SEPARATE MEETINGS?
47 Healthscope seeks an order under s 411(1) that a single meeting of its shareholders be convened for the purposes of considering the Scheme. But ASIC contends that the proposed Scheme should in reality be viewed as between Healthscope and two separate classes of its shareholders, with NWH AssetCo, NWH REIT or their affiliates being one class and all other Healthscope shareholders being the other class. Accordingly, ASIC contends that a separate meeting of each class is required to be convened.
48 Now I accept that the question of classes and separate class meetings for the purposes of a scheme of arrangement falls to be considered by reference to the text and context of s 411(1), which relevantly refers to an arrangement proposed between a company and its members or any class of them. And where separate classes arise, each class will only be bound by the scheme resolution if they have each approved the scheme by the requisite statutory majorities at their separate class meetings with subsequent Court approval.
49 In summary, ASIC says that because of the various sale and leaseback arrangements with Healthscope to which NWH AssetCo is a party, which I have touched upon earlier, NWH AssetCo (and its affiliates) must vote in a separate class to all other Healthscope shareholders.
50 In order to address ASIC's concerns it is necessary to delve further into the factual background. The class question arises in the context of the following matters leading up to Healthscope's announcement on 1 February 2019 of Brookfield BidCo's transaction to acquire 100% of the shares in Healthscope by way of a scheme of arrangement and a simultaneous takeover offer, which transaction included a proposed sale and leaseback by Healthscope of 11 properties to NWH AssetCo and a sale and leaseback by Healthscope of a further 11 properties to MPT Operating Partnership, L.P. (MPT). For the purposes of this section of my reasons I will refer to either or both of Brookfield BidCo and Brookfield LP as simply "Brookfield".
51 On 26 April 2018, Healthscope announced receipt of an indication of interest from BGH Capital I, together with AustralianSuper Pty Ltd, Carob Investment Private Limited (a subsidiary of GIC (Ventures) Private Limited), Ontario Teachers' Pension Plan Board and Canada Pension Plan Investment Board (collectively the "BGH - AustralianSuper Consortium") to acquire all of the shares in Healthscope for $2.36 per share. The BGH - AustralianSuper Consortium held voting power in 20% of the shares in Healthscope and was subject to exclusivity arrangements which provided that this 20% parcel of shares could not be voted in favour of a competing proposal or accepted into any competing proposal.
52 On 8 May 2018, NWH REIT lodged an initial substantial shareholder notice in which is stated that it had acquired a 10% relevant interest in Healthscope by way of a forward derivative contract with Deutsche Bank AG, which acquisition was described in the notice as a "Strategic Investment". The accompanying announcement to that notice included the following statements by NWH REIT:
Healthscope is one of Australia's leading private hospital operators with a portfolio of 45 hospitals concentrated in large metropolitan centres throughout Australia.
An acquisition of Healthscope's underlying hospital related real estate is of interest to NWH and Vital Healthcare Property Trust (Vital) in line with their long term strategy to invest in healthcare real estate assets in the Australasian market. NWH and Vital currently intend to pursue any potential Healthscope real estate acquisition jointly, with scope to introduce other capital partners as appropriate.
(Emphasis added.)
53 In this regard, I also note that in the draft independent expert report provided to me, Grant Samuel noted that "NorthWest acquired its interest in Healthscope in May 2018 shortly after announcement of the initial approach by the BGH-AustralianSuper Consortium. NorthWest acquired the interest to "give it a seat at the table" and some degree of leverage to pursue the acquisition of Healthscope's underlying property portfolio".
54 Now in fact the relevant forward derivative contract entered into on 8 May 2018 was between NWH AssetCo and Deutsche Bank, and described as a "Share Option Transaction - Collar (Cash Settlement)". NWH AssetCo is a subsidiary of NWH REIT. So the transaction entered into by NWH AssetCo with Deutsche Bank gave rise to NWH REIT's relevant interest in shares in Healthscope.
55 On 14 May 2018, Healthscope announced that it had received an indicative proposal from Brookfield to acquire all of the shares in Healthscope by way of a scheme of arrangement at an indicative price of $2.50 per share.
56 On 22 May 2018, Healthscope announced that it had decided not to provide due diligence to either Brookfield or the BGH - AustralianSuper Consortium and announced that it would undertake a strategic review of its hospital property portfolio.
57 On 21 August 2018, Healthscope announced that it had completed its strategic review of its freehold hospital property assets and that it was proposing to establish an unlisted property trust to hold the majority of those assets which would be leased back to Healthscope. It was proposed that Healthscope would hold a majority interest in the hospital property trust and a new co-investor would be introduced to hold up to 49% in the trust.
58 On 23 October 2018, Healthscope announced that it had received an unsolicited proposal from the BGH - AustralianSuper Consortium to acquire all of the shares in Healthscope by way of a scheme of arrangement at an indicative price of $2.36 per share being the same price per share as its 26 April 2018 proposal. The proposal was subject to a significant number of conditions including a condition that the proposed sale of an interest in Healthscope's property assets not proceed and no other material assets be divested.
59 On 12 November 2018, Healthscope announced that it had received a proposal from Brookfield to acquire 100% of Healthscope by way of an off-market takeover representing $2.455 per share and a simultaneous scheme of arrangement representing $2.585 per share which contained a condition that Healthscope not enter into a binding agreement to give effect to its proposed property transaction announced on 21 August 2018 or divest other material assets, but which permitted Healthscope to continue to conduct the process already underway in respect of its proposed property transaction.
60 During discussions between Brookfield and Healthscope, Brookfield indicated to Healthscope that a 100% sale and leaseback of the relevant properties would form part of Brookfield's binding proposal. But Healthscope continued to progress its own property proposal in parallel during November and December 2018 in case the Brookfield transaction did not proceed to a definitive agreement.
61 On 20 November 2018, NWH REIT announced that it had acquired on-market 1% of voting shares in Healthscope which together with the forward derivative contract with Deutsche Bank increased its interest in voting shares in Healthscope to up to 11.1%. NWH REIT reiterated the comments made in its 8 May 2018 proposal about pursuing a potential Healthscope real estate acquisition. Again, the relevant transaction seems to have been entered into by NWH AssetCo.
62 On 4 December 2018, NWH REIT made an announcement in which it referred to its 8 May 2018 announcement and said further that on 30 November 2018 it had amended the forward derivative contract with Deustche Bank to increase its interest in voting shares in Healthscope to 13.41%. In that announcement, NWH REIT again reiterated the comments made in its 8 May 2018 proposal about pursuing a potential Healthscope real estate acquisition. Again, the relevant dealings were between NWH AssetCo and Deutsche Bank.
63 On 1 February 2019, a series of interlocking agreements were entered into between Brookfield and NWH REIT, Healthscope and NWH REIT and Brookfield and Healthscope regarding the scheme of arrangement, the simultaneous takeover and the sale and leaseback of properties by Healthscope to NWH AssetCo. The transaction value of the properties to be sold by Healthscope to NWH AssetCo under the sale and leaseback arrangements was approximately $1.3 billion.
64 ASIC has contended that the class question is to be considered through the prism of the rights and associated obligations on the part of NWH REIT, NWH AssetCo and their affiliates as created by these interlocking agreements and the impact of those rights and associated obligations on the ability of NWH REIT, NWH AssetCo and their affiliates on the one hand, and the other Healthscope shareholders on the other hand, to consult together with a view to their common interest. Let me say something concerning these interlocking agreements.
65 The first agreement is the Process, Voting Commitment and Exclusivity Deed (Process Deed) dated 1 February 2019 between Brookfield and NWH REIT.
66 Under the Process Deed as correctly summarised by ASIC:
(a) Brookfield agreed that it would not enter into an implementation deed with Healthscope in respect of the proposed scheme of arrangement and concurrent takeover unless Healthscope had entered into the commitment deed with NWH REIT providing for the sale of certain Healthscope hospital properties to NWH REIT/NWH AssetCo and the leaseback of those properties to Healthscope or only enter into an implementation deed if that implementation deed is conditional on (or otherwise requires) Healthscope's entry into the commitment deed (and such condition is for Brookfield's benefit and must not be waived without NWH REIT's prior written consent) (clause 3.2(a));
(b) Brookfield undertook to NWH REIT that it would take all reasonable steps within its control to procure that Healthscope entered into the commitment deed and that Healthscope complied with its obligations under that deed (clause 3.2(b));
(c) Brookfield undertook to NWH REIT not to waive or amend certain specified conditions or rights in the implementation deed or waive the takeover condition in certain circumstances where such waiver or amendment would be materially prejudicial to NWH REIT without NWH REIT's prior written consent (clause 3.3(a));
(d) Brookfield undertook to NWH REIT that if directed in writing to do so by NWH REIT, Brookfield would exercise any right it had to terminate the implementation deed or reserve its right to terminate the implementation deed to permit Brookfield and Healthscope to agree an extension to the timetable for the Scheme and/or takeover if Healthscope or its affiliates prior to the scheme meeting breached their obligations under the sale contracts (under which Healthscope was to agree to sell certain properties to NWH REIT/NWH AssetCo) or any step up contract in certain circumstances (clause 3.3(b));
(e) NWH REIT undertook in favour of Brookfield that during the exclusivity period it would procure that all of the shares the subject of the forward derivative contract with Deutsche Bank (defined in the Process Deed as the "Forward") and any other Healthscope shares in which NWH REIT or NWH AssetCo had a relevant interest were:
(i) voted at the scheme meeting in favour of the Scheme in return for cash consideration;
(ii) voted at any general meeting of Healthscope to be held prior to the end date in favour of a capital reduction resolution in relation to the concurrent takeover;
(iii) tendered into the takeover no later than 1 business day prior to the scheme meeting;
(iv) voted against any competing proposal,
(clause 4(a)).
(f) these voting and tendering undertakings of NWH REIT ceased to apply if 2 business days before the scheme meeting, there was a settlement delay in any property or properties proposed to be sold by Healthscope to NWH REIT/NWH AssetCo under a sale contract (where the aggregate sale price exceeds $250 million) and where NWH REIT/NWH AssetCo had notified both Brookfield and Healthscope that it would not be acquiring any of those settlement delayed properties (clauses 4(b) and 10.2);
(g) NWH REIT agreed that during the exclusivity period it would not and would not procure that its affiliates and associates enter into any arrangement or agreement in relation to any competing proposal and would not propose or encourage any enquiries, negotiations or discussions with a view to obtaining from anyone any competing proposal or participate in negotiations or discussions with any person regarding any competing proposal (where the term "competing proposal" was defined to include any proposal where a third party could acquire 20% or more of the shares in any member of the Healthscope Group) (clause 7);
(h) NWH REIT must 2 business days before the scheme meeting either pay a certain amount into an escrow account or deliver to Brookfield a letter of credit for that amount, which amount was to be loaned to Brookfield under a loan called the "PropCo Bridge Loan" and where such amount could be applied by Brookfield towards the payment of the scheme cash consideration to Healthscope shareholders under the proposed scheme of arrangement (see clause 10);
(i) if NWH REIT failed to either pay the relevant amount into escrow or deliver the letter of credit then Brookfield could terminate the Process Deed and could request that Healthscope exercise any applicable right to terminate the commitment deed and any sale contract which had not been completed (clause 10.6);
(j) if NWH REIT failed to execute the PropCo Bridge Loan documentation, then Brookfield could request that Healthscope exercise any applicable right to terminate the commitment deed and any sale contract which had not been completed (clause 11.4);
(k) in the event that a sale of a particular Healthscope property to MPT did not proceed, NWH REIT/NWH AssetCo had the right to elect to acquire that property (clause 12 and the definition of "Step Up Event"); and
(l) in the event that the implementation deed was terminated, then Brookfield could by notice in writing to NWH REIT terminate the Process Deed (clause 13.3).
67 The second of these interlocking agreements is the commitment deed dated 1 February 2019 between Healthscope, NWH AssetCo and NWH REIT (as guarantor). Under the commitment deed as ASIC has correctly summarised:
(a) by the date that the bidder's statement was to be dispatched, Healthscope had to procure that the Healthscope entity which was the proposed seller of the property to be sold to NWH AssetCo entered into a lease with Healthscope in respect of that property on certain terms (clause 6.1);
(b) by 1 business day before the scheme meeting, Healthscope was required to procure that the relevant Healthscope selling entity enter into a sale contract and the umbrella deed for each Healthscope property to be sold to NWH AssetCo (clauses 6.2 and 7.5);
(c) the settlement date for the contracts of sale was the next day after the implementation date of the Scheme;
(d) under the pro forma umbrella deed, if the implementation deed was terminated prior to the date of the scheme meeting then all of the sale contracts terminated on the same day as the implementation deed was terminated (clause 8.1).
68 ASIC has also made reference to the third and final interlocking agreement being the implementation deed which I have referred to earlier. Under this deed by way of summary:
(a) the Scheme will not be effective until each of the conditions in clause 3.1 are satisfied or waived. These conditions include FIRB approval for the NWH AssetCo sale and leaseback transaction. It is noted that under clause 3.3 of the Process Deed, Brookfield has undertaken to NWH REIT that it will not without NWH REIT's consent waive or amend the condition in the implementation deed regarding the FIRB approval; I would note that this FIRB approval has now been obtained;
(b) Healthscope must:
(i) comply with its obligations under the property transaction documents, being those documents relating to the sale and leaseback of the relevant properties;
(ii) promptly provide to Brookfield any material notice or other material communication under or in connection with the property transaction documents and any replacement property transaction documents;
(iii) comply with any reasonable direction from Brookfield to exercise rights under the property transaction documents including a notice to complete or terminate the property transaction documents;
(iv) not exercise, amend, vary or waive any rights of the relevant Healthscope group member under the property transaction documents without the prior written consent of Brookfield,
(clause 8.4(a));
(c) Healthscope is not obliged to take any action in respect of a sale arranged or proposed by Brookfield of some or all of the real estate assets of the Healthscope group, a refinancing arranged or proposed by Brookfield of the Healthscope group or the use of proceeds of such sale or refinancing if in the opinion of the Healthscope board (after taking legal and financial advice) such action would be a breach of the law or otherwise breach the fiduciary or statutory duties of the Healthscope board or would require the implementation of a transaction or change to the capital structure before the takeover bid or the scheme is unconditional (clause 8.4(i));
(d) Healthscope may terminate the implementation deed prior to the close of the offer period for the takeover offer if a majority of the Healthscope board change or withdraw their recommendation to Healthscope shareholders to vote in favour of the scheme or the capital reduction resolution, accept the offer or recommend a superior proposal. Were the implementation deed to be terminated by reason of a superior proposal (which superior proposal would presumably be to the potential benefit of Healthscope shareholders including NWH AssetCo assuming it had settled the forward derivative contract) then under the pro forma umbrella deed, the sale contracts under which the Healthscope properties were to be sold to NWH AssetCo would be terminated and NWH AssetCo would lose the benefit of the $1.3 billion property sale transaction.
69 Following Healthscope's announcement on 1 February 2019 of the proposed Scheme, concurrent takeover and the sale and leaseback transactions, the following announcements and notices were made or lodged by Brookfield and NWH REIT.
70 On 1 February 2019, NWH REIT issued an announcement saying, inter-alia, that:
(a) NWH AssetCo was not the registered holder of Healthscope shares but that it had a right to acquire up to 13.41% of Healthscope shares under a forward derivative contract entered into with Deutsche Bank;
(b) NWH AssetCo had a relevant interest in 8.74% of Healthscope shares being the number of shares in which Deutsche Bank then had a relevant interest.
71 On 4 February 2019, Brookfield lodged a notice of initial substantial holder which stated, inter-alia, that:
(a) the total number of votes attached to all of the voting shares in Healthscope or voting interests in the Scheme that the substantial holder or an associate had a relevant interest in on the date the substantial holder became a substantial holder was 8.74%;
(b) Brookfield did not consider that it had a relevant interest in any Healthscope shares, however, it had entered into an agreement with NWH REIT which may mean that it is taken to have an agreement or be acting in concert with NWH REIT in relation to the conduct of Healthscope's affairs; I have emphasised aspects of this proposition given that ASIC has sought to attach greater significance to this notice than is warranted; and
(c) as far as Brookfield was aware, NWH REIT was not the owner of shares in Healthscope but that it controlled NWH AssetCo and NWH AssetCo was taken to have a relevant interest under it arrangements with Deutsche Bank.
72 On 19 March 2019, NWH AssetCo/NWH REIT lodged a notice of change of interests of substantial holder which stated that it now had a relevant interest in 10.13% of Healthscope shares under the forward derivative contract with Deutsche Bank.
73 On 25 March 2019, NWH AssetCo/NWH REIT lodged a further notice of change of interests of substantial holder which stated that it now had a relevant interest in 11.55% of Healthscope shares under the forward derivative contract with Deutsche Bank.
74 Let me now refer to statements made in the draft transaction booklet and the independent expert's report which appear to be of relevance.
75 As to relevant interests held by BGH - AustralianSuper Consortium and NWH AssetCo/NWH REIT, it is noted that:
(a) on 9 November 2018, the BGH - AustralianSuper consortium disclosed to ASX that it had a relevant interest in shares representing voting power of 19.13% in Healthscope; and
(b) on 12 April 2019 Deutsche Bank had disclosed to ASX that it had a relevant interest in Healthscope shares. This represented voting power of 13.41% in Healthscope; correspondingly, as at 15 April 2019 NWH AssetCo/NWH REIT (and Brookfield) had an equivalent relevant interest in Healthscope shares.
76 As to the shares held by the BGH - AustralianSuper Consortium, the draft transaction booklet stated the following:
The Scheme can only proceed if, among other conditions, the requisite majorities of Healthscope Shareholders (being more than 50% in number present and voting and at least 75% of votes cast) vote in favour of the Scheme.
As at the date of the Implementation Deed, the BGH-AustralianSuper Consortium had agreed to vote its Healthscope Shares against any competing offer. The BGH-AustralianSuper Consortium held 19.13% of the total Healthscope Shares on issue as at the date of its substantial holder notice on 9 November 2018. This resulted in a risk that the Scheme may not be approved, and thus Healthscope Shareholders would be unable to benefit from Brookfield's higher offer. Whilst the agreement between the BGH-AustralianSuper Consortium was terminated on 31 March 2019, the voting intentions of the former consortium members are not known.
The simultaneous Takeover Offer can proceed with a lower threshold of acceptances from Healthscope Shareholders holding at least 50.1% of the shares (and the satisfaction or waiver of other conditions).
The Takeover Offer enhances the possibility of delivering value to Healthscope Shareholders by increasing the prospects of a successful Brookfield transaction should the Scheme not be approved by the requisite majorities of Healthscope Shareholders.
77 As to the BGH - AustralianSuper Consortium, it is noted further that on 2 April 2019, AustralianSuper Pty Ltd lodged a notice of change of interests of substantial holder which stated in effect that AustralianSuper Pty Ltd now had a relevant interest in 15.86% of Healthscope shares and that it ceased to have a relevant interest in other Healthscope shares by reason of the expiry on 31 March 2019 of the co-operation agreement between AustralianSuper Pty Ltd, BGH and other consortium entities.
78 Further, as to the relevant interest that NWH AssetCo has under its forward derivative contract with Deutsche Bank and the voting of shares dealt with under that contract in favour of the proposed Scheme, the independent expert's report states:
…NorthWest has a relevant interest in 13.41% of Healthscope shares as a result of a forward derivative contract entered into with Deutsche Bank AG, Sydney Branch ("Deutsche") on 8 May 2018, and, under a Process, Voting Commitment and Exclusivity Deed entered into with Brookfield BidCo, has an obligation to procure the vote of approximately 13.41% of Healthscope shares in favour of the Scheme and capital return and to procure the tendering of approximately 13.41% of Healthscope shares into the Takeover Offer.
79 Let me now turn to ASIC's arguments. ASIC submits that the rights of NWH AssetCo/NWH REIT are so dissimilar from the rights of other Healthscope shareholders that it is impossible for them to consult together with a view to their common interest at the one Scheme meeting. Accordingly, it says that there should be two separate classes and correspondingly separate meetings.
80 It has particularly emphasised the following matters.
81 First, NWH REIT/NWH AssetCo on or about 8 May 2018 acquired what it described as a strategic investment in Healthscope shortly after the 26 April 2018 BGH - AustralianSuper Consortium proposal to acquire Healthscope. In its 8 May 2018 announcement, NWH REIT expressly stated that an acquisition of Healthscope's underlying related real estate was of interest to it (and the entity Vital) in line with their long-term strategy to invest in healthcare real estate assets in the Australian market. In its 8 May 2018 announcement, it stated that it (and Vital) currently intend to pursue any potential Healthscope real estate acquisition jointly.
82 Second, following the announcement by Healthscope on 12 November 2018 of Brookfield's scheme of arrangement and takeover offer proposal, NWH REIT reiterated in announcements or notices issued on each of 20 November 2018 and 4 December 2018 the comments made in its 8 May 2018 announcement about pursuing any potential Healthscope real estate acquisition.
83 Third, under the Process Deed:
(a) NWH REIT has confirmed that its board has acknowledged that it believes that Brookfield facilitating entry into of the commitment deed and any "Step Up Commitment Deed" (if applicable) will provide significant benefits to NWH REIT and its stakeholders;
(b) NWH REIT has the right to direct Brookfield to exercise any right Brookfield has to terminate the implementation deed or reserve any right to terminate the implementation deed if Healthscope prior to the scheme meeting breached its obligations under the sale contracts (under which Healthscope was to agree to sell certain properties to NWH AssetCo/NWH REIT) in certain circumstances, which termination would bring an end to the Scheme and any benefits under it to the other Healthscope shareholders;
(c) NWH AssetCo/NWH REIT is obliged to vote the Healthscope shares the subject of the forward derivative contract in favour of the Scheme;
(d) NWH AssetCo/NWH REIT is obliged to vote the Healthscope shares the subject of the forward derivative contract against any competing proposal, where such a competing proposal may be a superior proposal and provide greater benefits to the other Healthscope shareholders;
(e) these voting undertakings of NWH AssetCo/NWH REIT cease to apply if 2 business days before the scheme meeting there is a relevant settlement delay in any property or properties proposed to be sold by Healthscope to NWH AssetCo under a sale contract and where NWH AssetCo would then have the right or ability to vote those shares against the Scheme, which given the percentage of votes able to be cast by NWH AssetCo could well, so ASIC submitted, be determinative of whether the Scheme is approved at the scheme meeting. ASIC says that this ability to vote otherwise if these circumstances occur 2 business days prior to the scheme meeting provides leverage in respect of Healthscope's obligations to deliver the relevant properties to NHW AssetCo and demonstrates, so ASIC says, the primacy of the sale and leaseback transaction to NWH AssetCo over the scheme consideration offered under the Scheme;
(f) NWH REIT/NWH AssetCo is obliged during the exclusivity period not to enter into any arrangement or agreement in relation to any competing proposal or participate in negotiations or discussions with any person regarding any competing proposal, where any such competing proposal may be a superior proposal and provide greater benefits to the other Healthscope shareholders;
(g) NWH AssetCo is obliged to make a loan to Brookfield which is to be applied towards payment of the scheme cash consideration to Healthscope shareholders under the Scheme and where if NWH AssetCo defaults in that obligation, Brookfield may request that Healthscope exercise any applicable right to terminate the commitment deed and any sale contract which has not been completed. ASIC says that this all demonstrates the primacy of the sale and leaseback transaction to NWH AssetCo and the extent to which NWH AssetCo is embedded in the Scheme and takeover transaction and is, to use ASIC's description, an "inside participant" in the Scheme and takeover transaction.
84 Fourth, the commitment deed contains the terms referred to above. And under that deed Healthscope is required by 1 business day prior to the scheme meeting to enter into the sale contracts for the sale of the relevant properties to NWH AssetCo, which obligation NWH AssetCo has the right to enforce.
85 Fifth, the implementation deed contains the terms referred to above. And under that deed FIRB approval for the NWH AssetCo sale and leaseback transaction is a condition precedent for the Scheme to become effective. Further, under the Process Deed, Brookfield has undertaken to NWH REIT/NWH AssetCo that it will not without their consent waive or amend the condition in the implementation deed regarding the FIRB approval. As I have said, that FIRB approval has already been obtained.
86 Sixth, Healthscope may terminate the implementation deed prior to the close of the offer period for the takeover offer if a majority of the Healthscope board change or withdraw their recommendation to Healthscope shareholders to vote in favour of the Scheme or the capital reduction resolution, accept the offer or recommend a superior proposal. It is said that this would result in the sale contracts with NWH AssetCo being terminated and whereby NWH AssetCo would lose the benefit of the $1.3 billion property sale transaction.
87 Seventh, Brookfield on 4 February 2019 lodged an initial substantial shareholder notice indicating it had entered into an agreement with NWH REIT which may mean that it is taken to have an agreement or be acting in concert with NWH REIT in relation to the conduct of Healthscope's affairs. As I have said, I consider that ASIC has exaggerated the significance of this notice.
88 Generally, ASIC submits that the differences in rights between NWH AssetCo (or its affiliates) and the other Healthscope shareholders mean that any community of interest between them has been displaced for the purposes of them considering and voting upon the proposed Scheme, where such consideration would include the merits of the Scheme itself in the absence of the broader transaction, whether there are any other potential proposals which might be more advantageous to shareholders, and the prospects of Healthscope delivering greater benefits to shareholders in the longer term by staying a listed company and pursuing its own sale and leaseback proposal. And it submits that the bundle of rights, benefits and associated obligations on the part of NWH AssetCo under the interlocking and interconnected agreements described above demonstrate the following matters.
89 First, NWH AssetCo is an inside participant in the proposed Scheme and is wedded to the proposed Scheme as a means of obtaining the benefits to be afforded to it under the sale and leaseback transaction. As such, ASIC says that it should not be attending at, and participating in, the same scheme meeting as the general body of Healthscope shareholders who are "outsiders" to the said interlocking and interconnected transaction documents and the transactions proposed thereunder. ASIC says that in this regard, the usual practice observed when a bidder holds shares in a target is for the bidder to be either excluded from the scheme meeting or for the bidder not to vote at the scheme meeting on the basis that the bidder, as an insider to the transaction and a proponent of the transaction, does not have a community of interest with the general body of shareholders. In this regard ASIC again makes reference to the notice of initial substantial holder lodged by Brookfield on 4 February 2019 and the subsequent revised notice on 1 March 2019 which refers to a potential "associate" relationship between Brookfield and NWH AssetCo. Again, I consider ASIC's position to be overstated.
90 Second, ASIC says that the primary focus of NWH AssetCo is the sale and leaseback transaction and not the amount it will receive for any shares under either the Scheme or the takeover offer; it is noted that it is not presently the holder of the shares under the forward derivative contract.
91 Third, ASIC says that the acquisition of NWH AssetCo's strategic investment in Healthscope seems to have been a means to an end, with the end being the sale and leaseback transaction and not any amount to be paid for the Healthscope shares under any change of control proposal.
92 Fourth, ASIC says that NWH AssetCo has in effect a closed mind to any competing and perhaps superior proposal or to any long term benefits that may flow to shareholders from Healthscope remaining a stand-alone listed company. Accordingly, ASIC submits that NWH AssetCo does not have a community of interest with the other Healthscope shareholders to whom these are relevant and material matters in considering the proposed Scheme. It says that NWH AssetCo (including affiliates such as NWH REIT) should not attend the same scheme meeting as the other Healthscope shareholders and participate in discussions with the other Healthscope shareholders given the primacy of NWH AssetCo's focus on the sale and leaseback transaction; it says that its participation in any discussions on the merits of the proposed Scheme will be through that prism.
93 Fifth, ASIC says that given the parcel of votes to be cast in favour of the Scheme by NWH AssetCo, and the fact that shareholders are not required to attend or vote at the Scheme meeting, if NWH AssetCo or its affiliates are able to attend the same Scheme meeting as the other shareholders, its voting parcel as a percentage of votes actually cast on the Scheme resolution may very well be instrumental in determining whether or not the Scheme is passed.
94 Now before turning to some legal themes there are a number of difficulties for ASIC's position arising out of the relevant documents and transactions, even accepting as I do that a single shareholder can constitute a separate class if it has differing interests from the general body of shareholders such as to make it impossible for them all to consult together with a view to their common interest.
95 First, NWH AssetCo is not presently a member of Healthscope and may not become one by the Scheme meeting, although ASIC said that this was most unlikely not to occur. Presently NWH AssetCo only has a right to acquire Healthscope shares from Deutsche Bank. The terms of the share forward transaction arrangements nominate a date for settlement on 8 May 2020 or any earlier date. It is trite to observe that voting rights are only exercisable by the person listed in Healthscope's share register as the holder (see s 250E and the definition of member (s 231(b))).
96 Further, in terms of the position vis-à-vis Deutsche Bank, as pointed out by Healthscope, even though NWH REIT has agreed with Brookfield BidCo to procure NWH AssetCo to vote the relevant shares in favour of the Scheme, it is unclear how enforceable that is against Deutsche Bank, if at all. Moreover, even if it is so enforceable, that does not deny that Deutsche Bank may still be the registered holder at the time of the Scheme meeting.
97 In summary, if NWH AssetCo is not now a member and may not be at the time of the Scheme meeting, and the position as to the enforcement of rights against Deutsche Bank is unclear, then to separate a class now or at the Scheme meeting in the terms suggested by ASIC is problematic.
98 Second, the sale and leaseback arrangements are not a condition precedent to the Scheme. But the obligation to complete arises if the Scheme becomes effective or if the takeover bid becomes unconditional. ASIC has emphasised in the present context the significance of whether a side deal is a condition precedent to the Scheme. If it is, so ASIC submits, this may support stipulating a separate class for the member with the side deal. But as Healthscope points out, strictly the sale and leaseback arrangements are not a condition precedent to the Scheme. Further, theoretically the Scheme could be implemented even if the sale and leaseback arrangements did not complete. Now it may be accepted that the relevant FIRB approval concerning such arrangements is a condition precedent, but two points. First, that condition has now been satisfied. Second, the nature of that condition precedent is qualitatively quite different from the sale and leaseback arrangements themselves being conditions precedent in terms of ASIC's point and context. But in any event, even if the sale and leaseback arrangements were conditions precedent, that is only one matter to consider and does not dictate that there needs to be separate meetings.
99 Third, ASIC has submitted that NWH REIT can "call for the Implementation Deed to be terminated". But NWH REIT has no such unqualified right. Under clause 3.3 of the Process Deed, NWH REIT may only direct Brookfield to exercise a right of termination which Brookfield BidCo has under the implementation deed. But Brookfield BidCo's termination rights are circumscribed, and require it to establish a material breach by Healthscope of the implementation deed, or that a member of the Healthscope board has engaged in conduct which effectively withdraws support for the Scheme or the takeover bid, or a repudiation by Healthscope of the sale and leaseback agreements. Further, NWH REIT's ability to direct Brookfield to exercise such a right only arises where Healthscope has breached an obligation under the sale and leaseback agreements and where such breach has a material impact. So considered, I do not think that ASIC's point has much force.
100 Fourth, NWH AssetCo's rights and interests under the sale and leaseback arrangements do not depend upon it becoming a Healthscope shareholder.
101 Fifth, ASIC has made the point that NWH REIT and NWH AssetCo are wedded to the Scheme and will vote for it come what may to obtain the benefits under the sale and leaseback arrangements. But of course this ignores the fact that NWH REIT and NWH AssetCo can still get such benefits if the Scheme fails but the takeover bid becomes unconditional (assuming acceptances at or above 50.1%).
102 Sixth, one of the usual concerns in considering whether to separate shareholders into separate classes is that it might give a minority group of shareholders an effective and unwarranted veto over the Scheme. But that is not a concern in the present case. NWH REIT/NWH AssetCo is to procure Deutsche Bank to vote in favour of the Scheme. But another potential veto problem could arise given the prospect that the BGH - AustralianSuper Consortium with voting power of approximately 19% of the share capital of Healthscope could vote against the Scheme. If NWH AssetCo is placed in a separate class, that would considerably and inappropriately enhance BGH - AustralianSuper Consortium's veto power who would be left in the main class of shareholders. Now strictly this may not be directly relevant to whether I order the class separation of NWH AssetCo, but it makes me cautious in separating out NWH AssetCo unless I strictly need to, particularly as, after all, I can address any relevant concerns at the approval hearing once I know the outcome of the vote and voting patterns, and whether the votes of NWH AssetCo/Deutsche Bank made any relevant difference.
103 Seventh, ASIC has also attached significance to NWH AssetCo's/NWH REIT's undertaking to vote against a competing proposal. But for there to exist a competing proposal capable of being voted on, the voting commitment itself that has been given is likely to have terminated. This is because the voting commitment only applies during the exclusivity period, which ends if the directors of Healthscope cease to recommend the Scheme and/or Brookfield ceases to pursue it. As Healthscope points out, for a competing proposal to get to the stage of being voted on despite the exclusivity provisions in the implementation deed, the stage will have been reached where the directors of Healthscope cease to recommend the Scheme and/or Brookfield ceases to pursue it, and the voting commitment will have expired. So analysed, ASIC's point becomes hollow.
104 Eighth, ASIC has made some other points that I should briefly touch on. I reject its suggestion that NWH AssetCo is not interested in the Scheme consideration but rather only the sale and leaseback transactions such that it would lack commonality with other shareholders. Rather it seems to me that the latter is an add on rather than a substitution, and that the overlap of interest fortifies rather than denies commonality. Further, as to ASIC's point that there would be a tension in interests concerning competing proposals, I have disposed of this point in the preceding paragraph. Finally, as to tension in interests concerning Healthscope staying listed and pursuing its own sale and leaseback arrangements, the fact that there might be diversity of views and competing collateral motivations does not of itself destroy commonality such as to make it impossible to consult together. Indeed, consultation is only worthwhile where diverse views are expressed and vigorously debated with the best decision then reached through this competitive tension.
105 Let me now turn to some of the relevant legal principles.
106 The well-established test for identifying a class for the purposes of a scheme of arrangement is that expressed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. Sovereign Life Assurance concerned a creditors' scheme of arrangement, but the test enunciated by Bowen LJ has been adopted ever since in members' schemes (Re Foster's Group Limited [2011] VSC 93 at [15] per Ferguson J). Bowen LJ expressed the class test in the following terms:
…The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest…
107 Accordingly, the question for present purposes is whether the rights of NWH AssetCo (or its affiliates) are so dissimilar from the rights of the other Healthscope shareholders as to make it impossible for them to consult together with a view to their common interest. Or put another way, do the differences in rights between NWH AssetCo (or its affiliates) and the other Healthscope shareholders mean that any community of interest between them has been displaced for the purposes of them considering and voting upon the proposed Scheme, where such consideration would include the merits of the Scheme, whether there are any other potential proposals which might be more advantageous to shareholders and whether there are prospects of Healthscope delivering greater benefits to shareholders in the longer term by staying a listed company and pursuing its own proposed sale and leaseback proposal?
108 Now Mr Philip Crutchfield QC for Healthscope contends that doctrinal purity demands that at the first court hearing I should only decide issues of class on the strict basis of considering the legal rights of shareholders qua shareholders against Healthscope and any alteration to those rights as a shareholder under the Scheme. And to the extent that ASIC has stepped outside the relevant teaching, its position is heretical. Mr Crutchfield QC has prayed in aid the three pronged approach of Bathurst CJ in First Pacific Advisors LLC v Boart Longyear Ltd (2017) 320 FLR 78 at [80]. But there is a danger in taking such a short form exposition in a judge's reasons, decontextualizing it and then divining its meaning only by reference to a textual analysis of the words used.
109 Healthscope has also referred to other authorities endeavouring to make good the point that the existence of separate commercial or other interests is not relevant to the class issue, including rights not derived from legal rights against the scheme company. More generally it points out that the question of class definition does not involve a general inquiry into the commercial motivations of members for voting in favour of or against a scheme, a proposition which I accept.
110 Healthscope says that applying Bathurst CJ's approach, if NWH AssetCo was a Healthscope shareholder, its rights against Healthscope would be the same as all other shareholders' rights against Healthscope, and those rights would not be differently affected by the Scheme. The implementation of the Scheme would extinguish all of those rights in return for the Scheme consideration.
111 It says that any potential benefit that NWH AssetCo might obtain under the sale and leaseback agreements does not impact class composition, but rather is a matter for me to consider at the approval hearing as part of my general fairness discretion. And to facilitate my consideration of this at the second court hearing, Healthscope has undertaken to tag any votes of NWH AssetCo and its associates cast at the Scheme meeting, and provide a voting report to me for the purposes of the second court hearing which will detail how NWH AssetCo and its associates voted.
112 For my part, I consider that Healthscope's approach to class definition is too narrow. I prefer a more flexible and commercial approach.
113 First, even accepting that there may be no differential treatment of different classes of shareholders under the Scheme itself, as is the present case, that does not preclude separate classes being stipulated. The text of s 411(1) refers to "members or any class of them". The text leaves open how class delineation or characteristics may be stipulated. The inquiry is not confined to whether there are separate classes stipulated under the scheme company's constitution or whether a class can only be stipulated by reference to differing treatment or outcomes arising under the terms of the scheme of arrangement instrument itself concerning shareholders rights qua shareholder.
114 Second, I do not doubt that a shareholder who has entered into or has the benefit of a pre-scheme agreement with the scheme company which confers upon the shareholder a benefit which is more than de minimis, and particularly where the entry into of that agreement is a condition precedent to the scheme, may potentially justify that shareholder being placed in a separate class. Equally, if the vote of that shareholder has been purchased as part of the pre-scheme agreement that may warrant considering whether it should be put into a separate class.
115 Third, and indeed as Mr Greg Ahern for ASIC pointed out, not even a pre-scheme agreement with the scheme company may be necessary. If a takeover is being achieved through a scheme of arrangement with the bidder having purchased say 19.9% of the target's shares (the target being the scheme company), the bidder may be considered to be in a separate class.
116 Fourth, and more generally as to side deals, there is no general rule or approach to side deal cases. Each case, from the perspective of determining class composition, depends upon its own facts.
117 Fifth, for completeness, I should say that I do not consider that what I have said is significantly inconsistent with Black J's approach to applications of this type. First, I agree with what he said in In the matter of Pulse Health Limited [2017] NSWSC 651 at [13] that the fact that there is a pre-scheme agreement by a shareholder to vote shares in favour of a scheme is not sufficient of itself to warrant a separate class (see also In the matter of Westfield Corporation Limited [2018] NSWSC 584 at [39]). Second, in his discussion in Re Boart Longyear Ltd (2017) 121 ACSR 328 at [58], his Honour rejected the narrowness of the submission put to him that relevant rights were not class creating merely because they were not created by the relevant schemes. He readily accepted that pre-scheme agreements that were conditions precedent to a scheme and closely connected with an entity's participation in a scheme could be relevant to class delineation although he ultimately accepted that no separate delineation was necessary. That is consistent with what I have said above. Bathurst CJ on appeal did not need to engage on this question. Third, Black J at [69] said that no separate meeting was required if a participant was to receive a collateral benefit. Again, I have no difficulty with that conclusion either if that is all that is involved.
118 Ultimately one has to be careful of stipulating rigid categories or hard and fast rules, although some cases may be clear one way or the other in terms of the necessity for separate delineation. This is because the "impossible…to consult together with a view to their common interest" criterion requires a commercial evaluative judgment to be made of the transactions, circumstances and consequences said to justify the delineation, in the context of the particular scheme and its effect overall. Moreover, if the asserted discriminating feature can be dealt with at the second court hearing, there is less of a need to be definitive at the first court hearing in terms of class definition except in a clear class. Moreover one should be cautious about stipulating separate classes. It can easily and wrongly empower a minority view; I can of course easily deal with excessive or oppressive majority influences at the second stage as Finkelstein J has pointed out relating to the Opes Prime creditors scheme. If the minority view against a scheme has been put into a separate class, you may have unnecessarily created a power of veto if for the particular scheme all classes need to achieve the requisite statutory majorities for the thing to work. Further, if the minority view against a scheme has been left with the general body but you have put in a separate class a shareholder who would have voted in favour, then you have relatively increased the voting power of the minority in the general body making it easier to defeat the scheme. As I say, all of this suggests that one should be cautious in separating classes except in a clear case. And as Finkelstein J rightly said in effect in Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 at [66] one should not be too enthusiastic in taking a salamied approach. A "practical business-like approach" must be adopted. Otherwise you are locking in unnecessary downside, particularly when you do not need to given the second stage approval scrutiny that can take place.
119 Sixth, my attention has been drawn to Tronex Limited, in the matter of Tronex Limited [2019] FCA 312 upon which ASIC heavily relied. But a number of matters should be noted. First, the matter was unopposed with the scheme company serving up the separate classes. Second, the separation of the classes was justified given the fact that there were separate Class A and Class B shareholders differently affected by the scheme propounded such that O'Callaghan J rightly concluded at [35] "that a reasonable view could be taken that the rights of the Class B Shareholder will be altered by the Schemes in a material sense and in a manner which will not apply to Class A Shareholders". Accordingly, separation was justified without the need to consider the pre-scheme agreement that his Honour went on to deal with at [36] and formed part of his conclusion at [38]. Third, it was not drawn to his Honour's attention that what was submitted to him and recorded at [29] was not fully consistent with the authorities in terms of the conclusion that "they must vote in a separate class" (my emphasis). Indeed, I note that in Damien T and Rich A, Schemes, Takeovers and Himalayan Peaks (3rd ed, Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2013) at 367 it was said:
If the relevant member who entered into either a pre-scheme option or voting agreement were to receive, as consideration for entering into the agreement, a benefit which is neither de minimis or plainly immaterial and which is not available to other members, that member should, depending on the nature of the benefits, either be placed in a separate class or have their votes discounted or disregarded on the grounds of an extraneous interest.
120 So, the nature of the benefits have to be considered. Moreover, one option is not to order separate meetings but to leave the matter to the second court hearing approval stage. Moreover I note that the authors at this point did not deal with whether the pre-scheme agreement was a condition precedent to the scheme.
121 I need say nothing further on the legal principles. I accept ASIC's submissions that the points that it has advanced are relevant to class definition. But where I part company from ASIC is that I do not consider that the points that it has made require separate classes. Accepting, as it has submitted, that there is flexibility in the matters that can be considered, equally there is flexibility in Bowen LJ's test which after all has to be practically and commercially applied, and also with an eye to the considerable powers that I have at the second court hearing. Indeed, the flexibility of Bowen LJ's test implicitly requires the flexibility that ASIC has contended for in relation to the matters that can be considered.
122 In my view even if the sale and leaseback agreements are considered for class purposes, they do not have the consequence that it would be impossible for NWH AssetCo and Healthscope shareholders to consult together with a view to their common interests in relation to the Scheme. In particular, the different legal rights and obligations which NWH AssetCo has by reason of the sale and leaseback agreements do not displace the community of interest which would otherwise exist between it and all other Healthscope shareholders in considering the merits of the proposed Scheme. Their areas of difference do not outweigh their areas of common interest such as to make it impossible for them to consult together. Moreover NWH AssetCo's additional commercial motivation and interest has been made fully transparent in the transaction booklet.
123 Further, the matters set out at [94] to [104] further inform my view that it is not appropriate to order separate meetings.
124 In my view it is appropriate to leave these matters for further consideration at the approval stage.
125 Indeed on any view, if ASIC's point is good, I can at the second court hearing discount or discard the votes of NWH AssetCo and its affiliates. I can take the view at the second court hearing that these entities in fact voted for the Scheme not because it benefits them as members of the class generally but because it benefits them in some other capacity. As such I could take the view that their votes did not reflect the view of the class as such although they may have been strictly counted for the purposes of achieving the relevant statutory majorities. I could, accordingly, discount or discard such votes for the purposes of determining whether I should approve the Scheme. Healthscope has agreed to provide me with a report at the second court hearing which will set out the relevant voting patterns and enable me to consider the effect of any voting by NWH AssetCo or its affiliates. Moreover, to do so at that time may in any event demonstrate that these votes did not make a difference to the otherwise outcome in any event. In other words, the Scheme vote by other members may carry the day in any event.
126 In summary I will not order separate meetings.