Back in June this year and after a tumultous takeover attempt by...

Back in June this year and after a tumultous takeover attempt by Drillsearch (DLS) against 3D Oil (TDO). Three directors were forced to resigned, one of which was Russel Langusch (see the article below). It would seem that there was a shareholder revolt lead by truly independent Directors, which was ultimatley successful. What was of interest in the article below is this "Section 195 stipulates that directors of a public company who have a material personal interest in a matter to be considered by the board must not be present when it is discussed or vote on the matter". Some may argue that our new Chairman cannot be a party to these current negotiations with his significant shareholding in GGX. Either that or they are opening themselves up for a class action later in this saga. In the end it may be the case that history repeats itself, with another Chairman and MD falling on their sword in the face of shareholder dissatisfaction.


Thrills and spills at Drillsearch as directors take a beating over meeting.

Bryan Frith | June 10, 2009
Article from: The Australian

DRILLSEARCH did not get to first base in its attempt to delay today's shareholder meeting by bringing proceedings alleging that two of the directors had breached their fiduciary duties and were party to an illegal attempt to secure control of the company without making a takeover bid.

The proceedings were permanently stayed yesterday by NSW Supreme Court judge Reg Barrett, who declined to injunct the meeting. He ruled that the proceedings had not been properly brought because the three directors who authorised the action each had an obvious personal interest in a decision to resist holding the meeting -- to avoid adverse criticisms being aired by the other directors.

Therefore, the directors who voted on the resolution to authorise the proceedings did so in breach of section 195 of the Corporations Act or, alternatively, in breach of their fiduciary duties.

Section 195 stipulates that directors of a public company who have a material personal interest in a matter to be considered by the board must not be present when it is discussed or vote on the matter.

Today's shareholder meeting has been called to vote on the removal of warring board factions. Two of the directors, Jim McKerlie and the recently appointed Malaysian businessman Choo Beng Kai, convened a shareholder meeting to remove the other three, the chairman Peter Simpson, Peter Wicks and Russel Langusch -- who responded by proposing the removal of Choo and McKerlie.

Yesterday's ruling is the second humiliating court defeat for the Drillsearch trio. Barrett last week ruled that Drillsearch contravened the misleading and deceptive provisions of the Corporations Act by announcing to the ASX that the meeting would be adjourned because the board had agreed to a "renewal process".

He found that a board resolution by the trio was invalid and the representation that all directors had agreed to a board renewal was false and misleading. He also ordered that the meeting proceed on the scheduled date.

It now transpires that last Tuesday, after Barrett had reserved his decision on the earlier proposal to adjourn the shareholder meeting, the Drillsearch trio, without waiting on the outcome of those proceedings, resolved to authorise separate proceedings in Adelaide before the Federal Court, to run the action alleging breach of fiduciary duties and contravention of the takeover provisions.

That was a most unusual move because, while the company has assets in South Australia and Simpson lives in Adelaide, none of the parties to the intended proceedings were in Adelaide. Most were in Sydney.

On Friday the defendants to that action successfully applied to not only have the proceedings moved to Sydney, but to be transferred from the Federal Court to the NSW Supreme Court. And so the case came before Barrett.

Drillsearch alleged that Choo, McKerlie and Philip Kelso, a former managing director of Drillsearch who has been campaigning in support of Choo and McKerlie, had breached the substantial shareholding provisions and also section 606, which prohibits the acquisition of more than 20 per cent of a company without first making a takeover bid.

Drillsearch alleged there was an attempt by Choo, McKerlie and Kelso and their associates, including a bloc of overseas investors, to take control of the board -- and therefore the company -- without making a takeover offer.

For that to be the case, Drillsearch had to be alleging that those parties were acting in concert to influence the composition of the board or the conduct of the company's affairs.

Parties are not associated merely because they indicate their support in voting at company meetings, including votes on the removal of directors. But the parties are associated if they bind themselves to vote in a particular way. They must be free to exercise their vote as they wish, depending on the circumstances as they unfold.

There is a 2003 SA Supreme Court ruling, Flinders Diamond v Tiger International Resources, in which the court found that Tiger, which owned 29.7 per cent of Flinders, and other parties had agreed to seek control of the board, and install Anthony Campbell as managing director, in contravention of section 606.

But the court found Tiger had granted an "irrevocable proxy" to Campbell.

In the case of Drillsearch, Choo and McKerlie own less than 1 per cent of the capital and there are no declared substantial shareholders. Choo believes he has the support of a group of 15 to 20 Malaysian investors who own about 18 per cent of the company, while McKerlie and Kelso are thought to have the support of further 12 per cent. Those investors are concerned at recent events including the resignation of the former managing director David Williams in protest against the takeover bid for 3D Oil.

The 3D offer closed unsuccessfully last night, with Drillsearch securing acceptances for only 32 per cent of the company, falling well short of satisfying its 50.1 per cent minimum acceptance condition. Drillsearch itself is the subject of a scrip offer from Beach Petroleum.

Clearly, the Malaysian investors are the "overseas bloc" that Drillsearch alluded to in its court proceedings. They were among a group of investors who took up a 60 per cent shortfall to a 1 for 1 rights issue by Drillsearch early last year.

Ironically, they were introduced to Drillsearch by the advisory group Carling Capital, and Wicks was involved. Carling and Wicks joined the board on the same day that the shortfall was taken up, but Carling resigned later last year.

Carling Capital advised Drillsearch in relation to its failed bid for 3D.

Drillsearch did not get to air its allegations of an attempt to secure control of the company via the board as Choo's counsel sought a stay on the grounds that the application to injunct today's shareholder meeting was not properly commenced, because the directors purporting to bring the action had a material personal interest in the outcome.

Barrett agreed and ordered a permanent stay. He considered that bringing the proceedings was effectively an abuse of process and it fell to the inherent jurisdiction of the court to prevent an abuse of process.

It seems that unless Simpson, Wicks and Langusch resign before today's board meeting, they are likely to be removed as directors. The failed attempts to prevent the meeting going ahead suggest they think so too.

Barrett is yet to rule on the costs of yesterday's proceedings but one intriguing possibility raised is that because the proceedings were not properly commenced, the law firm which represented Drillsearch -- Adelaide's DMAW Lawyers -- may be liable. If not it's possible the Drillsearch trio could be held personally liable, or Drillsearch will have to pay the costs.