Fiducian Portfolio Services Ltd v Fiducian Investment Management Services Ltd and Another - [2018] FCA 1412 - FCA 2018 case summary — Zoe

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

[2018] FCA 1412

Federal Court of Australia|2018-09-12|Before: Limited Mr P, Yates J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2018-09-12

Before

Limited Mr P, Yates J

Catchwords

CORPORATIONS - scheme of arrangement - application for orders to convene meeting of shareholders

Source

Original judgment source is linked above.

Catchwords

CORPORATIONS - scheme of arrangement - application for orders to convene meeting of shareholders

Judgment (15 paragraphs)

[1]

Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act), the plaintiff convene a meeting (Scheme Meeting) of its members for the purpose of considering, and if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed between the plaintiff and its members (Scheme) being the scheme of arrangement set forth in Annexure B to the explanatory statement in relation to the Scheme, which is Exhibit 1 in the proceeding (Scheme Booklet).
Pursuant to s 411(1) of the Act, the Scheme Booklet be approved for distribution to the members of the plaintiff.
The Scheme Booklet to be dispatched to members of the plaintiff be substantially in the form of Exhibit 1 in the proceeding.
The Scheme Meeting be held at 11.30 am (Sydney time) on 17 October 2018 at Level 12, 225 George Street, Sydney in the State of New South Wales.
The Chairperson of the Scheme Meeting be Garry Roy Sladden and, in his absence, Mark William Baillie.
The Chairperson appointed to the Scheme Meeting have the power to adjourn the Scheme Meeting in his absolute discretion, including to another day.
Except for procedural motions, all voting at the Scheme Meeting be by poll as declared by the Chairperson.
Rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules) shall not apply to the Scheme Meeting, except for r 75-15(2) of the Insolvency Practice Rules (Corporations) 2016 (Cth).
Pursuant to s 1319 of the Act, on or before 19 September 2018, there be dispatched to: (a) each member of the plaintiff, who has nominated an electronic address for the purposes of receiving notices of meeting and proxy forms from the plaintiff, at such address, an email which contains links to an electronic copy of the Scheme Booklet and a sample proxy form in respect of the Scheme Meeting substantially in the form of the document behind tab 3 of Exhibit SNM1 (Proxy Form); and (b) each other member of the plaintiff, by hand at, or prepaid post or courier to, and in the case of a member whose registered address is outside Australia, by pre-paid airmail post or air courier for overseas pre-paid post to, the address of that member as set out in the register of members of the plaintiff, a copy of the Scheme Booklet and the Proxy Form.

[3]

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.

[4]

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].

[7]

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.

[10]

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.

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

At a glance

Court

Decision date

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Catchwords

Source

Catchwords

Judgment (15 paragraphs)

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Legislation Cited (3)

Cases Cited (4)