Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd
[2015] WASC 242
•3/07/15
SANTOS OFFSHORE PTY LTD -v- APACHE OIL AUSTRALIA PTY LTD [2015] WASC 242
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2015] WASC 242 | |
| Case No: | CIV:1853/2015 | 26 JUNE 2015 | |
| Coram: | PRITCHARD J | 3/07/15 | |
| 35 | Judgment Part: | 1 of 1 | |
| Result: | Declarations granted | ||
| B | |||
| PDF Version |
| Parties: | SANTOS OFFSHORE PTY LTD APACHE OIL AUSTRALIA PTY LTD APACHE EAST SPAR PTY LTD APACHE KERSAIL PTY LTD |
Catchwords: | Contract Joint venture agreement Proper construction Clause in joint venture agreement giving right of preemption Validity of notices Whether conditions stipulated in notice to the preemptive right holder are valid Meaning of 'relevant to' Meaning of 'equivalent to' |
Legislation: | Nil |
Case References: | APT SEA Gas Holdings Pty Ltd v ANP SEA Gas Holdings Pty Ltd [2010] NSWSC 1221 Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191 Beaconsfield Gold NL v Allstate Prospecting Pty Ltd [2006] VSC 320 Commissioner of State Taxation (WA) v Nischu Pty Ltd (1991) 4 WAR 437 Distillers Co Biochemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 Fimiston Mining NL v Western Reefs Ltd (Unreported, WASC, Library No 950633, 22 November 1995) Fitzgerald v Masters (1956) 95 CLR 420 G Scammell & Nephew Ltd v HC & JG Ouston [1941] AC 251 Goldus Pty Ltd v Australian Mining Pty Ltd [2015] SASC 32 Masters v Cameron (1954) 91 CLR 353 Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 Re A Lease between Permanent Trustee Australia Ltd and Woolworths (Queensland) Pty Ltd (Unreported, QSC, No 9507 of 1998, 6 November 1998) REST SEA Gas Pipelines Pty Ltd v APT SEA Gas Holdings Pty Ltd [2010] NSWCA 296 Simsmetal Ltd v Wanless Metal Industries Pty Ltd (Unreported, NSWSC, 19 March 1997) Spencer v Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418 Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486 THL Robina Pty Ltd v The Glades Gold Club Pty Ltd [2004] QSC 461 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522 Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
APACHE OIL AUSTRALIA PTY LTD
First Defendant
APACHE EAST SPAR PTY LTD
Second Defendant
APACHE KERSAIL PTY LTD
Third Defendant
Catchwords:
Contract - Joint venture agreement - Proper construction - Clause in joint venture agreement giving right of preemption - Validity of notices - Whether conditions stipulated in notice to the preemptive right holder are valid - Meaning of 'relevant to' - Meaning of 'equivalent to'
Legislation:
Nil
Result:
Declarations granted
Category: B
Representation:
Counsel:
Plaintiff : Mr B Dharmananda SC & Mr D Jackson
First Defendant : Mr A Archibald QC & Mr B Luscombe
Second Defendant : Mr A Archibald QC & Mr B Luscombe
Third Defendant : Mr A Archibald QC & Mr B Luscombe
Solicitors:
Plaintiff : Herbert Smith Freehills
First Defendant : Clifford Chance
Second Defendant : Clifford Chance
Third Defendant : Clifford Chance
Case(s) referred to in judgment(s):
APT SEA Gas Holdings Pty Ltd v ANP SEA Gas Holdings Pty Ltd [2010] NSWSC 1221
Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99
Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191
Beaconsfield Gold NL v Allstate Prospecting Pty Ltd [2006] VSC 320
Commissioner of State Taxation (WA) v Nischu Pty Ltd (1991) 4 WAR 437
Distillers Co Biochemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Fimiston Mining NL v Western Reefs Ltd (Unreported, WASC, Library No 950633, 22 November 1995)
Fitzgerald v Masters (1956) 95 CLR 420
G Scammell & Nephew Ltd v HC & JG Ouston [1941] AC 251
Goldus Pty Ltd v Australian Mining Pty Ltd [2015] SASC 32
Masters v Cameron (1954) 91 CLR 353
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451
Re A Lease between Permanent Trustee Australia Ltd and Woolworths (Queensland) Pty Ltd (Unreported, QSC, No 9507 of 1998, 6 November 1998)
REST SEA Gas Pipelines Pty Ltd v APT SEA Gas Holdings Pty Ltd [2010] NSWCA 296
Simsmetal Ltd v Wanless Metal Industries Pty Ltd (Unreported, NSWSC, 19 March 1997)
Spencer v Commonwealth of Australia [1907] HCA 82; (1907) 5 CLR 418
Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486
THL Robina Pty Ltd v The Glades Gold Club Pty Ltd [2004] QSC 461
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165
Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429
Wilkie v Gordian Runoff Ltd [2005] HCA 17; (2005) 221 CLR 522
Zhu v Treasurer (NSW) [2004] HCA 56; (2004) 218 CLR 530
- PRITCHARD J:
Introduction
1 This action concerns a dispute between the parties in relation to the validity of notices (Notices) issued by the defendants under an agreement between them for the operation of a joint venture for the exploitation of a petroleum production licence - the Spar Joint Operating Agreement (Spar JOA).1 The Notices were issued by each defendant pursuant to cl 12.3 of the Spar JOA. That clause confers a pre-emptive right on the other Parties to the Spar JOA to purchase the interest of a Party in the joint venture operation in the event that that Party proposes to transfer its interest to a third party, or in the event that there is to be a change in the control of that Party. Each Notice constitutes an offer by each defendant to sell its interest in the joint venture operation on the terms and conditions set out in the Notice.
2 Santos Offshore Pty Ltd (Santos) says that some of those terms and conditions (the challenged Conditions) did not comply with the requirements of cl 12.3 of the Spar JOA, with the result that the Notices, or alternatively the challenged Conditions, are invalid. It now seeks declarations to that effect and orders requiring Apache Oil Australia Pty Ltd (Apache Oil), Apache East Spar Pty Ltd (Apache East Spar) and Apache Kersail Pty Ltd (Apache Kersail) to specifically perform their obligations under the Spar JOA to issue a notice which complies with the requirements of cl 12.3 of the Spar JOA.
3 For the reasons outlined below, each of the challenged Conditions failed to comply with the requirements of cl 12.3 of the Spar JOA, and in consequence each of the Notices is invalid. I will make declarations to that effect. However, I am not persuaded that this is an appropriate case for orders for specific performance.
4 In these reasons for decision I deal with the following matters:
1. Relevant factual background;
2. The pre-emptive rights clauses in the Spar JOA;
3. The proper construction of cl 12.3 of the Spar JOA;
4. Why each of the challenged Conditions fails to comply with the requirements of cl 12.3 of the Spar JOA and is invalid; and
5. Issues relevant to the relief sought: severance and specific performance.
1. Relevant factual background
5 The relevant factual background was not in dispute. It was outlined in the affidavits of Mr Michael Hackett2 and Mr Philip Jackson.3
The agreements between Santos, Apache Oil, Apache East Spar and Apache Kersail
6 In 2010, Santos, Apache Oil, Apache East Spar and Apache Kersail entered into two agreements. The first - a Sale and Purchase Agreement (Spar SPA) - was an agreement by which Santos sold to each of the other parties an interest in a petroleum retention lease which it owned.4 Under the Spar SPA, Apache Oil and Apache East Spar each purchased a 25% legal and beneficial interest in the assets the subject of the Spar SPA, while Apache Kersail purchased a 5% legal and beneficial interest in those assets. Santos retained a 45% legal and beneficial interest in the assets the subject of the Spar SPA. The parties also agreed to form an unincorporated joint venture (the Spar JV) in respect of the retention lease (and its successor titles including successor licences). In 2011 the retention lease was converted into a petroleum production licence (the Production Licence).5
7 Under the second agreement - the Spar JOA - the Parties6 agreed on terms for the operation and exploitation of the retention lease (now the Production Licence) under the Spar JV.
8 Under the Spar JOA, the undivided interest of each Party to the Spar JOA (expressed as a percentage of the total interests of all Parties) in the rights and obligations derived from the Parties' interest in the Production Licence, Joint Property,7 Petroleum,8 and the Spar JOA, is known at that Party's Participating Interest.9 Santos presently holds a 45% Participating Interest, Apache Oil and Apache East Spar each own a 25% Participating Interest, and Apache Kersail owns the remaining 5% Participating Interest, under the Spar JOA.
9 If a Party to the Spar JOA wishes to transfer to a third party its rights and obligations in its Participating Interest, or if there is proposed to be a Change in Control of any Party to the Spar JOA, cl 12 of the Spar JOA confers rights of pre-emption on the other Parties to the Spar JOA so that they will first be given the opportunity to acquire that Party's Participating Interest instead. Clause 12.3 of the Spar JOA deals with the right of pre-emption in the case of a Change in Control of a Party to the Spar JOA.
10 All of the issued share capital and voting rights in Apache Oil, Apache East Spar and Apache Kersail are held by Apache Energy Ltd.
11 Prior to April 2015, all of the share capital and voting rights in Apache Energy were held by a group of other companies (the Apache group).10 In April 2015, the Apache group and certain other companies (the Vendors), entered into an agreement with Viraciti Energy Pty Ltd, by which Viraciti agreed to purchase shares in certain companies, including all of the shares and voting rights in Apache Energy (the Viraciti SPA).11 There is no dispute that that will result in a Change in Control (as that term is defined in the Spar JOA12) for each of Apache Oil, Apache East Spar and Apache Kersail.
12 On 15 May 2015, Apache Oil, Apache East Spar and Apache Kersail each issued a Notice to Santos which purported to comply with the requirements of cl 12.3 of the Spar JOA. Each of the Notices advised of the proposed Change in Control and offered to sell the relevant Participating Interest in the Spar JOA to Santos on the terms and conditions set out in the Notice.
The Viraciti SPA
13 As a result of its purchase of all of the shares in Apache Energy, Viraciti will in turn acquire ownership of Apache Energy's subsidiaries - Apache Oil, Apache East Spar, and Apache Kersail - and, subject to the exercise of any right of pre-emption in respect of any of the Participating Interests, the assets and liabilities of those companies.
14 It is not necessary for present purposes to outline all of the terms of the Viraciti SPA. Some of those terms are discussed below. By way of introduction it is necessary to mention only that, save for the express exclusion of certain assets (which are not presently relevant), the Viraciti SPA does not provide for the transfer of the assets of all of those companies whose shareholdings are transferred to Viraciti under that agreement. However, some of the terms of the Viraciti SPA expressly refer to the assets of the companies whose shareholdings are transferred, or their subsidiaries. Not surprisingly, given the subject matter of that agreement, the Viraciti SPA also contains a number of other terms which do not expressly refer to assets.
The Notices and the challenged Conditions
15 As I have already mentioned, each of the Notices is in relevantly identical terms. Mr Jackson deposed that the process for drafting the Notices involved:
[I]dentifying the terms and conditions in the Viraciti SPA relevant to the Participating Interests of Apache Oil, Apache East Spar and Apache Kersail and adjusting those terms and conditions to reflect and replicate the same legal and commercial outcomes for the plaintiff in relation to the Participating Interests as the legal and commercial outcomes for Viraciti.13
16 Using the Notice given by Apache Oil as an example, I note the following aspects of its terms.
17 The Notice provides that it constitutes an offer by Apache Oil to sell its 25% Participating Interest to Santos for an amount equal to its Cash Value 'and on the terms set out in this letter'.14
18 The Notice states that the Viraciti SPA does not contain any allocation of the total Purchase Price amongst individual assets, and goes on to set out Apache Oil's determination of the Cash Value of its Participating Interest 'as at the Economic Transfer Date'.15 An explanation is offered for how that determination was reached.
19 The Notice then turns to the terms and conditions on which the offer to sell is made. The Notice explains that:
[T]he [Viraciti] SPA involves the acquisition of the shares in a number of entities which collectively hold a substantial portfolio of assets, and deals with issues which are primarily relevant to a corporate-level acquisition. As such, the terms and conditions of the [Viraciti] SPA are largely irrelevant to an offer of the [Participating Interest].16
20 The Notice then sets out 12 conditions on which the offer to Santos to purchase Apache Oil's Participating Interest is made. Santos' case is that the challenged Conditions - conditions (c), (d), (e), (j) and (k) - failed to comply with the requirements of cl 12.3 of the Spar JOA. Each of the challenged Conditions is set out later in these reasons.
21 Attached to the Notice was a copy of the Viraciti SPA which was heavily redacted to exclude commercially sensitive information which Apache Oil claimed was not relevant to the offer to sell the Participating Interest.
2. The pre-emptive rights clauses in the Spar JOA
22 The dispute between the parties concerns the meaning and operation of cl 12.3 of the Spar JOA, which applies when there is to be a Change in Control of any Party to the Spar JOA.
23 Subject to some presently irrelevant exceptions, a Change in Control encompasses any direct or indirect change in the Control (that is, the ownership, directly or indirectly or more than 50% of the voting rights17) of a Party to the Spar JOA, or the Operator (that is, Apache Oil), whether through a merger, sale of shares or other equity interests, or otherwise, through a single transaction or series of related transactions, from one or more transferors to one or more transferees. A Party subject to a Change in Control must satisfy the terms and conditions in cl 12.3 of the Spar JOA.18
24 If a Party proposes to transfer its Participating Interest to a third party, that Transfer (defined, relevantly, to mean a sale, assignment, encumbrance or other disposition by a Party of any rights or obligations derived from the Production Licence or the Spar JOA, including its Participating Interest19) will be effective only if that Party satisfies the terms and conditions of cl 12.2 of the Spar JOA.20
25 If a Transfer or a Change in Control occurs without satisfaction by the Transferor, or the Party subject to the Change in Control, of the requirements of cl 12.2 or cl 12.3 respectively, each other Party is entitled to enforce specific performance of cl 12 in addition to any other remedies to which it may be entitled.21
26 Extracts from cl 12 of the Spar JOA are set out in Annexure 1 to these reasons.
3. The proper construction of cl 12.3 of the Spar JOA
27 Resolution of the dispute between the parties turns on the proper construction of cl 12.3 of the Spar JOA. The principles of contractual construction are well established. They are set out below.
Relevant principles of contractual construction
28 A contract must be given an objective construction.22 The question is to be determined by what a reasonable business person would have understood the language in which the parties expressed their agreement to mean.23
29 That requires consideration of the language used, the context, the subject matter and purpose of the provisions of the contract, and of the surrounding circumstances known to the parties.24
30 Unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption that the parties intended to produce a commercial result.25 Consequently, a commercial contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience.26 For the same reason, if the language of a contractual term is open to two constructions, the construction which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust will be preferred.27
31 The terms of a contract should be construed in the context of the contract as a whole, because the meaning of any one part of the contract may be revealed by other parts.28 In addition, the words of every clause must, if possible, be construed so as to give 'a congruent operation to the various components of the whole'.29
The subject matter and purpose of cl 12.3
32 It is convenient to start the analysis of cl 12.3 of the Spar JOA by considering the subject matter of cl 12 as a whole.
33 The Spar JOA is an agreement in relation to the operation of a joint venture which exists to exploit the Production Licence for the production of petroleum. In the event of a proposed Change in Control of a Party to the Spar JOA, or a Transfer of the Participating Interest of a Party to the Spar JOA, cl 12.2 and cl 12.3 confer rights on the other Parties to the Spar JOA to first acquire the Participating Interest in question. Clause 12 thus creates a right for the other Parties to the Spar JOA to pre-empt the Transfer of the Participating Interest, or the Change in Control as it affects the Participating Interest, and to acquire that Participating Interest for itself.
34 The purpose of pre-emptive rights in resource joint venture agreements similar to the present kind was described by Hargrave J in Beaconsfield Gold NL v Allstate Prospecting Pty Ltd30in the following way:
Pre-emptive rights are usually included in resource joint venture agreements. Given the importance of the identity, financial capacity and reliability of the participants in a joint venture, pre-emptive rights operate to ensure that existing participants are empowered to exclude new participants by purchasing the outgoing participant's interest if they so desire. They also permit a joint venturer who may take the view that it has expended a significant amount of money in a high risk area to have an opportunity to increase its interest if another joint venturer desires to withdraw from the joint venture. This allows an enhanced opportunity to reap the rewards from past risk-taking and expenditures.
- His Honour's observations are, with respect, entirely apposite in the present case.
35 Having regard to the purpose of pre-emptive rights clauses, the courts have recognised that there is a need for caution in adopting a construction which would restrict their operation or which would permit their application to be avoided31 and thus which would erode the benefit conferred by the grant of a right of pre-emption.32 For the same reason, pre-emptive rights clauses have been construed so as not to render it impossible for a joint venturer to satisfy the requirements of the offer.33
Overview of the structure and operation of the rights of pre-emption in cl 12
36 Next, it is useful to note the overall structure and operation of cl 12.2 and cl 12.3. It is apparent from the structure and the terms of those clauses that they seek to establish parallel processes for the acquisition of a Participating Interest in circumstances where the Transfer of that Participating Interest is proposed, or where there is to be a Change in Control of a joint venture Party.
The structure and content of cl 12.3
37 Clause 12.3 establishes the procedure which must be followed in the event of a Change in Control of any Party34 (referred to as the Acquired Party35).
38 The first step in that procedure is set out in cl 12.3(C). That clause requires an Acquired Party (in this case, Apache Oil, Apache East Spar, and Apache Kersail) to issue a notice to each of the other Parties to the Spar JOA (the cl 12.3(C) notice). The cl 12.3(C) notice is to be issued 'once the final terms and conditions of a Change in Control have been fully negotiated'.
39 The cl 12.3(C) notice must have three components - two substantive, and one of an evidentiary nature. First, it must disclose 'the final terms and conditions as are relevant to its [that is, the Acquired Party's] Participating Interest'. Secondly, it must disclose the Acquired Party's determination of the Cash Value of its Participating Interest. These components together constitute an offer to sell the Acquired Party's Participating Interest to the other Parties. In addition, the cl 12.3(C) notice must be accompanied by a copy of the instruments or portions of the agreement negotiated for the Change in Control (the Change in Control transaction agreement) 'establishing such terms and conditions'. The latter component of the cl 12.3(c) notice, as I have noted, appears to have an evidentiary function. The provision of the Change in Control transaction agreement establishes (that is, proves the existence of) the final terms and conditions negotiated between the Acquiror and the Acquired Party.
40 Next, cl 12.3 confers a right on the other Parties to the Spar JOA to acquire the Acquired Party's Participating Interest on the terms and conditions described in cl 12.3(C).36 The right to acquire the Participating Interest is a right of 'each other Party' to the Spar JOA (other than the Acquired Party)37 and correspondingly, the cl 12.3(C) notice is required to be given to 'the other Parties'.
41 That right to acquire the Acquired Party's Participating Interest is subject to a number of qualifications, which are set out in cl 12.3(D) and the remaining subclauses in cl 12.3.
42 First, the right to acquire that Participating Interest is conditioned on compliance with the process set out in cl 12.3(D) of the Spar JOA. The Party wishing to acquire the Participating Interest must deliver to all other Parties a counter-notification that it accepts the terms and conditions described in cl 12.3(C) without reservations or conditions, within 60 days of the cl 12.3(C) notice.38
43 Secondly, the right to acquire the Participating Interest is a right to acquire that Participating Interest 'for cash' rather than for some other form of consideration.39 It is a right to acquire the Participating Interest 'for the Cash Value on the equivalent terms and conditions set out in the cl 12.3(C) notice for cash'. (The 'Cash Value' is defined in cl 12.1(B), and is the market value in US dollars of the Participating Interest in question, which is 'based upon the amount in cash a willing buyer would pay a willing seller in an arm's length transaction', and which is to yield the vendor the same after-tax proceeds that the vendor would have obtained from the merger or stock sale that constituted the Change in Control transaction.) I will return to consider the meaning and operation of the words 'on the equivalent terms and conditions' in a moment.
44 Thirdly, the Acquired Party's determination of the Cash Value of its Participating Interest (that is, its proposal as to what the Cash Value is), which is to be set out in the cl 12.3(C) notice, is deemed to be correct unless any Party gives notice to the Acquired Party, in compliance with the process set out in cl 12.3(G) of the Spar JOA. In that event, cl 12.3(G) - (I) set out a process for the final determination of the Cash Value by an independent expert.
45 Fourthly, if more than one Party notifies the Acquired Party that it wishes to acquire the Participating Interest, then (subject to them reaching an agreement to the contrary) each of those Parties is to share in the Participating Interest by acquiring a portion of it equal to the ratio that its existing Participating Interest represents to the total of their Participating Interests.40
46 Fifthly, no Party has a right or an obligation under cl 12.3 to acquire any asset other than a Participating Interest, 'regardless of whether other properties are subject to the Change in Control'.41 That qualification recognises the prospect that a Change in Control may be effected in a number of ways, including (as in this case) by the transfer of the shares in the Acquired Party, which may result in a change in the control of other assets or properties owned by the Acquired Party. Consequently, this qualification prevents the Acquired Party from seeking to impose a condition that the other Parties acquire other assets or interests, in addition to the Participating Interest. Conditions of that kind have the potential to impede the other parties to a joint venture agreement from exercising their rights of pre-emption.42
47 Sixthly, the right to acquire the Participating Interest may not be exercised unless the Change in Control is completed, and, if the Change in Control agreement terminates, so too does the right of pre-emption.43
The structure and content of cl 12.2
48 It is immediately striking that the structure and content of cl 12.2(F) very closely resembles that of cl 12.3.
49 Clause 12.2(F) applies to any Transfer of all, or a pro-rata percentage, of a Party's Participating Interest.44 There is a requirement for the transferor to provide a notice to the other Parties disclosing 'all such final terms and conditions as are relevant to the acquisition of the Participating Interest'.45 A right to acquire that Participating Interest is conferred on each other Party.46
50 That right is qualified in a number of respects, including by a time limit for the provision of the counter-notification accepting the terms and conditions set out in the notice, and that the right does not extend to a right (nor an obligation) to acquire other assets apart from the Participating Interest.47 If more than one Party counter-notifies, then subject to their contrary agreement, each Party shall acquire a proportion of the Participating Interest equal to the ratio of its own Participating Interest to the total Participating Interests of all those Parties who counter-notified.
51 The right to acquire is a right to acquire the Participating Interest for cash.48 Where the proposed Transfer is itself a cash transfer of the Participating Interest, the right to acquire is a right to acquire on the same final terms and conditions as were negotiated with the proposed transferee.49 If the proposed Transfer transaction is not a Cash Transfer, or involves other properties, the notice is to include the transferor's view of the Cash Value 'and each other Party shall have a right to acquire such Participating Interest on the same final terms and conditions as were negotiated… and the terms and conditions of the applicable instruments shall be modified as necessary to reflect the acquisition of the Participating Interest for cash'. And in the event of a dispute about the Cash Value, that Cash Value is to be determined by an independent expert.50
52 I will return to consider the significance of the parallels between cl 12.2 and cl 12.3 later in these reasons.
Key questions in relation to the construction of cl 12.3
53 For present purposes, four key questions emerge in relation to the meaning of the terms of cl 12.3:
(i) What is the meaning of the phrase 'the final terms and conditions as are relevant to its Participating Interest' in cl 12.3(C)?
(ii) What is the meaning of the phrase 'on the equivalent terms and conditions set out in the Clause 12.3(C) notice' set out in cl 12.3(F)?
(iii) Does the phrase 'on the equivalent terms and conditions set out in the Clause 12.3(C) notice' in cl 12.3(F) apply to the identification of the terms and conditions set out in the cl 12.3(C) notice?
(iv) Is cl 12.3 uncertain and therefore unenforceable?
(i) What is the meaning of the phrase 'the final terms and conditions as are relevant to its Participating Interest' in cl 12.3(C)?
54 The terms and conditions which must be identified in the cl 12.3(C) notice are those that are 'relevant to' the Acquired Party's Participating Interest. The word 'relevant' is an adjective which means 'bearing upon or connected with the matter in hand'51 and 'closely relating to the subject or point at issue'.52
55 Two other features of the phrase 'the final terms and conditions as are relevant to its Participating Interest' in cl 12.3(C) should be noted. The 'terms and conditions' in question are those which pertain to the Acquired Party's Participating Interest. That Participating Interest is the sole point of reference for the identification of the terms and conditions which should be included in the cl 12.3(C) notice. The terms and conditions which must be included in the cl 12.3(C) notice do not include those which are relevant to any other matters dealt with in the Change in Control transaction agreement (such as terms setting out the means by which the Change in Control is to be effected). Furthermore, the terms and conditions which must be identified are those relating to 'its' (that is, the Acquired Party's) Participating Interest. Accordingly, terms and conditions in the Change in Control transaction agreement which are relevant to other assets, or to the Participating Interests of other Parties, are not to be included in the cl 12.3(C) notice.
56 In short, on the ordinary meaning of the words in cl 12.3(C), the terms and conditions from the Change in Control transaction agreement which must be identified in the cl 12.3(C) notice are only those which bear upon, or are connected with, the Participating Interest of the Acquired Party, or which relate to that Participating Interest. That leaves the question of how close the connection or relationship must be between the terms and conditions included and the Participating Interest itself.
57 In my view, the words 'such terms and conditions as are relevant to its Participating Interest' should be construed as requiring a close connection between the terms and the Participating Interest. I have reached that view for three reasons.
58 First, that meaning of the words 'relevant to' is consistent with the subject matter of cl 12.3(C). Clearly the Parties to the Spar JOA were cognisant of the fact that a Change in Control transaction agreement (unlike a Transfer) would not necessarily pertain to particular assets or property of the Acquired Party. Yet a Change in Control of a Party would inevitably result in a change in the control of the Participating Interest. From that perspective, in a notional sense, every term and condition in a Change in Control transaction agreement might be viewed as 'relevant to' the Participating Interest of the Acquired Party. The inclusion of the words 'relevant to its Participating Interest' were clearly intended as words of limitation.
59 Secondly, and more significantly, to construe the words 'relevant to' as requiring a close connection between the terms and conditions of the Change in Control transaction agreement and the Participating Interest of the Acquired Party, would be consistent with the purpose of the right of pre-emption in cl 12.3. Such a construction would enable the other parties to the Spar JOA to have the opportunity to acquire the Acquired Party's Participating Interest, on only those terms and conditions as may be identified in the Change in Control transaction agreement as having a close bearing on, or connection with, the Participating Interest itself. Conversely, if cl 12.3(C) were construed so as to permit the inclusion of terms and conditions with a more tenuous connection with the Participating Interest, the result may be to render it more difficult for the other Parties to exercise the right of pre-emption.
60 Thirdly, support for this construction of the phrase can also be gleaned from the contractual context, and in particular from cl 12.2(F). Under that clause, the transferor is required to provide the other Parties to the Spar JOA with a notice setting out 'such final terms and conditions [as have been negotiated for the Transfer] as are relevant to the acquisition of the Participating Interest' (the cl 12.2(F) notice).53 Again, the requirement that the terms and conditions be 'relevant to' the Participating Interest is a limiting requirement which recognises that a Transfer may encompass the transfer of rights and obligations which must include, but may not be limited to, the Participating Interest of the transferor. In a case where other assets or interests are to be transferred by the transferor to a third party, the only terms and conditions which are to be included in the cl 12.2(F) notice are those which are relevant to the acquisition of the Participating Interest.
61 In order to meet the description of a term or condition which is 'relevant to' the Acquired Party's Participating Interest, it is not necessary that a term or condition in the Change in Control transaction agreement expressly refer to a Participating Interest. (Given the variety of ways in which a Change in Control might be effected, a Change in Control transaction agreement may not contain terms which make express reference to particular assets of the Acquired Company.) The terms and conditions which are relevant to the Participating Interest will be those which bear upon, or operate upon, or are otherwise closely connected or related to, the Participating Interest, and to its acquisition by the Acquiring Party.
(ii) What is the meaning of the phrase 'on the equivalent terms and conditions set out in the Clause 12.3(C) notice' set out in cl 12.3(F)?
62 The defendant's case is that the terms and conditions set out in the cl 12.3(C) notice must be modified so that they produce the same legal and commercial outcomes for Santos as in relation to the Participating Interests as the legal and commercial outcomes for Viraciti under the Viraciti SPA. They rely on cl 12.3(F) in support of this contention. Accordingly it is necessary to identify the meaning and intended operation of the words 'on the equivalent terms and conditions set out in the Clause 12.3(C) notice', which appear in cl 12.3(F). The word 'equivalent', when used as an adjective, means equal in value, measure, effect, efficacy, import or significance54 and 'that is virtually the same thing; identical in effect; tantamount'.55
63 At first blush, the meaning of this phrase in cl 12.3(F) is far from clear. One possible meaning which appeared open was that the use of the adjective 'equivalent' was designed to confirm that each of the Parties has the same right - namely to acquire the Participating Interest for the Cash Value on equivalent (that is, the same) terms and conditions as each other Party. Were that the intention, however, the word equivalent would more likely have been used as an adjective to describe the 'right to acquire' rather than to describe the terms and conditions set out in the cl 12.3(C) notice.
64 An alternative possible construction is that the phrase was intended as a further qualification or explanation of the terms and conditions which should be included in the cl 12.3(C) notice. This construction is not without its attractions, not the least of which is that, applied in this way, the word 'equivalent' might convey some measure of the extent to which, or standard by which, all of the terms and conditions in the Change in Control transaction agreement might be modified so as to be capable of operating as terms and conditions for the acquisition of the Participating Interest. However, I have reached the view that this construction of cl 12.3(F) should not be preferred for the following reasons.
65 First, the contractual context does not support this construction. If the word 'equivalent' were intended to apply to the terms and conditions identified as relevant to the Participating Interest, it is difficult to envisage why that qualification was not included in cl 12.3(C) itself. In addition, as I have already noted, the right to acquire the Participating Interest is conferred by cl 12.3(D). It is a right to acquire that Participating Interest on the 'terms and conditions described in clause 12.3(C)'. If some notion of equivalence had been intended to apply, the more likely point for its inclusion would have been in cl 12.3(D) as a right to acquire the Participating Interest on terms 'equivalent to' the 'terms and conditions described in clause 12.3(C)'. Furthermore, within cl 12.3 there are a number of references to the right to acquire the Participating Interest being on the 'terms and conditions described in cl 12.3(C)', rather than on the 'terms and conditions described in cl 12.3(C) as modified by reference to the requirement for equivalence in cl 12.3(F)'.
66 Secondly, the word 'equivalent' imports a concept of relativity: something must be 'equivalent to' something else. Yet if the phrase 'equivalent terms and conditions set out in the Clause 12.3(C) notice' is intended to describe all of the terms and conditions which are relevant to the Participating Interest and which are to be set out in cl 12.3(C), it is not clear to what those terms and conditions must be equivalent. For that reason, this construction would render cl 12.3(C) uncertain in its operation.56 That potential outcome strongly militates against the correctness of this construction.57
67 Thirdly, the importation of a test of 'equivalence' in relation to the terms and conditions which are relevant to the Participating Interest is not necessary in order for cl 12.3(C) to operate in a practical sense. Clause 12.3(C) is concerned with identifying terms from a Change in Control transaction agreement which will operate as the terms and conditions of an offer to acquire a Participating Interest. Those terms and conditions are likely to require some modification to enable them to operate in that different context. In my view it is implicit in cl 12.3(C) that such modification of those terms and conditions may be made. (I discuss these modifications further below.) In APT SEA Gas Holdings Pty Ltd v ANP SEA Gas Holdings Pty Ltd,Brereton J reached a similar conclusion. His Honour accepted that a pre-emptive rights clause could be construed as though it contained words to the effect that the terms of the offer must be the same as those of the proposed transaction 'mutatis mutandis and so far as relevant to the pre-emptive transaction'.58
68 Accordingly, in my view, the preferable construction of cl 12.3(F) is that the reference to 'the equivalent terms and conditions set out in the Clause 12.3(C) notice for cash' operates in relation to the determination of the consideration to be paid for the Participating Interest. That conclusion is strongly supported by the immediate context. The first sentence in cl 12.3(F) deals with the consideration to be paid for the acquisition of the Participating Interest. The right to acquire that Participating Interest (which is conferred by cl 12.3(D)) is qualified by cl 12.3(F) which makes clear that it is a right to acquire the Participating Interest for cash (rather than on the basis of some other consideration), and the price to be paid is the 'Cash Value on the equivalent terms and conditions… for cash'.
69 Viewed through that contextual prism, the reference to 'equivalent terms and conditions' in cl 12.3(F) in my view recognises that the terms and conditions in the cl 12.3(C) notice, in so far as they have a bearing on the consideration to be paid, must be understood as applying so as to result in an equivalent cash price for the acquisition of the Participating Interest, rather than in such other form of consideration as may have applied under the Change in Control transaction agreement.
70 That construction is also supported by the broader context. In the case of a Transfer which is not a Cash Transfer, or which involves other assets apart from the Participating Interest, cl 12.2(F)(3) provides that each other Party has the 'right to acquire such Participating Interest on the same final terms and conditions as were negotiated with the proposed transferee except that it shall pay the Cash Value… in lieu of the consideration payable in the third party offer, and the terms and conditions of the applicable instruments shall be modified as necessary to reflect the acquisition of a Participating Interest for cash'. As I have already observed, it is apparent that cl 12.2(F) and cl 12.3 establish parallel procedures for the exercise of rights of pre-emption in the case of a Transfer and a Change in Control. The construction of the words 'equivalent terms and conditions' in cl 12.3(F) which I prefer would have the result that the operation of that clause would be very similar to clause 12.2(F)(3).
(iii) Does the phrase 'on the equivalent terms and conditions set out in the Clause 12.3(C) notice' in cl 12.3(F) apply to the identification of the terms and conditions set out in the cl 12.3(C) notice?
71 For the reasons above, the phrase 'on the equivalent terms and conditions set out in the Clause 12.3(C) notice' does not constitute a basis for modifying the content or operation of the terms and conditions of the Viraciti SPA, or such of those terms and conditions as are relevant to the Participating Interest, to achieve some general measure of 'equivalence' with the position of Viraciti under the Viraciti SPA. The only modifications which may be made to the terms and conditions from the Change in Control transaction agreement which are relevant to the Participating Interest are of two kinds. First, modifications may be made as are necessary to reflect the fact that the offer constituted by those terms and conditions identified in the cl 12.3(C) notice is an offer by the Acquired Party to sell only the Participating Interest to the other Parties to the Spar JOA. Secondly, the terms and conditions in the cl 12.3(C) notice, in so far as they have a bearing on the consideration to be paid, may be modified so as to make clear that the Participating Interest will be acquired for cash (determined in accordance with the definition of 'Cash Value' in the Spar JOA), rather than on the basis of such other form of consideration as may have been contemplated in the Change in Control transaction agreement.
72 Consequently, I do not accept the defendants' contention that, in preparing the Notices, it was proper to identify those terms and conditions of the Viraciti SPA which were relevant to their Participating Interest, and then to adjust those terms to reflect and replicate the same legal and commercial outcomes for Santos in relation to the Participating Interests as the legal and commercial outcomes for Viraciti.59
73 Having said that, I have reached the conclusion that Santos' action must succeed primarily because the challenged Conditions were not conditions which were 'relevant to' each defendant's Participating Interest or were otherwise inconsistent with cl 12.3 of the Spar JOA.
74 For completeness, I note that the Notices failed to include a number of terms and conditions from the Viraciti SPA which are clearly relevant to the assets of Apache Energy and those of its subsidiaries which were acquired under the Viraciti SPA (including each Participating Interest). Counsel for the defendants did not demur from that conclusion.60 There was nothing whatsoever in the Notices to suggest that the offer in each Notice, if accepted, was intended to constitute an agreement to agree on more comprehensive terms for the acquisition of the Participating Interest.61 Subject only to a very clearly expressed contrary intention, the terms of cl 12.3(C) of the Spar JOA would in any event have strongly militated against that construction of each Notice. However, it was not part of Santos' case that the Notices failed to comply with the requirements of cl 12.3 of the Spar JOA because they did not set out all terms and conditions relevant to the Participating Interest. It is, therefore, not necessary to further explore this issue.
(iv) Is cl 12.3 uncertain and therefore unenforceable?
75 The defendants' case was that if the construction of cl 12.3 for which they contended was not accepted, then cl 12.3 would necessarily be uncertain and unenforceable 'because it does not prescribe the process by which the Change in Control terms and conditions are to be adjusted to reflect and replicate the same legal and commercial outcomes for the plaintiff in relation to the Participating Interests as the legal and commercial outcomes for [Viraciti] under the Viraciti SPA'.62
76 A contract will only be considered uncertain and thus unenforceable if its terms are 'so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention'.63
77 That is not the case here. The words in cl 12.3 evince a clear meaning. That clause clearly outlines the means for identifying the terms and conditions of a Change in Control transaction agreement which will constitute the offer to sell the Acquired Party's Participating Interest to the other Parties to the Spar JOA. The test of 'relevance' is hardly uncommon in commercial and legal contexts and can be readily applied. Furthermore, the modifications which may be made to those terms and conditions identified as being relevant to the Participating Interest are confined in their scope. The permissible modifications are solely those which reflect the fact that those terms and conditions are to constitute an offer by the Acquired Party to sell the Participating Interest to the other Parties to the Spar JOA (rather than terms and conditions of a Change in Control transaction), and that the Participating Interest is to be acquired for cash (rather than by such other form of consideration as may have been contemplated in the Change in Control transaction).
4. Why each of the challenged Conditions fails to comply with the requirements of cl 12.3 of the Spar JOA and is invalid
78 In my view, each of the challenged Conditions failed to comply with the requirements of cl 12.3 of the Spar JOA.
Conditions (c) and (d) - purchase price adjusted at the date of Completion
79 Using the Notice from Apache Oil as an example, conditions (c) and (d) provide:
(c) The Economic Transfer date is 12.01am (Western Australia time) on 1 October 2014.
(d) Therefore, the Purchase Price payable by Santos is the Cash Value, adjusted at the date of Completion as follows:
(i) by adding all costs and expenses paid or incurred by Apache Oil from the Economic Transfer Date in relation to the [Participating Interest];
(ii) by deducting all revenues or receipts received by Apache Oil from the Economic Transfer Date in relation to the [Participating Interest].
81 The defendants' case is that Viraciti thus assumes the benefit and burden of all the assets and liabilities of Apache Oil, Apache East Spar and Apache Kersail from the Economic Transfer Date.68 Counsel for the defendants submitted that conditions (c) and (d) ensure that a purchase by Santos of the Participating Interests will occur on equivalent terms and conditions in respect of price adjustments. They submitted that that approach was mandated by the proviso in the definition of 'Cash Value' in the Spar JOA because 'without replicating the terms of clause 8.1(b), there would be no reference point for the purposes of the proviso in the definition of 'Cash Value''.69
82 I am unable to accept that conditions (c) and (d) comply with the requirements of cl 12.3 of the Spar JOA for three reasons. First, in the case of a Change in Control, the price to be paid for the acquisition of the Participating Interest is determined by reference to the 'Cash Value'. The Cash Value is the market value of the Participating Interest, based upon the amount in cash a willing buyer would pay a willing seller in an arm's length transaction.70 Clearly an objective test is involved.71 That criterion is subject to a proviso when a Change in Control transaction is involved. The proviso is that the Cash Value is to yield the transferor the same after-tax cash proceeds that would have been obtained from the particular Change in Control transaction (whether that involved a merger or a sale of shares).
83 Conditions (c) and (d) are not consistent with the requirements of cl 12.3 of the Spar JOA because they seek to substitute a criterion for determining the price to be paid for the Participating Interest which departs from the criterion set out in the definition of 'Cash Value'. The proposed purchase price under condition (d) is not the Cash Value but the Cash Value adjusted by reference to expenses and revenues of the Acquired Party within a particular timeframe.
84 Furthermore, an objective assessment of the market value of the Participating Interest will require an assessment of its value as at the date of the acquisition of the Participating Interest. In contrast, conditions (c) and (d) require that the adjustments to the Cash Value are assessed by reference to expenses and revenues of the Acquired Party from an earlier point in time. In that respect also, conditions (c) and (d) seek to substitute a criterion for determining the price to be paid which is different from the criterion set out in the definition of 'Cash Value'.
85 Secondly, conditions (c) and (d) derive no support from cl 12.3(F) of the Spar JOA. As I have already observed, cl 12.3(F) recognises that the terms and conditions in the cl 12.3(C) notice, in so far as they have a bearing on the consideration given for the Change in Control of the Participating Interest, must be understood to apply so as to result in a cash price for the acquisition of the Participating Interest, rather than some other form of consideration.
86 Thirdly, even leaving these difficulties to one side, condition (d) does not replicate s 8.1(b) of the Viraciti SPA. Its terms are significantly different from s 8.1(b) of the Viraciti SPA.
Condition (e) - requirement to acquire all of the Participating Interests
87 Using the Notice from Apache Oil as an example, condition (e) is in the following terms:
(e) Consistent with the terms of the Change in Control transaction [ie the Viraciti SPA], Santos must exercise its rights under cl 12.3 of the [Spar JOA] in respect of each of the notice given by [Apache Oil, Apache Kersail, Apache East Spar] to acquire the same interests transferred in accordance with the Change in Control transaction.
88 The defendants' case is that under the Viraciti SPA, Viraciti agreed by a single covenant in a single transaction to purchase from the Vendors all of the shares in Apache Energy and thereby acquired ownership of the defendants and all of their assets including all of the Participating Interests.72 Counsel for the defendants submitted that Viraciti thus contracted to purchase all of the Participating Interests or none at all, with the result that an 'equivalent' offer to Santos must be on the condition that it acquires all of the Participating Interests.73 I am unable to agree, for the following three reasons.
89 First, there is nothing in the Viraciti SPA to indicate that it was a condition of that agreement that Viraciti would acquire ownership of all of the assets of Apache Energy's subsidiaries, and in particular of each of the Participating Interests. No doubt that would be a consequence of the acquisition of all of the shares and voting rights in Apache Energy but it was not a condition of the Viraciti SPA itself. Furthermore, the Viraciti SPA expressly contemplated that some assets may be subject to pre-emptive rights. The Viraciti SPA establishes a procedure for dealing with pre-emptive rights74 which may be held by other persons in relation to assets of, or interests in, the Vendors or their subsidiaries.75 The Viraciti SPA expressly provides that the Purchase Price payable under the Viraciti SPA will not be affected by the exercise of any pre-emptive rights. Instead, in the event that a holder of a pre-emptive right validly exercises that right, the consideration which is paid for the acquisition of the asset or interest in question is to be treated as an asset of the company from which that asset or interest is acquired, and no adjustment is to be made to the Purchase Price payable under the Viraciti SPA itself.76 The manner in which the exercise of pre-emptive rights is treated under the Viraciti SPA confirms that that agreement was not conditional on the acquisition of all of the Participating Interests. Consequently, it cannot be said that condition (e) in each of the Notices constitutes a condition drawn from the Viraciti SPA which is relevant to each of the Participating Interests in question.
90 In addition, counsel for the defendants submitted that if Santos were able to acquire the Participating Interest of only one of the defendants then it would be able to 'make the acquisition for a price which did not yield the same proceeds as the Viraciti SPA'.77 Having regard to the fact that under the Spar JOA the exercise of a pre-emptive right does not alter the Purchase Price payable under the Viraciti SPA, that submission cannot be accepted.
91 Secondly, for the reasons set out above, condition (e) cannot be supported on the basis that it would produce an 'equivalent' position to the legal and commercial position of Viraciti under the terms and conditions in the Viraciti SPA.
92 Thirdly, counsel for the defendants submitted that it would be an 'anomalous' consequence that each of Apache Oil, Apache East Spar and Apache Kersail would be entitled to a right to acquire the other's Participating Interests. In my view no anomaly arises at all. As I have noted above, cl 12.3 expressly confers a right on each other Party to the Spar JOA to acquire the Participating Interest of an Acquired Party. The fact that Apache Oil, Apache East Spar and Apache Kersail are all subsidiaries of Apache Energy does not detract from their individual standing under the Spar JOA. Each of those parties is a Party to the Spar JOA and owns a discrete Participating Interest under the Spar JOA. There is no basis for construing the references in cl 12.3 to 'each other Party' as meaning only 'such other Parties as are not themselves subject to a Change in Control'.
Condition (j) - indemnification of the Acquired Party
93 Using the Notice from Apache Oil as an example, condition (j) is in the following terms:
(j) From Completion, Santos will be required to indemnify Apache Oil against all costs and liabilities in respect of the [Participating Interest] which may accrue or arise on or after the Economic Transfer Date. Santos will be required to indemnify Apache Oil against environmental costs, claims or liabilities regardless of when the circumstance giving rise to such costs, claims or liabilities may have occurred.
94 The defendants' case is that condition (j) reflects the obligations set out in s 9.1(b), s 9.2(b), s 9.3(b) and s 9.11(a) of the Viraciti SPA.78 Counsel for Viraciti submitted that without condition (j) Santos would be able to purchase the Participating Interests on terms which are not 'equivalent to' those terms in the Viraciti SPA.
95 The first question is whether condition (j) is a term drawn from the terms and conditions from the Viraciti SPA which is 'relevant to' the Participating Interest of the Acquired Party in question, modified (if necessary) so as to limit the operation of that term to the Participating Interest alone.
96 I do not accept that condition (j) derives support from s 9.1(b) of the Viraciti SPA. That section provides that Viraciti shall indemnify the Vendors against any and all Claims against them, and all Losses and Liabilities suffered 'as a direct result of any breach of a representation, warranty or covenant' of Viraciti as set out in the Viraciti SPA. On its face, that indemnity is not 'relevant to' the assets acquired by virtue of the Change in Control, including the Participating Interests of the defendants. In its operation it might be relevant to those assets, if the representations, warranties or covenants referred to themselves pertain to the assets acquired. But condition (j) is not expressed as being subject to any term or condition reflecting a warranty, representation or covenant given by the Acquiring Party in respect of the Participating Interest, and consequently, there is no connection between s 9.1(b) (as purportedly reflected in condition (j)) and the Participating Interest.
97 Under s 9.2(b) of the Viraciti SPA, Viraciti and Apache Energy agree to indemnify the Vendors (that is, the Apache group) from all losses and liabilities in respect of Environmental Liabilities in respect of the assets, properties or interests of the Companies or their subsidiaries. In addition, under s 9.3(b), Viraciti and Apache Energy agree to indemnify the Vendors from and against any and all claims, losses and liabilities relating to the Business, the Shares, the Subsidiaries and their subsidiaries. (The term 'Business' means 'the businesses carried out by the Companies and/or the Subsidiaries, including as operator or in their capacity as a joint venture participant or interest holder under the Title and Operating Documents'.79)
98 In my view, those terms are 'relevant to' the Participating Interest because the liabilities for which Viraciti is to indemnify the Vendors may include liabilities which may arise from Viraciti's exercise of its rights of ownership in respect of the assets of Apache Energy's subsidiaries, including the Participating Interest. In that sense, the indemnity given is one which bears upon, or is closely connected to, each Participating Interest.
99 Counsel for Santos submitted that s 9.2(b) of the Viraciti SPA is expressly subject to the warranties given by the Vendors, including the warranty in s 4.1(w) which is a warranty that, to the Vendors' knowledge, no Environmental Liabilities have arisen within the previous 24 months. Counsel for Santos submitted that Santos was not given the benefit of that warranty, and consequently condition (j) imposed an obligation larger than the obligation imposed on Viraciti.
100 That submission highlights the fact that it is apparent that the Notices do not set out all of the terms and conditions of the Viraciti SPA which are 'relevant to' the Participating Interest. By way of example, certain warranties are given by the Vendors in respect of assets held by them or their subsidiaries, including a warranty that each company and subsidiary holds the rights, title and interest in each Title listed in Schedule E to the Viraciti SPA.80 (That list includes the interest of each of Apache Oil, Apache East Spar and Apache Kersail in the Production Licence.) Similarly, the Vendors warrant that no company or subsidiary is in material breach of any of the terms and conditions applicable to any title.81 And the Vendors warrant that, to their knowledge, the Business and the operations thereof are in compliance with applicable environmental laws, and no material claims are pending under environmental laws with respect to the subsidiaries or the Business or the operation thereof.82
101 In condition (h) of each of the Notices, each of the defendants warrants that it has 'good title to the Offered Interest, subject to encumbrances arising under the terms of the Spar JOA and under applicable laws. All other warranties are expressly excluded'.
102 For present purposes it is not necessary to explore this issue further because the fact that the Notices do not set out all of the warranties given by the Vendors in respect of assets under the Viraciti SPA, and consequently do not set out all of the terms and conditions which are relevant to the Participating Interests, was not a pleaded basis for challenging the Notices.
103 Returning to condition (j), the indemnities given by Viraciti under s 9.2(b) and s 9.3(b) of the Viraciti SPA are expressly subject to the warranties given by the Vendors. Because condition (j) is not said to be subject to any warranties, I do not accept that condition (j) reflects s 9.2(b) or s 9.3(b) with only such modifications as are required to reflect the acquisition of the Participating Interest by a party to the Spar JOA.
104 Furthermore, for the reasons outlined above at [62] - [70], I do not accept that condition (j) can be supported on the basis that it meets a requirement of equivalence to the terms and conditions of the Viraciti SPA which are relevant to the Participating Interest.
105 Consequently, in my view, condition (j) does not comply with the requirements of cl 12.3(C).
Condition (k) - payment of the final Part 2 Payment under the Spar SPA
106 Using the Notice from Apache Oil as an example, condition (k) is in the following terms:
(k) Without limiting the foregoing, Santos will be required from Completion to assume any payment obligation of Apache Oil arising under the [Spar SPA] including any further payment to be made in respect of the 'Part 2' payment referred to in the Agreement.
107 The Purchase Price under the Spar SPA was payable in up to three instalments. The first was paid by Apache Oil, Apache East Spar, and Apache Kersail in September 2010.83 The second instalment was paid by Apache Oil, Apache East Spar and Apache Kersail in October 2011.84 The third instalment is not yet payable. The quantum of that third instalment must be calculated in accordance with a formula under the Spar SPA by reference to the estimated petroleum reserves available in respect of the Production Licence. There was no dispute that the third payment may be as low as $0 or as high as more than $US54 million.85 There was also no dispute that under the Spar SPA, each of Apache Oil, Apache East Spar and Apache Kersail is severally liable to pay the third instalment of the purchase price to the extent of its relevant portion.86
108 The defendants' case is that under the Viraciti SPA, Viraciti agreed to assume the obligation of the defendants to fund any further payment that may become due to Santos under the Spar SPA, and that by Article 9.3(a) of the Viraciti SPA, Viraciti agreed to cause the Companies (and their subsidiaries) to meet all of their obligations, including obligations in respect of operations relating to the business carried out by those Companies.87 Counsel for the defendants submitted that those obligations included the payment obligations in cl 4 of the Spar SPA. They submitted that the 'principle of equivalency in clause 12' requires that Santos assume the like obligation.88
109 The effect of that submission, if accepted, would be that Santos would be required to assume the obligation of each of the defendants to pay the third instalment of the Purchase Price which is payable under the Spar SPA. In other words, Santos would be required to pay that third instalment to itself. That outcome, with respect, would be absurd.
110 There are two reasons why condition (k) does not comply with the requirements of cl 12.3 of the Spar JOA.
111 First, s 9.3(a) of the Viraciti SPA is not a term of that agreement which is 'relevant to' the assets of the Companies acquired or their subsidiaries, including the Participating Interests. Section 9.3(a) contains an obligation on Viraciti to cause the Companies and their subsidiaries to engage in particular conduct. That obligation does not bear upon, or operate upon, the assets of those Companies or their subsidiaries. And while the operations of the Business are connected with the use of the Participating Interest, the obligations of those Companies or their subsidiaries in relation to the operations of the Business, cannot be described as being so closely connected to the Participating Interest to warrant characterisation as 'relevant to' the Participating Interest.
112 Secondly, even if s 9.3(a) may properly be characterised as a term or condition which is 'relevant to' the Participating Interest, condition (k) does not reflect the terms of that clause modified only as necessary to reflect that the Participating Interest is to be acquired by a Party to the Spar JOA. The Payment of the third instalment of the Purchase Price under the Spar JOA cannot be characterised as an obligation in respect of the operation of the Business. The liability of each of the defendants to pay the Purchase Price under the Spar SPA constitutes a debt owed by each of them to Santos. It is not an obligation of each of the defendants in relation to the 'Business'. It is not an obligation which arises under the Spar JOA. Counsel for Santos submitted that the obligation was akin to an obligation to repay a loan advanced in the form of vendor finance. I accept that submission.
113 Accordingly, condition (k) does not comply with the requirements of cl 12.3 of the Spar JOA.
5. Issues relevant to the relief sought: severance and specific performance
114 Santos' primary case was that the Court should declare each of the Notices wholly invalid. I am satisfied that declarations of that kind should be made here.
115 I should add that I have given consideration to whether the challenged Conditions might be severed from the Notices. In Tern Minerals NL v Kalbara Mining NL,89 Ipp J considered whether a notice constituting an offer to sell, made pursuant to a contractual right of pre-emption, was invalid. One of the issues which arose was whether a term in the notice, which was void for uncertainty, could be severed from the notice itself. His Honour resolved that question having regard to the intention of the parties (the offer in the notice having been accepted).
116 Assuming that the intentions of all of the parties, as manifested in the Spar JOA, are relevant to the question of severability in this case, in my view the terms and conditions set out in a cl 12.3(C) notice cannot be regarded as divisible. Clause 12.3(C) requires that 'such terms and conditions' (that is, all of them) must be accepted without reservations or conditions in order to constitute an acceptance of the offer. There can be no doubt that the Notices were prepared on that basis.
117 Finally, I turn to the question of specific performance. In my view, this is not an appropriate case for an order for specific performance. Nothing in the facts before the Court suggests that the defendants do not intend to comply with their obligation to give a notice which complies with cl 12.3 of the Spar JOA. Once declarations are made that the Notices are invalid, the obligation on the defendants to issue a Notice will be re-enlivened.
Orders
118 I will hear from the parties as to the form of the orders which should be made.
Annexure 1
Spar JOA - Clause 12 (extracts)
12.1(B) For the purposes of this Agreement:
'Cash Transfer' means any Transfer where the sole consideration (other than the assumption of obligations relating to the transferred participating Interest) takes the form of cash, cash equivalents, promissory notes or related interests (such as production payments ) in the Participating Interest being transferred.
'Cash Value' means the market value (expressed in U.S. dollars) of the Participating Interest subject to the proposed Transfer or Change in Control, based upon the amount in cash a willing buyer would pay a willing seller in an arm's length transaction; provided, that, in the case of a Change in Control, the Cash Value shall be computed to yield the transferor the same after-tax cash proceeds that would have been obtained from the merger or stock sale comprising the Change in Control transaction(s).
12.2(F) Any Transfer of all or a pro rata percentage (but not a constituent part) of a Party's Participating Interest … shall be subject to the following procedure.
(1) Once the final terms of a Transfer have been fully negotiated, the transferor shall disclose all such final terms and conditions as are relevant to the acquisition of the Participating Interest (and, if applicable, the determination of the Cash Value of the Participating Interest) in a notice to the other Parties, which notice shall be accompanied by a copy of all instruments or relevant portions of instrument establishing such terms and conditions. Each other Party shall have the right to acquire the Participating Interest subject to the proposed Transfer from the transferor on the terms and conditions described in Clause 12.2F(3) if, within 30 Days of the transferor's notice, such Party delivers to all other Parties a counter-notification that it accepts such terms and conditions without reservations or conditions (subject to Clauses 12.2F(3) and12.2(F)(4), where applicable, and other than the attainment of any necessary Government approvals). If no Party delivers such counter-notification, the Transfer to the proposed transferee may be made, subject to the other provisions of this Clause 12, under terms and conditions no more favourable to the transferee than those set forth in the notice to the Parties, provided that the Transfer shall be concluded within 180 Days from the date of the notice plus such additional period as may be required to secure governmental approvals. No Party shall have a right under this Clause 12.2(F) to acquire any asset other than a Participating Interest, nor may any Party be required to acquire any asset other than a Participating Interest, regardless of whether other properties are included in the Transfer.
(2) If more than one Party counter-notifies that it intends to acquire the Participating Interest subject to the proposed Transfer, then each such Party shall acquire a proportion of the Participating Interest to be transferred equal to the ratio of its own Participating Interest to the total Participating Interests of all the counter-notifying Parties, unless the counter-notifying Parties otherwise agree.
(3) In the event of a Cash Transfer that does not involve other properties as part of a wider transaction, each other Party shall have a right to acquire the Participating Interest subject to the proposed Transfer on the same final terms and conditions as were negotiated with the proposed transferee. In the event of a Transfer that is not a Cash transfer or involves other properties included in a wider transaction (package deal), the transferor shall include in its notification to the other Parties a statement of the Cash Value of the Participating Interest subject to the proposed Transfer, and each other Party shall have a right to acquire such Participating Interest on the same final terms and conditions as were negotiated with the proposed transferee except that it shall pay the Cash Value in immediately available funds at the closing of the Transfer in lieu of the consideration payable in the third party offer, and the terms and conditions of the applicable instrument shall be modified as necessary to reflect the acquisition of a Participating Interest for cash. In the case of a package sale, no Party may acquire the Participating Interest subject to the proposed package sale unless and until the completion of the wider transaction (as modified by the exclusion of properties subject to pre-emptive rights or excluded for other reasons) with the package sale transferee. If for any reason the package sale terminates without completion, the other Parties' right to acquire the Participating Interest subject to the proposed package sale shall also terminate.
- (4) For the purposes of Clause 12.2(F)(3), the Cash Value proposed by the transferor in its notice shall be conclusively deemed correct unless any Party (each a 'Disagreeing Party') gives notice to the transferor with a copy to the other Parties within 10 Days of receipt of the transferor's notice stating that it does not agree with the transferor's statement of the Cash Value, stating the Cash Value it believes is correct, and providing any supporting information that it believes is relevant. In such event, the transferor and the Disagreeing Parties shall have 15 Days in which to attempt to negotiate an agreement on the applicable Cash Value. If no agreement has been reached by the end of the 15 Day period, either the transferor or any Disagreeing Party shall be entitled to refer the matter to an independent expert as provided in Clause 18.3 for determination of the Cash Value.
- …
12.3(B) Any Change in Control of a Party shall be subject to the following procedure.
12.3(C) Once the final terms and conditions of a Change in Control have been fully negotiated, the Acquired Party shall disclose the final terms and conditions as are relevant to its Participating Interest, including the date of the Change in Control, and its determination of the Cash Value of that Participating Interest in a notice to the other Parties. The notice shall be accompanied by a copy of all instruments or relevant portions of instruments establishing such terms and conditions and which will constitute, subject to this Clause 12.3, an offer to sell such Party's Participating Interest to the other Parties.
12.3(D) Each other Party shall have the right to acquire the Acquired Party's Participating Interest on the terms and conditions described in Clause 12.3(C) if, within sixty (60) Days of the Acquired Party's notice, such Party delivers to all other Parties a counter-notification that it accepts such terms and conditions without reservations or conditions (subject to the terms of this clause 12.3, where applicable, and other than the attainment of any necessary Government approvals). If no Party delivers a counter-notification, the Change in Control may proceed without further notice, subject to the other provisions of this Clause 12, under terms and conditions no more favourable to the Acquiror than those set forth in the notice to the Parties, provided that the Change in Control shall be concluded within one hundred eighty (180) Days from the date of the notice plus such additional period as may be required to secure Governmental approvals. No Party shall have a right nor any obligation under this clause 12.3 to acquire any asset other than a Participating Interest, regardless of whether other properties are subject to the Change in Control.
12.3(E) If more than one Party counter-notifies that it intends to acquire the Participating Interest subject to the proposed Change in Control, then each such Party shall acquire a proportion of that Participating Interest equal to the ratio that its own Participating Interest represents to the total Participating Interests of all of the counter-notifying Parties, unless the counter-notifying Parties agree otherwise.
12.3(F) Each other Party shall have a right to acquire the Participating Interest of the Acquired Party for the Cash Value on the equivalent terms and conditions set out in the Clause 12.3(C) notice for cash. No Party may acquire the Acquired Party's Participating Interest pursuant to this Clause 12.3, unless and until completion of the Change in Control. If, for any reason, the Change in Control agreement terminates without completion, the other Parties' rights to acquire the Participating Interest under this Clause shall also terminate.
12.3(G) The Cash Value proposed by the Acquired Party in its notice under clause 12.3(F) shall be conclusively deemed correct unless any Party (each a Disagreeing Party) gives notices to the Acquired Party with a copy of the other Parties within twenty one (21) Days of receipt of the Acquired Party's notice stating that it does not agree with the Acquired Party's statement of the Cash Value, stating the Cash Value it believes is correct, and providing any supporting information that it believes is relevant. In such event, the Acquired Party and the Disagreeing Parties shall have fifteen (15) Days in which to attempt to negotiate an agreement on the applicable Cash Value. If no agreement has been reached by the end of the twenty one (21) Day period, either the Acquired Party or any Disagreeing Party shall be entitled to refer the matter to an independent expert as provided in Clause 18.3 for determination of the Cash Value.
1 Contained in affidavit of Michael Hackett affirmed 5 June 2015 and attachments MH1 - MH21 (exhibit 1), attachment MH2.
2 Exhibit 1.
3 Affidavit of Phillip Sidney Redmond Jackson sworn 16 June 2015 and attachment PJ1 (exhibit 2).
4 Known as Petroleum Retention Lease WA-4-R.
5 Petroleum Production Licence WA-45-L.
6 Each of Apache Oil, Apache Kersail, Apache East Spar and Santos is referred to as a Party, and they are collectively known as the Parties, under the Spar JOA.
7 As defined in cl 1.46 of the Spar JOA.
8 As defined in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth); see cl 1.64 of the Spar JOA.
9 Spar JOA cl 1.62.
10 Apache International Finance II SARL, Apache Finance Pty Ltd and Apache Ravensworth Corporation LDC.
11 Contained in exhibit 1, attachment MH12.
12 Spar JOA cl 1.12.
13 Exhibit 2 [10].
14 Exhibit 1, annexure MH9.
15 Exhibit 1, annexure MH9.
16 Exhibit 1, annexure MH9.
17 Spar JOA cl 1.16.
18 Spar JOA cl 12.1(A)(ii).
19 Spar JOA cl 12.1(B) definition of 'Transfer'.
20 Spar JOA cl 12.1(A)(i).
21 Spar JOA cl 12.1(A).
22Electricity Generation Corporation v Woodside Energy Ltd[2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ); Pacific Carriers Ltd v BNP Paribas[2004] HCA 35; (2004) 218 CLR 451 [22] (Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[2004] HCA 52; (2004) 219 CLR 165 [40].
23Electricity Generation Corporation v Woodside Energy Ltd[2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ); Pacific Carriers Ltd v BNP Paribas[2004] HCA 35; (2004) 218 CLR 451 [22] (Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[2004] HCA 52; (2004) 219 CLR 165 [40].
24Electricity Generation Corporation v Woodside Energy Ltd[2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ); Pacific Carriers Ltd v BNP Paribas[2004] HCA 35; (2004) 218 CLR 451 [22] (Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[2004] HCA 52; (2004) 219 CLR 165 [40].
25Electricity Generation Corporation v Woodside Energy Ltd[2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ).
26Electricity Generation Corporation v Woodside Energy Ltd[2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan & Kiefel JJ), citing Zhu v Treasurer (NSW)[2004] HCA 56; (2004) 218 CLR 530 [82] (Gleeson CJ, Gummow, Kirby, Callinan & Heydon JJ).
27Australian Broadcasting Commission v Australasian Performing Rights Association Ltd(1973) 129 CLR 99, 109 (Gibbs J, in dissent, but not on this point of principle); Distillers Co Biochemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd(1974) 130 CLR 1, 11 (Gibbs J).
28Fitzgerald v Masters(1956) 95 CLR 420, 437 (McTiernan, Webb & Taylor JJ).
29Wilkie v Gordian Runoff Ltd[2005] HCA 17; (2005) 221 CLR 522 [16] (Gleeson CJ, McHugh, Gummow & Kirby JJ); Australian Broadcasting Commission v Australasian Performing Rights Association Ltd(1973) 129 CLR 99, 109 (Gibbs J, in dissent, but not on this point of principle).
30Beaconsfield Gold NL v Allstate Prospecting Pty Ltd[2006] VSC 320 [33] (Hargrave J); see also Goldus Pty Ltd v Australian Mining Pty Ltd[2015] SASC 32 [89] (Parker J).
31Beaconsfield Gold NL v Allstate Prospecting Pty Ltd[2006] VSC 320 [34] (Hargrave J).
32THL Robina Pty Ltd v The Glades Gold Club Pty Ltd [2004] QSC 461 [49] (Chesterman J).
33 See, for example, THL Robina Pty Ltd v The Glades Gold Club Pty Ltd[2004] QSC 461 [49] (Chesterman J); Re A Lease between Permanent Trustee Australia Ltd and Woolworths (Queensland) Pty Ltd(Unreported, QSC, No 9507 of 1998, 6 November 1998) (Moynihan J); Fimiston Mining NL v Western Reefs Ltd(Unreported, WASC, Library No 950633, 22 November 1995) (Steytler J); Simsmetal Ltd v Wanless Metal Industries Pty Ltd(Unreported, NSWSC, 19 March 1997) (Cohen J).
34 Spar JOA cl 12.3(B).
35 Spar JOA cl 12.3(A).
36 Spar JOA cl 12.3(D).
37 Spar JOA cl 12.3(D); see also cl 12.3(F) and cl 12.3(E).
38 If no counter-notification is given, the Change in Control may proceed on the same final terms and conditions as proposed: see Spar JOA cl 12.3(D).
39 Spar JOA cl 12.3(F).
40 Spar JOA cl 12.3(E).
41 Spar JOA cl 12.3(D).
42THL Robina Pty Ltd v The Glades Gold Club Pty Ltd [2004] QSC 461 [45] - [50] (Chesterman J).
43 Spar JOA cl 12.3(F).
44 Spar JOA cl 12.2(F).
45 Spar JOA cl 12.2(F)(1).
46 Spar JOA cl 12.2(F)(1).
47 Spar JOA cl 12.3(F)(1).
48 Spar JOA cl 12.2(F)(3).
49 Spar JOA cl 12.2(F)(3).
50 Spar JOA cl 12.2(F)(4) - (6).
51 Macquarie Dictionary Online; Oxford English Dictionary Online.
52 Oxford English Dictionary Online.
53 Spar JOA cl 12.2(F)(1).
54 Macquarie Dictionary Online; Oxford English Dictionary Online.
55 Oxford English Dictionary Online.
56Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd[1968] HCA 8; (1968) 118 CLR 429, 436 (Barwick CJ).
57Australian Goldfields NL (in liq) v North Australian Diamonds NL [2009] WASCA 98; (2009) 40 WAR 191 [7] (McLure P), [141] (Buss JA), [52] (Pullin JA agreeing).
58 cf APT SEA Gas Holdings Pty Ltd v ANP SEA Gas Holdings Pty Ltd[2010] NSWSC 1221 [50] (Brereton J) (unsuccessfully appealed, although this point was not addressed, in REST SEA Gas Pipelines Pty Ltd v APT SEA Gas Holdings Pty Ltd[2010] NSWCA 296).
59 Defendants' written submissions [8].
60 ts 47 - 48.
61 See Masters v Cameron (1954) 91 CLR 353, 360 - 361.
62 Defence [7].
63Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd[1968] HCA 8; (1968) 118 CLR 429, 437 (Barwick CJ) citing G Scammell & Nephew Ltd v HC & JG Ouston[1941] AC 251, 268 (Lord Wright).
64 See Viraciti SPA s 2.5. Under the Viraciti SPA s 1.1, 'Closing' means 'the transfer of possession and beneficial ownership of the Shares from Vendors to Purchaser in accordance with this Agreement, the exchange of executed transfer documents and all other agreements …, payment of the Purchase Price … and delivery of all other items and consideration … to be delivered at the Closing Time'. The Closing Time is defined in s 1.1 to mean the later of either 15 June 2015 or a date after notification of the satisfaction or waiver of all conditions. Mr Jackson deposed that completion of the Viraciti SPA occurred on 5 June 2015: see exhibit 2 [8].
65 Viraciti SPA s 2.5.
66 The Economic Transfer Date is defined in s 1.1 of the Viraciti SPA as 12.01 am Western Australian time on 1 October 2014.
67 Viraciti SPA s 8.1.
68 Amended defence [11].
69 Defendants' written submissions [30].
70 See Spencer v Commonwealth of Australia[1907] HCA 82; (1907) 5 CLR 418, 440 - 442.
71 See, for example, Commissioner of State Taxation (WA) v Nischu Pty Ltd(1991) 4 WAR 437, 443.
72 Amended defence [12].
73 Defendants' written submissions [31] - [32].
74 The term 'pre-emptive rights' is defined in s 1.1 of the Viraciti SPA to mean a right of first refusal or offer, or pre-emptive or preferential purchase right, to purchase or otherwise acquire all or any portion of, assets or interests of one of the Vendor companies or any subsidiary thereof, or any participating interests of those companies in any title of, or operating documents to which those companies are party.
75 Viraciti SPA s 7.23.
76 Viraciti SPA s 7.23(d).
77 Defendant's written submissions [32].
78 Amended defence [13].
79 Viraciti SPA s 1.1.
80 Viraciti SPA s 4.1(m).
81 Viraciti SPA s 4.1(n).
82 Viraciti SPA s 4.1(w).
83 Amended statement of claim [11], amended defence [1].
84 Amended statement of claim [11], amended defence [1].
85 Amended statement of claim [12], amended defence [1].
86 Amended statement of claim [7], amended defence [1].
87 Amended defence [14].
88 Defendants' written submissions [39].
89Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486.
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