REASONS FOR JUDGMENT
1 The plaintiff, Alinta Limited (Alinta), has applied to the Court for orders under s 411 of the Corporations Act 2001 (Cth) (the Act) that meetings be convened of its ordinary shareholders and the holders of options for the purpose of considering and, if thought fit, agreeing to schemes of arrangement.
2 The shares of Alinta's predecessor were first listed for quotation on Australian Securities Exchange Limited (ASX) in 2000. Following approval by the Court on 9 October 2006 (In the matter of The Australian Gas Light Company (No 2) (2006) 60 ACSR 406) of a scheme of arrangement between Alinta's predecessor and its members, the shares in Alinta were also listed for quotation by the ASX. The scheme of arrangement of October was interdependent with another scheme of arrangement involving the Australian Gaslight Company (AGL). The assets of AGL included interests in Australian Pipeline Trust (APT). As a result of the October schemes of arrangement, Alinta has interests in energy producing and energy infrastructure enterprises including AGL's and other interests in APT.
3 In January 2007, Alinta announced that it had received an approach concerning a potential management buy-out proposal by a group of senior executives. Alinta's board then initiated a competitive process by which potentially interested parties were invited to put forward expressions of interest to acquire Alinta or interests of Alinta. Proposals were received on 23 March 2007 from two consortia, described as Macquarie Bank Consortium, and a consortium formed by a joint venture of Babcock & Brown International Pty Limited (Babcock & Brown) and Singapore Power International Pty Limited (Singapore Power). The latter consortium (The Babcock-Singapore Consortium) formed ES&L Pty Limited (the Bidder), as the vehicle for the furtherance of their proposal. Following negotiations with both the Macquarie Bank Consortium and the Babcock-Singapore Consortium, a Scheme Implementation Agreement was entered into between Alinta, the Bidder, Babcock & Brown and Singapore Power, under which the Bidder was to acquire the entire issued share capital of Alinta (the Original Agreement).
4 A public announcement was made by Alinta on 30 March 2007 concerning the Original Agreement. On 4 May 2007, Macquarie Bank Consortium submitted a revised proposal to Alinta. In response, the Babcock-Singapore Consortium submitted a revised proposal. The latter revised proposal also involved three managed funds connected with Babcock & Brown. The three managed funds (the Funds) are:
· Babcock & Brown Infrastructure Group, comprising Babcock & Brown Infrastructure Limited and Babcock & Brown Infrastructure Trust.
· Babcock & Brown Power comprising Babcock & Brown Power Limited and Babcock & Brown Power Trust.
· Babcock & Brown Wind Partners, comprising Babcock & Brown Wind Partners Limited, Babcock & Brown Wind Partners Bermuda Limited and Babcock & Brown Wind Partners Trust.
5 On 11 May, Alinta entered into an Amended and Restated Scheme Implementation Agreement with the Bidder, Babcock & Brown and Singapore Power (the Scheme Implementation Agreement). The Scheme Implementation Agreement was made the subject of the public announcement on 11 May 2007. By clause 2.1(a) of the Scheme Implementation Agreement, Alinta agrees to propose a scheme of arrangement between Alinta and its shareholders (the Share Scheme). By clause 2.2(a) of the Scheme Implementation Agreement, Alinta agrees to propose a scheme of arrangement between Alinta and creditors who hold options to subscribe for shares in the capital of Alinta.
6 Under clause 2.1(b) of the Scheme Implementation Agreement, the Share Scheme is to provide that each Alinta shareholder may elect to receive alternative forms of consideration, as described below. Under clause 3.1 of the Scheme Implementation Agreement, the Share Scheme is not to become effective until certain conditions have been satisfied. The conditions include approval by the Court and, where relevant, the approval of governmental authorities. The conditions also include the non-occurrence of adverse events concerning Alinta. The Option Scheme is also conditional upon the same conditions but is also conditional upon the Share Scheme becoming effective. The Scheme Implementation Agreement contains provisions concerning the conduct of Alinta's business pending the consideration of the Schemes and imposes effective obligations on the parties to ensure that the Schemes can proceed and be given effect to.
7 Clause 7 of the Scheme Implementation Agreement contains restrictions on Alinta soliciting or inviting alternative proposals and restrictions on participating in negotiations with third parties in relation to competing proposals. Clause 7 also contains a provision whereby Alinta must pay a break fee in the sum of $59,250,000 to the Babcock-Singapore Consortium if the Schemes do not proceed in certain circumstances. However, clause 7.6 provides that if a court or a review panel of the Takeovers Panel determines that any part of the break fee constitutes a breach of a fiduciary or statutory duties for the directors of Alinta or unacceptable circumstances within the meaning of the Corporations Act or would if paid be unlawful for any reason, then Alinta is not to be obliged to pay such part of the break free as would constitute such a breach of duty or unacceptable circumstances or would be unlawful.
8 Since the consideration proposed under the share Scheme involves securities of the Funds, it is desirable to say something briefly about the members of the Babcock-Singapore Consortium. Singapore Power is a wholly owned subsidiary of Singapore Power Limited. The principal business of Singapore Power Limited and its subsidiaries is the ownership and operation of electricity and gas transmission and distribution businesses and the provision of market support services to the energy market in Singapore, serving over one million customers. Singapore Power Limited has existing business interests in Australia through an Australian subsidiary, SP AusNet, which owns Victoria's primary electricity transmission network and a gas distribution network located in western Victoria. SP AusNet is listed on ASX and on the Singapore Exchange.
9 Babcock & Brown is a global investor with longstanding involvement in the creation, origination, syndication and management of asset and cash flow based investments. It was founded in 1997 and listed on ASX in October 2004. Babcock & Brown operates from 29 offices across Australia, North America, Europe, Asia, United Arab Emirates and Africa. It has five operating divisions.
10 The three Funds were established by Babcock & Brown. Babcock & Brown Infrastructure operates global energy and transport infrastructure assets, Babcock & Brown Power is Australia's largest stock exchange listed power generation business and Babcock & Brown Wind Partners is one of the world's leading investors in wind farms. All three Funds are managed by Babcock & Brown. It is proposed that Babcock & Brown Infrastructure and Babcock & Brown Power will acquire part of Alinta's current asset portfolio.
11 The Bidder, Singapore Power and Babcock & Brown have executed a Deed Poll with the intention that the Deed Poll may be relied upon and enforced by any Scheme Participant in accordance with its terms, notwithstanding that the Scheme Participant may not be a party to the Deed Poll. By the Deed Poll, the Bidder agrees to provide or procure the provision of the Share Scheme Consideration to each Share Scheme Participant the Bidder also agrees to provide the Option Scheme Consideration.
12 While the Share Scheme itself is reasonably straightforward, the consideration proposed has considerable complexity by reason of the alternative considerations offered to Alinta shareholders. Under the Share Scheme, it is proposed that, subject to election to take alternative consideration, shareholders of Alinta will receive in respect of each share the following consideration:
(a) $8.925 in cash;
(b) the issue of 1.599 exchangeable preference shares in Babcock & Brown Infrastructure;
(c) the issue of 0.752 Babcock & Brown Infrastructure Securities;
(d) the issue of 0.669 Babcock & Brown Power Securities;
(e) the issue of 0.26 Babcock & Brown Wind Partners Securities.
13 In addition, it is proposed that there will be a distribution to shareholders of Alinta of Alinta's holding in APT. That distribution will occur at the same time as the proposed completion of the Share Scheme. The distribution will be effected partly by a declaration of a dividend and partly by a reduction of the capital of Alinta, such that the whole of Alinta's holding in APT will be distributed to its members. That arrangement reflects the terms of settlement of another proceeding in the Court in which the trustee of APT sought orders for divestment by Alinta of its units in APT.
14 The members of Alinta will be given the right to elect how they will receive the consideration for their shares. If they make no election, they will receive the consideration that I have already briefly described. However, they may elect to maximise the exchangeable preference share component of the consideration or the cash component of the consideration or the Funds' securities component of the consideration. They may also elect in certain circumstances to participate in a Cash Out facility.
15 Each component of the consideration is to be subject to a cap. It is an overriding principle of the determination of the components of the consideration to be paid to members that no more cash will be payable in aggregate than the total cash available (as defined), no more exchangeable preference shares will be issued in aggregate than the cap determined in accordance with the Share Scheme and no more Fund Securities will be issued in aggregate than the total securities available (as defined). It is possible that the elections will mean that each shareholder will receive the shareholder's preferred mix of components of the consideration. However, the chances are that some shareholders will not necessarily receive the full extent of the election that they make, having regard to the provisions to which I have just referred.
16 For the purposes of determining entitlements, the value of consideration that consists of Fund securities listed on ASX will be based on the volume-weighted average price of those securities over the period of five business days immediately after the date in which the Scheme meetings are held. On the basis of such valuation over the five business days up to and including 27 June 2007, the consideration per Alinta share, excluding possible franking credits, will be $15.91 per share. Some shareholders would be entitled to franking credits up to 40 cents per share and those shareholders would receive value, on the basis of the recent evaluation, of $16.31.
17 The proposed explanatory memorandum to accompany the notices of the meetings is divided into two parts. Part A might fairly be described as a simplification of the proposal. Part B is a complex and detailed description of Alinta, the members of the Babcock & Singapore Consortium and the calculation of the alternative considerations that is to be the subject of election. A draft of the explanatory memorandum in the form of a printed booklet has been submitted to the Australian Securities and Investments Commission (the Commission), which has indicated that it does not wish to be heard in opposition to the application to convene meetings of members and optionholders. The booklet satisfies the requirements of the Corporations Regulations, except for certain matters in respect of which the Commission has granted relief.
18 The scheme proposed for optionholders essentially involves the extinguishment of the options in exchange for a payment equal to the value of the base consideration, less the option fee payable for the exercise of options. Those optionholders whose options become exercisable before the schemes become effective would have the option of exercising their options and participating in the Share Scheme. Other optionholders will simply receive the cash consideration to which I have referred.
19 The circumstances leading up to the negotiation of the terms of the Scheme Implementation Agreement indicate that the restriction on soliciting offers for competing proposals is unlikely to have a detrimental effect. It is clear enough that the board of Alinta took reasonable steps to solicit proposals prior to entering into the Original Agreement and considered the amended proposal from Macquarie Bank Consortium before entering into the Scheme Implementation Agreement. The break fee is less than 1% of the value of the consideration that would be paid if the scheme is approved. It is reasonable to expect that the costs of the Schemes and of Babcock-Singapore's investment in the Schemes would be very substantial, such that a fee representing approximately 0.75% of the total value of the consideration is not unreasonable in the event that the Schemes do not proceed for the reasons that are provided for in the Scheme Implementation Agreement.
20 Although there is no legal requirement to do so, Alinta engaged Grant Samuel & Associates Pty Limited (Grant Samuel) to prepare an independent report as to whether the Share Scheme is in the best interest of Alinta shareholders, whether the Option Scheme is in the best interest of Alinta optionholders and whether the capital reduction is fair and reasonable to Alinta shareholders as a whole and does not materially prejudice Alinta's ability to pay its creditors. In a report to be included in the explanatory memorandum or scheme booklet, Grant Samuel say that they have estimated that the full underlying value of Alinta's issued shares is in the range $13.84 to $16.16 per share. That value includes a premium for control and exceeds the price at which Alinta shares would be expected to trade in the absence of the proposal presently under consideration or some similar transaction. They consider that that also exceeds the price at which Alinta shares would be expected to trade, even if some kind of internal restructure were implemented.
21 Grant Samuel have attributed an aggregate value in the range $15.74 to $16.07 per Alinta share for the consideration under the share scheme. That is based on the default alternative, prior to any adjustments that might be made. That value reflects values for each of the securities offered, based largely on current market values, but adjusted to reflect certain specific factors. Grant Samuel believe that that is a reasonable approach. The securities of the Funds and of APT are all listed on ASX and have reasonably liquid share registers. They generally own established assets producing steady cash flows and are not rated materially different from their peers. Grant Samuel consider that the Share Scheme provides fair value to Alinta's shareholders and is an opportunity for them to crystallise the substantial value uplift that has been created since Alinta's predecessor was listed seven years ago. Grant Samuel conclude that the consideration lies at the top end of their estimated value range and that, even if the market price of all of the scrip components of the consideration fell materially, the aggregate value of the consideration would remain within the estimated value range. Grant Samuel also point out that to the extent that franking credits of 40 cents may be available to some shareholders, that will be of additional value to those shareholders.
22 Grant Samuel also address in their report a number of disadvantages and risks that shareholders should consider carefully informing their view on the proposal. Those disadvantages and risks include:
· the complexity of the proposal and the uncertainties attached to and consequences of the choices in the alternative forms of consideration;
· the lack of certainty as to the amount per share to be received from the alternatives;
· the fixed income nature of the exchangeable preference shares which are the only part of the consideration that provides capital gains tax rollover relief;
· the impact, for small Alinta shareholders who do not want cash, of the fragmented nature of the consideration on the size of individual interests in the new entities;
· the fact that the Funds are all externally managed under the control of Babcock & Brown;
· the change in the mix and composition of underlying investments; and
· the loss of the diversification benefits from Alinta's broad portfolio businesses.
23 While Grant Samuel does not consider that those risks and disadvantages are not inconsequential, they consider that they do not outweigh the merits of the proposal. Grant Samuel consider that, on balance, Alinta shareholders are likely to be better off if the Share Scheme is approved than if it is not. They therefore consider that it is in the best interest of Alinta shareholders. Grant Samuel also consider that the Option Scheme is in the best interest of optionholders, who will receive cash payment equal to the market value of the default alternative, less the exercise price. Grant Samuel consider that the capital reduction is fair and reasonable to Alinta shareholders as a whole and will not materially prejudice Alinta's ability to meet its debts to its creditors. Grant Samuel point out that their report does not consider the investment merits of the enlarged Funds or of APT. They point out that the decision whether to buy, hold or sell securities in the Funds, or whether to buy, hold or sell exchangeable preference shares, is a separate investment decision upon which Grant Samuel offer no opinion.
24 The booklet contains historical income statements of Alinta for the year end of 31 December 2006, a historical pro forma balance sheet as at 31 December 2006, which assumes completion of certain transactions described in the booklet, and a pro forma balance sheet as at 31 December 2006 split by consortia members as described in the booklet. It also contains forecast income statements for Alinta for the six months ending 30 June 2007 to 31 December 2007 and 30 June 2008, and pro forma forecast income statements for the year ending 30 June 2008 split by consortia member.
25 Based on their review which was not an audit, and subject to certain limitations explained in their report, PricewaterhouseCoopers Securities Limited have reported that nothing has come to their attention that causes them to believe that the pro forma balance sheets have not been properly prepared on the basis of the pro forma transactions, that the pro forma adjustments do not form a reasonable basis for the pro forma balance sheets or that the historical Alinta financial information does not present fairly the historical income statement of Alinta. Based on their review of the forecast financial information, which again is not an audit, and subject to limitations set out in the report, PricewaterhouseCoopers say that nothing has come to their attention that causes them to believe that the best estimate assumptions set out in the booklet do not provide a reasonable basis for the preparation of the forecast or that the forecast financial information is not properly prepared on the basis of the best estimate assumptions.
26 Ernst and Young were also requested by the directors of Alinta to provide an independent income tax opinion regarding the Share Scheme and certain tax matters relating to the booklet. Ernst and Young have provided a report on those matters, which is to be included in the booklet. In addition, PricewaterhouseCoopers were requested by the directors of Alinta to provide a summary of the tax implications for participants in the Alinta executive option plan as a result of entering into the Options Scheme. A report by PricewaterhouseCoopers is also included in the booklet.
27 I am satisfied that the Schemes are such that the members and optionholders of Alinta, properly informed, might reasonably agree to the Schemes. I am also satisfied, on the material that I have been presented with and the affidavits that have been read in support of the application, that if the proposed Schemes receive approval by the statutory majority at the relevant meetings, the Court will be likely to approve the schemes on the hearing of any application that is unopposed. In those circumstances I propose to order that meetings be convened in order to consider whether the Schemes should be agreed to.