JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA CITATION : WESTGOLD RESOURCES LTD [2012] WASC 301 CORAM : HALL J HEARD : 22 AUGUST 2012 DELIVERED : 22 AUGUST 2012 PUBLISHED : 24 AUGUST 2012 FILE NO/S : COR 114 of 2012 BETWEEN : WESTGOLD RESOURCES LTD Catchwords:
Corporations - Schemes of arrangement - Members' scheme of arrangement - Creditors' scheme of arrangement - Option holders treated as creditors - Application to convene meetings pursuant to s 411(1) Corporations Act 2001 (Cth) - Relevant considerations
Legislation:
Corporations Act 2001 (Cth), s 411
Result:
Application granted
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Category: B
Representation:
Counsel:
Applicant : Mr D R Williams QC & Mr R L McKenzie
Solicitors:
Applicant : Jackson McDonald
Case(s) referred to in judgment(s):Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485FT Eastment & Sons v Metal Roof Decking Supplies (1977) 3 ACLR 69Re ACM Gold Ltd and Mount Leyshon Gold Mines Ltd (1992) 34 FCR 530Re Archaean Gold NL (1997) 23 ACSR 143Re Asia Oil and Minerals Ltd (1986) 5 NSWLR 42Re Austomax Resources Ltd (1985) 10 ACLR 194Re AXA Asia Pacific Holdings Ltd [2011] VSC 4Re BDC Investments (1987) 6 ACLC 85Re BDC Investments [No 2] (1988) 13 ACLR 201Re Coles Group Ltd [No 2] [2007] VSC 523; (2007) 215 FLR 411Re Compania de Electricidad de la Provincia de Buenos Aires Ltd [1980] Ch 146Re Cytopia Ltd [2009] VSC 560Re Foundation Health Care Ltd [2002] FCA 742; (2002) 42 ACSR 252Re GIO Building Society and ASIC (2001) 39 ACSR 77Re Hudson Conway Ltd [2001] VSC 21; (2000) 33 ACSR 657Re Lonsdale Financial Group [2007] VSC 394Re MIA Group [2004] NSWSC 712; (2004) 50 ACSR 29Re Niagara Mining Ltd [2002] FCA 165; (2002) 132 FCR 266Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 33 ACSR 595Re Opus Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20Re Orica Ltd [2010] VSC 231Re Parmelia Resources NL (1994) 15 ACSR 392Re SFE Corporation Ltd (No 1) [2006] FCA 670; (2006) 59 ACSR 82Re Stockbridge Ltd (1993) 9 ACSR 637(Page 3)Re WebbCentral Group Ltd [2006] FCA 937Re White Energy Co Ltd [2009] FCA 1218Soverign Life Insurance Company v Dodd [1892] 2 QB 573
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Introduction 1 Westgold Resources Ltd (Westgold) made application by originating process filed on 17 July 2012 under s 411(1) of the Corporations Act 2001 (Cth) for orders that meetings of the company's members and option holders be convened for the purpose of considering and, if thought fit, approving schemes of arrangement in respect of the issued shares and options in the company. On 22 August 2012 I made the orders sought. These are my reasons for doing so.
2 Westgold is a mining company incorporated in Western Australia and listed on the Australian Securities Exchange. It is proposing two schemes of arrangement under s 411 of the Corporations Act. The first is a members' scheme of arrangement between Westgold and its shareholders. The other is a creditors' scheme of arrangement between Westgold and the holders of options to acquire shares in the company. If implemented the schemes will affect a restructure of Westgold whereby it will become a wholly owned subsidiary of Metals X Ltd (ABN 25 110 150 055) (Metals X). Metals X is also a mining company incorporated in Western Australia and listed on the ASX.
3 Pursuant to the share scheme all Westgold shares are to be transferred to Metals X in consideration for which Metals X will issue to Westgold shareholders 11 new Metals X shares for every ten Westgold shares held. Certain Westgold shareholders will be eligible to receive cash consideration from Metals X instead of new Metals X shares. Those shareholders are either foreign registered shareholders who may be precluded by foreign securities laws from receiving an offer under the share scheme or small shareholders whose shares have a market value of below $500.
4 Pursuant to the option scheme all Westgold options will be cancelled in consideration for which Metals X will issue to Westgold option holders 11 new Metals X options for every 10 Westgold options held. The existing Westgold options fall into a number of tranches with differing exercise prices and expiry dates. The proposal is that the new Metals X options will have comparable terms and conditions to the Westgold options in each tranch.
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Function of the court
5 Schemes of arrangement of this type are subject to a three-stage approval process. First the applicant must seek the court's approval to hold a meeting of its members or creditors pursuant to s 411(1) of the Corporations Act and to dispatch to the members or creditors an explanatory statement as required by s 412(1)(a) of the Corporations Act.
6 The second stage is the convening of a meeting as ordered by the court to consider the scheme and vote on a resolution in respect of it. A resolution in favour of a members' scheme of arrangement must be passed by more than 50% of the relevant members present and voting (either in person or by proxy) and at least 75% of the votes cast on the resolution: s 411(4)(a)(ii) of the Corporations Act. A resolution in favour of a creditors' scheme of arrangement must be passed by more than 50% in number of creditors present and voting (either in person or by proxy) and being a majority whose debts or claims against the company amount in aggregate to at least 75% of the total amount of the debts and claims of the creditors present and voting in person or by proxy: s 411(4)(a)(i) of the Corporations Act.
7 If the resolutions are passed the third stage is for the applicant to return to the court and seek the approval of the court to give effect to the scheme. At that stage there is an opportunity for any objections to implementation of the scheme to be considered in more detail. It is also at that stage that the Australian Securities and Investments Commission (ASIC) is likely to seek to intervene if it considers it necessary to do so.
8 The present application relates to the first stage only. The question at this stage is whether the court should allow the calling of meetings to consider the proposed schemes. Two schemes of arrangement are involved which require the convening of separate meetings of the members and option holders. This calls for separate consideration, though the members and option holders have a broad degree of common interest.
9 The matters relevant to the exercise of the discretion of the court under s 411 of the Corporations Act will vary depending upon the circumstances of the scheme under consideration. There are two broad categories of relevant matters:
(a) whether the scheme 'is of such a nature and cast in such terms that, if it achieves the statutory majority at the [members or creditors] meeting the court would be likely to approve of it on the hearing of a petition which is unopposed': FT Eastment & Sons v Metal
(Page 6) Roof Decking Supplies (1977) 3 ACLR 69, 72 (Street CJ); Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485, 504 and Re GIO Building Society and ASIC (2001) 39 ACSR 77 [5] (Austin J); and
(b) whether 'the members or creditors [are to be] properly informed of the nature of the scheme before the scheme meeting': Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 33 ACSR 595 [30] (Santow J) and Re Foundation Health Care Ltd [2002] FCA 742; (2002) 42 ACSR 252 [38] (French J).
10 Whilst at the first stage the court is not being asked to approve the scheme or schemes, it is appropriate to give some consideration to whether there is any apparent impediment to such approval being granted. In Re Cytopia Ltd [2009] VSC 560 [3] Davies J Said: The approach that the court should adopt when considering this application is to review the scheme and the scheme booklet to ascertain whether the scheme complies with the requirements under the Act and to consider whether there is any presently discernable reason as to why the proposed scheme of arrangement should not be put to the meeting of the members to vote on. Ordinarily the court will not order the convening of a meeting 'unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the meeting the court would be likely to approve it on the hearing of a petition which is unopposed' Thus as Finklestein J observed in Re Opus Prime Stockbroking Ltd:
it is necessary for a court to be alive to any difficulties that may arise if in due course it may be asked to approve the scheme.
The authorities make it clear that the court's role at this stage is not to express a view on whether the proposed scheme should be approved. It is also clear that it is not the court's role to usurp the shareholders' decision by attempting to intrude its own commercial judgment. The court is to be concerned with whether there is adequate disclosure to the shareholders in the scheme booklet (or explanatory memorandum), whether the legal requirements otherwise have been complied with and whether the scheme on its face is one that is sufficiently fair and reasonable to be capable of being put to the shareholders for their approval or rejection. [citations omitted]
11 Similar views were expressed by Murray J in this court in Re Stockbridge Ltd (1993) 9 ACSR 637, 647. See also Re Foundation Health Care Ltd (263 - 264); Re ACM Gold Ltd and Mount Leyshon Gold Mines Ltd (1992) 34 FCR 530, 534 and Re Hudson Conway Ltd [2001] VSC 21; (2000) 33 ACSR 657. (Page 7)
12 The minimum disclosure requirements for an explanatory statement are set out in s 411 and s 412 of the Corporations Act and sch 8 of the Corporations Regulations. The ASIC has also issued regulatory guides as to the contents of explanatory statements. These include Regulatory Guide 60 'Schemes of Arrangement'; Regulatory Guide 111 'Content of Expert Reports'; Regulatory Guide 112 'Independence of Experts' and Regulatory Guide 228 'Prospectuses, Effective Disclosure for Retail Investors'. The effect of these guides is to require a level of disclosure equivalent to that applicable to a takeover document.
13 In considering the explanatory statement it is not for the court to substitute its commercial judgment for that of properly informed shareholders or creditors. What is important is that there be full disclosure to ensure that the shareholders and option holders can make an appropriate and informed decision based on their own commercial interests: see Re Archaean Gold NL (1997) 23 ACSR 143, 147 (Santow J).
14 In Re Orica Ltd [2010] VSC 231 [7] - [8] Davies J said:
The function of the court on an application to convene a meeting essentially is: (a) to consider whether the scheme booklet provided to the shareholders sufficiently discloses the detail and effect of the scheme to enable shareholders to make an informed decision on how to vote;
(b) to consider procedural matters about the calling and conduct of the meeting;
(c) to ascertain whether the Australian Securities and Investments Commission (ASIC) has had reasonable opportunity to examine the proposed scheme;
(d) to consider whether there may be matters that may make it unlikely that the scheme will be capable of a grant of approval by the court if, in due course, its approval is sought and so make it futile to put the scheme to the shareholders for their vote
It is not the function of the court on an application for an order convening a meeting to consider the business or commercial efficacy of the proposed scheme, as that is a matter for the shareholders. Nor is it the court's role to express a view on whether the proposed scheme should be approved if the requisite majority of votes is obtained. An order of the court that the meeting be convened is not an indication that the court has a view as to the
(Page 8) merits of the scheme or as to how shareholders should vote. [citations omitted]
Nature of the schemes 15 For the purposes of an application under s 411(1) of the Act the arrangement proposed must be between a 'Part 5.1 body' and its members or any class of them or its creditors or any class of them. A Part 5.1 body is defined in s 9 of the Act to include a company registered under the Act. A scheme designed to effect an acquisition by one company of the shares in another, such as the share scheme here proposed, may be an arrangement under s 411(1): Re Foundation Health Care Ltd.
16 The predominant line of authority is that an option holder is a creditor for the purposes of s 411 of the Corporations Act and that a scheme of arrangement to cancel or acquire options can be undertaken as a creditors' scheme of arrangement. Option holders are considered creditors on the basis that if an option holder seeks to exercise an option but the company does not issue shares in satisfaction of that exercise the option holder would have a claim against the company for damages. The option holder is therefore considered to be a contingent creditor of the company: Re Compania de Electricidad de la Provincia de Buenos Aires Ltd [1980] Ch 146, 182 - 183 and Re Asia Oil and Minerals Ltd (1986) 5 NSWLR 42. That position was also adopted by Barrett J in Re MIA Group [2004] NSWSC 712; (2004) 50 ACSR 29 who noted that option holders have for over two decades been regarded as creditors for the purpose of s 411 (and its predecessors) and it would be inappropriate not to follow the prevailing trend. There have been some cases in which judges have expressed hesitation about this analysis: Re BDC Investments (1987) 6 ACLC 85 (Needham J); Re BDC Investments [No 2] (1988) 13 ACLR 201, 203 (Young J); Re Austomax Resources Ltd (1985) 10 ACLR 194 (Franklyn J) and Re Parmelia Resources NL (1994) 15 ACSR 392, 393 (Steytler J). Nonetheless the judges who expressed these doubts were prepared to follow the dominant line of authority. That was not the case in Re Niagara Mining Ltd [2002] FCA 165; (2002) 132 FCR 266 in which Lee J held that option holders should be considered contingent members rather than contingent creditors and that options could be acquired or cancelled under a members' scheme of arrangement. However, where there is an established line of authority on the proper construction of national legislation it should generally not be departed from, particularly by judges at first instance: Australian Securities Commission v Marlborough Gold Mines Ltd (492). That position is reinforced where to depart from a long accepted approach is
(Page 9) likely to create commercial uncertainty or practical difficulty. For these reasons I consider that it is appropriate to treat the option scheme in this case as a creditors' scheme of arrangement under s 411.
The explanatory statement 17 Westgold has provided, as an annexure to an affidavit of Mr Scott James Huffadine, the managing director of Westgold, a copy of the proposed explanatory statement. That statement sets out the proposed schemes. It includes on pages 1 and 2 a list of possible reasons to vote in favour or against the schemes. It includes letters from the chairman of Westgold and the chairman of Metals X stating their support of the proposed merger. It also includes, as an annexure, an independent expert's report.
18 The applicant submits that the explanatory statement accords with sound commercial practice and that this is evidenced by the conclusions of the independent expert, BDO Corporate Finance WA Pty Ltd (BDO), who was engaged to determine whether the share and option schemes are in the best interests of the shareholders and option holders.
19 BDO concluded that:
20 An offer is considered fair if the value of the offer, price or consideration is equal to or greater than the value of the security the subject of the offer. This comparison is made assuming a knowledgeable and willing but not anxious buyer and a knowledgeable and willing but not anxious seller acting at arm's length: See ASIC Regulatory Guide 111.0 - 111.23. 21 Analysis of the fairness of the share scheme is based upon an assessment of the value of the Westgold shares compared to the value of the Metals X shares that would be issued as consideration. BDO has made this assessment on the basis of different scenarios regarding the possible development of assets following the effective merger. These different scenarios are referred to in their report. The scenarios take into account that in order to develop existing mining projects either Westgold or the merged entity would be likely to need to raise funds by equity
(Page 10) raising and a debt facility. The fairness of the scheme to shareholders varies depending upon whether the value of the projects is likely to be realised. I should note that another independent report from Behre Dolbear Australia, minerals industry consultants, is annexed to the BDO report. This second report provides a valuation of the mineral assets of both Westgold and Metals X.
22 As regards the option scheme, BDO considers that it is not fair because the current assessed value of 11 new Metals X options is less than the value of ten Westgold options across all tranches. The existing Westgold options fall into a number of tranches which have different expiry dates and exercise prices. The intention is to cancel the Westgold options and issue to the option holders new options in Metals X which have comparable expiry dates and exercise prices. 23 In its assessment of the value of both the existing Westgold options and the new Metals X options, BDO has used the Black Scholes Option Pricing Model. This is one of the most commonly used methodologies for valuing unlisted or thinly traded options: See ASIC Regulatory Guide 111.73. I accept that this appears to be an appropriate valuation method to use for valuing the options. This valuation method is relevant not only to assessing the fairness of the option scheme but also in determining the amount of the debt or claim attributable to an option holder for voting purposes. The Black Scholes method of valuation was accepted as an appropriate basis on which to determine the value of options for the purposes of voting entitlement in Re MIA Group and also in the matter of Re White Energy Co Ltd [2009] FCA 1218. In the latter case Siopis J noted that in any event it was open to a person to complain at the second court hearing if they considered that the valuation methodology in relation to voting entitlements was not appropriate.