This case illustrates the preference of the Courts at a first scheme hearing to leave the question as to whether the scheme should be approved to be dealt with by shareholder discussions at the scheme meeting or the second court hearing, even where the expert has formed the view that the scheme is reasonable but not fair.
Blackgold International Holdings Limited (Blackgold) applied for leave under section 411(1) of the Corporations Act 2001(Cth) to convene a meeting to approve a proposed scheme of arrangement between Blackgold and its shareholders with consideration of 4 and a half cents per share.
In considering whether there was anything obvious about the scheme which would, if the requisite majorities were achieved, preclude the Court from making final orders at the second hearing, Siopsis J noted that there was an unusual feature of this particular scheme. This was because the expert report from BDO Finance (WA) Pty Ltd (BDO) stated that, in the expert’s opinion, the scheme was reasonable but not fair.
BDO based its opinion that the scheme was not fair on the following:
- prior to the announcement of the scheme, Blackgold's share price had been about 2 cents per share but trading in Blackgold’s shares had been, and was at the relevant time, very thin; and
- based on BDO’s independent assessment of the value of Blackgold’s underlying assets by reference to discounted cash flow analysis and the attendant assumptions and projections, BDO’s view was that the lowest value for Blackgold’s shares would be 7.4 cents and the highest would be 36.7 cents per share.
However, factors that led BDO to conclude that the scheme was nonetheless reasonable (and in the best interests of shareholders) included:
- the risks associated with carrying out coal mining in China (including the manner in which China is now seeking to regulate coal mining and the fact that at least one of Blackgold’s licences may not be renewed); and
- the fact that, given the thin share trading, the scheme may offer the opportunity for Blackgold shareholders to realise cash which they might not otherwise be able to do.
Siopsis J cited the observations of French J in Re Foundation Healthcare (2002) 42 ACSR 252 that the question of whether an arrangement warrants court approval is generally to be answered when the scheme returns to court for the second hearing (and not at the first hearing), and that the probability is that any questions as to whether any interests are adversely and unfairly affected will arise at the scheme meeting and/or final court approval stage.
Siopsis J concluded that the BDO report did not warrant the Court coming to the view that the scheme was so obviously unfair or unreasonable that it should not be allowed to go to a meeting, and it will always be open to an objecting shareholder to make submissions opposing approval at the second hearing.