U and D Coal Ltd v Australian Kunqian International Energy Co Pty Ltd
[2014] VSC 386
•22 August 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2014 01300
| U & D COAL LTD (ACN 165 894 806) | Plaintiff |
| v | |
| AUSTRALIAN KUNQIAN INTERNATIONAL ENERGY CO PTY LTD (ACN 153 835 440) | Defendant |
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JUDGE: | SIFRIS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18 August 2014 |
DATE OF JUDGMENT: | 22 August 2014 |
CASE MAY BE CITED AS: | U & D Coal Ltd v Australian Kunqian International Energy Co Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2014] VSC 386 |
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CORPORATIONS – Compromise required company to acquire shares in itself – Compromise subject to Court approval – Court approval granted under s 259A(c) of Corporations Act 2001 (Cth) – No prejudice to creditors or shareholders as a whole.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P W Collinson QC with | Minter Ellison |
| For the Defendant | Mr P D Crutchfield QC | Jones Day |
HIS HONOUR:
Introduction
On 5 December 2013 the plaintiff, U & D Coal Ltd (‘UND’), lodged a replacement prospectus (‘the Prospectus’) with the Australian Securities and Investments Commission (‘ASIC’) in relation to an initial public offering (‘IPO’) of 250 million shares at 50 cents per share.
Pursuant to the Prospectus, the defendant, Australian Kunqian International Energy Co Pty Ltd (‘KQ’) applied for 100 million shares in UND (‘IPO Shares’) for an aggregate subscription price of $50 million (‘Subscription Monies’).
On 10 March 2014, KQ issued a notice under s 737of the Corporations Act 2001 (Cth) (‘the Act’) (‘s 737 Notice’) which alleged, inter alia, that the Prospectus contravened s 724 of the Act and entitled KQ to request the return of the IPO Shares to UND and have the Subscription Monies repaid to it.
The validity of the s 737 Notice was disputed by UND. UND commenced this proceeding to set aside the s 737 Notice.
The originating process came on for hearing on 18 August 2014. Senior Counsel for each party announced that the proceeding had settled and that on 15 August 2014 UND and KQ had executed a Deed of Settlement.
Deed of Settlement
The relevant provisions of the Deed of Settlement are set out hereunder:
3. Court Order
The parties agree to make a joint application to the Supreme Court of Victoria for consent orders that:
(a)UND may acquire and cancel the IPO Shares from KQ on the terms of this Deed (Court Order); and
(b)the Proceeding is dismissed with no order as to costs (with a right to reinstatement in the event that this Deed is terminated pursuant to clause 2).
4. Loan
4.1 Loan Agreement
Immediately upon the grant of the Court Order, KQ will loan to UND the sum of $20 million (Loan Sum) on the following terms:
(a)interest on the Loan Sum is to accrue at the rate of the 3 month Bank Bill Swap Rate plus a margin of 0.9%;
(b)interest on the Loan Sum is to be capitalised quarterly;
(c)the Loan Sum and accrued interest is due and payable in full upon the earlier of:
(i)three years from the date of execution of this Deed; or
(ii)UND having sufficient excess cash in its bank account to both repay the Loan Sum and provide UND with sufficient working capital to satisfy its operating expenses for six months (with operating expenses to include any capital expenses or costs arising in accordance with UND’s business operations);
(d) as security for the Loan Sum, UND will:
(i)grant KQ first-ranking security over all unencumbered assets of UND; and
(ii)procure that its subsidiaries will grant KQ first-ranking security over all those subsidiaries’ unencumbered assets and second ranking security over those subsidiaries’ assets already subject to a Security Interest (subject to consent from the holder of the Security Interest);.
4.2 Facility Agreement
The parties agree to negotiate a facility agreement to replace the loan agreement set out in clause 4.1 within thirty days of the execution of this Deed. The terms of the facility agreement are to be substantially similar to the terms of the Facility Agreement executed between China Construction Bank Corporation, Sydney Branch (ABN 24 125 167 553) and U & D Mining (Australia) Pty Ltd (ACN 152 892 638). UND will provide a first draft of the facility agreement and security documents to KQ within 10 days after the date of execution of this Deed.
5. Acquisition of IPO Shares
Immediately upon the grant of the Court Order, UND will acquire and cancel KQ’s IPO Shares at a cost of 50 cents per share namely for $50 million (Settlement Sum) pursuant to the Court Order.
6. Payment
Payment of the Loan Sum to UND by KQ will be made simultaneously with and set-off against payment of the Settlement Sum payable to UND under the terms of this Deed. Payment of the balance will be effected on the date of grant of the Court Order by electronic funds transfer to an Australian bank account of KQ as notified to UND in writing by KQ.
7. Selective buy-back
(a)UND will announce to ASX its intention to make a selective buy-back offer to all other persons issued shares under the Prospectus and who remain holders of shares in UND as at the record date for the buy-back (the Buy-Back) subject to receipt of the Loan Sum and the shareholder approval required by the Corporations Act.
(b)The Buy-Back will proceed at a price of 50 cents per share.
(c)The decision whether to participate in the Buy-Back will be at the election of the relevant shareholders. Any shares not acquired as part of the Buy-Back will remain issued capital of UND.
(d)KQ agrees that it will:
(i)vote in favour of the Buy Back at any general meeting of the members of UND called for the purpose of considering the Buy Back; and
(ii)assist and support UND in the preparation of any documentation prepared in connection with the Buy Back, including with the provision of information necessary for that purpose.
Court Order
On 18 August 2014 I made the following orders by consent:
(1)The plaintiff may:
(a)acquire from the defendant the 100,000,000 shares in the plaintiff issued to the defendant on 12 February 2014 for the consideration specified in the Deed of Settlement, under the initial public offering described in the replacement prospectus lodged by the plaintiff with the Australian Securities and Investments Commission on 5 December 2013; and
(b)cancel those shares.
(2)The proceeding otherwise be dismissed, with a right of reinstatement.
(3)Each party bear its own costs of the proceeding.
I indicated that my reasons would follow. These are the reasons.
Reasons
Section 259A(c) of the Act permits a company to acquire shares in itself ‘under a court order’. There are other exceptions to the rule prohibiting a company from directly acquiring its own shares. The most obvious exception is a share buy-back under s 257A of the Act. That section sets out a buy-back procedure. The parties do not invoke or rely on this procedure.
Although s 259A(c) may have greater application in a scheme of arrangement or oppression proceeding where a buy-back is appropriate,[1] there is in my view no reason why it should not apply in this case. The power to make the order resides in s 259A(c) itself and there is no need to resort to another section, such as s 233(1)(e).
[1]As permitted by s 233(1)(e). See also Quinlan v Fiboze Pty Ltd (1988) 14 ACLR 312.
It is appropriate in this case because it gives effect to the settlement of the parties. If the defendants had succeeded in the case, a consequence of the validity of the s 737 Notice would be declaratory relief and orders facilitating the buy-back or restitution in integrum. Instead they have decided to resolve the matter. Unless there is a compelling reason the Court shall give effect to the compromise.
Save for one matter, there are no issues of fairness or reasonableness to the shareholders as a whole and creditors[2] are unaffected. The relevant matter is the position of minority shareholders. As the Deed of Settlement records, it is proposed to have a meeting of shareholders to consider extending the same buy-back terms to ‘all other persons issued shares under the Prospectus and who remain holders of shares in UND’ (clause 7(a)). Clause 7(d) requires KQ to vote in favour of the resolution.
[2]UND has no creditors and its only assets are the shares it holds in U & D Mining (Australia) Pty Ltd (‘U & D Mining’). UND has no outstanding liability to the Australian Taxation Office, and is currently a non-revenue producing coal exploration company with carry forward tax losses.
In December 2013, KQ held 510 million shares in UND or 51% of the total issued share capital.
UND presently has three major shareholders and approximately 480 minority shareholders who also obtained their shares under the IPO. At the date of swearing this affidavit, UND’s major shareholders and their respective shareholdings are as follows:
Shareholder
Percentage of Issued Share Capital Held
KQ
55.03% (610 million shares)
China Kunlun International Holdings Limited (‘Kunlun’)
21.65% (240 million shares)
Golden Globe Energy Limited (‘Golden Globe’)
20.75% (230 million shares)
On or about 15 August 2014, UND’s lawyers, Minter Ellison, wrote to Herbert Smith Freehills, the lawyers for Kunlun and Golden Globe, to advise that UND intended to settle this Proceeding and to advise of the terms of the proposed settlement.
On or about 15 August 2014, Minter Ellison wrote to ASIC to advise that UND intended to settle this Proceeding and to advise of the terms of the proposed settlement.
ASIC is concerned that minority shareholders may not be dealt with ‘on an equal footing with KQ, who under the proposed orders, will have its subscription monies repaid’.[3] For the resolution[4] to be passed both Kunlun and Golden Globe will need to vote or abstain from voting. At present they are non-committal. ASIC has suggested that their involvement, in order to ensure the passing of the resolution and equal treatment of minority shareholders, should be a condition precedent to the implementation of the Deed of Settlement. The parties do not agree. I also do not agree.
[3]Letter from ASIC to Minter Ellison dated 18 August 2014, handed to the Court. ASIC declined to appear. Of course, this is not meant as a criticism.
[4]A special resolution is required.
I am not prepared to rewrite the contract or compromise of the parties. I am also not prepared to make it a condition of approval of the buy-back. Of course, it may happen anyway. Kunlun and Golden Globe may well decide to vote in favour of the resolution or not attend the meeting.
If, for whatever reason, the resolution does not pass, other consequences may follow. However, this does not mean that the Court should not give effect, so far as it can, to the resolution of a fairly complex proceeding between parties, simply because others – who are not involved in the litigation – are treated differently, there being in these circumstances no requirement to treat everyone the same, desirable as this may be.
Finally, it is relevant to note that the company itself (and the defendant), all with highly responsible representation have specifically endeavoured to bring about this result for all. They do not control Kunlun and Golden Globe. One may imagine what would happen if there was a properly based class action by the minority shareholders for the same relief. However, these shareholders have elected not to serve any notice or take any further step in relation to the Prospectus. On one view, the compromise affects them no more than UND settling a matter with an external financier.
The orders were properly made in the circumstances.
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