In the matter of Ardent Leisure Limited trading as Ardent Leisure Limited; Ardent Leisure Management Limited in its capacity as the responsible entity of the Ardent Leisure Trust [2018] NSWSC 1665
By way of background, securities in the Ardent Leisure Group are stapled securities listed on Australian Securities Exchange Limited ("ASX"). Under the terms of the constitutions of ALL and the Trust, each share in ALL is stapled to a unit in the Trust, and vice versa, to form an Ardent Leisure Group stapled security which is quoted and traded on ASX. Ardent Leisure Group is the owner and operator of leisure and entertainment assets. The group's businesses are divided into two divisions. The first comprises 41 indoor entertainment centres across 16 states in the United States which are referred to as the "Main Event" business. The second comprises an Australian theme parks business, comprising the Dreamworld, WhiteWater World and SkyPoint theme parks and attractions on the Gold Coast. Ardent Leisure Group has divested several other businesses, including health club, marinas and bowling and entertainment divisions, and the group's remaining business is concentrated in ALL rather than in the Trust.
ALL and ALML identify the purposes of the Part 5.1 Scheme and the Trust Scheme (together, "Schemes") as being to effect a reorganisation and simplification of the corporate structure of the Ardent Leisure Group, to which it refers as the "Proposal."
ALL and ALML rely on an affidavit dated 28 September 2018 of Mr Crispian Lynch, a partner in the firm of solicitors who acts for them. That affidavit refers to the operations of ALL and outlines the Proposal and an internal restructuring ("Proposed Restructure") that is contemplated following implementation of the Schemes, to which I refer further below. An affidavit dated 5 October 2018 of Mr Christopher Todd, the Group General Counsel of ALL and ALML, addresses the background to the proposed transactions, the capital structure of ALL, the terms of the proposed transactions, the proposed treatment of Ineligible Foreign Securityholders (as defined) to which I will refer below, and a guarantee that is to be provided by a proposed new holding company, Ardent Leisure Group Limited ("NewCo") in respect of ALL's liabilities arising from a recent incident at Dreamworld that resulted in the death of four guests to which I also refer below. That affidavit also refers to the explanatory statement for the Schemes, the directors' recommendation in respect of the Schemes, the manner in which proposed scheme meetings would be conducted, the manner in which scheme materials would be sent to securityholders, the several conditions precedent to the Schemes as set out in section 10.2 of the explanatory statement and the process which was adopted for verification of the securityholder booklet.
An affidavit dated 5 October 2018 of Mr Tapan Parekh, a partner in Deloitte Corporate Finance Pty Ltd ("Deloitte"), refers to Mr Parekh's experience and to the independent expert report prepared by Deloitte in respect of the proposed transactions and confirms Mr Parekh holds the opinions expressed in that report and has not become aware of any facts and circumstances since the date of that report which would cause him to change those opinions. An affidavit dated 8 October 2018 of Mr Gavin Sultana, who is a director of Ernst & Young Transaction Advisory Services Ltd, refers to a draft independent limited assurance report prepared by Ernst & Young, in respect of historical financial information and pro forma historical financial information in respect of the proposed transactions. Mr Sultana confirms that he holds the opinions expressed in that report and that he has not become aware of any facts and circumstances since the date of that report which would cause him to change those opinions.
An affidavit dated 4 October 2018 of Dr Gary Weiss, the non-executive chairman and a non-executive director of ALL and ALML, indicates his consent to act as chair of the scheme meetings. An affidavit dated 8 October 2018 of Mr David Haslingden, a director of ALL and ALML, indicates that he is willing to act as chair of the scheme meetings if Dr Weiss is unable or unwilling to do so.
An affidavit dated 8 October 2018 of Mr D'Andreti, a partner in the firm acting for ALL and ALML in the proceedings, refers to dealings with the Australian Securities and Investments Commission ("ASIC") in respect of the draft explanatory statement for the Schemes and regulatory relief provided by ASIC and ASX in respect of the Schemes and refers to an Implementation Deed between NewCo, ALL and ALML and a Deed Poll executed by NewCo in favour of each eligible Ardent Leisure Group securityholder in relation to NewCo's performance of its obligations under the Schemes. A further affidavit dated 9 October 2018 of Mr D'Andreti refers to the proxy form which is proposed to be included with the explanatory statement for the Schemes.
[2]
The nature of the proposed transactions
As I noted above, the Proposal involves unwinding the existing stapled security structure of the Ardent Leisure Group and incorporating and listing NewCo as a new holding company for the group. The underlying businesses and assets and liabilities of the Ardent Leisure Group do not change under the Proposal. The Schemes provide for existing stapled securityholders (other than Ineligible Foreign Securityholders who would receive cash rather than NewCo shares under a sale facility to which I refer below) to receive one share in NewCo in exchange for each stapled security they hold, so that they will continue to hold the same proportionate ownership interest in the Ardent Leisure Group following implementation of the Schemes.
The Part 5.1 Scheme between ALL and its ordinary shareholders provides for shareholders to transfer all of their shares in ALL to NewCo in consideration for the issue of one NewCo share for each ALL share. As Mr Jackman points out, the effect of the Part 5.1 Scheme will be to make ALL a wholly owned subsidiary of NewCo. The judicial advice application in respect of the Trust Scheme concerns a proposed amendment to the constitution of the Trust to effect a "trust scheme" of the kind described in Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107 and in Guidance Note 15 issued by the Takeovers Panel. If passed, the proposed amendments to the Trust's constitution would provide for the transfer of all units in the Trust to NewCo in consideration for the issue of one NewCo share for each unit in the Trust. ALL and ALML also propose that, immediately following implementation of the Schemes, there would be a 2:1 share consolidation of NewCo shares so that each eligible securityholder would then hold one NewCo share for each stapled security they held prior to implementation of the Schemes. NewCo will seek admission to the official list of ASX and the existing directors of ALL and ALML will also be the directors of NewCo.
The Implementation Deed between ALL, ALML and NewCo sets out the procedures to be followed to implement the Proposal and the Proposed Restructure, to which I refer further below, and Mr Jackman draws attention to the several steps that would be taken to implement the Schemes. On the Implementation Date, ALL shares would be "de-stapled" from Trust units by determinations made by the directors of ALL and ALML pursuant to the ALL and Trust constitutions and as authorised by resolutions to be put to extraordinary general meetings of ALL shareholders and unitholders in the Trust respectively to be held on the same day as the Part 5.1 Scheme meeting. Four resolutions are proposed to give effect to the Proposal. The first resolution is a resolution approving the Part 5.1 Scheme that is to be considered by ALL shareholders at a scheme meeting to be convened under s 411(1) of the Corporations Act. Three further resolutions are to be considered by concurrent extraordinary general meetings of securityholders, comprising a general meeting of ALL shareholders and a general meeting of Trust unitholders. Those three resolutions are the "de-stapling" resolutions to be put before ALL shareholders and unitholders in the Trust; a resolution of unitholders in the Trust to amend its constitution in accordance with a Trust constitution Deed Poll to give effect to the Trust Scheme; and a resolution of unitholders in the Trust under item 7 of s 611 of the Corporations Act to authorise NewCo's acquisition of all the units in the Trust. It is proposed that those extraordinary general meetings would be held immediately following conclusion of the Part 5.1 Scheme meeting ordered by the Court.
NewCo would then issue the NewCo shares comprising the consideration for the Part 5.1 Scheme to securityholders (other than Ineligible Foreign Securityholders) in return for their shares in ALL and would also issue the NewCo shares comprising consideration for the Trust Scheme to securityholders (again, other than Ineligible Foreign Securityholders) in return for their units in the Trust. NewCo shares that would otherwise be issued under the Part 5.1 Scheme and Trust Scheme to Ineligible Foreign Securityholders would instead be issued to a sale agent appointed by the Ardent Leisure Group for the purpose of sale and remission of proceeds to the Ineligible Foreign Securityholders according to their entitlements. A two for one consolidation of NewCo shares would then occur, resulting in each eligible securityholder holding one NewCo share for every one stapled security they held prior to implementation of the Schemes and, upon the issue of the Newco securities, NewCo must register the former Ardent Leisure Group securityholders as the holders of NewCo shares. The obligations of NewCo under the Schemes are supported by the Deed Poll given by NewCo in favour of ALL shareholders and unitholders in the Trust (Implementation Deed cl 4.8; D'Andreti 8.10.18, [16]).
Following implementation of the Schemes, and under the Proposed Restructure, NewCo's holdings in ALL and the Trust would be transferred to a newly-incorporated wholly owned subsidiary of NewCo ("Aust HoldCo") and the overseas assets of ALL will be transferred to a second newly-incorporated wholly owned subsidiary of NewCo ("Foreign HoldCo"). Both Aust HoldCo and Foreign HoldCo would be Australian proprietary companies. The Ardent Leisure Group intends to carry out the Proposed Restructure in the first half of 2019. There is, of course, a risk that the Proposed Restructure would not be implemented, which is addressed in the explanatory statement provided to securityholders concerning the Schemes.
The directors of ALL and ALML have unanimously recommended that securityholders vote in favour of the Schemes, in the absence of a superior proposal (securityholder booklet [6.6]). Deloitte's independent expert report also expresses the opinion that the Proposal and Proposed Restructure are in the best interests of securityholders in the Ardent Leisure Group, on the basis that their advantages outweigh their disadvantages. That report was amended, in the course of the hearing, to indicate Mr Parekh's view that, even if the Proposed Restructure did not occur, the advantages of the Proposal outweighed its disadvantages and that the Proposal was in the best interests of the Ardent Leisure Group and its securityholders. The securityholder booklet also contains information as to the tax implications of the Proposal.
[3]
Applicable principles in respect of the Part 5.1 Scheme
Mr Jackman draws attention to several well-established principles applicable to whether to convene a scheme meeting under s 411 of the Corporations Act. The Court may order a scheme meeting to be convened and approve the draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the explanatory material will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the securityholder booklet and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20].
There is evidence that ALL is a Part 5.1 body (Ex CPL-1, pp 1-70) and the proposed scheme is an arrangement within the meaning of s 411 of the Act. There is no reason to doubt that the scheme booklet provides proper disclosure to securityholders. I have referred to evidence of a verification and due diligence process above. The securityholder booklet was also amended in the course of the hearing to clearly distinguish between the Proposal, which is the subject of the Schemes, and the wider Proposed Restructuring that may be implemented after the Schemes, and to more clearly distinguish the advantages of the Proposal, on the one hand, and of the additional steps that would be taken in the Proposed Restructuring. The securityholder booklet was also amended, in the course of the hearing, to disclose that, to the extent that the Proposal allows a higher proportion of earnings to be applied to fund growth of the Ardent Leisure Group's US business and make further capital investments, and NewCo's directors exercise their discretion to take that course, then future distributions may be lower than would otherwise be the case. It seems to me that that amendment adequately discloses that possibility, which is the converse of a perceived advantage of the Proposal in allowing the flexibility for increased capital expenditures going forward. ALL and ALML have committed themselves to propounding the Schemes under the Implementation Deed (Ex AD-1, pp 267-298) and there is no reason to doubt the Schemes are bona fide and properly proposed.
By letter dated 8 October 2018 (Ex A2), ASIC advised the solicitors for ALL that it had been given at least 14 days' notice of the hearing of the application and had had a reasonable opportunity to examine the terms of the Part 5.1 Scheme and draft explanatory statement and did not currently propose to appear to make submissions or intervene to oppose the Part 5.1 Scheme at the first hearing. ASIC reserved its position as to a statement under s 411(17)(b) of the Corporations Act that it had no objection to the Part 5.1 Scheme until the second Court hearing, in accordance with its usual practice. As Mr Jackman points out, the Court will address that question at that second court hearing.
As Mr Jackman also points out, the Court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of an application that is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commissions v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. Mr Jackman also draws attention to the observations of French J in Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44], cited with apparent approval in Re CSR Ltd (2010) 183 FCR 358 at [58], that:
"… It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given: Re ACM Gold Ltd (1992) 34 FCR 530 ; 107 ALR 359; 7 ACSR 231; 10 ACLC 573 (O'Loughlin J). The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. So to do would be to "introduce burdensome and to a large extent ineffectual consideration at this interlocutory stage": Re Jax Marine Pty Ltd [1967] 1 NSWR 145 at 148 (Street J).
The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further."
Mr Jackman also points out that, at the first hearing, the Court is concerned not with whether final approval should be given to the scheme, but whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for securityholders' consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211 at [23]. Mr Jackman also points out that the Court is not required to be satisfied that no better scheme could have been proposed, and the question is instead whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re DUET Finance Ltd above at [14]. I will address several specific issues in respect of the Schemes below. Nothing has emerged from the hearing to suggest that the Part 5.1 Scheme is not properly put to securityholders for their consideration or could not be approved at the second court hearing if it receives the requisite securityholder approvals.
[4]
Applicable principles in respect of the Trust Scheme
As Mr Jackman points out, registered managed investment schemes are not Part 5.1 bodies for the purposes of the scheme provisions in Part 5.1 of the Corporations Act. However, it is now common in a "trust scheme" for a responsible entity to seek judicial advice in a two-stage process that is analogous to that adopted in company schemes under Part 5.1 of the Corporations Act: Re Mirvac Limited above; Re Macquarie Goodman Funds Management Ltd (2004) 52 ACSR 194; Re Abacus Funds Management Ltd above; Re Macquarie Capital Alliance Ltd [2008] NSWSC 745; (2008) 67 ACSR 484; Re Macquarie Communications Infrastructure Group [2009] NSWSC 487; Re DUET Management Company 1 Limited [2013] NSWSC 817; (2013) 95 ACSR 34; Sydney Airport Holdings Limited [2013] NSWSC 1665.
At a first court hearing, the responsible entity will typically seek judicial advice that it is justified in propounding resolutions to implement the scheme and in proceeding on the basis that proposed amendments to the constitution of the registered managed investment scheme to implement the trust scheme would be within the powers of alteration conferred by that document and s 601GC of the Corporations Act: Re Mirvac Ltd above at [47]; Re Macquarie Capital Alliance Ltd above at [19]; Re DUET Management Company 1 Ltd above at [9]. Mr Jackman also points out that s 601GC(1)(a) of the Corporations Act confers a wide power of alteration of the constitution of a managed investment scheme: Re Mirvac Ltd above at [44]-[47]; Elders Forestry Management Ltd v Seels [2012] VSC 287 at [72]; Re DUET Management Company 1 Limited above at [10]. It is also well-established that there is no implied limitation on the Court's power to give advice pursuant to s 63 of the Trustee Act or on the discretionary factors that the Court may take into account: Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar (2008) 237 CLR 66 at [55]-[59].
I will deal with several specific issues below. I am otherwise satisfied that ALML, as responsible entity of the Trust, would be justified in proceeding on the basis that the making of the proposed amendments to the Trust's constitution in connection with the Trust Scheme, following the requisite approval by unitholders, would be within its powers, including the power of alteration conferred by the Trust's constitution and s 601GC of the Corporations Act.
[5]
Potential liabilities in respect of the Dreamworld incident
Mr Jackman also properly recognises that, on 25 October 2016, four guests died on a ride at Dreamworld, and a coronial inquest into those deaths is presently taking place. ALL recognises that, as the operator of Dreamworld, it may be subject to a prosecution under Queensland workplace health and safety legislation, although no such prosecution has to date been brought. ALL has also received claims from families and other affected persons, many of which have been settled by its insurer, and ALL submits that further claims may be dealt with in a similar way. Mr Jackman submits that the implementation of the Schemes will not affect the assets or liabilities of ALL or the Trust. In any event, NewCo, which will become the new holding company of the Ardent Leisure Group, has given an irrevocable guarantee in respect of ALL's liabilities that may arise from these events (securityholder booklet [6.8], Todd 5.10.18 [22]). It does not seem to me that implementation of the Schemes has any apparent adverse impact upon any claims of third parties arising from those events.
[6]
Treatment of Ineligible Foreign Securityholders
Mr Jackman points out that there are a small number of foreign securityholders in Ardent Leisure Group, who are resident outside Australia and to whom, by reason of foreign securities law requirements, there would be difficulty in issuing new securities. It is proposed that the securities that would otherwise be issued to those persons in respect of the Schemes be issued to a sale agent appointed by ALL and ALML and the proceeds of sale of the relevant shares will be paid to those securityholders. The securityholder booklet sets out the criteria under which a securityholder is treated as an Ineligible Foreign Securityholder; indicates that such a securityholder will not receive shares in NewCo; and also discloses that Ineligible Foreign Securityholders will receive the proceeds of the sale of the NewCo shares conducted by the sale agent to which they would have been entitled to receive under the Schemes. Mr Jackman submits, and I accept, that Ineligible Foreign Securityholders do not constitute a separate class for the purposes of the scheme meeting: Re Hills Motorway Ltd [2002] 43 ACSR 101 at 104; Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 at [8]. This matter does not give any reason not to convene the meeting in respect of the Part 5.1 Scheme or give the advice sought in respect of the Trust Scheme.
[7]
Treatment of performance rights
Mr Jackman points out that the Ardent Leisure Group has certain performance rights on issue under a Deferred Short Term Incentive Plan and Long Term Incentive Plan for Ardent Leisure Group executives, in addition to stapled securities which are subject to the Part 5.1 Scheme and Trust Scheme. These performance rights are not the subject of the Schemes and it is proposed that, following implementation of the Schemes, NewCo will adopt equivalent employee equity schemes to the existing Deferred Short Term Incentive Plan and Long Term Incentive Plan and holders of existing performance rights will be invited to receive NewCo shares on exercise of their performance rights in place of stapled securities in the Ardent Leisure Group. This matter is addressed in sections [11.9] and [11.11] of the securityholder booklet. Mr Jackman submits, and I accept, that securityholders who also hold performance rights under the Deferred Short Term Incentive Plan or Long Term Incentive Plan do not constitute a separate class for the purpose of the scheme meeting: Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]. This matter also does not give any reason not to convene the meeting in respect of the Part 5.1 Scheme or give the advice sought in respect of the Trust Scheme.
[8]
Deemed warranty
The Part 5.1 Scheme provides, in cl 5.6, for a deemed warranty by securityholders that their shares in ALL will be free from encumbrances, and a similar warranty is deemed to be given under the Trust Scheme that securityholders' units in the Trust will be free from encumbrances (proposed article 32.11 of the Trust's constitution as set out in Annexure D to the securityholder booklet). The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [57]-[63]; Re DUET Management Company 1 Ltd above at [23]. This matter also does not provide reason not to order the convening of the Part 5.1 Scheme meeting or give the advice sought in respect of the Trust Scheme.
[9]
Orders
The orders proposed by ALL and ALML provided for despatch of the securityholder booklet by electronic means to those securityholders who have an electronic address for the purposes of receiving notification of notices of any meeting, and I am satisfied that such an order may be made: Re Alinta Ltd (No 2) [2007] FCA 1378. The proposed orders partly exclude the operation of r 2.15 of the Supreme Court (Corporations) Rules which provides that, subject to any direction to the contrary, regs 5.6.11 to 5.6.36A of the Corporations Regulations 2001 (Cth) apply to court ordered meetings, and the corresponding provisions in the Insolvency Practice Rules (Corporations) 2016 (Cth).
If the Part 5.1 Scheme is approved by the Court and the Court also gives the judicial advice sought at the second hearing in connection with the Trust Scheme, NewCo intends to rely on the Court's approval and advice for the purpose of qualifying for exemption from the registration requirements of the Securities Act 1933 (US), provided for by s 3(a)(10) of that Act, in connection with the issue of NewCo shares under the Part 5.1 Scheme and Trust Scheme. Mr Jackman points out, and I accept, that recognition of this matter by the Court is a requirement of their qualifying for the exemption and that further consideration of the application of the exemption, if required, is a matter for the second court hearing: Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [11]-[20]; Re Simavita Holdings Limited [2013] FCA 1274 at [50]-[52].
For these reasons, I made orders in accordance with those proposed by ALL and ALML at the hearing on 9 October 2018.
[10]
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Decision last updated: 02 November 2018