Stirling Resources Nl v Capital Energy Nl

[1996] FCA 222

IN THE FEDERAL COURT OF AUSTRALIA  )
  )
NEW SOUTH WALES DISTRICT REGISTRY  )     No NG 3201 of 1996
  )
GENERAL DIVISION                  )

BETWEEN:STIRLING RESOURCES NL

Applicant

AND:CAPITAL ENERGY NL

Respondent

CORAM:    HILL J
PLACE:    SYDNEY
DATED:    3 APRIL 1996

REASONS FOR JUDGMENT

Stirling Resources NL ("Stirling") applies to the Court for an interlocutory injunction restraining the respondent, Capital Energy NL ("Capital") from making offers to acquire shares in Stirling from its shareholders, pursuant to an offer referred to in a Part A Statement dated 5 March 1996 and intended to be distributed also to the shareholders with those offers.

On 7 March 1996 Capital served upon Stirling a Part A Statement relating to a takeover scheme pursuant to which Capital proposed to make offers for all of the fully paid ordinary twenty cent shares in Stirling.  By letter dated 18 March Stirling advised Capital that it regarded the Part A Statement as being inadequate and deficient in that it contained, so it was said, insufficient information for Stirling shareholders to make a proper and informed decision concerning the offers proposed to be made.  The letter set out
certain areas where it was said insufficient information had been provided.  The allegation was denied by Capital in a letter dated 21 March 1996.  Capital gave in the same letter notice of its intention to dispatch the Part A Statement as soon as possible after 22 March 1996.

The correspondence between the parties continued in a letter from Stirling to Capital dated 25 March 1996.  It was in this context that solicitors for Stirling sought an undertaking that offers not be despatched pursuant to the Part A Statement, failing which an application would be made to this Court.  The undertaking was not given, an application was then made to this Court the same day and ex parte injunctions made pending the application coming before me on 1 April 1996.

The Part A Statement is alleged to be deficient in three essential respects.  The first can be compendiously referred to as the way in which it deals with the procedure to be adopted where the offer is accepted by foreign shareholders.  The second concerns para18 of the Part A Statement concerning Capital's intentions regarding Stirling's business, said not to comply with cl20 of Part A of s750 of the Corporations Law ("the Law").  Finally, it is said, that the Part A Statement fails to address the effect of the offer on Capital.

The Part A Statement is, however, also criticised because it does not indicate whether it is proposed that Silksafe Pty Limited ("Silksafe") proposes to accept the offer, a matter having an impact on the thirty percent minimum acceptance condition.

It must be borne in mind that the present proceedings are interlocutory only.  In determining whether to grant an injunction pending the final hearing of the matter, I am required to consider whether there is an arguable issue to be tried and, if so, where the balance of convenience lies.  These two factors interact the one with the other: Trade Practices Commission v Santos Ltd (1992) 38 FCR 382 at 392.

I accept as the core principle underlying the takeover provisions of the Law: "the desirability of ensuring that the acquisition of shares in companies takes place in an efficient, competitive and informed market": Gantry Acquisition Corp v Parker & Parsley Petroleum Pty Ltd (1994) 51 FCR 554 per Sheppard J at 561 and see to the same effect the comments of Burchett J at 566.

I shall deal briefly first with the matters of complaint said to arise out of the Part A Statement and then the balance of convenience.

THE TREATMENT OF OVERSEAS SHAREHOLDERS
         Essentially, the takeover scheme involves a script offer: four shares in the capital of Capital for every one share in Stirling.

Clause 4.3 of the offer document is in the following terms:

"If your address as shown in the register of members of Stirling is a place outside Australia and its external Territories then you shall not be entitled to receive Capital Shares for your Stirling Shares by reason of your acceptance of this Offer and you will be a `foreign shareholder' for the purposes of this clause 4.3.  If you are a foreign shareholder and you accept this Offer, Capital will:

(a)arrange for the allotment to a nominee approved by the Stock Exchange (`Nominee') the number of Capital Shares issued in accordance with the Offers to which you and all other foreign shareholders would have been entitled but for this clause 4.3;

(b)cause the Capital Shares so allotted to be offered for sale in such manner, at such price and on such other terms and conditions as are approved by the Stock Exchange;

(c)pay to you the amount ascertained in accordance with the formula:

Net Proceeds  x    NS

of SaleTS

Where:

Net Proceeds of Sale is the amount
(if any) remaining after deducting from the proceeds of sale the expenses of the sale and the amounts (if any) payable to Capital in respect of the allotment of the Capital Shares; and

NS is the number of Capital Shares which would but for this Clause 4.3 otherwise have been allotted and issued to you; and

TS is the total number of Capital Shares allotted to the Nominee under this Clause 4.3 in respect of the Stirling Shares held by all foreign shareholders.

Payment will be made in Australian dollars, or if this is unlawful, the currency of the country of residence of the foreign shareholder (as shown in the register of Stirling shareholders)."

It may be noted that Capital obtained consent of the Australian Securities Commission, having regard to s636(1) of the Law, to permit the offer to be made in this form.

The submissions on behalf of Stirling point to the differential effect on the capital of Stirling of different percentages of foreign shareholders accepting the offer. For example, if 100 percent of Stirling shareholders accepted the offer then Capital would issue a total of 506,197,084 shares, 47,740,404 of those shares would be allotted to the nominee. In the result, Capital would then have 694,827,420 issued shares, of which 47,740,404 would be sold in accordance with the procedure laid down in s621(3) of the Law, comprising approximately 6.9 percent of Capital's total issued share capital.

On the other hand, if thirty percent of shareholders accept the offer, there would be a total issue of 151,859,128 shares, 14,322,121 of those shares would be allotted to the nominee and Capital would have a total of 342,988,744 issued shares, of which 14,322,121 (4.2 percent) would be sold in accordance with s621(3) procedure.

The Part A Statement and offer are criticised because they contain no information as to whether Capital has done anything to put in place the procedure set out in s621(3), such as identifying a nominee, setting out the manner, price and terms and conditions of the s621(3) sale procedure, or obtaining Stock Exchange approval thereto. It is said the Part A Statement contains no information about the effect that the sale of shares would have in the various alternative possibilities to which reference is made above, on Capital's share price, and that information of this kind is essential to both the foreign shareholders and the non-foreign shareholders. It is said that the information is material to the making of an informed decision by the foreign shareholders since the shareholder is entitled to know the price he or she is likely to receive, or at least is entitled to sufficient information about the procedure to be adopted to enable that price to be assessed, as well as to know the time at which he or she would receive the cash consideration.

It is submitted that the failure to provide this information is a breach of cl17 of Part A of s750 of the Law, as being a matter material to the making of the decision by the foreign shareholder whether to accept that offer.

It is also submitted that the failure to provide this information is a breach of cl11 of Part A of s750 of the Law. That clause provides as follows:

"If the consideration for the acquisition of the shares to which the takeover offers relate ... is to be satisfied in whole or in party by the payment of cash, the statement shall set out:

...

(b)if the offeror is not to provide all of the cash, or is not to provide any of it, from the offeror's own funds:

(i)particulars sufficient to identify the other person who is, or each of the other persons who are, to provide, whether directly or indirectly, some or all of the cash from that person's or those persons' own funds; and

(ii)particulars of the arrangements by which that cash will be provided by that other person or those other persons."

It is also submitted that the failure to provide information will be material to decisions made by local shareholders, whether or not to accept the offer.

Of the points raised, the most substantial seems to me to be the issue whether cl11(b) of s750 has been infringed.  This turns upon the question whether the consideration for the acquisition of the "foreign" shares is in fact cash or whether it is something else.  Looked at from the point of view of the provider of the consideration, it is clear that the consideration is not cash but rather shares.  Looked at from the point of view of the foreign shareholder, it may be said that the consideration is shares, in that the foreign shareholders will not receive script but rather the proceeds of the forced sale through nominees.

Although it is inappropriate to express a concluded view on the matter, I think that the correct analysis in the present circumstances is that the consideration is not cash but script, albeit that the script is to be sold.  This being so, I do not think that there is a breach of cl11(b).

The remaining criticisms stem from the nature of the mechanism adopted rather than breach of any particular provision of the Law. It is obvious that the number of shares ultimately to be put on the market will depend upon the number of foreign shareholders who accept the offer and the procedure which follows from that acceptance. Of course, there will be a large number of shares come on to the market. Of course, the quantum of shares which comes on the market will depend upon the percentage of foreign acceptances.

I do not think there is a requirement that various percentages be set out in the offer document in order that there be a fully informed market.  Nor do I think that the Part A Statement or offer offends any relevant principle by failing to indicate whether a nominee has been chosen or whether a timetable has yet been set up.  In my view, no arguable issue in these respects emerges.

CAPITAL'S INTENTIONS
         Paragraph 18 of the Part A Statement reads as follows:

"It is the intention of Capital that if the Takeover Scheme is successful and Capital's nominees constitute the majority of the directors on the board of Stirling:

(1)the business of Stirling and its subsidiaries will be continued in its present form.  It is intended to focus Stirling more on its core activities being petroleum exploration and production.  Stirling's investments which do not relate to petroleum exploration and production will be evaluated and their importance to the Stirling group assessed in terms of their strategic value and any future benefit they may bring to the Stirling group beyond the core asset activities.  The divestment of such non-core assets that produce a marginal return or have no strategic value to the Stirling group, may be considered.  In addition the acquisition of assets complimentary to Stirling's core activities will be considered although no particular assets have been identified at this stage;

(2)except for that outlined in paragraph (1) above no major changes are intended to be made to the business of Stirling or its subsidiaries, including any redeployment of the fixed assets of Stirling or any of its subsidiaries except that Capital will consider the pooling of office, administration and technical facilities of Capital and Stirling, where the pooling of such facilities would result in a long term reduction of overheads.  In future Capital would also consider co-operating with Stirling in the acquisition and exploration of assets jointly where this would benefit each company; and

(3)the staffing requirements of the combined Capital/Stirling group of companies will be reviewed.  The present employees of both Capital and Stirling will be given due consideration for continued employment in accordance with the requirements of the enlarged Capital group.  To the extent that there would be a duplication of functions or a decision made that particular functions should be discontinued, the employment of staff considered surplus to requirements may be terminated."

The criticism of this clause can be put very shortly.  First, it is said, that there is no criterion given for success of the takeover scheme.  Second, and more significantly, it is said that there is a lacuna in the information provided so that the intentions of Capital are set out only as applicable in certain circumstances but not in others.  Finally, it is said, that the intentions as recorded are expressed in such vague language as to be unintelligible.

Counsel for Capital was unable to indicate what the criterion of success was, whether it was thirty percent, being the satisfaction of the minimum condition, or whether it was some higher percentage, say in excess of fifty percent.  That is a difficulty in itself.  But more significantly, the intentions are set out only in a certain event, namely success of the takeover scheme and, in the result, the appointment of a majority of directors being nominees of Capital.  This leaves open what the intention of Capital would be if there was success (whatever that means), but there was not a majority of directors.

Clause 20 of Part A requires there to be set out particulars of the offeror's intentions regarding various matters.  It seems to me that that clause has been breached because the clause does not contemplate that there be set out particulars of intentions only in limited circumstances, but not other circumstances.  No doubt it would be possible to make the statement conditional upon offers under the takeover scheme being accepted, but that is not the point.

I should add that I do not think that the vagueness employed in the statement of intentions would be a sufficient ground for enjoining the sending out of the Part A Statement.

Another criticism made concerning para18 referred to correspondence passing between Mr Hovanessian, a director of Silksafe and formerly a director of Stirling, and Mr Humphries, Chairman of Stirling.  It is unnecessary to detail the matters set out in that letter.  It suffices to say that mention is made of a possible oil or gold float in the Philippines, involving Zephyr Minerals NL, a company 48.3 percent owned by Stirling.  Mr Hovanessian is the Managing Director of Capital and was a director of Stirling until 14 February 1996.  Reference is also made to correspondence from a Mr Fisher, who is a director of both Capital and Stirling.

The submission is that it can be inferred that both Mr Hovanessian and Mr Fisher have a detailed knowledge of the business and operation of Zephyr Minerals by reason of their directorship in both Stirling and Zephyr, and from the correspondence that they have formed views as to the future of Stirling's interest in Zephyr.  So it is said the views they have formed should have been included in the Part A Statement as involving the intentions of Capital.

I have great difficulty with this submission.  Let it be assumed that the correspondence does, as is submitted, contain views which can be said to be proposals intended to be put in place by Mr Hovanessian and Mr Fisher.  Why, it may be said rhetorically, must these views be contain in the Part A
Statement unless they are actually the view of Capital?  Views in the minds of individual directors not communicated to other directors nor made the subject of board decision, can not be taken as being the plans of the company of which the proponents are directors.  It is trite to say that a company can only act through its directors.  Likewise a company's intentions can only be judged by reference to the intentions of the directors, not the directors singly but the directors acting as a board.  There may be cases in which a particular person may be found as a fact to be the governing mind of a company so that that person's intentions may be taken as being the intentions of the company.  The present has not, however, been shown to be the case.  The failure to deal in the Part A Statement with matters the subject of views by Mr Hovanessian or Mr Fisher does not, in my view, require the conclusion that there has been a failure to comply with Part A of s750.

THE PROSPECTS/EFFECT OF THE OFFER ON CAPITAL
         The Part A Statement is criticised by counsel for Stirling because it does not address the possible situation which could arise if acceptances under the offer reach the level entitling Capital to move to 100 percent acquisition.  Particularly, it is said, that the documents says nothing about the commercial or ongoing financial effect on Capital of having doubled its size, assuming a thirty percent acceptance, or having increased its size fivefold assuming a fifty percent acceptance.  It is said that such an increase in capital would
have material effects on Capital. Failure to identify those effects is said to be failure to comply with s1022AA(2)(b)(i) of the Law and hence cl18 of Part A of s750 of the Law.

Section 1022AA(2)(b) relevant to a script offer requires there to be set out:

"... all such information as investors and their professional advisers would reasonably require, and reasonably expect to find ... for the purpose of making an informed assessment of:

(i)the effect of the offer ... on the disclosing entity ...".

The emphasis is on reasonableness. It is self-evident with a script offer that the capital structure of the offeror will vary depending upon acceptances. This is even more so where in the case of some accepting shareholders their shares will be sold on the market. As presently advised I do not see how it can reasonably be expected that various alternative scenarios should be dealt with in the manner suggested by counsel in the Part A Statement. I do not think that the alleged deficiency would be of a sufficiently clear and serious kind to warrant the granting of interlocutory relief, even assuming in favour of Stirling that there was a breach of s1022AA(2)(b)(i).

THE MINIMUM ACCEPTANCE CONDITION
The offer is expressed to be conditional upon the receipt by Capital of valid acceptances of offers for at least thirty percent of the Stirling shares. This is subject to the ability of Capital, subject to the Law, to declare the offer free of the condition.

It appears from the Part A Statement that within the meaning of the Law, Capital, or its associates, are entitled to some 16,328,000 Stirling shares (approximately thirteen percent of the Stirling shares presently on issue) because Messrs Hovanessian and Fisher have relevant interests in shares in Silksafe, which in turn holds 16,098,000 in Stirling.

The criticism advanced is that it is necessary, for an offeree to be fully informed, that the Part A Statement indicate whether Silksafe intends to accept Capital's offer.  If it does then the thirty percent condition really is a condition of seventeen percent acceptance.  Further, it is said that the Part A Statement does not indicate whether the thirteen percent of shares which Silksafe holds is intended to be included in or excluded from the thirty percent minimum acceptance offer.

The materiality of this matter is said to come about for several reasons.  First, it was said that information as to whether Silksafe intends to accept the offer would assist a Stirling shareholder to assess the likelihood of the minimum acceptance condition being fulfilled.  It would also enable the shareholders of Stirling to assess the likelihood of Capital's nominees constituting the majority of the directors on the board of Stirling.

I think it is fairly arguable that, in a case such as the present, it would be necessary to disclose the intentions of Silksafe in so far as they are capable of being known by Capital.  There is a considerable difference between an offer which is really conditional upon a seventeen percent acceptance to an offer which is conditional upon a thirty percent acceptance.  The greater vice may well be that Capital can defer until the last moment the decision whether the offer should be accepted by Silksafe allowing it to convert the thirty percent minimum condition to a seventeen percent minimum condition at will.

THE BALANCE OF CONVENIENCE
         I turn now to deal with the balance of convenience. In this regard I was referred to a decision of McLelland CJ in Eq in Solomon Pacific Resources NL v Acacia Resources Limited (unreported, 20 March 1996).  That case likewise concerned an application for interlocutory injunction to restrain a Part A
Statement and offer being dispatched.  In the course of his judgment the Chief Justice said:

"As Bryson J observed in Ical v County Natwest Securities Aust 13 ACLR 129 at 131-2 there are limits to the efficacy of endeavouring to secure compliance with statutory provisions relating to takeover offers by granting injunctions in proceedings conducted with great urgency, particular in matters of any complexity. The application in the present case was heard by me on the next business day following the date of commencement of the proceedings, and the hearing took most of the day. If an interlocutory injunction is granted, the making of the contemplated offer by Acacia to shareholders of Solpac may be delayed for some considerable time until the final hearing can take place, in circumstances where the market for shares in both Solpac and Acacia may well be quite volatile. There are of course other sanctions for any contraventions of the law which may ultimately be established. These and other factors relevant to the discretionary considerations governing the grant of interlocutory injunctions in such matters as these are discussed by Ryan J in Associated Dairies v Central West Dairy 11 ACSR 234 at 244-6. The overriding consideration for the Court in deciding whether to grant or refuse interlocutory injunction is what course is best calculated to achieve justice between the parties, having due regard also to the interests of other affected persons as well as the public interest, in the circumstances of the particular case. In such a case as the present, having regard to (a) the practical consequences of the grant of an interlocutory injunction, (b) the vagueness of the criteria in some of the statutory requirements application [sic] to Part A statements including the concept of `materiality', and (c) the availability of other sanctions and remedies, including the ability of the target company in its Part B statement to draw attention to any alleged deficiencies in the Part A Statement, that overriding consideration will generally dictate that an interlocutory injunction to restrain the despatch of offers and a Part A statement on the basis of alleged deficiencies in that statement be granted only where the deficiencies appear to be clear and serious."

I am content to accept what his Honour there says.  Certainly it is entitled to great weight.

There can of course be no fixed rule governing whether or not an interlocutory injunction should be granted in a particular case. Much turns upon the circumstances. While it is true that the present application has been heard as a matter of urgency, it is not the case that if an interlocutory injunction is made the making of offers could be delayed for a considerable time until the final hearing can take place. As it happens in the present case, it is possible to arrange for a final hearing within a matter of weeks. If offers are sent which do not comply with the Law there is, at the worst, the possibility that shareholders will be misled (and also perhaps confused) as well as the fact that contracts apparently formed by acceptance of the offers may ultimately be set aside. In the circumstances where it seems possible that an urgent final hearing can be given, there may be greater tendency to cause injustice by permitting the offers to proceed immediately rather than delaying their dispatch for what should be a very brief period.

I am of the view in the present case that the balance of convenience favours an interlocutory injunction restraining the offers being sent until a final hearing of the matter which can be achieved within the next few weeks.  There is no reason why an extension of time for the dispatch of the offers would not be granted by the Commission to permit this course being taken.

DISCRETIONARY MATTERS
         It was urged upon me that as a discretionary matter I should refuse to grant relief.  Attention is directed to the delay in time which took place between Stirling becoming aware of the Part A Statement, on the one hand, and it commencing proceedings, on the other.

I think that it is true that Stirling has not proceeded with as much expedition in the matter as was possible.  However, in my view, the delay is not such as to require me in the exercise of discretion to refuse to grant interlocutory relief.  I would accordingly continue the ex parte injunctions originally granted by Finn J until further order.

I certify that this and the
preceding eighteen (18) pages
are a true copy of the Reasons
for Judgment herein of his Honour
Justice Hill.

Associate:

Date:  4 April 1996

Counsel and Solicitors      SD Rares SC with VF Kerr

for Applicant:              instructed by Hunt & Hunt

Counsel and Solicitors      PM Jacobson QC with AI Tonking

for Respondent:             instructed by Deacons Graham & James

Date of Hearing:            1 April 1996

Date Judgment Delivered:         3 April 1996