Fiducian Portfolio Services Ltd v Fiducian Investment Management Services Ltd and Another

Introduction 1 The plaintiff, Folkestone Limited (Folkestone), seeks an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act) that it convene a meeting of the holders of its fully-paid ordinary shares (the shareholders) to consider and if thought fit agree to, with or without modification, a scheme of arrangement (the scheme) under which the shares held at the Record Date (as defined in the scheme) (the scheme shares) will be transferred to Charter Hall Limited (Charter Hall) for the scheme consideration.

Background 2 Folkestone is a real estate funds manager and developer with offices in Melbourne and Sydney. Its funds management business provides funds management services to a range of listed and unlisted real estate funds in Australia. As at 30 June 2018, it had approximately $1.6 billion under management. Folkestone has co-investments in a number of the funds that it manages, including 30.7 million units (a 12% interest) in a social infrastructure real estate investment trust called Folkestone Education Trust (FET). Folkestone's development revenue includes amounts in relation to direct balance sheet investments, interest in joint ventures and associated entities, and interest on preferred equity loans. As at 30 June 2018, Folkestone had $76 million invested in a mixture of active and non-active (i.e. subject to planning approval) residential and commercial development projects primarily located in Victoria and New South Wales. Folkestone and FET are listed on the Australian Securities Exchange (ASX). 3 Charter Hall is part of the Charter Hall Group, which is a property fund manager and investor on behalf of institutional, wholesale and retail clients. The Charter Hall Group has over $23.2 billion in funds under management across the office, retail and industrial sectors. It owns and manages 330 commercial properties in Australia. 4 On 4 June 2018, Folkestone received an unsolicited proposal from Charter Hall to acquire all of Folkestone's shares. Prior to that time, Folkestone's directors had considered a range of options as to how best to maximise value for the shareholders, including by sale of selected assets. The board concluded that, subject to a superior proposal emerging, the sale of Folkestone by way of scheme of arrangement, at a significant premium to the historical trading price of its shares, would deliver the most value to shareholders. 5 On 22 August 2018, Folkestone and Charter Hall entered into a Scheme Implementation Agreement under which Folkestone agreed to propose the scheme and issue to the shareholders an Explanatory Memorandum (referred to in the orders as the Scheme Booklet), which will stand as the explanatory statement required under s 412(1)(a) of the Act. 6 As at 11 September 2018, there were 148,368,964 shares on issue. There were also 2,998,728 Performance Rights on issue. On vesting, these rights entitle the holders to be issued with ordinary shares in Folkestone on a one for one basis. As I explain further below, Folkestone's directors propose to take steps to cause the Performance Rights to vest if the scheme becomes effective.

The Scheme 7 The scheme is straightforward. If agreed to by the shareholders, and approved by the Court, the scheme shares will be transferred to Charter Hall for the scheme consideration, and Charter Hall will thereupon become Folkestone's sole shareholder. 8 The scheme consideration comprises two components. The first component is a cash payment provided by Charter Hall of $1.354 per scheme share. This is referred to in the Explanatory Memorandum as the Bidder Consideration. The second component is a special dividend of $0.036 per share for each share held at the Special Dividend Record Date (defined in the scheme). The aggregate consideration is, therefore, $1.39 per share/scheme share. 9 Folkestone has applied to the Australian Taxation Office for a class ruling in relation to the tax implications of the scheme, including the availability of franking credits in relation to the special dividend. 10 Performance risk is managed by Charter Hall paying the Bidder Consideration into a trust account in cleared and immediately available funds prior to the Implementation Date (defined in the scheme). The Bidder Consideration has been set aside in its entirety and is made up of the Charter Hall Group's own cash surplus amounts. Further, Charter Hall has executed a deed poll in favour of the shareholders bound by the scheme (the scheme shareholders) in which it covenants to deposit the Bidder Consideration and to undertake all other actions attributed to it under the scheme, as if it were a party thereto. A copy of the deed poll is included in the Explanatory Memorandum. 11 On the Implementation Date, and subject to the provision of the (aggregate) scheme consideration to the scheme shareholders, the scheme shares will be transferred to Charter Hall, without the need for further acts by the scheme shareholders. 12 Under the scheme, each scheme shareholder warrants that its scheme shares (including any rights and entitlements attaching to its shares) will, at the date of transfer, be fully paid and free from all Encumbrances (as defined in the scheme) and interests of Third Parties (as also defined in the scheme) of any kind, whether legal or otherwise, and restrictions on transfer of any kind, and that it has full power and capacity to transfer the scheme shares to Charter Hall together with any rights attaching to those shares. The attention of shareholders is directed to the warranty in the Explanatory Memorandum. 13 The scheme is subject to certain conditions precedent. These include the conditions in clause 3.1 of the Scheme Implementation Agreement other than clause 3.1(h) referring to the Court's approval of the scheme. The attention of shareholders is also directed to the conditions precedent in the Explanatory Memorandum. 14 In the course of considering the scheme, the Australian Securities and Investments Commission (ASIC) queried whether one of the conditions precedent - described in the Scheme Implementation Agreement as relating to an FET Exit Transaction - constituted a lock-up device. It seems that ASIC's concerns in that regard have been assuaged. Folkestone submits that the condition precedent should not give rise for concern by the Court because the non-fulfilment of that condition will simply mean that the scheme will not become effective and that Charter Hall will be provided with a ground to terminate the Scheme Implementation Agreement. No third party will be prevented from instigating a transaction which would trigger the condition. 15 At any second court hearing, appropriate proof of the satisfaction or, if available and applicable, waiver of the conditions precedent should be provided: see the remarks in Fiducian Portfolio Services Ltd v Fiducian Investment Management Services Ltd and Another (No 2) [2015] FCA 95; (2015) 228 FCR 587 at [44]-[49].

The directors' recommendation 16 The directors believe that the scheme is in the best interests of the shareholders. They have unanimously recommended that shareholders vote in favour of it. Each director has signified his intention to vote all the shares he owns or controls in favour of the scheme, in the absence of a superior proposal. The reasons for this recommendation are clearly set out in the Explanatory Memorandum, as well as the reasons why shareholders might not vote in favour of the scheme.

The independent expert's report 17 Folkestone has engaged Lonergan Edwards & Associates Limited (Lonergan Edwards) to prepare a report on the acquisition, which states whether the scheme is fair and reasonable, and in the best interests of the shareholders. 18 Lonergan Edwards has assessed the value of the shares on a 100% controlling interest basis at between $1.30 and $1.42 per share. As the scheme consideration lies within and towards the top end of the assessed valuation, Lonergan Edwards has expressed the opinion that the scheme consideration is fair to the shareholders. Based on the guidance provided by ASIC's Regulatory Guide 111 - Content of expert reports, Lonergan Edwards has concluded that the scheme is also reasonable. It has also reasoned that, as the scheme is fair and reasonable, it is in the best interests of the shareholders. 19 The report that Lonergan Edwards has provided is detailed. It will be included in the Explanatory Memorandum. In the report, the advantages and disadvantages of the scheme are discussed. Detailed consideration is also given to the valuation methodologies that have been adopted. The report explains why these methodologies are appropriate. 20 The report and the opinions expressed have been verified by its two co-authors, Mr Toscan and Ms Planinic, who are directors of Lonergan Edwards. 21 It is convenient to record that the scheme consideration represents a premium on recent market prices for the shares prior to the announcement of the scheme to the market. The extent of this premium is not only discussed in the report, but also in the Explanatory Memorandum.

Verification of the Explanatory Memorandum 22 There is evidence before me of the steps taken to verify the accuracy of the information in the Explanatory Memorandum. 23 Mr Bryant - the Group General Counsel and Company Secretary of Charter Hall - has deposed to the steps taken to verify the information he has described as the Charter Hall Information, comprising the following sections in the Explanatory Memorandum: Section 1 (in the right-hand column next to the item titled "Who is Charter Hall Group?"); Section 5; and Section 9.5(b). Mr Bryant has deposed to his satisfaction that, on the basis of the verification process undertaken, the Charter Hall Information is accurate and complete, is not misleading or deceptive, does not contain any material omissions, and is in a form appropriate for distribution to the shareholders. 24 Mr Martin - the Chief Financial Officer and Company Secretary of Folkestone - has deposed to the steps taken to verify all information in the Explanatory Memorandum other than the Charter Hall Information, the report prepared by Lonergan Edwards, and statements in relation to the tax consequences of the scheme contained in Section 1, Section 2.15 and Section 8 (the Folkestone Information). Mr Martin has deposed to his belief that the Explanatory Memorandum does not omit any relevant information about Folkestone necessary to be disclosed to the shareholders in connection with the scheme; that, in the case of statements of fact, the facts are true and no material facts have been omitted; that, in the case of statements of opinion and forward-looking statements, the statements are based on reasonable grounds; and that the Folkestone Information is not misleading or deceptive. 25 I also note that, on 11 September 2018, the directors of Folkestone resolved to approve the Explanatory Memorandum. 26 Subject to the matter I have noted at [44] below, and subject further to any matter that might be raised at a second court hearing, I am satisfied that the Explanatory Memorandum is in accordance with the requirements of s 412(1)(a) of the Act and is in a form appropriate to be sent to the shareholders.

Taxation implications 27 The Explanatory Memorandum contains a section which provides a general summary of the Australian income tax, goods and services tax and stamp duty implications for Australian resident scheme shareholders. This section has been prepared by PricewaterhouseCoopers, who have provided a written acknowledgement to the effect that, in their opinion, and having made all enquiries they consider necessary and appropriate, there are no material misstatements in this section in relation to Australian income tax, goods and services tax or stamp duty.

FY18 dividend 28 The FY18 dividend of $0.03 per share, which has been declared, will be paid to shareholders registered as such on the FY18 Dividend Record Date (defined in the Explanatory Memorandum). This dividend will be paid in addition to the scheme consideration and irrespective of whether the scheme is approved.

The Scheme Implementation Agreement 29 The Explanatory Memorandum summarises relevant provisions of the Scheme Implementation Agreement. 30 The summary includes detailed reference to the group of provisions that constitute the exclusivity arrangements that Folkestone has entered into. These provisions regulate the actions, discussions and negotiations that Folkestone can have with respect to any Competing Proposal (defined in the Scheme Implementation Agreement). In substance, a Competing Proposal is one which would result in a third party acquiring or having a right to acquire, or obtaining an economic interest in, all or a substantial part of the business, assets or undertakings of Folkestone and each of its subsidiaries; acquiring control of Folkestone; or acquiring a relevant interest in the shares, as a result of which the third party, together with any of its associates, will have, in aggregate, a relevant interest in more than 20% of the shares. 31 By way of broad overview, the exclusivity provisions are: a "no shop" restriction (cl 8.1); "no talk and no due diligence" restrictions that are subject to a fiduciary carve-out (cll 8.2 and 8.3); a "notification of approaches" obligation (cl 8.4); a "matching right" obligation (cl 8.5); and a "provision of information" obligation (cl 8.6). 32 These arrangements are imposed over the Exclusivity Period, which is defined in the Scheme Implementation Agreement as the End Date (the date five months after the date of the Scheme Implementation Agreement, or such other date agreed in writing between Folkestone and Charter Hall), the date the Scheme Implementation Agreement is terminated in accordance with its terms or the Implementation Date, whichever is the earliest. The Exclusivity Period is capable of precise ascertainment. I am satisfied that the period is, in the circumstances, reasonable. 33 Mr Martin was involved in the negotiations undertaken in relation to these provisions. He has deposed that the provisions were agreed to following arm's length commercial negotiations in which Folkestone and Charter Hall were represented by their respective solicitors. Folkestone was also represented by financial advisers. Mr Martin has deposed that Folkestone's decision to agree to the provisions was in the best interests of its shareholders in relation to the scheme and Charter Hall's participation in the scheme. 34 The summary of the Scheme Implementation Agreement in the Explanatory Memorandum also includes reference to Folkestone's obligation to pay a break fee to Charter Hall in certain circumstances, including termination of the Scheme Implementation Agreement as a result of a material breach by Folkestone. Importantly, the break fee will not be payable merely because the scheme is not approved by the shareholders at the scheme meeting. 35 The break fee is 1% of the amount of the scheme consideration. It has been calculated as $2,049,518.55. The amount of the fee is within the guidance provided by the Takeovers Panel Guidance Note 7 - Lock-up devices. 36 Mr Martin has deposed that the break fee was agreed to following arm's length commercial negotiations in which, once again, the parties were represented by their solicitors and Folkestone was also represented by financial advisers. He has deposed that the decision to agree to the break fee was in the best interests of the shareholders in connection with the scheme and Charter Hall's participation in the scheme. 37 Mr Bryant has deposed that Charter Hall requested that provision be made for a break fee and that Charter Hall would not have entered into the Scheme Implementation Agreement in the absence of such a provision. He has confirmed that the amount of the break fee has been calculated to compensate Charter Hall for certain categories of costs and expenses which it has or will incur in pursuing the scheme. He has deposed that, although these costs and expenses cannot be accurately quantified, the break fee is intended by Charter Hall to be a genuine and reasonable pre-estimate of them.

Performance rights 38 As I have noted, Folkestone has issued certain Performance Rights. The rights have been issued under the Folkestone Limited Executive Incentive Plan (the Executive Incentive Plan). Holders of these rights are entitled to be issued with shares in Folkestone on a one for one basis. Under the Scheme Implementation Agreement, Folkestone must procure that all outstanding Performance Rights are vested or lapsed, and that the relevant shares are issued or agreed to be issued, before the Record Date. 39 Folkestone's directors have determined that, in accordance with and as permitted by the terms of the Executive Incentive Plan, the vesting of the issued Performance Rights will be accelerated so that they will vest prior to the Record Date, subject to the scheme becoming effective. Shares will be issued to the holders of the Performance Rights. The shares will comprise part of the scheme shares for the purpose of implementing the scheme. 40 Thus, the holders of the Performance Rights will not be entitled to participate in the scheme meeting, but the shares issued upon the vesting of the Performance Rights will be scheme shares (by virtue of the fact that they will be issued before the Record Date) and treated in the same way as all the other scheme shares. Folkestone submits, and I accept, that vesting of the Performance Rights in this way, so as to enable the shares so vested to participate in the scheme, does not give rise to class-creating issues, particularly in light of the fact that the vesting will only take place subject to the scheme becoming effective: BigAir Group Limited, in the matter of BigAir Group Limited [2016] FCA 1296 at [15].

Chairperson of scheme meeting 41 Mr Sladden is a Non-Executive Director and the current Non-Executive Chairman of Folkestone. He has been nominated to act, and has agreed to act, as the chairperson of the scheme meeting. Mr Baillie is also a Non-Executive Director and the current Non-Executive Deputy Chairman of Folkestone. He has been nominated to act, and has agreed to act, as the chairperson of the scheme meeting should Mr Sladden be unable to act. Each has made an affidavit that has been filed in compliance with r 3.2 of the Federal Court (Corporations) Rules 2000 (Cth).

Dispatch of the Explanatory Memorandum 42 Folkestone proposes to email those shareholders who have elected to receive notices by email with links to the Explanatory Memorandum, which will include the notice of scheme meeting and a sample proxy form. I am satisfied that this is appropriate: see the remarks in MDA National Limited v Medical Defence Australia Limited [2014] FCA 954 at [87]-[105]. Otherwise, the Explanatory Memorandum, notice of meeting and a proxy form will be delivered by hand or sent by prepaid post or courier to shareholders whose registered address is in Australia, or by prepaid airmail post or air courier to shareholders whose registered address is outside Australia.

ASIC 43 ASIC has advised that the notice requirement of s 411(2)(a) of the Act has been complied with. It has also advised that it has had a reasonable opportunity to examine the terms of the scheme and the draft explanatory statement, and to make submissions to the Court: see s 411(2)(b) of the Act. 44 Further, ASIC has waived the requirements of cl 8302(h) of Pt 3 of Sch 8 of the Corporations Regulations 2001 (Cth) on condition that Folkestone complies with certain other conditions, including in relation to the Explanatory Memorandum.

Conclusion and Disposition 45 I am satisfied that Folkestone is a Pt 5.1 body and that the scheme is an "arrangement" for the purposes of s 411(1) of the Act. I am satisfied that the formal requirements that are preliminary to the Court convening a meeting under s 411(1) of the Act have been complied with. I am also satisfied that the proposed scheme is of such a nature and is cast in such terms that, if it receives the requisite statutory majorities, the Court would be likely to approve it on an unopposed application. Orders, substantially as sought by the plaintiff, should be made. I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.