Re Unity Mining Limited (No 1)

[2016] VSC 829

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST

S ECI 2016 00005

IN THE MATTER of UNITY MINING LIMITED
(ACN 005 564 073)

UNITY MINING LIMITED Plaintiff

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	19 February 2016
DATE OF JUDGMENT:	19 February 2016
CASE MAY BE CITED AS:	Re Unity Mining Limited (No 1)
MEDIUM NEUTRAL CITATION:	[2016] VSC 829

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CORPORATIONS – Scheme of arrangement – Convening of meeting – Inter-conditionality of scheme and capital reduction approval – Breakup of assets valuation where company running at a loss – Convening of scheme meeting approved – Section 411 Corporations Act 2001 (Cth).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M I Borsky	Baker & McKenzie
For Diversified Minerals	Mr G J Ahern	K & L Gates

HIS HONOUR:

Introduction

1. I have before me an application dated 14 January 2016 made under s 411 of the Corporations Act 2001 (Cth) (the Act) by Unity Mining Limited (Unity) for an order pursuant to s 411(1) of the Act that a meeting be convened and held of the holders of ordinary shares in Unity, other than Diversified Minerals Pty Ltd (Diversified) and any associates of Diversified within the meaning of s 12 of the Act, for the purpose of those shareholders considering a proposed scheme arrangement between them and Unity, and if thought fit, passing a resolution in favour of it.

1. The application also seeks an order that the proposed scheme arrangement be approved.  At this stage, the court is conducting a preliminary hearing as to whether the meeting of shareholders should be convened for them to consider and vote on the proposed scheme.

The scheme

1. The scheme has been conveniently summarised by the Chairman in his proposed letter of 19 February 2016 to shareholders, which will be included in the explanatory booklet sent to shareholders.  In this letter, the Chairman states that on 7 December 2015, Unity announced it had signed an agreement with Diversified, an associate of the Australian mining services contractor called PYBAR Group, under which it is proposed that Diversified, through its wholly owned subsidiary Diversified Minerals Management Pty Ltd, will acquire all of Unity’s shares that Diversified and its associates do not already own or control by way of a scheme of arrangement in conjunction with a contemporaneous equal capital reduction, which is together described as the ‘transaction’.

1. If the transaction proceeds to completion, it will deliver to Unity shareholders, other than the excluded shareholders, total cash payments of 2.9 cents for each Unity share they own, as at 7.00 pm Melbourne time on the record date.[1]  This is comprised of 1.0 cent per Unity share to be received through the capital return and 1.9 cents per Unity share to be received as scheme consideration, together the ‘total cash payments’.  As Unity shareholders will not be participating in the scheme, they will only receive the capital reduction of 1.0 cent per Unity share.

   [1]Plaintiff’s outline of submissions (17 February 2016), [3].

1. The Chairman’s letter foreshadows the meetings, which will be held on 31 March 2016, to approve the scheme, and the capital return, if thought fit. 

1. I am satisfied that ASIC has been served with the proposed scheme and explanatory booklet and it has had reasonable time to consider the proposed scheme.[2] 

   [2]See s 411(2) of the Act.

1. A letter from ASIC has be tendered which states that it was served with the material and has had reasonable opportunity to consider the scheme and that it does not propose to appear to oppose the scheme.

1. I have been greatly assisted in this matter with the provision of an outline of submissions.[3]  It canvasses all the matters that are traditionally considered by a court at this stage in determining whether to convene meetings to consider the scheme.  The memorandum considers the usual issues which the court addresses, such as the credit or performance risk, which in substance takes into account the conditions and steps which will be taken to ensure that the target shareholders receive the consideration they have been promised under the scheme. 

   [3]Plaintiff’s outline of submissions (17 February 2016).

Issues

1. In this case, the consideration of the 1.9 cents a share is going to be placed in a trust account, controlled by the target company.  In addition, the 1.0 cent capital reduction was submitted as totalling around 12 million, and the company, as at 31 December, reportedly had some $18 million in cash.[4]  Before the scheme is implemented, the directors of the target company, Unity, have to certify that they have the money available to pay the 1.0 cent per share consideration.  Mr Borsky has urged on me that the availability of the $18 million in cash and the payment into the trust account should satisfy the Court on the issue of the credit or performance risk.

   [4]Sources of funding are detailed in section 5.4 of the Explanatory Booklet, 42 (confirmed by letter from Diversified dated 28 January 2016, a copy of which appears in exhibit CBJ-9 to the Jones affidavit).

1. I have asked Mr Borsky to ensure that on the hearing of the application to approve the scheme, if the shareholders do adopt it, further affidavit material on the mechanics of the payment of the capital reduction moneys, along with the consideration to be paid for the shares being acquired, is provided. 

1. As is clear from my description of the scheme, this is a takeover being affected by a scheme arrangement rather than by under the takeover provisions.  This is not the time for me to consider the implications of the section in the Act dealing with the schemes that avoid the takeover provisions.[5]  If need be, these considerations will be addressed at the next hearing.   

   [5]Specifically, s 411(17).

1. The target company has issued options and performance rights to directors.  The options are to be cashed out.  I am satisfied that the valuation has been properly and fairly done and that the provisions about cashing out the options are fair and reasonable as between shareholders.  The same observations apply to the performance rights which are going to be converted to Unity shares.[6]

   [6]Plaintiff’s outline of submissions (17 February 2016) [53]–[69].

1. I am satisfied about the inter‑conditionality of the scheme and the return of capital.  I have considered the exclusivity provisions, which are typical in a takeover type scheme.  I think they are fair and reasonable.  The break provisions provide for a fee of little in excess of one per cent.  It is the court’s traditional view one per cent as a not excessive sum.[7] 

   [7]See, eg, Re APN News & Media Ltd (2007) 62 ACSR 400, 409–411 [48]–[55]; Re Coles Group Ltd (2007) 25 ACLC 1380, 1390 [69]–[74]; Re Colonial First State Private Capital Ltd [2007] FCA 1619, [27].

1. As I said, the purpose of the scheme is to effect the takeover.  I am satisfied that the shareholders have been given adequate information to consider the scheme, or will be given adequate information to consider the scheme, in particular, the expert’s opinion. 

Valuation technique

1. I noted that the expert’s opinion has been calculated on the basis of a valuation breakup of the assets, including valuing individual mines and assets.  This method of valuation is distinct from the usual method in which discounted cash flows and capitalisations based on earnings are used.  In the situation where the target company is operating at a loss, it is obvious why the breakup valuation method is superior to any earnings-based valuation (which could result in a negative value being attributed).

Conclusion

1. As for the prospects of final approval, all that is necessary to be stated at this stage is that, in my opinion, this is a scheme that a reasonable shareholder may adopt in their own interest.  Accordingly, I propose to make the orders convening the meetings as sought.