- Australian Securities & Investments Commission v Mariner Corporation Limited

The Court's role in approving a scheme of arrangement and trust scheme at the second Court hearing

Mr Jackman draws attention to the familiar principles that, at a second Court hearing in respect of a scheme of arrangement, the Court will consider whether relevant procedural requirements have been satisfied and will then exercise its discretion as to whether to approve the scheme: Re Central Pacific Minerals NL [2002] FCA 239 at [12]; Re Redcape Property Fund Ltd and Trust Company (RE Services) Ltd (as the responsible entity for the Redcape Property Trust) [2012] NSWSC 486 at [7]; Re Aveo Group Ltd [2019] NSWSC 1679 at [15]. He recognises that the Court will give substantial weight to creditors' own assessment of their interests, as manifested in the voting at the scheme meeting: Re Ovato Print Pty Ltd [2020] NSWSC 1882 at [31].
Mr Jackman also points to several matters that are relevant to the Court's exercise of its discretion, including whether the Court's orders convening the scheme meeting have been complied with; whether all other statutory requirements have been satisfied, including that the scheme was agreed to by the requisite statutory majorities; whether all conditions to which the scheme is subject (other than Court approval and lodgement of the Court's orders with ASIC) have been met or waived; whether the creditors have voted in good faith and for proper purposes; whether the scheme is fair and reasonable so that an intelligent and honest person who was a member of the relevant class, properly informed and acting alone might approve it; whether the plaintiff has brought to the Court's attention all matters that could be considered relevant to the exercise of the Court's discretion; whether there has been full and fair disclosure to creditors of all information material to the decision; whether the scheme has a compulsive or oppressive effect upon minority shareholders or creditors; whether the scheme offends public policy; and whether the interests of other groups who are not parties to, but are affected by, the scheme are dealt with appropriately: Re David Jones Ltd (No 3); [2014] FCA 753 at [3]; Re Boart Longyear Ltd (No 2) (2017) 323 FLR 241; (2014) 122 ACSR 437; [2017] NSWSC 1105 at [60]; Re BIS Finance Pty Ltd [2018] NSWSC 3 at [10]; Re Ovato Print Pty Ltd above at [31]-[32].
Mr Jackman also points out that the Court has a similar role in determining whether to grant judicial advice at the second Court hearing. The Court will similarly consider whether the procedural requirements for the obtaining of the unitholders' approval have been satisfied, and give weight to the level of support by unitholders of the proposal, and whether any person appears at the second Court hearing to express any opposition to it: Re Cromwell Property Securities Ltd [2006] NSWSC 1449 at [23]; Re Commonwealth Managed Investments Ltd [2014] NSWSC 244. I summarised the applicable principles in an application under s 63 of the Trustee Act in respect of a proposed trust scheme in Re Walsh & Company Investments Ltd as responsible entity of Fort Street Real Estate Capital Fund I, Fort Street Real Estate Capital Fund II, Fort Street Real Estate Capital Fund III and Fort Street Real Estate Capital Fund IV [2020] NSWSC 1746 at [41]ff, where I observed that: "[The applicant] here invokes the Court's jurisdiction under s 63 of the Trustee Act 1925 (NSW), albeit in the particular setting of a trust scheme. Generally, that section authorises the Court to give an "opinion advice or direction on any question respecting the management or administration of the trust property" and permits relief aimed at resolving legitimate doubts held by a trustee as to the proper course of action and protecting the trust and those entitled to it. In Re Australian Pipeline Ltd (2006) 60 ACSR 625; [2006] NSWSC 1316 at [17] , Barrett J noted the role of such advice in providing guidance for the future and referred to Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 at 201 where Lord Oliver of Aylmerton observed that: "A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court." In Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 at [56] -[59] , the majority of the High Court observed that there were no implied limitations on the power to give advice or on the discretionary factors relevant to the giving of advice, and the power is confined only by the subject matter, scope and purpose of the legislation, and may be exercised whenever a question arises as to "the management or administration of the trust property" or "the interpretation of the trust instrument". The majority also noted (at [64]) that the procedure operates as "an exception to the Court's ordinary function of deciding disputes between competing litigants" and affords a facility for providing "private advice" to trustees although the Court is not bound to give such advice. The function of the Court in a judicial advice application is to determine what should be done in the best interests of the trust: Macedonian Orthodox Community Church St Petka Inc above; Re Estate Late Chow Cho-Poon; Application for judicial advice [2013] NSWSC 844 at [45] . In Equititrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) v Equititrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) (No 4) [2017] FCA 1133 at [7] , Jagot J summarised the applicable principles as including, inter alia, that (1) the jurisdiction or power to give judicial advice is not constrained by any implications or limitations not found in the express words of the section; (2) the Court's discretion is confined only by the subject matter, scope and purpose of the legislation, and there are no implied limitations on the discretionary factors that may arise or rules governing the relative importance of such factors; (3) the judicial advice procedure is intended to be summary in character; (4) a judicial advice application is in the nature of 'private advice' and a departure from usual Court proceedings in which there are multiple, adversarial parties and a person served with documents in respect of a judicial advice application is not thereby a 'party' to the application; (5) the right to obtain judicial advice protects the trustee, but it thereby also protects the interests of the trust, by enabling the trustee to act in the interests of the trust without fear of being personally liable for costs; (6) the function of the Court in a judicial advice application is to determine what should be done in the best interests of the trust; and (7) the usual form of order is that the trustee "would be justified" in taking the relevant course of action. I have drawn on my judgment in Re Go Energy Group Ltd [2019] NSWSC 558 at [18] ff for this summary of these principles. The judicial advice given by the Court in the particular context of a second hearing in respect of a trust scheme is in turn typically directed to the question whether a responsible entity is justified in giving effect to and implementing a proposal approved by unitholders: Re Mirvac Limited (1999) 32 ACSR 107 at [48]; Re Homemaker Retail Management Ltd (2001) 40 ACSR 116 at [5]-[7]; Re Macquarie Goodman Funds Management Ltd (2004) 52 ACSR 194 at [10]. In order to give such advice at a second Court hearing in a trust scheme, the Court will need to be satisfied that the procedural requirements to obtain unitholders' approval have been satisfied: Re Cromwell Property Securities Ltd [2006] NSWSC 1449 at [23]. In determining whether to give such advice, the Court will also give considerable weight to the level of support by members of the proposal and also to whether any person appears at the second Court hearing to express any opposition to it: Re Commonwealth Managed Investments Ltd [2014] NSWSC 244 at [3]."

Determination

I should first address several specific issues before reaching a conclusion as to the Creditors' Scheme and the Trust Scheme. Mr Jackman points out that the implementation of the schemes is conditional on several conditions precedent being satisfied or waived, and I noted above that Spark RE tendered certificates under cl 3.2 of the Creditors' Scheme signed by Spark RE and Consortium Sub stating that all of the relevant conditions precedent in clauses 3.1(a) and 3.1(b) of the Creditors' Scheme have been satisfied or waived, other than the conditions relating to Court approval of the Creditors' Scheme and the granting of the judicial advice with respect to the Trust Scheme. Mr Jackman also addressed the position in respect of the proposed payment, if the schemes become Effective (as that term is defined in the Scheme Implementation Deed ("SID")), of a special distribution of 12 cents, fully franked to the value of 5.14 cents for each Spark security held by a Spark securityholder as at the record date for the special distribution.
The question of funding of the scheme consideration was also addressed at the second Court hearing. I had observed, in my earlier judgment in respect of the first Court hearing (at [31]-[33]) that: "A potential issue arose in respect of that Deed Poll, because it is apparent that Consortium Sub does not have the capacity to perform its obligations under the Deed Poll without financial support from Consortium members and funding from third party lenders which is presently conditional. Spark RE initially relied on the decisions in Re QMS Media Ltd [2019] FCA 2172 and Re Vocus Group Ltd [2021] NSWSC 630 and submitted that these cases reflect an "established practice" of not obtaining deeds poll from consortium members in addition to the bidding entity, provided that there are binding agreements for the consortium members to provide their agreed share of the scheme consideration. Spark RE submitted that the funding arrangements described in section 8.2 of the scheme booklet and the transaction structure for these schemes are similar to those considered in Re Vocus Group Ltd above. It seems to me that Spark RE's reliance on "binding agreements for the consortium members to provide their agreed share of the scheme consideration" has the difficulty that those agreements may here be terminated on specified grounds and the facility with third party lenders is presently conditional. The decisions on which Spark RE relies also do not seem to me to establish such an "established practice", or explain its basis, although they each did not require that consortium members be party to the deed poll given by the bidding entity. I do not consider this matter is reason not to convene the scheme meetings, although it will require particular attention at the second Court hearing, for the reasons noted below. As I noted in delivering oral reasons for making orders at the conclusion of the first Court hearing, it seems to me that the ordinary practice by which the holding company of a bidding entity becomes party to the deed poll in a scheme is a desirable one. However, I recognise that that there may be practical difficulty in implementing that practice where several independent entities form a consortium in respect of a major acquisition, on terms governing the relationship between themselves, which are likely to be addressed in the funding arrangements as between themselves. Although Consortium members are here not party to the Deed Poll, likely for that reason, the level of performance risk is reduced where the commitment letters are enforceable by Spark RE, although they are not enforceable by individual unitholders and are presently conditional. The Deed Poll will then have greater utility after Consortium Sub has been funded by Consortium members and third party lenders to proceed with the acquisition of notes and units pursuant to the schemes. It seems to me the degree of conditionality that presently attaches to Consortium Sub's funding, and the fact that Consortium members are not party to the Deed Poll, should not lead the Court to decline to convene a scheme meeting at the first Court hearing. As I noted in Re Isentia Group Ltd [2021] NSWSC 910, any issue as to conditionality of that funding can be addressed at the second Court hearing, when the Court can have regard to evidence whether the conditions precedent in respect of the funding to be provided by Consortium members and by third party lenders have then been satisfied. It seems to me that the approach that is adopted here, involving a combination of a deed poll given by the bidding entity, the enforceability of funding commitments by the target entity and, ultimately, the Court's review of whether conditions to the funding have been satisfied at the second Court hearing, will sufficiently protect the unitholders' interests. This matter therefore also does not provide reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme, although the Court will need to be satisfied that Consortium Sub has been funded to perform its obligations under the schemes at the second Court hearing."
Mr Jackman observes that, as I noted in the earlier judgment, section 8.2 of the scheme booklet discloses that Consortium Sub intends to fund payment of the Scheme Consideration (as that term is defined in the SID) using a combination of debt and equity. Mr Jackman refers to Spark RE's receipt of three equity commitment letters from entities associated with the three Consortium members, which commit that entity to provide specified funding to Consortium Sub to receive on the business day before the Implementation Date (as defined in the SID). Mr Jackman also notes that the balance of the scheme consideration will be provided by debt funding obtained by Consortium Sub.
Mr Jackman in turn recognises that the equity commitment letters are subject to specified conditions, including the schemes becoming Effective (as defined in the SID) and each other equity commitment letter (and in the case of the PSP Investments commitment letter and OTPP equity commitment letter, the KKR limited guarantee) not being modified, amended or altered in any manner adverse to the relevant Consortium member without its prior written consent. Mr Jackman also points out that the equity commitment letters and KKR limited guarantee cannot be modified, amended or altered without Spark RE's prior consent, because Spark RE is a party to the equity commitment letters and the KKR limited guarantee, and cl 7 of the OTPP equity commitment letter and PSP Investments equity commitment letter provide the OTPP equity commitment letter and PSP Investments equity commitment letter may not be amended or otherwise modified without the prior written consent of Spark RE, Consortium Sub and the relevant Consortium member.
Mr Jackman referred to an undertaking provided by Sparke RE, on 23 November 2021 prior to the second Court hearing, that it will not consent to any modification, amendment or alteration of the OTPP equity commitment letter or the PSP Investments equity commitment letter, in any manner adverse to the KKR Investor without the KKR Investor's prior written consent; the KKR equity commitment letter, the KKR limited guarantee or OTPP equity commitment letter, in any manner adverse to the PSP Sponsor without the PSP Sponsor's prior written consent; and the KKR equity commitment letter, the KKR limited guarantee or PSP equity commitment letter, in any manner adverse to the OTPP Sponsor without the OTPP Sponsor's prior written consent (as these terms are defined in the Spark Undertaking) (Ex PP3, Tab 10). This undertaking is plainly a relevant matter and was properly drawn to the Court's attention. Spark RE relied on it at the second Court hearing as a matter that protected securityholders' interests and indeed submitted that "as at the second Court hearing, the obligation of each Consortium member to pay the Equity Commitment to Consortium Sub is subject only to the condition that the Schemes become Effective." It was not apparent to me at the hearing, and it is not apparent to me now after allowing an opportunity for further submissions, that this undertaking had the result, or advances matters beyond the existing requirement for Spark RE's consent to any amendment. It seems to me that undertaking likely promotes equality of treatment between Consortium members but, if all Consortium members wished to be released from the funding commitments, then they would presumably all procure that the relevant consents were given.
Mr Jackman also submits that Consortium members which have made legally binding commitments to provide the equity commitment to Consortium Sub have done so on the basis of the schemes becoming "Effective" by order of the Court approving the schemes. I accept that is a proper condition and it will be satisfied upon lodgement with ASIC of the Court order approving the Creditors' Scheme and lodgement with ASIC of the amendments to the Trust's constitution with respect to the Trust Scheme. I also accept that that condition poses no real risk to Spark securityholders since it would necessarily be satisfied before their securities were acquired under the schemes.
Mr Jackman also refers to a debt commitment letter dated 22 August 2021 addressed to Consortium Sub by which a syndicate of banks has severally agreed to provide secured debt facilities to Consortium Sub in an aggregate total amount of no less than AUD $920 million to, among other things, fund part of the aggregate scheme consideration payable by Consortium Sub under the schemes. Mr Jackman points out that the total of the equity commitment and debt commitment exceeds the maximum aggregate amount of cash payable on implementation of the schemes by Consortium Sub to scheme securityholders of approximately AUD $5.16 billion as set out in section 8.2(a) of the scheme booklet.
There is evidence that Consortium Sub has since entered into a Common Terms Deed, Syndicated Facility Agreement ("SFA") and relevant security documents with the lenders, which formalise the debt arrangement provided for in the Debt Commitment Letter, but are subject to specified conditions ("Financing Conditions"), some of which have been satisfied or waived prior to the second Court hearing. However, several Financing Conditions remain outstanding, relating to the receipt of a certificate executed by the borrower confirming that the schemes have become effective; confirmation that the relevant obligors have obtained all authorisations necessary for the entry by the obligors into and performance of the transactions by the obligors; and results of all ASIC and Personal Property Securities Register searches in relation to the obligors. Mr Jackman refers to Mr Stewart's evidence, which I noted above, that the first of these conditions depends on the outcome of this hearing; the second also cannot be satisfied until the Court approves the schemes; the third, relating to searches, cannot be satisfied until three business days before the funding date of the debt facilities, as the bank lenders require these searches to be current as at that time; and the Financing Conditions are customary in an acquisition facility for an asset of this type and the size of the commitment from the lenders.
Mr Jackman also refers to several conditions that remain outstanding under the SFA, although several of these relate to the means by which funding is drawn down under the SFA. Mr Stewart's evidence is that it is customary for a funding notice to be delivered after all Financing Conditions, including the outstanding deed conditions, have been satisfied or are as close to satisfaction of those conditions as possible; satisfaction of the SFA conditions is within the control of Consortium Sub, subject to any unforeseen change of law or government action which would mean Consortium Sub is unable to comply; and the SFA conditions are customary in an acquisition facility for an asset of this type and the size of the commitment from the lenders.
Mr Jackman points to several cases in which approval has been granted to schemes which remain subject to the conditions, including Re HIH Casualty and General Insurance Ltd (2005) 215 ALR 562 at 571; (2005) 53 ACSR 12; [2005] NSWSC 240 (requiring orders from another Court with jurisdiction in relation to part of the subject matter of the scheme); Re Bolnisi Gold NL [2007] FCA 1668 at [30] (foreign regulatory approval); Re Allied Gold Ltd (No 2) [2011] QSC 194 at [20] (stock exchange approval for quotation of securities); and, recently, Re Isentia Group Ltd [2021] NSWSC 1069 at [14] (admission of shares on a foreign stock exchange). Mr Jackman also referred to the principles applicable to approval of a scheme that is subject to conditions subsequent, as noted in Re NRMA Ltd 2000) 33 ASCR 595 at 646-648; [2000] NSWSC 82, although he also rightly recognises that is not the question here, which relates to Consortium Sub's existing capacity to fund the scheme consideration.
For completeness, Spark RE's solicitors also made additional submissions after the hearing, at my request, as to the treatment of conditions precedent to drawdown for acquisition financing in the context of takeover bids under Chapter 6 of the Corporations Act. They point out that the requirement as to funding of a takeover bid arises from s 631(2)(b) of the Corporations Act, which requires that a person must not publicly propose, either alone or with other persons to make a takeover bid if "the person is reckless as to whether they will be able to perform their obligations relating to the takeover bid if a substantial proportion of the offers under the bid are accepted." They note that the rationale behind the prohibition is that, if a bid is announced that cannot be completed, a false market may be created in the target securities and the integrity of the market may be compromised: Company Law Advisory Committee to the Standing Committee of Attorney's-General, "Second Interim Report, February 1969, at 13 [37]. They also fairly point out that the focus of this provision, and of the Takeovers Panel's consideration of debt funding conditions in the bid context has been on availability of firm funding at the time a proposed acquisition is announced and at the time the bidder's statement is issued, rather than at the time the bid becomes unconditional. That gives rise to a different issue than that which arises here, shortly before the schemes will take effect provided that the conditions to Consortium's equity and debt funding are satisfied.
Spark RE's solicitors also point to a draft of the Takeovers Panel's Guidance Note 14, "Funding Arrangements", issued in draft form on 30 October 2003 and a second issue on 11 February 2010, which note that a bidder may risk a declaration of unacceptable circumstances in respect of funding arrangements for the cash consideration for a bid if it does not have a "reasonable basis" to expect that it will have funding in place to pay for acceptances when its bid becomes unconditional. That requirement is plainly directed to an earlier point of time in the bid process, and it is clear here that Consortium Sub had a reasonable basis for its expected funding of the schemes at all relevant times, although that funding is not yet unconditional. The Panel also observed, more relevantly, that the level of certainty of a bidder's funding should increase as the bid progresses, with funding and security documents being finalised and executed before the bid becomes unconditional.
Spark RE's solicitors also note that the Panel issued a revised GN14 after the decision in Australian Securities & Investments Commission v Mariner Corporation Limited (2015) 106 ACSR 343; [2015] FCA 589, which provides at [17]: "The degree of certainty about the availability of the funds may increase during a bid as the likelihood of bid conditions being fulfilled or waived increases. A bid should not be declared, or allowed to become, unconditional until: a. binding funding arrangements are documented in final form and b. commercially significant conditions precedent to drawdown have been fulfilled or there is no material risk that they won't be." It seems to me that the focus here on a "material risk" that conditions precedent to drawdown will not be satisfied is commercially sensible, and I will also have regard below to the practical risk of that arising in this case. For completeness, Spark RE's solicitors note that the Takeovers Panel considered bid funding since the third reissue of GN14 in AWE Limited [2018] ATP 4, Keybridge Capital Limited [2020] ATP 9 and [2020] ATP 6 and in The Agency Group Australia Limited 01 & 02 [2021] ATP 2, but has not considered funding conditions at the time a bid has become unconditional.
Returning now to the position in these schemes, Mr Jackman submits that the continuing (albeit limited) conditionality of the equity commitment letters and debt commitment letter at the date of the second Court hearing should not cause the Court any concern about Consortium Sub's ability to fund the scheme consideration, having regard to the nature of the remaining conditions. It seems to me that a risk necessarily remains that these funding conditions might not be satisfied if, for example, there were a major adverse market development between the approval of the schemes and drawdown of the funding that led the Consortium or its lenders to wish to withdraw from the transaction. However, I am satisfied that (as was also the case with a condition that remained outstanding at the second Court hearing in Re Isentia Group Ltd above, relating to the admission of the shares to a foreign stock exchange) there are practical reasons that warrant the course that has been taken in respect of funding conditions here, including lenders' legitimate interests in respect of a very large financial commitment; the risk that the conditions will not be satisfied is minimal, although not non-existent; and those conditions provide no reason not to approve the schemes.
It seems to me that, perhaps making explicit what has been implicit in the Court's approach to substantial schemes involving third party funding in the past, the Court should be satisfied here that standard funding conditions, which are understandably required to protect the interests of third party funders in respect of a very substantial transaction and which continue after the point of the second Court hearing and approval of the scheme, until the point of implementation of the scheme in the near future, do not prevent approval of the schemes at the second Court hearing. To the extent that a risk arises from these conditions, it seems to me that the Court should recognise the practical necessity of such conditions in funding arrangements at least in respect of substantial schemes, and the interests of security holders are in any event sufficiently protected by the mechanism adopted to prevent transfer of their securities before the scheme consideration is paid.
Turning now to other aspects of the schemes, I am satisfied, by reference to the evidence to which I referred above, that Spark RE complied with the Court's orders, including in respect of the dispatch of the scheme booklet to Spark securityholders and the conduct of the scheme meetings. I have referred to the passage of the relevant resolutions in respect of the Creditors' Scheme by the requisite majorities above. ASIC has now confirmed that it has no objection to the Creditors' Scheme under s 411(17)(b) of the Corporations Act and that letter is sufficient to satisfy the requirements of section 411(17) of the Act. I am also satisfied as to the dispatch of the scheme booklet to securityholders and the conduct of the meetings in respect of the Trust Schemes and I have referred above to the evidence that the relevant resolutions were passed by the requisite majority of securityholders.
Mr Jackman submits, and I accept, that the Court can conclude that the schemes are fair and reasonable, where Spark RE's board of directors unanimously recommended that the Spark securityholders vote in favour of the schemes, in the absence of a Superior Proposal (as defined), and subject to the independent expert concluding (and continuing to conclude) that the schemes are in the best interests of Spark securityholders; no Superior Proposal subsequently arose; the independent expert concluded that the schemes are fair and reasonable, and are therefore in the best interests of Spark securityholders, in the absence of a Superior Proposal; the schemes were agreed to by the requisite majorities of Spark securityholders, as noted above, and no securityholder opposed the orders sought at the second court hearing; and there is no reason to doubt that all material information has been provided to Spark securityholders. I am satisfied that Spark RE has made out its case for the approval of the Creditors' Scheme under s 411 of the Act and for provision of judicial advice to the effect that it is justified in implementing the Trust Scheme in accordance with the resolutions passed by securityholders.
As requested by Spark RE, I will also make an order under s 411(6) of the Corporations Act amending the Creditors' Scheme to clarify that there are no Excluded Securityholders, consistent with the approach taken to identify excluded shareholders by name in Re Prime Infrastructure Holdings Ltd [2010] NSWSC 1337 at [6]-[7], Re Coca-Cola Amatil Ltd [2021] NSWSC 489 at [14] and Re Isentia Group Limited above at [15]. I accept that there is no utility having the Court order annexed to the Trust's constitution, and I will make an order under s 411(12) of the Act exempting Spark RE from the requirement to do so that would otherwise arise under s 411(11) of the Act, consistent with the approach taken in Re Equinox Resources Ltd (2004) 49 ACSR 692; [2004] WASC 143 at [22].

At a glance

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Judgment (7 paragraphs)

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Legislation Cited (2)

Cases Cited (31)