Mincom Limited v EAM Software Finance Pty Ltd [2008] NSWSC 323 | Case summary

1 In these proceedings, each of the three plaintiff companies (which I shall call "MCPA", "MCPB" and "MPCM") seeks separate relief in relation to a composite proposal involving all of them. 2 Each of MCPA and MCPB applies for orders under s 411(1) of the Corporations Act 2001 (Cth) for the convening of a meeting of its members to consider a scheme of arrangement between the particular company and its members. Each such scheme is part of the wider composite proposal. 3 In the case of MPCM, the application is an application under s 63 of the Trustee Act 1925 for judicial advice. The advice sought, at this point, is advice to the effect that MPCM, as a trustee and responsible entity, is justified in placing a particular proposal before a meeting of holders of units in a registered managed investment scheme with a view to their considering a resolution to alter the constitution of the managed investment scheme to accommodate the proposal. If the resolution were passed, MPCM would seek further judicial advice before proceeding to implement the proposal. 4 The concerted action by the three companies is explained by the fact that the proposal relates to stapled securities each of which consists of one share in the capital of MCPA, one share in the capital of MPCB and one unit of the managed investment scheme known as the Macquarie Private Capital Trust (or "MPCT") of which MPCM is the responsible entity. 5 The proposal entails transfer of all the stapled securities to BSPEL Australia Limited ("BSPEL"), a Guernsey company, in return for a cash price. The proposal is intended to be carried into effect, as to the separate elements of the stapled securities, by the scheme of arrangement between MCPA and its members, the scheme of arrangement between MCPB and its members, and the operation of a new mechanism inserted into the constitution of the MPCT, with each of these measures being so structured that none takes effect except in company with both of the others. The general approach has been taken in earlier cases. 6 Several issues were canvassed before me and it is appropriate that I make observations about some of them. 7 I mention first a matter directly concerning the part of the overall proposal that involves the managed investment scheme. There will be resort, in that connection, to the power to amend the scheme's constitution or, more particularly, the aspect of that power mentioned in s 601GC(1)(a) of the Corporations Act allowing alteration of the constitution by special resolution of the members of the scheme. The alteration will involve the insertion into the constitution of provisions mirroring those of the two schemes of arrangement. 8 One unit holder ("MISL"), as trustee of a trust, holds about 48 percent of the stapled securities and thus the same proportion of the units of the managed investment scheme. The responsible entity, MPCM, and the 48 percent unit holder, MISL, are both subsidiaries of Macquarie Group Limited. Another subsidiary of Macquarie Group Limited, MIML, has entered into an arrangement to continue to provide investment management services to the stapled security entities under the ownership of BSPEL, assuming that its acquisition under the proposal of the whole of the stapled securities is completed. 9 MISL has informed MPCM and the companies proposing the two schemes of arrangement that it intends to vote in favour of the acquisition proposal. The explanatory statement to be circulated to security holders, not unnaturally, refers to this. 10 The circumstances I have briefly described have given rise to some apprehension as to the applicability of s 253E: "The responsible entity of a registered scheme and its associates are not entitled to vote their interest on a resolution at a meeting of the scheme's members if they have an interest in the resolution or matter other than as a member. However, if the scheme is listed, the responsible entity and its associates are entitled to vote their interest on resolutions to remove the responsible entity and choose a new responsible entity." 11 It was suggested that any impact of this provision might be relevant to the exercise of the discretion conferred by s 411(4)(b) and to the further judicial advice that MPCM might seek, but I indicated that I did not wish to be addressed on it at this stage. One does not know whether MISL will in fact give effect to its stated intention to vote in favour of the proposal. If it does not vote, no issue will arise. If it does vote, the meaning and implications of s 253E will have to be addressed in light of that fact and the circumstances as they then exist. For the court to consider the matter now would be to embark on a speculative exercise and to give an advisory opinion divorced from any established factual situation. Any question arising under s 253E can be addressed when MPCM seeks further judicial advice, if it needs to be addressed at all. 12 The second point I mention is that the consideration to be paid for the stapled securities is variable, in that it is a stated cash sum subject to adjustment in accordance with a fixed formula. One element of the calculation involves the NAV, or net asset value, of each stapled security at the end of the calendar month immediately preceding the day which is ten business days before the meetings of security holders. The amount will thus be fixed, at the latest, ten business days before the meetings and may be fixed at an earlier time. The explanatory statement to be sent to security holders makes it clear that written notice of the calculated amount will be given to security holders in such a way that they have it either with the explanatory statement or, at least, in sufficient time before the meeting to allow considered decision making. The form of notification is exhibit 4. The fact that the formula is fixed and timely notification will be made means that this matter need not be of concern. 13 The third matter concerns the inclusion in the schemes of arrangement of a warranty to which each security holder will become bound that the holder's securities are not encumbered. The provision is in terms corresponding with those considered by Mansfield J in Re Hostworks Group Limited [2008] FCA 64. I quote paragraph [41] of his Honour's judgment: "Under cl 7.3(a) of the Implementation Agreement, each scheme participant is deemed to have warranted that all of its shares in Hostworks which are transferred under the scheme will be free from all mortgages and encumbrances. Fryberg J in Re Mincom Ltd (No 3) (2007) 25 ACLC 207, regarded an almost identical deemed warranty clause as onerous and unreasonable and "calculated to catapult unsuspecting shareholders who have not read the small print of the arrangement in the schedule to the explanatory statement into a state of breach of warranty": at [21]. In Re APN News & Media Ltd 62 ACSR 400, Lindgren J disagreed with the approach of Fryberg J: see at [59]-[62]. I respectfully agree with and adopt the views of Lindgren J. I share the understanding of his Honour that the purpose and effect of such a clause is simply to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged. The amount of the damages payable for breach of the warranty would be equal to the amount required to discharge the encumbrance. I note that the approach of Lindgren J has been preferred in subsequent cases, including by Robson J in Re Coles Group Ltd [2007] VSC 389 at [45]; by Lander J in Re Adelaide Bank Ltd [2007] FCA 1582 at [33]; and by Gyles J in Orion Telecommunications Ltd [2007] FCA 1389 at [9]." 14 In view of the preponderance of opinion reflected in several cases mentioned at the end of this passage and the detailed consideration given to the matter by Lindgren J in Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400, I am satisfied that the inclusion of the warranty provision should not cause me to withhold the relief now sought. 15 The fourth matter very properly raised by Mr Oakes SC upon this ex parte application is whether MISL, in the scheme of arrangement context, should be considered to constitute a single class, with all other members constituting the other class. The circumstance that gives rise to this possibility has already been mentioned, namely, that it is intended that MIML, a related company of MISL, will continue to provide investment services to the stapled security entities under their new ownership if the proposal is successfully brought to a conclusion. The possibility that MISL should be regarded as in a class of its own comes, it appears, from an apprehension that the arrangement between MIML and BSPEL involves a collateral benefit destroying MISL's ability to consult together in a common interest with other holders of the stapled securities. Mr Oakes submitted that this fear is unfounded. 16 I agree that, as matters now stand, there is no reason to think that a separate class exists. There is evidence from Lonergan Edwards Limited that the base management fee that will apply under the arrangement is consistent with the observed level of base management fees and that the performance fee basis is less attractive than the current basis and the market generally. It is thus indicated that MIML will not be receiving any special benefit. This allays any concern that MISL might be motivated by a desire to see advantage conferred on its related company rather than by the considerations common to the holders of the stapled securities as a general body. This is reinforced by the evidence given by Mr Terry about the way MISL has approached the matter as a whole. The welfare of MIML does not appear to have entered into the equation at all. 17 The possibility that a separate class might ultimately be found to have existed ought therefore not deflect the court at this point from letting the proposal go forward on the existing basis. The rights and interests of MISL do not appear to be relevantly different from those of other security holders and there is no apparent reason to think that it cannot participate together with them in a common interest. 18 The fifth matter concerns exclusivity. The scheme implementation agreement contains a "no shop" promise by MCPA, MCPB and MPCM given to BSPEL, being a promise not to solicit any competing acquisition proposal in respect of the stapled securities. In addition, there is a "no talk" promise, also given to BSPEL, which is a promise not to engage in negotiations or discussions with anyone who proposes a competing acquisition proposal. The latter is subject to fiduciary carve-outs to ensure that directors remain free to discharge their duties notwithstanding their company's contractual promise. Both promises operate only for a confined period, being, I am satisfied, a period necessary to bring the current proposal to its conclusion in the ordinary course. 19 Santow J said of such arrangements in Re Arthur Yates and Company Limited [2001] NSWSC 40; (2001) 36 ACSR 758, that they should be for no more than a reasonable period, capable of precise ascertainment, should not have the capacity to inhibit due discharge of directors' duties and should be given adequate prominence in the materials sent to members. An aspect of this has been refined in later cases to the extent that the fiduciary carve-out is required only in relation to "no talk" agreements. Reference may be made to the observations on these matters generally of Lindgren J in Re APN News & Media Ltd (above), Robson J in Re Coles Group Limited [2007] VSC 389 and Mansfield J in the Hostworks case to which I have referred. The provisions in the present case conform to the standards emerging from the cases. 20 Allied with these exclusivity provisions are the break fee provisions: "(a) Reimbursement Fee : MPCG must pay BSPEL a reimbursement fee of $1,155,000 if: (i) the Independent Directors change, withdraw or modify their unanimous recommendation in relation to the Schemes otherwise than where permitted to do so under the SIA, and BSPEL terminates the SIA; (ii) MPCG is in breach of its 'No Shop' or 'No Talk' obligations and BSPEL terminates the SIA as a consequence; (iii) a Competing Transaction is announced prior to the Scheme Meetings and is completed within 270 days of being announced; or (iv) BSPEL terminates the SIA as a result of a MPCG Prescribed Occurrence. (b) Reverse Break Fee : A reverse break fee of $1,155,000 is payable by BSPEL to MPCG if MPCG terminates the SIA for a material breach by BSPEL." 21 Four things should be said about these provisions. First, the evidence shows that the quantum was actually negotiated between the parties, with proposals and counter-proposals being put. It thus appears to represent commercial recognition of a pre-estimate of loss or wasted cost on each side. Second, that quantum is consistent with the Takeovers Panel Guidance Note 7, being some 1 percent of the equity value of the enterprise. Third, the structure is not such that the fee is payable if the security holders exercise their right to reject the proposal by their votes. Fourth, there is nothing before the court at this point to suggest that the fee provisions have the capacity to operate coercively upon security holders pondering whether and, if so, how to exercise their votes. 22 There is a very helpful analysis of the issues relevant to "break fee" provisions of this kind in the judgment of Lindgren J in Re Bolnisi Gold NL (No 2) [2007] FCA 2078. The proposal before me seems to fit the criteria there discussed. The fee provisions should not cause the court to withhold the relief now sought. 23 The fifth matter to be mentioned is the question whether, at this stage (that is, upon the applications under s 411(1) for orders for the convening of meetings), the court should come to a view on the question whether, in terms of s 411(17)(a), each of the interlinked schemes of arrangement has been "proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6". Section 411(17) is as follows: "The Court must not approve a compromise or arrangement under this section unless: (a) it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or (b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement; but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b)." 24 In Mincom Limited v EAM Software Finance Pty Ltd [2007] QSC 207; (2007) 61 ACSR 266, Fryberg J referred to the well-established principle that, at the stage of deciding whether to make orders for the convening of meetings, the court should satisfy itself that, on the material then available to it, the scheme is such that approval of it by the court is likely to be granted if the required voting majority is obtained and the application for approval is unopposed. Having regard to that principle, his Honour saw it as necessary or appropriate for the applicant to adduce evidence at the convening stage on the question posed by s 411(17)(a). 25 That approach is somewhat at odds with the approaches that had been taken to that point. These were generally as outlined by Gyles J in Orion Telecommunications Limited [2007] FCA 1389 at [5]: "Counsel has correctly summarised what needs to be proved as follows: (a) The plaintiff is a 'Part 5.1 body'. (b) The proposed scheme is an 'arrangement' within the meaning of s 411. (c) There has been proper disclosure to members. (d) The scheme is bona fide and properly proposed. (e) The Australian Securities and Investments Commission (ASIC) has had reasonable opportunity to examine the proposed scheme and explanatory statement, to make submissions and has had 14 days' notice of the proposed hearing date of the first court hearing - see generally s 411(2). (f) Any other procedural requirements have been met, eg r 3.2 as to nomination of chairperson for scheme meeting." 26 Subsequently in Lonsdale Finance Group Limited [2007] VSC 394, Robson J referred to a submission as follows: "Section 411(17) is, like section 411(4), directed to the court's jurisdiction (or power) to approve a scheme. There has never been a necessity to require an applicant for an order for meetings to satisfy a preliminary onus in relation to the likelihood that the necessary majority would vote in favour of the scheme thus giving the court jurisdiction to approve it. Such matters were expressly excluded from preliminary consideration by Street CJ in FT Eastment which was a decision handed down at a time when s 411(17) did not exist. With respect to Fryberg J, the same approach should be taken to s 411(17). 27 A submission to the same effect was made in the present case. My own opinion is that the submission is correct and that it is not incumbent upon the court, at the convening stage, to canvass the question of avoidance of the operation of Chapter 6. The s 411(17) issue as a whole is one that, as the Act itself states, is to be addressed at the time of application for the court's approval under s 411(4)(b). It should be addressed in the light of the circumstances that exist at that time. It has that in common with the question whether the required voting majorities have been obtained. 28 This is, I think, consistent with what Santow J said in Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595 at [39]:

"Section 411(17) places a burden on the court thereafter not to approve a scheme where it was proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Ch 6 of the Corporations Law (s 411(17)(a)) or where ASIC has not issued a statement to the effect that the commission has no objection to the scheme (s 411(17)(b)). The words of s 411(17) suggest that it was envisaged that these be best dealt with at the scheme approval (s 411(6)) stage. This is especially because the court cannot know whether ASIC will give its "no objection" under s 411(17)(b) until after the members have voted, as ASIC in practice declines to take a position in advance." 29 As this passage indicates, the circumstances existing when approval of the scheme is sought may well be such that it never becomes the task of the court to consider whether the scheme has been propounded for a purpose related to the avoidance of a provision of Chapter 6. Section 411(17) precludes approval of the scheme by the court unless one of two conditions is fulfilled. The first is that the court is satisfied that the scheme has not been proposed for the avoidance purpose stated in s 411(17)(a). The second is that there is produced to the court a statement by ASIC as referred to in s 411(17)(b). If either condition is met, the court is not precluded by s 411(17) from granting its approval. It was recognised in Re ACM Gold Ltd (1992) 107 ALR 359 at 367 that production of an ASIC statement leaves the court free to exercise its discretion to approve, even though the existence of a purpose of avoidance within s 411(17(a) may be conceded. As the concluding part of s 411(17) makes clear, however, the court need not grant its approval just because an ASIC statement of the relevant description is produced. In other words, the production of an ASIC statement does not affect the court's general discretion to grant or withhold its approval. 30 But production of an ASIC statement in terms of s 411(17)(b) does absolve the court of any direct responsibility to address the s 411(17)(a) question. It may be that, even if an ASIC statement is produced, a member opposed to the grant of approval will mount an argument based on an intention to avoid the operation of a Chapter 6 provision. If this were to happen, the court would consider the question of avoidance. But it would do so because it had been raised in opposition and as relevant to the exercise of the court's discretion, not because of any statutory duty to do so or any statutory barrier erected by s 411(17). 31 As I view matters, the statutory duty to address the s 411(17)(a) question will arise only if a s 411(17)(b) statement by ASIC is not produced to the court at the time of the application for approval. This emphasises the separateness of the s 411(17)(a) inquiry and the fact that it is confined to the second hearing. 32 Mr Oakes makes an added point here. It concerns the meaning of "the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6". A provision of this kind first appeared as s 315(21) of the Companies Act 1981 (Cth) and corresponding State and Territory Codes. The condition in that legislation was related to a purpose of avoiding the operation of any provision of the Companies (Acquisition of Shares) Act 1980 and corresponding Codes. With the advent of the Corporations Law in 1990, provisions of the kind that had been included in the Act of 1980 became the whole of the Corporations Law's Chapter 6. It was at that point that s 411(17)(a) came to refer to avoidance of the operation of any provision of that Chapter 6. 33 By the Corporate Law Simplification Program Act 1999, however, Chapter 6 was rewritten and part of its former content was removed into Chapter 6A. All the provisions about compulsory acquisition of the shares of dissenting minorities in case of Chapter 6 takeovers then became housed in Chapter 6A. 34 When s 315(21) of the Companies Act 1981 was enacted, there was a general view that it was concerned with what might be described in loose terms as attempts to sidestep or circumvent the threshold for compulsory acquisition under the take-over provisions in the Companies (Acquisition of Shares) Act 1980. That view is recorded at page 81,019 (22 July 1988) of Paterson, Ednie and Ford, "Australian Company Law" (third edition). The same authors refer, however, to other ways in which a scheme of arrangement might be seen to avoid the operation of the takeover provisions. One is the equality of opportunity principle: see also Re Ranger Minerals Ltd [2002] WASC 207; (2002) 42 ACSR 582. The NCSC, ASIC's predecessor, saw s 315(21) as concerned, at least in part, with attempts to sidestep the exacting and detailed information and disclosure requirements of the take-over provisions. That is a view that ASIC continues to hold: see ASIC Regulatory Guide 60. 35 The precise scope of s 411(17)(a) has been potentially different since the compulsory acquisition provisions were placed outside Chapter 6 in 1999. 36 There is a general question of what the court would be required to address and inquire into if, of its own motion, it embarked on the inquiry concerning s 411(17)(a) at the convening stage without any contradictor. If the evidence is (as it is here) that no thought was given to proceeding by takeovers, the court would be left to hypothesise in a vacuum. 37 The most likely contradictor in the long run might be ASIC. It has indicated in this case that it does not wish to be heard on the application for orders for the convening of meetings. It has further indicated that it continues to have the matter under consideration and will make its attitude to the s 411(17)(a) matter known at a later stage. Consideration of that issue should be left to the second hearing. 38 This leads me to the seventh matter which is the requirement under s 411(2)(b) that ASIC be given a reasonable opportunity to consider the terms of the scheme and to make submissions to the court at the s 411(1) hearing. Correspondence with ASIC has been put into evidence and shows that this requirement has been satisfied. 39 Eighth and finally, I mention a matter of documentation that the court has required be adjusted. The two schemes of arrangement are subject to conditions precedent. Those conditions are not set out in the schemes themselves. Rather there is a cross-reference to the conditions precedent in the scheme implementation agreement. The original draft of the material to be sent to security holders, however, contained only a summary of the implementation agreement and therefore a summary of the conditions precedent. There was accordingly not within the explanatory statement itself a full statement of the conditions precedent to which security holders were asked to agree. Furthermore, some subtleties had been lost in translation of the full form of the conditions appearing in the implementation agreement into the summary form in the draft explanatory statement. So that the position may be perfectly clear, the court has required that the full form of the conditions precedent be included in the explanatory statement and this has now been done. 40 Having regard to the several matters I have mentioned, I am satisfied that orders under s 411(1) should be made and that judicial advice leading to a meeting of the members of the managed investment scheme should be given as sought. 41 I therefore make the orders in the short minutes of order, as follows: In respect of the first plaintiff:

Mincom Limited v EAM Software Finance Pty Ltd

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