FEDERAL COURT OF AUSTRALIA Macquarie Bank Limited ACN 008 583 542, in the matter of Macquarie Bank Limited ACN 008 583 542 [2007] FCA 1553 MACQUARIE BANK LIMITED ACN 008 583 542 IN THE MATTER OF MACQUARIE BANK LIMITED ACN 008 583 542 NSD 1728 OF 2007 EMMETT J 13 SEPTEMBER 2007 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1728 OF 2007 IN THE MATTER OF MACQUARIE BANK LIMITED ACN 008 583 542 MACQUARIE BANK LIMITED Plaintiff JUDGE: EMMETT J DATE OF ORDER: 13 SEPTEMBER 2007 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to Section 50 of the Federal Court of Australia Act 1976 (Cth), access to: 1.1 the documents tendered in this proceeding and admitted as Exhibit 1; and 1.2 the documents tendered in these proceedings and admitted as Exhibit GNB2, Tab 1 and Tab 4 be restricted to the Plaintiff and its legal advisers up to 9.30 am on 14 September 2007. 2. The Plaintiff convene such meetings as may be necessary for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed to be made between the Plaintiff and a class of its members, being the holders of ordinary shares in the capital of the Plaintiff ("members"), the terms of which are set out in Appendix A of Exhibit 1. 3. The Plaintiff convene such meetings as may be necessary for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed to be made between the Plaintiff and a class of its creditors, being the grantees of options over ordinary shares in the capital of the Plaintiff ("optionholders"), the terms of which are set out in Appendix B of Exhibit 1. 4. The meeting referred to in Order 2 above ("Members' Scheme Meeting") be held at 3.00 pm on Thursday, 25 October 2007 at The Grand Ballroom, The Westin Sydney, Lower Level, 1 Martin Place, Sydney. 5. The meeting referred to in Order 3 above ("Optionholders' Scheme Meeting") be held after the Members' Scheme Meeting and after a general meeting of the Plaintiff (which will follow the Members' Scheme Meeting but commence no earlier than 3.30pm) but commence no earlier than 4.00pm, on the same day and at the same place as the Members' Scheme Meeting. 6. The draft explanatory statement contained in Exhibit 1 and the notices of meeting be approved for distribution to members and optionholders. 7. David Stuart Clarke or, failing him, Harry Kevin McCann, be authorised to act as chairperson for the meetings referred to in Orders 2 and 3 above ("Scheme Meetings"). 8. The chairperson of the Scheme Meetings have the power to adjourn the Scheme Meetings for such time that the chairperson considers appropriate. 9. There be dispatched by prepaid post addressed to the members, in respect of the members' scheme of arrangement, and to the optionholders, in respect of the optionholders' scheme of arrangement, or personally served: 9.1 a document substantially in the form of the explanatory statement contained in Exhibit 1 together with its appendices; 9.2 a proxy form for the Optionholders' Scheme Meeting; and 9.3 a proxy form for the Members' Scheme Meeting, for those members and optionholders who are recorded in the Plaintiff's register of members (or, in the case of optionholders who are not also members, recorded in MBL's records as optionholders) on or about 25 September 2007. 10. The time by which members and optionholders must return their proxy forms for the Members' Scheme Meeting and the Optionholders' Scheme Meeting be, in each case, 6.00pm on Tuesday, 23 October 2007. 11. Voting at each Scheme Meeting shall be on a poll, except for procedural motions. 12. Other than regulation 5.6.13 of the Corporations Regulations 2001, Rule 2.15 of the Federal Court (Corporations) Rules 2000 shall not apply to the meetings referred to in Orders 1 and 2 above. 13. The Plaintiff be relieved of compliance with Rule 3.4 of the Federal Court (Corporations) Rules 2000 ("Corporations Rules")conditional upon the Plaintiff publishing, in accordance with Corporations Rule 2.11, a notice in accordance with, or substantially in accordance with, the notice annexed to these Orders and marked "A" on or before the date of the Scheme Meetings. 14. The proceedings be stood over until 29 October 2007 at 9.30am before Emmett J, or as he directs, for consideration of orders approving the schemes of arrangement. 15. The plaintiff be granted liberty to apply. 16. These orders be entered forthwith. 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 NSD 1728 OF 2007 IN THE MATTER OF MACQUARIE BANK LIMITED ACN 008 583 542 MACQUARIE BANK LIMITED Plaintiff JUDGE: EMMETT J DATE: 13 SEPTEMBER 2007 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The plaintiff, Macquarie Bank Limited (Macquarie Bank), has applied to the Court pursuant to s 411 of the Corporations Act 2001 (Cth) for orders that meetings of the members of Macquarie Bank and of certain creditors, being optionholders, be convened for the purpose of considering schemes of arrangement. 2 Macquarie Bank was first formed in 1969 as Hill Samuel Australia Limited and was originally a wholly owned subsidiary of Hill Samuel & Co Limited in the United Kingdom. Shares of Macquarie Bank were listed for quotation on Australian Securities Exchange Limited (ASX) on 29 July 1996. Macquarie Bank is described as a conglomerate which provides full service financial investment banking services. Macquarie Bank and its subsidiaries are organised into seven operating groups, each specialising in a defined product or market sector. They are: · the Investment Banking group; · the Equity Markets Group; · the Treasury and Commodities Group; · the Banking and Securitisation Group; · the Real Estate Group; · the Funds Management Group; and · the Financial Services Group. 3 Macquarie Bank is subject to the regulatory oversight of the Australian Securities and Investments Commission (ASIC) which monitors Macquarie Bank's compliance with company and financial services laws. As a public company listed on ASX, Macquarie Bank must also comply with the listing rules of ASX. 4 Macquarie Bank is a licensed bank and its activities are therefore regulated under rules overseen by Australian Prudential Regulatory Authority (APRA). APRA's banking regulations include rules that restrict the financial risk exposure to certain subsidiaries of authorised deposit taking institutions, of which Macquarie Bank is one. In particular, those rules restrict exposure to subsidiaries undertaking stockbroking, investment banking funds management and principal investing activities. 5 The Commonwealth Parliament has recently amended the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth), so as to permit the adoption of a non-operating holding company (NOHC) structure, by financial groups which have an authorised deposit taking institution as ultimate parent. Macquarie Bank wishes to take advantage of the opportunity to restructure that has been afforded by those amendments. It desires to do so in order to remove the tension that might otherwise exist between two objectives of Macquarie Bank. One objective is to position Macquarie Bank in a way that will enable it to continue to pursue the strategies that have been responsible for its strong growth. The second is to ensure that it is able to continue to meet its obligations to APRA. The purpose of the proposed schemes is to restructure Macquarie Bank so as to establish an NOHC as the ultimate parent of the group which will be listed for quotation on ASX. 6 The proposed NOHC will be Macquarie Group Limited (Macquarie Group). Macquarie Group is presently a wholly owned subsidiary of Macquarie Bank with an issued capital of two shares. It is proposed that, following implementation of the schemes, the banking and non-banking activities of the group will be re-organised and separated into distinct banking and non-banking arms. 7 Macquarie Group will wholly own a banking holding company and a non-banking holding company. The banking holding company will own Macquarie Bank, which will, in turn, own Macquarie Group's banking entities. The non-banking holding company will own the Macquarie Group's non-banking entities. Following the proposed restructure, most of the investment banking group activities will be transferred to the Non-Banking Group. The Investment Banking group is the business group that contains most of Macquarie Bank's activities that are considered to be of a non-banking nature. 8 In addition, some activities from the Equity Markets Group and the Treasury and Commodities Group will be transferred to the Non-Banking Group. The Investment Banking Group will be renamed to comply with banking regulations that limit the use of the words "bank" or "banking" in a business name to authorised deposit-taking institutions. Equity Markets Group and the Treasury and Commodities Group will be transferred to the Non-Banking Group. 9 As part of the proposed restructure, Macquarie Group will need to finance the initial transfer of the non-banking assets and business from Macquarie Bank and its subsidiaries to the non-banking holding company and its subsidiaries. The initial financing necessary to undertake those transfers will be achieved through a combination of external credit facilities and funding from Macquarie Bank. Macquarie Group has secured commitments for approximately $8 billion of external term bank facilities from a syndicate of Australian and international banks. 10 It is also proposed that there will be a capital reduction of approximately $3 billion by Macquarie Bank following completion of the restructure. Since all of the shares in Macquarie Bank will be held by Macquarie Group, or the interposed banking holding company, those funds will pass to Macquarie Group and will be used to assist to fund the acquisition of assets from the Banking Group by the Non-Banking Group, under the non-banking holding company. 11 The broad effect of the proposed schemes is that issued shares in Macquarie Bank will be transferred to Macquarie Group on the proposed Implementation Date. The consideration of that transfer will be the issue by Macquarie Group to each scheme shareholder of one share in the capital of Macquarie Group in respect of each Macquarie Bank share transferred. Following the issue of the Macquarie Group shares to scheme shareholders, Macquarie Group will cancel, by way of a capital reduction, the two issued Macquarie Group shares presently held by Macquarie Bank. 12 There are presently in force employee share option plans for the benefit of employees of Macquarie Bank and its subsidiaries. As part of the restructure, all options in respect of Macquarie Bank shares will be cancelled. In consideration of the cancellation, Macquarie Bank will procure that Macquarie Group will issue to each scheme optionholder one option over a Macquarie Group share in respect of each Macquarie Bank option that is cancelled. 13 It is possible that some tax consequences might flow that would be unfavourable for the scheme optionholders over and above the ordinary tax consequences that flow from the holding of options in Macquarie Bank. Macquarie Bank has agreed to alleviate the effects of those tax consequences whether they be permanent or timing disadvantages and provision is made in the proposed scheme with optionholders accordingly. 14 The proposed scheme between Macquarie Bank and its shareholders is in a reasonably common form. It provides that, upon the Implementation Date, as defined, all Macquarie Bank shares will be transferred to Macquarie Group. Macquarie Bank, as agent for each scheme shareholder, will apply for Macquarie Group shares to be issued to each scheme shareholder and Macquarie Bank will procure that Macquarie Group issues those shares. The scheme provides mechanisms for the transfer of shares that does not require specific intervention on the part of shareholders of Macquarie Bank. 15 The scheme proposed between Macquarie Bank and its optionholders is proposed on the basis that they are creditors of Macquarie Bank. Under the Rules of the Macquarie Bank Employees Share Option Plan, and variants for the United Kingdom and India, provision is made for the board of Macquarie Bank, or a committee appointed by the board, to invite any employee of the group to apply for options. At least in relation to Australia, an employee may apply for options in his or her own name or may nominate a Controlled Company to be the Grantee of options. 16 Where the invitation to apply for options is accepted, the proposed Grantee is required to enter into a deed with Macquarie Bank, regulating the terms upon which options will be granted. While the rules and the deeds provide that options will in fact be issued in the name of a nominee, the terms of the deed that would be entered into by the Grantee create a legal obligation, binding on Macquarie Bank and enforceable by the Grantee I am satisfied that the Grantees of options may fairly be regarded as creditors of Macquarie Bank, in relation to their options or their rights to have shares issued pursuant to the exercise of options. In relation to the question of voting by optionholders, it is proposed that the options will be valued and that the optionholders will be permitted to vote proportionately according to the value of the options that they hold. 17 Macquarie Bank has prepared a draft explanatory memorandum for despatch to shareholders and optionholders. The form of the explanatory memorandum has been submitted to ASIC which has indicated that it has no intention to appear before the Court in relation to this present application for orders that meetings be convened. 18 The proposed explanatory memorandum contains a pro-forma consolidated balance sheet as at 31 March 2007 and a pro-forma consolidated income statement in respect to the period ended 31 March 2007. It also contains an investigating accountant's report from PriceWaterhouseCoopers, confirming that, after their review of relevant materials, which was not an audit, nothing has come to their attention that causes them to believe that: · the pro-forma balance sheet has not been properly prepared on the basis of the transactions identified; · the pro-forma transactions do not form a reasonable basis for the pro-forma balance sheet; or · the proposed financial information set out in the Explanatory Memorandum does not present fairly: - the pro-forma historical income statement; and - the historical and pro-forma balance sheets that are set out in the Explanatory Memorandum. 19 The board of the Macquarie Bank have also retained KPMG Corporate Finance Australia Pty Ltd (KPMG) to provide an independent report in relation to the proposed restructure, including whether the proposed transaction is in the best interests of shareholders and in the best interests of optionholders. KPMG were also asked to consider whether the capital reduction was fair and reasonable from the perspective of Macquarie Bank's shareholders as a whole, and whether the capital reduction would materially prejudice Macquarie Bank's ability to pay its creditors. KPMG have expressed the opinion in a written report that the proposed restructure is in the best interests of both Macquarie Bank shareholders and Macquarie Bank optionholders. 20 They have also expressed the opinion that the capital reduction is fair and reasonable from the perspective of Macquarie Bank's shareholders as a whole, and would not materially prejudice Macquarie Bank's ability to pay its creditors, being those creditors which remain creditors of Macquarie Bank after the separation of Macquarie Bank into the proposed Banking Group and Non-Banking Group. 21 On 11 September 2007, Macquarie Bank and Macquarie Group entered into an Implementation Deed, creating obligations for each of them to give effect to the proposed restructure. By the Implementation Deed, each of Macquarie Bank and Macquarie Group undertakes to use its best endeavours, subject to compliance with their respective obligations, functions, powers and duties under the deed and the respective constitutions, to give effect to the proposed restructure, and the satisfaction of the conditions to which the obligations are to be subject. Those conditions are as follows: (a) the Court orders that the meetings be convened; (b) the necessary resolutions agreeing to the Share Scheme and the Options Scheme are passed at the meetings; (c) the capital reduction is approved at a general meeting of Macquarie Bank; (d) the parties obtain necessary waivers, authorisations and consents from the ASX, ASIC, APRA and the Treasurer; (e) the Court approves the schemes, assuming that they are agreed to by the members and optionholders; (f) ASX indicates in writing that it will grant permission for quotation of Macquarie Group shares once they are issued. Provision is made in the Implementation Deed for the taking of the steps necessary by the parties to ensure that the restructure takes place. 22 I am satisfied that the proposed schemes are such that an intelligent and honest person who is either a shareholder or an optionholder might approve the proposed schemes. I am satisfied that, assuming the schemes are agreed to by the members and optionholders, they are such that the Court would approve, if asked to by Macquarie Bank. 23 Some of the information contained in the evidence before me is of a commercially sensitive nature and, accordingly, it is appropriate that access to that evidence be restricted until tomorrow, when it is proposed that the information will be made public. I propose, therefore, to make orders as asked by Macquarie Bank for meetings of both members and optionholders to be convened. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 9 October 2007 Counsel for the Plaintiff: Mr I M Jackman SC Solicitor for the Plaintiff: Mallesons Stephen Jaques Date of Hearing: 13 September 2007 Date of Judgment: 13 September 2007