Tulla Resources PLC, Re

1. MRS JUSTICE JOANNA SMITH: Tulla Resources plc (“ the Company ”) applies to the court today for an order under section 899 of the Companies Act 2006 (“ ”) for the sanction of a scheme of arrangement referred to as “ CA 2006 the Demerger Scheme ”. This application will be followed on 23 June 2023 by a second application to the court to sanction a second scheme of arrangement referred to as “ the Takeover Scheme ” (together “ the Schemes ”). Although I am not dealing with the latter today, the documents and evidence to which I have been referred deal with both Schemes.

2. The Company is represented by Mr Ben Shaw KC, who has provided a comprehensive and helpful skeleton argument for which I am most grateful. No one else, whether shareholders or creditors, has attended court today with a view to making representations or to oppose the Schemes. I have read relevant sections of the Scheme Circular, together with the Chairman’s Report of the Demerger court meeting and the Takeover court meeting, four witness statements from Mr Stephen Maffey, together with a fifth provided shortly before the hearing (Mr Maffey is company secretary and general counsel of the Company) and three witness statements from Mr Kevin Maloney, executive chairman of the Company. During the course of the hearing, Mr Shaw highlighted various issues for my attention, together with the terms of the draft order sought.

3. The Company, a public limited company incorporated in England and Wales, and its subsidiaries, carries on business exploring and developing precious metals and minerals in Australia. Since March 2021, instruments representing the Company’s shares have been admitted to trading on the Australian security exchange (“ ASX ”). ASX uses the clearing house electronic sub-register system (“ CHESS ”) for the purpose of transferring ownership of securities. As the Company is incorporated in England, trades in its shares cannot be settled directly through CHESS. The Company has therefore issued CHESS depository interests (“ Tulla CDIs ”); these are traded on ASX and settled through CHESS. Each Tulla CDI represents one ordinary share in the Company. The legal title to the underlying ordinary shares (“ Tulla Shares ”) is held on behalf of the Tulla CDI holders by CHESS Depositary Nominees Pty Ltd (“ CDN ”), a subsidiary of Australian Securities Exchange Ltd, the Australian public company which operates the ASX. Holders of Tulla CDIs have the right to re-materialise their interests in the Company by surrendering their Tulla CDIs and acquiring shares in the Company from CDN. As at 2 May 2023, the Company’s issues share capital comprised 321,804,002 fully paid Ordinary Shares of £0.022962 each. Of these issued Ordinary Shares, 321,191,095 (i.e. 99.8%) were held by CDN and were represented by Tulla CDIs.

4. The Company’s principle asset is a 50% interest in an unincorporated joint venture known as the Central Norseman Gold Project (“ the CNG Project ”) located in the eastern goldfields of Australia. Pantoro Ltd, a public limited company incorporated in Australia (“ Pantoro ”) owns the other 50% interest in the CNG Project. Two subsidiaries of the Company own industrial mineral rights (“ IM rights ”) which are excluded from the joint venture with Pantoro. The Company and Pantoro have agreed to consolidate the ownership of the CNG Project within a single entity with the merged group focusing on gold mining and battery metal rights. It is anticipated that this will create a simplified structure with consequent benefits in terms of efficiency, enhanced liquidity and scale. This consolidation is to be effected by the Takeover Scheme, a transfer scheme in conventional form which will involve the acquisition of the Company’s entire issued share capital. As consideration for that transfer, Pantoro will issue 4.9578 New Pantoro Shares for every Takeover Scheme Share.

5. However, Pantoro wishes to focus only on gold mining and battery metals. It does not wish to pursue the development or exploitation of the Company’s IM Rights. Accordingly, it has been simultaneously agreed that before Pantoro’s takeover of the Company, the IM Rights will be demerged to a new Australian private company known as Phoenix Industrial Minerals Pty Ltd (“ Phoenix ”) for separate exploration and development; hence the separate Demerger Scheme which is effectively running in parallel with the Takeover Scheme and which is a condition of the Takeover Scheme. The demerger Scheme, however, is not conditional on the sanction or implementation of the Takeover Scheme.

6. The mechanism for effecting the demerger involves the ummarizedion of part of the balance standing to the credit of the Company’s share premium account through the issue of fully paid Demerger Bonus Shares to members. The issue of these new Demerger Bonus Shares was approved by special resolution of the Company on 29 May 2023. The intention is that they should now be cancelled and repaid on terms that the Company will satisfy its obligation to repay share capital by paying up the subscription price for new shares in Phoenix that will be issued to a custodian.

7. On 8 June 2023, Phoenix entered into a sale and purchase agreement (“ IMR Sale Agreement ”) with the Company’s two subsidiaries agreeing to purchase the IM Rights in exchange for payment of the market value of those rights as reported by Grant Thornton on 29 May 2023 in the sum of £1.5 million. In satisfaction of its obligation to pay the subscription price for new shares in Phoenix, the Company will issue a promissory note which it will assign to its subsidiaries in satisfaction of the obligation to pay the purchase price for the IM Rights under the IMR Sale Agreement. The net result of the demerger, as I understand it, will be that the Company owes its subsidiaries the balance due under the promissory note. Phoenix will become bound by the Demerger Scheme through the provision of a conventional undertaking to the court provided by Mr Shaw during the hearing today.

8. Mr Justice Zacaroli heard the Company’s application to convene meetings of shareholders to consider both Schemes on 5 May 2023. At that hearing, the Company raised two specific issues for consideration. In granting permission for these meetings to take place, Mr Justice Zacaroli expressed his provisional satisfaction as to those issues: first that the reduction of capital involved in the Demerger Scheme was not barred by section 641 (2A) CA 2006 ; and second that the Demerger Scheme involved a single class of members such that it was appropriate to convene a single meeting of shareholders to consider the Demerger Scheme.

9. Turning then to the jurisdictional requirements as set forth in sections 895 to 899 CA 2006 , I am satisfied that the Demerger Scheme amounts to a compromise or arrangement as required by section 895(1) CA 2006 in the sense that there is the necessary element of ‘give and take’ between the Company and its members, that being a low jurisdictional hurdle (see Lazari Properties 2 Ltd & Ors v New Look Retailers Ltd & Ors [2022] 1 BCLC 557). Under the Demerger Scheme, the Demerger Scheme Shareholders give up valuable IM Rights which would otherwise be available for distribution on the winding up of the Company in exchange for a new beneficial interest in shares in Phoenix.

10. Mr Justice Zacaroli considered there to be no issues as to class composition or otherwise at the convening hearing. Although the two issues raised by the Company before him at the convening hearing have quite properly also been raised with me, I accept that there is no reason now for the court to take a different view. On the issue of section 641 (2A) CA 2006 , I accept that it would not be appropriate for the two Schemes to be treated as a single composite scheme so as to engage the prohibition on reductions of capital as part of a takeover scheme. They do not involve the mischief at which section 641 (2A) is aimed because they do not involve the use of a reduction of capital to facilitate an acquisition of shares in the Company. Although it has been given an opportunity to comment, HMRC has apparently declined to do so. There is no attempt to use a reduction in capital to get around the paying of stamp duty and, further, the Demerger Scheme has a sensible commercial purpose of its own, namely to separate the Company’s industrial minerals business from its gold and battery metals businesses and give shareholders separate interests in each.

11. As to the issue of class constitution (where the test is well-known and involves considering whether rights are not so dissimilar as to make it impossible for members to consult together with a view to their common interest – see Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583) various features of the Demerger Scheme were drawn to Mr Justice Zacaroli’s attention and have been raised before me. Like him, I am satisfied that it was appropriate to give permission for the Company to convene a single meeting. The Demerger Scheme involves a single deal under which the Demerger Scheme Shareholders will receive a pro rata distribution of demerger bonus shares, and the demerger bonus shares will be cancelled and repaid on terms that all Demerger Scheme Shareholders, or in the case of CDN, Tulla CDI holders, will receive beneficial interests in Phoenix shares.

12. One final potential issue arises by reason of the fact that the Demerger Scheme contains a mechanism for “cashing out” Ineligible Foreign Securityholders. However, this also does not to my mind create any difficulties. Mr Justice Zacaroli was comfortable that there was no class constitution issue by reason of the existence of this mechanism and that there is no difference in the rights of Ineligible Foreign Securityholders. Their jurisdiction is a characteristic personal to them and it is open to them to provide an address where their shares may be enjoyed.

13. My attention was drawn by Mr Shaw in his skeleton argument to the irrevocable undertakings given to Pantoro by directors of the Company and others to vote in favour of the Schemes. But I accept that where no additional consideration for the provision of these undertakings was provided, they do not give rise to any class composition issues.

14. The Scheme Document contains the elements required by part 26 CA 2006 and a full and proper explanation of the Demerger Scheme and its effects on the Scheme’s Shareholders. The Explanatory Statement includes relevant disclosure, including cross-referencing to the interests of the directors set out in part 9 of the Scheme Document. The notice requirements provided for in the order of Mr Justice Zacaroli have been complied with in convening the court meeting. Owing to the fact that the Company recognized that CDN would be likely to receive instructions from Tulla CDI Holders both to vote for and against the Demerger Scheme, he made a “headcount direction” (see CGW Pharmaceuticals Plc [2021] EWHC 716) to the effect that where Demerger Scheme shareholders cast votes both for and against the scheme, those shareholders would be treated as voting in favour of the scheme if they cast more votes for the scheme than against the scheme, and otherwise would be treated as voting against the scheme.

15. The Demerger court meeting satisfied the requirement for a coming together at a physical venue taking place on 29 May 2023 and described in detail in the Chairman’s Report. The Demerger Scheme was approved at the court meeting by the statutory majority of more than 75% in value of those shareholders attending and voting at the meeting. The majority in value terms was 99.83%; the majority in number terms was 93.75%.

16. In his skeleton argument, Mr Shaw referred me to the relevant legal principles as to the approach to take to the exercise of my discretion in determining whether to sanction the Demerger Scheme. In particular, he referred me to the well-known passage in Buckley on the Companies Acts at [219] to [232], together with the authority of Re TDG Plc [2009] 1 BCLC 445 , per Morgan J at [29] to [30], where the learned judge ummarized the four key matters which require attention when the court is considering whether to sanction any proposed scheme of arrangement. Those matters were as follows:

1. The court must be satisfied that the provisions of the statute have been complied with.

2. The court must be satisfied that the class of shareholders, the subject of the court meeting, was fairly represented by those who attended the meeting, and the statutory majority are acting bona fide and not coercing the minority in order to promote interests adverse to those of the class they purport to represent.

3. An intelligent and honest person, a member of the class concerned and acting in respect of his own interests, might reasonably approve the scheme.

4. There must be no blot on the scheme.

17. I note that, in addition to setting out those matters, Morgan J also made it clear at [30] of his judgment that: “ ... the court does not act as a rubber stamp simply to pass without question the view of the majority but, equally, if the four matters I have referred to are all demonstrated, the court should show reluctance to differ from the views of the majority, and should certainly be slow to differ from the views of the majority, on matters such as what an intelligent, honest person might reasonably think.”

18. Having regard to each of the four matters identified by Morgan J, I am satisfied that the relevant requirements for the exercise of my discretion are met in this case. Taking each in turn: (1) I am satisfied that the provisions of the statute have been complied with for reasons I have already identified; (2) I am satisfied that the class of shareholders who were the subject of the court meeting was fairly represented by those who attended the meeting, and there is no evidence to suggest that the statutory majority was acting other than bona fide or coercing the minority to promote interests adverse to those of the class of Demerger Scheme Shareholders; (3) I am satisfied that the Demerger Scheme is one that an intelligent and honest person, a member of the class concerned and acting in respect of his own interests, might rightly approve. I accept that the Demerger Scheme Shareholders are the best judges of what is in their commercial interests and that the court ought not to depart lightly from that assessment. The majority in favour of the Demerger Scheme at the court meeting was very strong indeed; (4) I have not found any technical or legal defects in the Demerger Scheme and none has been drawn to my attention.

19. As for the proposed reduction in capital, the Company has obtained the necessary authority in general meeting for a reduction in its capital.

20. On 7 June 2023, the Company applied for and obtained directions in relation to the proposed cancellation of Demerger Bonus Shares. Deputy ICC Judge Agnello KC was satisfied that there was no real likelihood that the proposed reduction of capital would prejudice the interests of the Company’s creditors. She therefore directed that section 646 CA 2006 was not to apply as regards any class of creditors of the Company.

21. I have no reason to suppose that Deputy ICC Judge Agnello KC was wrong to disapply section 646 CA 2006. This is only a small reduction of capital of around £1.5 million. There is no evidence of any financial difficulty on the part of the Company and, during the course of his oral submissions, Mr Shaw showed me a proforma balance sheet anticipating the balance sheet post-reduction and making clear that there is ample cash in the Company to meet any creditor claims. The Company has in any event obtained the consent of its major creditor, Nebari, and its contingent creditor, Pantoro, and has sufficient liquidity to meet the claims of other, smaller current creditors.

22. Finally, as I have mentioned, I received a fifth witness statement from Mr Maffey shortly before today’s hearing, confirming that all conditions precedent to the Demerger Scheme, other than the sanction of the court, have been satisfied.

23. In all the circumstances and on the undertaking of Phoenix to which I have referred, I accept that both the jurisdictional and discretionary requirements have been satisfied for the Demerger Scheme and I am prepared to sanction the scheme under section 899(1) CA 2006 . I am also prepared to confirm the cancellation of the Demerger Bonus Shares under section 648(1) CA 2006, and I am content with the form of order that has been put before me.

24. Although the skeleton argument for today’s hearing makes submissions as to the Takeover Scheme, there is no need for me to address those submissions, as they will be dealt with by the court on 23 June 2023. Epiq Europe Ltd hereby certify that the above is an accurate and complete record of the proceedings or part thereof. Unit 1 Blenheim Court, Beaufort Business Park, Bristol BS32 4NE Email: [email protected] This transcript has been approved by the Judge