Bancorp Investments Ltd v Primac Holdings Ltd [2004] NSWSC 458 | Case summary

1 In the course of yesterday and again this morning, I have heard three applications. Westfield Holdings Limited, which I shall call "Westfield", seeks orders under s.411 of the Corporations Act 2001 (Cth) for the convening of a meeting of its members for the purpose of considering and, if thought fit, agreeing to a Part 5.1 scheme of arrangement between the company and its members. In addition, each of Westfield Management Limited, the responsible entity of the Westfield Trust, and Westfield America Management Limited, the responsible entity of the Westfield America Trust, seeks judicial advice under s.63 of the Trustee Act 1925. When I refer to each as a "responsible entity", I intend to indicate that each occupies that position in relation to a registered managed investment scheme, being the relevant trust. 2 The latter two companies seek confirmation, in effect, that they would be justified in pursuing a proposal or plan of action of which the Part 5.1 scheme forms a part and which, if brought to fruition, will see the members of Westfield and the members of the two managed investment schemes come together in such a way that each holds not just securities of one of the investment entities, as at present, but also securities of the other two as well, with securities in the three being "stapled". The "stapling" will be effected by a combination of contractual provisions (in the form of a "stapling deed") and provisions of the constitutions of Westfield, the Westfield Trust, and the Westfield America Trust, so that transfers can occur only in parcels each consisting of one of each of the securities. In this way, each member who is now an investor in one of the investment vehicles will become a member of the other two as well. The Part 5.1 scheme of Westfield will be supplemented by a general meeting of Westfield to alter its constitution and meetings of members of the two managed investment schemes, also to amend their constitutions. Introduction of the stapling provisions into each constitution is one of the central elements of the amendments. 3 The approach under which orders are made convening a meeting for Part 5.1 purposes and judicial advice is given to the responsible entity of a managed investment scheme in a situation such as this can now be regarded as well established. The foundations of the procedure were, I think, laid by Austin J in Re Mirvac Ltd (1999) 32 ACSR 118. The availability of the Trustee Act jurisdiction in relation to a registered managed investment scheme was confirmed by his Honour in MTM Funds Management Ltd v Cavalone Holdings Pty Ltd (2000) 35 ACSR 440. This recognizes that, under s.601FC(2), the responsible entity of a registered managed investment scheme holds scheme property on trust. I followed the same course in both Re Homemaker Retail Management Ltd (2001) 187 ALR 520 and Re The Hills Motorway Ltd (2002) 43 ACSR 101. One point brought out in the Mirvac case is that at this stage any judicial advice given should be confined to steps leading up to the meeting of the members of the managed investment scheme. The advice for which the two responsible entities now apply is so confined. 4 The court's role on a s.411 application of this kind has been described in a number of cases. According to the formulation adopted by Santow J in Re NRMA Insurance Ltd (2000) 33 ACSR 523, the court must see, on the material placed before it, that the proposal fits within the statutory concept of arrangement or compromise, that there will be available to members all the main facts relevant to the exercise of their judgment, that ASIC has had a reasonable opportunity to examine the proposal and that the scheme is so conceived and presented as to that structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it should not, in due course, receive the court's approval if the necessary majority of members' votes is achieved. To substantially similar effect are observations of Austin J in Re GIO Building Society Ltd (2001) 39 ACSR 77, French J in Re Foundation Healthcare Ltd (2002) 42 ACSR 252 and Parker J in Re Ranger Minerals Ltd (2002) 42 ACSR 582. Slightly different, but by no means conflicting, are the criteria enunciated by Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 and repeated in the following terms by Conti J in Re CSR Ltd (2003) 45 ACSR 34: "(i) the likelihood or otherwise that the court will approve the scheme of arrangement, if the statutory majority of shareholders is achieved at the proposed scheme meeting; (ii) whether there has been compliance with such preliminary matters as are relevant to the holding of the meeting; (iii) where there will be sufficient disclosure, to those persons and entities who will be affected by the scheme of arrangement, of its detail and effects; and (iv) whether there has been reasonable opportunity for the commission to examine the terms of the scheme of arrangement." 5 I am satisfied that the elements of the overall proposal involving Westfield amount to a "compromise" or "arrangement" of the kind with which Part 5.1 is concerned. I am also satisfied that the powers of amendment in relation to the constitutions of the two managed investment schemes are adequate to support the alterations on which effectuation of the overall proposal depends. In addition, I have concluded that, having regard to the principles enunciated in cases such as NRMA Insurance and Central Pacific Minerals it is appropriate to order the convening of a meeting of the members of the Westfield under s.411. The same considerations lead to a conclusion that the court should give the responsible entity of each managed investment scheme its opinion, advice or direction that the responsible entity is justified in progressing matters to a point where the planned meeting of the managed investment scheme's members has been held and an expression of the willing of the membership has been obtained. I note, in that connection, that the meeting of the members of each managed investment scheme will consider not only a special resolution under the Corporations Act for the purpose of altering the constitution but also a separate special resolution having no foundation in either the statute or the constitution conveying the attitude of the membership regarding the proposal as a whole. 6 There are, however, a few matters to which special reference should be made. The first issue I mention is disclosure. One of the matters to which the court pays attention at the convening stage is the adequacy of the information to be provided to members. On that, I would observe at once that this is a complex proposal involving, among other things, judgments as to value relativities as among the three entities and assessment of various pros and cons. I am satisfied that guidance appearing on its face to be adequate, in the sense of being comprehensive, is given by the directors of the three companies in both the core document or set of documents that will go to all three groups of members and in each separate group of documents tailored for each separate constituency, as well as in an expert's report prepared by Grant Samuel, an investigating accountant's report of Ernst & Young and a separate report on taxation considerations by Greenwoods & Freehills. The pros and cons identified by the respective directors and those identified by Grant Samuel do not entirely coincide which means that members are given a range of views to assist decision making. They also have the benefit of a comprehensive and reasoned assessment by Grant Samuel on questions of fairness and reasonableness. I have been taken to the due diligence and verification process followed in preparing the content of the documents. It has been probing and thorough. 7 The second matter to be mentioned concerns existing options to subscribe for shares in Westfield and interests in one of the trusts or managed investment schemes, being the Westfield Trust. These options fall into three groups. One consists of options to subscribe for shares of Westfield under an employee share scheme. I am satisfied that it is within the power of Westfield as the employer company to take unilateral action to vary the entitlement of each option holder so that it becomes an entitlement to subscribe for stapled securities instead of just Westfield shares. Westfield intends to resort to that power to produce that result. The second option situation concerns a one-to-one contract between Westfield and an outside party conferring on that party an option to subscribe for shares. A new contract has been made so that, after this event, that option will relate to stapled securities. The third option is again one held by a single outside party. It relates to units of one of the managed investment schemes, being the Westfield Trust. It is expected that the relevant responsible entity will negotiate and conclude a new contract with that party causing the option to become an option in respect of stapled securities if the proposal as a whole reaches its implementation stage. 8 The thing to be said about the first (at least in theory) and the third (more realistically) of these option situations is that they involve a possibility that a person will enjoy into the future a right to acquire one only of the three elements making up the stapled security. That is something that will be at odds with full effectuation of the plan now proposed. If such a situation were seen to exist at the time application was made for approval of the scheme, together with judicial advice regarding the implementation phase, the parties would have to be prepared to satisfy the court that the existence of the outstanding option over one element of the stapled security only was not something material to the exercise of the court's discretion at that point. 9 The third matter I mention concerns the way in which the meetings will be held. There will be four meetings, being a scheme meeting of the members of Westfield, a general meeting of the members of Westfield, a meeting of the members of the Westfield Trust and a meeting of the members of the Westfield America Trust. The plan is that all three groups of persons will be physically present together and that the chairman, who will be the same for each meeting, will make introductory remarks and give an overview relevant to all three constituencies, following which procedures based on coloured cards will be implemented so that each separate group within the larger gathering of persons has the opportunity for separate debate and discussion on the proposed resolutions relevant to it. A separate vote will be taken on each resolution with voting, of course, confined to those entitled to vote on the particular resolution. The approach described in the evidence is, in all essential respects, identical with the approach I examined in the Re The Hills Motorway Ltd (above) at [21] to [23]. For reasons I expressed there, I consider it to be unobjectionable. 10 Fourthly, I refer briefly to the way in which the resolution to amend the constitution of Westfield is framed. The resolution is a resolution for the repeal of the existing constitution and adoption of a new constitution in the manner contemplated by ss.136(1) and (2). The full text of the new constitution, being of some length, is not included in the materials to be sent to members. Rather, it is to be available for inspection at an address in Sydney and, in accordance with an observation I made in the course of the hearing yesterday, it is now provided that the full text will be posted on an identified website and made available by mail to any member who contacts one of two specified telephone numbers to ask for a copy. There is in the documents to be sent to members, however, a comprehensive summary of the new constitution and a commentary on the significance of the ways in which it departs from the existing constitution. 11 This approach is, in my view, an acceptable one, provided the summary is seen in all respects to be complete and accurate. I endorse, in this connection, what was said by Austin J in Re Mirvac Ltd (above) at [23]. The relevant duty is the one that is recognised in cases such as Bulfin v Bebarfalds Ltd (1938) 39 SR (NSW) 423 and Fraser v NRMA Holdings Ltd (1995) 55 FCR 452. In Bancorp Investments Ltd v Primac Holdings Ltd (1984) 9 ACLR 263, it was a failure to adhere to that standard in a summary of this kind that led to a finding adverse to the validity to what had been done. I mention these matters merely to say that, in the present case, the court has not made any detailed analysis of the adequacy of the summary. 12 The fifth matter I mention is the way in which inquiries from members of the three entities will be handled. An affidavit of Mr Rusanow, Westfield's head of investor relations, deposes to arrangements that have been made with Jorgeson Shareholding Communications Services Pty Ltd to receive phone calls from members requiring guidance. Mr Rusanow's affidavit makes it clear that a script will be prepared and that call centre staff will be instructed to follow the script in dealing with callers. He further says that all operators at the call centre will be given strict instructions not to deviate from the script when responding to callers and that Jorgeson has quality control procedures to monitor client calls and call centre operators have those instructions. The affidavit refers to records that will be kept as calls are received. It adds that statistical reports compiled from these records will be available for submission to the court as required. If Jorgeson is unable to satisfactorily address any inquiry, that inquiry will be referred to Mr Rusanow or to a member of his staff at Westfield who will maintain a record of any such conversations with security holders. These arrangements are, in my view, sufficient to anticipate any issues that may arise on the second hearing if the matter proceeds that far, as to the effect that communication with members outside the four corners of the documents may have had. The arrangements are such that there should, if they are observed, be in existence a record of each conversation that can be taken into account if any such issue arises at that point. 13 The sixth matter to be mentioned is a procedural (but very important) one about the way in which persons who may be described as outsiders in relation to each particular entity and the procedures producing stipulations binding between the entity and its members will be assured of such performance by each such entity as is necessary to produce for those persons the results of the scheme as a whole is intended to produce. The members of the company and the company itself will be bound by the scheme of arrangement if and when it takes effect under Part 5.1. They will also be bound by the new constitution. The members of each managed investment scheme and that scheme's responsible entity will be bound by the managed investment scheme's amended constitution. The company and the two responsible entities will be bound by contract (in the form of an implementation deed) to do whatever is to be done by them to give effect to the plan as a whole. But the members of one entity (company or managed investment scheme) will not be in any direct relationship, contractual or otherwise, with either of the other entities in such a way as to be able to assert, as against either of the other entities, a right to have it do the things it is meant to do to bring the overall plan to fruition. I raised with counsel the question whether the position of such an outsider should be reinforced by deed poll given in favour of the particular outsider group by each entity other than that of which the persons in that group are members. 14 The issue of binding "outsiders" is one that received ongoing attention from McLelland J in a number of cases beginning, I think, with Re Glendale Land Development Ltd (1983) 7 ACLR 171 and including Re Buka Minerals NL (1983) 8 ACLR 507. Discussion in those cases points, in my opinion, to the strong desirability of a deed poll or other effective performance covenant by each relevant entity in favour of "outsiders". The fact that the scheme proposal before Conti J in Re Cranswick Premium Wines Ltd (2002) 44 ACSR 113 involved such a deed poll was a matter to which his Honour made specific reference in acceding to the application for orders convening meetings of members under s.411. 15 The desirability of some appropriate performance covenant by each participating entity in favour of affected persons other than its own members is, I think, strongly reinforced by the recent decision of French J in Toal v Aquarium Platinum Ltd [2004] FCA 550 (4 May 2004). That case is the first of which I am aware in which such a performance covenant given by deed poll in a Part 5.1 scheme context has been enforced. As French J's decision shows, persons in the position I have mentioned may derive further and better protection and assurance through a deed poll or similar mechanism by which performance covenants are given direct to them. I have been informed that, in the present case, it is intended to put such covenants in place in advance of any return to the court seeking orders approving the scheme of arrangement and for judicial advice to the responsible entities regarding the implementation phase. Having regard to the Toal case, that is, in my opinion, a highly desirable safeguard for the persons concerned and should be adopted. I am satisfied that the addition of that element will not cut across anything in the documents that have been prepared. 16 The seventh and final matter to which I wish to refer concerns ASIC. One of the factors to be taken into account, at this point, in accordance with both the Corporations Act and general principle is the position of ASIC. There has been produced a letter from ASIC making it clear that ASIC has had the opportunity to consider the proposed scheme that s.411(2) requires it to be given. ASIC has also stated that it does not intend to appear on the hearing of the present application and that that its attitude to the s.411(17) question will, in accordance with its normal practice, not be given at this stage but will be addressed if and when there is any application for approval of the scheme of arrangement. 17 As I have said, I am satisfied that the orders sought by each of Westfield, Westfield Management Limited and Westfield America Management Limited should be made. In each of 2901/04, 2900/04 and 2899/04, I make orders in accordance with the short minutes which I initial and date. Orders may be taken out forthwith.

Bancorp Investments Ltd v Primac Holdings Ltd

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