Decision
39I start with two propositions that, at the present moment at least, I think to be relatively uncontroversial.
40The first is that, as Mr Sheahan submitted, the evident purpose of the Incentive Fee is to reward the responsible entity if the trusts outperform the selected benchmark. That is done (as the definition of Securities Index says) by calculating, among other things, the accumulated returns to shareholders at the relevant date.
41I interpolate that, as a matter of common sense, those returns might be thought to include amounts received by acceptances of the takeover offer.
42The second point is that I do not think that the words "most recently traded on ASX" can be read literally. The parenthesised exclusion of special crossings makes that clear, along with the following reference to "other trades". By necessary implication, those "other trades" would be non-market trades because, in the usual way, at least, on market trades would be trades "in the ordinary course of trading".
43As I have indicated, APL's position on this point fluctuated. At one point it appeared to agree. Its written submissions in reply said, among other things, that special crossings are:
"transactions which are subject to the Market Rules and which are required to be "reported to ASX under the Rules", which are therefore recorded on the ASX trading platform like any other on market trade. ... Thus, the exclusion of "special crossings supports APL's interpretation, which treats "traded on ASX" as referring to transactions recorded on the ASX trading platform."
44The only way that I could understand that submission is that it accepts that special crossings are not traded on ASX, if that expression is read literally. The submission entails that the words do not have their core meaning, and that they embrace trades which, whilst not effected on the trading platform, are nonetheless to be regarded as if they had been, because they are recorded on that platform.
45It does not follow from the first point that I stated that the case for Hastings succeeds as a matter of course. That is because the parties chose the Securities Index as the measure of, or proxy for, accumulated return; and expressed that measure in a formulaic way. It does follow, however, that in seeking to give meaning to the formula one should bear in mind what it is trying to achieve, and should seek, to the extent that the words allow, to give effect to that purpose.
46It follows from the second point, that as Mr Sheahan submitted, the preposition "on" in the adjectival clause "most recently traded on ASX" cannot be read literally. Thus, the task is to find a substitute nexus between sales (or trades) propounded as candidates for "TP", and "ASX".
47In this context, the acronym "ASX" cannot connote only the company (regardless of the definition). It must connote as well the market operated or provided by that company.
48Once it is understood that the use of the preposition "on" does not mandate that only on market trades can be considered as candidates for TP, the search for an appropriate nexus must take into account at least three matters.
49The first is that the candidates to be considered be capable of description, without doing violence to the English language, as "trades". The ordinary English meaning of that word, as a noun, denotes a transaction of sale and purchase, or of exchange.
50The second matter is that, even if "on" is not to be read literally, there must be some objectively rational connection between the trades or sales and the market operated by ASX.
51The third matter is that in selecting the nexus, a choice should be made that seeks to achieve or promote rather than to derogate from the purpose for which TP is to be calculated.
52It is clear, from the complexity of the constitutions and otherwise, that the parties should be taken to have had an understanding of the relevant market mechanisms. Those market mechanisms include the ordinary processes of trading through the ASX trading platform. They include also the processes of takeover bids, effected by market or off-market bids. See generally ch 6 of the Corporations Act, noting that by s 616, those are the two alternative ways of making a takeover bid. Those market mechanisms would include, further, the operation of the ASX market rules and related rules, including among many other things, the provision for suspension from quotation on various scenarios.
53In short, I think, one should proceed on the basis that the constitutions were intended to operate in the wider context of the market with all its regulatory and other incidents.
54On the face of things, the drafter might have saved considerable trouble by using market price instead of TP. But that could lead to problems if the securities were suspended from quotation for more than fifteen days. There would be no daily weighted average price (clause 1.3 (a)(i)), and perhaps no ability to use the process of valuation for which clause 1.3(a)(ii) provides. That is because the latter clause is predicated on the ability to derive a price under the former. If that be correct, then use of market price would require recourse to clause 1.3(b), with less precision again.
55In this way, it could be said that the use of TP and the statement of the way it is to be derived takes account of, or accommodates, the possibility of suspension of quotation, and that it authorises, by implication at least, recourse to trades that are not strictly speaking on market.
56To my mind, there is a real connection between off-market bids and the market platform that is operated by ASX. What is under consideration is the market for securities listed and quoted on ASX.
57In that context, Section 20 of the ASX Market Rules applies. When one follows through Section 20 (as it stood in 2004 when the constitutions took effect) into the "Procedures" to which the section refers, it is clear that the actions that ASX may take (cl 20.4) may be taken in relation to off-market bids. See Section 20 of the Procedures (as at the same time). Procedure cl 20.4.1 refers to Appendix 20.4. That appendix (again, as at the same time) sets out the detailed actions that ASX will take in respect of proposed off-market bids, market bids and schemes. This no doubt recognises that such activities will influence prices on the market.
58That has to be considered against the following background.
59ASX operates the market which, under the market rules, is the market for products including securities of the kind now under consideration. It offers services and facilities intended to effectuate or facilitate trading. A market transaction includes not only transactions entered into on the trading platform but also transactions reported to ASX under the rules (see r 2.9 of the Market Rules).
60On market trading refers to the matching of buy and sell orders through the trading platform. Off-market trading, as one might expect, does not involve the matching of orders through the trading platform. Nonetheless, special crossings and other examples of off-market trading such as takeovers and schemes of arrangement will have an obvious influence on market price. The expert evidence (this is one instance where it was of some relevance) suggests that off-market trading could constitute up to 20% of the total value of trades in listed securities over any particular period of time. It is, obvious, in those circumstances that off-market trading may have a very considerable effect on the prices achieved through on market trading.
61All those matters would have been known to and understood by market participants in 2004. Those considerations suggest that there was a sufficient nexus between off-market bids and the market operated by ASX so that sales effected by acceptance of the off-market bids could properly be considered as candidates for TP.
62To my mind, that nexus becomes more distinct when, as here, the securities are suspended from quotation because the bidder, having reached 90%, has notified ASX that it proposes to move to compulsory acquisition (see s 661B of the Corporations Act). Sales effected by acceptances of the bid are then the only most recent candidates for TP. Reference to market sales necessarily involves travelling further back in time, more remote from the date at which the determination of the Incentive Fee is to be made.
63Looking at the matter purposively, once a bidder, being entitled to do so, has informed ASX that it will move to compulsory acquisition, the price achievable is fixed at the bid price. In those circumstances, as a matter of commercial reality, it is clear that the accumulated total return achieved by one will include the return (positive or negative) referable to disposal of their securities at that price.
64In this case, because the offer was for a combination of cash and scrip, the return would fluctuate according to movements in the price of the securities offered as part consideration. But that is a matter of machinery only. It has not prevented the parties from calculating what the Incentive Fee would be if Hastings' submissions were correct.
65I referred earlier to APL's submission that "trades not made on or effected on the ASX trading platform were nonetheless traded on ASX" because they were recorded on the ASX platform, and that was sufficient.
66That seems to me to conflate the process or activity of trading - buying and selling, or exchanging - with the recording of the outcome of that process or activity. It is the sales that set the market, or fix the "price" that is to be taken as TP. Recording the sales does no more than create a database from which price details can be extracted. By contrast to the mechanical process of recording trades, off-market trades also affect market prices. Purposively, they are more relevant to TP than the mechanical process of recording that which has occurred.
67I acknowledge that, as Mr Studdy submitted, acceptance of the construction for which Hastings contends could lead to two different "prices" (or more accurately, to two different candidates for "TP"). That does not seem to me to be an insuperable difficulty, although I do not necessarily embrace Mr Sheahan's submission that the discrepancies are likely to be insignificant (one or two cents per security may amount to a very large amount of money, depending on the number of securities on issue).
68It seems to me that the Schedule itself provides the answer to this problem. It would be a matter for the Approved Valuer to decide which of the two prices should be preferred, as reflecting prices achieved in the ordinary course of trading.
69As against this suggested anomaly (for which, as I have indicated, the structure of Schedule 3 seems to provide), there would be another anomaly, as Mr Sheahan submitted, if APL's construction were preferred. That would arise as follows.
70The Incentive Fee is 20% of the amount by which the Fund Return for a Period exceeds the Benchmark Return for the same period. (I leave aside, as having no present significance, the question of any previous shortfall.) The first element in the calculation of Fund Return is by reference to daily Market Price in the fifteen business days leading up to the end of the period. The second element is the Securities Index.
71The Benchmark Return likewise is calculated on the basis of (among other things) data relating to the fifteen business days leading up to the end of that Period.
72On APL's construction, the Securities Index will not always, or necessarily, be determined (and in this case would not be determined) on the basis of data relating to this period of fifteen business days.
73Thus, in this respect, there will be a mismatch. There will not be a comparison of like with like, or a comparison proceeding from identical starting points. Of course, if there were no other available construction, that anomaly must be accepted, but the construction for which Hastings contends avoids it.
74There is another matter which I consider to be significant. As I have noted, the Corporations Act provides for market bids and off-market bids. In this case, all that was available was the off-market bid, because the offer was to acquire for a combination of cash and scrip.
75Nonetheless, where a market bid is made, acceptance will lead to sales (or trades) on ASX. Thus, unless the Approved Valuer determines to disregard such sales, they will be taken into account in calculating TP for the purpose of deriving the Securities Index.
76It follows that, where the bid is made as a market bid, and where the offer price is higher than the preceding trading price, then the Incentive Fee will reflect, among other things, the accumulated total return that picks up the increase in price resulting from acceptances of the market bid. However, on the approach taken by APL, the same result does not follow where the increase in price is driven not by a market bid leading to sales on the market, but by an off-market bid. That would be so even if the effect of the off-market bid were to produce a return to security holders that was greater than the return they would have received had their securities been valued at the immediately preceding price derived from market trades.
77It does not seem to me that a conclusion which accepts that the results of one form of takeover activity may be relevant for the purposes of schedule 3, but excludes the other form, should be adopted unless there is no alternative.