The first concern - ASX listing rules 11.1.2 and 11.2
33It is convenient, at this point, to address an issue that loomed large in Smartec's case concerning the matter of concern raised by Smartec and referred to at item 1 of paragraph [24] above, that is, whether a requirement for securityholder approval arises under the ASX listing rules in relation to the US assets sale.
34ASX's listing rules 11.1, 11.2 and 11.3 are as follows:
" Change to activities
Proposed change to nature or scale of activities
11.1 If an entity proposes to make a significant change, either directly or indirectly, to the nature or scale of its activities, it must provide full details to ASX as soon as practicable. It must do so in any event before making the change. The following rules apply in relation to the proposed change.
11.1.1 The entity must give ASX information regarding the change and its effect on future potential earnings, and any information that ASX asks for.
11.1.2 If ASX requires, the entity must get the approval of holders of its ordinary securities and must comply with any requirements of ASX in relation to the notice of meeting. The notice of meeting must include a voting exclusion statement.
11.1.3 If ASX requires, the entity must meet the requirements in chapters 1 and 2 as if the entity were applying for admission to the official list.
Change involving main undertaking
11.2 If the significant change involves the entity disposing of its main undertaking, the entity must get the approval of holders of its ordinary securities and must comply with any requirements of ASX in relation to the notice of meeting. The notice of meeting must include a voting exclusion statement. The entity must not enter into an agreement to dispose of its main undertaking unless the agreement is conditional on the entity getting that approval. Rules 11.1.1 and 11.1.3 apply.
Suspension
11.3 ASX may suspend quotation of the entity's securities until the entity has satisfied the requirements of rules 11.1 or 11.2."
35The rules contain no definition of "significant change" or "main undertaking". There is, however, extensive commentary in Guidance Note 12 on ASX's policy in relation to the application of these provisions. It is appropriate to quote at length from the guidance note:
" Security holders' approval under listing rule 11.2
16. Listing rule 11.2 applies where an entity is disposing of its main undertaking. It does not apply where the entity is disposing of a major asset, or high profile asset, if these assets do not also constitute the entity's main undertaking.
17. Listing rule 11.2 is primarily directed at requiring security holder approval for a change that will result in the entity carrying on no significant business or holding no significant assets, other than cash (i.e., the creation of a cashbox). In many cases, the purpose of disposing of the main undertaking is to ready the entity to undertake a new business which may attract the operation of listing rules 11.1.2 and 11.1.3. This is discussed further in paragraph 34 of this Guidance Note. In other cases, the disposal may be a precursor to terminating the entity and listing rule 11.1.3 is not relevant.
18. Disposal of the main undertaking, which attracts the operation of listing rule 11.2, is distinguishable from disposal of a major asset or disposal of a high profile asset. A major asset is a lesser thing than the main undertaking - see the discussion at paragraphs 8 to 10 of Guidance Note 13 - Disposal of a Major Asset.
19. The application of listing rule 11.2 is relatively straightforward where the entity has a clearly identifiable main undertaking. However, where the entity has several business operations and none of them are clearly the predominant business of the entity, the position is more complex. ASX may apply listing rule 11.2 to the disposal of a significant individual business. ASX may also apply listing rule 11.2 where the entity proposes to dispose of several businesses, if collectively they are more significant than the business or businesses to be retained.
20. As mentioned in paragraph 11, an important consideration in the application of listing rules 11.1 and 11.2 is the extent to which the proposed change in business activiti4s is consistent with the business strategy that has been disclosed to the market by the entity and is understood and accepted by investors. For example, where the entity has announced that it proposes to concentrate on an identified substantial core business that it considers has growth prospects, ASX may be prepared to accept that the identified core business is the main undertaking and listing rule 11.2 does not apply to disposals of non-core businesses even if they are of significant size.
What comparisons will ASX use to determine what is a disposal of the 'main undertaking'?
21. Among other things, ASX uses transaction-based comparisons to decide what requirements an entity contemplating a change to its activities must meet under the Listing Rules. ASX will adopt a 50% rule-of-thumb benchmark to assist its application of listing rule 11.2. Where the comparison figures listed below vary by 50% or more, ASX is more likely to consider that the entity is disposing of its main undertaking. Although ASX refers to a benchmark of 50%, ASX will continue to assess all decisions on a case by case basis. This reflects the diversity in the operations of listed entities.
22. The comparisons are:
hTotal consolidated assets as a result of the transaction by the entity or its child entity compared to total assets in the entity's latest audited, consolidated financial statements.
hTotal equity interests as a result of the transaction by the entity or its child entity compared to total equity interests in the entity's latest audited, consolidated financial statements.
hThe number of securities issued by the entity as a result of the transaction compared to the number on issue before the transaction.
hThe projected annual profit (before tax and extraordinary items) of the entity (or group) after the transaction compared to the annual profit in the entity's (or group's) latest audited, consolidated financial statements.
hThe projected annual revenue of the entity (or group) after the transaction compared to the annual revenue in the entity's (or group's) latest audited, consolidated financial statements.
hThe projected exploration expenditure of the entity (or group) for its next reporting period after the transaction compared to the aggregated exploration expenditure over the previous period.
23. In some cases tests based on assets, profits or revenues may not give a meaningful indication of the significance of the acquisition to the entity. For example, revenue and expense items can vary considerably from year to year, and in some cases it will not be appropriate to adopt a profit or revenue-based test. If a comparison produces an anomalous result, ASX may substitute other relevant indicators of significance."
36This commentary makes two things clear: first that, as ASX sees things, there will be some cases in which the "main undertaking" will be identified objectively by reference to the subject matter of the particular transaction viewed in the context in which the transaction occurs; and, second, that there will be other cases (of a "more complex" kind) where ASX will, in an active sense, "apply" rule 11.2 and have regard to certain principles "to assist its application" of it.
37Except in an obvious case admitting of no doubt, therefore, the position seems quite clearly to be that a disposal will, for the purposes of listing rule 11.2, entail the "main undertaking" if ASX deems it to entail the "main undertaking"; and that, as a corollary it will not entail the "main undertaking" if ASX does not deem it to entail the "main undertaking".
38It is not surprising that ASX has formulated its rules on the footing that identification of an entity's "main undertaking" will often involve uncertainty warranting what is, in essence, intervention by ASX as decision-maker. The "undertaking" of a company is often understood as the whole of its property, assets and operational capacity. Thus, in Re Borax Company Ltd [1901] 1 Ch 326, Lord Alverstone CJ was of the opinion that a company would "still be carrying on some part of the undertaking as contemplated by the memorandum of association", notwithstanding the sale of the whole of its assets and property (including goodwill) except certain securities. If the "undertaking" is thus a totality, any reference to the "main undertaking" is confusing and raises questions of degree and commercial judgment.
39The applicability and meaning of a predecessor of listing rule 11.2 were in issue in Australian Securities Commission v Cracow Resources Ltd (unreported, NSWSC, Windeyer J, 12 August 1993 BC9305041). The listing rule there under consideration stated that " any sale or disposal of the company's main undertaking shall be conditional upon ratification by shareholders in general meeting". Upon an application made by Australian Securities Commission for an order directing compliance with the listing rule, the question was whether a large debt owed to the listed company (Cracow) by another company (NHM) and a parcel of shares in NHM held by Cracow constituted Cracow's "main undertaking". It is instructive to note the following passage in the judgment of Windeyer J:
"The plaintiff commission says that either:
i. undertaking is synonymous with business; that the business or undertaking of Cracow after 1991 was investing in mining companies by means of purchase of shares or the making of loans; and that any liquidation or disposal of those shares and loan investments represents a disposal of the main undertaking; and that the adoption of the business plan was a decision to dispose of the main undertaking; or
ii. if undertaking is not synonymous with business then the NHM investment was and is the main asset of Cracow and thus its main undertaking.
As against this Cracow says that since 1991 there has been only one undertaking that being investment and management in the mining industry; that this is borne out by the 1991 and 1992, Annual Reports and by many subsequent documents; that the proportionate share held by Cracow in the issued capital of NHM has reduced from 50.27% at 30 June 1992 to 20.2% at 20 July 1993 brought about partly by issues of new shares by NHM and partly by share sales of Cracow being four sales of 900000, 194000, 360000 and 3,262,528 shares respectively; and that even after the latest sale pursuant to the option agreement Cracow will hold 2,017,413 shares in NHM.
I think it reasonable to say that the investment of Cracow in NHM comprises its shares in the company and the moneys lent to the company. The evidence makes it clear that the loans were made to protect its investment and fund the company in the hope of earning income in due course from the shareholding. If that is the position then it seems clear that whether or not one looks at book values, market values of shares plus book value for debt or option values the NHM investment was the main investment of Cracow at the time of grant and exercise of the options. Thus if main undertaking means main investment rule 3S(2) has been breached. And so it has if in like circumstances main undertaking means main asset and main asset is equivalent to main investment which I do not think it is. Debts receivable and shares are entirely different assets in form.
The question then is whether or not main undertaking does mean main asset or even main investment. It would of course have been easy to say so if it did just as Listing Rule 3J(3) does. Asset is a relatively clear concept. I consider that in the context in which it appears in the listing rules and for that matter in the Articles of Association of Cracow undertaking relates to the business of the company. For instance the main asset of a bus company may be its buses; but its undertaking is I consider the business operation of a bus company. If the directors determined for the purposes of the business of a bus company to sell all its buses and then to lease them back that would not I think amount to a disposal of its main undertaking; it would still be operating the same business. Nor do I consider that if undertaking means business and direction is changed then the disposal of part of that business would necessarily be disposal of a main undertaking. A stockbroker may for instance conduct as a separate operation a mortgage broking business and decided to sell that operation. Its disposal would not I think be a disposal of a main undertaking. It is dangerous to seek too much guidance from decisions as to the meaning of the word undertaking in other contexts, particularly compulsory acquisition cases, The Electricity (Balmain Electric Light Co Purchase) Act 1957 57 SR 100 or cases determining the meaning of a charge over the undertaking of a company such as in Re Panama, New Zealand & Australian Royal Mail Company 1870 LR 5 Ch App 318 although that was held a charge over the assets of a continuing business. 3S of the Listing Rules is headed "Changes in control and/or activities" which supports the view that main undertaking in the context here means main business. That view is supported by Top of the Cross Pty Limited v FCT 1980 50 FLR 19 and Bayfront Holdings Limited v Inland Revenue Commissioner [1971] 1 WLR 1333. I can envisage a company formed for the single purpose of gold recovery from Cracow might have been changing its activities when it made the decision to go forward with a more diversified mining operation; and in fact it did seek shareholder approval for the purchase of the Tasmanian, Victorian and South Australian interests as it was obliged to do under another part of the listing rules although it did not seek approval for disposition of the Cracow interests. But since that time the company, not considering itself a trader, was an investor in mining enterprises albeit for the most part indirectly through company holdings; that was its business and on the evidence will continue to be its business."
40Given the questions of degree and of commercial judgment involved in identifying a particular company's "main undertaking", it is not surprising that the listing rules contemplate that ASX will play a supervisory and decision-making role in determining the applicability of listing rule 11.2. Such a determinative role of ASX lies at the heart of the listing rules in any event: see the discussion in Bateman v Newhaven Park Stud Ltd [2004] NSWSC 392; (2004) 49 ACSR 454 at [10] - [12].
41CNP has put into evidence its correspondence with ASX concerning the applicability of listing rules 11.1.2 and 11.2. Some of that correspondence is subject to a confidentiality order. Also in evidence are written representations made by Smartec's solicitors to ASX. I need not review the correspondence in any detail. It is sufficient to note that ASX stated (and later confirmed) that listing rule 11.2 does not apply and that ASX does not intend to impose a requirement under listing rule 11.1.2; also that these opinions or statements of position on ASX's part have been expressed after consideration of both information provided by CNP and representatives made by Smartec.
42By letter dated 9 May 2011 to Smartec's solicitors, ASX referred to various relevant considerations and commented on several particular matters put to it on behalf of Smartec. Particularly pertinent, I think, is the following paragraph of the letter:
"Notwithstanding your submissions, ASX has not been provided with any new information that would suggest that its original decision was grounded on incorrect or incomplete information. Accordingly, based on the information currently to hand, ASX does not see any proper basis for it to change the original decision it conveyed to Centro that listing rules 11.1.2 and 11.2 do not apply to the proposed sale by Centro of its US property assets."
43Viewed in context, therefore, Smartec's submission that it has a genuine need of access to CNP's books for purposes related to the applicability of listing rules 11.1.2 and 11.2 boils down to an assertion that it should be given such access so that it may investigate whether CNP has failed to give accurate and complete information to ASX for the purposes of ASX's decision-making.
44I should add that I was taken to evidence of disclosure and announcements by CNP describing the assets position in a way that ascribes negative value to the United States property assets. At 30 June 2009, for example, the Super LLC vehicle was said to have a property portfolio valued at $6.1 billion and debt of $6.3 billion, with properties being secured against multiple tranches of debt. The position was, in concept, similar at later times. There is thus a cogent argument that, if the "main" undertaking is to be judged according to stand-alone value, the United States property assets are not "main". But that, of course, is not the only consideration that ASX might bring to bear.
45According to CNP's 2010 annual report, Super LLC is a joint venture between CNP and other Centro entities which owns US properties which have been secured against the debt within the Super LLC structure. Under the terms of the joint venture, each participant is entitled to the economic benefits and bears the economic burdens of separately identified properties, including the property specific debt encumbering those assets.
46Against this, counsel for Smartec pointed out that the gross book value of the United States assets in the 2010 annual report was $10.7 billion which, when the debt of the asset-owning entities is ignored, indicates a significant proportion of total assets.