Permanent Trustee Company Ltd v National Australia Managers Ltd NSWSC, 8 August 1994, unreported

Judgment (ex tempore) 1HIS HONOUR: By summons filed on 4 February 2014 the plaintiff Commonwealth Managed Investments Ltd ('CMIL') seeks orders pursuant to (NSW) Trustee Act 1925, s 63, in respect of a proposed transaction effecting the internalisation of the management of two listed managed investment schemes ("the CFX trusts"), called the CFS Retail Property Trust 1 and CFS Retail Property Trust 2 the securities of which are stapled and trade as a single security ("CFX") on the Australian Stock Exchange ("ASX"). 2CMIL is the responsible entity of the CFX trusts. The issued shares in CMIL are owned by CFX Co Ltd which is a wholly owned subsidiary of the Commonwealth Bank of Australia ("CBA"). The CFX trusts are also managed by subsidiaries of CBA. The proposed internalisation will result in ownership of CMIL being transferred to CFX security-holders, and the funds also being managed by entities owned by those security-holders. 3In accordance with what is now a well established procedure, CMIL seeks, on this occasion, the opinion, advice and direction of the court as to whether it is justified in convening a scheme meeting for the purpose of considering, and if thought fit voting on, ten proposed resolutions to approve and give effect to the proposed transaction; whether it is justified in distributing an explanatory memorandum, now comprised in draft form in PXO3, to the registered security-holders in CFX; and whether it is justified in proceeding on the basis that proposed amendments to the constitution of each of the CFX trusts will be within the powers of alteration conferred by those constitutions and by (Cth) Corporations Act 2001, s 601GC. 4If the advice sought today is given, and the proposal is approved at a scheme meeting proposed to be held on 7 March 2014, CMIL will then seek, at a second Court hearing proposed to be held on 10 March 2014, the opinion, advice and direction of the Court as to whether it would be justified in implementing the scheme, giving effect to the proposed amendments to the constitutions, and doing all things necessary to effect the scheme. 5The appropriateness of this process of seeking judicial advice under s 63 in connection with a trust scheme is now well established: see, for example, Re Sydney Airport Holdings (as responsible entity of Sydney Airport Trust 2) [2013] NSWSC 1665 and the cases referred to therein. 6At the first hearing, the Court is concerned not with whether final approval should be given to the scheme, but with whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: see Re Abacus Funds Management Ltd (2006) 24 ACLC 211 at [23]. 7The Court will not decline to order that a trustee would be justified in submitting a matter to a meeting simply because there are disputable matters which might or might not ultimately be approved. It is only if there are features that clearly preclude a positive result at the second hearing that the Court will, at the first stage, decline to permit the matter to go to members: see, in connection with Corporations Act, Part 5.1, Re Australand Holdings Limited (2005) 54 ACSR 687, [28] - [29], an approach which has subsequently been applied to trust schemes in Abacus Funds Management and Cromwell Property Securities. 8The first issue presently raised is the proposed amendments to the constitutions of each of the CFX trusts. Each constitution contains a clause conferring a broad power of amendment. Corporations Act, s 601GC(1)(a), contains a similarly broad power of amendment. Consistent with the decisions of the Court in Permanent Trustee Company Ltd v National Australia Managers Ltd (NSWSC, 8 August 1994, unreported, McLelland CJ in Eq); Re Mirvac Ltd (1999) 32 ACSR 107, 45 - 47, and Re Cromwell Property Securities Ltd [2006] NSWSC 1449, there is no reason to suppose that the powers contained in the relevant constitutions are not sufficiently wide to admit of the proposed amendments. 9So far as concerns the adequacy of the explanation of the proposals, a comprehensive explanatory memorandum has been prepared; has been discussed with ASIC whose requisitions have been satisfied; and has also been discussed with the ASX which has also expressed satisfaction with the final form. 10The explanatory memorandum contains the independent directors' recommendation, a comprehensive independent expert's report, and the other usual reports and summaries. A detailed verification process has been undertaken to ensure that statements in the explanatory memorandum are not misleading or deceptive or likely to mislead or deceive, and to identify source documents for those statements. 11I am satisfied that the proposals and resolutions are adequately explained by the explanatory memorandum. 12The plaintiff has rightly drawn attention to a number of matters which might warrant consideration in terms of whether the scheme should ultimately be approved. 13So far as the foreign security-holders are concerned, at this stage, it seems at least clearly arguable that the provisions by which a small number of foreign security-holders might be subject to a compulsory sale process are of a kind that have been approved in respect of other like schemes. 14So far as concerns the absence of a members' resolution under Corporations Act, s 208, approving the transaction as a related party transaction, the Independent Board Committee established to have responsibility on behalf of the board for the proposed transaction, has determined that the exception in Corporations Act, s 210, applies. That section provides that member approval is not needed to give a financial benefit on terms that would be reasonable in the circumstances if the public company or entity and the related party were dealing at arms length, or are less favourable to the related party than such terms. 15In the present case, the independent expert's report of Grant Samuel concludes that the consideration to be paid to CBA, which for relevant purposes is the related entity, is "fair" because the cost is below the net present value of the net savings in operating costs that will arise over the life of the existing management agreements, plus the income from external clients. Assuming that the trust's asset portfolio grows at a rate of approximately 2.5 per cent per annum over the long-term, the net present value of the net savings is approximately $ 570 million to $613 million, or $59 million to $102 million greater than the total effective cost of the proposal. Further, the proposal represents multiples of around ten times the pro forma incremental cash flow which, while at the higher end of the range compared to Australian internalisations over the past seven years, is considered reasonable having regard to the surrounding circumstances. Additionally, the evidence also establishes that the current terms are the outcome of a lengthy negotiation between the Independent Board Committee and CBA. 16It may well be that the exception in s 210 applies, and I do not need to reach a conclusion about that at this stage, if at all. Ultimately, it would seem that whether the exception is applicable or not would be tested only on an application for a civil penalty under s 209(2) or a criminal prosecution under s 209(3), of a person allegedly involved in a contravention. On the other hand, I have not found in the evidence any direct expression of opinion of the independent expert (or anyone else) that the terms would be reasonable in the circumstances if the entity and CBA were dealing at arm's length, and it may well be desirable that that be addressed at the second hearing. 17In any event, I am satisfied that it is not so clearly the case that the s 210 exception does not apply as to present an obstacle to approving the meeting being convened. 18While the proposal contains "deal protection" provisions of the no-shop and no-talk variety, there is a "fiduciary carve out" in terms which have been found acceptable in other like cases. 19The proposal also contains provision for a reimbursement fee and compensation fee to be payable to CBA in certain events. It does not seem to me that the inclusion of these provisions in the implementation deed provides a reason for not permitting the meeting to be called. In Re SFE Corporation Ltd (ABN 74 000 299 392) (No 1) (2006) 59 ACSR 82, Gyles J said that he would be inclined to refrain from ordering a meeting on account of such provisions only if the amount of a break fee was such that it could influence voting at the meeting, or if there were some other unusual circumstances. 20It seems to me that so far as the "reimbursement fee" and the "compensation fee" are concerned in this case, it is likely that their quantum is within the tolerance established by the Takeover Panel rules and decisions in like cases. And while I am not convinced that they would not influence voting at the meeting - indeed, the explanatory memorandum recognises that the risk of incurring the compensation fee is a potential implication of not voting in favour of the proposal - it also seems to me that if the meeting is not convened and the transaction does not proceed, the risk of its being incurred is no less. 21I am therefore satisfied that the proposals and resolutions are adequately explained to those who have a financial interest in them, and there is no such obvious flaw in the proposed scheme that it would be inappropriate for it even to be submitted for consideration by security-holders. 22The Court orders that: (1)The plaintiff would be justified in convening concurrent extraordinary general meetings ("scheme meeting") of the security-holders of CFS Retail Property Trust 1 ("CFX1"), and CFS Retail Property Trust 2 (CFX2") (together "CFX"), for the purpose of considering and if thought fit, voting on the resolutions which are set out in annexure D to the explanatory memorandum which is exhibit PXO3 herein ("the explanatory memorandum"). (2)The plaintiff would be justified in distributing an explanatory memorandum substantially in the form of exhibit PXO3 to all registered security-holders of CFX. (3)The plaintiff would be justified in proceeding on the basis that the proposed amendments to the constitutions of each of CFX1 and CFX2 would be within the powers of alteration conferred by the respective constitutions of CFX1 and CFX2, and s 601GC of the Corporations Act. (4)The proceedings be adjourned to 10 March 2014 for considering the balance of the judicial advice sought in paragraph 72 of the statement of facts. 23These orders may be entered forthwith.