Federal Court of Australia

A-Cap Energy Limited, in the matter of A-Cap Energy Limited [2023] FCA 1142

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act), the plaintiff is to convene and hold:

(a)    a meeting (Share Scheme Meeting) of its ordinary shareholders (Shareholders) to consider and, if thought fit, to agree to (with or without modification) the scheme of arrangement (Share Scheme) proposed to be made between the plaintiff and Shareholders, the terms of which are set out in Annexure “A” to the proposed Scheme Booklet (Scheme Booklet) (a copy of which is at pages 16-464 of Exhibit CJD-1 to the affidavit of Courtney James Dixon sworn 15 September 2023 (Dixon affidavit));

(b)    a meeting (Option Scheme Meeting) of the holders of its listed options (Optionholders) to consider and, if thought fit, to agree to (with or without modification) the scheme of arrangement (Option Scheme) proposed to be made between the plaintiff and Optionholders, the terms of which are set out in Annexure B to the Scheme Booklet,

(together, the Scheme Meetings); and

(c)    the Share Scheme Meeting be held on 20 October 2023, commencing at 10.00am (AWST), and the Option Scheme Meeting be held on 20 October 2023, commencing at 11.00am (AWST), each to be conducted as a hybrid meeting in person at 52 Ord Street, West Perth, West Australia 6005 and via an online platform (which is to be accessed in accordance with the instructions included in the Scheme Booklet).

2.    Subject to these orders, the Scheme Meetings be convened, held and conducted in accordance with:

(a)    the provisions of Part 2G.2 of the Act that apply to a meeting of the members of the plaintiff; and

(b)    the provisions of the plaintiff’s constitution that apply in relation to meetings of members and that are not inconsistent with Part 2G.2 of the Act.

3.    Pursuant to s 1319 of the Act, at the Share Scheme Meeting:

(a)    the Shareholders who are eligible to vote will be those whose names are recorded in the register of members of the plaintiff at 4:00pm (AWST) on 18 October 2023 (Share Scheme Voting Time);

(b)    two Shareholders, present and entitled to vote, in person or by proxy or attorney under power, shall constitute a quorum;

(c)    each Shareholder, present and entitled to vote, will be entitled to one vote for each fully paid ordinary share in the capital of the plaintiff that the Shareholder is registered as holding at the Share Scheme Voting Time; and

(d)    voting on the resolution to agree to the Share Scheme is to be conducted by way of poll.

4.    Pursuant to s 1319 of the Act, at the Option Scheme Meeting:

(a)    the Optionholders who are eligible to vote will be those whose names are recorded in the register of Optionholders of the plaintiff at 4:00pm (AWST) on 18 October 2023 (Option Scheme Voting Time);

(b)    two Optionholders, present and entitled to vote, in person or by proxy or attorney under power, shall constitute a quorum;

(c)    each Optionholder, present and entitled to vote, will be entitled to one vote for each listed option that the Optionholder is registered as holding at the Option Scheme Voting Time; and

(d)    voting on the resolution to agree to the Option Scheme is to be conducted by way of poll.

5.    Pursuant to s 1319 of the Act:

(a)    Paul Anthony Ingram, or failing him Malcolm Smartt, be chairperson of each Scheme Meeting; and

(b)    in respect of each Scheme Meeting, the chairperson have the power to adjourn or postpone the meeting in their absolute discretion to such time, date and place that they consider appropriate.

6.    Pursuant to r 3.3(2) of the Federal Court (Corporations) Rules 2000 (Cth) (Rules), notwithstanding s 249Y(3) of the Act, the appointment of a proxy in respect of each Scheme Meeting shall not be revoked or suspended by the appointing Shareholder or Optionholder (Appointor) attending and taking part in the relevant Scheme Meeting, but if the Appointor votes on a resolution at the relevant Scheme Meeting, any votes cast by the proxy must not be counted in the results of the relevant poll.

7.    The following documents be approved for distribution to Shareholders and Optionholders:

(a)    subject to the amendments set out in Annexure “A” to these orders and such other amendments that do not substantially alter its contents, the Scheme Booklet (and the Scheme Booklet so amended be approved for the purposes section 411(1) of the Act);

(b)    the proxy forms in respect of Share Scheme Meeting and Option Scheme Meeting, substantially in the form of pages 776-779 of Exhibit PAI-1 to the affidavit of Paul Anthony Ingram sworn 11 September 2023 (Proxy Forms); and

(c)    the Small Scheme Participant and Small Option Scheme Participant (as defined in the Scheme Booklet) election form substantially in the form of pages 678-681 of Exhibit PAI-1 (Opt-in Notice).

8.    On or before 18 September 2023, the Scheme Meetings be convened by sending and there be dispatched to each Shareholder whose name is recorded in the plaintiff’s register of members and to each Optionholder whose name is recorded in the plaintiff’s register of Optionholders at 5:00pm (AWST) on 12 September 2023 (Register Time):

(a)    in the case of each Shareholder and Optionholder who has nominated an email address for the purpose of receiving documents from the plaintiff (Electing Email Holders), an email substantially in the form of pages 897-902 of Exhibit CJD-1 with instructions regarding accessing the Scheme Booklet online and lodging their proxy, Opt-In Notice and voting instructions online;

(b)    in the case of each Shareholder and Optionholder who has elected to receive documents from the plaintiff in a physical form (Electing Postal Holders) and whose registered address is in Australia, the following documents by pre-paid post to the relevant addresses recorded in the applicable register:

(i)    a letter substantially in the form of 903-908 of Exhibit CJD-1 with instructions regarding accessing the Scheme Booklet online and voting at the Scheme Meetings;

(ii)    a physical copy of the Scheme Booklet;

(iii)    a personalised single Proxy Form;

(iv)    an Opt-In Notice;

(v)    a copy of a guide to using Advanced Share Registry’s online meeting platform substantially in the form of 780-783 of Exhibit PAI-1; and

(vi)    a self-addressed reply-paid envelope for return of completed documents (for use within Australia only),

(the Hardcopy Materials);

(c)    in the case of each Shareholder and Optionholder who has made no election as to the manner in which they receive documents from the plaintiff (together, the Non-Electing Holders) and whose registered address is in Australia, the Hardcopy Meeting Materials, except for the Scheme Booklet, by pre-paid post to the relevant addresses recorded in the applicable register;

(d)    in the case of Electing Postal Holders whose registered address is outside of Australia, the Hardcopy Materials by pre-paid airmail post to the relevant addresses recorded in the applicable register, with the self-addressed envelope not being reply-paid; and

(e)    in the case of Non-Electing Holders whose registered address is outside of Australia, the Hardcopy Materials, except for the Scheme Booklet, by pre-paid airmail post to the relevant addresses recorded in the applicable register with the self-addressed envelope not being reply-paid.

9.    The plaintiff is not obliged to send documents in accordance with order ‎8 above to any person who becomes a Shareholder or Optionholder after the Register Time.

10.    Dispatch of the documents referred to above, in accordance with the terms of order ‎8 above, shall be taken to be sufficient notice of the Scheme Meetings.

11.    A proxy form, appointment of a corporate representative, or power of attorney to act on behalf of a Shareholder in respect of the Share Scheme Meeting will be valid and effective if, and only if, it is completed and delivered by 10.00am on 18 October 2023.

12.    A proxy form, appointment of a corporate representative, or power of attorney to act on behalf of an Optionholder in respect of the Option Scheme Meeting will be valid and effective if, and only if, it is completed and delivered by 11.00am on 18 October 2023.

13.    The plaintiff is to publish an announcement via the Australian Securities Exchange containing the substance of the matters set out in Form 6 of the Rules by no later than 19 October 2023.

14.    Pursuant to r 1.3 of the Rules, compliance with the following requirements of the Rules be dispensed with:

(a)    rule 2.4(1), to the extent that rule requires the affidavit filed with the Originating Process to state the facts in support of the process;

(b)    rule 2.15; and

(c)    rule 3.4 and Form 6.

15.    The proceeding be adjourned to 10.15 am (AWST) on 26 October 2023 for the hearing of any application to approve the Share Scheme and the Option Scheme.

16.    The plaintiff be granted liberty to apply.

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

Annexure “A”

(1)    Section 1.4j. on page 37 of the Scheme Booklet (page 52 of the Dixon affidavit) be amended by deleting the words:

(2)    Section 3.13 on page 67 of the Scheme Booklet (page 82 of the Dixon affidavit) be amended in the second paragraph under the heading ‘3.13 Treatment of A-Cap Performance Rights’ by deleting the words: ‘being approved by the Requisite Majorities of A-Cap Shareholders at the Share Scheme Meeting’ in the last sentence and in substitution thereof inserting the words: ‘becoming Effective’.

(3)    Section 12.2b. on page 186 of the Scheme Booklet (page 201 of the Dixon affidavit) be amended in the paragraph numbered ‘ii’ by deleting the words: ‘as if they had participated in the Share Scheme as Scheme Shareholders holding Scheme Shares equal to the number of A-Cap Performance Rights they held’ and in substitution thereof inserting the words: ‘on terms to be agreed’.

(4)    Section 12.2b. on page 186 of the Scheme Booklet (page 201 of the Dixon affidavit) be further amended in the second major paragraph under the heading ‘b. A-Cap Performance Rights’ by inserting the words: ‘(because the terms of the transactions required that all rights be vested and converted or cancelled on terms to be agreed and the Board did not consider that substantially different terms would be reached by agreement)’ after the words: ‘A-Cap Performance Rights with effect on the Record Date’ and before the words: ‘but on the basis that the vesting of all those A-Cap Performance Rights in subject to the Share Scheme becoming Effective.’

REASONS FOR JUDGMENT

FEUTRILL J:

Introduction

1    Section 411 of the Corporations Act 2001 (Cth) provides a mechanism for, amongst other things, a binding arrangement to be made between a company and its members or creditors. The arrangement is binding if the Court convenes a meeting of the company’s members or creditors and the arrangement is agreed to by majorities of members or creditors prescribed in s 411(4) and the Court approves the arrangement. Therefore, it is a mechanism for a company to make a binding arrangement with all members or creditors even those members or creditors in a minority which does not agree to the arrangement.

2    Due to the nature of an originating process brought under s 411 of the Act there are typically two court hearings. The first court hearing is an interlocutory hearing at which orders are made for the purpose of convening a meeting of a company’s members or creditors. Subject to the members or creditors voting in favour of the arrangement by required statutory majorities, there is a second court hearing for final orders to approve the arrangement.

3    The plaintiff (A-Cap) filed an originating process on 7 August 2023 by which, amongst other things, it sought an order for the Court to order separate meetings of the company’s members (shareholders) and the holders of certain listed options to acquire shares in A-Cap (optionholders) to be convened for the purpose of the shareholders considering an arrangement between the company and them (Share Scheme) and the optionholders considering an arrangement between the company and them (Option Scheme). (Collectively the Share Scheme and Option Scheme are referred to in these reasons as the Schemes.) On 15 September 2023 I made orders for the convening of such meetings. These are the reasons for those orders.

Evidence

4    A-Cap’s application for orders to convene the meetings of the shareholders and of the optionholders was supported by a number of affidavits. A-Cap read and relied on each of these affidavits at the first court hearing. The affidavits were as follows.

5    A short affidavit of Mr Adam Rompotis sworn 7 August 2023 filed with the originating process that provides a brief description of the proposed Schemes and exhibits a company search of A-Cap from the records maintained by the Australian Securities and Investments Commission and a redacted copy of a scheme implementation deed made between A-Cap and Lotus Resources Limited dated 12 July 2023 (SID). Mr Rompotis is a legal practitioner and employee of Jones Day, A-Cap’s solicitors.

6    A substantial affidavit of Mr Paul Anthony Ingram sworn 11 September 2023. Mr Ingram is a director and deputy chairman of A-Cap. His affidavit exhibits a copy of a draft Scheme booklet (including a draft explanatory statement required by s 412(1) of the Act) and other documents relevant to the application. The documents include copies of a draft independent expert report (IER), an independent technical assessment and valuation report (ITVR), a draft investigating accounts’ report (IAR), an unredacted copy of the SID and each of the proposed Schemes. Amongst other things, Mr Ingram deposes facts relating to the process A-Cap has undertaken to verify the accuracy of the information contained in the draft Scheme booklet. Mr Ingram also deposes facts satisfying the requirements of r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth) as these relate to him as the proposed chair of the meetings and, on information and belief, as these relate to Mr Malcom Smartt, as alternate chair. Mr Ingram’s affidavit also exhibits a copy of a deed by which the SID was amended.

7    An affidavit of Mr Keith Graham Bowes sworn 14 September 2023. Mr Bowes is the managing director of Lotus. He deposes facts relating to the process Lotus has undertaken to verify the accuracy of the information contained in the draft explanatory statement or Scheme booklet as it relates to Lotus. Mr Bowes’ affidavit also exhibits copies of deed polls that Lotus executed with respect to performance of its obligations under the proposed Schemes on 12 July 2023 (Share Deed Poll, Option Deed Poll and, collectively, Deed Polls). His affidavit also exhibits a copy of a letter by which Lotus consents to being named in the Scheme booklet and to the inclusion of all statements made about or attributed to Lotus in the Scheme booklet.

8    Two affidavits of Mr Courtney James Dixon each sworn 15 September 2023. Mr Dixon is a legal practitioner in the employ of Jones Day. His first affidavit exhibits a further draft of the explanatory statement or Scheme booklet and a marked-up version of that document (A-Cap has requested the Court approve that version of the Scheme booklet for distribution to shareholders and optionholders.) He deposes that amendments to the draft Scheme booklet were made as a result of communications with ASIC. His first affidavit also exhibits amended versions of draft communications proposed to be sent to shareholders and optionholders in connection with the proposed Schemes and a deed by which the SID was further amended. He deposes certain facts relating to the fees of A-Cap’s financial advisors and performance rights issued to directors of A-Cap referred to in more detail later in these reasons. He also deposes facts relating to the final stages of the verification process referred to in the affidavits of Mr Ingram and Mr Bowes. His second affidavit deposes facts relating to the final step in the verification process.

9    At the hearing A-Cap tendered a bundle of correspondence from ASIC which was received as Exhibit A. That correspondence comprised the usual letter that ASIC provides before the first court hearing. There were also four further letters by which ASIC allowed A-Cap, under reg 5.1.01(1) of the Corporations Regulations 2001 (Cth), to send an explanatory statement which does not state certain matters set out or contain or have annexed certain reports and documents referred to in various paragraphs of Pt 2 of Sch 8 to the Regulations or comply with certain requirements of Pt 2 of Sch 8.

Overview of the proposed Schemes

10    A-Cap is a public company limited by shares which is registered in Victoria. It is a resources exploration and development company with interests in the Letlhakane Uranium Project in Botswana and Wilconi Nickel Cobalt Project in Western Australia. The shares the subject of the proposed Share Scheme (ASX:ACB) and options the subject of the proposed Option Scheme (ASX:ACBO) are quoted on the Australian Securities Exchange (ASX). Lotus is also a public company limited by shares. Its shares are also quoted on the ASX (ASX:LOT). Lotus is a resources company with an interest in the Kayelekera Uranium Project in Malawi.

11    A-Cap has proposed the Schemes by which Lotus would acquire all A-Cap shares on issue and all listed A-Cap options. The consideration for the A-Cap shares under the Share Scheme is one new ordinary share in Lotus (Lotus share) for every 3.54 A-Cap shares (Share Scheme Consideration). The consideration for the listed A-Cap options under the Option Scheme is one Lotus share for every 500 options (Option Scheme Consideration). (Collectively the Share Scheme Consideration and Option Scheme Consideration is referred to in these reasons as the Scheme Consideration.)

12    If the proposed Schemes were implemented, A-Cap would become a wholly owned subsidiary of Lotus, A-Cap would be delisted from the ASX and A-Cap’s shareholders and optionholders would hold approximately 21% of the issued share capital of Lotus. Those Lotus shares would be tradeable on the ASX.

13    After communications with ASIC, by deeds of amendment dated 11 and 12 September 2023, A-Cap and Lotus amended the terms of the SID. Under the terms of the SID, as amended, A-Cap and Lotus agreed to implement each of the Schemes subject to certain conditions precedent. The SID, as amended, also contains typical commercial terms of a non-hostile transaction between one company (bidder) and another company (target) involving a change of control of the target, including provisions for exclusivity and break-fees, described later in these reasons.

Power to convene meetings

14    The principles applicable to the exercise of the Court’s power under s 411(1) to convene a meeting between a company and its members are well settled and have been summarised and set out in numerous judgments of this and other courts. These principles were recently summarised in Chesser Resources Limited, in the matter of Chesser Resources Limited [2023] FCA 1021 at [15], [17]-[18] as follows.

(1)    Section 411(1) confers a discretion on the Court to make appropriate orders to convene a meeting of a company’s members where the following pre-conditions, drawn from s 411, are met.

(a)    A compromise or arrangement is proposed between a Part 5.1 body and its members (or any class of them) (s 411(1)).

(b)    An application is made in a summary way for an order by the body or a member of the body (s 411(1)).

(c)    Fourteen days’ notice of the hearing of the application has been given to ASIC (or such lesser period as the Court or ASIC permits (s 411(2)(a)).

(d)    The Court is satisfied that ASIC has had a reasonable opportunity (s 411(2)(b)):

(i)    to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and

(ii)    to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement.

See, e.g., Kidman Resources Ltd, in the matter of Kidman Resources Ltd [2019] FCA 1226; (2019) 375 ALR 760 at [22] (O’Callaghan J).

(2)    In addition to the pre-conditions within s 411, the Court should also be satisfied that all applicable procedural requirements have been or will be met or otherwise that it is appropriate to modify or dispense with one or more of them.

(3)    As to the exercise of the Court’s discretion, in this respect the Court should be satisfied of two matters. First, that the Schemes are ‘fit for consideration by the proposed meeting in the sense that it is “of such a nature and cast in such terms that, if it achieves the statutory majority at the […] meeting, the court would be likely to approve it on the hearing of a petition which is unopposed”. Second, that “the members [are to be] properly informed of the nature of the Scheme before the meeting”’: see, DuluxGroup Ltd, in the matter of DuluxGroup Ltd [2019] FCA 961; (2019) 136 ACSR 546 at [19] (O’Bryan J) and the authorities there cited.

(4)    The question of whether or not to accept the consideration for shares or options in arrangements such as the Schemes is a commercial matter for the shareholders and optionholders to assess. In general, members or creditors should not be prevented from having the opportunity to do so provided that they are adequately informed and have sufficient time to consider the proposed compromise or arrangement: see, e.g., Amcor Limited, in the matter of Amcor Limited [2019] FCA 346 at [50] (Beach J).

(5)    The Court’s role under s 411 is supervisory. In general, at the first court hearing the Court should confine itself to ensuring that the applicable procedural and substantive requirements are met (including that there will be adequate disclosure), with limited consideration of issues of fairness. The Court should only consider the merits or fairness of a proposed compromise or arrangement at such a hearing if the issue is such as would unquestionably lead to a refusal to approve it at the approval hearing (second court hearing): Kidman Resources at [26] citing Re CSR Ltd [2010] FCAFC 34; (2010) 183 FCR 358 at [74], [76]; see, also, Amcor at [47].

Compromise or arrangement and Part 5.1 body

15    A-Cap is a Part 5.1 body. It is a company and the definition of a ‘Part 5.1 body’ in s 9 of the Act includes a company. There is also no doubt that the proposed Schemes involving a change of ownership and control of all the issued share capital in A-Cap and all the listed A-Cap options is each an ‘arrangement’ within the meaning of that term in s 411(1).

16    The shareholders are manifestly members of the company for the purposes of s 411 of the Act. Although there have sometimes been doubts expressed about the proposition (e.g., Re Niagara Mining Limited [2002] FCA 1651; (2002) 132 FCR 266 (Lee J)), the overwhelming weight of judicial authority is to the effect that holders of options to acquire shares in a company are to be treated as creditors of that company for the purposes of s 411 of the Act: e.g., Security Matters Limited, in the matter of Security Matters Limited [2023] FCA 19 at [35] (Anderson J) (and the authorities there cited). Therefore, the optionholders, as holders of listed options to acquire shares in A-Cap with the same exercise price and expiry date, are a class of creditor for the purposes of s 411 of the Act.

Explanatory statement

17    Pursuant to s 412(1) of the Act, where a meeting is convened under s 411, the body must send an explanatory statement containing certain information with every notice convening the meeting that is sent to a member. Pursuant to s 411(1), where the Court makes an order convening a meeting it may approve the explanatory statement. Typically, the Court will not make an order convening a meeting without also approving the explanatory statement.

18    In this case, the proposed Scheme booklet contains the explanatory statement for each of the Schemes. The contents of that document is considered later in the context of considering if the members (shareholders) and creditors (optionholders) are to be properly informed on the nature of the Schemes.

Notice to ASIC

19    On 24 August 2023 A-Cap provided ASIC with copies of the originating process, Mr Rompotis’ first affidavit, a draft of the Scheme booklet (including the explanatory statements) and a letter notifying ASIC of the date of the first court hearing. On 7 September 2023 a further draft of the Scheme booklet, in the form of the exhibit to Mr Ingram’s affidavit, was provided to ASIC.

20    The draft Scheme booklet has been reviewed by ASIC. On 14 September 2023 ASIC provided A-Cap’s solicitors with a letter in which ASIC expresses the view that there has been compliance with the requirements of s 411(2) of the Act and ASIC’s policy contained in Regulatory Guide 60: Schemes of Arrangement (RG). ASIC also indicated that it did not intend to appear or oppose the Scheme at the first court hearing.

21    In Chesser Resources (at [26]-[28]) I made reference to and reiterated the importance of the function and role ASIC performs under s 411 and its duty to assist the Court by presenting argument if it deems that to be necessary or desirable. Also, where, as here, ASIC has provided its usual letter to a scheme proponent before the first court hearing and has indicated that it does not wish to appear and make submissions at that hearing, the Court is entitled to infer that ASIC has discharged its obligation to assist the Court as set out in the statement of ASIC’s approach to that duty in RG 60.4.

Duty and responsibility of scheme proponent

22    In Chesser Resources (at [29]) I also underscored the duty and responsibility of scheme proponents to bring to the Court’s attention all matters that could be considered relevant to the exercise of the Court’s discretion on an application under s 411 of the Act. As a consequence, the Court is entitled to be confident that all relevant material is before the Court on the application.

Is the Scheme fit for consideration?

Terms of the Schemes

23    A-Cap requested BDO Corporate Finance (WA) Pty Ltd to prepare an independent expert report stating whether the Schemes was in the best interests of shareholders and optionholders for the purposes of s 411 of the Act. In response to that request, BDO Corporate Finance prepared the IER that forms part of the proposed Scheme booklet. The author(s) of that report record that it was prepared in accordance with ASIC Regulatory Guide 111 (Contents of expert reports) and Regulatory Guide 112 (Independence of experts). A-Cap also engaged Valuation & Resource Management Pty Ltd to prepare an independent technical assessment and valuation report with respect to the mineral assets of A-Cap and Lotus. Although engaged by A-Cap, BDO Corporate Finance instructed VRM. VRM prepared that report which is the ITVR that forms part of the proposed Scheme booklet. Based in part on the opinions expressed in the ITVR, the author(s) of the IER opine(s) that the proposed Schemes are fair and reasonable and in the best interests of the shareholders, as to the Share Scheme, and the optionholders, as to the Option Scheme.

24    In keeping with a scheme proponent’s duty and responsibility, A-Cap has drawn the Court’s attention to the following features of the Schemes and SID transaction as a whole that may have a bearing on the question of fitness for consideration of the Schemes.

(a)    Interconditionality of the Schemes;

(b)    Canaccord Genuity (Australia) Limited (A-Cap’s financial advisor) fees paid in script;

(c)    Unlisted options and performance rights;

(d)    Directors’ recommendations;

(e)    Lock-up devices: exclusivity provisions and break fees;

(f)    Performance risk; and

(g)    Deemed warranty and no encumbrance provisions.

25    I have considered each of these matters and the terms of the Schemes and I am satisfied that there is no obvious aspect or feature of those terms that would result in refusal to approve one or both of the Schemes if they came before the Court for approval. Otherwise, to the extent that there are features of the Schemes that raise matters that could affect the ultimate approval of the Schemes these are not matters which, at this stage, warrant denying the shareholders and optionholders the opportunity to consider the Schemes. Each of the matters and my reasons for being so satisfied are considered in turn.

Collateral benefits and class issues

26    Three of the features to which A-Cap has drawn to the Court’s attention (interconditionality of the Schemes, Canaccord’s fees, and unlisted options and performance rights) raise as potential matters fairness and public policy, in the context of a change of control transaction, that certain shareholders (or optionholders) will receive benefits that other shareholders (or optionholders) will not receive. Where a shareholder (or optionholder) would receive a benefit in connection with a scheme that other shareholders (or optionholders) would not receive that has the potential to result in shareholders (or optionholders) having different ‘rights’ under the scheme or certain shareholders (or optionholders) receiving additional consideration for shares (or options) under the scheme. The existence of different rights raises an issue as to whether the shareholders (or optionholders) should be divided into different classes. The existence of additional benefits raises a question about the fairness of the Schemes, in the context of a change of control transaction, and whether the public policy of Ch 6 of the Act would be undermined if the Schemes were to be approved.

27    Section 623 of the Act provides:

623    Collateral benefits not allowed

(1)    A bidder, or an associate, must not, during the offer period for a takeover bid, give, offer to give or agree to give a benefit to a person if:

(a)    the benefit is likely to induce the person or an associate to:

(i)    accept an offer under the bid; or     

(ii)    dispose of securities in the bid class; and

(b)    the benefit is not offered to all holders of securities in the bid class under the bid.

(1A)    An offence based on subsection (1) is an offence of strict liability.

(2)    For the purpose of this section, a person does not receive a benefit that is not offered under a takeover bid merely because the person sells bid class securities on market and the takeover bid is an off market bid or a conditional bid.

(3)    This section does not prohibit:

(a)    the variation of a takeover offer as provided by sections 649A to 650D; or

(b)    an acquisition of securities through an on market transaction; or

(c)    simultaneous takeover bids for different classes of securities in the target.

(Notes omitted.)

28    In general, a benefit given or offered to a shareholder (or optionholder) in a capacity other than as shareholder (or optionholder) is not a ‘benefit’ that ‘is not offered to all holders of securities in the bid class under the bid’ for the purposes of s 623 of the Act. For example, benefits given or offered to employees in their capacity as employees, not shareholders, are not such ‘benefits’: Gantry Acquisition Corporation v Parker & Parsley Petroleum Australia Pty Ltd [1994] FCA 465; (1994) 51 FCR 554 at 557, 563. Likewise, offers to acquire securities that fall outside a takeover scheme are made to the holders of those securities in their capacity as holders of those securities, not as shareholders of securities the subject of the takeover, and as such consideration for acquisition, cancellation or extinguishment of securities outside the takeover scheme is not a ‘benefit’ for the purposes of s 623: Ampolex Ltd v Mobil Exploration & Producing Australia Pty Ltd [1996] FCA 220; (1996) 65 FCR 503 at 535.

29    It also doubtful that consideration paid to acquire, cancel or extinguish non-takeover scheme securities is a ‘benefit’ within the meaning of s 623 where that consideration is less than or equal to the market price (value) of those securities: Ampolex at 535-536. Nonetheless, a premium paid for non-takeover scheme securities may constitute a ‘benefit’ and may be considered to be a benefit given or offered to the recipient as shareholder: Sagasco Amadeus Pty Ltd v Magellan Petroleum Australia Ltd [1993] HCA 14; (1993) 177 CLR 508 at 515-516. See, also, Aberfoyle Ltd v Western Metals Ltd [1998] FCA 744; (1998) 84 FCR 113 at 147-148.

30    Section 411(1) and s 411(4) refer, relevantly, to an arrangement between members or a class of members and creditors or a class of creditors. The expressions ‘class of members’ or ‘class of creditors’ are not defined in the Act. In a frequently cited passage, Bowen LJ observed in Sovereign Life Assurance Co (In Liquidation) v Dodd [1892] 2 QB 573 at 583:

The word ‘class’ is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term ‘class’ as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to a common interest.

31    The focus is on ‘rights’ not ‘interests’ per se. Members with the same rights may have divergent interests in voting one way or the other based on extraneous commercial interests, but that does not mean they are unable to consult with a view to their common interest with respect to their rights. Therefore, the relevant question is whether the legal rights and obligations of members are so dissimilar as to prevent them from consulting together with a common interest. Divergent commercial interests extrinsic to share membership does not normally require separate meetings: Re NRMA Ltd (No 1) [2000] NSWSC 82; (2000) 156 FLR 349 at [79] (Santow J); Re Opes Prime Stockbroking Ltd [2009] FCA 813; (2009) 179 FCR 20 at [64] (Finkelstein J); Re Hills Motorway Ltd [2002] NSWSC 897; (2002) 43 ACSR 101 at [12] (Barrett J). Further, undue division into separate classes can undermine the object of obtaining consent by a large majority through, in effect, giving a veto to a smaller group over the wishes of the majority: Nordic Bank Plc v International Harvester (Aust) Ltd (recs and mgrs. Apptd) [1983] 2 VR 298 at 302; NRMA Ltd (No 1) at [80]; Re Opes Prime at [66]. Applying these principles, courts in other cases have concluded that executives who will receive additional benefits as a consequence of vested performance rights or performance rights that will vest in connection with the scheme, are not in a separate class to other shareholders: see, e.g., DuluxGroup at [46]-[47]; Re Fosters Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Cashcard Australia Ltd [2004] FCA 223; [2004] 48 ACSR 738 at [5]-[13].

Interconditionality of the Schemes

32    The Share Scheme is conditional on the Option Scheme proceeding. Lotus may waive that condition if it is not satisfied (SID cll 3.1(m)-(o), 3.2(a)(iii)). The Option Scheme is conditional on the Share Scheme becoming effective. That condition cannot be waived by either A-Cap or Lotus (SID cll 3.3(f), 3.4(a)(i)).

33    An option scheme that is conditional on a share scheme is not unusual. Option schemes with that feature have been approved in other cases: e.g., Security Matters at [7]; Anatolia Energy Limited, in the matter of Anatolia Energy Limited [2015] FCA 1134 at [1]-[2]. Option schemes have also been approved where that scheme proceeding was capable of waiver at the option of the bidder: e.g., Invictus Gold Limited, in the matter of Invictus Gold Limited [2013] FCA 1132 at [8]. The proposed Scheme booklet contains appropriate disclosure of the conditions precedent to the Share Scheme and Option Scheme and the effect of those provisions including the risk to optionholders that if the Option Scheme is not approved that they will hold options in a company that is wholly owned by Lotus and that, if the options were exercised, the shares could be compulsorily acquired by Lotus under Pt 6A.2 of the Act.

34    These are not matters that self-evidently affect the fairness of the proposed Schemes. Shareholders and optionholders are able to consider and form views on whether or not the respective Schemes are in their best interests. These are commercial matters for the shareholders and optionholders.

Canaccord fees paid in script

35    A-Cap engaged Canaccord as its financial adviser in respect of mergers and acquisitions transactions. In accordance with the terms of that engagement Canaccord has and will receive fees in connection with the proposed Schemes.

36    Canaccord received part-payment of its fees in the amount of $500,000 through the issue of A-Cap shares of that value at the date of issue (9,615,385 shares). As these shares have been issued, Canaccord will be entitled to participate in and vote at any meeting of shareholders convened to vote on the proposed Share Scheme. The balance of Canaccord’s fees ($802,202) will be paid in cash upon successful implementation of the Schemes. Broadly, these matters are disclosed in the proposed Scheme booklet. That Canaccord is a shareholder is not class-creating even though it has a commercial interest, which is separate from other shareholders, in the success of the proposed Schemes: e.g., Tawana Resources NL, in the matter of Tawana Resources NL [2018] FCA 1456 at [44]-[48] (Banks-Smith J).

Unlisted options and performance rights

Unlisted options

37    Mr Ingram deposes that A-Cap has 54,000,000 unlisted options on issue. These options have varying issue dates and exercise prices but the same expiry date. The holders of these options are able to convert the option upon payment of the exercise price into one A-Cap share for each option.

38    A condition precedent to the Share Scheme becoming effective is that all the unlisted options are exercised or cancelled before the Record Date (as defined in the SID). If exercised before that date the option will be converted into a share that will then be acquired on the terms of the Share Scheme. A-Cap has entered into cancellation deeds with each holder of unlisted options. The options will be cancelled, if the Share Scheme becomes effective, in exchange for Lotus shares. The consideration (the number of Lotus shares) for each option has been calculated using a Black-Scholes (market-based) valuation methodology.

39    Any consideration paid for cancellation of unlisted A-Cap options is dealt with separately from the Share Scheme and is disclosed in the proposed Scheme booklet. Consideration paid for cancellation of options does not result in the holder of those options receiving any additional consideration, where they are also a shareholder, as compared to other Share Scheme participants. The consideration they receive is for cancellation of one right (unlisted option) for another right (issue of a fraction of a new Lotus share). The consideration for cancellation of unlisted options was a market-based value determined in accordance with a Black and Scholes valuation methodology. Pursuant to the option cancellation deeds, the aggregate value for all cancelled unlisted options will be approximately AUD 400,000.

40    The treatment of unlisted options in connection with the Schemes does not give rise to any real question of collateral benefits, divergent rights or creation of separate classes of shareholders and optionholders. Further, the applicable conditions precedent, cancellation deeds and consideration for cancellation are appropriately disclosed in the Scheme booklet. The unlisted options held by directors and the Scheme Consideration that would be received for them upon cancellation are appropriately disclosed in the proposed Scheme booklet.

Performance rights

41    Mr Ingram deposes that A-Cap also has 30,000,000 performance rights on issue all of which are held by the directors of A-Cap. The performance rights were issued pursuant to offers of performance rights made to the directors under the terms of A-Cap’s Director Long Term Incentive Plan Rules (LTIP Rules). The performance rights are subject to performance measures connected to the share price of A-Cap shares. The performance rights are not vested or remain unvested rights until the performance measure is met. When met, the unvested right converts into a vested right and the holder of the vested performance right is entitled to convert that right into an A-Cap share for no consideration.

42    A-Cap has 22,500,000 unvested performance rights and 7,500,000 vested performance rights on issue. A condition precedent to the Share Scheme becoming effective is that all the performance rights (vested or unvested) are either converted into A-Cap shares or cancelled before the Record Date (SID cl 3.1(q), cl 6.2).

43    Clause 6.2(a) of the SID contemplates that where performance rights have vested A-Cap must take steps to ensure that the A-Cap shares are issued for those vested performance rights before the Record Date. Where performance rights have not vested cl 6.2(a) contemplates two alternative courses of action. First, the A-Cap Board may determine in accordance with any discretion to do so under the LTIP Rules to vest the unvested performance rights, in which case A-Cap must then issue A-Cap shares for those then vested performance rights before the Record Date. Second, if the A-Cap Board does not determine to vest the unvested performance rights, the performance rights must be cancelled or extinguished pursuant to an irrevocable binding deed entered into between Lotus, A-Cap and the holder of the performance right before the first court hearing such that the performance rights are replaced with Lotus shares on the Record Date. Further, cl 6.2(a) contemplates that there will be no outstanding performance rights as at the Record Date other than those subject to cancellation deeds and that the holders of performance rights will otherwise be entitled to participate in the Share Scheme as participants in that scheme.

44    Clause 6.2(b) contemplates Lotus entering into cancellation deeds and that it must approve and execute such deeds. It also provides that no consideration or benefit is to be given under a cancellation deed other than shares in Lotus and that no obligation is imposed on Lotus in a cancellation deed other than the requirement for Lotus to issue Lotus shares to the holder of performance rights representing not more than fair value for the relevant performance rights.

45    Clause 9.4 of the LTIP Rules provides that if a Change of Control event occurs (defined to include an order of the Court convening a meeting for the purposes of the Share Scheme) all unvested rights will vest and convert into a vested right notwithstanding that the performance measures have not been met if the A-Cap share price is equal to or greater than 9.25 cents on the date the Change of Control event occurs. If the share price is less than 9.25 cents on that date then the Board (defined to include the board of directors of A-Cap) must as soon as practicable after the Change of Control event occurs determine, in its absolute discretion, the number of unvested rights of a participant that will vest and convert into a vested right notwithstanding that the performance measures have not been satisfied, unless the Board in its sole and absolute discretion determines otherwise. Mr Dixon deposes, on information and belief, that although the LTIP Rules refer to 9.25 cents, when shareholders approved the plan, it was approved subject to an increase of the threshold to 10 cents. While expressed as an absolute discretion, it is implicit that the Board must act honestly (or honestly and reasonably) in the exercise of that discretion. That is, there must be a reason that is not arbitrary for determining to vest all or a proportion of unvested performance rights in the circumstance of a Change of Control event (as defined in the LTIP Rules).

46    A circular resolution of the A-Cap directors records that they voted in favour of a resolution that had the effect of vesting all unvested performance rights of each director on the Record Date subject to the shareholders approving the Share Scheme by the statutory majorities. The proposed Scheme booklet records that the intended effect of that resolution was that the performance rights would vest on the Record Date subject to the Share Scheme becoming effective, not to shareholders approving the Share Scheme. As the proposed Scheme booklet has been verified by the A-Cap directors, I accept that the intention of the directors is that the performance rights will only vest on the Record Date if the Share Scheme becomes effective and will not vest merely on shareholders voting in favour of the Share Scheme by the statutory majorities.

47    The circular also records that each director abstained from voting on that resolution to the extent it related to that director’s performance rights. It also records:

I.    In light of this and having considered all of the circumstances, each Director (except in relation to their own Unvested Rights, in which they have an interest as disclosed) believes it is necessary and desirable in the context of the Share Scheme that they exercise his or her discretion under the Director LTIP to vest all of the Unvested Rights held by each other Director (but not in respect of their own Unvested Rights in which they have a personal interest as disclosed) in accordance with rule 9.4(b)(iii) of the Director LTIP, subject to A-Cap Shareholders resolving to approve the Share Scheme by the requisite majorities of A-Cap Shareholders under the Corporations Act at the Scheme Meeting.

48    The proposed Scheme booklet runs to 448 pages. The booklet discloses, to a reader with sufficient stamina, the following information.

(1)    In Section 6.8d (p 95), that A-Cap has 30,000,000 performance rights issued in four tranches of 7,500,000 each of which expire on 17 January 2025. The tranches of the performance rights vest if the volume weighted average price of A-Cap shares for 10 consecutive trading dates meets the following thresholds: 14 cents; 18 cents; 22 cents; and 26 cents. The first tranche of 7,500,000 performance rights has vested because the performance measure (14 cents) was satisfied. The other tranches of the performance rights are unvested.

(2)    In Section 6.14 (p 103), for the last 12 months A-Cap shares have been trading at levels significantly below each of the thresholds for the unvested performance rights to vest. The highest price in that period was 11 cents in September 2022 and the lowest 4.1 cents in July 2023. At the time the proposed Schemes were announced the share price was 4.3 cents.

(3)    In Section 3.5q. (p 64) that it is a condition precedent that binding deeds are in place with holders of the performance rights or the performance rights have vested such that there will be no performance rights on issue on the Record Date.

(4)    In Section 1.5 (pp41-44), that 5,000,000 performance rights have been issued to six directors of which 1,250,000 have vested and 3,750,000 remain unvested. Further, if the Share Scheme is approved and implemented, that each of those directors will be issued A-Cap shares that will be acquired under the Share Scheme in exchange for 1,412,429 new Lotus shares. (Additional details of the interests of each director in A-Cap and implementation of the Scheme were provided in Section 12.1 (pp 184-185)).

(5)    In Section 12.2b. (pp186-187), a more detailed description of the condition precedent in cl 3.1(q) and cl 6.20 of the SID is provided. It also records that the A-Cap Board determined to exercise its discretion under the LTIP Rules to vest the remaining three (unvested) tranches of the performance rights with effect on the Record Date subject to the Share Scheme becoming effective.

49    In the form in which A-Cap requested the Court’s approval of the proposed Scheme booklet, Section 12.2b. did not contain an explanation of the reason(s), if any, for the A-Cap directors determining that it was ‘necessary and desirable’ for the Board to exercise its discretion under the LTIP Rules to vest all unvested performance rights. The proposed Scheme booklet also provided no explanation for the reason(s), if any, that the directors preferred to vest all performance rights rather than negotiate with Lotus for cancellation deeds in respect of those rights. In circumstances in which the performance rights would expire in January 2025 and the performance of the A-Cap share price was well short of that which would result in the remaining performance rights vesting, it might be thought that the ‘fair value’ of the performance rights was significantly less than the value of an A-Cap share. Acting rationally, Lotus would not – and was not permitted in accordance with cl 6.2(b) of the SID – to provide consideration more than the fair value of the performance rights. A-Cap tendered no evidence on the hearing of the application of the fair value of the performance rights.

50    It follows that the decision of the directors to vest all unvested performance rights under the terms of the LTIP Rules raises the possibility that, by so doing, they have conferred upon themselves a benefit that exceeds the fair value of those performance rights. As that was a possibility that was contemplated by the terms of cl 6.2(a) of the SID that is a benefit the directors would receive in connection with implementation of the Share Scheme that will not be received by shareholders which do not also hold performance rights.

51    While the performance of the A-Cap share price may have rendered the performance rights of less value than A-Cap shares, in the context of a change of control transaction in which the directors were to lose office, there may be rational and legitimate reasons for considering that the value of the cancellation of those rights, as contemplated in the SID, was greater than the fair value of those rights absent a change of control transaction. Accordingly, there may be rational and legitimate reasons for Lotus to provide consideration, in the form of Lotus shares, equivalent to the shares that would be received if the performance rights vested and A-Cap shares issued before the Record Date.

52    Having regard to these matters, I am satisfied that there is no obvious reason for considering that vesting of all performance rights will confer on the directors a benefit that exceeds the value of those rights in the context of the Schemes and terms of the SID. Further, if and to the extent the directors may receive consideration for performance rights that exceeds the fair value of those rights, it is doubtful that the excess would be material or be likely to induce the directors to vote in favour of the Share Scheme or recommendations in favour of the Schemes. Each director will receive 1,412,429 new Lotus shares (of a value of approximately $160,000) in exchange for the unvested performance rights upon implementation of the Share Scheme. That consideration is to be viewed in a context in which each director will be removed from office. Further, that any amount by which the consideration for the performance rights may exceed fair value (premium for performance rights) will be a portion, not the whole, of the Lotus shares issued as consideration for performance rights. In that context, for at least three directors any premium for performance rights would be a small portion of the total Scheme Consideration that would receive. For three other directors any premium would be a greater proportion, but nonetheless unlikely, in context, to be an inducement.

(a)    Mr Jiandong has a relevant interest in 467,751,682 shares and 4,000,000 unlisted options in respect of which 132,299,911 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;

(b)     Mr Ingram has a relevant interest in 10,454,758 shares and 6,000,000 unlisted options in respect of which 3,203,321 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;

(c)    Mr Michael Liu has a relevant interest in 15,595,939 shares and 3,500,000 unlisted options in respect of which 4,551,465 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;

(d)    Mr Jijing Niu has a relevant interest in 2,250,000 shares and 3,500,000 unlisted options in respect of which 781,426 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;

(e)    Mr Mark Syropoulo has a relevant interest in 505,524 shares and 3,500,000 unlisted options in respect of which 288,636 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights;

(f)    Mr Zhenwei Li has a relevant interest in 3,500,000 unlisted options in respect of which 145,833 new Lotus shares would be received upon implementation of the Share Scheme independently of the performance rights.

53    Otherwise, I do not consider the issue of new Lotus shares for performance rights to be class-creating even though it may create a different interest (or reason) for directors to vote in favour of the Share Scheme and Option Scheme in respect of their shares. The rights that the directors will receive for their performance rights (new Lotus shares) although received in connection with the Schemes are not rights that are, in substance, additional to rights of other shareholders. To the extent that there may be a premium for performance rights, for the reasons already given, I do not consider it to result in ‘rights’ so dissimilar that the directors (as shareholders) cannot meet with other shareholders in the same class.

54    While I am satisfied on the evidence tendered and on the assumption that A-Cap has properly discharged its duty and responsibility of full and frank disclosure on the hearing of the application that vesting of all performance rights does not raise an obvious reason for refusing to approve the Schemes, I am not satisfied that the explanatory statement, in the form in which A-Cap requested approval, provided adequate disclosure of the directors’ interests in the implementation of the proposed Schemes. Having regard to the connection between the directors’ recommendations to shareholders and optionholders and disclosure of their interests (including the facts that underpin the potential for payment of a premium for the performance rights), I consider it reasonable and necessary for the explanatory statement to include an explanation of the directors’ reason(s), if any, for determining to exercise the discretion to vest all unvested performance rights under the terms of the LTIP Rules. The explanation now given and included in the Scheme booklet as approved is to the effect that ‘because the terms of the transactions required that all rights be vested and converted or cancelled on terms to be agreed and the Board did not consider that substantially different terms would be reached by agreement’. That is, the directors considered the consideration that Lotus would pay under the cancellation deed would be the same. It will be a matter for the shareholders and optionholders to consider whether that explanation together with the other matters disclosed in the Scheme booklet has any influence on the manner in which they vote on the resolutions at the meetings. With the amendments to the draft Scheme booklet recorded in the annexure to the orders made on the application, I consider that the disclosure of the directors’ interests in the proposed Share Scheme is adequate.

Directors’ recommendations

55    The proposed Scheme booklet (including the draft explanatory statement) explains the effect of the proposed Schemes and, subject to the amendments referred to earlier in these reasons, states that any material interest of the directors and the effect of those interests on the proposed Schemes insofar as it is different from the effect of the like interests of other persons. The proposed Scheme booklet states that the directors have unanimously recommended that shareholders and optionholders vote in favour of the Schemes, in the absence of a superior proposal, and subject to the independent expert continuing to conclude that the Schemes are in the best interests of the shareholders and optionholders. Subject to the same qualifications, each A-Cap director intends to vote on all A-Cap shares held or controlled by them, in favour of the Share Scheme.

56    As I noted in Chesser Resources (at [61]) (by reference to the observations of Moshinsky J in Japara Healthcare Limited, in the matter of Japara Healthcare Limited [2021] FCA 1150; (2021) 156 ACSR 695 at [71] and the other authorities there cited), differing views have been expressed on the question of whether a director who is entitled to receive an additional benefit in connection with the scheme should make a voting recommendation. That is, a benefit in addition to a scheme consideration received as a shareholder. However, it has also been observed that a divergence in the authorities on this question ‘may be more apparent than real’.

57    Having regard to the nature of the ‘financial benefits’ the directors will receive and that they will now be fully and prominently disclosed in the proposed Scheme booklet, in this case, there is no reason in principle that the directors should decline to make a recommendation to shareholders as to how the shareholders should vote at any scheme meeting. In reaching this view, I take account that none of s 412(1)(a) of the Act, reg 5.1.01(1)(b) of the Regulations, reg 8301(a) of Sch 8 and reg 8302 of Sch 8, in its terms, disqualify a director from making a recommendation to shareholders about a scheme in circumstances in which the director may receive a substantial financial benefit if a scheme is approved. In the context of the facts of this case, as O’Bryan J observed in Kidman Resources (at [111]):

… shareholders, absent an explanation as to why any director is not “available”, does not “desire” or is not “justified” in making a recommendation’ (reg 8301(a)), or ‘has not decided’ whether he or she will vote in favour or against the scheme (reg 8302), would ordinarily expect directors to make such a recommendation, even when they may receive a substantial financial benefit. And, in my view, the statutory and regulatory regime applicable ordinarily requires them to make a recommendation, one way or the other, when they stand to gain if the scheme is approved or not.

(Emphasis original).

Lock-up devices

58    The SID, as amended, contains provisions for exclusivity (cl 9), reciprocal obligations to pay break fees (cl 10, cl 11) and termination where there is a competing transaction (cl 14.1(b)(iv)-(vi)). Provisions of this nature are standard commercial terms of agreement involving non-hostile change of control transactions. Australian Takeovers Panel Guidance Note 7 – Deal protection (Fifth issue published 8 August 2023) provides guidance on provisions of this nature and the circumstances in which they are not likely to involve ‘unacceptable circumstances’ from the perspective of the Panel. In this case, there is no obvious unfairness to shareholders or optionholders or potential to coerce shareholders or optionholders into voting in favour of the Schemes arising from the lock-up devices or deal protection provisions contained in the SID, as amended.

59    The circumstances in which the break fee is payable (characterised as a ‘reimbursement fee’) do not depart from standard practice: see, e.g., Asaleo Care Limited, in the matter of Asaleo Care Limited [2021] FCA 406 at [52] (and the authorities there cited). After amendments were made to the SID, the break fee was fixed at $660,000 which is approximately 1% of the implied equity value of A-Cap at the date the SID was made, which accords with the Panel GN 7. A break fee clause within the parameters of Panel GN 7 is generally not considered coercive. It is not payable merely because shareholders do not vote in favour of the Share Scheme. There is full and clear disclosure of the break fee and the circumstances in which it would be payable in the proposed Scheme booklet.

60    Lotus is also liable to pay a break fee of the same amount where A-Cap is entitled to terminate the SID for material breaches of terms or warranties or if certain conditions precedent relating to the Option Scheme are not satisfied or waived by Lotus. The element of reciprocity is another reason for considering that the break fee is not anti-competitive and within commercial norms: see, e.g., Excelsior Gold Limited, in the matter of Excelsior Gold Limited [2018] FCA 2064 at [61]-[64] (McKerracher J).

61    The exclusivity provisions: no continuing discussions (cl 9.1); no-shop (cl 9.2); no-talk (cl 9.3); due diligence information (cl 9.4); notification of approaches (cl 9.5); and, in effect, notice of competing transactions and matching rights (cl 9.6) are in relatively standard commercial form. The no-talk and restriction on the provision of due diligence information to third parties are subject to directors’ fiduciary duties (cl 9.7). After ASIC raised concerns regarding the form of the matching rights and fiduciary duty carve out provisions, these were amended by the first deed of amendment. These provisions, as amended, are acceptable having regard to the following.

(a)    The exclusivity period and coverage are capable of ascertainment. The clauses were publicly announced so that potential rival bidders can understand how to make an approach or competing bid.

(b)    Relevant restrictions are subject to directors’ fiduciary duties or that they are otherwise lawful.

(c)    The exclusivity period, although capable of extension by agreement, is six months from execution of the SID which is not an excessive period.

(d)    The provisions are explained and given prominence in the proposed Scheme booklet.

See, e.g., Asaleo at [54]-[57] (and the authorities there cited).

Performance risk

62    Lotus has executed the Deed Polls. Under each deed, Lotus irrevocably submits to the non-exclusive jurisdiction of courts in Western Australia and covenants in favour of shareholders and optionholders (as applicable) that it will comply with its obligations under the relevant Scheme. A-Cap and its directors may act as agent and attorney of the shareholders and optionholders for the purposes of enforcing the Deed Polls.

63    The Scheme Consideration for the proposed Schemes involves the issue of shares in Lotus to participants in the proposed Schemes. By the terms of the proposed Schemes, the transfer of all Scheme shares and Scheme options to Lotus is subject to Lotus first issuing to each Scheme shareholder and Scheme optionholder the Scheme Consideration in accordance with the Schemes and Deed Polls.

64    The risk to A-Cap shareholders and optionholders that Lotus may acquire their shares and options but not perform the obligations to issue and transfer the Scheme Consideration is almost entirely, if not completely, theoretical. There is, of course, a residual, theoretical, risk that if Lotus were not to complete the Schemes in breach of the Deed Polls, the Scheme shareholders and Scheme optionholders may suffer loss and may wish to commence proceedings against Lotus to recover that loss. As noted above, any proceedings could be commenced and prosecuted in a court of Western Australia.

65    A remote and theoretical performance risk is not a reason to refuse shareholders and optionholders the opportunity of voting in favour of the Schemes at scheme meetings: see, e.g., Chesser Resources at [56]; Anatolia Energy at [31]-[34].

Deemed warranty and no encumbrance provisions

66    The proposed Schemes will apply to the shareholders and optionholders and include deemed warranties and no encumbrance clauses in standard terms (cl 6.6 of both Schemes). The prevailing view is that such provisions are not objectionable provided that the attention of shareholders (and optionholders) has been drawn to them: see, e.g., Atlassian Corporation Pty Limited, in the matter of Atlassian Corporation Pty Limited [2013] FCA 1451 at [36]-[37] (and the authorities there cited). The warranties and no encumbrance clauses are specifically and clearly drawn to shareholders’ and optionholders’ attention in the proposed Scheme booklet.

Are shareholders properly informed?

67    Section 412(1) of the Act provides that where a meeting is convened under s 411 the body must, with every notice convening the meeting that is sent to a member or creditor, send the explanatory statement and it must contain information of the following character.

(1)    Explaining the effect of the arrangement and, in particular, stating the material interests of the directors, whether as directors, as members, or otherwise.

(2)    Explaining the effect on those interests of the arrangement insofar as it is different from the effect on the like interests of other persons.

(3)    Setting out such information as is prescribed.

(4)    Setting out any other information that is material to the making of a decision by a member whether or not to agree to the arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the members.

68    The prescribed information is described in reg 5.1.01 and Sch 8 (Pt 2, creditors/optionholders) (Pt 3, members/shareholder) of the Regulations.

69    As to optionholders, as noted earlier in these reasons, ASIC allowed A-Cap to send an explanatory statement that does not include most of the information prescribed in Sch 8 Pt 2.

70    As to shareholders, Sch 8, para 8301(a) provides that the explanatory statement must set out in relation to each director: (i) whether the director recommends acceptance of the Scheme or recommends against and, in either case, the reasons for so recommending; (ii) if the director is not available to consider the Scheme that the director is not so available and the cause of not being so available; and (iii) in any other case, that the director does not desire to make, or does not consider justified in making a recommendation and, if the director so requires, the reason for not wishing to do so. Schedule 8, para 8302(b) provides that the explanatory statement must also set out for each director by whom or on whose behalf shares are held whether the director intends to vote in favour of or against the Scheme or is undecided.

71    The draft Scheme booklet, as amended, appears to contain the required information and no apparent omission was drawn to the Court’s attention. Again, in keeping with the Scheme proponents’ duty and responsibility and the due diligence process undertaken, the Court is entitled to expect that any deficiency in the contents of the explanatory statement would be drawn to the Court’s attention.

72    A-Cap filed with its written submissions disclosure checklists for each of the Schemes. I have regard to those checklists and am satisfied that the draft Scheme booklet contains the information that is required to be disclosed in an explanatory statement for a members’ scheme and optionholders’ scheme of arrangement.

73    Otherwise, the facts Mr Ingram, Mr Bowes and Mr Dixon depose in their affidavits explain that a thorough verification process was undertaken for the purpose of identifying if there were any errors or misleading statements contained in the proposed Scheme booklet. Having regard to that evidence and that process, I am satisfied that reasonable endeavours have been undertaken to ensure that the information contained in the proposed Scheme booklet is accurate and not misleading in any material respect.

74    A-Cap has indicated that the financial results for the financial year ended 30 June 2023 for each of A-Cap and Lotus are to be lodged with the ASX by 30 September 2023. Those results have the potential to affect the opinion of the independent expert and the directors’ recommendations. Consequently, A-Cap intends to obtain an opinion from the independent expert upon publication of those financial results as to whether the opinion that the Schemes are in the best interests of the shareholders and optionholders in the absence of a superior proposal. If the independent expert’s opinion remains unchanged, A-Cap intends to make an ASX announcement to that effect. If the independent expert’s opinion changes, A-Cap intends to list the matter for further directions. I consider A-Cap’s approach and intended course of conduct appropriate subject, of course, to any material change in the independent expert’s opinion of the value of the Scheme Consideration.

Other matters

75    I am satisfied that the procedural requirements have been met or, to the extent these have not or will not be met, I am satisfied that the Court should exercise its power to modify or dispense with compliance with them as is reflected in the orders made on the application. The reasons for such modification or dispensation is either obvious from the nature of the orders made or explained elsewhere in these reasons. All modifications or disposal of procedural requirements were based on the nature of the evidence and submissions on A-Cap’s application.

76    A-Cap has requested that the Court make relatively standard orders under s 1319 with respect to convening and voting at the meetings and that the meetings be conducted as ‘hybrid’ meetings. Regarding the optionholders, A-Cap has requested that the amount of debts and claims for voting purposes on the proposed Option Scheme be based on the amount of the proposed Option Scheme Consideration for those options and given that all listed options have the same terms that each optionholder have one vote per option. I am satisfied that such orders are appropriate and should be made in this case.

77    A-Cap has requested that an order be made pursuant to r 1.3 of the Corporations Rules read with r 1.34 of the Federal Court Rules 2011 (Cth) dispensing with the requirement of r 2.15 which would otherwise make applicable the meeting requirements of Div 75 of Schedule 2 – Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth). Having regard to the nature of the proposed Schemes and the manner in which the meetings are to be convened and held that dispensation is appropriate.

78    A-Cap has requested that r 3.3(2) of the Corporations Rules be varied to relieve it from compliance with s 249Y(3) of the Act due to limitations arising from the online platform A-Cap proposes to use for the meetings if a person is present both in person and by proxy, the proxy vote will not be suspended during the meeting. However, if both the proxy and the in person vote, only the in person vote will be counted. I am also satisfied that dispensation from compliance with r 3.3(2), to the extent it requires compliance with s 249Y(3), should also be made.

79    A-Cap has requested an order dispensing with the requirement of r 2.4(1) of the Corporations Rules that the originating process be supported by an affidavit stating the facts in support of that process. That order will be also made because, in my view, it was not necessary for the purpose of commencing proceedings for orders under s 411 of the Act for the originating and (or) interlocutory process to be supported by an affidavit filed, at that time, stating the facts in support of the process. A short affidavit identifying the nature of the proposed Schemes was sufficient for the purpose of case managing the proceedings and to allocate dates for the first and second court hearings.

80    Last, A-Cap has requested that an order be made dispensing with the requirement of r 3.4 that it publish notice of the second court hearing in a newspaper. Having regard to the number and proportion of shareholders and optionholders that will receive paper copies (or hardcopies) of the Scheme booklet, there is a degree of doubt about the extent to which shareholders and optionholders preferred method of receiving information about A-Cap is electronic. Nonetheless, I accept that the prevailing method of ASX listed companies communicating with investors is through publication of announcements on the ASX online platform. I am satisfied that dispensation should be given as requested, subject to the Scheme booklet and communications with shareholders and optionholders prominently informing them that details of the second court hearing will be announced on the ASX platform and, otherwise, that details are available through A-Cap’s telephone information line.

Conclusion

81    Orders should be made substantially in terms of A-Cap’s minute of proposed orders.

Associate:

Dated:    22 September 2023