Archibald Howie Pty Ltd v Commissioner of Stamp Duties

NEW SOUTH WALES DISTRICT REGISTRY NSD 1316 OF 2007

IN THE MATTER OF INVESTA PROPERTIES LIMITED (ABN 54 084 407 241) INVESTA PROPERTIES LIMITED (ABN 54 084 407 241)

INTRODUCTION 1 On 18 July 2007 I made an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act), that the plaintiff, Investa Properties Limited (Investa), convene a meeting of the holders of the shares in Investa (Share Scheme Meeting) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement (Share Scheme). I also made an order pursuant to s 411(1) of the Act approving the explanatory statement required by s 412(1)(a) to accompany the notices of the Share Scheme Meeting. The following are the reasons why I made those orders.

General 2 The "Investa Group" is an Australian diversified property group listed on the Australian Securities Exchange (ASX) within the ASX "Top 100". As explained below, the Investa Group comprises Investa itself and the Investa Property Trust, a listed unit trust of which Investa is the responsible entity. 3 According to the evidence, based on the closing price on 30 May 2007, being the day immediately prior to the date of the Implementation Agreement referred to below, the Investa Group had a market capitalisation of approximately $4.1 billion. As at 31 December 2006, the Investa Group had assets under management of approximately $7 billion, which included direct investments, managed funds and development assets. The Investa Group's business includes a listed office portfolio, an external funds management business, a residential development business, and a commercial development business. 4 On 31 May 2007 Investa entered into an Implementation Agreement with Post Bidco Pty Limited (Morgan Stanley Bidco), an instrument of Morgan Stanley Real Estate (MSRE). MSRE is a division of the global financial services firm listed on the New York Stock Exchange, Morgan Stanley. MSRE comprises three major global businesses, being investing, banking and lending. MSRE manages approximately US$55.6 billion in real estate assets on behalf of its clients. 5 By the Implementation Agreement, Investa and Morgan Stanley agreed to implement a scheme by which, subject to security holders' agreement and Court approval, Morgan Stanley Bidco or a related body corporate of Morgan Stanley would acquire all of the shares in Investa (the Shares) and units in the Investa Property Trust that are "stapled" to the Shares (the Units) (together, the Securities). Morgan Stanley's offer was $3.00 per Security plus a dividend or distribution of eight cents per Security. The dividend or distribution is payable on 22 August 2007 and is in respect of the six month period ended 30 June 2007. 6 The fact that the Shares and Units are stapled indicates that neither a Share nor a Unit may be disposed of otherwise than with its accompanying Unit or Share respectively. Under the constitution of Investa, Shares may not be issued or transferred without an issue or transfer of the Units to which they are stapled. The constitution also provides that if there is a transfer of Shares without a transfer of the stapled Units, Investa is authorised to act as the transferor's agent for the purpose of transferring the stapled Units to the transferee (cl 5.2(c)). The Trust Deed dated 15 July 1977 constituting the Investa Property Trust contains reciprocal provisions (cl 19.3(a)). 7 Associated with the Share Scheme are certain amendments to the Trust Deed. For convenience, the amending of the Trust Deed may be referred to as the "Unit Scheme". Under the Unit Scheme the Unit holders are to resolve by special resolution to approve amendments to be effected by way of a Supplemental Deed to the same general effect as the Share Scheme. The Court is not called upon, however, to make any order in relation to the Unit Scheme.

Chapter 6 of the Act 8 Chapter 6 applies not only to the acquisition of relevant interests in shares, but also to the acquisition of relevant interests in the interests in a registered scheme that is listed on the ASX: see s 604 of the Act. Whereas the acquisition of the Shares will fall outside Ch 6 of the Act (s 611 item 17 exempts from the prohibitions contained in s 606 "an acquisition that results from a compromise or arrangement approved by the Court under Pt 5.1"), the acquisition of the Units will not. However, s 611 of the Act provides that certain acquisitions are exempt from the prohibitions in ss 606(1) and (2). One class of exempt acquisition is that described in item 7 of the table within s 611. Item 7 refers, relevantly, to: An acquisition approved previously by a resolution passed at a general meeting of the [members of the scheme] in which the acquisition is made, if: (a) no votes are cast in favour of the resolution by: (i) the person proposing to make the acquisition and their associates; or (ii) the persons (if any) from whom the acquisition is to be made and their associates; … The problem, however, as described by senior counsel for Investa, is that the Unit holders fall within (ii) because they are also the holders of the Shares to be acquired. 9 The Australian Securities and Investments Commission (ASIC) is proposing, in exercise of the power given to it by s 655A of the Act, to declare that Ch 6 applies as if specified provisions within Ch 6 were omitted, modified or varied as specified in the declaration. However, at the time of the hearing, consideration was still being given to the wording of the declaration. Senior counsel for Investa said that he was instructed that the question of the wording would probably be resolved during the course of the day of the hearing (18 July 2007). Investa asked that I include in the orders sought provision to cover the possibility that formal confirmation of the relevant declaration may not be received from ASIC prior to registration of the explanatory statement in accordance with s 412(6) of the Act. Accordingly, Investa asked that the words "in principle" be inserted in s 7.2(b) and s 9.17(a) of the explanatory statement in relation to the modification granted by ASIC. The effect of this would be that the relevant statement would be that ASIC had granted a modification under s 655A "in principle". I included those words in the orders made on 18 July 2007.

The Share Scheme 10 As is common in schemes of arrangement, the explanatory statement takes the form of a "Scheme Booklet" which includes various documents including the Scheme itself. 11 The Share Scheme recites that Investa is the responsible entity of the Investa Property Trust, that Investa is admitted to the official list of ASX, and that the Securities are quoted on the financial market conducted by ASX. The Share Scheme recites that at the date of the Scheme Booklet there were 1,525,535,427 Securities comprising 1,525,535,427 Shares stapled to 1,525,535,427 Units on issue. 12 The Share Scheme and Unit Scheme will not apply to "Excluded Securities". This expression is defined to mean the "Excluded Shares" and the "Excluded Units". Those expressions, in turn, are defined to mean respectively Shares and Units held by or on behalf of Morgan Stanley Bidco. 13 The Scheme consideration in respect of each Security held by a Scheme Participant is $3.00 cash, but if Investa or the Investa Property Trust should declare or pay any dividend or distribution, other than that of eight cents per Security previously mentioned, before the Share and Unit Schemes are implemented, then the consideration for each Security means $3.00 less the amount per Security of all such distributions and dividends, the record date for which precedes the Implementation Date. 14 The Scheme sets out various conditions precedent on which the Share Scheme is conditional, including, of course, approval by the Court in accordance with s 411(4)(b) of the Act, with or without modifications. If all of the conditions precedent have not been satisfied or, where applicable, waived, by 31 October 2007, the Share and Unit Schemes will not be implemented unless Investa and Morgan Stanley Bidco agree to extend that date, and, if required, the Court approves of the extension. 15 On the first business day after the date of Court approval, Investa is to lodge with ASIC not only an office copy of the Court orders under s 411(4)(b) of the Act approving the Share Scheme, but also, in its capacity as responsible entity of the Investa Property Trust and for the purposes of s 601GC(2) of the Act, a copy of the Supplemental Deed.

Verification and Due Diligence Process 16 There is evidence that within Investa, Morgan Stanley Bidco and Gilbert + Tobin (the solicitors for Investa), verification and due diligence processes have occurred in order to ensure that statements made in the Scheme Booklet (and therefore in the explanatory statement) are correct.

Funding 17 The explanatory statement (Scheme Booklet) contains detailed information in relation to MSRE and the sources of the funds with which the acquisition will be completed.

Performance Risk 18 Morgan Stanley Bidco has executed a Deed Poll by which it has covenanted in favour of the Scheme Participants (the holders of Securities other than Excluded Securities) to carry out the obligations to be performed by it under the Share Scheme and the Unit Scheme. In a series of cases, Gyles J has noted that notwithstanding such a deed poll, it is unsatisfactory that persons whose shares have been acquired should have no remedy for non-performance by the acquiring company other than to sue it on the deed poll: see Re Kaz Group Ltd [2004] FCA 738; Re Tempo Services Ltd (2005) 53 ACSR 526; Re SFE Corporation Ltd (2006) 59 ACSR 82 (SFE). 19 In SFE 59 ACSR 82, Gyles J suggested that a scheme might provide for payment by the acquiring company to a trustee prior to the vesting of title to the shares in the acquiring company, to be held by the trustee for payment to the shareholders immediately following the vesting. In my experience, this procedure is now commonly followed, as it has been in the present case. 20 Accordingly, under cll 4.2 and 4.4 of the Share Scheme, on or before 12.00 noon on the Implementation Date, Morgan Stanley Bidco is to pay the aggregate Scheme consideration in cleared funds into an account in the name of Investa, to be held by Investa on trust for the Scheme Participants (except that any interest on the amount is to be for the account of Morgan Stanley Bidco) for the purpose of its being paid over to them by dispatch not later than the Implementation Date. Also by 12.00 noon on the Implementation Date Morgan Stanley Bidco is to provide a certificate signed by a director confirming that Morgan Stanley Bidco has made that payment. After 12.00 noon on the same date, and subject to receipt by Investa of that certificate, the Shares, other than the Excluded Shares (if any), together with the Units that are stapled to the Shares, are to be transferred to Morgan Stanley Bidco.

Deemed warranty of freedom from encumbrances 21 Each Scheme Participant is deemed to have warranted that all of its Shares and Units to be transferred to Morgan Stanley Bidco will at the date of transfer be "fully paid and free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind…", and that the Scheme Participant has full power and capacity to sell and transfer them: cl 7.3. I have no difficulty with a provision of that kind: see APN News & Media Limited (2007) 25 ACLC 784 (APN) at [57]-[63].

Vesting free of encumbrances 22 As distinct from the deemed warranty just mentioned, the Scheme also includes (in cl 7.3(b)) what may be called a "vesting free of encumbrances" term. I discussed such a term in WebCentral Group Limited (No 2) (2006) 58 ACSR 742 (WebCentral) at [14]-[24], and will not repeat here what I said there. 23 The question that arises is whether, in the exercise of its discretion in an ex parte proceeding and without a contradictor, the Court should make an order for the convening of the meeting and later approving a scheme containing the particular term proposed. 24 Could the presence of the term detrimentally affect the interests held by third parties in the shares the subject of the scheme? If not, why have, or not have, the term as part of the scheme (see WebCentral 58 ACSR 742 at [20])? If so, should the Court support a term that can detrimentally affect the interests of third parties who have not been heard? 25 The effect of the Court's approval of a scheme agreed to by the requisite majorities in number and in value is that the scheme is binding on all members and on the company: s 411(4). As noted in WebCentral 58 ACSR 742 at [18], in substance the effect is to supply consent to be bound by the scheme, even of members who did not vote in favour of it. The vesting free of encumbrances term would be binding on all members. It would, however, leave the interests of third parties to be governed by general law principles. As noted below, those principles give very substantial protection to an acquiring company. 26 A "share" is a legal chose in action that is constituted by a bundle of contractual rights and obligations and represents a person's interest in a company, and which, subject to the company's constitution and possibly other constraints, is transferable, transmissible and capable of devolution by will and by operation of law: see the Act s 1070A, and Borland's Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 at 288; Commissioners of Inland Revenue v Crossman [1937] AC 26 at 66; Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 at 157. Under general law principles, a buyer of a share enjoys priority over the holder of an earlier equitable interest because of the doctrine of bona fide purchaser of the legal estate without notice: see Meagher RP, Heydon JD and Leeming MJ, Meagher Gummow and Lehane's Equity Doctrines and Remedies (Butterworths LexisNexis, 2002) at [8‑230]-[8-300]. 27 The only circumstances in which a "vesting free of encumbrances" term would have work to do would be if and to the extent that the acquiring company had notice of the equitable interest of a third party. I note in passing that the deemed warranty of freedom from encumbrances is expressed in terms that are, in the relevant part, identical to those of the vesting free of encumbrances provision, and this suggests that the drafter accepted that it was conceivable that at least in some circumstances equitable interests of third parties might survive implementation of the Share Scheme. Although it may be difficult to imagine such a case, a fortiori where the shares are traded on the market of the ASX, I see no reason why the Court should do anything that might give the impression that it was supporting the extinguishment of a third party's equitable interests in such rare circumstances. At least, before approving a scheme containing an unqualified vesting free of encumbrances term, I would require evidence that the acquiring company had no notice of any third party interests. 28 Apparently the purpose of a vesting free of encumbrances term is only to make clear, as is the position under general law principles, that the acquiring company takes the shares free of equitable interests of which it was unaware. 29 The vesting free of encumbrances term expressed in cl 7.3(b) of the Share Scheme incorporates a qualification in the light of the observations in WebCentral 58 ACSR 742. The term is as follows: To the extent permitted by law, all Investa Shares (including any rights and entitlements attaching to those shares) which are transferred to Morgan Stanley Bidco under this Investa Share Scheme will, at the date of the transfer of them to Morgan Stanley Bidco, vest in Morgan Stanley Bidco free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise, and free from any restrictions on transfer of any kind not referred to in this Investa Share Scheme. (Emphasis added.) 30 I regarded the opening words "To the extent permitted by law" as giving adequate notice that a third party would not suffer the extinguishment of an interest in shares if Morgan Stanley Bidco had had notice of that interest. I therefore took the view that those words overcame the difficulty referred to in WebCentral 58 ACSR 742, which was that the presence of a vesting free of encumbrances term might give the impression to third parties that their interests had been extinguished by the presence of the term where they would not have been in its absence.

No shop and break fee provisions 31 The Implementation Agreement contains "no shop" and break fee provisions. I discussed such provisions in APN 25 ACLC 784 at [25]-[35] and [36]-[55] respectively. 32 The affidavit of Jonathan Peter Callaghan, the Group General Counsel of the Investa Property Group, sworn 17 July 2007 deals at paras 23-26 with such provisions in the present case. The "no shop" provision (cl 14 of the Implementation Agreement) is to the effect that during a "No Shop Period" competing takeover proposals are not to be sought, and that if any are received, Morgan Stanley Bidco is to be given an opportunity to match them. 33 The break fee provision (cl 15 of the Implementation Agreement) is to the general effect that Investa will pay to Morgan Stanley Bidco a break fee of $20 million if, within nine months of the date of the Implementation Agreement, certain events occur. In general terms, these are that the proposed acquisition by Morgan Stanley Bidco fails for certain reasons, such as the acceptance of a competing takeover proposal. The break fee is not payable if the Investa Shareholders simply decide not to accept Morgan Stanley Bidco's offer. 34 Mr Callaghan's affidavit shows that the "no shop" and break fee provisions were agreed to by Investa following ordinary arm's length commercial negotiations between Investa and Morgan Stanley Bidco that were conducted over a period of two months, during which the parties were separately advised and represented by external legal advisers, and (in the case of Investa) by external financial advisers, with extensive experience of transactions of the present kind. Mr Callaghan states that Investa received legal advice on the operation of both provisions, and that Investa had regard to the guidelines set out in the Takeovers Panel Guidance Note 7 when it was negotiating and agreeing to them. 35 The amount of the break fee is $20 million which represents 0.49% of the equity value of the Securities as at 30 May 2007, and 0.43% of the total consideration offered by Morgan Stanley Bidco, including the eight cents per Security dividend or distribution to be paid to Security holders on 22 August 2007. Clearly, the amount of the break fee is well below the 1% of equity value referred to (at [7.18]) in the Takeovers Panel's Guidance Note 7: Lock-up Devices (2nd Issue, 2005).

Interests of members 36 There is affidavit evidence from Ian Richard Jedlin, a partner in the KPMG Partnership and an Executive Director of KPMG Corporate Finance (Aust) Pty Ltd, supporting the opinion expressed in a report by him and his co-directors, Diana D'Ambra and Lilian Look, to the effect that the Share Scheme is in the best interests of the members of Investa and is fair and reasonable to the non-associated Security holders. They assessed the fair value of the Securities to fall in the range of $2.85 to $3.15 per stapled Security (before allowing for payment of the dividend or distribution of eight cents per Security). Mr Jedlin and his co-authors note that the Morgan Stanley Bidco offer represents a value that is higher than any price at which the Securities have traded for the 12 month period to 30 May 2007, the date of the announcement of MSRE's offer. The offer represents a premium of between 13% and 28% over the market price of the Securities determined over that period of 12 months.

ASIC 37 There was also in evidence a letter from ASIC in a common form to the effect that ASIC did not intend to appear to make submissions or intervene to oppose the Share Scheme at the first Court hearing and that in accordance with its policy it would not provide a statement under s 411(17)(b) of the Act prior to the second Court hearing.

Chairing of the Share Scheme Meeting 38 There is evidence that Steven Crane, the chairman of Investa, is willing to act as chairman of the Share Scheme Meeting, and that if he proves to be unable to do so, John Ian Messenger, a non-executive director of Investa, is willing to chair the Share Scheme meeting.

CONCLUSION 39 For the above reasons I considered that the holders of the Shares should have the opportunity of considering the Share Scheme and I made the orders mentioned. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Counsel for the Plaintiff: Mr T F Bathurst QC

Solicitors for the Plaintiff: Gilbert + Tobin

Counsel for Post Bidco Pty Limited: Mr M B Oakes SC

Solicitors for Post Bidco Pty Limited: Minter Ellison

Date of Hearing: 18 July 2007

Date of Judgment: 18 July 2007

Date of Publication of Reasons: 31 July 2007