Nenna v Australian Securities and Investments Commission

Background and Blackstone Group's further offer

1. By way of background, an offer to acquire units in IOF was initially made by entities associated with the Blackstone Group ("Blackstone"), a conditional and non-binding proposal was then made by the Oxford Property Group, and Blackstone has subsequently increased the price offered by it to acquire those units. On 5 September 2018, the Court made orders under s 63 of the Trustee Act that the chair of ILMF would be justified in adjourning the meetings of unitholders until a date to be determined. Also on 5 September 2018, IOF announced that matter to Australian Securities Exchange Limited ("ASX").
2. After market close on 5 September 2018, two entities associated with Blackstone advised ILFM of a revised proposal. ILFM announced that matter to ASX before market open on 6 September 2018. Under the revised proposal, a higher amount of $5.52 per IOF unit ("Increased Price") is payable if the Proposal Resolutions (as defined) are approved by IOF unitholders on or before 17 September 2018 (unless Blackstone has waived that requirement which it may do so in its absolute discretion) and the proposal is implemented. If the Proposal Resolutions are approved by IOF unitholders after 17 September 2018 (except where Blackstone has waived the requirement that the Proposal Resolutions be voted on by IOF unitholders on or before 17 September 2018), and the proposal is implemented, IOF unitholders will receive a lower amount of $5.3485 per IOF unit ("Base Price"). That structure is novel although Mr Wood submits, and I accept, that its novelty does not fall for consideration today, and may or may not require further consideration at a second court hearing. On one view, the position may be relatively straightforward if Blackstone's revised proposal is approved by unitholders at a meeting held on 17 September 2018, since its consequence then would simply be that unitholders would receive a higher price for their units in IOF.
3. ILFM and Blackstone subsequently entered into transaction documents in respect of the revised proposal. An Amendment Deed dated 8 September 2018 between the Blackstone entities and ILFML, amended the Scheme Implementation Agreement ("SIA") (as previously amended by the SIA Amendment Deed dated 27 August 2018), to reflect the altered pricing structure to which I referred above and to amend the amount of the break fee payable under the SIA, so that an Increased Break Fee (as defined) of approximately $33 million (equal to 1% of the aggregate Increased Price) will apply if IOF unitholders vote on the Proposal Resolutions on or before 17 September 2018 or after that date if Blackstone has waived this requirement; and a Base Break Fee (as defined) of approximately $32 million (equal to 1% of the aggregate Base Price) will apply if IOF unitholders vote on the Proposal Resolutions after 17 September 2018 except where Blackstone has waived the requirement that the Proposal Resolutions be voted on by IOF unitholders on or before 17 September 2018.
4. Neither the Increased Break Fee nor the Base Break Fee will be payable by ILFM merely because the schemes are not approved by the requisite majorities of IOF unitholders at the IOF scheme meetings; and there is evidence that the Increased Break Fee and the Base Break Fee were agreed following commercial negotiations between ILFM and Blackstone. It appears that the ILFM Board was prepared to accept the amendments to the break fee in light of the Increased Price and an increase in costs incurred by Blackstone in connection with the proposal and those amounts are not inconsistent with Takeovers Panel Guidance Note 7: Lock-up devices and market practice. On 8 September 2018, Blackstone also entered into a further deed poll in favour of each IOF unitholder reflecting the revised scheme consideration amount and revised documentation confirming its equity funding for the proposal.
5. ILFM and Blackstone also agreed, by an Amending Deed - Confidentiality Deed dated 8 September 2018, that, if the SIA (as amended) is validly terminated, Blackstone will no longer be subject to standstill obligations in respect of non-disclosure of certain information revealed during the due diligence process which currently apply under the Confidentiality Agreement dated 3 May 2018 between ILFM and Blackstone (as amended), and may also enter into consortium arrangements with other parties to pursue a further transaction (including purchasing IOF units on market or making a takeover offer) in relation to IOF should it choose to do so. That provision may take effect depending on future commercial developments.

Third supplementary scheme booklet and second supplementary independent expert's report

1. A draft third supplementary scheme booklet, which sets out the relevant details of the amended Blackstone proposal and includes a second supplementary independent expert's report, was lodged with ASIC on 6 September 2018 and would be despatched to IOF unitholders subject to judicial advice confirming that ILFM would be justified doing so. There is evidence that, with the exception of specified information including that provided by Blackstone, ILFM has verified the material in the third supplementary scheme booklet, and Blackstone in turn verified the information relating to it included in the third supplementary scheme booklet.
2. ILFM also engaged KPMG Financial Advisory Services (Australia) Pty Ltd ("KPMG") to prepare a second supplementary independent expert's report ("SSIER") that is to be included with the draft third supplementary scheme booklet"). KPMG expressed the view that: "In our opinion, we consider the Scheme continues to be in the best interests of IOF Unitholders in the absence of a superior proposal. This opinion is based on our assessment that the Scheme is fair and reasonable and, in accordance with RG 111, in the best interests of IOF Unitholders. We note that as a consequence of Increased Price, in our opinion, the Scheme is now fair whereas previously we considered the Scheme to be not fair. It is fair as the Increased Price that is available to IOF Unitholders should they vote in favour of the Scheme on or before 17 September 2018 exceeds our assessed value range of an IOF Unit. … We have assessed the value of an IOF Unit to be in the range of $5.44 to $5.47. This range is 1 to 2 cents (0.2% to 0.4%) greater than the range of values assessed in the Supplementary IER of $5.42 to $5.46. This increase is a result of the extension of the implementation date for the Proposal from 20 September 2018 to 2 October 2018 (and the inclusion of the expected earnings that would be generated over this period) and an increase in the mark-to-market balance of the derivatives and US dollar debt. As the Increased Price of $5.52 exceeds our assessed value range for an IOF Unit, we consider the Scheme is fair. In accordance with RG 111, an offer is reasonable if it is fair. As we have assessed the Scheme to be fair, this means that the Scheme is reasonable."
3. Mr Wood submits that that the third supplementary scheme booklet should be approved by the Court on the basis that the events that have occurred since the second supplementary scheme booklet was distributed are material to IOF unitholders' decision as to how to vote at the meetings, and the increase in the proposal consideration offered by Blackstone and the conditions of that offer are critical to that decision. I am satisfied that, so long as it is appropriate to reconvene the previously adjourned meetings, then it is appropriate to distribute the third supplementary scheme booklet so that unitholders are properly informed for that meeting.

Resumption of IOF scheme meetings

1. Mr Wood submits that, although the adjournment power in respect of the meetings is conferred upon the chair at the meeting, by cl 17.1 and item 4 of Sch 2 of the constitution of each fund, it may be appropriate for judicial advice to be given to the responsible entity that an adjournment is justified where supplementary material is to be sent to securityholders: Re Investa Funds Management Ltd [2016] NSWSC 369 at [8]; Re Investa Listed Funds Management Limited as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1362; Re Investa Listed Funds Management Limited as responsible entity for the Armstrong Jones Office Fund and the Prime Credit Property Trust [2018] NSWSC 1369.
2. As I noted above, the directors of ILFM have determined that it is appropriate to reconvene the scheme meetings, in circumstances that the more favourable Blackstone offer is only available if it is approved by unitholders on or before 17 September 2018, a later date than that which was originally proposed by Blackstone. Although the terms of that offer may constrain other opportunities available to IOF unitholders, it is understandable that the directors of ILFM consider that it is preferable to give unitholders the opportunity to decide at unitholders meetings whether or not to accept that offer, in accordance with its terms, rather than to allow it to lapse because they have not had that opportunity. It seems to me that there would be nothing irrational or unreasonable in the directors of ILFM considering that the opportunity to accept the increased bid, in the terms in which it now exists, should be offered to unitholders in that manner. I have addressed in earlier judgments the question of the circumstances in which the Court will give advice in respect of matters of this kind and I need not address that question further.
3. Mr Wood points out that the third supplementary scheme booklet, if approved by the Court, will be published by ASX release after the hearing today and then sent to unitholders, and the meetings are proposed to be resumed at 2pm on 17 September 2018 with proxies being due at 2pm on 15 September 2018. Unitholders will therefore have four clear calendar days (including four clear business days) from the date the third supplementary scheme booklet is released to the ASX until proxies are due and a further two clear calendar days until the meetings. Mr Wood fairly recognises that these periods are shorter than the 10 calendar days' notice that ASIC indicates, in Regulatory Guide 60 dealing with schemes of arrangement under Part 5.1 of the Corporations Act 2001 (Cth), will "generally be appropriate for scheme participants, including those voting by proxy" to consider supplementary disclosures. Mr Wood submits that Blackstone's further proposal was well-publicised, and any interested unitholder was put on notice of the substance of the key terms which were being negotiated in that proposal (including the Increased Price and the Increased Break Fee) for a period of nine clear days prior to the due date for proxies). Mr Wood also submits that, if the relevant conditions are satisfied, the material changes introduced by Blackstone's further proposal as to which IOF unitholders will vote at the meetings, being an increase in the proposal consideration and the break fee, are straightforward and easy to understand.
4. I bear in mind that the time which will be available for unitholders to consider these matters, prior to that reconvened meeting, is somewhat abridged. I accept Mr Wood's submission that, in the circumstances, the question which unitholders have to address is primarily an increase in the price offered in respect of the Blackstone offer, and issues surrounding that matter have been well publicised so that unitholders are likely to be in a position to do so within a short time, and increase in the break fee. I do not disregard the fact that there will be much greater complexity in unitholders determining the question what would occur, if the resolutions necessary to give effect to the Blackstone proposal were not passed at a meeting on 17 September. However, it seems to me that unitholders' ability to address that larger question would also not necessarily be improved by any deferral of the meetings, at least for any short period, beyond the date now proposed by ILFM. I consider that the advice sought should be given in respect of the resumption of the IOF scheme meetings.
5. I will extend the time for the advertisement of the second meeting to be published, to reflect the practical constraints upon ILFM in publishing that advertisement, and where the date of the second meeting will no doubt become available to unitholders by circulation of the third supplementary scheme booklet, and also very likely by media reports.

Approval of voting record date

1. Mr Wood points out that IOF unitholder meetings were previously opened and immediately adjourned by the chair on 6 September 2018 and the voting record date for these meetings was set at 7pm on 4 September 2018. ILFM proposes to set the voting record date for the resumed IOF unitholder meetings at 7pm on 15 September 2018, and seeks judicial advice in that respect. Alternatively, ILFM seeks judicial advice that it would be appropriate to conduct the IOF unitholder meetings on the basis that the voting record date was at 10am on 4 September 2018.
2. Mr Wood draws attention to reg 7.11.37(2) of the Corporations Regulations 2001 (Cth) which relevantly provides that the convener (here, ILFML under cl 17.1 of the relevant constitutions) of a relevant meeting may determine that all the securities of the body corporate that are Division 4 financial products at a specified time before the meeting, for the purposes of the meeting, are held by the persons who held them at a specified time. Mr Wood points out that the stapled securities consisting of the units in the two funds (each of which is a registered management investment scheme) are listed on ASX and fall within the definition of Division 4 financial products. Regulation 7.11.37(3)(b) provides that the specified time, in any case, must not be more than 48 hours before the meeting.
3. Mr Wood recognises that, In the matter of Re1 Limited (ABN 80 145 743 862) and Re2 Limited as responsible entities for Westfield Retail Trust 1 and Westfield Retail Trust 2 (No 3) [2014] NSWSC 762 ("Re Westfield"), Brereton J observed at [20] that: "Advice is also sought as to certain provisions relating to who will be entitled to vote at the adjourned meeting. Those matters appear to be uncontroversial. In particular, as the adjourned meeting is not a new meeting, but a continuation of the meeting of 29 May [see Crawford v Australia and New Zealand Banking Group Limited (1994) 14 ACSR 310, 312], the same qualifications for eligibility to vote must apply as applied at the earlier meeting and, accordingly, the registration date of 27 May 2014 as the entitlement cut-off date remains appropriate."
4. Mr Wood also points out that, in Re Village Roadshow Ltd (No 2) [2003] VSC 456, Mandie J held at [6] that a "specified time" could become "stale" if the time elapsed between the "specified time" and the meeting date led to the constituency at the time of the voting record date not fairly reflecting the constituency at the time of the meeting date, and that the Corporations Regulations evinced an intention that entitlement to vote at a meeting should reflect the views of shareholders identified at a time not more than 48 hours prior to a meeting and observed that: "In my view the "specified time" for determining voting entitlements (ie, 1 November 2003) would be too stale by the time of the proposed date for the adjourned general meeting. A vote in December 2003 would reflect the views of the "constituency" as at 1 November 2003, but might not fairly reflect the views of the "constituency" on or about the relevant date in December 2003. The Corporations Regulations evince an intention that entitlement to vote at a meeting should reflect the views of shareholders identified at a time not more than 48 hours prior to the meeting. Of course, this would not necessarily occur at a meeting adjourned for any substantial period, but with a matter of the present importance, I do not think that the Court, in its discretion and for the purposes of an application for approval of this Scheme, should countenance such a long period between the time of identification of those entitled to vote and the time of voting."
5. Mr Wood points out that the decision in Re Village Roadshow Ltd (No 2) above does not appear to have then been cited before Brereton J in Re Westfield above and that there does not seem to have been dispute as to the voting entitlement date in Re Westfield above.
6. It seems to me that this question is not straightforward as a matter of the construction of reg 7.11.37 of the Corporations Regulations. However, the approach that is proposed by ILFM will give effect to the will of the unitholders on the register closer to the date of the reconvened meeting, and in that sense promotes the representation of unitholders' views at that meeting. It does not seem to me to be necessary to reach a final view as to the construction of reg 7.11.37(2) of the Corporations Regulations today. On either view of the scope of that regulation, it seems to me that the approach that ILFM proposes to take would be capable of validation under s 1322 of the Corporations Act at a second court hearing, on the basis that it involved a procedural irregularity relating to a meeting of members of a registered scheme and, even if it did not, because it would satisfy the requirements for validation under ss 1322(4) and (6) of the Corporations Act. I have regard, in these circumstances, to the fact that it is now well established that an advertent contravention of the Act may, in an appropriate case, be validated under that section: Nenna v Australian Securities and Investments Commission [2011] FCA 1193; (2011) 198 FCR 32; 284 ALR 386; 86 ACSR 204; Re DUET Management Co 1 Ltd [2013] NSWSC 817; (2013) 95 ACSR 34 at [18].
7. For this reason, without finally determining the question of the proper construction of reg 7.11.37(2) or its application in the circumstances, it seems to me that the Court can properly give a direction that contemplates that ILFM will proceed on the basis that it proposes, where validation under s 1322 of the Corporations Act be would likely be available, even if reg 7.11.37 did not support that approach.

Deal protection measures

1. Mr Wood refers to the circumstances in which a higher break fee was negotiated and notes the evidence will ordinarily be required in respect of a break fee and the circumstances in which a break fee may be permitted: Re SFE Corporation Limited [2006] FCA 670 at [6]-[7]; Re APN News & Media Ltd [2007] FCA 770 at [55]; Re Sirtex Medical Limited [2018] FCA 584 at [48]. Mr Wood points out that Guidance Note 7 issued by the Takeovers Panel indicates that a reimbursement fee should not exceed 1% of the equity value of the target, and that both the break fee that applies in respect of the Increased Price and the break fee that applies in respect of the Base Price represent approximately 1% of the equity value of IOF. He also notes that the revised break fees in either scenario will not be payable by ILFM merely because the schemes are not approved by the requisite majorities of IOF unitholders at the IOF scheme meetings and draws attention to section 2.4 of the third supplementary scheme booklet which indicates that the ILFM board was prepared to accept the amendments to the break fee in light of the Increased Price and the increase in costs incurred by Blackstone in connection with the raised proposal. He submits that payment of reimbursement or break fees of this magnitude are commonplace in schemes of this kind: Re Mosaic Oil NL [2010] FCA 985 at [19]. I am satisfied that that break fee, in the present circumstances, is consistent with the level of break fees that is permitted by the Takeovers Panel's Guidance Note and does not provide reason not to give the advice sought by ILFM in the present circumstances.

Orders

1. For these reasons, I made the orders sought by ILFM, with amendments to delete the words "for the purposes of Corporations Regulation 7.11.37" in paragraph 1(d) and to change the number "7" in paragraph 3 to "6" in the penultimate line and also to make new orders 5 and 6. The further application for judicial advice will be listed for further directions before me at 9.15am on 18 September 2018.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 September 2018