Ventura Investment Management Limited, in the matter of Ventura Investment... [2011] FCA 721 | Case summary

REASONS FOR JUDGMENT 1 This is the first court hearing of an application to approve a scheme of arrangement between Ventura Investment Management Limited ("Ventura") and its shareholders other than Centrepoint Alliance Limited ("CAF") and its subsidiary, Professional Investment Holdings Limited ("PIH"). 2 Ventura is an unlisted public company with an equity value on a control basis in the range of $5,291,000 to $5,549,000. Ventura has the following securities on issue: 1,919,700 fully paid ordinary shares ("Founder Shares"); and 2,166,700 fully paid redeemable preference shares ("Planner Shares"). 3 Ventura is a special purpose fund management company which seeks to provide investors with access to a range of retail funds and wholesale funds. Ventura is the responsible entity of 20 managed investment schemes and it manages those funds directly or in conjunction with specialist fund managers. As at 31 March 2011, Ventura had $878.9 million of funds under management. 4 The effect of the proposed scheme of arrangement is that CAF, a public company listed on the ASX, will acquire all of the issued shares in Ventura that are not already held by CAF or its subsidiary, PIH. The proposal which is to be put to shareholders contains a number of elements, some of which are not part of the scheme itself. 5 Nevertheless, it is appropriate to describe the elements of the proposal as follows: By operation of a Ventura board resolution, Ventura shareholders will be paid a Special Dividend on the Implementation Date, being a fully franked cash dividend of 46 cents for each share which a shareholder holds on the second court date; by operation of the Ventura constitution, together with a Ventura board resolution in terms of the Ventura constitution, on the Implementation date, all the Planner Shares (which are redeemable preference shares) on issue on the record date will be converted to Founder Shares (which are ordinary shares) on a basis established under a formula set forth in the constitution. The conversion basis will be one share for 0.8860017; by operation of the Scheme, on the Implementation Date, Ventura shareholders will transfer their shares (which will by then be Post-Conversion) to CAF; Ventura shareholders will receive, pursuant to the Scheme, 1.4 CAF shares for each Post-Conversion Ventura share that the relevant shareholder holds (rounded to the nearest share); and the Scheme will effect the acquisition of Ventura by CAF and will result in Ventura becoming a subsidiary of CAF. 6 The Scheme covers 81.9% of the Founder Shares and 84% of the Planner Shares. The balance of the shares in each class are held by CAF itself or through its subsidiary PIH. PIH was the subject of a scheme of arrangement approved by the court in November 2010 under which it was acquired by CAF: see Re Professional Investment Holdings Ltd [2010] FCA 1193 and Re Professional Investment Holdings Ltd (No 2) [2010] FCA 1336. The independent directors recommend that in the absence of a superior proposal, Ventura shareholders vote in favour of the Scheme. 7 The evidence to which I was taken today includes a report of Investorlink Corporate Limited ("Investorlink") which is the independent expert appointed to assess the fairness and reasonableness of the Scheme. Investorlink has prepared a report in which it concludes that the acquisition is fair and reasonable and in the best interests of Ventura shareholders. Mr Oakes SC, who appears for Ventura this morning, took me in some detail through the Investorlink report. It is unnecessary to refer to the report in great detail, but it is sufficient to say that Investorlink concluded that the most appropriate valuation methodology to value the shares in Ventura is to apply what is called a "dual basis" methodology. 8 The "dual basis" consists of adopting a capitalisation of future maintainable earnings approach for the value of the business operations of Ventura and a net assets approach to the value of assets and liabilities, that are surplus to core trading operations. Investorlink valued the future maintainable net profit after tax ("NPAT") of Ventura, at $350,000. This figure is based on what is described in the report as "normalised earnings," for the financial year 2011. The process by which this figure is arrived at is explained in the report. 9 The figure of $350,000 is less than the NPAT for Ventura in previous years, but the independent expert has seen fit to adjust those figures downward, in a manner which is explained in the report. Investorlink goes on to determine an appropriate multiple to be applied to the NPAT. The multiple which has been chosen is a range of 3.75 to 4.25, prior to the determination of an appropriate control premium. The range which Investorlink has determined as the appropriate multiple is less than the range which has been applied to certain other companies in the funds management business, but Investorlink sets out in its report the reason why it has selected the lower multiple. 10 Similar observations apply to the control premium, which is assessed by Investorlink in the range of 5% to 10%. The reasons why this range, which is lower than the control premiums that have been assessed for other companies in the funds management business, are also explained in the report. The effect of the assessments made by Investorlink in its report, calculate the equity value of Ventura (on a control basis) in the range from $5,291,000 to $5,549,000. This is set out in table 21 of the report to which I was taken this morning. Investorlink has determined the value of a scheme share as being in the range of $1.38 to $1.45 and this is also explained in table 21. 11 Investorlink has assessed the post merger value of a share in CAF as being in the range from 99 cents to $1.07. This is explained in table 33 of the report. The scheme consideration conversion ratio is 1.4 CAF shares for each post conversion Ventura share. This puts the determined value of a scheme share as in the range from $1.36 to $1.45, once again the relevant table, which explains this, is table 21. The consideration that is offered for each scheme share is in the range of $1.38 to $1.49. This is explained in table 37 of the report and is above the value of Ventura on a standalone basis. This is sufficient for Investorlink to conclude that the consideration offered is fair and that being fair it is also reasonable. 12 The conclusion that is reached by Investorlink is that the consideration is fair and reasonable and in the best interests of Ventura shareholders. This is set out in section 12.5 of the report. 13 Mr Oakes' submissions make reference to the usual principles applied in making the orders for the convening of meetings at the first court hearing. It is unnecessary to refer to the principles which are well-established in the authorities. Mr Oakes' submissions point to a number of aspects of the transactions, which he brought to my attention this morning. I accept that none of the matters are of concern to the court, insofar as they could be said to bear upon the question of whether I ought to make orders convening the meetings. 14 I will refer only briefly to the matters to which I was taken this morning. The Special Dividend has been declared conditional upon the Scheme proceeding. I was taken to the Ventura board resolution of 31 May 2011. I was also taken to the matters in the resolution, which bear upon compliance with the regime now applicable to the circumstances in which a dividend may be paid, as set out in s 254T of the Corporations Act 2001 (Cth) ("Corporations Act"). Each of the circumstances or matters set out in s 254T(1)(a)-(c) was the subject of the evidence contained in the resolution of 31 May. To the extent that it might be thought that the payment of the special dividend amounts to financial assistance by Ventura for acquiring shares in that company, the matters which are the subject of the resolution of 31 May 2011 appear to satisfy the requirements of ss 260A(1)(a)(i) and (ii). 15 I was also taken to evidence which establishes that, at least as at 31 March 2011, Ventura had cash on hand which would have been more than sufficient to meet the payment of the Special Dividend which will be in the order of $1.88 million. However, I should observe here that this is a matter which will be the subject of further evidence at the second court hearing. 16 I was also taken this morning to the provisions of Ventura's constitution which deals with the conversion of Planner Shares to Founder Shares. Article 5B.10 of the constitution provides that on a "Conversion Event", the board shall have the right to convert Planner Shares to Founder Shares at what is described as "the Conversion Rate". 17 The Conversion Rate is stipulated in article 5B.11 which sets out the formula pursuant to which the calculation was made that results in the ratio of 1 to 0.8860017 to which I referred earlier. A "Conversion Event" is defined in the article as covering a number of possible events, the relevant trigger in the present case being that the board considers that the conversion of the planner shares is in the best interests of the shareholders so long as the Scheme is approved. This is sufficiently covered by the terms of the resolution of 31 May 2011. 18 Whilst there are some deal protection clauses in the Merger Implementation Deed and the Scheme Booklet, there is nothing in the relevant provisions which falls outside the principles that have been applied in a series of cases, including Re APN News & Media Limited (2007) 62 ACSR 400 per Lindgren J. There is no break fee. There are exclusivity provisions, but these are subject to a "fiduciary carve-out" in relation to no-shop and no-talk obligations in accordance with the approach that has been accepted in a number of authorities both in the Supreme Court of New South Wales and in this Court. 19 Performance risk is dealt with in the manner that has been established for some time following upon observations about that issue by judges of the court. Moreover, a related issue dealing with the position that covers proxies in the period following the implementation date is covered in a way which embraces suggestions made by Emmett J in approving other similar schemes of arrangement. 20 There are a number of foreign shareholders. Ventura has identified nine. They include shareholders located in a number of countries including the USA and Canada. Inquiries of all jurisdictions other than Canada, where inquiries are still proceeding, indicate that the shares may be issued to shareholders in those jurisdictions. An application will be made at the second court hearing in accordance with the approach that has been taken in other instances to the requirements of the Securities Act 1933 15 USC s 77a. 21 I am satisfied, for the reasons that are referred to in the written submissions, that the approach that has been taken is not class-creating. This was dealt with in a number of authorities, including Re Hills Motorway Limited (2002) 43 ACSR 101. The same approach has been taken by a number of judges of this court. The authorities and the relevant principles are sufficiently covered in Mr Oakes's written submissions, which I will mark as MFI-2. The submissions set forth in MFI-2 as to the matters which are required to be proved and the other procedural matters need no further comment. 22 Moreover, I am satisfied that the orders which Mr Oakes asked me to make this morning are in accordance with those which have been made in similar applications. For these reasons, I propose to make those orders. 23 I should add by way of postscript that there is a minor typographical error in paragraph 8(e) of the written submissions which refers to a value of the scheme shares in the range of $1.36 to $1.45. This should be to a range of $1.38 to $1.45. I should also mention that the constitution of Ventura gives the definition of "Conversion Rate" by reference to article 5B.15, whereas, in fact, the applicable article is article 5B.11 as is correctly stated by Mr Oakes in paragraph 17 of his written submissions. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.

Ventura Investment Management Limited, in the matter of Ventura Investment Management Limited [2011] FCA 721

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