ASIC v Australian Property Custodian Holdings Limited No 3

Judgment (EX TEMPORE) 1HIS HONOUR: On 6 February 2014, the Court gave advice in the following terms [In the Matter of Commonwealth Management Investments Limited [2014] NSWSC 74, [22]]: (1)The plaintiff would be justified in convening concurrent extraordinary general meetings ("scheme meeting") of the security-holders of CFS Retail Property Trust 1 ("CFX1"), and CFS Retail Property Trust 2 (CFX2") (together "CFX"), for the purpose of considering and if thought fit, voting on the resolutions which are set out in annexure D to the explanatory memorandum which is exhibit PXO3 herein ("the explanatory memorandum"). (2)The plaintiff would be justified in distributing an explanatory memorandum substantially in the form of exhibit PXO3 to all registered security-holders of CFX. (3)The plaintiff would be justified in proceeding on the basis that the proposed amendments to the constitutions of each of CFX1 and CFX2 would be within the powers of alteration conferred by the respective constitutions of CFX1 and CFX2, and s 601GC of the Corporations Act. (4)The proceedings be adjourned to 10 March 2014 for considering the balance of the judicial advice sought in paragraph 72 of the statement of facts. 2As is the orthodox procedure on applications of this kind, CMIL now at the second Court hearing, seeks advice that it would be justified in giving effect to and implementing the transactions contemplated by the implementation deed, in giving effect to the amendments of the constitutions approved at the scheme meeting, and in doing all things necessary to implement the transactions contemplated by the implementation deed. 3At the second hearing, the Court must be satisfied that the procedural requirements for the obtaining of the members' approval have been satisfied: [Re Cromwell Property Securities Ltd [2006] NSWSC 1449, [23]]. The Court then gives considerable weight to the level of support by members of the scheme for the proposed transaction, and also to whether any person appears at the second Court hearing to express any opposition to it. 4The evidence establishes that CMIL has complied with the necessary procedural requirements to convene and conduct the scheme meeting. In particular, notices of the meeting, with a copy of the Explanatory Memorandum, were dispatched to all registered CFX security holders. Although the Explanatory Memorandum contained some amendments to the form in exhibit PX03 which was the subject of the advice at the first hearing, those amendments were not such as to cause it to be other than "substantially" in that form. The explanatory memorandum, as forwarded to security holders, included a statement of the judicial advice provided at the first hearing and a statement to the effect that any security holder who wished to oppose judicial advice being given at the second hearing may do so by filing and serving notice of appearance in the prescribed form, together with any affidavit to be relied on. 5Proxies were received and tallied. The scheme meeting was held on 24 March 2014 at 10.30am, as appointed by the notices of meeting. The resolutions were put to the meeting, and a poll taken in respect of each of them. The resolutions were carried by overwhelming majority. Resolutions 2 through 10 were carried by majority of 98.3 percent of the votes cast against 1.7 percent of the votes cast. Resolution 1 was carried by 99.6 percent of votes cast against 0.34 percent - although it is necessary to bear in mind that a much smaller number voted on resolution 1, for reasons to which I shall come. 6That the procedure for convening the meeting was satisfactory is confirmed by the circumstance that of the qualified electorate, 72.85 percent cast votes, including those who participated and expressly abstained. That is all the more impressive when it is observed that CBA did not vote its 12.45 percent holding, indicating that there was a practical voter turnout of in excess of 85 percent, except on resolution 1. On resolution 1, 55.38 percent of votes were excluded from voting on the basis of an exclusion that applied to that resolution. 7It can therefore be said that there has been overwhelming security holder support for the proposed transaction. No security holder has filed an appearance, nor sought to appear today at the second hearing to oppose the relief sought. In those circumstances it can be said that the security holders have "pronounced themselves content to see the proposal implemented", such that it is appropriate for the advice sought to be given "unless some particular factor indicates otherwise" [Re Abacus Funds Management Limited (2006) 56 ACSR 693, [5] (Barrett J)]. Likewise, the absence of appearance and opposition at the hearing is a highly relevant matter showing that "no-one affected has been sufficiently concerned by the proposal for compulsory sale to come to Court to complain" [Re Abacus Funds Management Limited, [11]]. In this case the reference to "compulsory sale" is all the more apt, given the foreign holder provisions, to which I shall shortly come. 8It is appropriate to refer to a number of matters which might impact on the Court's inclination to give the advice sought. 9In the judgment given at the first hearing, I observed: It may well be that the exception in s 210 applies, and I do not need to reach a conclusion about that at this stage, if at all. Ultimately, it would seem that whether the exception is applicable or not would be tested only on an application for a civil penalty under s 209(2) or a criminal prosecution under s 209(3), of a person allegedly involved in a contravention. On the other hand, I have not found in the evidence any direct expression of opinion of the independent expert (or anyone else) that the terms would be reasonable in the circumstances if the entity and CBA were dealing at arm's length, and it may well be desirable that that be addressed at the second hearing. 10Following those observations, advice was sought from the expert who had provided the expert report as to whether a different approach would have been adopted or a different opinion given had a report been sought for the purposes of Chapter 2E. In a letter of 28 February 2014, the expert advised that the opinion expressed would, in those circumstances, not have differed, and that the same considerations would have pertained. 11It seems to me that this advice miscarried somewhat. The concern to which I adverted in para 16 was the absence of evidence that "the terms would be reasonable in the circumstances if the entity and CBA would be arms length", and a report provided in connection with an application for shareholder approval under Chapter 2E does not raise that specific question posed by s 210. However, any concerns in this regard are mitigated, first, by the circumstances mentioned in the previous judgment (namely that whether an exception is applicable or not really only arises on an application for a civil penalty under s 209(2) or a criminal prosecution under s 209(3) of a person allegedly involved), but more importantly, that while the scheme meeting was not asked to give shareholder approval under Chapter 2E, the overwhelming results of the meeting are indicative of shareholder satisfaction with the fairness and reasonableness of the transaction in the circumstances. 12In the previous judgment, I also referred (at [13]) to the proposal that a small number of foreign security holders be subject to a compulsory sale process. In fact, since that time, further advice obtained by the plaintiff has established that an even smaller class of foreign holders than originally contemplated would be so affected. The evidence establishes that this is now limited to five jurisdictions -Vietnam, Thailand, Taiwan, Malaysia and the Netherlands - in which there are a total of eleven security holders, holding in aggregate 0.002 percent of the total number of issued securities. Foreign security holders in other jurisdictions, whom it was previously thought might not be able to participate in the internalisation proposal, have been notified by notice on the CFX website that they are now able to participate and will not participate in the compulsory sale facility. 13As indicated in the previous judgment, similar provisions for compulsory sale of the interests of foreign holders have been approved in other like cases. In this case, the very small number in question, relatively speaking, is one significant consideration. Another is that no foreign holder attended the scheme meeting and, of those who lodged proxies, none were from any of the jurisdictions in which participation in the compulsory sale facility would be required. No proxy received from a security holder outside Australia directed the proxy holder to vote against any resolution. Finally and fundamentally, the sale facility, though it will result in the compulsory sale of the security holder's interest, will nonetheless result in them getting value for that interest. In those circumstances, it does not seem to me that the foreign holder provisions are reason for declining to give the advice sought. 14In the course of the correspondence between the solicitors for the plaintiff and ASIC, ASIC has raised an issue as to whether what is conventionally called "stapling relief" is required. "Stapling relief" involves a modification granted by ASIC pursuant to (Cth) Corporations Act s 601QA and s 601FC(1)(c), (d) and (e), to the effect that references in those sections to "members of the scheme" are replaced by references to "members of the stapled group." 15It is not entirely clear why ASIC considers that such "relief" is necessary. In particular, I cannot really ascertain whether it is considered necessary in order to enable the responsible entity to have regard to the interests of the security holders qua shareholders in the stapled share, or whether it is regarded as necessary in order to compel the security holder to have regard to such interests. In other words, it is not clear to me whether such relief is seen as beneficial (in extending the responsible entity's scope of proper concern) or whether it is seen as protective (for the benefit of the security holders). 16However, what seems to me to be fundamental is, first, that whatever stapling relief might be granted, it would not affect the general law equitable duties of the responsible entity as a trustee, which would be to the security holders; secondly, that because of the stapled nature of the security, the security holders and the shareholders in the stapled share are one and the same person, and thirdly, that in such circumstances it is proper, permissible, and indeed necessary that the trustee have regard to the "best interests of members" in the context in which the trust operates, which in the present case is the context of a stapled security [ASIC v Australian Property Custodian Holdings Limited No 3 [2013] FCA 1342, [461]]. It is very difficult to conceive of a situation, and neither counsel nor I have been able to do so, in which the interests of a shareholder in the stapled share would diverge from those of a unit holder in the trust. If such an instance arises, there are many ways in which it could potentially be addressed. In short, the possibility that such a situation might arise does not afford an obstacle to giving the advice sought. There is no reason to suppose that, in the absence of stapling relief, the responsible entity would act otherwise than in accordance with its s 601FC duties and the analogous general equitable duties, and there is no reason to suppose that it cannot properly discharge its duties to its unit holders without the grant of stapling relief to permit it to take into account the interests of the same beneficiaries qua shareholders in the stapled shares. 17For those reasons, and having regard to the overwhelming support of the security holders for the proposed transaction, and the absence of opposition at the hearing, it is appropriate to give the advice sought. 18Accordingly, the Court orders that: (1) The plaintiff would be justified in giving effect to and implementing the transactions contemplated by the implementation deed dated 18 December 2013, and in giving effect to the amendments of the constitution of CFX 1 and CFX 2 approved at the scheme meeting and in doing all things necessary to implement the transaction contemplated by the implementation deed. (2) The costs of the plaintiff be paid out of the funds of the CFX Retail Property Trust 1 and CFX Retail Property Trust 2 on the trustee basis pursuant to Trustee Act 1925 s 93 pro rata to the paid up capital of those funds. 19These orders may be entered forthwith.