Australian Pipeline v Hastings

Provisions of the constitutions 5Since all the constitutions are in the same form, it is not necessary to refer to each individually. That is a mercy because their drafting is of labyrinthine complexity and Delphic opacity. They demonstrate to perfection the technique of meaning concealed by descending cascades of formulae, and by extensive defined terms reinforced by the obscurantism of further internal definitions. 6The entitlement to fees is given by cl 10.1: 10.1 Trustee's Remuneration The Trustee is entitled to receive out of the Assets of the Trust the remuneration (including the Management Fee and Incentive Fee) specified in schedule 3, and any other fees specified in schedule 3 in relation to the proper performance of its duties. 7That leads to Schedule 3. Although it is cl 2 of that schedule which is of principal relevance, I set the whole schedule out: Schedule 3 - Trust 1 The Management Fee payable to the Trustee under clause 10.1 of this deed is an amount up to 1.00% per annum of the Market Capitalisation of the Trust excluding the value of any distributions payable to Unit Holders of the Trust. This fee is to be calculated daily quarterly and must be paid quarterly in arrears. 2. The Incentive Fee (which accrues periodically) payable to the Trustee under clause 10.1 of this deed is calculated and payable as follows: The Incentive Fee equals 20% of the Fund Return for a Period above the Benchmark Return for the Period. If the Fund Return for a Period is less than the Benchmark Return for the Period. If the Fund Return for a Period is less than the Benchmark Return for that Period, the amount of the deficit ("Previous Shortfall" as defined below) is carried forward and taken into account in calculating whether the Fund Return exceeds the Benchmark Returns in subsequent Periods. The Incentive Fee for each Period is the greater of: (a) $0; and (b) 20% x (Fund Return - Benchmark Return - Previous Shortfall), where Fund Return for a Period equals: (1) the average of the daily Market Price of Stapled Securities, multiplied by the number of Stapled Securities on issue, in respect of each of the last 15 Business Days of the previous Period (except for the first Period, where it is the number of Stapled Securities on issue on the date on which unconditional trading in Stapled Securities commences on ASX, multiplied by the issue price of those Stapled Securities); multiplied by (2) the movement in the Securities Index over relevant Period expressed as a fraction, where: (A) the numerator is the average daily closing value of this index over the last 15 Business Days of the Period minus the average daily closing value of this index over the last 15 Business Days of the previous Period (except for the first Period where it is the initial accumulation index figure ascribed to the Stapled Securities); and (B) the denominator is the average daily closing value of this index over the last 15 Business Days of the previous Period (except for the first Period where it is the initial accumulation index figure ascribed to the Stapled Securities). The Securities Index is the accumulation index for the Group which calculates the accumulated total return received by Security Holders, including all distributions form the date on which unconditional trading in Stapled Securities commences on ASX. It will be specifically calculated for the Group by an Approved Valuer. The opening value of the Securities Index will be one. The value of the Securities Index at any particular time subsequently will be: TP x (one plus A) IP where: TP means the price at which Stapled Securities were most recently traded on ASX (excluding any special crossings or other trades which the Approved Valuer considers have not occurred in the ordinary course of trading); A means the number (or fractions of numbers) of Stapled Securities which would notionally have been issued if each distribution in respect of a Stapled Security (and any other Stapled Securities) issued pursuant to the reinvestment of distributions prior to the distribution in question) was reinvested at the closing price of Stapled Securities on the date of payment of the relevant distribution. IP means the aggregate issue price of a Stapled Security in an initial capital raising as contemplated by clause 5.6(a)(2) of this deed and the equivalent provisions of the constitutions of any other Group members. In the case of any bonus issues, security splits or consolidations, or other reconstructions, the value of TP and IP will be adjusted to take into account these changes as the Approved Valuer considers appropriate. Group means the Trust and any entities whose securities are Stapled to Units in the Trust. Benchmark Return for a Period equals: (a) the average of the Market Price of Stapled Securities, multiplied by the number of Stapled Securities on issue, in respect of each of the last 15 Business Days of the previous Period (except for the first Period where it is the number of Securities on issue on the date on which unconditional trading in Stapled Securities commences on ASX, multiplied by the issue price of those Stapled Securities); multiplied by (b) the movement in the Benchmark Index over the relevant Period expressed as a fraction, where: (1) the numerator is the average daily closing value of this index over the last 15 Business Days of the Period compared with the average daily closing value of this index over the last 15 Business Days of the previous Period (except for the first Period where it is the average daily closing value of this index over the last 15 Business Days immediately prior to the date on which unconditional trading in Stapled Securities commences on ASX); and (2) the denominator is the average daily closing value of this index over the last 15 Business Days of the previous Period (except for the first Period where it is the average daily closing value of this index over the last 15 Business Days immediately prior to the date on which unconditional trading in Stapled Securities commences on ASX. Benchmark Index means ASX/S&P 200 Industrials Accumulation Index (or such other equivalent index as may replace that index from time to time, as determined by an Approved Valuer) as reported by Bloomberg (or such other appropriate reporting agency as may be selected from time to time by an Approved Valuer). Period means: (a) subject to paragraphs (b) and (c) below, each six month period ending 30 June and 31 December; (b) for the first period, the period commencing on the date on which unconditional trading in Stapled Securities commences on ASX and concluding on 30 June 2005; and (c) in the case of the last period, the period which ends on the date of termination of the Trust or the date on which the Trustee ceases to be responsible entity of the Trust (whichever occurs first) and which commences on 30 June or 31 December which occurs last before this event. Previous Shortfall means: (a) for the first Period, $0; (b) for the second Period, the amount (if any) by which the Fund Return for the first Period was less than the Benchmark Return for the first Period; and (c) for each subsequent Period, the amount (if any) by which: (1) the Fund Return for the immediately previous Period; minus (2) the Benchmark Return for that immediately previous period; minus (3) the Previous Shortfall applicable to that immediately previous Period, produces an amount which is less than $0. The Incentive Fees calculated pursuant to this paragraph 2 represent the aggregate incentive fees payable to the Trustee by the Group in respect of the performance by the Trustee of its duties in relation to the Group members. If an Incentive Fee is payable in respect of any Period, then it will be apportioned between the Group members as follows: (a) if, on the last day of the Period, there are no Group members other than the Trust, then 100% of any Incentive Fee for that Period will be paid out of the assets of the Trust; (b) if, on the last day of the Period to which the Incentive Fee relates, the Net Asset Value of one (but not more than one) of the Group members is a positive amount, then 100% of the Incentive Fee will be paid out of the assets of that Group member; (c) if, on the last day of the Period to which the Incentive Fee relates, the Net Asset Values of more than one of the Group members is a positive amount, then an amount equal in aggregate to 100% of the Incentive Fee will be paid out of the assets of those Group members in the proportions which their Net Asset Values bear to each other; and (d) if, on the last day of the Period to which the Incentive Fee relates, the Net Asset Value of none of the Group members is a positive amount, then the Group members will pay an amount equal to 100% of the Incentive Fee out of their respective assets in the proportions which their Gross Asset Values bear to each other. 8The repeated references to "Market Price" take the reader back to cl 1.3: 1.3 Market Price (a) The Market Price for a Stapled Security in a class or an Option (as the case requires), on any Business Day is: (1) the daily weighted average traded price for a Stapled Security in that class or Option in that class for all sales on ASC for the period of the lesser of: (A) 15 Business Days immediately preceding the relevant Business Day; or (B) the number of Business Days immediately preceding the relevant Business Day during which the Stapled Security was quoted on ASX, in either case whether or not a sale was recorded on any particular day (apportioned between the Unit and any Attached Securities as the Trustee determines); or (b) Despite clause 1.3(a), for the purposes of clause 5.7(h), the Market Price for a Stapled Security or Option means an amount calculated in a manner which complies with the Corporations Act, is set out in the Terms of Issue and which in the opinion of an Approved Valuer will approximate the market price of a Stapled Security or Option at or around the relevant date. (c) the "Market Price" of an Option on any Business Day must be determined in the same manner as the Market Price for a Stapled Security is determined. 9"ASX" was a defined term: ASX means the Australian Stock Market Exchange Limited;

Chronology 10The parties prepared and tendered a statement of agreed facts. The following relevant facts emerge from it. 11On 15 December 2011, APL's parent company made an off-market bid for all the issued stapled securities in the trusts. I will refer to that as "the takeover offer". The consideration under the takeover offer was a mixture of cash and stapled securities in the offeror. The cash component was increased over time. 12By 16 November 2012, the offeror had acquired an interest in more than 90% of the issued securities. Accordingly, it was entitled to proceed to compulsory acquisition. It gave notice accordingly. 13After those notices were given, the securities were suspended from quotation, at the close of trading on 23 November 2012 14The offer remained open for acceptance until 13 December 2012. There were acceptances on each day (or business day) during the period from 26 November to 13 December 2012. 15On 13 December 2012, the holders of the securities resolved that Hastings retire as responsible entity and that APL be appointed in its place. That took effect on 17 December 2012. 16The result, having regard to the terms of cl 10.1 and schedule 3, is that Hastings is entitled to be paid the management fee and the incentive fee, in each case calculated as at 17 December 2012.

The evidence 17The parties favoured the Court with lengthy affidavits and a Court Book comprising three volumes of documents. Much of that material was irrelevant. None of the (non-expert) affidavits was read. By my count, less than half the material in the Court books was tendered. 18The parties also relied on two expert reports. At best, those reports were of marginal relevance.

The parties' submissions 19Counsel provided written submissions which in their length and complexity sought to rival, if not outstrip, the document with which they were concerned. Those submissions were elaborated in detail orally. 20I will not set out the detail of those submissions. I propose to indicate the outline of each party's position, so that what follows may be understood. I have taken that course because, it seems to me, there is a clear path through to a result which does not require the Court to consider the detail of each and every submission put. 21As one might expect, the submissions focused on the element "TP" in the formula that represents the value of the Securities Index. For convenience, I repeat that formula: TP x (one plus A) IP 22The particular, and I think only, issue that divided the parties, and which has led to their widely variant calculations of the Incentive Fee, is whether sales constituted by acceptances of the takeover offer that occurred after the securities were suspended from quotation (from the close of trading on 23 November 2012) are properly to be described as "traded on ASX". 23Mr Studdy SC, who appeared with Mr Nixon of counsel for APL, submitted that the relevant most recent trades on ASX were those that had occurred up until the suspension of quotation 24Mr Sheahan SC, who appeared with Mr Darke and Ms German of counsel for Hastings, submitted that the subsequent trades "constituted by acceptance of the takeover offer gave the price or amount that should be used in the formula as TP". 25The respective submissions may be summarised, at a high level of generality, as follows. 26APL contended that from 24 November 2012 until 17 December 2012, the relevant "price" was $2.85, being the closing price of the securities immediately prior to their suspension from quotation. APL submitted that acceptances thereafter of the takeover offer did not constitute trading on ASX. They did not establish a price on the trading platform operated by ASX. They could not be described as having occurred "in the ordinary course of trading", nor were they regulated by the market rules promulgated by ASX for on market trading. 27Hastings contended to the contrary. It submitted that what was required was that there be some relevant and logical nexus between the trades and the concept of price. That followed, in Hastings' submission, because the definition of TP necessarily contemplated that trades which had not been effected on the trading platform conducted by ASX could be taken into account in deciding what the price was. 28Hastings submitted that, looking purposively at the clause as a whole, it was apparent that the only way to capture "the accumulated total return received by security holders" was to take into account what they had received or could receive by acceptance of the takeover offer. 29Mr Studdy submitted that the construction advanced for Hastings would mean that there could be two different measures of TP at any given point in time. He gave as an example the possibility that Hastings had retired on 16 November 2012, before the securities had been suspended from quotation. He pointed to market evidence which showed that on the day in question there was a variance between the price established by trading records and the value of the takeover offer (which value varied to some extent because it included a scrip component). 30Mr Sheahan accepted this as theoretically correct, but submitted that the difference was (as, he submitted, one would expect in a partially efficient market) insubstantial. 31Such evidence as there is suggests that the variation between the two figures was of the order of one to three cents per security, varying from day to day. 32As I have said, Mr Sheahan relied on the parenthesised exclusion - "(excluding any special crossings or other trades which the Approved Valuer considers have not occurred in the ordinary course of trading)". He derived from this the proposition that "traded on ASX" extended beyond trading of securities on ASX's trading platform. As he said, special crossings were not treated in that way. 33Thus, Mr Sheahan submitted, all that was required was some rational link between the trades and the market. In this case he said, that rational link existed because of the way the acceptances were reported to the market through ASX's subsidiary, ASX Settlement and Transfer Corporation Pty Limited (ASTC). As its name suggests, that company provides settlement services for sales of listed securities. 34Mr Studdy accepted, I think, that the reference to "traded on ASX" would extend beyond trades actually effected on ASX's trading platform. I say "I think" because from time to time the submissions for APL appeared to withdraw from this position, causing the need for further interrogation to re-establish what had seemed to be common ground. 35Mr Studdy submitted that the necessary link was that the trades be "market transactions" for the purpose of ASX's market rules. Special crossings were and are market transactions. They are required to be reported to ASX and, like on market trades, they are recorded (once reported) on the trading platform. 36By contrast, Mr Studdy submitted, the acceptances of the (off-market) takeover offer were not subject to the market rules. They were not required to be reported to ASX. They were not recorded on the trading platform. Instead, he submitted, they were subject to the notification obligations set out in s 633 of the Corporations Act 2001 (Cth). 37Mr Sheahan relied on the evident purpose of the Incentive Fee, which was to reward Hastings to the extent that total returns outperformed the benchmark. That would not happen, he submitted, if the acceptances of the takeover offer were excluded from consideration. 38Each of Mr Studdy and Mr Sheahan referred at some length to ASX's Market Rules and Procedures, and to the settlement rules and procedures established by ASTC. I will not set out all the aspects of those documents on which each relied.

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.

Conclusion and Orders 78In my view, Schedule 3 to each of the constitutions should be construed in the way for which Hastings contends. 79It follows, as the parties have agreed, that APL's summons must be dismissed with costs, and that Hastings is entitled to judgment with interest and costs of its cross-claim. 80The parties are to bring in draft orders at 10 a.m. tomorrow to give effect to that conclusion. 81I stand the matter over accordingly. 82The exhibits will be handed out.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 November 2013