Re Perseverance Corporation Limited
[2007] VSC 574
•13 December 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 9695 of 2007
| IN THE MATTER OF PERSEVERANCE CORPORATION LIMITED (ACN 010 650 049) | |
| PERSEVERANCE CORPORATION LIMITED (ACN 010 650 049) | Plaintiff |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 December 2007 | |
DATE OF JUDGMENT: | 13 December 2007 | |
CASE MAY BE CITED AS: | Perseverance | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 574 | |
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CORPORATIONS – Scheme of arrangement – Takeover scheme – Approval of scheme – Discretion – Relevance of s 411(17) to discretion – Scheme approved - Sections 411(4)(b) and 411(17) Corporations Act (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M N Connock SC with Mr G Ahern | Clayton Utz |
FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69
Re Sonodyne International Ltd (1994) 15 ACSR 494
Re Australian Energy Limited [2006] FCA 155
Re Mincom Ltd [2007] QSC 058
Re APN News v Media Limited (2007) 62 ACSR 400
Re Arthur Yates & Co Ltd (2001) 36 ACSR 758
Re Lonsdale Finance Group Ltd [2007] VSC 394
HIS HONOUR:
The court has before it an application by Perseverance Corporation Limited, pursuant to s 411(1) of the Corporations Act dated 28 November 2007 for orders to convene a meeting of the holders of ordinary shares issued by Perseverance for the purposes of considering and if thought fit, resolving to approve a proposed scheme of arrangement between Perseverance and its shareholders (“the share scheme”); and to convene a meeting of the holders of options to subscribe for shares for the purpose of considering and if thought fit, resolving to approve a proposed scheme of arrangement between Perseverance and the option holders which if implemented will result in the cancellation of all options for cash consideration. If approved and permitted it will result in the acquisition, for cash consideration by Northgate Minerals Corporation through its wholly owned subsidiary Northgate Australian Ventures Corporation, of all Perseverance’s shares.
On 22 November 2007 a draft scheme booklet containing the explanatory statement required by s 412(1)(a) of the Act was delivered to ASIC. The solicitors for Perseverance have received two letters from ASIC dated 12 December 2007. The first letter deals with certain exemptions given by ASIC as to matters which otherwise Perseverance would have had to include in its explanatory statement. The second letter is the standard letter where ASIC advises that its policy in relation to providing statements under Para 411(17)(b) ‘is that it will not provide such a statement until the second, or confirmation, court hearing in relation to a scheme arrangement.’
ASIC go onto say:
This is because ASIC will not be in a position to advise the court properly until it has had an opportunity to observe the entire scheme process. It is also consistent with the wording of the section that relates the statement to the courts proof of the scheme.
However, ASIC recognises that proponents of the scheme may reasonably wish for an indication of ASIC's views before committing to the expense of calling a meeting and printing the scheme documentation.
Therefore I advise you that ASIC does not currently propose to appear to make submissions, or to intervene to oppose the schemes at the first hearing on 13 December. This current intention are based on the information provided by Perseverance to date, in relation to whether the schemes have been proposed for the purpose of enabling any person to avoid the operation within the provisions of Chapter 6 of the Act. ASIC's position may change if ASIC considers it appropriate to do so.
For a further explanation of ASIC's policy in relation to schemes of arrangement, see ASIC Policy Statements 60 and 142.
Without going to those policy statements in any depth, suffice it to say they provide, in effect, that ASIC ascertains whether the information that is provided to the members is similar to that provided under a takeover under Chapter 6 and to see whether they are disadvantaged by the scheme, as compared to a take over proceeded by way of Chapter 6.
Perseverance was incorporated on 25 June 1986. It is admitted to the official list of the ASX. It operates a business which primarily involves the exploration, development and production of gold projects within Victoria. For the financial year ending 30 June 2007, Perseverance generated revenue of approximately $117 million and recorded a nett loss of approximately $19.7 million. As at 27 November 2007, Perseverance shares on issue were 890,475,625 and a further 176,716,000 options were on issue. As at 27 November 2007, 9,948,000 Executive Options were on issue which by agreement will be cancelled in return for payment by Perseverance to each Executive Option Holder as set out in the relevant Executive Option Deed. On 19 December 2005, Perseverance issued 370 Notes. If the Noteholders approve the Noteholders’ Resolution and the Share Scheme becomes effective, the Notes will be redeemed on the day on which the Share Scheme is implemented.
Northgate is a coal and copper mining company incorporated under the laws of Ontario in Canada. Northgate is listed on the Toronto Stock Exchange and the American Stock Exchange. For the year ending 31 December 2006, Northgate generated revenue of approximately US$411m, and recorded nett earnings of approximately US$106m. The consideration payable by Northgate to the scheme shareholders and the scheme option holders is $192m. Northgate must sufficiently demonstrate it has sufficient resources to pay this amount.
The proposed transactions of the schemes.
The proposed schemes are set out in the proposed letter from the chairman, Mr Flu to the shareholders. The letter states:
On 29 October 2007, Perseverance and Northgate announced the terms for the proposed acquisition of Perseverance by Northgate via schemes of arrangement. Under the schemes, Northgate, through its wholly-owned subsidiary Northgate Australian Venture Corporation, will require all of the outstanding shares in Perseverance and the company's options will be cancelled. Shareholders will receive 20 cents for each share that they own and option holders will receive 8 cents for each option they own.
The Northgate offer of twenty cents per share provides substantial value to Perseverance Shareholders and represents:
·a 37.9 per cent premium to the Perseverance closing share price on 26 October 2007, which was the last trading day prior to the announcement, of the or 14.5 cents.
·A 37.1 per cent premium to the one month volume weighted average price of 14.6 cents before the announcement of the offer; and
·a 51.4 per cent premium to the volume weighted average price of 13.2 cents in the period from 12 July 2007, the day Perseverance was reinstated to the official quotation on the ASX following completion of the $26.5m placement, and 26 October 2007.
Further, the Northgate offer of 8 cents per option provides substantial value to Perseverance option holders as it reflects the Northgate offer price per share which as indicated above is a substantial premium to the trading range of those shares prior to the announcement.
The Perseverance directors have considered the advantages and disadvantages of the schemes and have unanimously reached a conclusion that the schemes are in the best interest of Perseverance shareholders and option holders. In reaching this conclusion, the Perseverance directors have reviewed a comprehensive range of alternative options for the company, which included a significant capital raising to restructure the company's balance sheet, and to fund the development program at the Fosterville Gold Mine and exploration. Such a capital raising would likely to be heavily discounted and dilutive to existing shareholders.
The Perseverance directors unanimously did recommend that in the absence of a superior proposal, shareholders and option holders vote in favour of the schemes, as the Perseverance directors propose to do in respect of the Perseverance shares and any options they hold at the scheme meetings.
An independent expert Deloitte Corporate Finance has concluded that the schemes, including the scheme consideration of twenty cents per share and eight cents per option, are both fair and reasonable and that, therefore, the Northgate proposal is in the shareholders' and option holders' best interests.
As for the share scheme, all shares on issue at the relevant date other than any held on behalf or for the benefit of Northgate or any of its related entities will be transferred by their holders to Navco with the result that Perseverance will become a wholly owned subsidiary of Northgate. In consideration for the transfer of scheme shares Northgate will pay, or procure the payment of 20 cents per share as was stated in the Chairman's letter. Under the option scheme, all options at the relevant record date other than any held on behalf of the benefit of Northgate will be cancelled on the implementation of the option scheme and the consideration will be, as mentioned in the Chairman's letter, 8 cents per share of the share option.
I now deal with the function of the court. Under s 411(1) the court may order a meeting of the class of members or creditors. Under s 411(2) the court must not make such an order unless notice has been given to ASIC and the court is satisfied that ASIC has had a reasonable opportunity to examine the scheme to raise any relevant issues in relation to the proposed arrangement and the draft explanatory statement. The evidence shows that they were delivered to ASIC on 22 November 2007 thus the fourteen days notice has been given and I am satisfied that ASIC has had a reasonable opportunity to examine the scheme and to make submissions in relation to the proposed arrangement and the draft explanatory statement.
What test should I apply? In FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd[1] Street CJ said “the court will not ordinarily summon a meeting unless the scheme is of such a nature and is cast in such terms that if it achieves a statutory majority at the creditors’ meeting, the court would be likely to approve it on the hearing of a petition which is unopposed.”[2] The court will be likely to approve the scheme if reasonable to suppose that sensible business people might consider the arrangement proposed by the companies of benefit to its members. See also Re Sonodyne International Ltd. [3]
[1](1977) 3 ACLR 69,at 72
[2]Ibid
[3](1994) 15 ACSR 494 at 499 per Hayne J
Before applying that test it is appropriate that I look at some other relevant factors. First of all I will consider the classification of the option scheme. The weight of authority is to treat option holders as contingent creditors rather than contingent members for the purposes of s 411. I refer to Re Australian Energy Limited. [4] As to the warranty by the Perseverance shareholders, Clause 7.2 of the share scheme provides the following:
The Scheme Shareholders are taken to have warranted to Perseverance, and appointed and authorised Perseverance as its attorney and agent to warrant to Northgate and Navco, that all their Perseverance shares (including any rights attached to those shares) which are transferred under the scheme will, at the date of transfer, be fully paid and free from all encumbrances and that they have full power and capacity to transfer their Perseverance shares together with any rights attached to those shares to Navco under this scheme.
[4][2006] FCA 155 at [10] per Lindgren J
Paragraph 8.9 of the scheme booklet specifically draws shareholders' attention to the deemed warranty contained in clause 7.2 of the share scheme and sets out its terms and substance. The purpose of the deemed warranty, in my view, is to prevent a shareholder when shares are subject to encumbrances from receiving the same consideration as that received by those shares which are free from encumbrances. I see no difficulty with the provision provided for in this proposed scheme. I only mention this matter because in Re Mincom Ltd[5] Fryberg J did see a difficulty. I refer and rely upon Re APN News v Media Limited. [6]
[5][2007] QSC 058
[6](2007) 62 ACSR 400, at 410 per Lindgren J
I now deal with the exclusivity provisions. Clause 9 of the merger implementation agreement contains certain exclusivity provisions. These exclusivity provisions are defined under the following headings. “The no shop restriction”, “The no talk restriction” and “The no due diligence restriction”. In Re Arthur Yates & Co Ltd,[7] Santow J stated that exclusivity provisions should be no more than a reasonable period capable of precise ascertainment and “may differentiate between actively soliciting an alternative merger proposal or simply dealing with an unsolicited one” but in either case should be “framed so that it is subject to the overriding obligation not to breach director's fiduciary duties or be otherwise unlawful” and should be given “adequate prominence” in the explanatory statements sent to shareholders.[8]
[7](2001) 36 ACSR 758, at 760 per Santow J
[8]Ibid
It was submitted to me that the exclusivity provisions in clause 9 satisfy these criteria because:
(a) They only operate for a lock up period of up to approximately five months under the Merger Implementation Agreement, unless Perseverance and Northgate agree in writing to an extension;
(b) Other than the “no shop” clause, it is said they are subject to a fiduciary and other legal duties exception; and
(c) a copy of the Merger Implementation Agreement was contained in the explanatory memorandum and the exclusivity provisions that are separately referred to in sections 5.3(c) and 12.14 of the scheme booklet.
I accept those submissions subject to one caveat and this deals with the point that Santow J referred to where he said:
[S]uch an exclusivity clause [should] be framed so that it is subject to the overriding obligation not to breach the directors’ fiduciary duties or be otherwise unlawful.[9]
[9]Ibid
I was concerned that, rather than the obligation being subjected to the directors not breaching their fiduciary duties or otherwise being unlawful, one of the exceptions in cl 9.5(a)(ii) appeared to me to limit the directors exercising their fiduciary duties so long as their view was consistent with that of their external lawyers. I expressed the view in discussion with counsel that that approach was not consistent with the obligation of directors. The duty of directors is a personal and subjective one and, in my view, the duty should not be overborne by the advice of lawyers, although clearly their duty can be informed by external advice and should in a difficult case be so informed.
The proponent was prepared therefore to accept an amendment by deleting the words “to that effect” as they appear in clause 9.5 of the Merger Implementation Agreement. I acknowledge that it is an agreement between Northgate and Perseverance which required the consent of them both to amend. I also acknowledge that the directors no doubt thought the clause was in the best interests of the company in entering into the agreement. But in my view to keep faith with the principles laid down by Santow J which I agree with, it is an appropriate concession and amendment for both Northgate and Perseverance to make.
I now turn to the break fee. It was submitted that the Merger Implementation Agreement contained, in clause 10, a break fee of $2.5 million payable by Perseverance in certain circumstances. Clause 10.1(d) records that the break fee is to compensate Northgate for advisory costs, the costs of management and directors' time, commitment fees and financing costs, out of pocket expenses and reasonable opportunity costs. I accept that.
The total value of the consideration for the shares scheme, the option scheme, the cancellation of the executive options and the redemption of the notes is approximately $230 million, and the break fee of $2.5 million represents approximately 1.08 per cent of the equity value of Perseverance implied by the transaction and consideration.
It was submitted to me that in Re APN News & Media Ltd, Lindgren J stated that break fees are common, and have not been considered to be an obstacle to orders being made under s.411(1).[10]
[10](2007) 62 ACSR 400 at 408-09
As observed by Lindgren J, the relevant issue was whether the liability to pay the break fee would be likely to coerce offeree shareholders into agreeing to the scheme or to deter companies from making a competing offer.[11] It was submitted that, as to the first matter outlined by Lindgren J, the potential liability on the part of Perseverance to pay the break fee is not a matter likely to coerce offeree shareholders into agreeing to the scheme. I accept that submission. Under Clause 10.2(d), the break fee is not payable if the share scheme is not passed by the requisite majority at the proposed share scheme meeting.
[11]Ibid 410
As to the second matter observed by Lindgren J, it is submitted that the break fee liability is not likely to deter other companies from making a competing offer, given that the break fee represents only 1.8 per cent of the transaction consideration and is of a fixed amount of $2.5 million. I accept that submission as well.
As to the performance risk, it is submitted that in considering whether to approve a scheme involving the participation of a person other than the company and its members, the court should ensure that the relevant party is bound to perform the role assigned to it and that its obligations are able to be enforced. Its obligations do not depend upon s 411 which is confined to the obligation of the company and its members or creditors. I agree with that submission.
It has been submitted that in this case Northgate must pay, or procure that NAVCO pays, by depositing by 12.00pm on the day a particular scheme is implemented, into an account in the name of Perseverance an amount equal to the aggregate consideration for that particular scheme, and such amount is to be held on trust by Perseverance for the purpose of sending to the Scheme Shareholders or Scheme Optionholders, as appropriate.
Pursuant to the terms of each Scheme, the payment must occur before the shares are transferred or the options are cancelled. It is further submitted that the obligations of Northgate for the Share Scheme are secured by a deed poll dated 5 December 2007 in favour of shareholders and for the Option Scheme are secured by a deed poll dated 5 December 2007 in favour of the optionholders.
In my view, the performance risk is reasonably acceptable to be able to be put to the members and option holders.
As to s 411(17), Perseverance anticipate receiving from ASIC a no objection statement under Paragraph 411(17)(b). If the approval is unopposed it is likely in my view such a statement will be produced, accordingly there will be no bar to the court exercising its discretion whether or not to approve the scheme or not under s 411(17). I do not need to further consider s 411(17) at this stage, and I refer to my comments about that matter in Re Lonsdale Finance Group Ltd [2007] VSC 394.
I have already referred to the director's recommendation and the fact that Deloitte Corporate Finance Pty Ltd have given an independent expert's report which says that the proposals are fair and reasonable and therefore in the best interest respectively of shareholders and option holders.
Taking all these matters into account, I conclude that the proposals are such that it could be reasonably supposed by sensible business people to be, for each of the proposals, for the benefit of the class concerned.[12] I find that it is likely that each scheme will be approved if unopposed. I will therefore make the orders sought.
[12]Re Sonodyne (1995) 15 ACSR 494 at 499 per Hayne J
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