FEDERAL COURT OF AUSTRALIA

Drillsearch Energy Limited, in the matter of Drillsearch Energy Limited [2015] FCA 1508

IN THE MATTER OF DRILLSEARCH ENERGY LIMITED ACN 006 474 844

THE COURT ORDERS THAT:

1.    Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act):

(a)    the plaintiff convene a meeting (Scheme Meeting) of the holders of fully paid ordinary shares in the plaintiff other than Beach Energy Limited ACN 007 617 969 and its related bodies corporate (as defined in the Act) (Scheme Shareholders) for the purpose of considering and, if thought fit, agreeing to a scheme of arrangement (with or without modification) between the plaintiff and the Scheme Shareholders (Scheme of Arrangement), the terms of which are set out in Annexure D of the document which is at Tab 9 of Exhibit CRT2 in this proceeding, as modified by Annexure WJK9 to the affidavit of William John Koeck affirmed 14 December 2015 (Scheme Booklet);

(b)    the Scheme Meeting be held at 11.00 am (Sydney time) on 27 January 2016 at Museum of Sydney, AGL Theatre, Level 2 Corner of Phillip and Bridge Streets, Sydney, New South Wales;

(c)    James McKerlie or, failing him, Fiona Robertson, act as Chairman of the Scheme Meeting;

(d)    the Chairman of the Scheme Meeting has the power to adjourn the Scheme Meeting in his or her absolute discretion for such time and to such date as the Chairman considers appropriate; and

(e)    the Scheme Booklet be, and hereby is, approved for distribution to Scheme Shareholders.

2.    Subject to registration of the Scheme Booklet with the Australian Securities & Investments Commission pursuant to s 412(6) of the Act, on or before 18 December 2015, there be dispatched to:

(a)    each Scheme Shareholder who has nominated an electronic address for the purposes of receiving notices of meeting from the plaintiff (via the on-line “Investor Centre” maintained by Link Market Services Pty Limited (Link)), at such address, an email substantially in the form of the document behind Tab 13 of Exhibit CRT2 in this proceeding, including URL links to the Scheme Booklet, and a proxy form in respect of the Scheme Meeting substantially in the form of the document behind Tab 14 of Exhibit CRT2 (Proxy Form); and

(b)    each Scheme Shareholder who has a registered address outside Australia by prepaid airmail post to the address of that Scheme Shareholder as set out in the register of members of the plaintiff, a copy of the Scheme Booklet, a Proxy Form and a reply-paid envelope addressed to Link; and

(c)    each other Scheme Shareholder by prepaid post to the address of that Scheme Shareholder as set out in the register of members of the plaintiff, a copy of the Scheme Booklet, a Proxy Form and a reply-paid envelope addressed to Link.

3.    Notice of the hearing of an application pursuant to s 411(4) of the Act for an order approving the Scheme of Arrangement be published once in The Australian newspaper by an advertisement substantially in the form of Annexure A to these orders, such advertisement to be published on or before five days prior to the Scheme Meeting, and the plaintiff be otherwise exempted from compliance with r 3.4 of the Federal Court (Corporations) Rules 2000 (Cth) (Rules).

4.    Pursuant to s 1319 of the Act, r 2.15 of the Rules shall not apply to the Scheme Meeting, except in so far as that Rule applies reg 5.6.13 of the Corporations Regulations 2001 (Cth).

5.    The proceedings be stood over to 10.15 am on 18 February 2016 before Yates J for the hearing of an application to approve the Scheme of Arrangement.

6.    The plaintiff be granted liberty to apply.

7.    These orders be entered forthwith.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF DRILLSEARCH ENERGY LIMITED ACN 006 474 844

REASONS FOR JUDGMENT

1    The plaintiff, Drillsearch Energy Limited, seeks an order under s 411(1) of the Corporations Act 2001 (Cth) (the Act) that a meeting of holders of fully paid ordinary shares in the plaintiff other than Beach Energy Limited (Beach) and its related bodies corporate (for ease of reference, the members) be convened (the scheme meeting) for the purpose of considering and, if thought fit, agreeing to a scheme of arrangement, with or without modification, between the plaintiff and the members (the scheme).

Background

2    The plaintiff is a public company listed on the Australian Securities Exchange (the ASX). Its main business activity is the exploration for, and production of, oil and gas.

3    Beach is also a public company listed on the ASX. It is a gas exploration and production company, based in Adelaide, with its core operations in the Cooper and Eromanga Basins.

4    As at 8 December 2015, the plaintiff had on issue:

(a)    462,254,673 ordinary shares, held by 5,650 members;

(b)    3,590,933 unlisted options;

(c)    5,059,909 performance rights; and

(d)    1,250 convertible notes.

5    As at 14 December 2015, Beach had a relevant interest in 21,053,615 ordinary shares in the plaintiff, representing approximately 4.5% of the plaintiff’s issued share capital.

6    On 23 October 2015, the plaintiff and Beach entered into a Merger Implementation Agreement containing the terms and conditions on which they have agreed to implement a proposal for Beach to acquire all the issued shares in the plaintiff in which it does not already have a relevant interest. The scheme is integral to the implementation of that proposal. It will effect a merger of the plaintiff and Beach, with the plaintiff becoming a wholly-owned subsidiary of Beach. The plaintiff will then cease to be listed on the ASX.

7    The consideration for the shares to be acquired under the scheme (the scheme shares) will be new shares in Beach that will be issued for the purposes of the scheme. If the scheme is approved, the scheme shareholders will receive 1.25 fully-paid new Beach shares for each scheme share (the scheme consideration). The new Beach shares will rank equally in all respects with all existing Beach shares. The transfer of the scheme shares is subject to the provision of the scheme consideration.

8    Restrictions in certain foreign countries may make it impractical or unlawful to offer or receive the scheme consideration in specie in those countries. For the purposes of the scheme, a scheme shareholder whose registered address is a country or territory other than certain identified countries or territories will be treated as an Ineligible Foreign Shareholder. As at 8 December 2015, the plaintiff had 179 overseas shareholders, 40 of whom are, for the purposes of the scheme, Ineligible Foreign Shareholders. As at 8 December 2015, Ineligible Foreign Shareholders held 964,302 ordinary shares, representing approximately 0.21% of the total number of shares on issue at that date. For these scheme shareholders, the scheme consideration will be issued to a nominee for sale on-market. The net proceeds of the sale will be paid to Beach who, in turn, will remit the proceeds proportionally to each Ineligible Foreign Shareholder according to a formula specified in the scheme.

9    By clause 8.2(b) of the scheme, the scheme shareholders will be taken to have warranted that the scheme shares will be fully-paid and free from all mortgages, charges, security interests, liens, encumbrances, interests of third parties of any kind and restriction on transfer of any kind, and that the scheme shareholders have full power and capacity to transfer the scheme shares. The provisions of the deemed warranty have been drawn to the attention of members in the scheme booklet: see section 10.4. I am satisfied that sufficient disclosure has been made: Talent2 International Limited, in the matter of Talent2 International Limited [2012] FCA 771 at [16]; Atlassian Corporation Pty Limited, in the matter of Atlassian Corporation Pty Limited [2013] FCA 1451 at [36].

10    Clause 8.3(a) of the scheme provides that, to the extent permitted by law, the scheme shares will be transferred free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind. Clauses in this form have been found to be acceptable in other schemes of arrangement: see, for example, the discussion in Investa Properties Limited, in the matter of Investa Properties Limited (2007) 25 ACLC 1,186; [2007] FCA 1104 at [22]-[30].

Deed Poll

11    Beach has executed a deed poll in favour of all scheme shareholders under which it has covenanted to pay the scheme consideration and to undertake all the actions attributed to it under the scheme. The deed poll is expressed to be governed by the laws of New South Wales. Beach has given a covenant to the effect that it irrevocably submits to the non-exclusive jurisdiction of the courts of New South Wales and appeal courts therefrom and that, in respect of any proceeding in those courts, it irrevocably waives any objection to venue on the basis of forum non conveniens.

Other features of the merger proposal

Options

12    The plaintiff has issued 3,590,933 unlisted options to 10 individuals. Each option, upon exercise, entitles the holder to receive one fully-paid share in the plaintiff, subject to payment of the relevant exercise price.

13    The plaintiff will procure the optionholders to execute Option Cancellation Deeds before the holding of the scheme meeting. The Option Cancellation Deeds will provide that, if the merger becomes effective, the unexercised options will be cancelled. The consideration for the cancellation will be an amount calculated in accordance with the Black-Scholes pricing model and will be paid by Beach. The optionholders have the right to exercise all or any of their unexercised options prior to cancellation on giving certain notice. An optionholder exercising that right will be issued with the appropriate number of shares in the plaintiff and will be entitled to participate in the merger.

14    The arrangements in respect of options are disclosed in section 3.13 of the scheme booklet.

Performance rights

15    The plaintiff has implemented short term (STI) and long term (LTI) incentive schemes for its employees.

16    Under the STI, employees are eligible for an annual incentive benefit in the form of cash or a combination of cash and Performance Rights. These Performance Rights vest after one year, subject to continuing employment.

17    Under the LTI, eligible employees in management roles through to the executive team receive Performance Rights. These Performance Rights vest after three years, subject to certain performance conditions and continuity of employment.

18    On vesting, one share in the plaintiff is issued for each Performance Right. No consideration is payable for the issue.

19    Currently, there are 5,059,909 unvested Performance Rights. Under the terms of their issue, these Performance Rights will vest upon a change of control of the plaintiff. Accordingly, if the scheme is approved, shares in the plaintiff will issue to the Performance Rights holders, who will be entitled to receive the scheme consideration in respect of those shares.

20    The arrangements in respect of Performance Rights are disclosed in section 3.14 of the scheme booklet.

Convertible notes

21    In May 2013, the plaintiff, through its wholly-owned subsidiary Drillsearch (Finance) Pty Limited, issued US$125 million in convertible notes. These notes have a maturity date of 1 September 2018 and carry a fixed coupon of 6% per annum, payable semi-annually.

22    Under the terms of issue, a “change of control” will occur if the scheme is approved. This will trigger the requirement to notify noteholders of that fact. The noteholders will then be able to elect, within stipulated time periods, for the redemption of the notes or their conversion into shares in the plaintiff. The plaintiff will have the right to redeem notes that remain unredeemed or not converted by the noteholders. The plaintiff has agreed with Beach that, following approval of the scheme at a second court hearing, the plaintiff will exercise its redemption rights in respect of all convertible notes that have not been redeemed or converted. The dates for the Scheme Record Date and the second court hearing have been chosen advisedly to facilitate these arrangements. Noteholders who validly exercise their conversion rights and are issued with shares in the plaintiff prior to the Scheme Record Date will be entitled to participate in the scheme.

23    The arrangements in respect of convertible notes are disclosed in section 3.15 of the scheme booklet.

Exclusivity provisions

24    The plaintiff is subject to “no shop”; “no talk and no due diligence”; and “notice of competing proposal” obligations. The exclusivity period is from 23 October 2015 to the earlier of 30 April 2016; the Implementation Date for the scheme; or the date of termination of the Merger Implementation Agreement. These dates are capable of precise ascertainment. The period is within the range one customarily sees with schemes of this kind. I am satisfied that the period is reasonable in the circumstances.

25    The “no talk and no due diligence” obligation is subject to a fiduciary carve-out in standard terms: see clause 13.3 of the scheme.

26    The exclusivity provision has been sufficiently drawn to the attention of the members in section 10.2 of the scheme booklet: see Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9].

Break fee

27    The plaintiff has agreed to pay a break fee to Beach of approximately $3.8 million if the scheme does not proceed by reason of the matters referred to in clause 11.3 of the Merger Implementation Agreement.

The position of the directors

28    The plaintiff’s directors unanimously recommend that the members vote in favour of the scheme, in the absence of a superior proposal. Each director has expressed his or her intention to vote in favour of the scheme in relation to all shares in which he or she has a relevant interest, in the absence of a superior proposal.

The independent expert

29    Ernst & Young Transaction Advisory Services Limited (EY) has been engaged to provide a report to consider whether the scheme is in the best interests of the plaintiff’s members (the EY report). EY has compared the assessed value of a share in the plaintiff, on a control basis, to the assessed value of the scheme consideration per share.

30    EY has assessed the fair value of a share in the plaintiff, on a control basis, to be within the range of $0.61 to $0.73. It has assessed the fair value of the scheme consideration to be within the range of $0.65 to $0.78 per share. As the scheme consideration exceeds the range of assessed values of a share in the plaintiff, EY considers the terms of the scheme to be fair and reasonable and, accordingly, in the best interests of members.

31    Stuart Gordon Bright is a partner of Ernst & Young and a director and representative of EY. He has had overall responsibility for the preparation of the EY report. He has confirmed that the opinions expressed in the EY report are opinions that he holds.

Investigating accountant’s report

32    KPMG Financial Advisory Services (Australia) Pty Limited (KPMG) has been jointly engaged by the plaintiff and Beach to prepare an Investigating Accountant’s Report in respect of pro forma historical financial information for the merged group as at 30 June 2015. The report will be provided as part of the scheme booklet.

33    Jonathan Andrew Dunlop is the author of the report. He has verified the opinions expressed in it. In particular, Mr Dunlop has confirmed that, subject to the limitations and qualifications set out in the report, and based on KPMG’s procedures, which are not an audit, nothing has come to his attention that causes him to believe that the pro forma historical statement of financial position of the plaintiff and Beach as at 30 June 2015, as set out in the scheme booklet, has not been prepared or presented fairly, in all material respects, on the basis of the pro forma transactions and/or adjustments described in section 6 of the scheme booklet and in accordance with the recognition and measurement principles prescribed in the Australian Accounting Standards and Beach’s accounting policies.

CHAIRMAN of THe scheme meeting

34    James David McKerlie, who is a non-executive director and the Chairman of the plaintiff, has consented to act as Chairman of the scheme meeting. Fiona Ann Robertson, who is also a non-executive director of the plaintiff, has consented to act as Mr McKerlie’s alternate in that role. Mr McKerlie and Ms Robertson have each made an affidavit as required by r 3.2 of the Federal Court (Corporations Rules) 2000.

Verification of scheme booklet

35    There is evidence before me that the statements of fact made in the scheme booklet have been verified through an extensive verification process. On 10 December 2015, the plaintiff’s directors resolved that, subject to the approval and direction of the Court, the draft scheme booklet as at 8 December 2015, was in an appropriate form for dispatch to the members, subject to the confirmation of certain matters of detail and the addition of matters such as dates, numbers and so on. Similarly, on 10 December 2015, Beach’s directors approved certain information in the draft scheme booklet as at 10 December 2015, for which Beach was responsible in providing.

ASIC

36    Draft copies of the scheme booklet have been lodged with the Australian Securities and Investments Commission (ASIC). Notice of the hearing of the present application has been given to ASIC in accordance with s 411(2)(a) of the Act. ASIC has signified that it has had a reasonable opportunity to examine the terms of the proposed scheme and the draft explanatory statement. ASIC has also signified that it does not wish to make submissions at the present time in relation to the proposed scheme or the draft explanatory statement (constituted by the scheme booklet). In these circumstances, I am satisfied that the requirements of s 411(2)(b) of the Act have been satisfied.

Other matters

37    ASIC has granted relief from compliance with cl 8302(d) of Pt 3 of Sch 8 to the Corporations Regulations 2001 (Cth) in respect of the explanatory statement.

38    ASX has provided a waiver in respect of ASX Listing Rule 6.23.2. This is in regard to the proposed cancellation of the options: see [13] above.

consideration

39    I am satisfied that the plaintiff is a Part 5.1 body and that the scheme is an “arrangement” for the purposes of s 411(1) of the Act.

40    I am satisfied that the scheme is of such a nature and cast in such terms that, if it achieves the relevant statutory majorities, it is likely to be approved in an uncontested application: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72; Re Permanent Trustee Co Ltd (2002) 43 ACSR 601; [2002] NSWSC 1177 at [8]-[10]; Centrebet International Limited, in the matter of Centrebet International Limited [2011] FCA 870 at [29].

41    I am satisfied that the formal requirements that are preliminary to the Court convening a meeting under s 411(1) of the Act have been satisfied.

Disposition

42    Orders, substantially as sought, should be made.

Associate:

Dated:    22 February 2016