Macquarie Group Limited, in the matter of Macquarie Group Limited [2010] FCA 1507

REASONS FOR JUDGMENT 1 The plaintiffs in this proceeding have applied to the Court for orders under s 1322(4) of the Corporations Act 2001 (Cth) (the Corporations Act) in relation to the possible effect of s 259C of the Corporations Act. Section 259C(1) relevantly provides that the issue or transfer of shares of a company to an entity it controls is void except in circumstances specified within that sub-section. Section 259C(2) provides that the Australian Securities and Investments Commission (the Commission) may exempt a company from the operation of s 259C. 2 In circumstances that I shall describe briefly, there have been transfers or issues of shares of one or other of the first two plaintiffs to others of the plaintiffs in circumstances other than those specified in s 259C(1). There was no relevant exemption under s 259C(2) in force in relation to those issues or transfers. It would follow that the relevant issues or transfers would be void by the operation of s 259C. 3 However, s 1322(4) of the Corporations Act provides that the Court may make an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under the Corporations Act or in relation to a corporation is not invalid by reason of any contravention of the provision of the Corporations Act or a provision of the constitution of the corporation. Nevertheless, under s 1322(6), the Court must not make an order under s 1322(4) unless, relevantly, the Court is satisfied that the act, matter, thing or proceeding is essentially of a procedural nature, that the person or persons concerned in or party to the contravention or failure acted honestly or that it is just and equitable that the order be made and that no substantial injustice has been or is likely to be caused to any person. Section 1322(4) authorises the making of orders under that provision that have the effect of nullifying what otherwise would be the consequence of s 259C (see Westpac Banking Corporation and Ors (2004) 53 ACSR 288). 4 The first plaintiff, Macquarie Group Limited (Macquarie Group) has, since November 2007 been the non-operating holding company and ultimate listed parent for the Macquarie group. Macquarie Bank Limited (Macquarie Bank) was formerly the listed parent of the Macquarie group, although is now a subsidiary of Macquarie Group. The third plaintiff, Macquarie Investment Management Ltd, is a wholly owned subsidiary of Macquarie Bank and acts as the responsible entity for registered managed investment schemes and as a fund manager. The fourth plaintiff, Macquarie Life Limited (Macquarie Life), is a wholly owned subsidiary of Macquarie Bank and is a life insurance company registered with and supervised by the Australian Prudential Regulation Authority (APRA). The fifth plaintiff, MQ Specialist Investment Management Limited (MQSIML), is also a wholly owned subsidiary of Macquarie Bank and is a full service alternative fund manager. The sixth plaintiff, MQ Portfolio Management Limited (MQPML), is also a wholly owned subsidiary of Macquarie Bank and acts as the responsible entity for registered managed investment schemes. The seventh plaintiff, Bond Street Custodians Limited (Bond Street), provides custodial and depository services to related entities and external clients and is also a wholly owned subsidiary of Macquarie Bank. The eighth plaintiff Belike Nominees Pty Limited (Belike) provides custodial and depository services to related entities. The ninth plaintiff, Macquarie Funds Management Pty Limited (Macquarie Funds) is a specialist trustee company. 5 Various exemptions have been granted from time to time by the Commission under s 259C of the Corporations Act. It is not necessary, for present purposes, to recount the details of those exemptions. However, one of the exemptions imposes a condition that the aggregate percentage of voting shares in Macquarie Group, in respect of which its controlled entities have the power, or control voting or disposal, must not exceed 5 per cent of Macquarie Group's voting shares. 6 Prior to the issue of Macquarie Group shares under an employee share plan retention scheme in 2010, controlled entities' aggregate percentage of voting shares in Macquarie Group was significantly below the five per cent threshold referred to in the Commission's exemption. In March 2010, the Macquarie Employee Retained Equity Program (the Program) was established. Bond Street act as trustee in relation to a number of portfolios for the Program. Each portfolio in the Program is recorded in a system with unique portfolio code and quantity held. 7 On 10 May 2010, Bond Street commenced acquiring shares in Macquarie Group as trustee of the Program. Because of a procedural error, one of the portfolios in the Program was not correctly flagged in the system for calculating daily holdings. The Risk Management Group of Macquarie Group, which is responsible for disclosures to the Australian Securities Exchange (the ASX) and relevant offshore stock exchanges, was not informed of information so as to enable it to aggregate the corporate positions for reporting purposes. 8 On 1 June 2010, the aggregate percentage of voting shares in Macquarie Group, in respect of which its controlled entities have the power to control voting or disposal, exceeded 5 per cent of the total voting shares. However, those responsible for reporting did not become aware of the excess until 30 June 2010. Following identification of the excess on 30 June 2010, Macquarie Group took appropriate steps to notify the ASX and undertook a review of the conditions of the exemptions issues by the Commission. 9 It was discovered that one trade had happened in breach of the condition on 2 July 2010, when Macquarie Life Australian Enhanced Equities Fund acquired 1024 shares by way of a dividend re-investment plan as a result of a corporate action election made on 14 May 2010. At that point Macquarie Group's aggregate holdings was less than 5 per cent. Following that incident, a further review was undertaken of all the conditions of the exemptions, as a result of which it became apparent that there had been non-compliance with conditions of other exemptions on earlier occasions. 10 The matters were identified by the Risk Management Group on 5 July 2010. Investigations indicated that, between 1998 and 2010, Macquarie Life's statutory funds acquired and sold a substantial number of shares. During that period it purchased 1,087,479 shares and sold 1,043,720 shares. It has also been determined that MQPML has, from time to time, acquired shares which it was understood could be acquired within one of the exemptions referred to in s 259C(1). There is now some concern that that exemption may not apply in the circumstances. Careful examination and investigation have been carried out by the Macquarie Group to ensure that all possible instances of issues and transfers referred to in s 259C have been ascertained. 11 Steps have now been taken by Macquarie Group and its subsidiaries to ensure compliance with the reporting and other conditions applicable to the exemptions granted by the Commission. On 29 July 2009, Macquarie Life, on behalf of Macquarie Life Australian Enhanced Equities Fund voted in favour of a resolution relating to the re-election of Mr H.K. McCann as a director of Macquarie Group. That vote was in contravention of a condition of a relevant exemption granted by the Commission. The breach related to the exercise of voting rights with respect to some 45,644 shares which represented 0.2 per cent of the total number of votes cast in favour of the resolution. Since the resolution was passed with a majority of 99.52 per cent, the voting rights exercised did not have any impact on the outcome of the resolution. Investigations have been undertaken to determine whether there have been any other instances where voting rights have been exercised that ought not to have been, but no other instances have been discovered. 12 The further investigations that have been carried out have disclosed that there were gaps from time to time in the exemptions granted by the Commission between 16 October 1999 and 3 November 1999. During that period, Macquarie Life acquired some 5,500 shares. The need to seek relief in relation to that acquisition was not perceived at the time. 13 Macquarie Group makes use of multilayered trust structures with respect to its offerings of investment products. Subsidiaries of Macquarie Group have, over a considerable period, acquired shares as custodian for other Macquarie entities that are responsible entities or trustees of managed investment schemes or superannuation funds. It had been understood, within the group, that s 259C(1)(b) was applicable to such arrangements. Section 259C(1)(b) excludes, from the operation of s 259C(1), an issue or transfer to an entity as trustee where neither the company or any entity it controls has a beneficial interest in the trust other than a beneficial interest that satisfies the conditions set out in that provision. 14 It is now thought that s 259C(1)(b) may not be applicable because it may be arguable that the responsible entity or trustee holds a beneficial interest in the trust arising from the custody arrangement or fund to fund investment notwithstanding that it holds the interest on trust for investors. Macquarie Bank and Macquarie Group had not considered that it was necessary to seek exemption from the Commission to permit such custodial arrangements, although it appears that other organisations have, in fact, obtained exemptions from the Commission in relation to such arrangements. 15 Having regard to the complexity of transactions involving Macquarie Bank and Macquarie Group shares, it is inordinately difficult to identify precisely what transfers or issues may have occurred. If s 259C of the Corporations Act were to operate to avoid transfers and issues of shares in which the third to the ninth plaintiffs have acquired an interest during the period in question, investors in the relevant funds and investment platforms could suffer substantial disadvantage. That disadvantage may also extend to members of the public who have been parties to transactions with the plaintiffs, including acquisitions of shares in Macquarie Bank or Macquarie Group, as the case may be, effected at official meetings of prescribed financial markets. It is virtually impossible to identify the other parties to such transactions in order to deal with the consequences of the transactions being void. 16 In mid-July 2010, Macquarie Group wrote to the Commission and to APRA informing each of those bodies of its intention to make this application to the Court under s 1322 of the Corporations Act. The correspondence outlined the nature of the circumstances, which I have briefly described. Macquarie Group wrote again to the Commission and to APRA enclosing copies of the originating process and affidavits that have given rise to this hearing. 17 The originating process makes clear that this hearing was fixed for today at 2:15 pm. The Commission indicated that it neither supported nor opposed the application and did not intend to appear at the hearing. I have been informed that a representative of APRA informed the solicitors for the plaintiffs that APRA had no intention to be represented today. When the matter was called, there was no appearance for any other person. In all of the circumstances, I am satisfied that it is appropriate to grant relief to the plaintiffs in relation to any issue or transfer of shares that might otherwise be voided by the operation of s 259C. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.