Mincom Ltd v EAM Software Finance Pty Ltd [2010] NSWSC 1104 | Case summary

2010/299154 PRIME INFRASTRUCTURE HOLDINGS LIMITED & 2 ORS JUDGMENT 1 I have today made certain orders upon applications concerning stapled securities each of which consists of three components: a share in the capital of Prime Infrastructure Holdings Limited, or "PIH"(a company registered under the Corporations Act 2001 (Cth)), a unit in a unit trust scheme known as the Prime Infrastructure Trust which is a registered managed investment scheme under the Corporations Act and a unit in a second unit trust scheme known as the Prime Infrastructure Trust 2 which is also a registered managed investment scheme. The responsible entity of each managed investment scheme is Prime Infrastructure Re Limited. 2 The applications related to a proposal for the acquisition of such stapled securities by Brookfield Infrastructure Partners Limited, a Bermuda entity which I shall call "BIP". Some 39% of the stapled securities are already owned by BIP. The proposal to which the applications related is concerned with the remainder of the stapled securities. 3 The intention with respect to that remainder is that each holder's holding of stapled securities will be transferred to BIP without immediate action of the holder and by virtue of agency to be created by a Part 5.1 scheme of arrangement between PIH and its members (other than BIP) and by amendments to the constitutions of the two managed investment schemes. 4 The orders made were, first, orders relating to the convening of a meeting of members of PIH under s 411(1) of the Corporations Act and orders under s 63 of the Trustee Act 1925 giving the opinion, direction or advice of the court to the responsible entities of the two managed investment schemes. The judicial advice was to the effect that the responsible entities will be justified in playing their respective parts in the overall plan up to the point of seeking, through resolutions, the concurrence of stapled security holders in their capacity as holders of units of the managed investment schemes. 5 The twofold application was made in the way that has become commonplace since the decision of Austin J in Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107. 6 One aspect of the matter calls for particular comment. It concerns the provisions of the overall plan concerning the consideration to be provided by BIP to the holders of the compulsorily transferred stapled securities. 7 Under the proposed arrangement, each relevant holder of stapled securities will be entitled to receive interests in a Bermuda limited partnership of which BIP is the general partner. The interests in question are passive economic interests carrying no voting or other control rights. The interests will be made available at the rate of 0.24 for every transferred stapled security. 8 Two groups of holders of stapled securities will, however, receive, for the whole or some part of their stapled securities, cash instead of interests in the Bermuda limited partnership. The first group consists of stapled security holders with addresses in foreign countries where it would be unlawful or impracticable to make the partnership interests available. These holders may be referred to, for convenience, as "foreign holders". The second group will consist of holders who, by positive election, choose to take a cash component or, in the terms used in the documents, "make an election to participate in the Scheme Liquidity Facility". 9 The Scheme Liquidity Facility will be available to a holder of transferred stapled securities only in respect of four thousand or fewer of the BIP interests otherwise receivable by the electing holder. If an election is made by a holder of stapled securities in respect of the partnership interests otherwise receivable by that holder, a number of the partnership interests chosen by the holder, up to a maximum of four thousand, will not be issued to the holder. Rather, a cash sum calculated under quite complex provisions will be received by the holder instead of the BIP interests to which the election relates and only the balance, if any, of the holder's consideration will be in the form of partnership interests. 10 The effect of the provisions with respect to the Scheme Liquidity Facility is that a holder of stapled securities whose entitlement to partnership interests is four thousand or fewer will be able to receive a wholly cash consideration, while someone whose basic entitlement is to receive more than four thousand partnership interests will not be able to receive a wholly cash consideration. Likewise, a holder of a very large number of stapled securities will be able to receive in respect of a smaller proportion of his or her holding than someone whose holding of stapled securities attracts, say, an entitlement to five thousand partnership interests. 11 Cash quantification mechanisms exist with respect to both the partnership interest entitlements of foreign holders (who will be paid cash, come what may) and the cash consideration (or cash component of a larger consideration) receivable by stapled security holders who choose to take advantage of the Scheme Liquidity Facility. Each quantification mechanism depends on and fully reflects the market price of a partnership interest. It is significant, in this connection, to note that partnership interests are traded on both the New York Stock Exchange and the Toronto Stock Exchange, with the result that readily available and reliable indications of arm's length value can be expected to be available on a continuing basis. 12 The respective quantification mechanisms (one for the foreign holders and the other for holders taking advantage of the Scheme Liquidity Facility) have regard to market values at somewhat different times; and within the structure of the Scheme Liquidity Facility, regard may be had, in relation to parts of the overall total, to market values at slightly different times. 13 I pause, at this point, to note the function of the court at this stage of a Part 5.1 matter, that is, the stage at which the proponent of a scheme of arrangement between a company and its members (or a class of them) asks the court to make orders under s 411(1) with respect to the convening of a meeting or meetings. By analogy, the function with respect to judicial advice in a matter of the present kind is the same. A recent statement of the relevant principle may be found in the judgment of Davies J in Re Orica Ltd [2010] VSC 231. Her Honour said at [7] and [8}: "[7] The function of the Court on an application to convene a meeting essentially is: (a) to consider whether the scheme booklet that will be provided to the shareholders sufficiently discloses the detail and effect of the scheme to enable shareholders to make an informed decision on how to vote; (b) to consider procedural matters about the calling and conduct of the meeting; (c) to ascertain whether the Australian Securities and Investments Commission ('ASIC') has had reasonable opportunity to examine the proposed scheme; (d) to consider whether there may be matters that may make it unlikely that the scheme would be capable of a grant of approval by the Court if, in due course, its approval is sought and so make it futile to put the scheme to the shareholders for their vote: FT Eastman and Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 72 (Street CJ); Australian Securities Commission v Malborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485; Lindholm, Re Opes Prime Stockbrocking Limited (Administrators appointed)(Receivers and Managers Appointed) [2008] FCA 1425; (2008) 171 FCR 473; Re CSR Limited [2010] FCAFC 34; Re Foundation Health Care Limited [2002] FCA 742; (2002) 42 ACSR 252.

[8] It is not the function of the Court on an application for a order convening a meeting to consider the business or commercial efficacy of the proposed scheme, as that is a matter for the shareholders nor is it the Court's role to express a view on whether the proposed scheme should be approved, if the requisite majority of votes is obtained: Re Sonodyne International Limited (1994) 15 ACSR 494, 497. An order of the Court that the meeting be convened is not an indication that the Court has a view as to the merits of the scheme or as to how shareholders should vote." 14 In the present case, no issue arose in relation to items (a) and (b) of Davies J's formulation. As to (c), which derives directly from s 411(2) of the Corporations Act, a letter from ASIC tendered by the plaintiffs made it clear that ASIC had had the relevant opportunity. It is in relation to item (d) that comment is warranted. The matters concerning cash consideration to which I have referred raised two questions that might ultimately need to be canvassed in the context of any application for approval of the Part 5.1 scheme. 15 The first is whether there are, because of differentiation, distinct classes of holders of stapled securities and therefore, for Part 5.1 purposes, distinct classes of members, with the result that, in Part 5.1 terms, the scheme is, in reality, in part a scheme between the company and one class of members, in part a scheme between the company and another class of members and so forth. If that is the true characterisation, the situation may, at the time of any application under s 411(4)(a) for the court's approval, turn out to be one in which the court has no power to grant that approval. 16 In accordance with normal practice, the application - a combination of an application under s 411(1) and an application for judicial advice regarding progress to the meeting stage - was brought by the plaintiffs ex parte, although with an appearance, by leave, also by counsel representing BIP. In the absence of a contradictor, the court has not received full argument on the class question. 17 It follows from item (d) in Davies J's list above that, if the court sees, at the s 411(1) stage, that a scheme proposed as one between the company and a single class of its members is in reality one between the company and each of several distinct classes of members, the s 411(1) order will not be made. The class question is thus one that needs to be considered at the s 411(1) stage, albeit on the basis of the evidence provided to the court at that point and without the views of any contradictor. 18 It was submitted on behalf of the plaintiffs that no class differentiation emerges in this case. I was sufficiently persuaded that that proposition is correct to view the class possibility as something that need not prevent the proposal going to members for their consideration. 19 The key, I think, is that, as I have said, the cash element, whether for a foreign holder or for a holder who elects to participate under the Scheme Liquidity Facility, will be dictated by market prices of BIP partnership interests. The provisions are complex and, according to circumstances, market prices at slightly different times may apply to different aspects of the calculation as it relates to different people. But the important point is that the cash elements will be market based and in that way will represent a true reflection of the value of the partnership interests comprising the primary entitlement of a holder and which would have been received had it not been supplanted by cash. 20 In relation to the test for recognising classes, I would venture to repeat here what I said in Re Hills Motorway Ltd [2002] NSWSC 897; (2002) 43 ACSR 101 at [12]: "The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail." 21 Given the fact that market prices will determine the cash elements receivable by all holders who do not receive the basic consideration consisting fully of partnership interests, it seemed to me that the answer, if the class question came to be debated in full, would very likely be that there was, within the body of security holders as a whole, an ability to consult together with a view to their common good. On that footing, the class possibility was not something that dissuaded the court from making the s 411(1) order. 22 The second matter arising from the pricing provisions and the cash election mechanism is another that will be relevant, if at all, when any subsequent application for s 411(4)(a) approval comes before the court. At that point, attention will necessarily be given to s 411(17): "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)." 23 For reasons explained in earlier cases, it is premature for the court to seek to come to any conclusion on that matter at this stage: Re Orion Telecommunications Ltd [2007] FCA 1389; Re Macquarie Private Capital A Ltd [2008] NSWSC 323; (2008) 26 ACLC 366; Re Macquarie Capital Alliance Ltd [2008] NSWSC 745; (2008) 67 ACSR 484; compare Mincom Ltd v EAM Software Finance Pty Ltd [2007] QSC 37; (2007) 61 ASR 266. 24 It must be said, however, that, as things now stand, the impression I have is, first, that the proposal as a whole could have been approached simply through a takeover scheme under Chapter 6 of the Corporations Act (or perhaps more accurately, three inter-conditional takeover schemes) and, second, that, under the Chapter 6 method it would not have been permissible for the consideration structure involving the Scheme Liquidity Facility to have been adopted since, on the face of things, it is inconsistent with s 619 which is one of the provisions implementing the purpose stated in s 602(c) which, in turn, reflects one of the fundamental Eggleston principles on which our takeover laws have been based for almost forty years. 25 If that impression is valid, there may be scope for a debate upon any s 411(4)(a) hearing as to whether the court is precluded by s 411(17) from approving the scheme. Any such debate will, of course, be forestalled if a s 411(17)(b) statement by ASIC is produced to the court. The other possibility is that ASIC does not furnish such a statement and submissions are made by some interested person against the making of an approval order. If the question whether the court should be satisfied in terms of s 411(17)(a) were to become contentious at that point, there would no doubt be a number of factors to consider and a need for evidence from relevant decision-makers within the company. The question would be whether, on an overall view and taking into account all relevant matters, the avoidance purpose with which s 411(17)(a) is concerned was at work. 26 ASIC, in accordance with its usual practice, has not, at this stage, expressed an opinion on the general issue raised by s 411(17) or on the question whether it will make a s 411(17)(b) statement. It has indicated that it will, in the ordinary course, address the matter if and when a s 411(4) application is made. 27 The court likewise is not called upon to express a view at this point. The need for it to do so will arise, if at all, only in relation to any s 411(4)(a) application. **********

Mincom Ltd v EAM Software Finance Pty Ltd

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