Cachia v Westpac Financial Services Limited [2005] NSWSC 1309 | Case summary

6186/05 ABACUS FUNDS MANAGEMENT LTD JUDGMENT - Ex Tempore 1 HIS HONOUR: This is an application for judicial advice under section 63(1) of the Trustee Act 1925. It is made by a company which is the responsible entity of two managed investment schemes. 2 Each of those management investment schemes involve property being held on the terms of a unit trust. Each of the units in those unit trusts is stapled to a share in a corporation. The units in one of the unit trusts are stapled to shares in one corporation, the units in the other unit trust are stapled to shares in a different corporation. The stapled security formed by one of the units, and the share to which it is stapled, is listed on the Australian Stock Exchange, with the stapled securities known as Abacus Property Group. The other stapled security, known as the Abacus Diversified Income Fund, is not listed. 3 A proposal has been formulated, which would have the effect of a further stapling taking place, between the components of the listed stapled security, and the components of the unlisted stapled security. 4 The way in which it is proposed that that will happen is by there being, first, a consolidation of the unlisted stapled securities, under which, for each existing stapled security, the holder receives 0.78 restructured stapled securities, which staple together the same two securities as now make up the unlisted stapled security. 5 After that, it is proposed that the trust which is part of each of the respective stapled securities will make a distribution to its respective unit holders, and that the amounts so distributed to each of the unit holders will be used, by each of them, to acquire units in the trust of which they are not presently a member. There will then be a stapling together of the two different types of stapled securities, by amendments to the constitutions of the four relevant entities and the execution of a stapling deed. 6 The proposal is one which has been considered by the managements of the various entities which make up the respective stapled securities, and each of these managements has come to the view that the proposal is in the interests of, in the case of the corporations, the respective corporations, and, in the case of the trusts, the unit holders of the respective trusts. 7 A draft explanatory memorandum has been drawn up, which aims to explain to all holders of both classes of stapled securities how the proposal will operate, and how it will affect them. As well, a separate document has been prepared giving an overview of the proposal insofar as it relates to each of the individual stapled securities. It is proposed that the latter documents will be distributed to the respective holders of the stapled security to which each such document relates. 8 As well, proposed amended constitutions for the entities have been drawn up, and drafts of an implementation deed and a stapling deed have likewise been drawn up. 9 There has been a detailed independent expert's report prepared by PKF Corporate Advisors Pty Ltd. Mr Fayad is the a director of PKF Corporate Advisors Pty Ltd who had responsibility for the preparation and finalisation of the report, and also of an independent accountant's report which reviewed the financial forecasts and a pro forma balance sheet for each entity. He has sworn an affidavit which affirms to his belief that the proposed merger is in the interests of the two groups of security holders, considering each as a separate group, and that in his view it has been arrived at after due consideration of all relevant information pertaining to each group, and that the information is to the best of his knowledge and belief complete and accurate. 10 The independent expert's report states, in some detail, the facts and reasoning which have lead Mr Fayad to that view. It also provides a reasoned case, for the particular degree of consolidation which it is proposed will be achieved in the unlisted stapled security. The purpose of that consolidation is to enable one of the consolidated stapled securities in the unlisted entity to be of a value which makes it appropriate for that security to be stapled to one of the securities in the listed entity. 11 Mr Fayad gives reasons why the particular degree of consolidation which has been proposed is in his view appropriate. 12 Each of the trust deeds contains a power of amendment, which is stated in extremely broad terms. 13 Today, the plaintiff seeks advice of the Court on two matters only. One is whether it is justified in issuing the particular overview documents and explanatory memorandum which have been drawn up (as those documents might be subsequently amended pursuant to any requirement imposed by ASIC) to members of the two trusts for the purpose of meetings of each of the managed investment schemes to consider resolutions (the effect of which is set out in the overview document and explanatory memorandum) aimed at implementing the proposal. The other is whether the plaintiff would be justified in proceeding on the basis that the amendments to the two trust constitutions which are proposed to be made are within the powers of alteration conferred by the respective constitutions of the two trusts and section 601GC(1)(a) Corporations Act 2001 (Cth). 14 The summons seeks certain additional advice - broadly, that, if the constitutional amendments and resolutions which it is proposed to be put to the various meetings are passed, that the plaintiff would be justified in acting on those resolutions to implement the proposal. I mention now that one of the terms of the proposal which is being put to the various security holders, is that implementation of the proposal will be dependent upon the Court granting that judicial advice. That additional judicial advice is not sought at this stage, and will be sought only if the proposal is passed by the meeting. 15 Advice has also been obtained from Mr King, of Greenwoods and Freehills Pty Ltd relating to the taxation effects of implementation of the proposal. Mr King has verified the opinions in his report, and its basis. 16 The procedure which is being followed in relation to the present proposal is closely analogous to what has now become a well worn track for the implementation of stapling of securities. Under the familiar type of proposal for stapling of securities, the stapling which is effected is a stapling between a company share, and a unit in a unit trust. On the familiar track, the trustee of the unit trust seeks judicial advice as to the appropriateness of implementing the proposal insofar as it involves the trust, and the Court's approval is sought to the implementation of a scheme of arrangement concerning the company. That type of course has been followed in Re Mirvac Limited (1999) 32 ACSR 107, Re Westfield Holdings Ltd (2004) 49 ACSR 734, and in Re Australand Holdings Limited (2005) 54 ACSR 687. 17 One difference between the present proposal and the familiar way of effecting a stapling of securities is that, here, it is two securities which are already stapled which are proposed to be further stapled. Because each of the trust units is already stapled to a share, there is no need for there to be a scheme of arrangement of the companies involved in the proposal - the stapling can be effectively achieved without that. Thus, for the purpose of the present proposal, only judicial advice to the trustee of the trusts, the responsible entity of the management investment, is being sought. 18 The power to give such judicial advice, and appropriateness of doing it, has been affirmed in the three cases I have already mentioned at para [16] above. 19 The proposals have, as one element in them, a requirement that foreign holders of stapled securities will have their securities sold, and the proceeds distributed to them, and will not take part in the further stapling of the existing securities. In that way, one class of security holders is being treated in a way which is different to the other. 20 In Cachia v Westpac Financial Services Limited (2000) 170 ALR 65; 33 ACSR 572, Hely J took the view that the principles in Gambotto v WCP Limited (1995) 182 CLR 432 did not extend to interests under a unit trust. That principle is one whereby it can be an abuse of the statutory power to alter the constitution of a company if the power is exercised in a way which allows a majority shareholder to compel the sale of the shares of the minority, so as to leave the majority shareholder with a total control of the company that it would not otherwise have had. 21 For the purpose of today's application, I need not decide whether the Gambotto principle applies to interests under a unit trust. I note that in Re Australand Holdings Limited (2005) 54 ACSR 687 at [10] Barrett J said that: "[Hely J's views]... may well be a correct analysis, given that the majority judgment in the High Court confines its analysis to principles derived from company law cases."

Amongst those principles was that the Corporations Act itself gave protection to minorities. 22 In Re Australand Holdings Limited (2005) 54 ACSR 687, Barrett J said that there were two reasons why the Gambotto principle did not apply in the particular case before him. One reason was because there was no discrimination in that case, because each of the unit holders was being treated in the same way. The second was that, in any event, there would be a second approach to the Court for judicial advice, after all the various resolutions had been passed (assuming they were) and that the forum created by the second application provided what Barrett J described in Re Australand at [15] as "a sufficient analogy with the safeguards in company law to which the majority referred in Gambotto." 23 By analogy with the principles which are applied in connection with schemes of arrangement, the question to be decided today is not whether final approval should be given to the scheme. Rather, it is a question of whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate for it to be even submitted for consideration. Even though there is an element of discrimination in the present scheme, so far as the foreign unit holders are concerned, the fact that the finding in Cachia v Westpac Financial Services Limited (2000) 170 ALR 65; 33 ACSR 572 has been made, and the second reason adopted by Barrett J in Re Australand Holdings Limited (2005) 54 ACSR 687, are sufficient at the present stage to justify the trustees and the responsible entity in going forward with the proposal. The applicability of the Gambotto principle may need to be given more extensive consideration when and if the second application for judicial advice is made. 24 The power of amendment in the two trust deeds is, as I have said, a very wide one. Mr Jackman SC could not think, when I asked him, of any sensible argument which could be put as to why the proposal might be outside the power of amendment. Nor has any such argument occurred to me. 25 Section 601GC(1)(a) Corporations Act 2001 (Cth) allows the constitution of a registered scheme to be amended, amongst other things, by special resolution of the members of the scheme. What is proposed in the present case is that there will be a special resolution required to effect the change in the constitution. 26 In these circumstances, I am satisfied it is appropriate to give the advice which is sought. 27 The proposal is one whereby the full bulk of the draft documentation which has been prepared will not be distributed to the security holders. Rather, the essential provisions of the documentation are summarised in the explanatory memorandum. This is a course which has been approved in previous stapling proposals eg Re Westfield Holdings Ltd (2004) 49 ACSR 734, at [10] provided that security holders who want to see the actual documentation can obtain it readily. There is a proposal that the full text of the documentation will be posted on the website of the listed property trust. An undertaking that it will be so posted has been proffered to the Court by Dr Wolfe the Deputy chairman of the responsible entity of the trusts. 28 Upon the undertaking of Dr Frank Wolfe to cause to be posted on the website of the trust documentation identified in paragraph 46 of the affidavit of David James Bastian sworn 7 December 2005, I make orders 1, 2 and 3 in the short minutes of order which I initial and date today's date. 29 I give directions in accordance with paragraphs 4, 5 and 6 of those short minutes of order. **********

Cachia v Westpac Financial Services Limited

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