagonal share (cash consideration); and
(ii) two shares in A1 Gold for every five cancelled Octagonal shares (scrip consideration).
The scrip consideration will be provided by Octagonal transferring approximately 58,363,789 A1 Gold shares (out of the 169,672,726 which it holds) to scheme participants.
The total cash consideration (representing $0.0055 for each share held by the scheme participants) is $802,502. Abbotsleigh will provide to Octagonal funding by way of advance of $802,502 for the purpose of paying the cash consideration (Abbotsleigh advance).
The terms of the Abbotsleigh advance are contained in Schedule 3 to the Scheme Implementation Deed (annexure B to the scheme booklet). If the scheme is approved, $802,502 will be paid to the scheme participants as the cash consideration and the Abbotsleigh advance will become the liability of Octagonal, repayable to Abbotsleigh. However, Abbotsleigh must not call for the repayment of all or any part of the advance if the payment of that call by Octagonal would result in Octagonal being unable to pay its debts as and when they become due and payable.
The plaintiff’s submissions set out the terms of the Abbostleigh advance, which were recorded in Schedule 3 to the Scheme Implementation Deed. The plaintiff submitted that the Abbotsleigh advance causes no prejudice to either the Octagonal shareholders (because while the scheme participants remain shareholders of Octagonal, the company is not obliged to repay the advance; and by the time any obligation to repay arises, the scheme participants will no longer have an interest in Octagonal, having received their scheme consideration in return for the cancellation of their shares), or the creditors (as the loan is not repayable if that would result in Octagonal’s inability to pay all its creditors).[3]
[3]Plaintiff’s outline of submissions, [35].
Shareholder approval
The scheme involves a selective capital reduction as well as a related party transaction, as the shares in Octagonal will be transferred to a related entity, being Abbostleigh, an entity of which Mr Gandel is also a director. Accordingly, both Part 2J.1 of the Act (which relates to capital reductions) and Chapter 2E (which relates to related party transactions) must be complied with and there are therefore several stages to the scheme approval.
Therefore, in addition to the approval of the Court and ASIC (both are discussed further below) and other regulatory approvals, the scheme is subject to scheme participants approving the scheme by passing resolutions at the relevant meetings discussed below, approving the scheme, the selective capital reduction, and the related party benefit that would be given to Gandel shareholders under the proposed scheme.
The capital reduction proposed is a selective reduction, as it does not apply to every shareholder.[4] A selective capital reduction must be approved in accordance with s 256C(2) of the Act. Further, as the selective capital reduction involves the cancellation of shares, it also must be approved by two special resolutions:
(a) the Gandel shareholders would also approve the selective capital reduction as a special resolution. That resolution would be proposed only if the selective capital reduction is passed by non-Gandel shareholders; and
(b) a special resolution passed at a meeting of the scheme participants (being the shareholders whose shares are to be cancelled).
[4]Pursuant to s 256B(1) of the Act, which provides that a company may reduce its share capital if the reduction: (a) is fair and reasonable to the company’s shareholders as a whole; and (b) does not materially prejudice the company’s ability to pay its creditors; and (c) is approved by the shareholders under s 256C.
The independent expert has given the opinion that the selective capital reduction is fair and reasonable to Octagonal’s shareholders as a whole.
In relation to the related party transactions, as there may be a financial benefit given to Abbotsleigh as a result of the overall transaction (s 229), and as Mr Gandel is a director of both Abbotsleigh and Octagonal and is therefore considered a related party transaction (s 228), it is proposed that a resolution approving the transaction be put to non-Gandel shareholders at the general meeting.[5]
[5]Section 208 of the Act provides that for a public company to give a financial benefit to a related party, the company must obtain approval of the members in the way set out in ss 217 to 227 of the Act.
Accordingly, the scheme is subject to:
(a) the scheme resolution which must be passed by the requisite majority of scheme participants under the Act (scheme resolution);
(b) approval of the scheme resolution, scheme participants will be asked to approve, by a special resolution, the reduction and cancellation of the shares held by the scheme participants (selective reduction non-Gandel resolution); and
(c) the selective reduction non-Gandel resolution being passed, to do so a general meeting is to be held where:
(i) Gandel shareholders will vote to approve the selective capital reduction (scheme participants can either abstain or vote against the resolution but cannot vote in favour) (selective reduction Gandel resolution); and
(ii) scheme participants will be asked to approve a related party benefit provided to Abbotsleigh and its associated shareholders (related party resolution).
If any of the scheme resolution, the selective reduction non-Gandel resolution, the selective reduction Gandel resolution or the related party resolution are not passed, the scheme will not proceed.
Aside from the scheme, shareholder approval will also be sought at the general meeting for the repayment of loan funds to another Gandel-associated company, Gandel Metals Pty Ltd, to approve the mode of repayment by way of transfer of A1 Gold shares (other than those shares making up the scheme consideration) rather than payment of cash.
The role of the court
The statutory framework relating to schemes of arrangement involves a three-stage process:
(a) the hearing of an application to the court for orders to convene a meeting or meetings;
(b) the holding of the meeting or meetings; and
(c) the hearing of an application to the court for an order to approve the scheme (preceded by an application to an Associate Judge).
At this stage of the process what is involved in obtaining the Court’s approval for the convening of meetings for shareholders to consider a scheme of arrangement to be entered into between the shareholders of Octagonal and Octagonal, the steps that are to be taken and the issues to be addressed by the Court, were set out by Barrett J in Re Westfield Holdings Limited,[6] in which his Honour said as follows:[7]
The court’s role on a s 411 application of this kind has been described in a number of cases. According to the formulation adopted by Santow J in Re NRMA Insurance Limited, the court must see on the material placed before it, that the proposal fits within the statutory concept of an arrangement or compromise, …
[6](2004) 49 ACSR 734 (‘Re Westfield’).
[7]Re Westfield, [4] (citations omitted).
I am satisfied that the proposed scheme in this case does so fit within the relevant statutory concept.
Barrett J then proceeds:[8]
… [t]hat there will be available to members all the main facts relevant to the exercise of their judgment …
[8]Re Westfield, [4].
And again, Dr Bigos has satisfied me with reference to the scheme booklet, the independent expert’s report and the independent director’s letter that all the facts relevant to the exercise of members’ judgment have been disclosed.
His Honour continues:[9]
… that ASIC has had a reasonable opportunity to examine the proposal …
[9]Re Westfield, [4].
Relevantly, I have received a letter from ASIC,[10] in which ASIC stated that it has had a reasonable opportunity to examine the proposal.
[10]Tendered this morning in the affidavit of Thomas Kim.
The judgment continues:[11]
… and that the scheme is so conceived and presented as to that structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it should not, in due course, receive the court’s approval if the necessary majority of the members’ vote is achieved.
[11]Re Westfield, [4].
I think this is such a scheme. Dr Bigos has explained to me the problems facing Octagonal: Octagonal underwent a transitional period in 2015, moving from gold miner and producer to gold explorer; as with other junior mining companies, Octagonal experienced increasingly difficult conditions in raising equity funding.[12]
[12]First Gray affidavit [36].
Pursuant to a short-term loan agreement with Gandel Metals — the loan being secured over shares held by Octagonal in A1 Gold, as at the time of hearing — Octagonal owed Gandel Metals $1.3 million. Octagonal investigated investment opportunities within both the resources and non-resources sectors with no success. The share price of Octagonal has traded at more than 100 per cent discount to the market value of the A1 Gold shares which it holds. Thus even after accounting for all liabilities, Octagonal shares are trading at well below their net asset value, the main asset being shares in A1 Gold. The estimated tax year losses to 30 September 2015 was $187,000.[13]
[13]First Gray affidavit, [51].
In view of the approaching deadline for repayment of their loan, Gandel Metals proposed that Octagonal’s then current structure was unsustainable and proposed that the situation needed to be resolved urgently.
Under the scheme a fair distribution of those shares is going to be distributed to the non‑Gandel shareholders, plus the interim dividend. The value of that consideration, the independent expert has opined, is fair and reasonable.[14] The company otherwise faces a bleak future in view of the high compliance costs and the fact that its activities are constrained by those costs.
[14]‘Independent Expert Report’, Scheme Booklet Annexure A, 132–133.
There is, in my view, a likelihood that the Court would approve the scheme if the statutory majority of shareholders is achieved. As I have said, there has been compliance with preliminary matters, there has been appropriate disclosure at this stage and there has been a reasonable opportunity for ASIC to examine the scheme.
Dr Bigos has pointed out to me the issue concerning the foreign shareholders who will receive the fair value of their shares in Octagonal rather than shares in A1 Gold. The problems with issuing shares to overseas shareholders, including the difficulty in complying with their own securities legislation where the offer of shares is involved, are widely understood.
I accept the propositions put forward by Dr Bigos in Octagonal’s comprehensive submissions.
Amendments to the independent expert report
The independent expert, PPB Corporate Finance Pty Ltd trading as PPB Advisory, has provided an independent expert report, expressing the opinions that:
(a) the scheme is in the best interests of the scheme participants in the absence of a superior offer;
(b) the selective capital reduction is fair and reasonable to the scheme participants; and
(c) the loan repayment of the loan from Gandel Metals is fair and reasonable to the scheme participants.
Dr Bigos has indicated that amendments will be made to the expert’s report to accommodate the fact that the range of values of the scheme consideration falls within the range of values of the shareholding, save that on the upper value of the shareholding the consideration falls below the value of the shareholding.
I have considered this issue before in the case of Re Dyno Nobel Limited,[15] where I said that:[16]
[15][2008] VSC 154 (‘Dyno’).
[16][2008] VSC 154 [35], [36].
To resolve the issue and to make sure the shareholders were fully informed, the expert agreed to amend his report as follows:
Notwithstanding the fact that the high end of our assessed value for a Dyno Nobel share is above the high end of our assessed value of the Share Scheme Consideration, as the range of values that we have concluded upon for the Share Scheme Consideration falls within the range of values that we have ascribed to the Dyno Nobel shares being acquired we confirm the terms of the Share Scheme to be fair.
Also, the expert added to the report the following:
ASIC Regulatory Guide 111.0 provides that ‘an offer is fair if the value of the offer price or consideration is equal to or greater than the value of the securities the subject of the offer.’ ASIC Regulatory Guide 11.62 provides that an expert should usually give a range of values for the securities the subject of the offer. In this report, we consider that, if the value of the consideration offered falls within the range of values of the securities the subject of the offer, the offer is fair.
That, in the present circumstances, the independent expert has opined that the scheme is fair and reasonable, yet, on the upper value of the shareholding the consideration falls below the value of the shareholding, in my view, can be explained by incorporating the matters I refer to in Dyno and have quoted above, into the expert’s report in this instance to explain the situation to the shareholders.
It is a matter for the shareholders whether they accept this scheme or not, and it is not for this Court to judge on commercial considerations. This Court is merely to judge that the shareholders will be able to make a decision based on full disclosure of all information so that they can decide whether it is in their interests or not to accept the proposed scheme.
Accordingly, for the above reasons I made the orders sought.
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