Mirvac Funds Management Ltd in its capacity as responsible entity of Mirvac Industrial Trust [2014] NSWSC 1569

Judgment 1The Plaintiff, Mirvac Funds Management Ltd ("MFML"), as responsible entity of Mirvac Industrial Trust (MIX), seeks orders of the Court under s 63 of the Trustee Act 1925 (NSW). In particular, MFML seeks the opinion, advice and direction of the Court that it would be justified in convening a meeting of MIX unitholders to consider, and, if thought fit, agree to proposed scheme resolutions; distributing an explanatory memorandum to MIX unitholders in advance of that meeting; and proceeding on the basis that proposed amendments to MIX's constitution would be within the powers of alteration conferred by that constitution and s 601GC of the Corporations Act 2001 (Cth). 2The proposed scheme is a trust scheme in a well-established form, which in this case involves the proposed acquisition of all the units in MIX by a third party, AustFunding Pty Ltd ("AustFunding"), a wholly owned subsidiary of the Goldman Sachs Group Inc. The principles by which an application of this kind is to be determined are well-established. Although a registered managed investment scheme is not a Pt 5.1 body for the purposes of the provisions applicable to corporate schemes in Part 5.1 of the Corporations Act, a responsible entity may implement a "trust scheme", in which it seeks judicial advice in a two-stage process, by analogy with a scheme under Pt 5.1 of the Corporations Act: Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107; Re Macquarie Goodman Funds Management Ltd (as responsible entity of Macquarie Goodman Industrial Trust) [2004] NSWSC 1197; (2004) 52 ACSR 194; Re Abacus Funds Management [2005] NSWSC 1309; (2006) 24 ACLC 211; 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; Re Macquarie Communications Infrastructure Group [2009] NSWSC 487; Re DUET Management Company 1 Ltd [2013] NSWSC 817; (2013) 95 ACSR 34. 3The responsible entity of the scheme may obtain judicial advice under s 63 of the Trustee Act at the first hearing, 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 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 above at [19]; Re DUET Management Company 1 Ltd above at [9]. An explanatory statement is then sent to unitholders in respect of a meeting to consider the resolutions to implement the scheme, which will describe the proposed transaction, disclose that judicial advice and draw attention to unitholders' rights to appear at a second hearing and object to the trust scheme: Re DUET Management Company 1 Ltd above at [9]. If unitholders approve the proposed scheme, the Court may give judicial advice to the responsible entity at a second hearing that, having regard to the result of the meetings and any other relevant circumstances, it is justified in implementing the scheme: Re Mirvac Ltd above at [48]; Re Homemaker Retail Management Ltd [2001] NSWSC 1058; (2001) 40 ACSR 116 at [6]; Re Macquarie Goodman above at [10]. The nature of the proposal 4The nature of the proposal is set out in MFML's helpful submissions, and I have drawn on those submissions in the material which appears below. MFML, in its capacity as responsible entity of MIX, and AustFunding entered into a Scheme Implementation Agreement on 19 September 2014, by which MFML agreed to propose a trust scheme to MIX unitholders by which AustFunding would acquire all of the units in MIX. The scheme is subject to, inter alia, approvals from MIX unitholders, the Court's opinion, advice and directions, and the satisfaction or waiver of conditions precedent in the Scheme Implementation Agreement. 5An explanatory memorandum (Ex TGS2 to an affidavit affirmed by Mr Thomas Story on 14 October 2014) was prepared by MFML and is to be provided to MIX unitholders. A due diligence and verification process has been undertaken in respect of the explanatory memorandum and is described in affidavits affirmed by Mr Nicholas Blake of MIX and Mr David Gribble of Goldman Sachs and also in Mr Story's affidavit. An independent expert's report is to be included in the explanatory memorandum, and indicates the independent expert's assessment that AustFunding's proposal (including the scheme) is fair and reasonable and in the best interests of MIX unitholders. Ms Rachel Foley-Lewis, one of the people responsible for preparing that report, has confirmed that she holds the opinions expressed in the report and that she is not aware of any facts or circumstances which would cause her to change the opinions expressed in the report. A summary of Australian tax considerations for Australian tax resident unitholders of MIX was prepared by an accounting firm for inclusion in the explanatory memorandum. Mr Michael Davidson of that firm, one of the people responsible for preparing that report, confirms that he holds the opinions expressed in the report and is not aware of any facts or circumstances which would cause him to change the opinions expressed in the report. 6The explanatory memorandum and a proxy form is proposed to be sent to MIX unitholders on the register as at 17 October 2014 and to unitholders on the register as at 5 November 2014 to whom those documents have not previously been despatched. Copies of the explanatory memorandum and proxy form will not be sent to new unitholders who come onto the register between 5 November 2014 and 17 November 2014, the voting record date for the scheme, but copies may be downloaded from MIX's website until at least 19 November 2014, the date of the scheme meeting. Performance risk and foreign exchange risk 7In submissions, Mr Jackman properly noted that the case law recognises the importance of scheme members' ability to enforce entitlements to be received under a scheme: Re Kaz Group Ltd [2004] FCA 738 at [4]-[5]; Re Tempo Service Ltd [2005] FCA 410; (2005) 53 ACSR 523; Re SFE Corporation Ltd [2006] FCA 670; Re Webcentral Group Ltd [2006] FCA 937; Re Brambles Industries Ltd [2006] FCA 1273; (2006) 59 ACSR 501; Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [23]; and Re Macquarie Capital Alliance Ltd above. That issue is addressed by a commonly used, and effective, mechanism in this scheme, by a Deed Poll executed by AustFunding on 13 October 2014 by which AustFunding covenants in favour of MIX unitholders that it will observe and perform all obligations imposed on it under the Scheme Implementation Agreement and by proposed amendments to MIX's constitution under the Supplemental Deed Poll in Annexure C to the Explanatory Memorandum, which will be executed by MFML if the scheme become effective. That provision addresses performance risk, so far as unitholders are concerned, since it has the consequence that the obligations imposed upon AustFunding become directly enforceable by unitholders. 8Mr Jackman also fairly draws attention to the fact that, under cl 4.2(a) of the Scheme Implementation Agreement, AustFunding will make payment of the scheme consideration in US dollars (assuming the scheme is approved) to be held on trust for MIX unitholders. Under cl 4.2(b) of the Scheme Implementation Agreement, that payment will be converted into Australian dollars at the prevailing exchange rate before distribution to MIX unitholders. The amount ultimately received by MIX unitholders will therefore depend in part on the AUD/USD exchange rate applied to AustFunding's payment. This risk is fairly disclosed in the explanatory memorandum. 9The mechanism for payment to be made was also addressed at some length in oral submissions. Clause 41.3(a) of a Supplemental Deed Poll amending MIX's constitution, to be executed by MFML in its capacity as responsible entity, provides for the mechanism for the provision of the scheme payment and the scheme consideration. The first step in that mechanism is for the acquirer to pay the scheme payment in immediately available funds into a US dollar denominated trust account nominated by the responsible entity, maintained by a third party on terms agreed with the acquirer. As I have noted, AustFunding has covenanted to make that payment and, it will be noted, there is a degree of protection to unitholders so far as that account is to be denominated as a trust account. Clause 41.3(b) in turn provides that that amount is held on trust for unitholders, except for interest on the amount which is for the account of AustFunding; that the amount is to be converted to Australian dollars, reflecting the fact that the assets owned by the trust are located in the United States and the scheme consideration is payable by AustFunding in US dollars; and on conversion is to be held in an Australian dollar denominated trust account nominated by the responsible entity on trust for unitholders, except that any interest on that amount will be for the account of AustFunding. Within three business days after the implementation date, the scheme consideration is then to be paid in the manner described by the Supplemental Deed Poll. 10Clause 41.4 of the Supplemental Deed Poll in turn provides that the transfer of units to AustFunding becomes effective, subject to AustFunding having provided the scheme payment in the manner contemplated by cl 41.3(a) of the Supplemental Deed Poll. Although there was some discussion of this in the course of submissions, it seems likely that condition will be satisfied at the point at which AustFunding has paid the relevant funds, that is, by depositing them into the US dollar denominated trust account as contemplated by cl 41.3 of the Supplemental Deed Poll. That proposition is hardly surprising, since an acquirer might well understand that it ought to be entitled to the benefit of its purchase of units in the trust, once it has paid for them. 11A question arose, in the course of submissions, as to the position in respect of the period between the payment by AustFunding and the distribution of funds to unitholders, so far as there is plainly a risk, albeit possibly only a theoretical risk, to unitholders that they might be obliged to transfer the units, once AustFunding has made the relevant payment, even if moneys were not ultimately paid to them by reason of a failure of the intervening process. It seems to me that the mitigants of that risk are first, as I have noted, that the moneys are held on trust for unitholders, pursuant to the terms of the Supplemental Deed Poll. Second, as became clear in the course of submissions, and has now been clarified by an amendment to the terms of the explanatory memorandum, AustFunding will deposit the scheme payment into a US dollar account with an authorised deposit taking institution in Australia, and the consequence of that seems to me to be that the risk taken by unitholders is no different in kind from that which is taken by all Australian citizens, in their ordinary affairs, in dealing with authorised deposit taking institutions in Australia. 12It seems to me that the performance risk, that might otherwise arise in respect of the payment consideration, is therefore addressed in a manner that is well recognised in the cases, including the decision in Macquarie Capital Alliance Ltd above, to which Mr Jackman helpfully drew my attention, where Austin J noted that concerns had been expressed from time to time about credit or performance risk, but accepted that that risk was addressed in circumstances where the transfer of scheme shares was in that case expressed to be subject to the acquirer paying the scheme consideration, as it is here, and providing confirmation of that payment; where obligations were imposed upon the acquirer under a deed poll, as there are here; and obligations were also imposed on the responsible entity receiving the funds, as they are here by the Supplemental Deed Poll. I am satisfied that, in this case, where the funds will be held in an authorised deposit taking institution in Australia, the position is no different from that which would arise in any other scheme where performance risk is addressed in this manner. 13For this reason, it does not seem to me that the question of performance risk provides any reason not to grant the advice which is sought by the responsible entity. Transfer free of encumbrances and deemed warranty 14Clause 41.8(a) of the Supplemental Deed Poll provides that, "to the maximum extent permitted by law", relevant units will be transferred free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise. Provisions of this character have been accepted in the case law: Re Investa Properties Ltd [2007] FCA 1104; (2007) 25 ACLC 1186 at [30]; Re HPAL Ltd [2007] FCA 1570 at [5]; Re Dyno Nobel Ltd [2008] VSC 154 at [8]-[9]; Re DUET Management Company 1 Ltd above. 15Clause 41.8(b), which is also to be inserted into MIX's constitution by the Supplemental Deed Poll, also provides that each MIX unitholder is deemed to have warranted that all of their MIX units (including any rights, entitlements and obligations attaching to them) which are transferred will, at the time of transfer, be fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and other interests of third parties of any kind, whether legal or otherwise, and restrictions on transfer of any kind and they have full power and capacity to sell and transfer their units pursuant to the scheme. The legitimacy of deemed warranty provisions of this kind were accepted by Lindgren J in Re APN News & Media Ltd above and by Mansfield J in Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137, by contrast with the view taken by Fryberg J in Re Mincom Ltd (No 3) [2007] QSC 207; (2007) 213 FLR 364. In Re APN News & Media Ltd above, Lindgren J noted (at [63]) that the attention of scheme participants should be drawn to the existence of the deemed warranty, and that is done in section 4.16 of the explanatory memorandum. As Mr Jackman points out, Davies J similarly noted in Re Cytopia Ltd [2009] VSC 560 (at [23]) that: "The view consistently taken by courts in recent times is that the purpose and effect of such a clause simply is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged and that the deemed warranty clause is unobjectionable. I note that the deemed warranty clause is disclosed in ... the Scheme Booklet and I accept the submission that it is no obstacle to the court ordering the convening of a meeting." Break fee 16Mr Jackman also draws attention to cl 12.2(a) of the Scheme Implementation Agreement, to which attention is drawn in section 8.4 of the explanatory memorandum, which provides that MFML must pay a "break fee" in various specified circumstances. Such a fee is not payable under the Scheme Implementation Agreement if the requisite approvals are not obtained from MIX unitholders at the scheme meeting. Mr Jackman points to evidence that the provision for a break fee was included in the Scheme Implementation Agreement after commercial negotiations between the parties (Blake 9.10.2014 [30]) and, perhaps more importantly, that the amount of the break fee is specified as 1% of the scheme consideration of $US69,453,766, as adjusted for transaction costs. Although the amount of that fee is not presently certain, because it will be affected by the adjustment for transaction costs, there is evidence that it will be marginally higher or lower than 1% of the scheme consideration (Gribble 9.10.2014 [28]; Blake 9.10.2014 [29]) and that AustFunding's transaction costs will be significantly higher than that amount (Gribble 9.10.2014 at [29]). That break fee is not of sufficient size to place any pressure upon unitholders to approve the transaction were they otherwise not disposed to do so and does not seem to me to provide any reason not to give the advice sought. Orders 17Having regard to these matters, I was satisfied that judicial advice leading to a meeting of the members of the managed investment schemes should be given as sought, and I made orders substantially in the form sought by the Plaintiffs, as initialled by me and placed in the file.

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