Permanent Trustee Co Limited v National Australia Managers Ltd

CATCHWORDS : CORPORATIONS - Arrangements and reconstructions - Schemes of arrangement or compromise - Application for order pursuant to s 411(4)(b) Corporations Act 2001 (Cth) approving scheme of arrangement between applicant and shareholders - Where scheme of arrangement approved by shareholders by special resolution - Application granted - CORPORATIONS - Managed investments - Trust deed or constitution - Members of trusts which are managed investment schemes passed resolutions approving, inter alia, merger of trusts with another trust - Resolutions required amendments to constitutions of trusts - Application by trustee of trusts for orders that is justified in acting upon resolutions passed by members of trusts - Whether amendments to constitutions of trusts were within powers of alteration contained in constitutions of trusts and in s 601G Corporations Act - Where resolutions of members of trusts commanded overwhelming support - Application granted.

LEGISLATION CITED : Corporations Act 2001 (Cth) Trustee Act 1925 (NSW)

Re Australand Holdings Limited (2005) 219 ALR 728 Abacus Funds Management (2005) 24 ACLC 211 Permanent Trustee Co Limited v National Australia Managers Ltd (McLelland CJ in Eq, 8 August 1994, unreported, BC9402940) CASES CITED : Re Mirvac Limited (1999) 32 ACSR 107 Kearns & anor v Hill (1990) 21 NSWLR 107 Cachia v Westpac Financial Services (2000) 33 ACSR 572 Re Challenge Bank Ltd (1995) 19 ACSR 421

PARTIES : In the Application of Cromwell Property Securities Ltd (ACN 079 147 809) In the Application of Cromwell Corporation Ltd (ACN 001 056 980)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORAIONS LIST

5481/06 In the applicaton of Cromwell Property Securities Ltd (ACN 079 147 809)

5438/06 In the application of Cromwell Corporation Ltd (ACN 001 056 980) JUDGMENT 1 HIS HONOUR: There are currently two applications before me. The first is an application by Cromwell Corporation Ltd ("CCL") for an order pursuant to s 411(4)(b) of the Corporations Act 2001 (Cth) approving a scheme of arrangement between CCL and its shareholders, approved by the shareholders by special resolution on 6 December 2006. Other incidental relief is sought in relation to that application. 2 The second application is by Cromwell Property Securities Ltd ("CPS") for orders that it is justified in proceeding on the basis that amendments made to the constitutions of certain trusts of which it is trustee are within the powers of alteration contained in those constitutions and in s 601GC of the Corporations Act. Judicial advice is sought to the effect that CPS is justified in acting upon special resolutions of members of each of the trusts passed at meetings held on 6 December 2006. 3 On 27 October 2006, I made an order on the application of CCL pursuant to s 411(1) of the Corporations Act convening a meeting of ordinary shareholders for the purposes of their considering and, if thought fit, agreeing to the proposed scheme of arrangement. I also gave judicial advice on that occasion to CPS that it was justified in convening meetings of members of each of the trusts for the purposes of considering and, if thought fit, passing resolutions for the purposes of implementing the proposal. 4 Each of the trusts in question is a managed investment scheme of which CPS is the responsible entity. CCL is a public company whose shares are listed on the Australian Stock Exchange. Its business is that of property funds management. Those activities are conducted through its subsidiary, CPS. CPS is the responsible entity of ten registered managed investment schemes known as syndicates, and of a registered managed investment scheme known as the Cromwell Diversified Property Trust. 5 The proposal which was the subject of the scheme of arrangement and the meetings of members of the trusts was for the syndicate members or unit holders to be asked to pass special resolutions to approve the merger of the syndicates with the Cromwell Diversified Property Trust. Following the merger, existing unit holders in the syndicates would hold units in the Cromwell Diversified Property Trust and the assets of the Cromwell Diversified Property Trust would include the beneficial interests in the assets of the syndicates. 6 The proposal also involved the stapling of units in the Cromwell Diversified Property Trust with shares in CCL. The effect of the stapling proposal is that all ordinary shareholders in CCL would hold an equivalent number of units in the Cromwell Diversified Property Trust and all unit holders would hold shares in CCL. Any dealings in the shares would have to be accompanied by like dealings with the units, and vice versa. 7 Amongst the advantages of the proposal was the consolidation of the different businesses conducted by the trusts and allowing the unit holders in the Cromwell Diversified Property Trusts and the syndicates the ability to trade stapled securities in the larger group on the stock exchange. The merger proposal considered by the unit holders of the trusts was conditional upon approval being given by members of CCL and the unit holders of the Cromwell Diversified Property Trust to the stapling proposal, and the conditions of the stapling proposal being satisfied. The stapling proposal was not conditional on the approval of the merger proposal. In the result, both proposals have been approved by the members of the CCL and by the unit holders in all of the trusts concerned. 8 The ten syndicates comprise five coupled syndicates. Each coupled syndicate consisted of two trusts known as a property trust and a planned investment trust. The only investments of the property trust were in units of the planned investment trust. These comprised part of the assets of the property trust. CPS was the responsible entity of each trust. The merger of the coupled syndicates with the Cromwell Diversified Property Trust is effected by the amendment of the constitution of the respective trusts, the issue of new units in the Cromwell Diversified Property Trust to members of the syndicates, and the transfer of their units in the property trusts and the planned investment trusts to CPS. The ratio of new units in the Cromwell Diversified Property Trust varied according to each syndicate, reflecting an independent assessment of the value of each of the trusts. 9 The amendments to the constitutions of the trusts have the effect that CPS was irrevocably appointed as the agent and attorney of each trust member to execute all necessary documents to give effect to the merger if the special resolutions were passed. 10 On the application for judicial advice at the first hearing, I took the approach that the Court should proceed by analogy to the approach to be taken on an application under s 411(1) of the Corporations Act for an order convening a general meeting of members of a company to consider a proposed scheme of arrangement. As Barrett J said in Re Australand Holdings Limited (2005) 219 ALR 728 (at 735, [28] and [29]): "[28] The approach the court takes to applications under s 411(1) is well known and need not be repeated. I had occasion to refer to it recently in Re HIH Casualty & General Insurance Ltd (2005) 215 ALR 562 ; 53 ACSR 12 ; [2005] NSWSC 240. It is sufficient to say that an important element turns on the question often associated with FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, namely, whether the scheme is of such a kind and presented in such a way that, if the necessary majority is obtained or the meeting held in accordance with the court's order, the court is likely to approve it upon a subsequent application for its approval. Where, as here, the trustee or responsible entity of a managed investment scheme seeks judicial advice whether it is justified in placing a proposal before members (but on the footing, secured by scheme conditions, that there will be no implementation without further judicial advice), the same approach is, in my view, appropriate.

[29] The court will, at the first stage, decline to permit the matter to go to members if it sees features clearly precluding a positive result if and when the matter comes back before it for approval. It should not decline to act at the first stage on the basis of matters which, while they may perhaps be arguable, do not represent clear inhibitions. The proper forum for resolution of matters of that kind is the second hearing, where they may be argued inter partes, assuming any interested person wishes to do so."

11 This approach was approved and applied by Campbell J in Abacus Funds Management (2005) 24 ACLC 211. 12 In the present case, the scheme conditions ensured that the proposal could not be implemented without further judicial advice. That was secured by cl 3.1 of the Implementation Deed, as amended following discussion with counsel at the first hearing. 13 The present application for judicial advice is made under s 63 of the Trustee Act 1925 (NSW). Such advice may be given under s 63, notwithstanding that the trusts are governed by a law other than the law of New South Wales (Permanent Trustee Co Limited v National Australia Managers Ltd (McLelland CJ in Eq, 8 August 1994, unreported, BC9402940); Re Mirvac Limited (1999) 32 ACSR 107 (at 115, [38]). 14 The amendment to the constitutions of the trusts went beyond regulating the incidents of the relationship between the responsible entity as trustee, and the members of each of the managed investment schemes as beneficiaries. It also went beyond regulating the incidents of the relationship of the scheme members inter se in relation to scheme property. The amendments provide for the compulsory purchase of a member's interest in the trust fund held by the responsible entity in return for allocation of new property to be held on a different trust. 15 Having regard to the decision of the Court of Appeal in Kearns & anor v Hill (1990) 21 NSWLR 107, of McLelland CJ in Eq in Permanent Trustee Co Ltd v National Australia Managers Ltd at [5] and [6], of Austin J in Re Mirvac Limited at [42]-[46], and of Hely J in Cachia v Westpac Financial Services (2000) 33 ACSR 572 at [68]-[72], I considered that the question of the scope of the amending power, whilst raising potentially arguable issues, did not create a clear inhibition to the implementation of the proposal. As Barrett J said in Re Australand Holdings at [29], the proper forum for the resolution of such an arguable issue is the second hearing, where there may be an argument inter partes if any interested person wishes to argue the matter. 16 On the return of CCL's originating process and CPS's summons today, there has been no appearance by any member of CCL, or by any member of any of the managed investment schemes affected by the merger proposal, opposing the relief sought. Of course, all such persons were given notice of their right to appear today and to be heard on the question of whether the orders now sought should be made. 17 In Re Abacus Funds Management Limited (2006) 56 ACSR 693, Barrett J noted that, in that case, the proposals commanded overwhelming support. His Honour said (at 694-695, [5]): " The affected persons have thus pronounced themselves content to see the proposal implemented and that, in an overall sense, satisfies me that the judicial advice sought should be given unless some particular factor indicates otherwise. "

18 In the present case, many of the resolutions also commanded support which can be described as overwhelming. 19 The stapling resolution was approved by more than 99% of the members of CCL who voted on the resolutions, both by number and volume. The stapling resolution was approved by almost 94% of the members of the Cromwell Diversified Property Trust. The merger resolution was approved by more than 93% of the members of the Cromwell Diversified Property Trust, and by up to 99% by the members of some of the individual syndicates. The lowest level of approval in favour of the merger resolution, and the associated resolutions for amendment of the constitution, was 88.56% in the case of the Northbourne Property Trust. The percentage of unit holders of the Northbourne Plan Investment Trust voting in favour of the merger resolution was 90.57%. That percentage is calculated taking into account votes in favour of the resolution made by the registered unit holder of interests in that trust held by CPS. If CPS's votes are not taken into account, the resolution was nonetheless passed by more than 85% of unit holders. 20 A question was raised on the present application as to whether those votes should be excluded pursuant to s 253E of the Corporations Act. In the view I take, it is unnecessary to resolve that question. On any view, there was a very substantial vote in favour of the resolutions. 21 No one has appeared on the present application to argue that the amendments to the constitutions of the trusts to give effect to the merger proposal are beyond the power of amendment conferred in the trusts' constitution or s 601GC of the Corporations Act. Having regard, in particular, to the reasoning of Hely J in Cachia v Westpac Financial Services in the passage to which I have previously referred, I am satisfied that CPS is justified in acting on the basis that the amendments are within the powers of alteration contained in each of the constitutions and in s 601GC. 22 The independent expert's report was to the effect that, in the opinion of the expert, the stapling proposal and the merger proposal were in the best interests of members and unit holders. I am satisfied that the proposals are at least fair and reasonable from the viewpoint of an intelligent and honest person who might approve it (Re Challenge Bank Ltd (1995) 19 ACSR 421 at 422). 23 The procedural requirements for the obtaining of shareholder and unit holder approval have been satisfied. I am of the view that the orders sought in both applications should be made. 24 For these reasons, in proceedings 5438 of 2006, I make orders in accordance with the short minutes of order which I initial and date today and place with the papers. 25 In proceedings 5481 of 2006, I make an order in accordance with the short minutes of order which I initial and date today and place with the papers, subject to the addition of the following. In paragraph numbered [2] which forms part of the order, after the words "Explanatory Memorandum", the following is to be added: " including executing the deeds poll amending the constitutions of each of the trusts defined in the Implementation Deed dated 23 October 2006, as amended on 30 October 2006, as the 'Merger Trusts' and the deed poll amending the constitution of the trust defined in that deed as the 'Diversified Trust'. "

26 I also direct that the originals of the affidavits of which I have been provided copies may be filed without exhibits in the Registry. The exhibits to the affidavits read on the first hearing may be returned.

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