Re Unity Mining Limited (No 2)
[2016] VSC 830
•27 April 2016
| 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: | 27 April 2016 |
DATE OF JUDGMENT: | 27 April 2016 |
CASE MAY BE CITED AS: | Re Unity Mining Limited (No 2) |
MEDIUM NEUTRAL CITATION: | [2016] VSC 830 |
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CORPORATIONS – Application for further despatch of materials in connection with a proposed amendment of a scheme of arrangement – Scheme involved purchase by offeror of all shares in target company – Target company agreed with the offeror to amend the scheme to buy the shares for a higher price but subject to a condition that if the scheme was rejected by its shareholders, then the target company sell its major asset to the offeror, subject to the approval of target’s shareholders in general meeting – Whether agreement for sale of major asset in those circumstances constituted improper coercion on members to vote in favour of scheme – Held coercion unacceptable – Application refused – 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
On 27 April 2016, I gave preliminary reasons, subject to revision, amendment and elaboration. I now publish my revised reasons.
On 19 February 2016, Unity Mining Limited (Unity), applied, under s 411(1) of the Corporations Act 2001 (Cth) (the Act), for orders to convene a meeting of its shareholders, other than Diversified Minerals Pty Ltd (Diversified) and any associate of Diversified (the excluded shareholders), for the purpose of considering, and if thought fit, passing a resolution in favour of a proposed scheme of arrangement between Unity and its shareholders, other than the excluded shareholders (scheme shareholders).
The scheme, if approved, would effect the acquisition by Diversified, through its wholly owned subsidiary, of all of the shares in Unity not already held by the excluded shareholders. Diversified is associated with the PYBAR Group. The PYBAR Group is an Australian provider of mining services.
If the scheme is approved, the scheme shareholders will receive 2.9 cents for each share they held in Unity at the scheme record date, proposed to be on 15 April 2016. Of the total consideration of 2.9 cents, 1.9 cents per share is proposed to be paid in cash by Diversified and 1 cent per share is proposed to be received by all shareholders in the form of a contemporaneous capital reduction by Unity under Part 2J.1 of the Act. The scheme and the capital return are inter-conditional. Neither will proceed without the other.
Excluded shareholders are not eligible to vote on the scheme, but will be eligible to vote on an ordinary resolution to approve the capital return, which is to be considered and voted upon at a special general meeting to be held on the same day as the scheme meeting.
On 19 February 2016, I made orders convening a meeting of scheme shareholders to be held on 31 March 2016 to consider and, if thought fit, approve the scheme.
Unity has received a fresh offer from Diversified. Unity applies for orders for a further despatch of materials to shareholders in connection with the fresh offer under an amended scheme.
An increased offer was first negotiated on the eve of the meeting on 13 April 2016, convened to consider the scheme of arrangement, and then adjourned, pursuant to the orders I made on 19 February 2016.
Development since February orders
On 14 March 2016, a substantial shareholder in Unity, Brahman Pure Alpha Pty Ltd (Brahman), declared a relevant interest in Unity of 18.2 per cent. On 18 March 2016, Unity announced to the Australian Stock Exchange (ASX) that it had been verbally advised by Brahman that, at that point in time, Brahman intended to vote against the resolutions at the special general meeting of members of Unity to approve the capital reduction, and the resolution to approve the scheme.
On 24 March 2016, Unity received from Brahman a notice of requisition of meeting pursuant to s 249(d) of the Act requesting that Unity call a general meeting of its members, within 21 days, to consider resolutions to remove the chairman and Gary Davison as directors of Unity and to appoint Richard Baumfield and Tony Wolfe as directors in their place. On 29 March 2016, Unity informed the ASX of the receipt of the notice of requisition.
On the day prior to the scheme meeting (and the special general meeting), 30 March 2016, negotiations commenced between Diversified and Unity regarding a possible amended scheme to be considered by Unity shareholders at the scheme meeting and the special general meeting.
On 31 March 2016, before the market opened, Unity announced to the ASX that Unity was moving into a trading halt as a consequence of a material development and that it intended to adjourn the scheme meeting and the special general meeting.[1]
[1]Second Parker affidavit, [14].
At 10.00 am, the chairman opened the special general meeting and adjourned the special general meeting to a date and time to be determined by the chairman and advised to shareholders.[2]
[2]Exhibit KJP-5, Second Parker affidavit, [16].
At 11.00 am, the chairman opened the scheme meeting and adjourned the scheme meeting to a date and time to be determined by the chairman and advised to shareholders.[3]
[3]Exhibit KJP-6, [18].
On 3 April 2016, Unity received a written offer from Diversified to increase the consideration offered to scheme shareholders from 1.9 cents per share to 2.2 cents per share (revised offer). Under the revised offer, all Unity shareholders were to continue to receive a capital reduction of 1 cent per share, making the total consideration to be received by scheme shareholders 3.2 cents per share.[4]
[4]Second Parker affidavit, [21].
The revised offer was conditional upon Unity agreeing that:
(a)if the scheme was not approved by scheme shareholders, or was terminated for any reason, Unity would propose to its shareholders a resolution to appoint two nominees of Diversified to the Unity board;
(b)if the scheme was not approved by scheme shareholders, or it was terminated for any reason, Unity would agree to put forward a proposal to a meeting of shareholders to sell all of the rights, title and interest held by it in all assets of the Henty Gold Project, comprising tenements ML 7M/1991, ML/2006 and ML 5M/2002, on terms contained in an attached agreed term sheet, and, if voted in favour of by the shareholders, enter into definitive documents on those terms within 10 business days of the date of the revised offer (the potential sale). The potential sale would be subject to Unity shareholders passing a resolution to approve the sale as required by ASX Listing Rule 10.1; and
(c)Unity would hold a meeting of shareholders to approve the appointments and the potential sale of the Henty Gold Project close to the time of the rescheduled or adjourned scheme meeting and Unity must use its best endeavours to ensure that such general meeting be held no later than the meeting to be called by Unity in response to the notice of requisition.
Unity agreed to the revised offer on 4 April 2016.[5]
[5]Exhibit KJP-7, Second Parker affidavit, [22].
According to the Unity Annual Report for the 2015 financial year, the Henty Gold Mine produced 50,450 ounces of gold, the Dargues Gold Mine was subject to a temporary halt to development and the Kangaroo Flat Mine was not in production. These appeared to be the extent of Unity’s operations. On this basis, the Henty Gold Mine was a significant, if not the main, asset of the company.
On 12 April 2016, Unity received from Brahman a notice of intention stating that if:
(a)Diversified entered into a binding agreement with Unity to increase the amount of the scheme consideration per share to 2.3 cents per share such that the total consideration would be increased to 3.3 cents per share;
(b)Unity publicly announced the agreement to the ASX by 13 April 2016; and
(c)the scheme meeting took place no later than 31 May 2006,
then Brahman would vote all of the shares it held as at the date of the notice of intention in favour of the capital return in the scheme and Brahman’s notice of requisition would be automatically withdrawn.
Unity and Diversified proceeded to enter into negotiations regarding a possible further increase of the scheme consideration to 2.3 cents per share. On 13 April 2016, Unity and Diversified entered into a written agreement (the further revised offer)[6] pursuant to which:
(a)Diversified agreed to increase the scheme consideration to 2.3 cents per share, such that the total consideration to be received by scheme shareholders would be 3.3 cents per share including the capital return of 1 cent per share;
(b)Diversified agreed that the revised offer was varied by deferring the requirement for Unity to issue a notice to call the general meeting until after the outcome of the votes on the capital return and the scheme was known;
(c)Unity and Diversified would promptly move to formalise the further revised offer by executing documentation in seeking shareholder and other approvals as expeditiously as possible; and
(d)Diversified consented to Unity releasing the further revised offer within the time limits set out in the notice of intention, and Unity agreed to do so.[7]
[6]Exhibit KJP-18, Third Parker Affidavit, [12].
[7]As summarised in the plaintiff’s submissions (27 April 2016), [19].
Unity announced the further revised offer on 13 April 2016, specifically, that Brahman’s notice of requisition had been withdrawn and attaching copies of the revised offer of the notice of intention.[8] As a result, the hearing which had been set for 14 April 2016 was further adjourned. A number of documents were executed to give effect to the revised offer and then the further revised offer.[9]
[8]Exhibit KJP-18, Third Parker Affidavit, [13].
[9]These were identified in the plaintiff’s submissions, [21]–[29] (Exhibit MFI P1).
The application before the Court
Unity seeks further orders for the conducting of the proposed adjourned scheme meeting including a revised explanatory booklet. Unity has set out proposed steps that will be taken at the meeting. In substance, Unity has proposed that the meeting should be asked to resolve whether the resolution put before the meeting should be amended. If the meeting agreed to amend the resolution, then the meeting would vote on the amended resolution. It was submitted that was the procedure which was approved by Barrett J in Re Citect Corporation Ltd.[10]
[10][206] NSWSC 143, [13].
I expressed concern about the degree of disclosure of the agreement that was made on 3 April 2016 to the shareholders. Mr Borsky took me through a chain of documents whereby a shareholder would be able to ascertain what was happening. I found it difficult to follow the documents. In my opinion, it would have been difficult for a shareholder to work out the true state of affairs.
I suggested to Mr Borsky that this difficulty may have been remedied by appropriate amendments to the chairman’s letter to shareholders that accompanies the explanatory booklet.
I am not prepared, however, to make the orders sought that would allow the scheme to be amended as proposed and be put to the members at the adjourned meeting of members. I have concerns about the nature of the amended scheme now being proposed. Namely, whether the proposed scheme still falls within the definition of an ‘arrangement’ for the purposes of s 411 of the Act and whether the shareholders are being inappropriately coerced into voting for the proposed scheme.
The scheme now proposed to Unity shareholders includes the conditions which are attached to the increased offer, as shown in a letter of 3 April 2016.[11] In my view, as the letter states, the offer by Diversified is conditional on the terms set out in the letter of 3 April. Under those terms, if the scheme is not approved by the shareholders, the sale by Unity of the Henty Gold Project to Diversified is triggered, subject to shareholder approval (in accordance with ASX Listing Rule 10.1).
[11]Exhibit KJP-7, Second Parker Affidavit, [20].
In my opinion, in this case Unity shareholders should be able to approve the scheme or not approve the scheme. In my view, it is not appropriate in the circumstances of this case to make the non-approval of the part of the scheme involving the sale of the members’ shares to Unity the trigger for the approval of another part of the scheme, whereby Unity will sell its Henty Gold Project, subject to shareholder approval. In my view, such a constructed scheme does not permit the shareholders to vote for or against the scheme as a whole. By voting against one part they are taken to vote in favour of another part. Thus shareholders are denied the ability to vote against both parts.
That is not to say that such a structure may not be appropriate in other schemes. For the reasons discussed below, I do not consider that such a structure is appropriate in this case.
I accept that the sale of the Henty Gold Project would be subject to shareholder approval. A scheme, such as that proposed by Unity under Part 5.1, requires a majority of 75 per cent of the votes cast on the resolution (where votes are calculated on the number of shares held).[12] The shareholders’ resolution to approve the sale of the Henty Gold Project under rule 10.1 of ASX listing rules only requires a simple majority of those present at the meeting in person or by proxy.
[12]Section 250E(1) of the Corporations Act (subject to any right or restrictions attached to any class of shares).
The different voting requirements between those to approve a scheme and those to approve a sale of an asset, could lead to uncertainty as to whether a vote against the scheme would or would not lead to a sale of the Henty Gold Project.
For the reasons discussed below, I am satisfied that the amended scheme does constitute an arrangement that would be capable of being the subject of an order under s 411, but that it results in undue coercion on the shareholders to vote in its favour and is therefore unacceptable in its current form.
The statutory concept of an arrangement
Before making orders under s 411(1), the Court must be satisfied that, among other things, the proposed scheme falls within the statutory concept of an arrangement.[13] In Re NRMA Ltd, Santow J explained that:[14]
…the word “arrangement” is to be given a wide meaning. Thus, the word has been given a liberal meaning. Generally speaking, unless the arrangement is ultra vires the company or seeks to deal with a matter for which a special procedure is laid down by the Corporations Law or to evade a restriction imposed by the Corporations Law, almost any arrangement otherwise legal which touches or concerns the rights and obligations of the company or its members or creditors, and which is properly proposed, may come under s 411.
[13]Re Hills Motorway Ltd (2002) 43 ACSR 101, [5].
[14](2000) 33 ACSR 595, [20], (citations omitted). See also Re Foundation Healthcare Ltd (2002) 42 ACSR 252, [39] where French J said the word ‘arrangement’ is of wide import.
Schemes of arrangement vary considerably in their nature, objectives and circumstances.[15] In dismissing an argument that a proposed scheme did not fall within the statutory concept of an arrangement, the Full Court of the Federal Court said in Fowler v Lindholm, Re Opes Prime Stockbroking Ltd:[16]
[15]Re Ranger Minerals Ltd (2002) 42 ACSR 582, [47].
[16](2009) 259 ALR 298, [67], [70], [72]–[73], (citations omitted).
A purported scheme of arrangement must involve some arrangement in a sense that is to be construed liberally. No narrow interpretation should be given to the expressions “compromise” or “arrangement”. An arrangement within the meaning of s 411 connotes some element of give and take. A proposal that conferred no benefit on creditors and constituted the mere confiscation of interests would not be an arrangement within the meaning of s 411. An arrangement must involve some bargain giving benefit to both sides. However, there is no reason to construe the term in s 411 as restricting in any way the nature of the bargain that might be made between company and creditors, subject only to the additional requirement that the arrangement must be within the power of the company and not in contravention of the Corporations Act.
…
…The contention advanced by Mr Fowler is that terms such as are presently in issue, being the requirement for creditors to give a release and indemnity to Merrill Lynch and ANZ, take the purported schemes outside the concept of a scheme of arrangement that can be made binding on creditors who do not vote in favour of it, by the operation of s 411.
…
…All that is required is a compromise or arrangement between the company and its creditors. These schemes are clearly between the scheme companies and their creditors.
There is also no principled basis for a restrictive approach. Provisions of s 411 are intended to provide a flexible mechanism to facilitate compromises and arrangements between insolvent companies and their creditors as an alternative to liquidation. If there is an adequate nexus between a release or indemnity, on the one hand, and the relationship between the creditor and the company, as creditor and debtor, on the other hand, there is no reason in principle why a scheme could not validly incorporate a release and indemnity such as is provided for in the schemes. The claims against Merrill Lynch and ANZ that are released and are the subject of the indemnity arise out of dealings with the scheme companies. Thus, the claims of creditors against the scheme companies and the claims against Merrill Lynch and ANZ substantially overlap. The arrangement involves a settlement of claims that are significantly interrelated. Without the release, there could be no compromise or arrangement.
It may be said that it is not clear whether Unity would be bound to sell the Henty Gold Project to Diversified (subject to shareholder approval) if the shareholders vote against the scheme, or whether Unity intended to sell the Henty Gold Project to Diversified (subject to shareholder approval). In my opinion, it is not necessary for me to resolve this issue.
Either way, shareholders may feel coerced to approve the scheme (and thus the sale of their shares) in the face of keeping their shares but losing the Henty Gold Project.
Coercion and the proposed Henty Gold Project sale
Courts may refuse to make orders if the scheme of arrangement involves unreasonable coercion being imposed on the shareholders to vote one way or another.
Courts may decline to make orders under s 411(1) where a break fee, exclusivity arrangement, or other aspect of a proposed scheme is likely to coerce offeree shareholders into agreeing to the scheme, or to deter companies from making a competing offer.
In Re SFE Corporation Ltd,[17] Gyles J considered the effect of ‘no shop’, ‘no talk’, and break fee clauses in a proposed scheme of arrangement. His Honour said:[18]
…these clauses are not such as to cause me to refrain from ordering the meeting. I would only be inclined to do that if the amount of the break fee was such that it could influence voting at the meeting to be convened or if there were some other unusual circumstances.
[17](2006) 59 ACSR 82.
[18](2006) 59 ACSR 82 [7].
The cases appear to say that coercion is not a concern where break fees are not payable simply because shareholders vote against the scheme. This was the result in the following cases, where the requirements of s 411 were held to have been met: Re Cape Alumina Ltd;[19] Re Cortona Resources Limited;[20] Re People Telecom Limited;[21] Re APN News & Media Ltd;[22] Re Healthscope Limited;[23] Re Mitchell Communication Group;[24] Re Andean Resources Limited;[25] Re Cytopia Ltd;[26] Re Toll Holdings Ltd;[27] and Re Staging Connections Group Ltd.[28]
[19][2013] FCA 1212, [40].
[20][2012] FCA 1295, [34], [43].
[21][2009] FCA 180, [4].
[22](2007) 62 ACSR 400, [39].
[23][2010] VSC 367, [27].
[24][2010] VSC 423, [28].
[25][2010] FCA 1190, [22].
[26][2009] VSC 560, [16].
[27][2015] VSC 123, [32].
[28][2015] FCA 1012, [42]–[43].
The circumstances of this case appear to be similar in that the proposed Henty Gold Project sale is not triggered by the shareholders rejecting the proposed scheme. If the shareholders vote against the scheme, what is triggered is a meeting at which shareholders will be asked to pass an ordinary resolution to approve the sale. The shareholders would still need to approve the sale before it could occur.
It is not enough, however, that the break fee, or sale of the Henty Gold Project in this case, is not triggered by a no vote. The shareholders must be aware of that fact, to ensure that the break fee does not unduly influence their voting. In Re Texon Petroleum Limited, Farrell J said:
While disclosure of the lock-up device and break fee arrangements is undoubtedly required, express disclosure of the fact that a “no” vote will not incur the break fee is desirable to ensure that there is balanced disclosure and any concern that Texon shareholders may have had on that score is addressed.[29]
[29][2013] FCA 29, [33].
Farrell J repeated those thoughts in Re PrimeAg Australia Ltd:
It is appropriate that shareholders have, among the many disclosures concerning exclusivity arrangements and break fees (which are appropriately set out in the Explanatory Memorandum), a disclosure that they are free to vote for or against a Scheme without PrimeAg thereby incurring a break fee. Otherwise the weight of disclosure can be misleading and potentially coercive.[30]
[30][2013] FCA 1001, [35].
Where a break fee is payable in the event that the shareholders vote against the scheme, the break fee is referred to as a ‘naked’ break fee. Naked break fees are not necessarily coercive. In Re Bolnisi Gold NL, a naked break fee was held not to be coercive.[31] Lindgren J said:[32]
In my opinion, it will be appropriate for the court to decline to order that a scheme meeting be convened, or that a scheme be approved, if the court is satisfied that a naked no-vote break fee is so large as to be likely to coerce the shareholders into agreeing to the scheme, rather than assessing the offer on its merits. However, the court should not readily find that the target company’s directors have committed the company to an arrangement that will have the impermissible coercive effect on the company’s shareholders, and nor should the court seek to substitute its view of the best interests of the company for that of the directors.
[31](2007) 243 ALR 545.
[32]Ibid [12].
The condition concerning the proposed sale is not analogous to a naked break fee. This is because it is not the sale that is triggered by the no vote. Rather, the no vote merely triggers a meeting at which shareholders will be asked to approve the sale.
The effect on voting of circumstances/conditions other than the traditional ‘lock-up devices’ has been considered in several cases. Of particular note is Re Cortona Resources Limited.[33] In that case, the Federal Court made orders convening a meeting to consider a proposed share scheme of arrangement between Cortona and its shareholders. The scheme would effect a merger by the acquisition of all of the fully paid ordinary shares in Cortona by Unity Mining Ltd.
[33][2012] FCA 1295.
On the morning of the hearing, Cortona and Unity had entered into a term sheet for a term loan of $1 million. The scheme booklet had marked up amendments to explain the loan and its purpose. Cortona only needed to provide security for the loan if the scheme were not implemented. If the scheme were not implemented, Cortona would then be required to give security over some freehold property. The loan was a drawdown facility, and it was not repayable on demand. Barker J said:[34]
There is nothing obvious in that transaction, in my view, to suggest that it is a “lock up” device or in the nature of a break fee by a side wind, which might prevent the free consideration by members of the scheme proposal.
…
I do not consider that the term sheet transaction identified is a reason not to make the orders convening a meeting of members. It too is a matter that the members may properly consider at the meeting in light of the disclosure made.
[34][2012] FCA 1295, [43], [45].
In Re Anatolia Energy Ltd,[35] the two (proposed) merging companies had entered into a convertible loan agreement. The details of the loan were in the scheme booklet. The loan from the offeror to the plaintiff offeree was repayable on maturity with interest of 12 per cent payable in the form of ordinary shares in the offeree. If the scheme implementation agreement was terminated, or if there was a change in control of the target company, the loan became repayable earlier. The right to convert the loan into shares arose earlier if there were a change in control, or if the shareholders voted against the scheme. McKerracher J accepted that the loan agreement should not prevent free consideration of the proposed scheme by members and said that ‘any perceived issue of unfairness arising out of the convertible loan agreement … can be addressed at the second court hearing.’[36]
[35][2015] FCA 1134.
[36][2015] FCA 1134 [45]–[46].
Finally, in Re PrimeAg Australia Ltd,[37] multiple transactions were proposed. The two critical transactions were the scheme and the Emerald transaction. The scheme was conditional on the Emerald transaction having been approved at an earlier extraordinary general meeting. The Emerald transaction was not conditional on the scheme being later approved at the scheme meeting. The proposed Emerald transaction was an undervalue sale of the target company’s property. An independent expert had formed the view that in the absence of the scheme going ahead, the Emerald transaction would not be fair and may not be reasonable. The Court did not consider it appropriate for the Emerald transaction to be voted on before the scheme was voted on. One of the Court’s concerns was that if the ordinary resolution to approve the Emerald transaction were passed, there would be greater commercial compulsion to vote in favour of the scheme.[38] The order of the meetings was reversed and the Court made the orders under s 411(1).
[37][2013] FCA 1001.
[38][2013] FCA 1001 [28].
Conclusion
In this case, the condition in respect of the Henty Gold Project sale has the potential to influence shareholders’ votes on the proposed scheme. This is because the shareholders may wrongly understand that by voting against the proposed scheme they are voting in favour of selling the Henty Gold Project. The relationship between the proposed scheme and the proposed sale are not adequately explained in the disclosure material. Even if the shareholders understand that a no vote only triggers a proposal to sell, and not an actual sale, their uncertainty as to the terms of the proposed sale may weigh on their minds when voting on the scheme.
The proposed scheme raises the following concerns:
(a)The supplementary explanatory booklet may not be sufficiently clear in its explanation of the relationship between the proposed scheme and the potential Henty Gold Project sale. If scheme shareholders (wrongly) understand that rejection of the proposed scheme triggers a sale of the Henty Gold Project, their vote on the proposed scheme may be unduly influenced;
(b)If the shareholders are not adequately informed about the terms of the proposed Henty Gold Project sale, their uncertainty in respect of that sale may influence their voting on the scheme; and
(c)The voting power at the general meeting is different to that required to approve the scheme. A shareholder at the scheme may be coerced to vote in favour of the scheme by the consideration that a vote sufficient to defeat the scheme may not be sufficient to prevent the sale of the Henty Gold Project. Thus, to be on the safe side, it may be better to vote for the scheme; and
(d)If the proposed scheme gives the impression that by voting against the scheme the shareholders endorse Unity attempting to sell the Henty Gold Project, the proposed scheme may not fall within the statutory concept of an arrangement.
In applications under s 411(1), the Court does not act as a rubber stamp to convene meetings and approve schemes.[39] In my opinion, the form of the amended scheme involves an unacceptable level of coercion on the shareholders to vote in favour of the scheme. Further, the form of the amended scheme involves an unacceptable level of uncertainty as to the consequences of voting against the share acquisition by Unity, which itself adds to the coercion to accept the purchase offer.
[39]Re PR Finance Group Ltd [2013] FCA 633, [58].
For these reasons, the Court refuses the plaintiff’s application for orders under s 411(1) to allow the amended scheme to be put to shareholders at the adjourned meeting.
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