Re Phosphate Resources Ltd

Case [2005] FCA 1705

FEDERAL COURT OF AUSTRALIA

In the matter of Phosphate Resources Limited [2005] FCA 1705

CORPORATIONS – scheme of arrangement – application for approval of scheme of arrangement involving shareholders – scheme involving acquisition of shares by another company – effective merger – criteria for approval – procedural deficiencies – disallowance of proxies – disallowance based on misconstruction of time specified in Court order for commencement of shareholder meeting – refusal to entertain motion at shareholders’ meeting for one day adjournment of meeting – refusal based upon restrictive construction of Court order – Independent Expert Report – incomplete information – valuation offer based on variable underlying cash position – variability not disclosed in report – application for approval refused – application for extension of time to file annual financial report and for relief from civil liability – no substantial injustice – parties acting honestly – carelessness and wrong assumption – application granted

Corporations Act 2001 (Cth) s 411(4), (5), (6), (10), (11), (12), (17), s 249L, s 250B

Central Pacific Minerals NL [2002] FCA 239 cited
Application of NRMA Limited (2000) 18 ACLC 533 cited
In the Matter of Foundation Healthcare Limited (No 2) [2002] FCA 973 cited

PHOSPHATE RESOURCES LIMITED
WAD 193 OF 2005

FRENCH J
24 NOVEMBER 2005
PERTH


IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

 WAD 193 OF 2005

IN THE MATTER OF PHOSPHATE RESOURCES LIMITED
ACN 009 396 543

PHOSPHATE RESOURCES LIMITED
PLAINTIFF

JUDGE:

FRENCH J

DATE OF ORDER:

24 NOVEMBER 2005

WHERE MADE:

PERTH

THE COURT ORDERS THAT:

A.On the Plaintiff’s application filed 22 September 2005 for approval of a Scheme of Arrangement:

1.The application is dismissed.

2.The plaintiff is to pay the objecting shareholders’ reasonable disbursements of and incidental to the conduct of their opposition to the application for approval of the Scheme of Arrangement to be taxed, if not agreed.

B.On the Plaintiff’s application filed 25 October 2005 under s 1322 of the Corporations Act 2001 (Cth):

1.The period set out in s 319(3)(a) for the plaintiff to lodge its annual report for the financial year ended 30 June 2005 is extended to 31 December 2005.

2.The plaintiff and its directors and officers are relieved from any civil liability in respect of a contravention of s 319(3)(a) of the Corporations Act 2001 (Cth) with respect to the lodgment of the plaintiff’s annual report for the financial year ended 30 June 2005.

3.The plaintiff is to lodge a copy of this order with the Australian Securities and Investment Commission (ASIC) forthwith.

4.Upon service of this order on ASIC, ASIC is to include notice of the order in its database.        

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.


IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

 WAD 193 OF 2005

IN THE MATTER OF PHOSPHATE RESOURCES LIMITED
ACN: 009 396 543

PHOSPHATE RESOURCES LIMITED
PLAINTIFF

JUDGE:

FRENCH J

DATE:

24 NOVEMBER 2005

PLACE:

PERTH

REASONS FOR JUDGMENT

Introduction

  1. Phosphate Resources Limited (PRL)…

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AGLC
Re Phosphate Resources Ltd [2005] FCA 1705
Case
[2005] FCA 1705
Decision Date

CaseChat Overview and Summary

Phosphate Resources Limited (PRL) sought approval for a scheme of arrangement for its merger with another company, CII, and an extension of time for filing its annual financial report. The applicants also sought relief from civil liability for the failure to lodge the report in time. The dispute was heard and decided by the Federal Court of Australia. The key legal issues included whether the scheme met the statutory requirements, whether the majority of shareholders voting in favour of the scheme acted in good faith, and whether the scheme was fair and reasonable. Additionally, the court had to determine whether the consideration offered under the scheme was adequate and whether there were any inadequacies in the process that could affect the integrity of the scheme approval process. The court found that the directors, who were also shareholders in CII, did not need to vote as a separate class. However, the court had concerns about the variability of the underlying cash figures on which the valuation of PRL shares was based, and whether the shareholders were fully and properly informed. The court also found that there were significant issues affecting the integrity of the process, such as the misconstruction of the court’s order and the refusal to entertain a vote on a motion for adjournment. As a result, the court dismissed the application for approval of the scheme. The court granted the extension of time for filing the annual report and relief from civil liability for the failure to lodge the report in time. The final orders included dismissing the application for approval of the scheme, extending the period for lodging the annual report, relieving the plaintiff and its directors and officers from civil liability, and requiring the plaintiff to lodge a copy of the order with the Australian Securities and Investment Commission.

Orders

Orders of the court

A. On the Plaintiff’s application filed 22 September 2005 for approval of a Scheme of Arrangement:

1. The application is dismissed.

2. The plaintiff is to pay the objecting shareholders’ reasonable disbursements of and incidental to the conduct of their opposition to the application for approval of the Scheme of Arrangement to be taxed, if not agreed.

B. On the Plaintiff’s application filed 25 October 2005 under s 1322 of the Corporations Act 2001 (Cth):

1. The period set out in s 319(3)(a) for the plaintiff to lodge its annual report for the financial year ended 30 June 2005 is extended to 31 December 2005.

2. The plaintiff and its directors and officers are relieved from any civil liability in respect of a contravention of s 319(3)(a) of the Corporations Act 2001 (Cth) with respect to the lodgment of the plaintiff’s annual report for the financial year ended 30 June 2005.

3. The plaintiff is to lodge a copy of this order with the Australian Securities and Investment Commission (ASIC) forthwith.

4.

Background

Background to the litigation

PRL also sought an extension of time for filing its annual financial report and relief from civil liability for the failure to do so in accordance with the requirements of the Corporations Act 2001 (Cth) (the Act). For reasons set out below, orders will be made in accordance with that application. Factual and Procedural Background PRL has conducted phosphate mining operations on Christmas Island since 1990. Phosphate has been mined on the Island for over 100 years. PRL’s right to mine is derived from a lease granted by the Federal Government. That lease was extended for 21 years in August 1997. It covers an area of approximately 20 square kilometres which represents about 15% of the Island’s land area. Phosphate mining is the principal industry on Christmas Island. PRL is the main employer on the island and an important contributor to the economic and social wellbeing of the Island population. The company has about 152 employees of whom 126 are permanent and 26 casual. At 31 March 2005 PRL had 3,397,507 fully paid shares on issue. These were held by 223 shareholders. The top 20 shareholders held 2,133,850 shares which represented 62.8% of the issued shares. CII held 39.06%, representing 1,327,180 shares. 39.52% of the issued shares as at 31 March 2005 were held by residents of Christmas Island comprising current and past directors and employees of PRL and their families, employees of the Christmas Island Shire and their families, business owners and other residents. CII is an investment holding company which was established in 1987. Until 9 June 2005 it was known as Asset Backed Holdings Ltd. Its major investment is its 39.06% shareholding in PRL. Historically it had investments in Commerce Australia Pty Ltd which is an internet service provider and a software development company. It also had a 25.5% interest in Aliquat Asset Management Limited which is a property management company. It disposed of these interests in 2002 and 2003. On 21 July 2004 CII announced its intention to make an off-market bid for all of the shares issued in PRL that it did not already own. It served a bidder’s statement on PRL on 31 August 2004. It offered $3 cash for every PRL share held. At the time of that offer it had a 35.45% interest in the company. Its offer was conditional upon it acquiring a relevant interest in at least 90% of the shares which PRL had on issue. Following various extensions to the offer period it waived that condition. When its offer closed on 26 November 2004 it had increased its interest to 42.05%. However its holding was diluted to 39.06% because PRL issued shares to employees under a prospectus of 22 February 2005. The off-market bid having been unsuccessful, discussions ensued between the two companies and they announced their intention, on 21 February 2005, to merge by way of a Scheme of Arrangement. The salient features of the Scheme are as follows: 1. CII offers $1 cash plus 11 CII New Shares for every PRL share. 2. The Scheme covers all PRL shares held by each shareholder. 3.A number of conditions precedent to the Scheme becoming effective would have to be satisfied including: (i) regulatory consents and approvals being given; (ii)the absence of any restraint or prohibition on the acquisition by order of any regulatory authority or court; (iii)no Prescribed Occurrences having occurred in PRL or CII between the date of the agreement and 5pm on the date that the matter came back to the Court for approval of the Scheme; (iv)no material adverse change in PRL or CII; (v)due diligence investigations by PRL and CII not revealing any information which would amount to a PRL or CII adverse change; (vi)no CII or PRL takeover proposal being made; (vii)obtaining of an independent expert report by PRL which concludes that the Scheme is in the best interests of the Scheme participants; (viii)PRL Board recommendations for the Scheme continuing at the time that PRL shareholder approval is obtained; (ix)CII New Shares to be issued as consideration to Scheme participants being approved for official quotation by the Australian Stock Exchange (ASX); (x)PRL and CII shareholder approvals being obtained; (xi)Court approval of the Scheme being obtained.

Evidence

Evidence Before The Court

Evidence at the hearing was on affidavit. The deponents were not cross-examined save for two of PRL’s witnesses, Mr K Pendergast who prepared the Independent Expert Report, and Mr R Monzu.The Evidence - Notification of the Proposed Meeting It is convenient first to refer to that part of the evidence relating to the calling of the meetings pursuant to the Court order of 8 August 2005. The affidavit of Annette Fay Garstone, sworn 30 September 2005, established that 240 copies of the Scheme Booklet in the form referred to in the Court order were printed. Copies of the booklet were placed in envelopes addressed to shareholders of the company. At least 168 copies were addressed to shareholders who lived on Christmas Island. Kevin Edwards, a consultant to PRL, collected the boxes from the PRL office in Perth and took them in his vehicle for delivery to Freightshop. He swore his own affidavit as to the steps he took. Freightshop is a provider of air freight consignment services from mainland Australia to Christmas Island. The envelopes containing the copies of the Scheme Booklets were not sealed as Malay and Chinese translations of portions of the Booklets were to be included. Ms Garstone explained in her affidavit that a large proportion of PRL shareholders are of Malay or Chinese descent. It is the company’s usual practice when sending out important information to shareholders to include Malay and Chinese translations of that information. She caused Sections 1 to 5 inclusive of the Scheme Booklet (together with the cover page, chairman’s letter and contents page) to be translated into Malay and Chinese. She retained the services of a professional translation company based in Singapore. She received the completed Malay and Chinese translations on 10 August 2005. She forwarded them to Ms Seet Choy Lan, an executive assistant in the employ of PRL at its Christmas Island branch office. She gave instructions for 172 copies of the translations to be made. On 12 August 2005 Ms Seet phoned Ms Garstone and reported that she and Mr Allan Robartson, the commercial manager employed by PRL at its Christmas Island office, had delivered the 168 sealed envelopes to the Australia Post Office on Christmas Island for posting to shareholders. Ms Seet swore her own affidavit setting out the steps she took in relation to the Booklet. Ms Garstone sent copies of the Scheme Booklet, including the Malay and Chinese translations, to shareholders of the company living in mainland Australia and overseas. She posted those on 12 August 2005. On the same day she asked Ms Seet to arrange for a copy of the Scheme Booklet, including Malay and Chinese translations, to be posted to a Mr Ng Tan An who had evidently signed a share transfer form to transfer his shares to another person. However that transfer had not been registered on the company’s share register. The transferor still being recorded on the share register on 10 August 2005, Ms Garstone asked Ms Seet to make sure that he received a copy of the Scheme Booklet.

Decision

Reasons for decision

FRENCH J

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

Established by: FRENCH J

It was submitted that the directors of PRL, being also shareholders in CII, should have voted as a separate class. As counsel for PRL pointed out however, the directors were ordinary shareholders in the same class as any other ordinary shareholder. Their shareholdings were disclosed in the Scheme Booklet. Neither the Act nor the Court order required that they vote in a separate class. This contention does not raise any basis for refusing approval to the Scheme. The Consideration offered under the Scheme It was contended by Mr Pauley that the Consideration offered for shares in PRL under the Scheme was inadequate. PRL on the other hand, argued that the shareholders are the best judges of whether a scheme is in their commercial interests and that the Court will be reluctant to make a decision contrary to the views expressed at the meeting – Central Pacific Minerals NL [2002] FCA 239 at [13]-[14] Emmett J. See also Application of NRMA Limited (2000) 18 ACLC 533 at 541; In the Matter of Foundation Healthcare Limited (No 2) [2002] FCA 973 at [31]. It is not for the Court to go behind a commercial judgment which it was reasonably open for shareholders properly informed to make. In this case however there are, as I have already indicated, some significant questions about the basis upon which the conclusions of the independent expert were advanced. This is particularly so in relation to the variability of the underlying cash figures on which the valuation of PRL shares was based. Absent clear advice to the shareholders about that variability, it seems to me that there is a real question whether the Independent Expert Report may have been materially incomplete. In so saying, I do not express any view that the proposed merger is not in the best interests of the shareholders. It may well be so when proper account is taken of the range of advantages that it offers. Indeed, subject to the sufficiency of the Consideration, it would be open to a meeting of shareholders properly informed to conclude that PRL would be a lot better off allied with a listed company that has opportunities for fund raising and expansion that are not available to PRL by itself. In my opinion, however, the questions about certain aspects of the Independent Expert’s Report do leave a doubt about whether shareholders who read and relied upon the Report were fully and properly informed. Whether the Scheme should be Approved The Court has a discretion to refuse to approve a scheme of arrangement. Generally speaking, in deciding whether to approve a proposed scheme, it is necessary that the Court be satisfied that: 1. the requirements of s 411 have been met; 2.the majority of shareholders voting in favour of the scheme acted in good faith and not in pursuit of some illegitimate purpose; 3.the proposal is sufficiently fair and reasonable that an intelligent and honest shareholder acting alone might approve it – see Application of NRMA Limited. Generally speaking, where a scheme has been approved by properly informed shareholders at duly convened meetings and is fair and reasonable, the Court will be reluctant to go behind the commercial judgment so exercised. In this case however there are, in my opinion, significant questions affecting the integrity of the process by which the shareholders of PRL were brought to the point of their resolution. The factors affecting the integrity of the process in my opinion are: 1.the misconstruction of the Court’s order as to the time of the Christmas Island meeting which had the result that a significant number of shareholder proxies which would have been instrumental in effecting a rejection of the Scheme were wrongly disallowed; 2.the refusal to entertain a vote on a motion for adjournment of the Christmas Island meeting which would have allowed an opportunity for shareholders who had lodged disallowed proxies to vote in person; 3.the existence of inadequacies in the Independent Expert’s Report particularly as to the variability of figures upon which the valuation of PRL shares was based.