Federal Court Orders Shareholder Meeting on Company Merger

OUTCOME: Allowed

FEDERAL COURT OF AUSTRALIA

[COMPANY], in the matter of [COMPANY] [2007] FCA 2079

[COMPANY]

(ABN 46 107 406 771) NSD 2390 OF 2007

LINDGREN J

13 DECEMBER 2007

SYDNEY IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 2390 OF 2007

IN THE MATTER OF [COMPANY] (abn 46 107 406 771) BETWEEN: [COMPANY]

(ABN 46 107 406 771)

Plaintiff

JUDGE: LINDGREN J

DATE OF ORDER: 13 DECEMBER 2007

WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act): (a) the plaintiff, [COMPANY] ([NAME]) convene a meeting (Scheme Meeting) of the ordinary shareholders in [NAME] other than the [NAME] of Excluded Shares, for the purpose of considering and, if thought fit, agreeing (with or without modification) to a Scheme of Arrangement proposed to be made between [NAME] and its ordinary shareholders, other than the [NAME] of Excluded Shares, the terms of which are contained in Annexure B of the scheme booklet which is exhibit 1 in these proceedings (Scheme Booklet); (b) the Scheme Meeting to be held on 29 January 2008 at 10am at The [NAME] 2 Harbourview Hotel, 17 Blue St, North Sydney; (c) [NAME] [NAME] or failing him, [NAME] act as [NAME] of the Scheme Meeting; (d) the Chairperson of the Scheme Meeting have the power to adjourn the Scheme Meeting for such time that the [NAME] considers appropriate; (e) the Scheme Booklet be approved for distribution to shareholders; and (f) the Scheme Booklet to be dispatched to each of the shareholders of the plaintiff be in the form or to the effect of exhibit 1 and may be sent by pre-paid post, and in the case of a member of the plaintiff whose registered address is outside the country, by pre-paid airmail post, or dispatched by air courier for overseas pre-paid post.

2. Rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) shall not apply to the Scheme Meeting, except in so far as that rule applies Regulation 5.6.13 of the Corporations Regulations 2001 (Cth).

3. The plaintiff publish a notice of the hearing of any application for an order approving the Scheme substantially in the form of "Annexure A" hereto on or before 22 January 2008 and the plaintiff is relieved from compliance with Rule 3.4 of the Federal Court (Corporations) Rules 2000 (Cth) to the extent necessary.

4. The proceedings be stood over to 1 February 2008 at 9.30 am before Justice Lindgren, for hearing of any application to approve the Scheme.

5. The plaintiff be grated liberty to apply.

(a) The plaintiff exercise the liberty to apply referred to in Order 5 if the plaintiff proposes to inform shareholders of any amendment to the Merger Ratio.

6. These Orders be entered forthwith.

An "Excluded Share" is a fully paid ordinary share in [NAME] held by [COMPANY] or its Related Bodies Corporate as defined in section 50 of the Act. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 2390 OF 2007

(ABN 46 107 406 771)

Plaintiff

JUDGE: LINDGREN J

DATE: 27 DECEMBER 2007

PLACE: SYDNEY

REASONS FOR JUDGMENT (first court hearing)

INTRODUCTION 1 On 13 December 2007 I made an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) on the application of the plaintiff ([NAME]) that [NAME] convene a meeting of its ordinary shareholders, other than [NAME] of excluded shares, for the purpose of their considering and, if thought fit, agreeing (with or without qualification) to a scheme of arrangement between [NAME] and its shareholders (Scheme Meeting, Shareholders and Scheme respectively). An excluded share is a fully paid ordinary share in [NAME] held by [COMPANY] ([COMPANY]) or its Related Bodies Corporate as defined in s 50 of the Act. 2 I also made an order pursuant to s 411(1) of the Act approving the explanatory statement required by s 412(1)(a) of the Act to accompany the notice convening the Scheme Meeting for distribution to the Shareholders. 3 The following are the reasons why I made those orders.

OUTLINE OF SCHEME 4 [NAME] is a public company registered in Victoria. Its securities are listed on the Australian Stock Exchange (ASX). It carries on business as an oil and gas exploration company. 5 Under the proposed Scheme, the Shareholders will sell all of their shares, other than excluded shares, to [COMPANY]. [COMPANY] is a public company also listed on the ASX. 6 The consideration that the Shareholders will receive for each share in [NAME] is a value equal to 1.175 [COMPANY] shares for every [NAME] share (the Merger Ratio), subject to adjustment in certain circumstances under a reset mechanism (see para 12). 7 The Shareholders can elect to receive the consideration (Scheme Consideration) in one of the following three forms: (a) The [NAME], comprising 1.175 [COMPANY] per ordinary share in [NAME]; (b) The Mixed Scheme [NAME], comprising $0.50 cash per ordinary share in [NAME] plus the number of [COMPANY] shares required to bring the value of the Scheme Consideration up to the value of the Merger Ratio; or (c) The [NAME] comprising: (i) $0.50 cash per ordinary share in [NAME]; (ii) a further cash sum being a proportionate share of the "Total Scheme Cash Pool Residual" (being $115 million less the amount of cash paid to Shareholders who elect the Mixed Scheme [NAME]); plus (iii) the number (if any) of [COMPANY] shares required to bring the value of the Scheme Consideration up to the value of the Merger Ratio. 8 If a Shareholder does not make a valid election, that Shareholder is deemed to have elected the [NAME] for all shares held. 9 The Scheme will effect the acquisition of [NAME] by [COMPANY] and will result in [NAME] becoming a wholly owned subsidiary of [COMPANY]. [NAME] will then cease to the listed on the ASX. 10 [NAME] and [COMPANY] entered into a Merger Implementation Deed (MID) on 24 October 2007, as amended and restated on 12 December 2007. By the MID, they agreed to use their best endeavours to implement the Scheme, subject to satisfaction or waiver of various conditions precedent. The conditions precedent include Shareholder and Court approval. 11 The Scheme will be implemented as follows: (a) [COMPANY] will provide the cash component of the Scheme to [NAME] on the business day prior to the implementation date of the Scheme by depositing that sum into a trust account operated by [NAME] as trustee for the Shareholders as at the record date (being five business days prior to the implementation date); (b) On the implementation date, [COMPANY] will provide the scrip component of the Scheme Consideration to the Shareholders (other than "[NAME]" and "[NAME]" – see respectively para 20 and para 14) by entering the shareholding details of the Shareholders in the register of members of [COMPANY], and despatching (within five business days) to the Shareholders the relevant holding statements, share certificate or equivalent documentation representing the total number of [COMPANY] shares issued to the respective Shareholders; (c) The scrip component of the Scheme Consideration which would otherwise be required to be issued to "[NAME]" and "[NAME]" will be issued to [COMPANY] ([NAME]) as the entity appointed by [COMPANY] for the purposes of [NAME] and remission of the proceeds of [NAME] to [COMPANY]. [COMPANY] will hold the proceeds of [NAME] on trust for such "[NAME]" and "[NAME]" and [COMPANY] will pay the proceeds to them according to their entitlements; (d) On the implementation date, all of the shares in [NAME] will be transferred to [COMPANY]. 12 The reset mechanism works in the following way. [COMPANY] is entitled to reset the Merger Ratio during a "Reset Period" if: · during a "Drilling Period", a public announcement is made by [COMPANY] which provides confirmation of a "Material Discovery" having been made as a direct result of drilling on permits in which [COMPANY] holds an interest; · [COMPANY]'s post-discovery share price is 15% greater than its pre-discovery share price; and · [COMPANY]'s share price also outperforms the S&P/ASX Energy 200 index by a cumulative 15%. 13 The "Reset Period" is defined in the MID. [NAME] will notify the Shareholders of any amendment to the Merger Ratio in advance of the Scheme Meeting by making an announcement to the ASX and sending a separate communication to the Shareholders outlining the effect of the reset mechanism being triggered. 14 I have referred above to the "[NAME]". The reference is to Shareholders who, at their [NAME], elect to dispose of the scrip component of the Scheme Consideration to which they are entitled, under a [NAME] [NAME] conducted by [NAME] ([NAME] [NAME]).

DEEDS POLL 15 The obligations of [COMPANY] under the Scheme, and those of [NAME] under the [NAME] [NAME], are supported by separate deeds poll executed by [COMPANY] and [NAME] in favour of the Shareholders.

A POSSIBLE TAKEOVER BID FOR THE SHARES IN [NAME] 16 If the Scheme is not agreed to by the Shareholders, but a certain related scheme between [COMPANY] (which holds approximately 53% of the shares in [NAME]) and its shareholders is approved both by the Court and the shareholders of [COMPANY], [COMPANY] must make a takeover bid under Ch 6 of the Act in respect of the ordinary shares in [NAME]. The consideration which [COMPANY] would offer under the takeover bid for each ordinary share in [NAME] would be the number of [COMPANY] shares equal to the Merger Ratio. There would be no cash consideration. However, Shareholders would be offered the opportunity to participate in a [NAME] [NAME] on terms similar to the [NAME] [NAME] that forms part of the Scheme.

RECOMMENDATION BY THE DIRECTORS OF [NAME] 17 The board of directors of [NAME] unanimously recommends that, in the absence of a superior proposal, the Shareholders vote in favour of the Scheme.

INDEPENDENT EXPERT'S REPORT 18 [COMPANY] ([NAME]) was retained by the board of directors of [NAME] as an independent expert to assess the Scheme. [NAME] has prepared a report in which it concludes that the Scheme is in the best interests of the Shareholders in the absence of a superior proposal. [NAME] assesses the fair market value of each share in [NAME] to be between $1.40 and $1.60. [NAME] assesses the value of the Scheme Consideration by estimating the fair market value of a share in the proposed merged entity as being between $1.50 and $1.60. [NAME] estimates the value of the Scheme Consideration to be received by the Shareholders, that is to say, 1.175 [COMPANY] shares for every ordinary share in [NAME], as being between $1.65 and $1.75 per ordinary share in [NAME].

PERFORMANCE RISK 19 The provision for payment of the cash component of the Scheme Consideration to [NAME] prior to the transfer of the Shareholders' shares in that company (see para 11(a)) is a safeguard against the risk that the Shareholders will suffer delay or default in the provision of the Scheme Consideration after their shares have been transferred to [COMPANY]. They will not be relegated to the remedy of suing on the deed poll: see [COMPANY] [2004] FCA 738; [COMPANY] (2005) 53 ACSR 523 at 524; [COMPANY] (2006) 59 ACSR 82; [NAME] (2006) 59 ACSR 501; [COMPANY] (2007) 62 ACSR 400 at 405, at [23]. The cash component of the Scheme Consideration will be held by [NAME] on trust for the Shareholders according to their respective entitlements.

[NAME] 20 I have referred above to the "[NAME]". This reference is to a small number of [NAME] shareholders in [NAME] in respect of whom it is proposed that the scrip component of the Scheme Consideration to which they will become entitled be issued to [NAME] as the entity appointed by [COMPANY] for the purposes of [NAME] and the payment of the proceeds of [NAME] to the Shareholders.

EXCLUSIVITY ("NO SHOP" AND "NO TALK") RESTRICTIONS 21 Clause 9 of the MID is an exclusivity clause which contains "no shop" and "no talk" restrictions. The period of this exclusivity clause is from the date of the MID, being 24 October 2007, until the earlier of the end date of the MID, being 31 March 2008, or the termination of the MID in accordance with its terms. The maximum period of the exclusivity clause is therefore just over five months. 22 The exclusivity provisions are subject to the overriding obligations of the directors of [NAME] and [COMPANY] not to breach their fiduciary duties or statutory obligations. 23 The exclusivity provisions are given appropriate prominence in the Scheme Booklet. 24 I do not think that there is anything untoward or alarming in these provisions.

BREAK FEE 25 The MID provides in cl 10 for a break fee of $4 million. The break fee is reciprocal: it is payable by [NAME] to [COMPANY] and by [COMPANY] to [NAME] in the circumstances identified in the MID. 26 The break fee is not triggered merely by reason of the Shareholders voting not to agree to the Scheme.

Accordingly, it is not a disincentive to the Shareholders in their consideration of the proposed merger. 27 The reasonableness and appropriateness of the break fee is supported by affidavit evidence of the kind to which I referred in Re [COMPANY] (2007) 62 ACSR 400 at 411, at [55]. In particular, there is affidavit evidence of [NAME], a non-executive director and [NAME] of the board of directors of [NAME], to the following effect: · The break fee was agreed to as a result of normal commercial negotiations between [NAME] and [COMPANY]; · [COMPANY] required the break fee provision and the board of [NAME] was satisfied that the final form of the provision was acceptable; · The board of [NAME] negotiated a reverse break fee equal in amount; · Mr [NAME] believes that neither the break fee nor the exclusivity provisions mentioned above operate against the interests of the Shareholders and that it was in the interests of the Shareholders that those provisions be included in the MID; · The break fee of $4 million is approximately 0.88% of the total equity value of [NAME], or 0.85% of the total equity value assuming that options to take up shares are exercised.

Accordingly, the break fee is below the 1% "cap" referred to in para 7.14 of the Takeovers Panel's Guidance Note 7: Lock-up devices; and · The break fee of $4 million is approximately 0.64% of the value of the Scheme Consideration or 0.62% of the value of the Scheme Consideration assuming that options to take up shares are exercised. 28 In my view, the break fee provision should not stand in the way of the Shareholders having the opportunity to consider the Scheme.

[NAME] 29 There are 18,750,000 options on issue to subscribe for ordinary shares in [NAME]. Under the MID, [NAME] is to use its best endeavours to procure that each [NAME] holder has entered into an "[NAME] Agreement" with [COMPANY] or exercised all of their options prior to the date of the Scheme Meeting. 30 The number of new [COMPANY] shares that each [NAME] holder will receive for each [NAME], in consideration for the transfer of the [NAME] to [COMPANY], will be the number of new [COMPANY] shares equal to the [NAME] value, less the exercise price of the [NAME].

FINANCIAL ASSISTANCE 31 It is a condition precedent to the operation of the MID that [NAME] be "debt free" at 5 pm on the day prior to the second court hearing. 32 In so far as the repayment of debt by [NAME] would be likely to be financial assistance under Part 2J.3 of the Act, s 260C(5)(d) of the Act exempts "a discharge on ordinary terms of a liability that the company has incurred as a result of a transaction entered into on ordinary commercial terms" from the requirements of s 260A. 33 Moreover, s 260A(1) of the Act allows the giving of financial assistance to a person by a company for the acquisition of shares in the company or in its holding company, in the circumstances stated in paras (a), (b) or (c) of s 260A(1). The condition referred to in s 260A(1)(a) is that the giving of the financial assistance does not materially prejudice the interests of the company or its shareholders, or the company's ability to pay its creditors. 34 I accept [NAME]'s submission that, on the evidence, the proposed discharge of [NAME]'s liabilities would be exempt under s 260C(5)(d) of the Act and that, in any event, the giving of the financial assistance would not be prejudicial to the interests of [NAME] or the Shareholders or to [NAME]'s ability to pay its creditors. I accept the submission because: (a) the Shareholders will be given the opportunity to vote on the proposed Scheme after full disclosure of the proposed repayment of debt; and (b) the proposed repayment of debt does not materially prejudice the ability of [NAME] to pay its creditors, according to Mr [NAME] affidavit evidence.

CONCLUSION 35 It was for the above reasons that I was of the opinion that the Shareholders should have the opportunity of voting on the Scheme and that I ordered [NAME] to convene the Scheme Meeting.

I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate: Dated: 27 December 2007

Counsel for the plaintiff: [redacted]

Solicitor for the plaintiff: [redacted]

Counsel for [COMPANY]: Mr [COUNSEL]

Solicitor for [COMPANY]: [COUNSEL] of Hearing: 13 December 2007

Date of Judgment: 13 December 2007

Date of Publication of Reasons 27 December 2007