In the recent decision of Cauldron Energy Ltd v Beijing Joseph Investment Co Ltd [2016] WASC 22, the Court held that the requirement to obtain shareholder approval under a placement agreement was satisfied. This was despite the fact that in obtaining the approval, shareholders were not provided with all information material to the decision of whether or not to vote in favour of the resolutions.

Partner Robyn Ferguson and Associate Kellie Clee discuss the implications of this decision in the following alert.

Background

Cauldron Energy Ltd (Cauldron) entered into four letter agreements for the placement of shares in Cauldron to Beijing Joseph, Joseph Investment, Guangzhou City and Guangzhou Joseph for a total subscription price of $4 million.

Each of the placement agreements noted that shareholder approval was required in accordance with the ASX Listing Rules. Shareholder approval was obtained for the issue of the shares to Beijing Joseph, Joseph Investment and Guangzhou City (Subscribers) under three of the four placement agreements at a general meeting held on 30 September 2014.

Although shareholder approval had been obtained, the Subscribers refused to pay the subscription price and Cauldron commenced proceedings seeking to recover the subscription price.

The Subscribers argued that they were not required to pay as the resolutions passed at the general meeting were “not legally passed as a general resolution” and were “invalid and of no effect” on the basis that:

  • the resolutions were not obtained in accordance with all applicable laws including the ASX Listing Rules and the Corporations Act 2001 (Cth) (Corporations Act); and
  • shareholders of Cauldron were not given all information material and reasonably necessary to make the decision whether or not to vote in favour of the resolution.

Justice Mitchell held that, under the terms of the placement agreements, the Subscribers’ obligation to pay the subscription price was conditional upon the shareholders of Cauldron approving the placement of the relevant shares.

His Honour also considered that a proposal by Guangzhou City to invest an additional $5 million in Cauldron was material to shareholders’ decision whether to approve the placement of shares to Guangzhou City but this had not been disclosed to shareholders.

The Court was required to determine whether the validity of the shareholders’ approval  depended on shareholders being provided with all material and reasonably necessary information to decide whether or not to vote in favour of the resolutions.

Legal requirements for approving the placement of shares

The subscription and issue of shares in an ASX listed company may be subject to requirements under both the Corporations Act and the ASX Listing Rules.

Section 606(1) of the Corporations Act requires that a person must not acquire a relevant interest in voting shares in a company through a transaction in relation to those shares if (because of the transaction) their (or another person’s) voting power in the company would increase from below 20% to more than 20% (Restriction in s 606).

Section 611 sets out a number of exceptions to the Restriction in s 606.  This includes where the acquisition was approved by a resolution passed at a general meeting of shareholders where the shareholders were given all information known to the person proposing to make the acquisition or known to the company that was material to the decision on how to vote on the resolution (Item 7 Exception).

On the date that the notice of meeting was issued, Beijing Joseph, Joseph Investment and their associates (Joseph) held approximately 12.9% of the shares in Cauldron. The issue of shares and exercise of options provided for in the placement agreements was likely to cause Joseph to hold more than 20% of the shares in Cauldron. However, this scenario would ultimately depend on the shares and options issued to other investors and whether various options were exercised.

Rule 7.1 of the ASX Listing Rules provides that a company must not, without the approval of shareholders, issue or agree to issue shares exceeding 15% of the value of its securities.  This is calculated in the manner provided for in that listing rule (Restriction in LR 7.1).

Rule 7.2 of the ASX Listing Rules provides a number of exceptions to the Restriction in LR 7.1, including that it does not apply in the case of an issue of shares approved for the purposes of the Item 7 Exception.

Rule 7.3 of the ASX Listing Rules provides that, for shareholders to approve an issue of shares for the purposes of the Restriction in LR 7.1, the notice of meeting must include a number of specified matters. However, it does not expressly require shareholders to be given all information material to the decision of whether to approve the issue.

Shareholder approval for the purposes of the Item 7 Exception expressly requires shareholders to be given all information known to the company or to the person proposing to make the acquisition that is material to the decision on how to vote. However, approval for the purpose of the Restriction in LR 7.1 does not.

In addition to the requirements under the Corporations Act and the ASX Listing Rules, directors are bound and have a duty to make full and fair disclosure of all matters which are within their knowledge and which would enable the shareholders to make a properly informed decision on the issue in question. A director may be in breach of this duty when information put to shareholders is materially misleading or does not include material which is important and relevant to the decision which the shareholders are asked to make.

The Court’s decision

In spite of the fact that the voting power of Joseph in Cauldron may have ultimately increased from approximately 12.9% to more than 20% as a result of the placement agreements, the Court found that the efficacy of the shareholder approval obtained for the purposes of the placement agreements did not require compliance with the requirements set out in the Item 7 Exception, for the following reasons:

  • The placement agreements expressly referred to approval being obtained in accordance with the ASX Listing Rules. The information included in the notice of meeting satisfied Listing Rule 7.3 and the approval requirement under the Restriction in LR 7.1. On that basis, approval had been obtained in accordance with the ASX Listing Rules.
  • The placement agreements did not refer to any requirement for approval under the Corporations Act. Shareholder approval was not required to avoid a contravention of the Restriction in s 606 in respect of the issue of shares to Guangzhou City.  

    In respect of the issue of shares to Joseph, the requirement of shareholder approval to avoid a contravention of the Restriction in s 606 would depend on a variety of circumstances.  Therefore, the relevant placement agreements should not be construed as being conditional on a regulatory requirement which may or may not arise.

  • There is nothing in part 6.1 of the Corporations Act which provides that a resolution passed without material information is invalid, although it will not engage the Item 7 Exception.
  • A condition for the application of the Item 7 Exception is that shareholders were given all material information ‘known to the person proposing to make the acquisition or their associates’ as well as information known to the company. If the placement agreements were to require shareholder approval for the purposes of the Item 7 Exception, the Subscribers could conceivably avoid their obligations and invalidate any shareholder approval by refusing to provide the required information, which would be an unlikely commercial result.
  • To impose an obligation under the placement agreements to disclose all material information would introduce a considerable degree of uncertainty into the agreements. Whether particular information is material will often involve questions of judgment and degree, on which different minds may reasonably reach different conclusions. A condition of disclosure of all material information known to the parties would detract from the commercial certainty, and the commercial purpose, of the placement agreements.
  • The valid operation of the placement agreements should not depend on the engagement of the Item 7 Exemption. Section 607 of the Corporations Act expressly provides that a transaction is not invalid because it involves a contravention of the Restriction in s 606.
  • If material tending to favour approval is withheld, the withholding will not have had any substantial prejudicial effect because the approval will have been given despite information tending to support the decision not being available.

The Court also held that any omission to the proposal by Guangzhou City to invest an additional $5 million in Cauldron from the notice of meeting did not make the notice misleading and deceptive or likely to mislead or deceive.

Implications

Although it was unclear whether Joseph required shareholder approval to be obtained for the purposes of the Item 7 Exception, His Honour demonstrated a reluctance to impose additional requirements on Cauldron where:

  • the placement agreements did not include such a requirement; and
  • Cauldron had obtained shareholder approval in accordance with the requirements set out in the placement agreement.

This decision demonstrates the importance of considering and documenting any shareholder or regulatory approvals which may be required at the time the parties enter into the subscription or placement agreement.

However it also provides comfort to parties in that once a commercial agreement has been reached, the agreement will be enforceable in accordance with its terms and the Court will generally be reluctant to vary the agreement or to imply additional obligations.  Ultimately, the terms and requirements set out in the agreement will be paramount.