Re Westgold Resources Ltd (No 2) - [2012] WASC 395

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: WESTGOLD RESOURCES LTD [No 2] [2012] WASC 395

CORAM: HALL J

HEARD: 4 OCTOBER 2012

DELIVERED : 4 OCTOBER 2012

PUBLISHED : 24 OCTOBER 2012

FILE NO/S: COR 114 of 2012

BETWEEN: WESTGOLD RESOURCES LTD
Applicant

Catchwords:

Corporations - Schemes of arrangement - Members' scheme of arrangement - Creditors' scheme of arrangement - Application for approval of schemes following meetings of members and option holders - Court approval under s 411(4)(b) Corporations Act 2001 (Cth) - Relevant considerations

Legislation:

Corporations Act 2001 (Cth), s 411

Result:

Application for approval of both schemes granted
Orders exempting compliance with s 411(11) made

Category: B

Representation:

Counsel:

Applicant: Mr D R Williams QC

Solicitors:

Applicant: Jackson McDonald

Case(s) referred to in judgment(s):

In the matter of GRD Ltd [2009] FCA 1595
Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213
Re Amcor Ltd (2000) 34 ACSR 199
Re Anaconda Nickel Holdings Pty Ltd [2003] WASC 19; (2003) 44 ACSR 229
Re BRL Hardie Ltd [2003] SASC 97; (2003) 45 ACSR 397
Re Cytopia Ltd (No 2) [2010] VSC 4
Re Glencore Nickel Pty Ltd [2003] WASC 18; (2003) 44 ACSR 210
Re Hudson Conway Ltd [2000] VSC 21; (2000) 33 ACSR 657
Re Orica Ltd [2010] VSC 231
Westgold Resources Ltd [2012] WASC 301
Zenyth Therapeutics Ltd v Smith [2006] VSC 436; (2006) 60 ACSR 548

HALL J:

Introduction

On 22 August 2012 I made orders that meetings of the members and option holders of Westgold Resources Ltd (Westgold) be convened for the purpose of considering and, if thought fit, approving schemes of arrangement in respect of the issues shares and options in the company: Westgold Resources Ltd [2012] WASC 301.
The meetings were held on 3 October 2012 and resolutions approving the schemes of arrangement were passed. The company then made application to the court for final approval of the scheme pursuant to s 411(4)(b) of the Corporations Act 2001 (Cth).
On 4 October 2012 I heard the application for approval of the schemes. At the conclusion of the hearing I made the orders sought. These are my reasons for doing so.

Background

Westgold is a mining company incorporated in Western Australia and listed on the Australian Stock Exchange. It has proposed 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.
The intended effect of the share scheme is that all Westgold shares will be transferred to Metals X in consideration for which Metals X will issue to Westgold shareholders 11 new Metals X shares for every 10 Westgold shares. Some 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.
The intended effect of the option scheme is that 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. It is proposed that the new Metals X options will have comparable terms and conditions to the Westgold options in each tranche.
On 22 August 2012 Westgold made application for orders that meetings of the company's members and option holders be convened for the purpose of considering and, if thought fit, approving the schemes of arrangement. An order of the court directing the holding of meetings in such circumstances is provided for by s 411(1) Corporations Act. The Court may also approve an explanatory statement which is to accompany notice of meetings. This initial application to the court represents the first stage in a three stage process. The second stage is the convening of the meetings. The third stage is the return to the court for formal approval of the schemes (where approved at the meetings).
The function of the court at the first stage is essentially to consider whether the scheme booklet to be provided to shareholders and option holders sufficiently discloses the detail and effect of the schemes so as to enable informed decisions to be made as to how to vote. Consideration is also given to procedural matters about the calling and conduct of the meeting, whether the Australian Securities and Investments Commission (ASIC) has had a reasonable opportunity to examine the proposed schemes and whether there are any matters that would make it unlikely that the schemes would be capable of a grant of approval in due course: Re Orica Ltd [2010] VSC 231 [7] ‑ [8] (Davies J).
I was satisfied that the information to be provided to the shareholders and option holders in the scheme booklet was sufficient for them to make informed decisions about whether to vote in favour of the schemes. I was also satisfied that the arrangements for meetings were appropriate, both as to timing and procedure. Accordingly, orders were made on 22 August 2012 that separate meetings of the shareholders and option holders be convened on 3 October 2012 and that prior to those meetings the scheme booklet be dispatched to the members and option holders.
The meetings were convened on 3 October 2012 and those meetings will be considered in more detail below. Where the members or option holders vote in favour of a scheme of arrangement it is then necessary for the company to return to the court for approval of the scheme. In the normal course, notice of the making of the second application to the court would be published following any meetings. In the present case, the dates of the meetings and the second application hearing were such that if notice was only published following the meetings it would provide insufficient notice of the hearing. In these circumstances, I made a further order on 25 September 2012 permitting notice of this hearing to be published before the date of the meetings to allow for at least five days notice of this court hearing.

The function of the court

When asked to approve a scheme of arrangement the role of the court is supervisory in nature. The court is required to be satisfied that there has been no oppression and that the compromise or arrangement is one that is capable of being accepted.
In Re Central Pacific Minerals NL [2002] FCA 239 [12] ‑ [13] Emmett J said:
In considering whether to approve an arrangement at the third stage, the court must first be satisfied that the second stage has been fully completed. It must be satisfied that the resolutions have been passed in accordance with the statutory requirements. Secondly, however, the court must then consider in the exercise of its discretion whether to approve the arrangement. While the primary task of the court is to see that the procedure whereby the arrangement has been approved by security holders is formally correct, it has the further duty of satisfying itself that the arrangement is fair and equitable between different classes of security holders, and as between security holders and those who will benefit from it.
The jurisdiction of the court in relation to an arrangement is supervisory, in the sense that the court is concerned to be satisfied that there has been an absence of oppression and that the arrangement is one that is capable of being accepted. For example, the court will withhold its approval where a majority is shown to be acting in bad faith or where a majority's acceptance is in the nature of a fraud on the minority. The court will, of course, generally take the view that the shareholders are the best judges of whether an arrangement is to their commercial advantage and will be reluctant to make decisions contrary to the views of security holders expressed at meetings. The function of the court does not extend to usurping the views of the relevant security holders.
In considering whether final approval of the share scheme and the option scheme should be granted the court must be satisfied as to the following matters:
(1)that there are no matters that would preclude approval under s 411(17) Corporations Act;
(2)that all of the procedural requirements have been complied with;
(3)that the share scheme is sufficiently fair and reasonable to Westgold's members; and
(4)that the option scheme is sufficiently fair and reasonable to Westgold's option holders.
I will deal with each of those matters separately later in these reasons.
The relevant procedural requirements as are follows:
(1)that any meeting convened by Westgold was convened and held in accordance with the orders of 22 August 2012;
(2)that resolutions were passed at the meetings in accordance with the requirements of s 411(4) of the Corporations Act;
(3)that Westgold has otherwise complied with the orders of the court, in particular in regard to giving notice of the meetings, provision of relevant information and notice of this hearing; and
(4)that ASIC has had a reasonable opportunity to examine the explanatory statement and to make submissions to the court.

Section 411(17) considerations

The court is precluded from approving a share or option scheme if the scheme has the purpose of avoiding the operation of the takeover provisions of ch 6 of the Corporations Act or there is no statement in writing by ASIC that it has no objection to the share or option scheme: s 411(17) Corporations Act. It is only necessary for one of those criteria to be met, however I am satisfied that both are met in this case.
In my earlier decision I considered whether the purpose of either of the schemes was to avoid the operation of ch 6 of the Corporations Act. At [35] I expressed the preliminary view that on the face of the documents that would not appear to be the purpose of the schemes. Rather, the scheme of arrangement method has been employed as an effective way of achieving a merger of the two companies. Furthermore, the schemes are of an 'all or nothing' nature such that in the event that the schemes are approved Westgold will become a wholly owned subsidiary of Metals X and this could not occur under ch 6 of the Corporations Act. On the basis of the materials provided on this application I confirm that preliminary view.
As to the second factor in s 411(17), ASIC has stated in writing that it has no objection to either the share scheme or the option scheme. That statement is in the form of a letter dated 3 October 2012. The letter refers to the two schemes and to the explanatory statement registered with ASIC on 23 August 2012. The letter also states that ASIC does not propose to appear at the hearing for approval of the schemes of arrangement on 4 October 2012. In these circumstances, the court is not precluded under s 411(17) from approving the share scheme or the option scheme.

Compliance with procedural requirements

The court's orders of 22 August 2012 required that Westgold convene meetings of the shareholders and option holders on 3 October 2012. There was a requirement that a notice of the meetings be published in the public notices column of both The West Australian and The Australian newspapers on or before 31 August 2012. There were also orders regarding the chairmanship and conduct of the meetings.
Notice of the two meetings was published as required on 30 August 2012 (see the affidavit for Alistair Michael Lagrange sworn 2 October 2012 pars 4 and 5). Copies of extracts from the relevant editions of the newspapers have been provided and I am satisfied that they meet the terms of the orders.
Meetings of the Westgold shareholders and option holders were held at 10.00 am and 10.30 am respectively on 3 October 2012. Both meetings were chaired by Mr Michael Atkins, a non‑executive director and the chairman of Westgold. The timing, place and chairmanship of the meetings was in accord with the orders and the published notices.
In order to satisfy the requirements of s 411(4)(a)(ii) of the Corporations Act in relation to the share scheme Westgold's members were required to pass a resolution in favour of the share scheme by a majority in number of the members present and voting (either in person or by proxy) and by 75% of the votes cast on the resolution.
The minutes of the meeting, which are annexed to the affidavit of Mr Atkins (affidavit of Michael William Atkins sworn 3 October 2012, annexure MWA 1) note that prior to the resolution being put he made a statement to the meeting setting out the background of the share scheme. That statement set out the essential features and effect of the scheme and the process which was being followed to implement that scheme. There was confirmation that the independent directors of Westgold recommended voting in favour of the share scheme and the reasons for that recommendation. There was confirmation that Metals X was excluded from voting on the share scheme by a reason of its existing shareholding interest in Westgold of 27% and the fact that it is the proponent of the merger. There was also a reference to the fact that the share scheme was subject not only to approval by Westgold shareholders but final approval by the court on 4 October 2012. The chairman invited members who were in attendance at the meeting to ask questions or make comments on the resolution. No questions or comments were forthcoming.
The following resolution was put to the share scheme meeting:
That pursuant to and in accordance with s 411 of the Corporations Act, the scheme of arrangement proposed between Westgold and Westgold shareholders, as contained in and more particularly described in the document of which the notice convening this meeting forms part, is approved (with or without modification as approved by the Supreme Court of Western Australia).
When the resolution was put to the vote Westgold's members passed it by a significant majority. The resolution was passed by 95.25% of members present and voting either in person or by proxy and by 98.7% of the votes cast on the resolution (see Atkins' affidavit par 20).
In order to satisfy the requirements of s 411(4)(a)(i) of the Corporations Act in relation to the option scheme the Westgold option holders were required to pass a resolution in favour of the option scheme by a majority in number of option holders present and voting either in person or by proxy, 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 option holders present and voting in person or by proxy.
Mr Atkins made a statement to the option scheme meeting, which was conducted separately to the share scheme meeting (see minutes of the option scheme meeting, Atkins' affidavit Annexure MWA 2). He noted the background and effect of the proposed option scheme. He confirmed that the option scheme was supported by the independent directors of Westgold and that the scheme was subject to final approval by the court on 4 October 2012.
The following resolution was then put to the option scheme meeting:
That pursuant to and in accordance with s 411 of the Corporations Act, the scheme of arrangement proposed between Westgold and Westgold option holders, as contained in and more particularly described in the document of which the notice convening this meeting forms part, is approved (with or without modification as approved by the Supreme Court of Western Australia).
The resolution was passed at the option scheme meeting. It was passed by 100% of option holders present and voting either in person or by proxy, being a majority of whose debts or claims against Westgold amount in aggregate to 100% of the total amount of the debts and claims of the option holders present and voting in person or by proxy (see the Atkins' affidavit par 21).
Prior to the meeting copies of the court approved scheme booklet had been sent to each person registered on the Westgold registry as a holder of ordinary shares or options issued as at 24 August 2012. In accordance with the orders of the court of 22 August 2012 the scheme booklet was sent to the Westgold shareholders and option holders on 31 August 2012.
Westgold was required to publish a notice advertising any hearing for the approval of the schemes pursuant to s 411(4)(b) of the Corporations Act on or before 28 September 2012. This was in accordance with r 2.11 of the Supreme Court (Corporations) Rules 2004 (WA): See the court's orders of 25 September 2012. In accordance with those orders a notice was placed in the public notices column of The West Australian newspaper on 27 September 2012 (see the La Grange affidavit par 6).
Westgold arranged for the lodgement of a copy of the court approved scheme booklet with ASIC on 23 August 2012 (see the affidavit of Scott James Huffadine sworn 3 October 2012 par 27). As previously noted, ASIC has provided Westgold with a written statement confirming that it has no objection to the scheme. In these circumstances, it is clear that ASIC has been provided with a reasonable opportunity to examine the scheme booklet and to make submissions to the court in relation to the two schemes.

Are the schemes fair and reasonable

The authorities make it plain that it is not for the court to second guess the view of the majority of the members in the exercise of their commercial judgment: Re BRL Hardie Ltd [2003] SASC 97; (2003) 45 ACSR 397 [20]. It is sufficient for the court to reach the view that the schemes of arrangement are fair and reasonable and that intelligent, honest and reasonable people acquainted with the terms of the schemes of arrangement would be prepared to enter into them.
Westgold submits that the schemes are sufficiently fair and reasonable for the following reasons. Firstly, an independent expert engaged to assess the merits of the schemes concluded that the share scheme is fair and reasonable and in the best interests of Westgold shareholders and that the option scheme is not fair but is reasonable and is in the best interests of Westgold option holders. Secondly, that the schemes were approved by the necessary majority of members and option holders at the meetings held on 3 October 2012. Indeed, it is submitted that there were overwhelming votes in favour of the schemes and that this attests to the absence of oppression and to the reasonableness of the schemes. Thirdly, that there was an absence of opposition to the application being heard by the court on 4 October 2012.
As regards the report of the independent expert that report, by BDO Corporate Finance (WA) Pty Ltd (BDO), is annexed to the affidavit of Sherif Andrawes sworn 21 August 2012. In that report BDO concluded that the share scheme is fair and reasonable and in the best interests of Westgold shareholders and that the option scheme is not fair but is reasonable and is in the best interests of Westgold option holders. 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.
Analysis of the fairness of the share scheme was 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 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. Another independent report from Behre Dolbear Australia, mineral industry consultants, is annexed to the BDO report. This second report provides a valuation of the mineral assets of both Westgold and Metals X.

As regards the options scheme, BDO concluded that it was not fair because the current assessed value of 11 new Metals X options was less than the value of 10 Westgold options across all tranches at the time the report was prepared. 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. However, BDO stated that the option scheme was, nonetheless, reasonable and in the option holders best interests. This conclusion took into account the future prospects of Westgold both as an independent company and as part of a merged entity.
In my earlier decision I referred to the valuation methodology used by BDO in its report. This valuation method has been accepted as being appropriate in other cases and has been utilised here both to assess the fairness of the option scheme and also to determine the amount of the debt or claim attributable to an option holder for voting purposes.
BDO concluded that implementation of both schemes is expected to bring a number of benefits to shareholders and option holders. These benefits include that the schemes will bring about a combined group with a stronger financial position. There are also said to be advantages in the creation of a company with a larger and more diversified portfolio of assets and an increased likelihood of return from cash investments. BDO has also referred to possible disadvantages of the schemes, including that security holders' interests will be diluted and that there will be a change of risk exposure. The BDO report contains details of their analysis and this report was available to members and option holders in good time before the meetings were held.
In Zenyth Therapeutics Ltd v Smith [2006] VSC 436; (2006) 60 ACSR 548 Dodds‑Streeton J said that courts should adopt a cautious approach to the approval of any scheme which independent experts consider to be not fair, particularly if this involves expropriation at an undervalue. Her Honour expressed the view that a scheme involving an offer at an undervalue should generally not be considered reasonable unless it is accompanied by some positive compensatory feature. In that case, the explanatory statement contained competing valuations and opinions on the fairness of the option scheme.
In the present case, the scheme booklet does not contain competing valuations or opinions in regards to the option scheme. The BDO report sets out the reasons why there are potential benefits to the option holders in approving the scheme notwithstanding the reservations as to the value. This is a case where the option holders could reasonably conclude that notwithstanding any difference in value between the Westgold options and the Metals X options at the time of implementation there are other potential commercial advantages to the scheme. In these circumstances it is open to the option holders to conclude that approval of the option scheme is in their interests.
There have been other cases in which the court has approved schemes of arrangement that were found by an independent expert to be not fair but reasonable: See In the matter of GRD Ltd [2009] FCA 1595 and Re Cytopia Ltd (No 2) [2010] VSC 4. In approving the scheme of arrangement in Re Cytopia Croft J noted that the size of the majority in favour of the scheme permitted the court to infer that the shareholders found the conclusion of the independent expert that the scheme was reasonable, despite being not fair, was persuasive. In the present case, that reservation only applies to the option scheme and that scheme was approved without dissent at the option holders' meeting.
There is no reason to doubt that the results of the meetings represent the wishes of the overwhelming majority of the members and option holders of Westgold. I am satisfied that prior to those meetings occurring the members and option holders received all of the information necessary to make fully informed decisions about their voting intentions. The fact that no members or option holders who were present at the meetings raised any questions or voiced any dissent supports a conclusion that the process was fair and appropriate. Both meetings were also informed of the intention of the company to make application to the court for approval of the share scheme on 4 October 2012 in the event that the resolutions were passed. At the hearing of the application no member or option holder sought to oppose the approval process.

Conclusion

For the above reasons I was satisfied at the hearing of the application that it was open for intelligent and honest members and option holders, having regard to their own interests, to conclude that they should approve the schemes: Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213, 245 (Fry LJ). As with most commercial ventures, the proposals are not without risk and the future of the merged entity may be affected by how successful it is in developing its assets, but those are matters that are properly ones for the members and option holders to take into account. The outcome of the meetings reflects the views of the overwhelming majority of both members and option holders. There appears to be a sound commercial basis for the conclusions of that majority. Importantly, there is nothing to suggest that the scheme is oppressive to any minority of members or option holders.
For these reasons I concluded that it was appropriate to approve both schemes and make the orders sought in that regard.
Westgold also sought orders exempting it from compliance with s 411(11) of the Corporations Act. It is open for the court to make such an order under s 411(12). Section 411(11) requires that a copy of the court's order approving the scheme be annexed to every copy of the relevant company's constitution issued after the order is made. Exemption orders have been made in a number of cases including Re Hudson Conway Ltd [2000] VSC 21; (2000) 33 ACSR 657; Re Amcor Ltd (2000) 34 ACSR 199; Re Glencore Nickel Pty Ltd [2003] WASC 18; (2003) 44 ACSR 210; Re Anaconda Nickel Holdings Pty Ltd [2003] WASC 19; (2003) 44 ACSR 229; In the matter of GRD Ltd; Re BRL Hardie Ltd and Re Cytopia.
In Re Cytopia Croft J granted an exemption having regard to the fact that security holders were capable of being fully informed of the scheme through ordinary channels for distribution of information regarding listed companies. He also noted that there was to be no alteration to the constitution of the company in that case or to the rights of shareholders, creditors or other persons dealing with the company as a result of the court approving the scheme. It was also relevant that the nature of the scheme in that case was such that it would be fully implemented within a short period after approval by the court after which time Cytopia would be a wholly owned subsidiary of another company and the scheme would be of merely historical interest.
Those factors are equally applicable in the circumstances of this case. If approved, the schemes are proposed to become effective on Friday, 5 October 2012 by lodging with ASIC an office copy of the court's orders made on 4 October 2012. In those circumstances I considered it appropriate to grant the exemption under s 411(12).