FEDERAL COURT OF AUSTRALIA Australian Pipeline Ltd ACN 091 344 704 v Alinta Ltd ACN 087 857 001 [2007] FCA 1046 AUSTRALIAN PIPELINE LTD ACN 091 344 704 v ALINTA LTD ACN 087 857 001, & ORS NSD1710 OF 2006 ALINTA LGA LTD ACN 052 167 405 v AUSTRALIAN PIPELINE LTD ACN 091 344 704 NSD2265 OF 2006 EMMETT J 28 JUNE 2007 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD1710 OF 2006 BETWEEN: AUSTRALIAN PIPELINE LTD ACN 091 344 704 Plaintiff AND: ALINTA LTD ACN 087 857 001 First Defendant TREWAS PTY LTD ACN 120 1111 006 Second Defendant AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION (NSW) Third Defendant JUDGE: EMMETT J DATE OF ORDER: 28 JUNE 2007 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The first, second, fourth and fifth defendants be released from the undertakings given to the Court on 28 June 2007 as set out in order 2 made by the Court on that date, as from the time of this Order. 2. On or before 14 December 2007, the second defendant (Trewas) and fourth defendant (Alinta) are to cause: (a) the 42,197,224 units in Australian Pipeline Trust (ARSN 091 678 778) (APT) of which the second defendant is the registered holder as at the date of this order (Trewas Units); and (b) the 42,197,224 units in APT Investment Trust (ARSN 115 585 441) (APTIT) that are stapled to the Trewas Units to be either: (i) distributed on a pro rata basis (allowing for rounding) to shareholders of Alinta, except in the case of foreign shareholders or shareholders who would otherwise receive an unmarketable parcel (as defined in the Market Rules of ASX Limited) or who hold less than 1,000 shares in Alinta, in which case Alinta may vest the units to which those shareholders would be entitled in a nominee for sale and distribution of the net proceeds of sale to the relevant Alinta shareholders; or (ii) sold or disposed of to purchasers, by way of bookbuild managed by an investment bank or licensed stock broker (which holds an Australian Financial Services licence that entitles them to conduct the bookbuild) appointed by Alinta, in such a way that that no person and their associates (as defined in section 12 of the Corporations Act 2001) is permitted to receive pursuant to the bookbuild more than 5% of the units in APT (and units in APTIT stapled to the units in APT) then on issue and that the first, second, fourth and fifth defendants and their associates (as defined in section 12 of the Corporations Act) not receive any units as a result of the bookbuild. 3. The proceeding be otherwise dismissed. 4. There be no order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD2265 OF 2006 BETWEEN: ALINTA LGA LTD ACN 052 167 405 Plaintiff AND: AUSTRALIAN PIPELINE LTD ACN 091 344 704 First Defendant APT PIPELIINES LTD Second Defendant ROBERT JOSEPH WRIGHT Third Defendant GEORGE HENRY BENNETT Fifth Defendant ROSS MURRAY GERSBACH Sixth Defendant RUSSELL ALLAN HIGGINS Seventh Defendant MICHAEL JOSEPH MCCORMACK Eighth Defendant JUDGE: EMMETT J DATE OF ORDER: 28 JUNE 2007 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The proceeding be dismissed. 2. There be no order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD1710 OF 2007 BETWEEN: AUSTRALIAN PIPELINE LTD ACN 091 344 704 Plaintiff AND: ALINTA LTD ACN 087 857 001 First Defendant TREWAS PTY LTD ACN 120 1111 006 Second Defendant AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION (NSW) Third Defendant NSD2265 OF 2006 BETWEEN: ALINTA LGA LTD ACN 052 167 405 Plaintiff AND: AUSTRALIAN PIPELINE LTD ACN 091 344 704 First Defendant APT PIPELIINES LTD Second Defendant ROBERT JOSEPH WRIGHT Third Defendant GEORGE HENRY BENNETT Fifth Defendant ROSS MURRAY GERSBACH Sixth Defendant RUSSELL ALLAN HIGGINS Seventh Defendant MICHAEL JOSEPH MCCORMACK Eighth Defendant JUDGE: EMMETT J DATE: 28 JUNE 2007 PLACE: SYDNEY REASONS FOR JUDGMENT 1 I have reserved judgment in two separate proceedings in the Court. While the two proceedings are quite independent of each other, the parties in the proceedings are similar although not completely identical. The first proceeding, NSD 1710 of 2006, is concerned with the acquisition of units in Australian Pipeline Trust (the Trust) during the period 16 August 2006 to 31 August 2006 and with the acquisition of a relevant interest in a separate parcel of units on 1 June 2006 and on 22 June 2006. The second proceeding, NSD 2265 of 2006, is concerned with an allotment, on 24 October 2006, of five million shares in the capital of the trustee of the Trust, Australian Pipelines Limited (the Trustee). 2 The parties in both proceedings have foreshadowed that, as a consequence of various compromises that are being proposed and in order to facilitate schemes of arrangement that are to be propounded, they will ask the Court to make orders in both proceedings, by consent. Those orders will, if they are made, completely dispose of both proceedings. I have been asked to consider making the orders in somewhat unusual circumstances. The parties have foreshadowed asking me to make the orders by consent, but have not yet asked me to do so. They are awaiting the completion of documentation giving effect to the various compromises. 3 It is proposed to move the Court tomorrow, 29 June 2007, for orders under the Corporations Act 2001 (Cth) (the Act) convening meetings for the purposes of agreeing to schemes of arrangement. At this stage, I have no knowledge as to the nature of the schemes, except to the extent that there have been public announcements made in relation to certain of the proposals. Nothing, however, has yet been formally put to the Court. Nevertheless, because of the timing constraints that are likely to be involved in the convening of meetings, for the purpose of agreeing to the schemes, the parties have asked the Court to entertain the present applications late at night. In order to put the proposed orders in context, it is desirable to say something more about the two proceedings. 4 In the first proceeding, the Trustee claimed orders for the divestiture of units in the Trust, on the basis that the acquisitions of units and of relevant interests to which I have briefly referred, contravened s 606 of the Act. For reasons that I published on 20 October 2006, I concluded that there was no contravention. Accordingly, I dismissed the proceeding. However, on 30 April 2007, a Full Court set my orders aside and made declarations as follows: (1) The acquisitions by Alinta 2000 Limited ACN 087 857 001 and Trewas Pty Limited (Trewas) of 32,820,063 units in the Trust during the period 16 August 2006 to 31 August 2006 inclusive was in contravention of section 606 of the Act. (2) The acquisition by Alinta Limited ACN 119 985 590 of a relevant interest in units held by Australian Gaslight Company, now known as Alinta AGL Limited by reason of entry into a merger implementation agreement dated 1 June 2006 and a merger implementation agreement dated 22 June 2006 was in contravention of s 606 of the Act. I have referred to two companies by reference to their ACNs because of an exchange of names that occurred in and after October 2006 as a consequence of schemes of arrangement that were approved by the Court in October 2006. 5 The Full Court remitted the proceeding to me for further consideration in accordance with their reasons. The question for further consideration was whether, in the light of the conclusion by the Full Court that there were contraventions of s 606, relief should be granted along the lines claimed by the Trustee. 6 The Trust is a managed investment scheme registered under Chapter 5C of the Act and the Trustee is the responsible entity of the Trust. It does not carry on any other business or engage in any other activity. The Trust was established in 2000 at the instigation of Australian Gaslight Company, as it was originally known (AGL). Until late October 2006 issued shares in AGL were listed for quotation on Australian Securities Exchange Limited (ASX). However, AGL is now a wholly owned subsidiary of the company now known as Alinta Limited ACN 119 985 590 (Alinta). Until the schemes to which I have referred became effective, the issued shares in another company, then known as Alinta Limited ACN 087 857 001, were also listed for quotation on ASX. 7 When the Trust was established in 2000, AGL's interests in certain gas transmission pipeline assets were transferred to the Trust, in exchange for which AGL acquired a parcel of units in the Trust. By 28 September 2006 that holding represented approximately 26 % of the total number of issued units in the Trust. Until the events that were the subject of the second proceeding, the issued share capital of the Trustee consisted of 24 shares held as to 12 by AGL and as to six by each of John Angus and James Graham, who are partners of the law firm known as Freehills. One of the most significant assets of the Trust is the whole of the issued share capital of APT Pipelines Limited (Pipelines), which actually owns the bulk of the gas transmission pipeline assets in which AGL formerly held an interest. Pipelines was a subsidiary of AGL until all of AGL's shares in Pipelines were transferred to the Trustee, when the Trust was established. 8 On 24 October 2006, 5 million shares in the capital of the Trustee were issued and allotted to Pipelines for $5 million in cash. The decision to issue the shares and the decision to apply for the shares were both made by Messrs Bennett, Higgins and McCormack (the Participating Directors), each of whom is a directors of the Trustee and of Pipelines. In the second proceeding, AGL seeks to have the issue and allotment of the shares by the Trustee to Pipelines set aside. Several bases were advanced as to why the Court should interfere in the transaction. They may be summarised as follows: · the Participating Directors acted in breach of duties owed by them under the general law and under the Corporations Act; · the issues of shares by the Trustee to Pipelines was oppressive to, unfairly prejudicial to or unfairly discriminatory against AGL in its capacity as a shareholder of the Trustee; · the Trustee acted in breach of trust in its capacity as trustee of the Trust and acted in contravention of provisions of the Corporations Act as the responsible entity of the Trust. 9 As the responsible entity of a registered management investment scheme, the Trustee was required to hold an Australian Financial Services licence (AFS licence) authorising it to operate the scheme. The Trustee in fact had an AFS licence. However, it was a condition of the Trustee's AFS licence that the Trustee must hold at least $5 million net tangible assets (Condition 5). Under the terms of the AFS licence, Condition 5 could be satisfied by an undertaking from a listed company to pay the sum of $5 million on demand. Condition 5 was satisfied until shortly after 24 October 2006 by an undertaking given by AGL. 10 However, as a consequence of the approval of the schemes in October 2006, AGL ceased to be a listed company. A contention advanced in the second proceeding was that that resulted in Condition 5 no longer being satisfied. The Trustee contended, however, that one effect of the allotment was to ensure that Condition 5 was satisfied by the $5 million in cash that was that was received from the subscription by Pipelines. 11 By their actions, in causing Pipelines to apply for shares in the Trustee and causing the Trustee to issue and allot shares to Pipelines on 24 October 2006 and by subsequently releasing the undertaking by AGL, the Participating Directors may be said to have created an ouroboros. An ouroboros is a mythical serpent that nourishes itself by consuming itself. It is sometimes regarded as a symbol for eternal life; it is also sometimes regarded as a symbol for a vicious circle. 12 There are two aspects of the ouroboros in the present case. The first is that the vast majority of the shares in the Trustee are now held by Pipelines, all the issued shares in which are held by the Trustee. The second aspect relates to the prospective benefit afforded to unitholders by the operation of Condition 5. One effect of Condition 5 was to provide funds from an outside source that could meet possible financial obligations of the Trustee to unitholders. However, after the allotment, if unitholders make a claim on the Trustee, the claim will be met from assets of the Trustee. That will have the effect of diminishing the value of the shares in the Trustee held by Pipelines, thereby diminishing the value of the shares in Pipelines, which are assets of the Trust. 13 Contentions in the second proceeding were directed to that aspect of the allotment. Other arguments were advanced as to why the allotment had the effect of destroying what was asserted to be a valuable right vested in AGL, which depended upon the fact that, under the trust deed establishing the Trust, the Trustee was entitled to substantial management fees. However, since the establishment of the Trust, the Trustee has in fact waived the fees. An issue in the proceeding was whether it was a legitimate object on the part of the Participating Directors to ensure that the unitholders can control the Trustee, so that the Trustee would be unlikely in the future to insist upon the payment of substantial management fees. 14 AGL contended in the proceeding, however, that the constitution of the Trustee, on its proper construction, reserved to it, as a shareholder, the capacity to control the composition of the board of the Trustee. That was a significant issue in the proceeding. On the other hand, if the construction contended for by the Trustee and Pipelines were accepted, the shares in the Trustee held by AGL were likely to be of nominal value. 15 The order foreshadowed in relation to the second proceeding is that the proceeding be dismissed and that there be no order as to the costs of the proceeding. While I have reserved my decision, I would have been in a position to make a decision within a fairly short time. However, it is fair to say that the issues are by no means clear. In those circumstances, if the parties ask me to make the orders that I have just mentioned, I would be disposed to do so, in order to engender circumstances where the parties' proposed compromise can be made effective. That would not necessarily preclude another unitholder making the same complaint concerning alleged breach of trust by the Trustee. 16 The orders foreshadowed in relation to the first proceeding involve a divestiture by Trewas of the units acquired in August 2006 and other units acquired in consequence of the holding of those units. In the proceeding, the primary relief sought by the Trustee was an order that the units be vested in the Australian Securities and Investments Commission (the Commission) for the purposes of disposition by the Commission. The orders that the parties have foreshadowed in relation to the securities in question are that Trewas and Alinta cause the units either to be distributed on a pro-rata basis to shareholders of Alinta or sold or disposed of to purchasers by way of book build managed by an investment bank or licensed stock broker appointed by Alinta. 17 In the first proceeding Alinta contended that, assuming that the Court considered that divestiture of some sort was appropriate, there was no need for an order vesting the units in the Commission. It is relevant that, in a third proceeding, which is no longer before me, the Takeovers Panel ordered divestiture of the securities in question. There is no reason to assume that Alinta would not comply with orders along the lines that have been foreshadowed and it is by no means certain that I would have ordered divestiture. The order foreshadowed is, therefore, not an unreasonable compromise and I would be disposed to make it, if the parties ask me to do so. 18 The Trustee also sought relief in the first proceeding in respect of contravention occasioned by entry into the merger implementation agreements. I concluded that there was no contravention. Further, any contravention found by the Full Court to have occurred can fairly be described as accidental. It is probably fair to say that it would not be a surprise if no relief were granted in respect of such contravention. Nevertheless, as I have said, I have not yet decided the matter. 19 The orders foreshadowed contemplate that there be no divestiture in respect of the parcel of securities held by AGL. Rather, the foreshadowed order is that the second proceeding be otherwise dismissed and that there be no order as to the cost of the proceeding. In the circumstances, I would be disposed to make orders along the lines foreshadowed if the parties ask me to do so. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 13 July 2007 NSD1710 of 2006 Counsel for the Plaintiff (3 May 2007): Mr M Leeming with Ms K Richardson Counsel for the Plaintiff (28 June 2007): Mr P M Wood Solicitor for the Plaintiff: Blake Dawson Waldron Counsel for the First and Second Defendants: Mr A J Sullivan QC with Mr J Kirk Solicitor for the First and Second Defendants: Chang Pistilli & Simmons The Third Defendant did not appear. Date of Hearing: 3 May 2007 Date of Judgment: 28 June 2007 NSD2265 of 2006 Counsel for the Plaintiff: Mr N C Hutley SC with Mr M H O'Bryan Solicitor for the Plaintiff: Blake Dawson Waldron Counsel for the Defendants: Mr A J Meagher SC with Mr G K J Rich Solicitor for the Defendants: Chang Pistilli & Simmons Date of Hearing: 17, 18, 19, 20, 23, 24, 26 April; 4, 8 May 2007 Date of Judgment: 28 June 2007