Sylvastate Limited, in the matter of Sylvastate Limited [2011] FCA 211

Outline of Scheme 3 The plaintiff, Sylvastate Limited is a public company founded in 1924 and listed on the Australian Securities Exchange (ASX). It is a listed investment company and, as at 7 March 2011, it had 863 members holding 15,798,150 shares. Whitefield, also a listed investment company, holds 210,636 of those shares. Under the proposed Scheme the shares in Sylvastate, other than those held by Whitefield (Scheme Shares), will be transferred to Whitefield and in consideration the shareholders, other than Whitefield (Scheme Shareholders) will receive Whitefield shares (Consideration Shares). The effect of the Scheme will be that Sylvastate will become a subsidiary of Whitefield. 4 Both the Scheme and the Scheme Booklet are exhibited to the affidavit of Mr Gluskie. The Scheme Booklet describes the Scheme in detail and, having reviewed the Scheme, I am satisfied that the description is accurate. It explains that the number of Consideration Shares that each Scheme Shareholder will receive will be based on the "relative Adjusted Net Asset Backing of Whitefield and Sylvastate". This calculation will be made in accordance with the formula set out in the Scheme Booklet and released to the ASX. It will also be published on Sylvastate's website not less than seven days before the Scheme Meeting. This will enable shareholders to calculate the number of Consideration Shares they would receive before voting on the proposal. 5 Sylvastate and Whitefield have three common directors and a common investment manager, White Funds Management Ltd, in which Mr Gluskie has a 96.5% interest. Mr Gluskie is also a substantial shareholder in both Sylvastate and Whitefield. Because of these interests Mr Gluskie has abstained from making a recommendation in respect of the Scheme. The other directors, including Mr Armstrong who is the only independent director, have expressed unanimous support for the Scheme and have indicated that they intend to vote in favour of the Scheme. 6 The Scheme Booklet outlines why the directors of Sylvastate have recommended that shareholders vote in favour of the proposed Scheme. It lists the following potential advantages: a lower Management Expense Ratio for the Merged Group than for Sylvastate as a standalone entity; a more efficient and sustainable ongoing cost structure; an uplift in the reported Net Asset Backing; an increase in liquidity; and greater market presence and visibility 7 The Booklet also identifies potential disadvantages and risks. These are clearly set out and explained in the Booklet. They include taxation consequences which may affect some shareholders, the risk that some of the potential advantages may not eventuate, the fact that shareholders resident outside Australia and New Zealand may not be entitled to participate in the Scheme and the fact that the Consideration Shares will represent a smaller voting interest in the Merged Group than the shareholders had in Sylvastate. The Scheme Booklet also sets out "Frequently asked questions" and answers to those questions.

Merger Implementation Agreement 8 The Merger Implementation Agreement is annexed to the Scheme Booklet. It is a comparatively simple agreement and does not make any provision for a break fee or no shop or no talk obligations. It provides that Sylvastate and Whitefield must each "undertake appropriate due diligence and verification processes" for the purpose of complying with their obligations to use reasonable endeavours to effect the Scheme. 9 Mr Gluskie's evidence included details of the due diligence process carried out by Sylvastate. It is not necessary to describe the details of the process here, however, I am satisfied that the process was comprehensive and carefully carried out. Mr Fowler gave evidence about the verification process in relation to Whitefield and stated that on the basis of his reasonable inquiries the material statements in the Scheme Booklet in relation to Whitefield are "true and not misleading or deceptive" and that there is no material omission. On the basis of Mr Gluskie's and Mr Fowler's evidence I am satisfied that the process of verification provides an adequate basis for the deponents' respective assertions and that the Court is entitled to rely on the accuracy of the statements in the Scheme Booklet.

Independent Expert's Report 10 The directors of Sylvastate appointed Grant Thornton Corporate Finance Pty Ltd (Grant Thornton) as an independent expert to assess the Scheme. A copy of Grant Thornton's report is annexed to the Scheme Booklet. The report concludes that the Scheme is "fair and reasonable and hence in the best interests of Non-Associated Shareholders". 11 In summarising the advantages of the Scheme the independent expert report notes that the only Independent Director of Sylvastate, Mr Armstrong, who personally owns shares, has stated that he intends to vote in support of the Scheme and that the merged entity that will be created by the Scheme will not be exposed to any new or unknown risk typically associated with a merger or takeover. The report refers to the economies of scale that the merged entity will achieve and adds that the merged entity, will have a significantly larger market capitalisation and improved liquidity than Sylvastate on a standalone basis. It is generally considered that companies with a larger market capitalisation attract greater coverage by the broker and investment community compared to companies with a smaller capitalisation. The increased profile and research coverage increases visibility to investors and potential interested parties. 12 The disadvantages identified as arising from the Scheme include that the Scheme Shareholders will not hold a controlling interest in the merged entities and "may receive a lower dividend in the Merged Entity than they would have received from Sylvastate on a standalone basis". 13 In analysing the adequacy of the consideration for Sylvastate shares the Independent Expert adopted "the net realisable assets /net asset backing (NAB) approach to value 100% of the issued capital in Sylvastate and Whitefield". The Report observes that "in the case of listed investment companies, the current or recent listed market values of the underlying investments provide an accurate representation of the current fair value of those companies' investment holdings. The report assesses the equity value per Sylvastate share as between $3.66 and $3.69 per share. The corresponding value per Whitefield share is assessed as between $3.19 and $3.22 and per Merged Entity share as between $3.20 and $3.23. On the basis of those assessments and an exchange ratio of 1.156, the Report values the Scheme Consideration at between $3.70 and $3.74. On that basis the Report concludes that the Share Consideration exceeds the value per Sylvastate Share by $0.04 to $0.05 or 1.1% to 1.4%. 14 The Independent Expert stated that the assessed fair market value range of the Scheme Consideration is greater than the assessed fair market value range of Sylvastate shares prior to the proposed Scheme. For that reason it concluded that the Scheme was fair. Having considered the likely advantages and disadvantages of the Scheme the Independent Expert also concluded that the Scheme was reasonable. The Independent Expert expressed its overall conclusion as follows: After considering the abovementioned quantitative and qualitative factors, Grant Thornton Corporate Finance has concluded that the Proposed Scheme is fair and reasonable and hence in the best interest of the [Scheme Shareholders].

Investigating Accountant's Report 15 Sylvastate engaged Grant Thornton Audit Pty Ltd (GT Audit) to prepare an Investigating Accountant's Report for inclusion in the Scheme Booklet. The Report comments on the indicative Pro-Forma Statement of Financial Position for the Merged Entity following implementation of the proposed Scheme as set out in a table at 6.18 of the Scheme Booklet. The Booklet states that the table was prepared, on the basis that the last month end immediately prior to the Scheme Meeting was 31 December 2010, and after adjustment for significant actual or expected transactions after that date up to the expected implementation Date for the Scheme, being 10 May 2011 subject to the following exception. The Pro-Forma Financial Statement does not include any adjustment for movements in the market value of investments nor the generation of net operating income after 31 December 2010. 16 In commenting on this Pro-Forma Statement the Investigating Accountant's Report states that the Investigating Accountant's review has not disclosed anything to suggest that the pro forma historical statement of financial position is not presented fairly "in accordance with the recognition and measurement principles prescribed in AGAAP and in accordance with the accounting policies adopted by the Merged Group". The Report notes that while it followed procedures that, in its professional judgment, it considered reasonable in the circumstances, nevertheless, These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than given in an audit.

Duty of Disclosure 17 In an application under s 411, the plaintiff has a duty of disclosure as described by Barrett J in Re Permanent Trustee Co Ltd (2003) 43 ACSR 601 at [7]: The fact that the application is ex parte is not without some significance. The absence of any defendant or contradictor sharpens the duty of the [plaintiff]. While a case such as the present is distinguishable from one where an interlocutory injunction is sought in the absence of the defendant (in that there is here no defendant as such) I think it is fair to say that [a plaintiff] in this kind of situation, like [a plaintiff] ex parte for an injunction, carries the responsibility of bringing to the court's attention all matters that could be considered relevant to the exercise of discretion. 18 In accordance with this duty the plaintiff brought a number of aspects of the proposed Scheme to the attention of the Court. It submits, however, that none of these matters should be of concern to the Court. I agree with this submission for the reasons given below.

One class 19 The plaintiff had designated one class to vote on the Scheme proposal however, in doing so it had considered the position of Mr Gluskie. As indicated above, at [5], Mr Gluskie has a significant interest in Sylvastate and in White Funds Management. The investment management arrangements are disclosed in the Scheme booklet and are referred to in the Independent Expert's Report. In its written submissions on the point the plaintiff made the following observations: On implementation of the scheme the Sylvastate investment management agreement will be terminated and investment management will continue under the Whitefield investment management agreement. Whilst the overall costs of operation after implementation of the scheme are expected to improve due to costs savings and synergies, the returns to the investment manager will increase because the Sylvastate investment management agreement will be terminated and certain cross subsidisations will cease… 20 In order to assist it in considering whether in the circumstances the present Scheme involves two classes, the plaintiff commissioned a supplementary report to be prepared by the Independent Expert, Grant Thornton. The Supplementary Independent Expert's Report, contained in a letter dated 9 March 2011, addressed to the Sylvastate independent directors, states Grant Thornton had been asked "to provide additional commentary and benchmark analysis in relation to the expected management fee expense payable by the Merged Entity if the Proposed Scheme is implemented". The letter states that its purpose is "only to assist the Federal Court of Australia in gaining a better understanding of the level of the investment management fee payable by the Merged Entity in comparison to comparable companies". The report compared the investment management fee ratio of the Merged Entity immediately following the implementation of the Scheme with that of comparable companies. In doing so it excluded the cost subsidisation arrangement for Sylvastate that will fall away on the termination of the Sylvastate investment management agreement following the implementation of the Scheme. On the basis of that comparison, it concluded that the ratio for the Merged Entity would "not be inconsistent with the investment management fee ratios observed for comparable companies", in other words it would be not be above market. 21 In Wattyl Limited, in the matter of Wattyl Limited [2010] FCA 854 I considered the issues involved in determining whether fully paid shareholders and partly paid shareholders asked to vote in respect of a proposed scheme of arrangement comprised one or two classes. In relation to those circumstances I said at [15]-[16]: It does not follow … that because different rights attach to partly paid shares holders of these shares are to be treated as a separate class for present purposes. The question is whether at the meeting convened for the purpose of obtaining shareholder approval of the Scheme the interests of the two groups of shareholders are so different "as to make it impossible for them to consult together with a view to their common interest"; Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583 per Bowen LJ. As Barrett J commented in Re Hills Motorway Management Ltd (2002) 43 ACSR 101 at 104: The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail. Where the community of interest to which Barrett J refers is lacking, even identical treatment will not be a sufficient basis for treating different groups of shareholders as being of the same class. The principles governing the distinction between classes are directed to avoiding the unfairness which would result if groups that do not have a community of interest were denied separate meetings in which to consider a proposed scheme of arrangement. The policy underlying those principles would be equally offended by a decision to order a separate meeting in respect of groups which in fact have the requisite community of interest; Application of Australian Co-operative Foods Ltd (2001) 38 ACSR 71 at 88 per Santow J. 22 If, as concluded in the Supplementary Report, the investment management fee ratio of the Merged Entity is comparable to those of similar companies it is difficult to see that the issue Mr Gluskie has to address in deciding how to vote on the Scheme is materially different from that of the Scheme Shareholders in general. In my view there is no basis for a conclusion that there is other than one class of Scheme Shareholders.

Performance risk 23 Protection of shareholders from the risk of not receiving the Consideration Shares in exchange for the transfer of their shares is provided in the Scheme itself and is dealt with by timing the issue of the Consideration Shares to occur before the transfer of the Sylvastate Shares occurs. The arrangement is supported by Whitefield's obligations under the Deed Poll whereby Whitefield covenants in favour of the Scheme Shareholders to perform its obligations under the Merger Implementation Agreement and the Scheme. Those obligations are subject to the Scheme becoming effective and will terminate if this does not occur on or before the Sunset Date.

Warranty by Scheme Shareholders 24 The Scheme provides that each Scheme Shareholder is deemed to have warranted that on the date of the transfer, all their shares will 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". Provisions of that kind are common and have not been seen to constitute a problem: APN News & Media Limited at [57]-[63]; Investa Properties Ltd [2007] FCA 1104 at [21]. The warranty is disclosed in section 7.5 of the Scheme Booklet.

Evidence necessary for a first court hearing 25 I am satisfied from the evidence before me that the requirements necessary to be proved at a first court hearing in relation to an application under s 411(1) of the Corporations Act 2001 (Cth) have been met. In particular I am satisfied that the plaintiff is a Part 5.1 body, that the proposed Scheme is an "arrangement" within the meaning of s 411, that Mr Iliffe has consented to act as chairman of the meeting and Mr Armstrong has consented to act in his absence. 26 I am satisfied that the Scheme is bona fide and properly proposed and that ASIC has been given an opportunity to examine the proposal and adequate notice of the first Court hearing date. The plaintiff has tendered a letter dated 9 March 2011 from ASIC stating that it does not propose to appear at the first Court hearing or to oppose the Scheme at that time.

Conclusion 27 On the basis of the evidence tendered at the hearing on 10 March 2010 and for the reasons given above, I made the orders sought by the plaintiff. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.