Envestra Limited, in the matter of Envestra Limited [2014] FCA 395

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 280 of 2014

IN THE MATTER OF ENVESTRA LIMITED ACN 078 551 685 ENVESTRA LIMITED ACN 078 551 685

JUDGE: YATES J DATE: 24 APRIL 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This is an application for an order under s 411(1) of the Corporations Act 2001 (Cth) (the Act) that a meeting of a class of members of the plaintiff, Envestra Limited (Envestra), be convened to consider and, if thought fit, approve a proposed scheme of arrangement.

Background 2 Envestra is registered under the Act. It is a public company limited by shares. It is listed on the Australian Securities Exchange (ASX). 3 Envestra is one of Australia's largest natural gas distribution companies. It owns natural gas networks that operate mainly as regulated monopolies in the key population centres of Victoria, South Australia and Queensland, as well as in smaller centres in New South Wales and the Northern Territory, reaching approximately 1.2 million customers. Envestra's assets consist of 22,856 km of distribution networks and 1,123 km of transmission pipes. Its revenue is generated mainly by charging retailers and industrial customers for the provision of gas haulage services through its networks. 4 Australian Pipeline Limited (APL) is a public company limited by shares. APL is the responsible entity of the Australian Pipeline Trust (APT) and the responsible entity of the APT Investment Trust (APTIT). APT and APTIT are managed investment schemes registered under Part 5C of the Act. APA Group is the group comprising APT, APTIT, APL and each of the entities controlled by APL in its capacity as responsible entity of APT and APTIT. APA Group is a stapled entity listed on the ASX. 5 APA Group is Australia's largest natural gas infrastructure business. It has ownership interests in and operates approximately $12.2 billion of energy infrastructure, principally for transporting and storing gas. This includes its interest in Envestra, to which I will shortly refer. 6 As at 2 April 2014, Envestra's issued capital comprised 1,796,808,474 ordinary shares. As at 28 March 2014, Envestra had approximately 15,600 shareholders. Based on the ASX closing price of $1.130 for Envestra shares on 1 April 2014, Envestra has a market capitalisation of approximately $2.030 billion. 7 Envestra has two substantial shareholders. APA Group holds 593,755,789 shares, representing 33.05% of Envestra's issued capital. Cheung Kong Infrastructure Holdings (Malaysian) Limited (CKI) holds 313,645,693 shares representing 17.46% of Envestra's issued capital. CKI has appointed two directors to Envestra's board - Ivan Chan and Dominic Chan.

The scheme 8 On 4 March 2014, Envestra and APL entered into a Scheme Implementation Agreement (the SIA) under which it was proposed that APL, in its capacity as responsible entity and trustee for APT, would acquire all the ordinary shares in Envestra not already owned by APA Group (the scheme shares) for the consideration (the scheme consideration) of either: 0.1919 stapled securities comprising one ordinary unit in APT and one ordinary unit in APTIT, stapled together such that they must only be transferred together (APA securities) per scheme share (the all scrip consideration); or cash of $1.17 per scheme share (the maximum cash consideration), via a scheme of arrangement (the scheme). 9 Shareholders participating in the scheme (scheme shareholders) will have an election as to whether to receive the scheme consideration as either the all scrip consideration or the maximum cash consideration. However, the total cash consideration to be made available to satisfy elections for the maximum cash consideration will be limited to $241 million (the available cash consideration). If all elections for the maximum cash consideration can be satisfied in full, the scheme shareholders who elect to receive that consideration will receive $1.17 cash for each Envestra share held at the Record Date (defined in the scheme). 10 However, if the available cash consideration is not sufficient to allow the relevant scheme shareholders to receive that consideration, their elections for cash will be scaled back on a pro-rata basis. This will result in those shareholders receiving less than 100% cash for their scheme shares, with the balance of the scheme consideration provided to them by a scrip component comprising APA securities of the relevant value. 11 Further, under the terms of the scheme, the scheme consideration, whether in the form of cash or scrip, may be adjusted if the scheme is implemented after 30 June 2014. 12 The scheme also makes provision for the sale of any Unmarketable Parcel of APA securities (defined in the scheme), should a relevant scheme shareholder so elect, and the sale of APA securities that would otherwise be required to be issued to any Ineligible Foreign Envestra Shareholder (defined in the scheme), with the proceeds, in each case, payable to the relevant scheme shareholder. It is not necessary for me to record the sale mechanism other than to note that the sale would be through a nominee appointed for that purpose. 13 The scheme will be implemented as follows: On the business day prior to the Implementation Date (defined in the scheme), APL will pay the cash consideration in cleared funds into a trust account. On the Implementation Date, the scrip consideration will be issued to the scheme shareholders, with each such shareholder being recorded as the holder of the relevant APA securities issued to that shareholder. On the Implementation Date, after these first two steps, the scheme shares will be transferred to APL as the responsible entity of APT without further act by the scheme shareholders, by Envestra taking certain steps referred to in the scheme. Thereafter, Envestra will register APL as the holder of the scheme shares. The cash consideration to which scheme shareholders are entitled will be paid by electronic funds transfer (in the case of those shareholders who have elected to receive the cash consideration in that manner) or dispatched to the scheme shareholders, within five business days after the Implementation Date. 14 The obligations of APL under the scheme are secured by a deed poll, which APL has executed in favour of the scheme shareholders. 15 The scheme and the deed poll are annexures to the scheme booklet, which is to serve as the explanatory statement for the purposes of s 412(1) of the Act. I am satisfied that the terms of the scheme have been satisfactorily disclosed and explained in the scheme booklet. 16 The scheme contains warranties to be given by each scheme shareholder. These warranties are to the effect that the scheme shares held by the scheme shareholder will be fully paid and free from encumbrances and other interests, and that the scheme shareholder has full power and the capacity to sell and transfer those scheme shares. The existence and terms of these warranties are satisfactorily disclosed in the scheme booklet. 17 Further, the scheme provides that scheme shareholders will be taken to have made a statement for the purposes of APT's constitution and APTIT's constitution that the current market value of one Envestra share is equivalent to 0.1919 APA securities and that Envestra is authorised to provide that statement of current market value to APL. 18 The purpose of this provision of the scheme is to enable, in conformity with each constitution, the scrip consideration to be issued in return for the transfer of the scheme shares. Under clause 4.3(b) of each constitution, where property is to be transferred to APL as trustee under each managed investment scheme in relation to an application for APA securities, a valuation of that property, acceptable to APL, must be provided. The valuation must state the current market value of that property. 19 APL is of the view that one Envestra share is equivalent to 0.1919 APA securities. It has formed that view on the basis that the best reflection of the current market value of the scheme shares is the value that it is prepared to pay, which, if the scheme is to become effective, will have been approved by the scheme shareholders. In this way, if the scheme is approved and becomes effective, APL will be empowered, in conformity with APT's and APTIT's respective constitutions, to issue the scrip consideration in accordance with the scheme. 20 This feature is satisfactorily disclosed and explained in the scheme booklet.

The attitude of directors 21 The directors (other than the APA Group affiliated directors), by majority, have recommended that participating shareholders should vote in favour of the scheme. Their reasons for making that recommendation are prominently set out in the scheme booklet. The two directors appointed by CIK, Mr Ivan Chan and Mr Dominic Chan, have recommended that participating shareholders should vote against the scheme. Their reasons for making that recommendation are also prominently set out in the scheme booklet.

CIK's intentions 22 CIK's holding in Envestra represents more than 25% of the scheme shares. Thus, if CIK votes against the scheme, the majority required under s 411(4)(a)(ii)(B) of the Act will not be obtained. Envestra has made inquiries of CIK regarding its possible voting intentions. CIK has not informed Envestra of those intentions. Further, it has advised Envestra that it does not currently intend to make a public statement regarding its voting intentions. I do not think that the uncertainty surrounding CIK's intentions is such that I should, for that reason, decline to make the orders presently sought.

The independent expert 23 Envestra has engaged Grant Samuel & Associates Pty Limited (Grant Samuel) to provide an expert opinion as to whether the scheme is fair and reasonable and in the best interests of Envestra's shareholders (other than the APA Group). Grant Samuel has prepared a report (the Grant Samuel report). Caleena Gai Stilwell, a director and authorised representative of Grant Samuel, has had overall responsibility for the preparation of that report. 24 In its report, Grant Samuel has valued Envestra's shares to be within the range of $1.11 to $1.32 per share. This value represents the estimated full underlying value of Envestra assuming 100% of the company is available to be acquired. It includes a premium for control. The value exceeds the price at which, based on current market conditions, Grant Samuel would expect Envestra shares to trade on the ASX in the absence of a takeover offer. 25 Grant Samuel has attributed a value to the scrip consideration of $1.15 to $1.27 per Envestra share, based on a value range for APA securities of $6.00 to $6.60. 26 It can be seen, therefore, that the value attributed to the scrip consideration and the maximum cash payment of $1.17 per share fall within Grant Samuel's estimate of the full underlying value for Envestra. It has concluded, therefore, that the scheme is fair. Grant Samuel has further concluded that, as the scheme is fair, it is also reasonable and in the best interests of shareholders. 27 In its report, Grant Samuel has also identified and discussed a number of other factors that support the reasonableness of the scheme and which, in its view, Envestra shareholders should consider in determining whether or not to vote in favour of the scheme. 28 In an affidavit, Ms Stilwell has stated that: the opinions expressed in the Grant Samuel report are opinions that she held at the date of that report; she is prepared to sign and intends to sign a copy of the report (in the form placed before the Court), and she has not become aware of any facts or circumstances since the date of the report that would cause her to change the opinions expressed in the report. 29 A signed copy of the Grant Samuel report will be included in the scheme booklet.

Other financial information 30 Envestra has engaged Deloitte Corporate Finance Pty Limited (Deloitte) to review certain: proforma historical financial information of the APA Group; historical financial information on Envestra, and proforma historical financial information for the combined group comprising APA Group, Envestra and its related bodies corporate following implementation of the scheme, as contained in the scheme booklet. 31 Deloitte has prepared a report (the Deloitte report), which will be included in the scheme booklet. The Deloitte report expresses the opinion that nothing has come to Deloitte's attention that would cause it to believe that the information referred to above is not presented fairly, in all material respects, on the basis of the proforma transactions and/or adjustments described in identified sections of the scheme booklet, which are in accordance with the recognition and measurement principles contained in the Australian Accounting Standards and the accounting policies adopted by the APA Group. 32 Johan Simon Duivenvoorde, a director and authorised representative of Deloitte, was responsible for the preparation of Deloitte report. He has made an affidavit in which he has stated that the opinions expressed in the Deloitte report are opinions that he holds, and that he has not become aware of any facts or circumstances since the date of preparing the Deloitte report which would cause him to change the opinions expressed in that report. 33 A signed copy of the Deloitte report will be included in the scheme booklet.

Aspects of the SIA 34 Clause 11 of the SIA contains exclusivity provisions ("no shop" and "no talk" provisions). The relevant "exclusivity period" is from the date of execution of the SIA (4 March 2014) until the earlier of the Implementation Date (expected to be 30 May 2014), the End Date (defined in the scheme to be 30 September 2014), or the date of termination of the SIA. In my view, this period is not unreasonable in the circumstances. 35 Importantly, the restrictions imposed by these provisions are subject to the usual fiduciary "carve out", such that Envestra's directors may in good faith take or refrain from taking steps in relation to any unsolicited and likely superior proposal, so as to avoid any likely breach of their fiduciary or statutory duties as directors. 36 The exclusivity provisions are satisfactorily disclosed in the scheme booklet. 37 Clause 11 of the SIA also places restrictions on Envestra in relation to entering into arrangements to pay a "break fee" to any third party, where the aggregate value of the agreed fee exceeds $10 million, or where the fee is payable as a consequence of an Acquisition Event (as defined in the SIA) being rejected by Envestra's shareholders. I note that any permitted break fee would be less than 1% of the equity value of the target (Envestra), in accordance with the Takeovers Panel's 1% guideline. 38 Where Envestra enters into a break fee arrangement with a third party, as permitted by the SIA, then Envestra has agreed to enter into an equivalent arrangement with APL in relation to the scheme, on terms that are no less favourable. At the present time, there is no break fee arrangement. Further in this regard, I note that, since the announcement of the proposed scheme in December 2013, no competing third party proposal has emerged. 39 The provisions of clause 11 of the SIA in relation to break fee arrangements are satisfactorily disclosed in the scheme booklet.

Chairman of the scheme meeting 40 I note that John Geoffrey Allpass has been nominated by Envestra's board to act, and is willing to act, as chairman of the scheme meeting. Further, Eric Fraser Ainsworth has been nominated by Envestra's board to act, and is willing to act, as chairman of the scheme meeting in the event that Mr Allpass is unable or unwilling to act. 41 Mr Allpass and Mr Ainsworth have made affidavits disclosing their interests, if any, in Envestra, the APA Group and the scheme. I can see no reason why either gentleman should not act as chairman of the scheme meeting.

Verification 42 There is extensive affidavit evidence concerning the verification of statements made in the scheme booklet.

ASIC 43 I note that the requisite period of notice has been given to the Australian Securities and Investments Commission (ASIC) in relation to the present application: s 411(2)(a). 44 I am satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and the draft explanatory statement (in the form of the scheme booklet) placed before it: s 411(2)(b)(i). 45 I note that there has been extensive correspondence between ASIC and Envestra's solicitors in relation to the drafting of the scheme booklet. This has led to a number of amendments. 46 I also note that, under reg 5.1.01(1) of the Corporations Regulations 2001 (Cth) (the Regulations), ASIC has granted certain exemptions in relation to the matters set out in paragraph 8302(h) of Part 3 of Schedule 8 to the Regulations, and in respect of the need to include, as part of the explanatory statement, an initial report prepared by Grant Samuel dated 3 March 2014. These exemptions were granted on certain terms. On my inquiry at the hearing, I was assured that those terms have been complied with. 47 Further, under clause 8305 of Part 3 of Schedule 8 of the Regulations, ASIC has consented to the Grant Samuel report containing a forecast of the profits or profitability of Envestra in the form provided to it on or about 2 April 2014. 48 On 3 April 2014, ASIC wrote to Envestra's solicitors advising that it did not propose to appear at the present hearing to make submissions or to oppose the scheme.

Consideration 49 I am satisfied that Envestra is a Pt 5.1 body and that the proposed scheme is for an "arrangement" for the purposes of s 411(1) of the Act. Further, I am satisfied that the proposed scheme is of such a nature and cast in such terms that, if it receives the requisite statutory majorities, the Court would be likely to approve it on the hearing of an unopposed application.

Disposition 50 For these reasons, I am satisfied that orders, substantially as sought, should be made. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.