FEDERAL COURT OF AUSTRALIA Santos QNT Pty Ltd v Tamboran Resources Limited [2017] FCA 670 File number: SAD 130 of 2017 Judge: BESANKO J Date of judgment: 14 June 2017 Catchwords: CORPORATIONS – consideration of an application for the inspection of company books under s 247A of the Corporations Act 2001 (Cth) – where it is not disputed that an order under s 247 of the Act should be made – where the "books" the subject of the order are not disputed – where application made in good faith and for a proper purpose – whether the persons or classes of persons who may inspect the documents is too wide – where defendant submits documents are commercially sensitive and confidential – where defendant has made statements of an intention to release particular commercial information to shareholders – whether order should be made limiting the use that a person who inspects books may make of information obtained during the inspection – where sufficient protection provided by the limitation on disclosure in s 247C of the Act – where cost and inconvenience to the plaintiff under a liberty to apply provision considered. Legislation: Corporations Act 2001 (Cth) ss 247A, 247B, 247C Federal Court Rules 2011 (Cth) r 7.23 Cases cited: Engel v National Biodiesel Limited (2015) 245 FCR 436 London City Equities Limited v Penrice Soda Holdings Limited [2011] FCA 674; (2011) 84 ACSR 573 Style Limited; in the matter of Merim Pty Ltd v Style Limited [2009] FCA 314; (2009) 255 ALR 63 Date of hearing: 8 June 2017 Registry: South Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 24 Counsel for the Plaintiff: Mr B Roberts SC with Mr I Thomas Solicitor for the Plaintiff: Thomson Geer Lawyers Counsel for the Defendant: Mr D Blight SC with Mr S Evans Solicitor for the Defendant: Rose & Co Lawyers ORDERS SAD 130 of 2017 BETWEEN: SANTOS QNT PTY LTD Plaintiff AND: TAMBORAN RESOURCES LIMITED Defendant JUDGE: BESANKO J DATE OF ORDER: 14 JUNE 2017 THE COURT ORDERS THAT: 1. The parties be heard as to the form of the orders in light of these reasons. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT BESANKO J: 1 Santos QNT Pty Ltd (Santos QNT) has brought an application against Tamboran Resources Limited (Tamboran) seeking an order under s 247A of the Corporations Act 2001 (Cth) (the Act) and an order for pre-action discovery under r 7.23 of the Federal Court Rules 2011 (Cth). 2 On 1 June 2017, I set down for hearing on 8 June 2017 that part of the plaintiff's application which relates to the order sought under s 247A of the Act. These reasons address that aspect of the plaintiff's application. 3 At the hearing on 8 June 2017, a number of matters were not in dispute. It was not disputed that an order under s 247A of the Act should be made and the "books" which were to be the subject of the order were not in dispute. The dispute between the parties relates to two matters and they are the persons or classes of persons who may inspect the documents and whether there ought to be an express limit upon the use which may be made of the information obtained as a result of the inspection allowed under the order. In those circumstances, it is sufficient for me to set out a relatively brief statement of the relevant facts. 4 The plaintiff relies on an affidavit of Mr William Ovenden filed on 24 May 2017. Mr Ovenden is Executive Vice President Exploration & Appraisal for the plaintiff and he is also Executive Vice President Exploration & Appraisal of Santos Ltd. The plaintiff relies on an affidavit of Mr Anthony Neilson filed on 24 May 2017. Mr Neilson is a director of the plaintiff. The plaintiff also relies on two affidavits of Mr Lucy Hatcher filed on 26 May 2017 and 31 May 2017 respectively. Ms Hatcher is a solicitor in the firm acting for the plaintiff. 5 The defendant relies on an affidavit of Mr Joel Riddle sworn on 6 June 2017. Mr Riddle is the chief executive officer of the defendant. 6 The plaintiff is a wholly owned subsidiary of Santos Ltd. It has no employees and the persons who carry out its functions and activities are employees of Santos Ltd. On 11 December 2012, the plaintiff and the defendant entered into a Subscription Agreement, a Farm-In Agreement and a Joint Operating Agreement. At that time, the defendant held three exploration permits under the Petroleum Act (Northern Territory) and had made an application for the grant of a further exploration permit. In February and March 2013, the plaintiff acquired a shareholding of approximately 14% in the defendant under clause 2 of the Subscription Agreement. Under clause 6 of that Agreement, the plaintiff has a right to participate in any proposed equity offer by the defendant, that is, any proposed equity security offer by the defendant to any entity other than or, in addition to, the plaintiff. The plaintiff referred to the rights under clause 6 as "top up" rights. The defendant has offered top up rights to the plaintiff in the past, but the plaintiff has not always elected to participate by accepting the offer. Its shareholding in the defendant as at 27 April 2017 was approximately 7%. Clause 7.2 of the Subscription Agreement gives the plaintiff the right to appoint a director of the defendant. The plaintiff has sought to have Mr Andrew Winter appointed as a director of the defendant, but for various reasons, which are at least partly explained in the affidavit evidence, that has not yet eventuated. 7 Certain steps identified in the Farm-In Agreement and the Joint Operating Agreement have, according to the evidence advanced by the plaintiff, been carried out. There is a dispute between the plaintiff and the defendant about compliance with the provisions of the Farm-In Agreement. 8 The 2016 Annual Report of the defendant states that on 24 April 2017, the defendant entered into a Subscription Agreement with BP-PE3 L.L.C. (Baupost). The Annual Report states that there was a placement of fully-paid preference shares (convertible into ordinary shares) (Preference Share Issue) at a subscription amount equivalent to AU$13,245,008, with the proceeds of that share issue received by the defendant on 11 May 2017 and it was agreed to issue Baupost with additional purchase rights to acquire further preference shares (which also appear to be convertible into ordinary shares) for a subscription amount of the lesser of approximately AU$19,623,237 and such amount which would increase Baupost's shareholding to no more than 45% of the defendant's issued share capital (Additional Purchase Rights). The Annual Report states that following the Preference Share Issue (upon conversion), Baupost may hold 33.3% of the ordinary shares in the defendant on a fully-diluted basis, and that if Baupost converts its Additional Purchase Rights, then its shareholding may increase to 45% of the issued ordinary share capital. 9 The plaintiff claims that prior to 18 May 2017, the defendant did not inform it of the Baupost Subscription Agreement. On 18 May 2017, the plaintiff received materials, including the 2016 Annual Report of the defendant. The plaintiff then asked the defendant to provide it with the Baupost Subscription Agreement and any other document recording or evidencing the terms of the Preference Share Issue or the Additional Purchase Rights, but the defendant has refused to provide such documents. 10 Mr Ovenden deposed to the circumstances which have led to the plaintiff's application for the inspection of documents under s 247A of the Act, the purpose of the application and the matters the plaintiff seeks to understand. He states: 40. I am concerned as to the following matters that are the occasion for the Plaintiff's application for inspection of documents under section 247A of the Corporations Act: (a) the capital raising transaction or transactions performed, or to be performed, under the Baupost Subscription Agreement may have, or have had, the effect of diluting the Plaintiff's shareholding in the Defendants, thereby affecting the Plaintiff's investment in the Defendant; (b) the transactions would appear to have triggered the Plaintiff's rights under clause 6 of the Subscription Agreement to top up its shareholding in the Defendant (a point ultimately not conceded by the Defendant in its letter of 19 May 2017 ("WD014"), given the statement that "the offer of top up shares may not apply at this time", in which case the Defendant should have already given the Plaintiff the opportunity to participate in the capital raising but has not done so; (c) the Plaintiff cannot tell from the information in the 2016 Annual Report or the Defendant's letter of earlier today whether the top up rights under clause 6 of the Subscription Agreement have in fact been triggered, or to what extent; (d) specifically, if there has been a Proposed Equity Offering within the meaning of the Subscription Agreement, the Plaintiff cannot tell from the 2016 Annual Report whether it is one that involves a capital raising to raise (in aggregate) $20 million or more, (in which case, I understand the Plaintiff would have a right to increase its shareholding in the Defendant to 20%) or less than $20 million, (in which case, I understand the Plaintiff would have a right to increase its shareholding in the Defendant only to the level held at the Subscription Date). In that regard, I note that the Preference Share Issue and Additional Purchase Rights said by the Defendant to have been conferred upon Baupost pursuant to the Baupost Subscription Agreement are each for subscription amounts less than $20 million, but that the total subscription amounts payable exceeds $20 million; (e) the Defendant may have breached its obligations under clause 6(b) of the Subscription Agreement to ensure that the Plaintiff may participate in a Proposed Equity Offer, but a final assessment of that question cannot be made without access to the terms of the Baupost Subscription Agreement and any other document setting out the terms of the capital raising; and (f) if the Plaintiff does have top-up rights under clause 6 of the Subscription Agreement, it is not in a position to decide whether or not to exercise those rights, and whether to institute proceedings to compel compliance by the Defendant with the Subscription Agreement, without further information about the terms and conditions upon which it would be entitled to participate in the relevant offering. I understand that the effect of clause 6(b) of the Subscription Agreement is that participation would be on the same terms as offered to (in this case) Baupost, yet the extent of the Plaintiff's understanding as to those rights is as set out in the 2016 Annual Report and the Defendant's letter of 19 May 2017 ("WD014"). 41. The purpose of the Plaintiff's application is therefore to obtain information and documents relevant to the following issues: (a) whether the Defendant's transaction with Baupost has triggered the Plaintiff's top up rights under clause 6 of the Subscription Agreement; (b) if so, the terms and conditions of the transaction in order that the Plaintiff can determine whether or not to exercise its top up rights, and whether to institute proceedings to compel compliance by the Defendant with the Subscription Agreement. 42. I am also concerned to understand: (a) whether the transaction with Baupost has given rise to a Change of Control of the Defendant within the meaning of the JOA. In that case, I understand that clause 14.4 of the JOA may give the Plaintiff the right to acquire the Defendant's Participating Interest in the joint venture in the manner set out in that clause; (b) whether any conduct or arrangements between existing shareholders and directors of the Defendant on the one hand, and Baupost on the other hand, may constitute unacceptable circumstances for the purposes of the Corporations Act. The Defendant states in its letter dated 19 May 2017 (exhibit "WD014") that there is no relevant arrangement for these purposes. 11 Mr Ovenden also sets out the plaintiff's correspondence with the defendant between 18 April 2017 and 22 May 2017 concerning the plaintiff's attempts to have Mr Winter appointed as a director of the defendant. In view of the limited nature of the dispute between the parties on this application, it is not necessary for me to set out the details of this correspondence and the issues it raises. The application under s 247A of the Act has now been heard and the defendant has given an undertaking not to hold an Annual General Meeting on 9 June 2017 as previously proposed and, for these reasons, it is not necessary for me to set out the matters advanced by Mr Ovenden in support of an urgent hearing of the plaintiff's application and the evidence the plaintiff claims supports a conclusion that the defendant is in the process of implementing a strategy to deprive the plaintiff of its rights. 12 Under s 247A of the Act, an applicant may be authorised to inspect books of a company or another person may be authorised to do so on the applicant's behalf. The Court may only make an order if it is satisfied that the applicant is acting in good faith and the inspection is to be made for a proper purpose (s 247A(1) of the Act). It is necessary for me to be satisfied of these matters even where, as here, the company does not oppose an order for inspection: Style Limited; in the matter of Merim Pty Ltd v Style Limited [2009] FCA 314; (2009) 255 ALR 63 (Style Limited) at [51] per Goldberg J. On the evidence before the Court, I find that the plaintiff in this case is acting in good faith and that the inspection it seeks is to be made for a proper purpose. 13 A person authorised to inspect books may make copies of the books unless the Court otherwise orders (s 247A(2) of the Act). Section 247B gives the Court the power to make any other orders that it considers appropriate including, relevantly for the purposes of this case, an order limiting the use that a person who inspects books may make of information obtained during the inspection. Section 247C of the Act provides that a person who inspects books on behalf of an applicant under s 247A of the Act must not disclose information obtained during the inspection other than to the applicant or to the Australian Investments and Securities Commission. The relevant principles in relation to ss 247A-247C of the Act have been discussed by Goldberg J in Style Limited, Robertson J in London City Equities Limited v Penrice Soda Holdings Limited [2011] FCA 674; (2011) 84 ACSR 573 (London City Equities) and Markovic J in Engel v National Biodiesel Limited (2015) 245 FCR 436 (Engel). 14 The dispute between the plaintiff and the defendant is reflected in the differences between paragraphs one and two of the proposed minutes of order each of them put forward. 15 The plaintiff's proposed minutes of order are in the following terms: Upon the Defendant's solicitor undertaking to send electronic copies, in PDF format, of the documents referred to an [sic] order 1 below to Mr Geoffrey Brennan (by email to GBrennan@tglaw.com.au) and Ms Lucy Hatcher (by email to LHatcher@tglaw.com.au) by no later than 5 pm (ACST) on 8 June 2017, it is ordered that: 1. The Plaintiff and its legal representatives are authorised under section 247A of the Corporations Act 2001 (Cth) to inspect the following books of the Defendant: a. the Subscription Agreement (Baupost Subscription Agreement) with BP-PE3 L.L.C executed by the Defendant on 24 April 2017, as referred to on page 3 of the Defendant's Annual Financial Report 30 June 2016 (the 2016 Annual Report); b. any other document recording or evidencing the terms of the "Preference Share Issue" or the "Additional Purchase Rights" (referred to on page 3 of the 2016 Annual Report) insofar as they are not fully set out in the Baupost Subscription Agreement; and c. any other document comprising a "Proposed Equity Offer" pursuant to which any "Equity Security" has been issued since 30 April 2016, as those terms are defined in the Subscription Agreement between the Plaintiff and the Defendant dated 11 December 2012 (the Subscription Agreement). 2. Subject to further order, the documents referred to in order 1, and any information contained in those documents, may be disclosed only to: a. such representatives of the Plaintiff and Santos Limited, being the persons identified in Schedule 1, who need to access such information or documents for the proper conduct of the Plaintiff's affairs; b. partners and solicitors of Herbert Smith Freehills; c. partners and solicitors of Thomson Geer; and d. Mr Brendon Roberts SC and Mr Ian Thomas (both of Bar Chambers, Adelaide). … SCHEDULE 1 Kevin Gallagher Anthony Neilson William Ovenden Naomi James Andrew Winter Mark Shimmield Nick Malbon Andrew Freeman Christian Paech Garth Briffa Arthur Braiotta The first five persons in Schedule 1 are senior management and directors within the Santos Group, the next three are involved in commercial and asset advice, and the final three persons are internal legal advisers within the Santos Group. 16 The defendant's proposed minutes of order are in the following terms: 1. Pursuant to section 247A of the Corporations Act, 2001 (Cth), Mr William Ovenden, an employee of the Plaintiff, and Mr Geoff Brennan, the solicitor for the Plaintiff, are authorised on the Plaintiff's behalf to inspect and make copies of the following books and records of the Defendant: 1.1. the Subscription Agreement (Baupost Subscription Agreement) with BP-PE3 L.L.C. executed by the Defendant on 24 April 2017, as referred to on page 3 of the Defendants' Annual Financial Report dated 30 June 2016 (the 2016 Annual Report); 1.2. any other document recording or evidencing the terms of the "Preference Share Issues" or the "Additional Purchase Rights" (referred to on page 3 of the 2016 Annual Report) insofar as they are not fully set out in the Baupost Subscription Agreement; and 1.3. any other document comprising a "Proposed Equity Offer" pursuant to which any "Equity Security" has been issued since 30 April 2016, as those terms are defined in the Subscription Agreement between the Plaintiff and the Defendant dated 11 December 2012. 2. Pursuant to section 247B of the of the Corporations Act, 2001 (Cth), the Plaintiff must not communicate or disclose information obtained as a result of the inspection or copying of such books and records as authorised by these orders to any persons except for the purpose of: 2.1. investigating and determining whether the Plaintiff may have any right(s) under clause 6 ("the Subscriber's Top-Up Right") of the Subscription Agreement between the Plaintiff and the Defendant dated 11 December 2012 (Subscription Agreement) by reference to the Baupost Subscription Agreement, and exercising any such right(s); 2.2. investigating and determining whether proceedings should be commenced by the Plaintiff against the Defendant in respect of clause 6 of the Subscription Agreement or pursuant to ss. 232 and 233 of the Corporations Act, 2001 (Cth), and prosecuting any such proceedings. … 17 The defendant submitted that it did not oppose the preamble to the plaintiff's paragraph one concerning the forwarding of electronic copies of the documents to the named persons. It had two complaints about the balance of the plaintiff's paragraph one. First, the plaintiff is a company and can only inspect books within s 247A(1) of the Act through authorised persons acting on its behalf. Secondly, the reference to the plaintiff's legal representatives lacks specificity and is too wide. 18 As to the plaintiff's paragraph two, the defendant submitted that its paragraph two was preferable and is similar to orders made by Robertson J in London City Equities and, although not in quite the same terms, by Markovic J in Engel. The defendant submitted that should the plaintiff want to use the information for any additional purpose or be uncertain about use, then it can exercise the liberty to apply provided in its orders. 19 The plaintiff submitted that rather than argue about whether a company could be authorised to inspect books under s 247A of the Act, its paragraph one could be amended to read "The Plaintiff by the persons identified in Schedule 1". It also submitted that any difficulty about the identity of its legal representatives could be overcome by a reference to those persons identified in its paragraph 2b, c, and d. As to its paragraph two, the plaintiff submitted that its order is appropriate and that a restriction as to disclosure based on purpose was not appropriate in the case of a fluid commerce dispute. The plaintiff should not have to return to the Court in cases of doubt under a liberty to apply provision. 20 In my opinion, the plaintiff's paragraph one with amendments is appropriate. I accept for the purposes of this application that natural persons must be authorised to inspect on behalf of the plaintiff. The persons nominated are appropriate. Any lack of clarity about the identity of the plaintiff's legal representatives can be overcome by a cross reference to the persons identified in the plaintiff's paragraph 2b, c, and d. Although that is potentially a large group, that is not inappropriate in a potentially complex commercial dispute. I will give the plaintiff the opportunity to redraft its paragraph one. 21 In my opinion, the plaintiff's paragraph two is also appropriate. It is true, as the defendant submitted, that orders similar to its paragraph two have been made in other cases (see London City Equities and Engel). However, it is not axiomatic that such an order will be made (see Style Limited). 22 The defendant submitted that the commercial terms and pricing structure of the Baupost Subscription Agreement were confidential. They are matters the defendant would not wish to be in the marketplace because (the defendant submitted) the information might affect the defendant's bargaining position in the case of future possible capital contributions. Whilst I accept that at a general level, it seems to me to be qualified by statements by the defendant to the effect that shareholders will be provided with sufficient information to enable them to determine whether they should approve the Baupost Subscription Agreement and that the information to be disclosed "will be sufficient to meet Santos' request for further information and for Santos to make any determination and exercise its voting rights as it sees fit". 23 In my opinion, the defendant will be sufficiently protected by the limitation on disclosure to those who need to access such information or documents for the proper conduct of the plaintiff's affairs and by s 247C of the Act. I reject the suggestion made by the defendant that the plaintiff presently contemplates some other use or purpose for the inspection which has not been disclosed in its evidence. Another factor, although by no means decisive, is the cost and inconvenience of the plaintiff having to return to the Court under the liberty to apply provision. 24 I will hear the parties as to the form of the orders in light of these reasons. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. Associate: Dated: 14 June 2017