FEDERAL COURT OF AUSTRALIA In the matter of Phylogica Ltd [2004] FCA 1768 CORPORATIONS – application for validation of share issue – issue of a different class of shares varying existing rights – procedures and requirements of Corporations Act 2001 (Cth) not complied with – notice of deemed variation not given to shareholders or lodged with ASIC – validation and ancillary orders sought Corporations Act 2001 (Cth) ss 246B, 246C(5), 246F(3), 254E, 1322(4), 1322(6) Alpha Resources Ltd v Corporate Affairs Commission (1987) 5 ACLC 844 cited Farnell Electronic Components Pty Ltd, Re (1997) 15 ACLC 1676 cited Golden Gate Petroleum Ltd, Re (2004) 50 ACSR 659 applied Insurance Australia Group Ltd, Re (2003) 128 FCR 581 cited Onslow Salt Pty Ltd, Re (2003) 198 ALR 344 cited Wave Capital Ltd, Re (2003) 47 ACSR 418 cited IN THE MATTER OF PHYLOGICA LTD WAD 281 of 2004 RD NICHOLSON J 13 DECEMBER 2004 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 218 OF 2004 IN THE MATTER OF PHYLOGICA LTD (ACN 098 391 961) APPLICANT JUDGE: RD NICHOLSON J DATE OF ORDER: 13 DECEMBER 2004 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. Pursuant to section 1322(4)(c) of the Act, the Applicant and its directors and officers be relieved from any civil liability in respect of any contravention of: (a) section 246F(3)(a), with respect to any failure to lodge ASIC forms 2205 and 210 in regard to the issue of Class A Performance Shares in the Company on 25 May 2004 (Class A Shares). (b) sections 246B(1) and (3), with respect to any failure to implement the procedure for variation of the rights of the ordinary shareholders and to notify those shareholders of the variation within 7 days after the variation was made. 2. Pursuant to section 1322(4)(d) of the Act, the period set out in section 246F(3) to make lodgement with ASIC of forms 2205 and 210 including documents providing for all the rights of the Class A Shares be extended to close of business on the second business day after the date of this order. 3. Pursuant to section 254E(1) of the Act, the issue of: (a) 1,176,472 Class A Shares to Mr Saliba Sassine; (b) 588,236 Class A Shares to Ms Ursula Rosemarie Kees; (c) 588,236 Class A Shares to Mr Richard Miles Hopkins; (d) 294,118 Class A Shares to the University of Western Australia; (e) 294,118 Class A Shares to Ms Rolee Akhaury Kumar; (f) 125,000 Class A Shares to Mr Graeme Raymond Boden; (g) 1,470,590 Class A Shares to the Fox Chase Cancer Center; (h) 1,470,590 Class A Shares to Mr Bruce Fielding McHarrie; (i) 1,470,590 Class A Shares to Mr Wayne Robert Thomas; (j) 16,470,608 Class A Shares to the Telethon Institute for Child Health Research; (k) 3,235,298 Class A Shares to Sassine and Associates Pty Ltd; (l) 3,235,298 Class A Shares to Paul Michael Watt, issued on 25 May 2004, each be validated and confirmed on the terms and conditions set out in Annexure GRB5 to the Affidavit of Graeme Raymond Boden sworn on 9 December 2004 and filed in this matter and contained in schedule A in these orders. 4. The Applicant lodge a copy of these Orders with ASIC for the purposes of and pursuant to section 254E(2) forthwith. 5. The Applicant and all other interested parties have liberty to apply to vary these orders. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. 'SCHEDULE A' PHYLOGICA LIMITED ACN 098 391 961 TERMS AND CONDITIONS OF CLASS A PERFORMANCE SHARES Issue 1. The Class A Performance Share will be issued for no consideration. Conversion 2. On the Conversion Event, the Class A Performance Share will automatically, be converted into Ordinary Shares without payment to Phylogica. 3. Subject to clause 4, each Class A Performance Share will convert into (1) Ordinary Share which share will rank equally with all other Ordinary Shares then on issue in Phylogica from the time the conversion takes effect. 4. In the event that the Conversion Event does not occur, or a Takeover Event has not occurred on or before 31st August 2007, each 100,000 Class A Performance Shares will convert into one (1) ordinary share (with any fractional entitlements being rounded up to the nearest whole fully paid share). 5. In the event that Phylogica is listed on the ASX, the Company shall make application to have the Ordinary Shares allotted pursuant to the conversion of the Class A Performance Share listed for official quotation in accordance with the Listing Rules. 6. Such conversion will not constitute a cancellation, redemption or termination of the Class A Performance Share or the issue, allotment or creation of a new share but will be by way of variation of the status of and rights attaching to, the Class A Performance Share so that it becomes an Ordinary Share. 7. The Class A Performance Share once converted into Ordinary Shares, will rank equally with all other Ordinary Shares then on issue from the time the conversion takes effect. Dividends 8. The Class A Performance Share will have no entitlement to dividends. General 9. The Class A Performance Share is not transferable. 10. The Class A Performance Share will have no entitlement to any bonus or rights issues made by the Company. 11. The performance shareholder will have no right to vote at any meeting of Phylogica. 12. The rights attaching to the Class A Performance Share will not be deemed to be varied by the creation or issue of any shares in Phylogica ranking equally with the Class A Performance Share. 13. The performance shareholder has the same rights as ordinary shareholders as regards receiving notices, reports and financial statements, and attending general meetings of Phylogica. Definitions The following terms have the following meanings: 'ASX' means Australian Stock Exchange Limited; 'Class A Performance Share' means a performance share in the capital of Phylogica on the terms and conditions set out above; 'Company' or 'Phylogica' means Phylogica Limited ACN 098 391 961; 'Conversion Event' means the earlier of: (a) the Company entering into arms length licensing or other commercialisation agreements with an unrelated party of parties on commercially acceptable terms which relate to the commercialisation of the Company's intellectual property and which provides for payments or agreements of any of the following types: (i) two licensing or similar transactions with an unrelated party(ies) that have a lump sum payment in the form of a royalty, research and development payment, licensing fee or similar payment of a minimum of $150,000 each; or (ii) two co-marketing agreements with an unrelated party(ies) to promote, market, licence or sell the company's technology that have payment in the form of an upfront fee, royalty, research and development payment, licensing fee or similar payment; or (iii) two co-development agreements with unrelated party(ies) to develop, promote, market, licence or sell the company's technology or products together that have payment in the form of an upfront fee, royalty, research and development payment, licensing fee or similar payment; or (iv) any combination of the transactions mentioned above in (i), (ii) or (iii) such that it constitutes the entering into of two successful arms length agreements with unrelated party(ies) on commercially acceptable terms; or (b) either: (i) a person lodging a bidder's statement to acquire any of the issued shares and: A. the bidder receiving acceptances under the bid which result in its voting power in the Company increasing above 50%; and B. the takeover bid becoming unconditional; (ii) an offer being made to acquire all or substantially all of the assets or business of the Company which the board of Phylogica puts to shareholders to approve; or (iii) the Company entering into a court approved scheme of arrangement or reconstruction which has the effect of changing the control of the Company; 'Listing Rules' means the Listing Rules of the ASX from time to time; 'Ordinary Shares' means ordinary fully paid shares in Phylogica; and 'Takeover Event' means any transaction (whether by takeover, merger, scheme of arrangement or other business or capital reorganisation) the implementation of which would result in a change of control of the Company. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WAD 218 OF 2004 IN THE MATTER OF PHYLOGICA LTD (ACN 098 391 961) APPLICANT JUDGE: RD NICHOLSON J DATE: 13 DECEMBER 2004 PLACE: PERTH REASONS FOR JUDGMENT 1 The applicant brings by way of originating process an application under ss 254E(1)(a) and (b) and 1322(4)(a), (c) and (d) of the Corporations Act 2001 (Cth) ('the Act'). The application seeks validation and ancillary orders arising from the issue of Class A Performance Shares ('A Shares') by the applicant on 25 May 2004 at a time when the applicant was subject to s 246C(5) and failed to lodge a 'rights' document with the Australian Securities and Investments Commission ('ASIC'). ASIC does not oppose the orders sought by the originating process and did not therefore appear at the hearing. 2 The circumstances in which the application is brought are set out in four affidavits filed on behalf of the applicant. Two are affidavits of Mr Boden, the Chief Financial Officer and Company Secretary of Phylogica Ltd who is the applicant. One is sworn on 9 December 2004 and the other on 10 December 2004. There is a further affidavit of a solicitor representing the applicant sworn on 9 December 2004 and a further affidavit from another solicitor sworn on 10 December 2004. 3 The circumstances which appear are as follows. The applicant is an unlisted Australian public company. It was founded and incorporated in 2001 to commercialise proprietary drug discovery technologies developed over five years of collaboration between the Telethon Institute of Child Health Research and the Fox Chase Cancer Centre in Philadelphia, United States. 4 The applicant is therefore a bio-pharmaceutical company utilising functional proteomics for the discovery and development of novel peptide therapeutics focused on proteins and their interactions. The aim of the applicant is to develop new cost-effective therapies and drugs. Its internal product development focuses on drug development in relation to house dust mite allergies, stroke and breast cancer. It owns four granted patents for its core drug discovery technology. 5 On 24 April 2004 the directors of the applicant passed the following resolutions: '(a) to seek shareholder approval for the division of the 103 ordinary shares on issue in the capital of the Company into 30,294,154 ordinary shares ("Shares"), by dividing each existing share into 294,118 shares ("Resolution 1"); (b) subject to obtaining shareholder approval for the share division in Resolution 1, allot 125,000 Shares to Graeme Boden for the consideration of $1.00, such that the issued capital of Phylogica becomes 30,419,154 Shares ("Resolution 2");. (c) Create a new class of share described as the Class A Performance Share ("Class A Share") which will be convertible to Shares in Phylogica on a 1 for 1 basis, subject to certain performance milestones being satisfied ("Performance Milestones") ("Resolution 3"); (d) Subject to obtaining shareholder approval for the Share division in Resolution 1 and the allotment in Resolution 2, a free bonus issue of Class A Shares on the basis of 1 Class A Share per ordinary share held at the time such that 30,419,154 Class A Shares will be on issue ("Resolution 4")' 6 On 18 May 2004, and subsequently, advice was provided to the applicant which included the preparation of the terms and conditions of the issue of the A Shares. However, the applicant was not advised at the time of the issue of the A Shares that in circumstances where it had one class of shares such issue may constitute a deemed variation of the rights to the shares of the applicant already on issue if the rights attaching to the new shares were different rights and were not provided for in the applicant's constitution or in a notice, document or resolution lodged with ASIC: see s 246C(5). Further the applicant was not advised at the time that where a deemed variation of rights may arise from the issue of the A Shares, notices in the form of ASIC form 2205 and form 210, should be lodged with ASIC within 14 days of the resolution being passed and, further, that a written notice of variation of rights be sent to shareholders within seven days of the variation order under s 246B(3). 7 On 21 May 2004 the shareholders in a general meeting resolved unanimously to authorise the share division described in Resolution 1 above. On 25 May 2004 the applicant therefore allotted the A Shares to each of the 12 existing shareholders. 8 On 27 May 2004 form 484 and form 208 were lodged with ASIC. However, form 2205 and form 210 were not so lodged. Furthermore, the written notice of the deemed variation was not given to shareholders. 9 No arrangement was made for any of the procedures arising under art 3.6 of the applicant's constitution to be complied in relation to the issue of the A Shares. 10 In November 2004 the applicant entered into commercially sensitive negotiations with a third party company in order that the third party would invest in it. This resulted in due diligence checks, during the course of which it was discovered that the applicant had not acted in the ways previously foreshadowed. That is, there was an issue regarding the validity of the issue of the A Shares due to procedures not being followed by the applicant in accordance with s 246C and s 246F of the Act, with consequent contraventions of the Act. 11 As a consequence this application has now been brought. The 12 shareholders previously referred to have been contacted and consulted concerning their attitude to the application. As appears from the affidavit of the second solicitor, there is in evidence a copy of a written acknowledgment by each of those shareholders (other than two to which I will refer) that they have no objection to the orders now sought being made and making other appropriate acknowledgments. The two exceptions are institutions, one of which holds in the order of 300,000 A Shares and the other, being the Telethon Institute previously referred to, holds almost 16.5 million A Shares and is by far the largest shareholder. 12 The applicant is seeking orders under s 254E as previously referred to. The application is for an order extending time under s 1322(4)(d) read with s 1322(6) of the Act, effectively allowing the applicant to comply with the requirements of the Act and its constitution in relation to variation of rights attaching to shares, as well as its lodgement obligation under s 246F of the Act. Application is also made for orders under s 1322(4)(c) to relieve the applicant from any civil liability in respect of any contraventions under s 246B (read with art 3.6 of the constitution) and s 246F(3) of the Act. 13 The principal section on which the application is brought is s 254E which reads: '254E (1) On application by a company, a shareholder, a creditor or any other person whose interests have been or may be affected, the Court may make an order validating, or confirming the terms of, a purported issue of shares if: (a) the issue is or may be invalid for any reason; or (b) the terms of the issue are inconsistent with or not authorised by: (i) this Act; or (ii) another law of a State or Territory; or (iii) the company's constitution (if any). (2) On lodgment of a copy of the order with ASIC, the order has effect from the time of the purported issue.' 14 Reliance is also placed on the provisions of s 1322(4)(a), (c) and (d) which read as follows: '1322 … (4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation; (b) …; (c) an order relieving a person in whole or in part from any civil liability in respect of a contravention or failure of a kind referred to in paragraph (a); (d) an order extending the period for doing any act, matter or thing or instituting or taking any proceeding under this Act or in relation to a corporation (including an order extending a period where the period concerned ended before the application for the order was made) or abridging the period for doing such an act, matter or thing or instituting or taking such a proceeding; and may make such consequential or ancillary orders as the Court thinks fit.' 15 It is necessary to consider the exercise of the powers contained in those sections with reference to the sections said to have given rise to the necessity for validation and ancillary orders. Reference is firstly made by the applicant to s 246B which reads: '246B (1) If a company has a constitution that sets out the procedure for varying or cancelling: (a) for a company with a share capital—rights attached to shares in a class of shares; or (b) for a company without a share capital—rights of members in a class of members; those rights may be varied or cancelled only in accordance with the procedure. The procedure may be changed only if the procedure itself is complied with. (2) If a company does not have a constitution, or has a constitution that does not set out the procedure for varying or cancelling: (a) for a company with a share capital—rights attached to shares in a class of shares; or (b) for a company without a share capital—rights of members in a class of members; those rights may be varied or cancelled only by special resolution of the company and; (c) by special resolution passed at a meeting: (i) for a company with a share capital of the class of members holding shares in the class; or (ii) for a company without a share capital of the class of members whose rights are being varied or cancelled; or (d) with the written consent of members with at least 75% of the votes in the class. (3) The company must give written notice of the variation or cancellation to the members of the class within 7 days after the variation or cancellation is made. (4) An offence based on subsection (3) is an offence of strict liability.' 16 Reference is also made to s 246C(5) which reads as follows: '246C … (5) If a company with 1 class of shares issues new shares, the issue is taken to vary the rights attached to shares already issued if: (a) the rights attaching to the new shares are not the same as the rights attached to shares already issued; and (b) those rights are not provided for in: (i) the company's constitution (if any); or (ii) a notice, document or resolution that is lodged with ASIC. …' 17 Further, reference is made to s 246F(3) which reads: '246F … (3) A public company must lodge with ASIC a copy of each document (including an agreement or consent) or resolution that: (a) does any of the following: (i) attaches rights to issued or unissued shares; (ii) varies or cancels rights attaching to issued or unissued shares; (iii) varies or cancels rights of members in a class of members of a company that does not have a share capital; (iv) binds a class of members; and (b) is not already lodged with ASIC. This also applies to a proprietary company that has applied under Part 2B.7 to change to a public company, while its application has not yet been determined.' …' 18 In Re Golden Gate Petroleum Ltd (2004) 50 ACSR 659, Lee J accepted that with regard to declarations and remedial orders sought pursuant to s 1322 of the Act, the provisions are to be given a liberal construction, allowing appropriate orders to be made that facilitate the conduct of commerce and serve the interests of the parties concerned where it is just and equitable that such orders be made. He cited Re Insurance Australia Group Ltd (2003) 128 FCR 581, at [27] per Lindgren J. Other authorities may be found in Re Wave Capital Ltd (2003) 47 ACSR 418, at [29]-[31]; Re Onslow Salt Pty Ltd (2003) 198 ALR 344, at [25]-[28]; Re Farnell Electronic Components Pty Ltd (1997) 15 ACLC 1676, at 1678; and in Alpha Resources Ltd v Corporate Affairs Commission (1987) 5 ACLC 844. 19 As appears from the affidavits to which I have made reference, the non-compliance in respect of which validation and ancillary orders are now sought arose entirely through inadvertence. As was put to me on behalf of the applicant, honesty pervades the action. On the evidence before the Court, there appears to be no reason why the discretion should not be exercised favourably. 20 In addition, there are sound commercial reasons why the errors arising from inadvertence should be validated. This arises from the fact that the applicant has, as of 5 November 2004, entered into a confidential in-principle agreement with a third party that is listed on the Australian Stock Exchange relating to a proposed investment of $2 million by that third party in the applicant, subject to a number of condition precedents being met. One of those condition precedents is the conversion of all the A Shares into shares. For the applicant to proceed with fulfilling that condition precedent, it is necessary for the potential invalidity of the issue of the A Shares to be resolved by the Court. The evidence is in the affidavit of Mr Boden that the proposed investment by the third party in the applicant will have significant benefits to it with respect to its ability to fund and continue its research and development program to commercialise its intellectual property. 21 In those circumstances I consider that, subject to one matter I will mention in a moment, the orders sought should be made. 22 The orders, in addition to addressing the matters requiring validation, also provide to the applicant and all other interested parties a liberty to apply or vary the orders. That is a sound protection. Nevertheless, in the circumstances where the very substantial shareholder, the Telethon Institute, has not yet signified along with the other institutional shareholder to which I referred earlier its acknowledgment and agreement to the course of action now proposed, it seems to me I should hold over the making of the orders pending receipt of that acknowledgment. This suggestion did not attract dissent from counsel and seems practicable in the circumstances. 23 Accordingly for the above reasons I would be prepared upon receipt, preferably of the acknowledgment of the two outstanding institutional shareholders but certainly of an acknowledgment from the Telethon Institute, to make the orders sought in the originating process. I will hold those orders over in chambers in accordance with that approach. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice RD Nicholson. Associate: Dated: 25 January 2005 Counsel for the Applicant: P Jooste QC with M Gerus Solicitor for the Applicant: Blakiston & Crabb Date of Hearing: 13 December 2004 Date of Judgment: 13 December 2004