3641/05 The Hills Motorway Ltd v UBS AG
3642/05 Hills Motorway Management Ltd v UBS AG
JUDGMENT
1 HIS HONOUR: These proceedings were heard together. Each plaintiff applies under s 459G of the Corporations Act 2001 (Cth) for an order setting aside a creditor's statutory demand. Hills Motorway Management Ltd ("Hills Management") is the responsible entity of the Hills Motorway trust.
2 In January 2005, shares in the Hills Motorway Ltd ("Hills") and units in the Hills Motorway trust were jointly quoted as stapled securities on the Australian Stock Exchange. On 31 January 2005, Transurban Investments Pty Ltd announced a takeover offer for all of the stapled securities in Hills Motorway Group. Transurban offered 1.47 Transurban stapled securities for each Hills stapled security.
3 The defendant, UBS AG was engaged to provide advice and assistance to Hills and Hills Motorway Trust. On 4 March 2005, it entered into an agreement with the plaintiffs which set out the terms on which it would act. The first paragraph of the letter provided:
" The purpose of this letter is to set out the terms on which the Hills Motorway Ltd and Hills Motorway Trust (together the "Company") has engaged UBS AG … to act as its sole financial adviser … to provide advice on, and assist in, takeover response preparation and responding (including by approaching potential competing offerors) to any proposal by a third party to acquire or merge with all, or substantially all, of the Company or any of its businesses (including the approach by Transurban Group in January 2005) (the "Transaction"). "
4 The letter then set out the services which UBS agreed to provide to "the Company" and the "Company's" obligations to UBS.
5 Clause 3 provided that "the Company agrees to pay UBS the following fee(s)." There was then set out a formula for calculating UBS's fee. In the event of the Transaction terminating without proceeding to closing or no offeror acquiring more than 50% of the Company's ordinary securities on issue, UBS was to be paid a fee of $6,880,000.
6 Clause 3 provided that if the Transaction proceeded to completion, the Company would pay a fee to UBS comprising a base fee of $3,880,000 plus a Completion Fee calculated in accordance with certain formulae. If the Transaction was completed by a Transurban scrip exchange offer, UBS was to be paid an additional $380,000 for every 1% increase in the ratio of Transurban securities to Company securities above 1.47:1. In other words, if the Transaction were completed by a Transurban scrip offer of 1.55:1, being an increase of more than 5% but less than 6% above the ratio of 1.47, UBS would receive a fee of $5,780,000. Clause 3(b) provided that in the case of a Transaction that was a cash offer, the Completion Fee would be 1.25% of the Premium Consideration. Clause 3(d) provided that if the Transaction included cash and non-cash consideration, including scrip, the Completion Fee would be 1.25% of the Premium Consideration. Hence, a fee of 1.25% of the Premium Consideration was payable if any part of the Transaction included cash consideration.
7 The agreement was signed by Mr Hopman as "managing director" and by Mr Collier as "chief financial officer", both of whom signed on behalf of the "Company". As the Hills Motorway trust was not a legal entity, the contracting party other than Hills must have been Hills Management.
8 On Friday 8 April 2005, a meeting was held of directors of Hills and Hills Management. Representatives of UBS and lawyers for Hills were also present. The minutes record that Mr Davis of UBS advised that there was a strong indication from the bulk of key institutional investors that they wanted the Hills board to negotiate a better offer from Transurban in value terms, and that a cash component would strengthen the offer. A document prepared by UBS was tabled outlining two proposed revised offer structures. Mr Davis recommended that both structures be put to Transurban. Each board member indicated that he would be prepared to recommend to Hills investors that they accept either of the revised offer structures. UBS was authorised to put the revised offer structures to Macquarie Bank, who were advising Transurban. The two revised offer structures were that Transurban should be asked to provide 1.55 Transurban securities for each Hills security, or 1.47 Transurban securities for each Hills security plus 50 cents in cash. At the closing price on 7 April 2005 for Transurban securities, the former proposal had a higher value. The values of both proposals would fluctuate, but not identically, according to movements in the price of Transurban securities.
9 The two revised offers which Hills sought to extract from Transurban were considered by Transurban. On the morning of 11 April 2005, the Hills board was advised that a holder of about 9% of the Hills securities had sold its stake to a hedge fund. It was expected that control of Hills would pass quickly. The board met on Monday 11 April 2005. Mr Murray, the chairman of Hills, advised the board that Macquarie, the adviser to Transurban, had indicated that the Transurban board was prepared to recommend an offer of 1.47 securities with a cash component of 25 cents. The minutes of the 11 April 2005 board meeting record that Macquarie had advised that Transurban was not prepared to adopt either of the proposed offer structures, but would be prepared to couple the offer of 1.47 Transurban securities for each Hills security with a cash component of 20 to 25 cents, and that if the board did not recommend the offer with a modest additional cash component to Hills' investors, Transurban would simply announce the increase without reference to the Hills directors. The meeting resolved that following the conclusion of the meeting, Mr Murrayshould put the revised proposal to the chairman of Transurban, Mr Cox, and otherwise engage in negotiations with Mr Cox with a view to extracting a revised offer comprising an offer exchange ratio of 1.47 and as high a cash component as possible, but at least 25 cents.
10 On 12 April 2005, Transurban made a revised offer of 1.47 shares in Transurban plus 25 cents in cash for each HMG security. The Hills and Hills Management boards formally recommended that investors accept Transurban's increased offer.
11 The effect of the inclusion of a 25 cent cash component for every one HMG security was to increase the fee which would otherwise have been payable to UBS by $5,580,000, or possibly $5,885,080. UBS claims that pursuant to the agreement of 5 March 2005, Hills and Hills Motorway owe it fees of $11,234,080. There was no dispute at the hearing before me that that was the fee payable under the agreement of 4 March, 2005. Hills and Hills Management say that had Transurban's offer been an all scrip offer rather than including a 25 cent cash component, the fee would have been $5,349,000.
12 The takeover was successful. The Hills Motorway Group is now controlled by Transurban. Hills and Hills Management have not paid UBS's fee. On 13 April 2005, UBS forwarded separate invoices to Hills and to the Hills Motorway trust. It claimed $5,617,040 from each of them. This was odd as it is clear from the letter of 5 March 2005 that Hills and Hills Management are jointly liable for the debt of $11,234,080, rather than each being severally liable for half of that debt.
13 On or after 3 June 2005, statutory demands were made on each of Hills and Hills Management. The demands were in accordance with the prescribed form. Each demand claimed that the debtor owed UBS $5,617,040, being the amount of the debt described in the Schedule. The description of the debt in the Schedule was:
" Invoice No. … dated 13 April 2005, for fees for providing financial advice and other assistance to the debtor in accordance with the engagement letter between the debtor and creditor dated 4 March 2005 "
14 Hills and Hills Management claim that they do not owe those debts. Leaving aside any offsetting claim, they jointly owe a debt of $11,234,080. They do not severally owe debts of $5,617,040. UBS says that it is not open to the plaintiffs to take this point as it is not identified as an issue in the affidavits filed within 21 days in support of the summons. UBS also says that the statutory demands described the debt as the fees owed under the engagement letter of 4 March 2005 and that it does not matter that each demand understates by half, the debt owed by Hills and Hills Management. Even if that is a defect, it is not one which causes substantial injustice. Nor is there any other reason why the demand should be set aside because of any such defect. (Corporations Act s 459J).
15 The affidavits filed for the plaintiffs within 21 days of the service of the statutory demand included a contention that Hills and Hills Motorway Management Ltd have an offsetting claim in the sum of $5,580,000. The basis of the claim was summarised in paragraph 16 of the affidavit of Mr Collier as follows:
" Hills and Management allege that UBS breached the engagement letter, was negligent and engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive under the Corporations Act 2001 and the Australian Securities Investments Commission Act 2001. Hills and Management allege they lost the chance to conclude their defence to the takeover on terms where they would be jointly liable to pay $5,580,080 less to UBS than they are contractually liable to do so upon the terms of the engagement letter. "
16 There then follows the description of the events to which I have referred above. The affidavits and supporting exhibit also disclosed that on the morning of 11 April 2005, Mr Collier, a director of Hills, was advised by UBS that he should advise the board about the impact a scrip and cash offer would have on UBS's fees if a scrip and cash bid was recommended by the directors. The minutes of 11 April 2005 record that Mr Collier noted that if the offer was revised to comprise a combination of scrip and cash, this would result in a substantial increase in the fees due to UBS.
17 It also appears from the affidavits filed within 21 days of the service of the statutory demand, that Transurban says that if the Hills board had requested that its scrip and cash offer be translated into a equivalent scrip offer, it would have accepted the proposal. Mr Burns, corporate counsel of Transurban, deposed that had Transurban been advised that by making a scrip and cash offer, Hills Motorway Group would incur an additional cost of approximately $5,000,000, Transurban would most likely have made a scrip only offer.
18 UBS says that these affidavits do not disclose any ground to establish that there is a genuine offsetting claim. Nowhere does it appear how UBS might have breached its contract, or been negligent, or been guilty of misleading and deceptive conduct. Rather, the evidence filed in support of the applications to set aside the statutory demands shows that on the morning of 11 April 2005, and whilst the Hills board was still in negotiations with the Transurban board, the board was told, if they needed telling, that if Transurban made a scrip and cash offer, this would result in a substantial increase in fees due to UBS. Hence, it was said by UBS that it was impossible to identify the ground upon which it would be contended that UBS engaged in misleading and deceptive conduct.
19 The affidavits did not raise any contention that there was anything improper in the fees which Hills and Hills Management agreed to pay UBS, including the structuring of the fee so that any cash component of an offer, however small, could result in a very substantial increase in UBS's fees, which might bear no relationship to the work UBS was to do, and no necessary relationship to additional value which might be provided to the holders of securities of Hills Motorway Group.
20 After the expiry of the period of 21 days following the service of the statutory demands, the plaintiffs filed further affidavits. Mr Bishop of Macquarie Bank deposed to having told Mr Davis and Mr Sweetman of UBS on Friday 8 April 2005, that Transurban was indifferent to whether the increase was in cash or scrip but would go for the lower offer. Hearsay evidence was also given of discussions with major investors in Hills Motorway Group for the purpose of seeking to establish that they were indifferent to whether a cash component was included in the offer, or would have preferred an all scrip offer. Mr Collier, in a later affidavit, swore that Mr Davis did not disclose to the directors of Hills and Hills Management that Macquarie had told him that the directors of Transurban were indifferent as to whether a scrip only, or a scrip plus cash offer, should be made. Nor, according to Mr Collier, did Mr Davis disclose that he had been told or believed that Transurban would select the recommendation that would enable it to acquire Hills's securities at the lowest total cost.
21 In an affidavit filed outside the 21-day period, the plaintiffs corrected the quantum of their off-setting claim. Mr Burns deposed that in calculating the off-setting claim of $5,580,080 referred to in his first affidavit, he had erroneously subtracted an amount of $275,000. The true amount of the off-setting claim was said to be $5,855,080.
22 These later affidavits were objected to on a number of grounds, including the ground that on the principle established in Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452 and cases which have followed it, the grounds to be relied upon to set aside the statutory demand must be identified in the affidavits filed within the 21-day period. Although it is open to a plaintiff to supplement its initial affidavits by supplementary evidence relevant to an area of controversy which has been identified in the initial affidavits, later affidavits, unless filed and served within the 21-day period, cannot be relied upon to identify a new ground for contending that the debt is genuinely disputed or raises a genuine offsetting claim. (Energy Equity Corporation Ltd v Sinedie Pty Ltd (2001) 166 FLR 179 at 185; Process Machinery Australia Pty Ltd v ACN 057 260 590 Pty Ltd [2002] NSWSC 45 at [21]-[22]).
23 It appeared to me that the objection to the admissibility of the affidavits based on this principle, could only properly be assessed in final submissions.
24 It was submitted for the plaintiffs that it was an implied term of UBS's retainer that it use reasonable care and skill and that it report back to the board the substance of its discussions with Macquarie. The plaintiffs contended that: