- Boral Energy Resources Ltd v TU Australia

Supreme Court of NSW|2021-02-10|Before: Black J

Solicitors: Herbert Smith Freehills (Plaintiff) King & Wood Mallesons (Acquirer) File Number(s): 2020/364467

Nature of the application and factual background

By Originating Process filed on 23 December 2020, the Plaintiff, The Trust Company (RE Services) Ltd ("VTH RE") as responsible entity of the Vitalharvest Freehold Trust ("VTH"), seeks orders in the nature of judicial advice under s 63 of the Trustee Act 1925 (NSW) in respect of a proposed trust scheme ("Trust Scheme"). VTH is a registered managed investment scheme under Ch 5C of the Corporations Act 2001 (Cth) and invests in agricultural property assets, including berry and citrus farms, and its units are quoted on the Australian Securities Exchange ("ASX"). The Trust Scheme contemplates that a third party, Macquarie Agricultural Funds Management Limited ("MAFM") or its nominee, will acquire the units in VTH at a premium. The proposal also contemplates an alternate transaction, by which the acquirer would acquire VTH's assets subject to unitholder approval ("Asset Sale") if the acquisition of units in VTH did not proceed by the Trust Scheme.

Affidavit evidence

Turning now to the affidavit evidence, VTH RE relies on the affidavit dated 23 December 2020 of its solicitor, Mr Luke Hastings, which refers to an announcement made by VTH to ASX on 17 November 2020 that VTH RE had entered into a Scheme Implementation Deed with MAFM under which MAFM or its nominee would acquire all of the issued units in VTH at $1.00 per unit by way of the Trust Scheme to be implemented through an amendment to VTH's constitution or, if the Trust Scheme was not approved by the requisite majority of unitholders, MAFM or its nominee (now Macquarie Agricultural Funds Management No 2 Pty Ltd as trustee of M2 Acquisition Trust ("MAFML2") would purchase VTH's assets for cash consideration of $300 million, subject to a unitholder resolution approving the sale of those assets under the ASX Listing Rules. Mr Hastings also referred to the structure of VTH, which I have noted above, and noted that VTH RE's directors had unanimously recommended that unitholders vote in favour of the Trust Scheme and the Asset Sale, in the absence of a Superior Proposal (as defined) and subject to the conclusions reached by the independent expert.
By her affidavit dated 4 February 2021, Ms Jaysintha Moodley, who is the General Manager, Legal of Perpetual Limited, which is the ultimate parent company of VTH RE, addresses the nature of VTH, the proposal for MAFM's acquisition of VTH, the terms of the Management Agreement by which the Manager is entitled to an early termination fee in certain circumstances, and the terms of the Facilitation Deed. Ms Moodley also addresses the consideration payable under the Trust Scheme or Asset Sale; the conditions precedent to the Trust Scheme or Asset Sale; and other terms of the Scheme Implementation Deed, including as to exclusivity and the reimbursement of costs, to which I refer below. Ms Moodley also addresses the manner in which the meeting of unitholders would be conducted and the provision of an independent expert's report by Grant Thornton, to which I will refer below. Ms Moodley also addressed the position of VTH RE's board in respect of the proposals, and the process adopted for verification of the scheme booklet which was in common form.
By his affidavit dated 4 February 2021, Mr Justin Robinson of Computershare Investor Services Pty Ltd ("Computershare"), which maintains VTH's register of unitholders, sets out the process which will be adopted for the dispatch of documents to unitholders by electronic and hard copy dispatch, and refers to the engagement of Lumi Technologies Pty Ltd ("Lumi") to provide a platform for an online unitholder meeting. Mr Robinson also addresses the steps which will be taken to tag votes of MAFML2 and Primewest and their associates at that unitholder meeting. An affidavit dated 4 February 2021 of Mr Bampfield, the Managing Director of Lumi, in turn outlines the manner in which Lumi's online meeting system operates.
By his affidavit dated 4 February 2021, Mr Daniel Natale, who is a partner in the solicitors acting for MAFM, in turn sets out the verification process which had been adopted in respect of information relating to MAFM included in the scheme booklet, and also addressed the negotiation of exclusivity and break fee provisions contained in the Scheme Implementation Deed and the execution of a Deed Poll in favour of scheme participants relating to the provision of the consideration for the transactions.
By her affidavit dated 5 February 2021, Ms Maslen-Stannage, who is a partner in the firm of solicitors acting for VTH RE, indicates her consent to act as chair of the unitholder meeting and that she will cause the votes of MAFML2 and Primewest and their associates to be tagged at that meeting. She also deals with correspondence with the Australian Securities and Investments Commission ("ASIC") in respect of the scheme and notes that, by email dated 5 February 2021, ASIC had indicated that it had no further comments on the then version of the scheme booklet. That booklet has since been revised to address matters raised at the first Court hearing on 8 February 2021. Ms Maslen-Stannage also addresses the approval of the scheme booklet by VTH RE's board and a number of non-material changes which had been made to the scheme booklet, the draft advertisement for the second Court hearing, and also referred to MAFML2's holding of a relevant interest in approximately 20.05% of the total units in VTH, a substantial portion of which are subject to an option agreement between the Macquarie interests and Primewest, and the balance of which are held by other funds associated with the Macquarie Group. By his affidavit dated 4 February 2021, Mr Richard McCarthy, who is a director of VTH RE, consents to act as chair of the unitholder meeting, if Ms Maslen-Stannage is unable to do so, and also indicates that he will cause the votes of MAFML2 and Primewest and their associates to be tagged at that meeting.
By a second affidavit dated 9 February 2021, read at a further hearing on 10 February 2021, Ms Maslen-Stannage set out amendments to the scheme booklet which had been made to address issues raised at the Court hearing on 8 February 2021, to which I refer below; the process which had been adopted for approval of the amendments to the scheme booklet by VTH RE; and also exhibited three independent expert reports in respect of other schemes, which had adopted a methodology which overlaps with, but is not identical to, that adopted by the independent expert in this transaction. I address that matter below. By his second affidavit dated 9 February 2021, Mr De Cian refers to amendments to the independent expert's report which had been made to address issues raised at the hearing on 8 February 2021, which I also address below.
By an affidavit dated 5 February 2021, Mr Andrea De Cian, a partner of Grant Thornton Australia Limited and a director of Grant Thornton Corporate Finance Pty Ltd ("Grant Thornton") set out his background and experience and exhibited a copy of his independent expert's report as it then stood. That report was subsequently revised, as I will note below, to address matters raised at the first Court hearing on 8 February 2021.
VTH RE also tenders a Statement of Facts (Ex SOF) on which it relies in respect of the application.

Further issues arising at the first Court hearing

Prior to the first Court hearing on 8 February 2021, at my request, my Associate raised three issues as to the explanatory statement and independent expert's report with the solicitors for VTH RE, to allow them to be addressed at that hearing. The first was the independent expert's approach to the question of whether there was a net (or collateral) benefit to the Manager or Primewest in respect of the proposed trust scheme. The second related to an apparent uncertainty in VTH RE's statements of expectation and opinion in the explanatory statement, that there would probably not be an early termination fee under the Management Agreement or any "excess manager payment". The third was the apparent length of the exclusivity period from the date of the Scheme Implementation Deed, and whether VTH RE had already committed VTH to that exclusivity period, even if the Court did not give the advice which was sought.
Appropriately, the solicitors for VTH RE drew those matters to ASIC's attention prior to the hearing on 8 February 2021 and advised ASIC of the submissions they proposed to make at that hearing and, by email dated 8 February 2021, ASIC advised that it did not have any comments on the early termination fee or exclusivity period and did not require a further briefing as to those matters. I address these issues below.

Applicable legal principles

Mr Williams, who appears for VTH RE, points out that it is now conventional in a "trust scheme" for a responsible entity to seek judicial advice in a two-stage process by analogy with schemes under Part 5.1: Re Mirvac Limited (1999) 32 ACSR 107; [1999] NSWSC 457; Re Macquarie Goodman Funds Management Ltd (2004) 52 ACSR 194; Re Macquarie Communications Infrastructure Group [2009] NSWSC 487; Re DUET Management Company 1 Ltd [2013] NSWSC 817; Re Sydney Airport Holdings Ltd [2013] NSWSC 1665; Re Investa Listed Funds Management Ltd [2018] NSWSC 1766. He also rightly observes that the principles and practice for an application for judicial advice under s 63 of the Trustee Act 1925 (NSW) in connection with a trust scheme are now well settled and have advantages in allowing the Court's oversight of transactions which have a similar commercial effect to Part 5.1 schemes of arrangement: Re Mirvac Limited (1999) above; Re Walsh & Company Investments Ltd [2020] NSWSC 1509 at [20].
Mr Williams also observes that, at the first hearing, the responsible entity will typically seek judicial advice that it is justified in propounding resolutions to implement the Trust Scheme and in proceeding on the basis that proposed amendments to the constitution of the registered managed investment scheme to implement the Trust Scheme would be within the powers of alteration conferred by that document and s 601GC of the Corporations Act: Re Mirvac Ltd above at [47]; Re DUET Management Company 1 Ltd above at [9]. Section 601GC(1)(a) of the Corporations Act provides that the constitution of a registered scheme may be modified or repealed and replaced with a new constitution by special resolution of the members of the scheme, being 75% of the votes cast by members entitled to vote on the resolution. Mr Williams also points out that the power of alteration under s 601GC(1)(a) of the Corporations Act is very wide, unlimited in terms, and its exercise is within the Court's jurisdiction under s 63 of the Trustee Act in a trust scheme context: Re Mirvac Ltd above at [44]-[47]; Re DUET Management Company 1 Ltd above at [10]. He also points out, and I recognise, that there is no implied limitation on the Court's power to give advice pursuant to s 63 of the Trustee Act, nor on the discretionary factors that the Court may take into account: Macedonian Orthodox Church St Petka Inc v His Eminence Petar (2008) 237 CLR 66; [2008] HCA 42 at [55]-[59].
The judicial advice given at the first Court hearing, and the right of unitholders to appear at the second Court hearing and object to the trust scheme, is then disclosed in an explanatory statement sent to unitholders for a meeting to consider the resolutions to implement the scheme; unitholders then meet to consider and vote on the resolutions; and, if unitholders approve the relevant constitutional amendments, the responsible entity typically seeks judicial advice at the second Court hearing that, having regard to the result of voting at the scheme meeting and any other relevant circumstances, it is justified in implementing the scheme: Re Mirvac Ltd above at [48]; Re Homemaker Retail Management Ltd (2001) 40 ACSR 116; [2001] NSWSC 1058 at [6].

Information provided to unitholders, conduct of meetings and despatch of documents to unitholders

No doubt has arisen as to the adequacy of the information to be provided to unitholders concerning the proposed transaction, other than in respect of the matters raised at the first Court hearing which I address below. The explanatory statement was verified in the usual way. Mr Williams also addressed the manner in which the proposed unitholder meeting would be held, as a virtual meeting as is now commonplace, as permitted by s 252Q of the Corporations Act provided the technology used gives members as a whole a reasonable opportunity to participate, and by cl 5(1) of the Corporations (Coronavirus Economic Response) Determination (No. 3) 2020 made by the Commonwealth Treasurer on 21 September 2020 under s 1362A of the Corporations Act. He also addressed the manner in which documents would be dispatched to unitholders. These matters do not give rise to any reason not to give the advice sought.

Performance risk

Mr Williams also addresses the question of performance risk, which is ordinarily considered at the first Court hearing in respect of a company or trust scheme, where a third party provides consideration or benefits to shareholders or unitholders under the scheme: SFE Corporation Ltd [2006] FCA 670 at [4]; Re APN News & Media Ltd (2007) 62 ACSR 400 at 405 ; [2007] FCA 770; Re Sydney Airport Holdings above at [17]; Re Mirvac Funds Management Ltd [2014] NSWSC 1569 at [7]; Re Villa World Ltd [2019] NSWSC 1207 at [22]. I accept that the provision for payment of the Trust Scheme consideration to a trust account operated by VTH RE (as trustee for the VTH Unitholders entitled to the Trust Scheme consideration), prior to transfer of their units in VTH, is a safeguard against the risk of any delay or default in the provision of the Trust Scheme consideration after their units in VTH have been transferred to MAFML2. I note that account will be held with an Australian authorised deposit-taking institution. This matter does not give rise to any reason not to give the advice sought.

Early Termination Fee and Excess Manager Payment

Under the terms of the Management Agreement, implementation of the Trust Scheme would trigger an obligation on the part of VTH RE to pay the Manager any accrued and unpaid management fees, plus an early termination fee of 1.5% of the gross asset value of VTH calculated and payable at the date of termination ("Early Termination Fee"). The Scheme Implementation Deed provides that, if the Trust Scheme becomes effective and is implemented, VTH unitholders will be entitled to receive $1.00 for each VTH unit held, less any "Excess Manager Payment" (as defined in the Scheme Implementation Deed and explained in sections 6.2(a) and 13.1(h) of the scheme booklet). The Excess Manager Payment is any amount in excess of $4.5 million paid or payable by VTH RE to the Manager as a result of the termination of the Management Agreement, including any Early Termination Fee, divided by the total number of VTH units.
The Chairman's Letter and sections 6.2(a) and 13.1(h) of the Scheme Booklet, prior to amendments which I address below, noted that VTH RE does not expect that there will be any Early Termination Fee under the Management Agreement, or any Excess Manager Payment, because the Manager has agreed to novate the Management Agreement to MAFML2 under the terms of the Facilitation Deed. As a result, VTH RE expects the Trust Scheme consideration to be $1.00 per VTH unit. Unitholders would also receive the interim distribution of 2.5 cents per VTH unit for the half year ended 31 December 2020.
In supplementary submissions, Mr Williams submitted that, if the Facilitation Deed becomes operative, and the Management Agreement is novated, then the Manager would not be entitled to an Early Termination Fee; and, if the Facilitation Deed did not become operative, and the Manager terminated the Management Agreement, then VTH expects, on the basis of the gross asset values of VTH disclosed in draft financial statements for the half year ended 31 December 2020, that any early termination fee will be less than $4.5 million and VTH RE did not intend to make any further payments to the Manager if the Manager terminated the Management Agreement. He submitted that VTH RE was of the view that, on that basis, there was no realistic prospect that an Excess Manager Payment would arise because it is within VTH RE's power to ensure that there was no such payment, and that it was proposed to amend the disclosure in the scheme booklet to clarify that expectation.
While the earlier version of the explanatory statement recorded VTH RE's understanding or expectation that the Manager could not receive both a fee payable by MAFM, under the Facilitation Agreement, and additional fees on termination of the Trust, it seemed to me that what was material to unitholders (particularly in determining the existence or non-existence of any collateral benefit to the Manager, to which I return below) was not VTH RE's understanding as to that matter, but the fact. Indeed, the independent expert's report treated as a fact that there would be no such additional payment, which the explanatory statement initially addressed only as a matter of VTH RE's understanding. The explanatory statement has now been amended (at section 3.3(e)) to record the fact that, if the Manager receives the $8 million payment under the Facilitation Deed, it will not receive an additional Early Termination Fee, and that $8 million is therefore the maximum amount the Manager will receive in respect of the transaction. It seems to me that that amendment properly addresses that issue.

Whether the Manager or Primewest will receive a collateral benefit by reason of the Facilitation Agreement

Mr Williams also recognises that the provision, in a trust scheme, of a collateral benefit to a unitholder not offered to other unitholders may constitute "unacceptable circumstances" warranting intervention by the Takeovers Panel: Takeovers Panel Guidance Note 15 Trust Scheme Mergers, [12(b)]. He submits, and I accept, that the approach taken to collateral benefits in a company scheme context is the "net benefits" test adopted by the Takeovers Panel in Guidance Note 21 Collateral Benefits: Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638 at 680; Re David Jones Ltd (No 3) [2014] FCA 753 at [15]. The same approach would be adopted in a trust scheme.
As I have noted above, the Facilitation Deed between the Manager and MAFM provided for the Manager to novate the Management Agreement and to provide services to assist in the orderly transition of management of VTH to MAFM, and that the $8 million payment is consideration for the Manager's agreement to do so. Mr Williams submitted that the Manager was agreeing to give up its entitlement to management fees for the balance of the Initial Term of the Management Agreement, through to 2028. He submitted that that was a valuable fee stream, and referred to an earlier transaction in June 2020 by which the Manager was acquired by the Primewest Group for $10 million, to which reference is made in the scheme booklet and the independent expert's report. Mr Williams also pointed out that the Trust Scheme, if implemented, would not give rise to an automatic termination of the Management Agreement. A change in control of VTH would give rise to a termination right, exercisable at the Manager's election under cl 10.5(b)(v) of the Management Agreement and, if the Manager exercised that right, it would be entitled to the Early Termination Fee calculated at 1.5% of gross asset value, estimated at approximately $4.5 million, under cl 10.9(b) and Sch 4 of the Management Agreement. He pointed out that the Manager was not obliged to terminate the Management Agreement and could continue to perform its role as manager of VTH following any change in control, and was to that extent entrenched in its position.
Mr Williams also referred to the approach taken in the initial version of Grant Thornton's independent expert's report to assessing whether the payment to the Manager under the Facilitation Deed amounted to a "net benefit" as understood in Guidance Note 21. He submitted, and I accept, that the ultimate question is one as to whether the $8 million payment exceeds the value of the rights forgone and obligations assumed by the Manager under the Facilitation Deed, so as to amount to a "net benefit". He noted that Grant Thornton's report first observed that the Manager and MAFM had negotiated the Facilitation Deed at arm's length (section 8.2) and then assessed the value of the management fee rights forgone by the Manager, by reference to the earlier transaction by which the Primewest Group acquired the management rights for VTH for $10 million in June 2020 and by reference to multiples paid in other transactions involving the internalisation of management rights. Mr Williams also pointed out, and I accept, that the Facilitation Deed is conditional upon implementation of the Trust Scheme and, relevantly, 50% of VTH unitholders not associated with the Manager approving the resolution to amend the VTH constitution to give effect to the Trust Scheme, under cl 2.1(b) of the Facilitation Deed. I recognise that condition reflects the recognition in Guidance Note 21 that a collateral benefit is unlikely to give rise to unacceptable circumstances if it is approved by fully-informed, non-associated security holders.
However, an issue arose at the first Court hearing as to the adequacy of explanation of this matter in the explanatory statement and independent expert's report, as distinct from whether unacceptable circumstances existed as a matter of fact. While the explanatory statement, in its initial form, addressed the issue whether there would be a net benefit to the Manager in the transaction, so as to give rise to a collateral benefit for the purposes of the Takeover Panel's Guidance Note 21, it did so by referring to the independent expert's view as to the matter, without VTH RE giving any indication as to whether it adopted or did not agree with the independent expert's view. That matter has now been addressed by an amendment to the explanatory statement and VTH RE now makes clear that, having regard to the independent expert's report, it takes the view that there is no net benefit to the Manager or its associates, so as to give rise to a collateral benefit for the purposes of the Takeover Panel's Guidance Note 21.
The independent expert report was also amended, in several respects, to address issues arising at the first Court hearing in respect of its approach to this issue. First, that report was amended to provide a clear summary of the approach which that expert has adopted in concluding that the terms of the Facilitation Agreement do not constitute the receipt of a net benefit by the Manager or its associates, which might have constituted a collateral benefit for the purposes of the Takeover Panel's Guidance Note 21. It seems to me that these amendments were important, because unitholders needed to understand not only the conclusions which the independent expert had reached in that respect but, in some respects more importantly, the reasoning process which led the independent expert to those conclusions. The amendments that have now been made will allow unitholders to assess the cogency of that reasoning for themselves rather than, as the earlier draft of the expert report rather did, leaving unitholders to rely on the expert's conclusions as to that matter without a sufficient explanation of how they were reached.
Second, while the amended independent expert's report observes that MAFM and the Manager were dealing at arm's length in negotiating the Facilitation Agreement, it rightly now acknowledges, as it had previously not, that that does not exclude the possibility of a net benefit to the Manager under that agreement. It seems to me that that matter needed to be acknowledged, because an acquirer, in negotiating a fee with a manager at arm's length, could rationally conclude that it was desirable to pay a significant premium to that manager to induce its associate (which holds a substantial number of units) to vote in favour of the relevant transaction. As Mr Williams fairly accepted in submissions, the absence of an arm's length negotiation between MAFM and the Manager might have raised a concern, but the fact of an arm's length negotiation does not affirmatively establish that the transaction does not take place at a premium or confer a net benefit on the Manager. The independent expert's reports now fairly discloses the steps in that reasoning process, so as to indicate why this issue is relevant, but also the limits of the conclusions that it supports.
Third, the independent expert's report now explains the use of an implied multiple of assets under management to assess the value of the management rights that are the subject of the Facilitation Agreement, and now fairly acknowledges that that approach is "simplistic" in some respects and "should be taken with caution", while also fairly noting that the approach supports his conclusion, with those disclosed limitations. It seems to me that the amendments made to that report in that regard were also necessary, because unitholders should be informed of the limitations of any analysis, and the information now provided to them will allow them to properly assess the weight which they should give to that analysis.
Fourth, the independent expert's report explains his use of the earlier transaction by which the Manager acquired the rights from a former manager, as a comparable transaction, in assessing the value of the rights and why he gives significant weight to that transaction. That explanation will again allow unitholders to assess the weight to give to that analysis. They may give it significant weight for the reasons the expert indicates. They may not, if they take the view that the analysis of that earlier transaction leaves open the possibility that, if the Manager acquired the rights at a premium from the former manager in the earlier transaction, then MAFM may have now acquired the same rights from the manager at a lesser premium thereby conferring a net benefit on the Manager. The important factor here is ultimately not whether the Court or a unitholder would give the same weight as the expert to this transaction in this respect, but that the independent expert fairly discloses the approach which he has here adopted, so as to allow a unitholder to assess its cogency. It seems to me that the amendments made to the report do fairly disclose that matter. I also bear in mind, of course, that unitholders may ultimately be little concerned with this issue, so far as the proposed transaction involves the acquisition of units in VTH or its assets at a premium, and unitholders may ultimately have little interest in the extent of any benefit provided to the Manager in respect of the transaction, if they are satisfied as to the amount of the premium which they would obtain on the sale of the units or the assets, and where unitholder approval excluding interested parties will be required for aspects of the transaction to go forward.
Fifth, the independent expert's report now provides a full explanation by reference to issues as to uncertainty as to revenue, growth and costs relevant to the valuation of the management rights, of why he did not seek to perform a discounted cashflow valuation of those rights, which might have been one possible way to assess whether the amount paid for these rights under the Facilitation Agreement conferred a net benefit on the Manager. It also explains why the uncertainty as to those matters would also make it difficult to undertake a reliable assessment of that matter by reference to an earnings multiple. It seems to me that that explanation will assist unitholders in understanding why that approach has not been adopted, and the uncertainties which have affected its feasibility. Sixth, the independent expert's report now updates the date to which it refers as to PGN's market capitalisation, from 21 December 2020 to the date of his report, a matter which affects the capitalisation figures which are adopted, the enterprise value and the amount of assets under management. While this amendment may not have been material to the expert's ultimate conclusion, it is plainly desirable that more current information is now adopted.
Finally, I have regard to an exhibit to Ms Maslen Stannage's supplementary affidavit dated 9 February 2021, which draws the Court's attention to other independent experts' reports in 2011, 2016 and 2017 which have performed assessments of whether there is a net benefit or collateral benefit to a manager in purchasing rights, using a methodology directed to multiples of assets under management. As Mr Williams has fairly recognised, in taking me through those reports, none of them are identical to the approach adopted by the expert here. The first, in 2011, is the closest comparable transaction, and the expert there adopted both a discounted cashflow approach, and a multiple of assets under management analysis, in reaching the conclusion that he reached. The expert here does not perform the former analysis. A second report, in 2016, related to an off-market takeover and an earnings multiple was there also adopted as a cross check on the analysis by reference to assets under management. A third, in 2017, relates to unitholder approval for an asset sale, although it raised somewhat similar as to a possible collateral benefit constituted by a facilitation payment. The expert was there able to adopt an earnings multiple analysis, with disclosed qualifications, which the expert here considers he is unable to adopt.
None of the precedent transactions referred to are identical for these reasons. However, Mr Williams points out, and I accept, that each of those transactions performed an analysis by reference to a multiple of assets under management, and treated that analysis as useful and meaningful in respect of assessing the value of the management rights, and those reports also recognise that that analysis is frequently used to value such rights in the market. Here, the expert has explained why he does not consider an alternative analysis is available, by way of a discounted cashflow multiple or an earnings based approach, and has also explained the weight that he gives to a comparable transaction. I accept that the approach that the expert has adopted is, as Mr Williams points out, not unprecedented, and its limits are adequately disclosed, so that unitholders may assess the reasoning process which is adopted by the expert.

Constitution of unitholder classes

I have referred to the terms of the Facilitation Agreement and the payment to the Manager under that Agreement above, and also noted that Primewest, an associated company of the Manager, holds a substantial number of units in VTH. Mr Williams recognises that Primewest's interest in the Trust Scheme being approved (so far as that will promote the prospect of the $8 million payment to the Manager under the Facilitation Deed) gives rise to a question whether Primewest should vote as a separate class of unitholder for the purposes of voting on the Trust Scheme or its votes otherwise be disregarded.
Mr Williams notes that the relevant test, in the company scheme context, to determine whether some members are in a different class from others is whether the membership interests of those members are affected by the scheme in such a way that it is impossible for them to consult together with the other members with a view to their common interests. He refers to the consideration of that test in earlier case law and by the Court of Appeal in Re Boart Longyear Ltd (2017) 121 ACSR 328; [2017] NSWSC 567 at [68]-[69]. He also refers to a possible difference of emphasis in the approach taken by Beach J in Re Healthscope Ltd [2019] FCA 542 at [106]-[121]. It may be that any such difference is more apparent than real, but I am bound by and would apply the approach taken in Re Boart Longyear Ltd above. Mr Williams submits, and I accept, that the case law indicates that a collateral benefit creating a different commercial interest between members, rather than different rights under or in connection with a scheme, generally does not require separate classes, although it may be relevant to the exercise of the Court's discretion whether to approve the scheme at the second Court hearing.
Mr Williams submits, and I accept, that Primewest should not be required to vote as a separate class of unitholder and that it is appropriate that VTH RE convene a single meeting of VTH unitholders to consider and vote on the Trust Scheme. I will assume, without deciding, that the requirement for separate classes of members for voting purposes should be applied in the context of a trust scheme as well as in company schemes, although I recognise there may be a question as to that matter where a scheme's constitution does not contemplate voting by class. I accept that there is no difference in the treatment of Primewest and other unitholders in VTH under the Trust Scheme, which affects the rights of all unitholders in the same way, and any impact of the Facilitation Deed is upon Primewest's commercial interests. It seems to me that any collateral benefit provided to Primewest, and any commercial interest arising under the Facilitation Agreement can be addressed by tagging of votes, as proposed by VTH RE, and as a matter relevant to whether to give the advice sought at the second Court hearing, consistent with the approach taken in Re Boart Longyear Ltd above at [68]-[69]. It seems to me that same analysis applies so far as entities in the Macquarie Group hold units in VTH.

Exclusivity arrangements

In his initial submissions, Mr Williams noted that cl 11 of the Scheme Implementation Deed is an exclusivity provision which includes a "no shop", a "no talk", and a "no due diligence" restriction and a "notification" and "matching right" obligation. He submits, and I accept, that exclusivity provisions in this form are now commonplace in schemes of arrangement and not inconsistent with the Takeover Panel's Guidance Note 7: Lock-up devices: Re Villa World Ltd above at [23]. Mr Williams also recognised that the Court is concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve-out; and the provisions must be clearly disclosed in the explanatory statement sent to shareholders, or in this case unitholders: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 at [9].
Mr Williams submitted that the term of the exclusivity arrangements was capable of precise ascertainment, and was restricted to the "Exclusivity Period" which lasts from the date of the Scheme Implementation Deed until the earlier of its termination, implementation of the Trust Scheme or completion date of the Asset Sale and the "End Date", being 12 months from the date of the Scheme Implementation Deed unless some other date is agreed by the parties. He submitted, ambitiously and without elaboration, that a term of 12 months was a reasonable period. That proposition was not self-evident and this issue was further addressed at the first Court hearing.
In further submissions, Mr Williams submitted that the Exclusivity Period under the Scheme Implementation Deed ends on the earlier to occur of the End Date (12 months from the date of that deed); implementation of the Trust Scheme or Asset Sale; or termination of the Scheme Implementation Deed, referring to the definition of "Exclusivity Period" in cl 1.1 of the Scheme Implementation Deed. He also noted that the parties have an obligation to use all reasonable endeavours to implement the Proposal in accordance with the timetable, under cl 6.1 of the Scheme Implementation Deed, and the current timetable contemplates implementation of the transaction in March 2021. Mr Williams also noted that, if the transaction did not proceed because the requisite majorities of unitholders did not pass the required resolutions or because the Court did not give the judicial advice sought, a condition precedent in cl 4.1 of the Scheme Implementation Deed will have failed, and that VTH RE will then have a right to terminate the Scheme Implementation Deed, after complying with a consultation process under cl 4.4 of the Scheme Implementation Deed, if it considers it to be in unitholders' best interests. He submits that the Exclusivity Period would not prevent VTH RE from pursuing alternative transactions should the currently proposed transaction not proceed because of a lack of unitholder support or a failure of the Court to grant the advice sought or any other reason constituting a failure of a condition precedent.
The length of the exclusivity period was disclosed (albeit indirectly by reference to a definition of "End Date") in the explanatory statement and, on the face of it, was a period of 12 months from the Scheme Implementation Deed. That might have appeared to be a lengthy exclusivity period, if it would continue after unitholders had voted down the transaction or the Court had declined to give the judicial advice that was sought. The explanatory statement has now been amended to make clear that that period is qualified, since, if the transaction is not approved by unitholders, or the judicial advice sought is not given by the Court, then VTH RE has a right to terminate the exclusivity arrangements, after good faith consultation with MAFM and in the absence of any agreement as to an alternative means of implementing the proposal. The explanatory statement has now also been amended to make clear that VTH RE will do so if it considers that it is in the best interests of unitholders to do so, and this excludes the possibility of an exclusivity obligation continuing for many months after a failed transaction. It seems to me that this amendment has been important, both to fairly disclose the position as to the exclusivity period to unitholders, and to indicate that the exclusivity arrangement which is proposed is not such as to place a fetter upon VTH's assets for a long period after the Scheme Implementation Deed, if the transaction did not proceed.
Mr Williams also noted that the "no talk" and "no due diligence" restrictions in cll 11.3(b) and (c) are subject to directors' fiduciary or statutory duties (under cl 11.4 of the Scheme Implementation Deed) and, although the "no shop" restriction is not subject to a fiduciary carve-out, this is consistent with authority: Re Bigair Group Ltd [2016] FCA 1296 at [21]. He submitted that, although the "matching right" is also not subject to a fiduciary carve-out, matching rights are increasingly common in schemes of arrangement and are unlikely to be anti-competitive because the terms of a competing proposal would likely need to be disclosed by VTH RE in any event pursuant to its continuous disclosure obligations and the matching right process under cl 11.6 corresponds to the course that a prospective bidder would expect VTH RE to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged: Re DUET Finance Ltd above at [24]. He noted, and I accept, that the exclusivity provisions are clearly disclosed in sections 3.3(c), 4.3(c) and 13.1(c) of the scheme booklet and there is evidence (albeit in what is now a somewhat standardised form) that they were the product of arm's length negotiations between the parties (Moodley 4.2.21 [40]-[41] and [44]; Natale 4.2.21 [19]). I accept that these matters do not give rise to any reason not to give the advice sought.

Reimbursement fee

A reimbursement fee of $1.85 million is potentially payable by VTH RE to MAFM (or its nominee) under cl 12 of the Scheme Implementation Deed and is summarised in sections 3.3(d), 4.3(d) and 13.1(e) of the scheme booklet. That fee is only payable in specified circumstances and is not payable solely by reason of VTH unitholders failing to approve the transaction in either form. I accept that it is not a disincentive to shareholders in their consideration of the proposal: Re Adelaide Bank Limited [2007] FCA 1582 at [31]; Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; [2007] FCA 2078. There is evidence (although again in a somewhat standardised form) (Moodley 4.2.21 [44]; Natale 4.2.21 [19]) that the reimbursement fee was negotiated between the parties in the course of arm's length negotiations in which all parties were represented by experienced advisers; cf Re APN News & Media Ltd (2007) 62 ACSR 400 at 411; [2007] FCA 770. The reimbursement fee represents less than 1% of the gross asset value of VTH, which was $285.631 million as at 30 June 2020 according to VTH's most recent annual financial report, and is therefore consistent with the Takeovers Panel's Guidance Note 7: Lock-up Devices. I accept that payment of break fees of such magnitude are commonplace in schemes of this kind and this does not provide a reason not to give the advice that is sought: Re Mosaic Oil NL [2010] FCA 985 at [19].

Judicial advice in respect of the Trust Scheme

This proposal is, at its simplest, one for the acquisition of the units or assets of VTH at an apparent premium. I bear in mind that VTH RE's directors unanimously recommend that VTH unitholders vote in favour of the transaction, in the absence of a Superior Proposal (as defined), and subject to the independent expert continuing to conclude that the transaction is in the best interests of VTH unitholders (sections 3.1 and 4.1 of the scheme booklet). The independent expert's report prepared by Grant Thornton concludes that each of the Trust Scheme and Asset Sale is fair and reasonable to, and in the best interests of, VTH unitholders, in the absence of a Superior Proposal (as defined), and that the Manager of VTH will not obtain a "net benefit" as a result of the arrangements contained within the Facilitation Deed. I have addressed the latter issue above. I am satisfied that VTH RE, as responsible entity of VTH, would be justified in proceeding on the basis that the making of the proposed amendments to VTH's constitution in connection with the Trust Scheme, following the requisite approval by unitholders, would be within its powers, including the powers of alteration conferred by that constitution and s 601GC of the Act. I am also satisfied as to the other issues that I have addressed above.

Judicial advice in relation to the Asset Sale

Mr Williams notes that, if the proposed amendments to the VTH constitution to give effect to the Trust Scheme are not approved by special resolution of VTH unitholders at the Meeting, unitholders will then be asked to consider an ordinary resolution to approve the Asset Sale. Unitholder approval of the Asset Sale is required by ASX Listing Rule 11.2 because the Asset Sale involves VTH disposing of its main undertaking. He points out that the submission to members of an alternative sale transaction, in the event a proposed scheme is not approved by members, has at least one precedent in the company scheme context. In Re Atlantic Gold NL [2014] FCA 697, Jacobson J made orders convening a scheme meeting of the company's shareholders in circumstances where, if the scheme were not approved at the meeting, the shareholders would be asked to vote on an ordinary resolution to approve the sale of the company's main undertaking to the bidder which would achieve a result almost identical to the scheme. There was no suggestion in that case that the existence of the alternative proposal weighed against the exercise of the Court's discretion to approve the scheme. I see no reason why it would do so in a trust scheme, where unitholders are properly informed as to the alternate transactions and can approve either or neither of them.
VTH RE also seeks judicial advice that, if the Trust Scheme is not approved but the Asset Sale is approved by VTH unitholders, it would be justified in proceeding on the basis that it has the power to dispose of the main undertaking of VTH pursuant to its general management power over trust property contained in cl 16.1 of the VTH Constitution. Mr Williams points out that advice is sought as a corollary to the usual advice sought in trust schemes, namely that VTH RE would be justified in proceeding on the basis that the proposed constitutional amendments are within the powers of amendment. He points out that, under cl 16.1 of VTH's constitution, VTH RE has all the powers in relation to the property of the trust that it is "legally possible for a natural person, corporation, trustee or responsible entity to have… as if it were the absolute and beneficial owner" of the property. I accept that the general power over trust property granted by cl 16.1 is limited only by the constraints that would apply to a beneficial owner in dealing with its own property, and no provision of the Trustee Act 1925 (NSW) or the Conveyancing Act 1919 (NSW) to which my attention was drawn prohibits VTH RE from disposing of the main undertaking of VTH. The disposal of the main undertaking of VTH would be subject to unitholder approval, with voting exclusions, under the ASX Listing Rules and VTH proposes to seek that approval.

Orders

For these reasons, I made the orders sought by VTH RE as the responsible entity of VTH at the conclusion of the first Court hearing on 10 February 2021.

Amendments 24 February 2021 - Amendment to Representation made. 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: 24 February 2021

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