Federal Court of Australia ISPT Pty Ltd, in the matter of ISPT Pty Ltd [2024] FCA 1305 File number: VID 1007 of 2024 Judgment of: BEACH J Date of judgment: 11 November 2024 Catchwords: CORPORATIONS – members' scheme of arrangement – first court hearing – order sought under s 411(1) of the Corporations Act 2001 (Cth) – scheme consideration – the question of voting classes – the quantum of the reimbursement and reverse reimbursement fees – the length of the exclusivity period – the relevance of the condition subsequent – orders made Legislation: Corporations Act 2001 (Cth) ss 411, 412, 1319 Cases cited: Re Amcor Ltd [2019] FCA 346 Re Healthscope Ltd (2019) 139 ACSR 608 Re Isentia Group Limited [2021] NSWSC 910 Re NRMA Insurance Ltd (2000) 33 ACSR 595 Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20 Re Vita Group Ltd (2023) 165 ACSR 576 Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 122 Date of hearing: 11 November 2024 Counsel for the Plaintiff: Mr P D Crutchfield KC and Ms K A Brazenor Solicitor for the Plaintiff: Gilbert + Tobin Counsel for IFM Investors Pty Ltd Mr B K Holmes Solicitor for IFM Investors Pty Ltd Herbert Smith Freehills ORDERS VID 1007 of 2024 IN THE MATTER OF ISPT PTY LTD ISPT PTY LTD (ACN 064 041 283) Plaintiff order made by: BEACH J DATE OF ORDER: 11 NOVEMBER 2024 THE COURT ORDERS THAT: 1. Pursuant to s 411(1) of the Corporations Act 2001 (Cth) (the Act), ISPT Pty Ltd ACN 064 041 283 (ISPT) convene a Scheme Meeting of ISPT Shareholders as those terms are defined in the proposed Scheme (the terms of which are set out in Annexure A to these orders) (ISPT Shareholders) for the purposes of considering and, if thought fit, agreeing (with or without any modification, alterations or conditions) to the Scheme proposed to be made between ISPT and those ISPT Shareholders who are Scheme Shareholders (as defined in the Scheme). 2. Pursuant to s 411 and s 1319 of the Act: (a) The Scheme Meeting is to be held in person on Wednesday, 4 December 2024 commencing at 9:00am (Melbourne time) at Level 11, 8 Exhibition Street, Melbourne Victoria 3000. (b) The Scheme Meeting is to be convened, held and conducted in accordance with the provisions of: (i) Part 2G.2 of the Act (save for any applicable replaceable rule) that apply to a meeting of ISPT's members; and (ii) the provisions of ISPT's Constitution that apply in relation to meetings of members and that are not inconsistent with Part 2G.2 of the Act. (c) The email to be sent to ISPT Shareholders described in Order 2(d) below, be substantially in the form which is at pages 271-273 of Annexure AJE-1 to the affidavit of Andrew John Elliott; (d) ISPT provide a copy of the document substantially in the form that appears at pages 26 to 457 of Annexure AMW2 to the affidavit of Alexandra Whitby sworn on 11 November 2024 (Transaction Booklet) to ISPT Shareholders by sending on or before 14 November 2024 an email which includes the following documents attached: (i) an electronic copy of the Transaction Booklet; and (ii) a proxy form in respect of the Scheme Meeting (Proxy Form). 3. Further to Orders 2(c) and (d) above, ISPT provide a hard copy of the Transaction Booklet to any ISPT Shareholder upon request before the date of the Scheme Meeting. 4. Pursuant to s 1319 of the Act: (a) the ISPT shareholders who are entitled to attend, take part in, and vote at the Scheme Meeting are those ISPT Shareholders who are registered in ISPT's share register as ordinary shareholders of ISPT as at 7:00pm (Melbourne time) on 12 November 2024; (b) Andrew Elliott, or failing him, Edward Smith, be the chairperson of the Scheme Meeting; (c) the chairperson of the Scheme Meeting shall have the power to adjourn the Scheme Meeting to such time, date and place as he or she considers appropriate; (d) a Proxy Form will be valid and effective if, and only if, it is completed and delivered in accordance with its terms by 5:00pm, 29 November 2024; and (e) voting on the resolution to approve the Scheme is to be conducted by way of poll. 5. Pursuant to rule 3.3(2) of the Federal Court (Corporations) Rules 2000 (Cth) (Rules), notwithstanding s 249Y(3) of the Act, the appointment of a proxy in respect of the Scheme Meeting shall not be revoked or suspended by the appointing ordinary shareholder of ISPT (ISPT Appointor) attending and taking part in the Scheme Meeting. However, if the ISPT Appointor votes on a resolution at the Scheme Meeting, the proxy is not entitled to vote as the ISPT Appointor's proxy on that resolution and any such vote must not be counted in the results of the relevant poll. 6. Pursuant to r 1.3 of the Rules, compliance with the following requirements of the Rules is dispensed with: (a) r 2.4(1), to the extent that rule requires the affidavit filed with the Originating Process to state the facts in support of the process; and (b) r 2.15. 7. ISPT publish in The Australian newspaper once on or before 29 November 2024 an advertisement substantially in the form of Annexure B to these Orders and ISPT otherwise be relieved from compliance with r 3.4 and Form 6 of the Rules to the extent necessary. 8. The proceeding be adjourned to 10.15am (Melbourne time) on 6 December 2024 before Justice Beach for the hearing of any application to approve the Scheme. 9. Liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. Annexure A [The order entered is available on the Commonwealth Courts Portal] Annexure B Notice of hearing to approve Scheme of Arrangement TO all the members of ISPT Pty Ltd (ACN 064 041 283) (ISPT): TAKE NOTICE that at 10:15am (Melbourne time) on 6 December 2024, the Federal Court of Australia (Victorian Registry) at Owen Dixon Commonwealth Law Courts Building, 305 William Street, Melbourne VIC 3000, will hear an application by ISPT seeking the approval of a scheme of arrangement between ISPT and its members (the Scheme) as proposed by a resolution to be passed by the members of ISPT at a meeting to be held at 9:00am (Melbourne time) on 4 December 2024. If you wish to oppose the approval of the arrangement, you must file and serve on ISPT a notice of appearance, in the prescribed form, together with any affidavit upon which you intend to rely at the hearing. The notice of appearance and affidavit must be served on ISPT at its address for service at least 1 day before the date fixed for the hearing of the application. The address for service of ISPT is c/o Gilbert + Tobin, Level 25, 101 Collins Street Melbourne, Victoria 3000 (Attention: Alexandra Whitby, email awhitby@gtlaw.com.au). REASONS FOR JUDGMENT BEACH J: 1 ISPT Pty Ltd has applied for orders pursuant to s 411(1) and s 1319 of the Corporations Act 2001 (Cth) to convene and hold a scheme meeting of holders of its fully paid ordinary shares. 2 The purpose of the scheme meeting is for ISPT shareholders to consider and if thought fit to approve a proposed scheme of arrangement which if implemented will result in the acquisition of 100% of ISPT's ordinary shares by IFM Investors Pty Ltd (IFM). 3 ISPT presently only has 25 ordinary shares on issue. It acts as a trustee of various real estate unit trusts, with such trusts' assets consisting of commercial and retail real estate across Australia. The various trusts' assets had a combined value of $20.3 billion as at 30 June 2024. 4 ISPT is now a sole purpose corporate trustee of the ISPT operations trust and a number of so-called ISPT qualifying trusts. In 2019 ISPT transferred all of its employees and assets and delegated its management function to ISPT Operations Pty Ltd (OpCo). ISPT no longer retains any assets in its own right. 5 Now each ISPT shareholder holds at least one unit in one or more of the ISPT qualifying trusts. Further, there are 26 units in the ISPT operations trust, which is an unlisted unit trust, the principal activity of which is investment in OpCo. Each ISPT shareholder is also a unitholder of the ISPT operations trust. 6 OpCo carries out the management activities of the ISPT qualifying trusts and is the entity by which all personnel relevant to the ISPT group are employed. OpCo has one ordinary share on issue which is held by ISPT as trustee of the ISPT operations trust. 7 IFM is an investor-owned Australian-based investment manager that operates a global investment management business relating to infrastructure, debt instruments, listed equities and private equity. As at 30 September 2024, IFM managed over $220 billion in investors' funds across these four asset classes. 8 IFM is wholly owned by Industry Super Holdings Pty Ltd (ISH), which in turn is owned by a collective of 16 so-called "profits to members" Australian industry superannuation funds. 9 It is also to be noted that approximately 80% of the shares in ISPT are held by shareholders who also hold shares in ISH. 10 Now pursuant to the terms of a transaction implementation deed dated 26 August 2024 entered into between each of ISPT, OpCo and IFM, those entities agreed to pursue a transaction of which the scheme forms a part. Broadly, the proposed transaction involves the following three elements. 11 The first element concerns the scheme under which IFM will acquire all of the ordinary shares in ISPT for a consideration of $1 per share or $25 in total. This consideration is many orders of magnitude below what is usual for schemes that I have approved. It also has the consequence on the arithmetic that the re-imbursement fee and the reverse re-imbursement fee in terms of the relevant percentages are many orders of magnitude above what is usual. 12 The second element concerns a proposed purchase whereby IFM will acquire the single fully-paid ordinary share in OpCo, currently held by ISPT as trustee for the ISPT operations trust, for $10 million subject to adjustments, which purchase price will be paid to the current unitholders of the ISPT operations trust. 13 The third element concerns a set of corollary transactions or steps to enable the scheme and the proposed purchase to be implemented successfully, and associated changes to the business structure of the relevant unit trusts going forward. This includes the so-called funds modernisation changes, which include changing from ISPT's cost recovery model to a fixed fee with rebate model for the ISPT qualifying trusts, as well as changes to the ISPT qualifying trusts' liquidity mechanisms and governance framework. 14 Now as to the power that I am exercising, the principles are not contentious. 15 In Re Amcor Ltd [2019] FCA 346, I said (at [47]): My function on an application to order the convening of a meeting is supervisory. At this stage I should generally confine myself to ensuring that certain procedural and substantive requirements have been met including dealing with adequate disclosure, with limited consideration of issues of fairness. But having said that, it is appropriate to consider the merits or fairness of a proposed scheme at the convening hearing if the issue is such as would unquestionably lead to a refusal to approve a proposed scheme at the approval hearing, that is the proposed scheme appears now to be on its face "so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further" (Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [44] per French J). … 16 Similarly, Jackman J in Re Vita Group Ltd (2023) 165 ACSR 576 stated (at [41]): … The question which the court must deal with is whether the arrangement proposed is of such a nature and is cast in such terms that, if the arrangement receives approval by the statutory majority at the relevant meeting, the Court would be likely to approve the arrangement on the hearing of any application that is unopposed, including the need to ensure that there is sufficient disclosure to those who will be affected by the arrangement of its details and effect … 17 Accordingly, my task at the first hearing is to assess, first, whether the statutory prerequisites to the making of orders convening a meeting have been met and, second, whether it is appropriate to exercise my discretion in favour of making those orders. And in exercising my discretion to make the necessary convening orders, it is appropriate to consider, first, whether the scheme is fit for consideration by ISPT shareholders and, second, whether ISPT shareholders will be properly informed as to the nature of the scheme. 18 I should say now that the scheme is fit for consideration by ISPT shareholders. The scheme is of such a nature and cast in such terms that if agreed to at the scheme meeting, I would be likely to approve it at the second court hearing. There is no issue arising from the scheme as it is presented to me at this stage which would unquestionably lead to my refusal to approve it at the second hearing. 19 Let me at this point say more about the scheme specifically and the proposed transaction more generally. 20 As I have indicated, the scheme forms part of a broader proposed transaction involving ISPT and OpCo, and various trusts with which they are associated. 21 The scheme comprises the acquisition by IFM of all 25 ordinary shares in ISPT, which shares are presently held by a variety of shareholders, in exchange for payment of consideration in the amount of $1 per ISPT share. The total scheme consideration payable by IFM is $25. 22 If the proposed scheme is implemented, ISPT will become a wholly-owned subsidiary of IFM. The scheme consideration is payable on the implementation date, which is the same date on which ISPT shares will be transferred to IFM pursuant to the scheme. The implementation date is the second business day after the scheme record date, which is presently expected to be 13 December 2024. 23 As to the second element of the broader transaction which I have previously identified, the proposed purchase comprises the acquisition of the single share in OpCo by IFM from ISPT in exchange for the payment of $10 million, less the amount of any relevant leakage such as dividends or cash payments made to ISPT shareholders before the implementation date (the purchase consideration). The purchase consideration is to be funded from cash and cash equivalents of IFM. 24 The purchase consideration is ultimately to be payable to the unitholders in the ISPT operations trust in accordance with their respective proportions of ownership of the ISPT qualifying trusts. The purchase consideration is to be payable on the implementation date as a distribution of capital from the ISPT operations trust prior to that trust being wound up by IFM. 25 Now if each of the scheme and the proposed purchase are implemented, and the ISPT qualifying trust approvals are passed, which I will elaborate on in a moment, ISPT and OpCo will adopt a funds modernisation proposal that has been put forward by IFM, which includes changing from ISPT's existing cost recovery model to a fixed fee with rebate model for the ISPT qualifying trusts, and changes to the ISPT qualifying trusts' governance framework. And if approved, the funds modernisation changes other than the new fee policy are to take effect from the time of implementation of the scheme and completion of the proposed purchase. 26 Now in order to approve and then implement the proposed transaction, it is necessary to pass a number of company resolutions and obtain a number of company and trust approvals. In this regard, the following is proposed to occur on 4 December 2024. 27 First, the scheme meeting will be held at which ISPT shareholders will vote on the scheme resolution. 28 Second, an ISPT extraordinary general meeting will be held. At this meeting, the special resolutions referred to in the transaction booklet as the "Company Approvals" will be voted on by ISPT shareholders. The company approvals take the form of special resolutions to amend the ISPT constitution so as to enable IFM to become an ISPT shareholder, despite not holding any units in a qualifying trust which is ordinarily a pre-requisite under the ISPT constitution to becoming an ISPT shareholder, and so as to amend the voting rights attached to the ISPT shares, so that each ISPT share will carry an entitlement to one vote. 29 As is apparent, the company approvals are necessary to allow IFM to become the sole shareholder of ISPT. 30 Third, an extraordinary general meeting will be held of the ISPT operations trust. At this meeting, the resolutions referred to in the transaction booklet as the "Trust Approvals" will be voted on by eligible unitholders in the ISPT operations trust. The trust approvals take the form of a resolution to amend the ISPT operations trust deed to permit the unitholders to direct ISPT, in its capacity as trustee of the ISPT operations trust, to pursue a purpose for the ISPT operations trust other than holding shares in OpCo, and also a resolution to direct ISPT, in its capacity as trustee of the ISPT operations trust, to sell the sole share in OpCo to IFM, and to perform its obligations in accordance with the terms of the transaction implementation deed. 31 Fourth, extraordinary general meetings will be held for each of the ISPT qualifying trusts. At these meetings, the eligible unitholders of each of the ISPT qualifying trusts will vote on what is referred to in the transaction booklet as the "ISPT Qualifying Trust Approvals", being resolutions to amend the trust deeds, to adopt and make provision for the implementation of the so-called new fee policy, to recharge certain fees and expenses in connection with the proposed transaction, and to take steps required for the implementation of the proposed transaction. Now if the ISPT qualifying trust approvals are not obtained, then either ISPT or IFM may terminate the transaction implementation deed. Moreover, IFM has the sole discretion to waive the condition precedent associated with these approvals. 32 Now as should be obvious from what I have said, the scheme and the proposed purchase are inter-conditional, insofar as implementation of the scheme is conditional upon completion of the proposed purchase. Further, there are a number of conditions precedent which are required to be satisfied or waived in order for the transaction to be implemented. I should say that the conditions precedent are fairly standard and I need say nothing further about them. But there is also a condition subsequent to the scheme, being implementation of the proposed purchase, which I will say something more about later. 33 Now let me return to the transaction implementation deed which provides for a number of deal protection devices or exclusivity arrangements. 34 First, it contains exclusivity provisions in the form of "no shop", "no talk" and "notification of competing proposal" obligations, and matching rights in favour of IFM. The "no talk" provision is expressed to be subject to the ISPT directors' fiduciary duties. I will say something more about the length of the exclusivity period later. 35 Second, the transaction implementation deed also contains reimbursement fee and reverse reimbursement fee provisions, also known as break fees and reverse break fees respectively, which I will address later. 36 Finally in terms of preliminary observations, I should note two other matters. 37 First, the independent expert Kroll Australia Pty Ltd has concluded in its independent expert's report that the proposed scheme is fair and reasonable, and in the best interests of ISPT shareholders, in the absence of a superior proposal emerging. 38 Second, the ISPT board of directors has unanimously recommended the proposed scheme to ISPT shareholders, in the absence of a superior proposal and subject to the independent expert continuing to conclude that the proposed scheme is in the best interests of ISPT shareholders. The ISPT directors believe that the benefits of the proposed transaction including the proposed funds modernisation changes outweigh the potential disadvantages and risks of the proposed transaction. The ISPT directors are also of the view that the proposed transaction presents a better outcome for investors than the ISPT group remaining as a standalone business, which would likely require significant capital to be injected going forward to execute its proposed business plan. 39 Now various matters have been drawn to my attention which it is appropriate to say something more about at this point. Scheme consideration 40 As I have said, ISPT has 25 ordinary shares on issue. Pursuant to the proposed scheme, ISPT shareholders will receive $1 per ISPT share as consideration for the acquisition of their shares by IFM. 41 Now the following issues arise in respect of the consideration payable pursuant to the proposed scheme and the proposed transaction more broadly, being: (a) first, the value and amount of the scheme consideration payable being the amount of $1 per ISPT share or $25 in total; (b) second, the inter-conditionality of the scheme and the proposed purchase as connected transactions; and (c) third, the total amount of consideration payable in respect of the proposed purchase not being known at the time of the proposed scheme meeting. 42 Turning first to the value and amount of the scheme consideration payable under the proposed scheme, all other things being equal the scheme consideration of $1 per ISPT share being a total of $25 might be perceived to be nominal consideration. 43 But the question of whether ISPT shareholders ought to accept particular consideration for their shares is a commercial matter for them to assess. Shareholders ought not be prevented from having the opportunity to do so provided that I am satisfied that they are acting on sufficient information and with time to consider what they are voting on. In this regard, the transaction booklet properly discloses the basis on which the ISPT shares have been valued at $1 each, and the shareholders will have the benefit of the independent expert's opinion regarding the scheme. In those circumstances they will be properly equipped to make an informed decision when voting on the scheme. 44 Further, in any event the scheme consideration is not nominal, but rather reflects the value of the ISPT shares. In 2019 ISPT transferred all of its employees and assets to OpCo. At that time, it also delegated its management functions to OpCo. Presently, ISPT's purpose is to act as the corporate trustee of the ISPT qualifying trusts and the ISPT operations trust. ISPT holds no assets in a beneficial capacity, and has limited liability as a trustee. Indeed, ISPT is what could be described as a zero profit entity, meaning that insofar as it provides trustee services to the ISPT qualifying trusts, the costs of those services are recovered from those trusts. So, it operates on a pure cost pass through basis. So for apparently these reasons the value of $1 was assigned to each of the ISPT shares for the purpose of the scheme consideration. 45 Further and consistently with this, the independent expert has assessed the value of ISPT on a controlling interest basis to be nil, and determined that the proposed scheme is fair to ISPT shareholders on the basis that the scheme consideration of $25 exceeds the expert's assessed value for ISPT. And in my view the independent expert report is expressed in terms which will afford the shareholders an opportunity to properly understand and assess the basis of the expert's opinion, and also the advantages and disadvantages of the proposed scheme, viewed in the context of the transaction as a whole. 46 This leads me to the second point concerning the inter-conditionality or inter-relatedness of the scheme and the proposed purchase. 47 The scheme must be considered in the context of the proposed transaction more broadly as the scheme is inter-related with and conditional on the proposed purchase. Consistently with this, the independent expert has assessed both the proposed transaction as a whole and the proposed scheme as fair and reasonable, and the ISPT directors consider that the scheme consideration and the purchase consideration deliver fair and reasonable compensation to ISPT shareholders for the transfer of the risks and rewards of the ISPT group's business to IFM. 48 In particular, the following aspects of the transaction are of particular relevance. 49 The purchase consideration is payable to the unitholders in the ISPT operations trust in accordance with their respective proportions of ownership of the ISPT qualifying trusts. Each ISPT shareholder is a unitholder in one or more of the ISPT qualifying trusts, and a unitholder in the ISPT operations trust. 50 Further, as ISPT shareholders are also investors in the ISPT qualifying trusts, their investment returns will be impacted through the change in manager and differential fee structure when these funds are managed by IFM. 51 Finally, let me say something about the third issue referred to earlier. 52 Now the total amount of the purchase consideration will not be known at the time of the scheme meeting. This is because the amount of the purchase consideration, but not the scheme consideration, may be adjusted to reflect any leakage that occurs between the so-called locked box date being 31 March 2024 and the implementation date, which is presently expected to be 13 December 2024. 53 But for two reasons the possibility of an adjustment to the purchase consideration to reflect any relevant leakage following the scheme meeting does not preclude me from making orders to convene the meeting. 54 First, the fact that the total amount of the purchase consideration will not be known at the time of the scheme meeting is disclosed in the transaction booklet. 55 Second, any uncertainty in the precise figure for the purchase consideration, as distinct from the formula by which it is determined, does not affect the scheme consideration itself, but rather only affects the purchase consideration, and the adjustments for leakage are clearly disclosed in the transaction booklet. 56 Let me now turn to the question of potential voting classes. Should there be separate voting classes? 57 The differential treatment of shareholders is a matter which may give rise to an issue of shareholder class definition for the purpose of scheme meetings. But it is ultimately a question of fact whether the rights of one group of members are, when considered in the totality of a proposed scheme's context, so dissimilar from the rights of other members such as to make it impossible for them to consult together with a view to their common interest. 58 Now consideration of the question of class composition usually involves three steps being, first, the identification of the rights existing members have against the company and analysis of the extent to which rights differ between members, second, the identification of the extent to which those rights are differently affected by the proposed scheme and, third, the assessment of whether that difference makes it impossible for the members to consider the scheme as one class. 59 Now the rights in this context are legal rights against the scheme company as shareholders, not divergent commercial interests extrinsic to the share membership. Moreover, the test in this regard is not one focusing on identical treatment, but rather one focusing on community of interest. 60 In Re Opes Prime Stockbroking Ltd (No 2) (2009) 179 FCR 20, albeit a creditors' scheme rather than a members' scheme, Finkelstein J explained that a commercial approach should be taken to the question of classes (at [66]): … the question whether they form separate classes must be assessed with the following factors in mind. First, when creditors are broken up into classes, each class is given power to veto the scheme and that is a process that undermines the basic approach of decision by majority ... Second, there is a built-in safeguard against majority oppression in that the court is not bound by the decision of the meeting. Thus, it is necessary to ensure that there is no oppression by the minority. Third, practical considerations are relevant. If a judge is too assiduous in identifying classes, it is possible to end up with any number of classes. In the end, schemes of arrangement are propounded in a business context. The judge should adopt a practical business-like approach to the issue, as would the creditors if they were to decide the matter. 61 Resonating with those themes, in Re Healthscope Ltd (2019) 139 ACSR 608, I observed (at [106], [108], [109], [112] to [114] and [118]): The well-established test for identifying a class for the purposes of a scheme of arrangement is that expressed by Bowen LJ in Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583. Sovereign Life Assurance concerned a creditors' scheme of arrangement, but the test enunciated by Bowen LJ has been adopted ever since in members' schemes (Re Foster's Group Ltd [2011] VSC 93 at [15] per Ferguson J). Bowen LJ expressed the class test in the following terms: … The word "class" is vague, and to find out what is meant by it we must look at the scope of the section, which is a section enabling the Court to order a meeting of a class of creditors to be called. It seems plain that we must give such a meaning to the term "class" as will prevent the section being so worked as to result in confiscation and injustice, and that it must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest… … Now Mr Philip Crutchfield QC for Healthscope contends that doctrinal purity demands that at the first court hearing I should only decide issues of class on the strict basis of considering the legal rights of shareholders qua shareholders against Healthscope and any alteration to those rights as a shareholder under the Scheme. And to the extent that ASIC has stepped outside the relevant teaching, its position is heretical. Mr Crutchfield QC has prayed in aid the three pronged approach of Bathurst CJ in First Pacific Advisors LLC v Boart Longyear Ltd (2017) 121 ACSR 136; 320 FLR 78; [2017] NSWCA 116 at [80]. But there is a danger in taking such a short form exposition in a judge's reasons, decontextualizing it and then divining its meaning only by reference to a textual analysis of the words used. Healthscope has also referred to other authorities endeavouring to make good the point that the existence of separate commercial or other interests is not relevant to the class issue, including rights not derived from legal rights against the scheme company. More generally it points out that the question of class definition does not involve a general inquiry into the commercial motivations of members for voting in favour of or against a scheme, a proposition which I accept. … For my part, I consider that Healthscope's approach to class definition is too narrow. I prefer a more flexible and commercial approach. First, even accepting that there may be no differential treatment of different classes of shareholders under the scheme itself, as is the present case, that does not preclude separate classes being stipulated. The text of s 411(1) refers to "members or any class of them". The text leaves open how class delineation or characteristics may be stipulated. The inquiry is not confined to whether there are separate classes stipulated under the scheme company's constitution or whether a class can only be stipulated by reference to differing treatment or outcomes arising under the terms of the scheme of arrangement instrument itself concerning shareholders rights qua shareholder. Second, I do not doubt that a shareholder who has entered into or has the benefit of a pre-scheme agreement with the scheme company which confers upon the shareholder a benefit which is more than de minimis, and particularly where the entry into of that agreement is a condition precedent to the scheme, may potentially justify that shareholder being placed in a separate class. Equally, if the vote of that shareholder has been purchased as part of the pre-scheme agreement that may warrant considering whether it should be put into a separate class. … Ultimately one has to be careful of stipulating rigid categories or hard and fast rules, although some cases may be clear one way or the other in terms of the necessity for separate delineation. This is because the "impossible…to consult together with a view to their common interest" criterion requires a commercial evaluative judgment to be made of the transactions, circumstances and consequences said to justify the delineation, in the context of the particular scheme and its effect overall. Moreover, if the asserted discriminating feature can be dealt with at the second court hearing, there is less of a need to be definitive at the first court hearing in terms of class definition except in a clear class. Moreover one should be cautious about stipulating separate classes. It can easily and wrongly empower a minority view; I can of course easily deal with excessive or oppressive majority influences at the second stage as Finkelstein J has pointed out relating to the Opes Prime creditors scheme. If the minority view against a scheme has been put into a separate class, you may have unnecessarily created a power of veto if for the particular scheme all classes need to achieve the requisite statutory majorities for the thing to work. Further, if the minority view against a scheme has been left with the general body but you have put in a separate class a shareholder who would have voted in favour, then you have relatively increased the voting power of the minority in the general body making it easier to defeat the scheme. As I say, all of this suggests that one should be cautious in separating classes except in a clear case. And as Finkelstein J rightly said in effect in Re Opes Prime Stockbroking Ltd (recs and mgrs apptd) (in liq) (2009) 179 FCR 20; 258 ALR 362; 73 ACSR 385; [2009] FCA 813 at [66] one should not be too enthusiastic in taking a salamied approach. A "practical business-like approach" must be adopted. Otherwise you are locking in unnecessary downside, particularly when you do not need to given the second stage approval scrutiny that can take place. 62 Of course in each case the ultimate outcome of this inquiry will involve a question of degree. 63 Now in this case, three aspects of the scheme potentially raise the question of whether more than one class of shareholders exists for the purpose of voting at the scheme meeting. Those aspects of the scheme are the following. 64 First, one has the fact that ISPT shareholders' voting power in respect of the proposed scheme does not correspond directly with the size of their shareholdings in ISPT, because the ISPT constitution prescribes a formula for the calculation of voting rights at ISPT shareholder meetings; I will set this out in a moment. 65 Second, one has the fact that all ISPT shareholders are also unitholders in the ISPT operations trust. Indeed most but not all unitholders in the ISPT operations trust are also ISPT shareholders. 66 Third, one has the fact that some ISPT shareholders hold shares in both ISPT (the target) and also ISH, which as I have said is the holding company of the bidder, IFM. 67 But in my view none of these matters whether considered alone or in combination is class-creating for the purpose of voting at the scheme meeting. 68 First, in respect of the differential voting power of ISPT shareholders, this is not a situation created or affected by the proposed scheme. This is the status quo which is established by cl 28(a)(ii) of the ISPT constitution, which provides that where a poll vote at a company meeting is held, each ISPT shareholder: shall, irrespective of the number of shares held by the Member, have the number of votes determined in accordance with the following formula: where: "V" is the number of votes of the Member; "T" is the total value of the Units in Issue on the date of the notice of the meeting at which the poll is held; and "U" is the aggregate value of the Units in all of the Qualifying Trusts registered in the name of the Member on the date of the notice of the meeting at which the poll is held, provided that notwithstanding the number of votes that a Member may have by virtue of the application of this formula, no Member shall have more than FORTY NINE PER CENT (49%) of the total number of votes … 69 In this context, "Unit" means unit of a trust, where the trusts are defined to include the ISPT qualifying trusts. "Units in Issue" means the total number of units in the qualifying trusts, which is defined in the ISPT constitution to include the Core Fund, the 50 Lonsdale Fund, the IRAPT Fund, any other "Open Ended Trust" (as that term is defined in the ISPT constitution) and any other trust that ISPT shareholders resolve to be a "Qualifying Trust". Now as at the date of the transaction booklet, the Core Fund, the 50 Lonsdale Fund and the IRAPT Fund are the only qualifying trusts. 70 Further, as not all of the unitholders in the "Qualifying Trusts" (as that term is defined in the ISPT constitution) hold ISPT shares, the number of votes for the purpose of "V" in the formula set out will be pro-rated up, so that the voting entitlement for all ISPT shareholders equates to 100%. 71 Generally, each ISPT shareholder's voting rights at the scheme meeting are referable to their unitholdings in the qualifying trusts and all ISPT shareholders' voting rights are calculated in the same manner. The proposed scheme treats all ISPT shareholders equally concerning voting and also more broadly in respect of the calculation of scheme consideration. On this basis, the threshold test for separate classes is not met, because there is no difference in either the existing legal rights of ISPT shareholders or the legal rights granted to them under the proposed scheme. 72 Second, all ISPT shareholders are also unitholders in the ISPT operations trust and most but not all unitholders in the ISPT operations trust are also ISPT shareholders. In this regard, it is the unitholders in the ISPT operations trust who will receive the purchase consideration pursuant to the proposed purchase which, although not strictly part of the proposed scheme itself, is part of the broader transaction in which the proposed scheme falls for consideration. But just being both a unitholder in the ISPT operations trust and an ISPT shareholder is not class-creating in and of itself. The facts of this case are analogous to cases where for example merely being both a shareholder and an optionholder does not make a person's interests so dissimilar from those who are merely shareholders to make it impossible for them to consult together with a view to their common interest. 73 In this case, there is no difference in the way in which ISPT shareholders in that capacity are treated under the scheme to warrant the creation of separate voting classes. 74 Third, the fact that some ISPT shareholders also hold shares in ISH does not change this analysis. The mere fact of persons holding interests in both the target and the bidder (or in this case its holding company, ISH) in the context of a proposed scheme of arrangement is not class-creating in and of itself, where their legal rights vis-à -vis the scheme company are no different to the legal rights of other target members under the proposed scheme, as distinct from the possibility of differences in economic interest. Ultimately, the legal rights of those ISPT shareholders who also own shares in ISH are the same as those ISPT shareholders who are not investors in ISH, albeit that their commercial interests may vary. Accordingly, there is no suggestion that viewed in the totality of the proposed scheme's context, the interests of ISPT shareholders who also hold shares in ISH are so dissimilar that they are unable to consult with other ISPT shareholders with a view to their common interest. Reimbursement fee and reverse reimbursement fee 75 Now under the transaction implementation deed, in certain specified circumstances ISPT and IFM are each liable to pay to the other a reimbursement fee or reverse reimbursement fee (as the case may be) in the amount of $500,000. If payable at all, the fee is only payable once. The reimbursement fee is not payable if the scheme and the proposed purchase are implemented. Let me elaborate on the provisions of the deed. 76 Clause 12.1 sets out the background to the reimbursement fee: (a) The parties acknowledge that, if they enter into this deed and the Transactions are subsequently not implemented, IFM will incur significant costs, including those set out in clause 12.4. (b) In these circumstances, IFM has requested that provision be made for the payments outlined in clause 12.2, without which IFM would not have entered into this deed or otherwise agreed to implement the transactions. (c) The ISPT Board believes, having taken advice from its external legal advisers and Financial Adviser, that the implementation of the Transactions will provide benefits to ISPT and the Unitholders and that it is appropriate for ISPT and OpCo to agree to the payments referred to in clause 12.2 in order to secure IFM's participation in the Transactions. 77 Clause 13.1 sets out the background to the reverse reimbursement fee: (a) The parties acknowledge that, if they enter into this deed and the Transactions are subsequently not implemented, ISPT will incur significant costs, including those set out in clause 13.4. (b) In these circumstances, ISPT has requested that provision be made for the payments outlined in clause 13.2, without which ISPT and OpCo would not have entered into this deed or otherwise agreed to implement the Transactions. 78 Clause 12.4 relevantly provides that: The Reimbursement Fee has been calculated to reimburse IFM for costs including the following: (a) fees for legal, financial and other professional advice in planning and implementing the Transactions (excluding success fees); (b) reasonable opportunity costs incurred in engaging in the Transactions or in not engaging in other alternative acquisitions or strategic initiatives; (c) costs of management and directors' time in planning and implementing the Transactions; and (d) out of pocket expenses incurred by IFM and its employees, advisers and agents in planning and implementing the Transactions, and the parties agree that: (e) the costs actually incurred by IFM will be of such a nature that they cannot all be accurately ascertained; and (f) the Reimbursement Fee is a genuine and reasonable pre-estimate of those costs, and ISPT and OpCo each represent and warrant that it has received written legal advice from its legal advisers in relation to the operation of this clause 12. 79 The corresponding provision concerning the reverse reimbursement fee (cl 13.4) is in similar terms. 80 Now it is well accepted that break fees can be justified by reference to the costs incurred by the offeror and the benefit that an offer may confer on the members of the target company by increasing its value. 81 Typically break fees are assessed according to the Takeovers Panel's Guidance Note 7: Deal protection (GN7), which provides that in the absence of other factors, a break fee payable by a target not exceeding 1% of the equity value of the target is generally not unacceptable. 82 But as Black J observed in Re Isentia Group Limited [2021] NSWSC 910, "the lower the equity value of the scheme company, the greater the chance that the 1% guideline might be exceeded where many of the transaction costs incurred by acquirers have a fixed character" (at [21]). 83 So it is in this case. The independent expert has assessed the value of ISPT on a controlling basis to be nil. If the total scheme consideration of $25 is used as a proxy for ISPT's equity value, the reimbursement fee and the reverse reimbursement fee of $500,000 represents a percentage of the equity value of ISPT of many orders of magnitude above the guideline 1%. 84 But the 1% guideline stated in GN7 is just that. GN7 itself recognises that it applies in the absence of other factors which may justify a different percentage. 85 Now I would only refrain from ordering a scheme meeting by reason of a break fee if I considered that the amount of the fee could influence voting at the meeting. But in the present context the amount of the proposed reimbursement fee and reverse reimbursement fee does not preclude me from making orders to convene the scheme meeting. 86 The parties have incurred substantial costs in pursuing the scheme and the proposed transaction. ISPT's costs in progressing the proposed transaction are estimated to be in excess of $10.8 million. There is also evidence that IFM's professional adviser expenses in connection with the transaction exceed the quantum of the reimbursement fee. 87 Further, the transaction implementation deed records that the parties have incurred and expect to incur fees for legal, financial and other professional advice, costs of management and directors' time, and out of pocket expenses as well as opportunity costs associated with pursuing the proposed transaction and not engaging in other alternative acquisitions or strategic initiatives. 88 Both cl 12.4 in respect of the reimbursement fee and cl 13.4 in respect of the reverse reimbursement fee record that these fees represent a genuine pre-estimate of each of ISPT's and IFM's costs. Indeed, the evidence before me is that the amount of these fees in fact represents only a partial reimbursement of the out-of-pocket costs actually incurred to date. 89 Further, the reimbursement fee and the reverse reimbursement fee were negotiated at arms length, with each of ISPT and IFM having the benefit of independent financial and legal advice during this process. 90 Further, IFM would not have entered into the transaction implementation deed or agreed to implement the transaction if the reimbursement fee had not been agreed. Similarly, ISPT and OpCo would not have entered into the transaction implementation deed or agreed to implement the transaction if the reverse reimbursement fee had not been agreed. 91 Further, the actual amount of the reimbursement fee and the reverse reimbursement fee ($500,000) is not, in and of itself, unusually large. It is also a capped amount. 92 Further, the triggers for payment of the reimbursement fee are reasonable. So, it is significant that the reimbursement fee is not payable if the transaction is implemented, and nor is it payable simply if ISPT shareholders do not vote in favour of the scheme. 93 Further, both the reimbursement fee and the reverse reimbursement fee are clearly disclosed in the transaction booklet. 94 Clearly, this is not a case in which the amount of these fees is such that it is likely to coerce shareholders into agreeing to a scheme or to deter the making of a competing offer for ISPT's shares. Accordingly, the reimbursement fee and the reverse reimbursement fee do not preclude me from making orders to convene the scheme meeting. The length of the exclusivity period 95 Clause 11 of the transaction implementation deed contains exclusivity provisions that are commonplace in schemes of arrangement and reflect the reality that a prospective bidder under a scheme would not wish to spend substantial time and money on a bid proposal only to find that the directors of the target company are using that bid to solicit superior offers. 96 In this case: (a) clause 11.2 contains "no shop" and "no talk" provisions, with the "no talk" provisions being subject to the fiduciary carve-out in cl 11.3; (b) clause 11.4 requires ISPT and OpCo to notify IFM of any approaches by potential competing bidders; (c) clause 11.5 contains a matching right provision which operates in the event that a competing proposal is received, which is subject to a fiduciary carve-out; and (d) clause 11.7 contains a provision of information requirement which operates in the event that a competing proposal is received. 97 Now all of these provisions contain obligations which are expressed to operate during the "Exclusivity Period", which in this context is defined (schedule 2) as the period from and including the date of the transaction implementation deed to the earlier of: (a) the date of termination of the deed; (b) the "End Date", being nine months after the date of the deed (26 May 2025) or such other later date as agreed; and (c) the "Effective Date", which is presently expected to be 9 December 2024. 98 Now it must be said that the maximum exclusivity period provided for under the transaction implementation deed (nine months) is one of the longer periods that I have encountered in dealing with schemes. 99 But all that I am concerned to ensure is that: (a) any exclusivity period should be for no more than a reasonable period that is capable of precise ascertainment; (b) the exclusivity clause directed at dealing with an unsolicited alternative proposal should be subject to a fiduciary carve-out; and (c) the relevant provisions are clearly disclosed in the explanatory statement sent to shareholders. 100 Further, when determining whether an exclusivity period is reasonable, it is appropriate to take account of, first, the complexities of the transaction and potential delay in obtaining regulatory approvals, particularly where there are lengthy review periods associated with obtaining such approvals, second, the period required to actually effect the scheme proposal, third, the operation of the break fee provisions with respect to the exclusivity period and, fourth, the level of control that the bidder has over the target's actions by operation of the break fee provisions. 101 In the present case the proposed transaction of which the scheme forms part is comprised of a number of complex and novel transactions, which have taken a considerable period of time for the parties to negotiate. In this regard, the independent expert specifically identified the complexity of the proposed transaction. ISPT and IFM first started exploring the potential for a merger of the two organisations in 2021. The negotiation process involved extensive consultation between IFM, ISPT and shareholders, and an extensive due diligence process. 102 Further, the exclusivity provisions are in standard terms of the kind ordinarily found in merger implementation agreements, and are disclosed to shareholders in the transaction booklet. 103 In the circumstances, in my view the exclusivity period in this matter is reasonable, and it would not preclude competing bids for ISPT. It does not preclude me from ordering the convening of the scheme meeting. Condition subsequent 104 Now clause 3.4 of the scheme document contains a condition subsequent to the proposed scheme, to the effect that implementation of the proposed scheme is conditional upon, and must not take place until, implementation of the proposed purchase has occurred in accordance with the terms of the transaction implementation deed or that condition has been waived by written agreement. If this condition subsequent is not satisfied or waived, the proposed scheme will lapse and be of no further force or effect. 105 As is explained in the transaction booklet: In addition to the Conditions Precedent, the Implementation of the Purchase is also a condition subsequent to the Scheme being implemented. This means that the Scheme will only be implemented if the Purchase is completed. Completion of the Purchase and Implementation of the Scheme are expected to occur on the same day (being the Implementation Date). 106 In Re NRMA Insurance Ltd (2000) 33 ACSR 595, Santow J observed that most schemes qualify for approval only after all conditions are satisfied, other than the formal requirement of lodgement of the court order. But the inclusion of conditions subsequent in a scheme is not unusual, although members must be able to see clearly at the time the scheme is proposed what they are being asked to accept. He discussed conditions subsequent at [61] to [63] and in his Appendix A. Santow J stated (at 647): (28) The use of conditions subsequent to bring about termination of a scheme of arrangement needs to be distinguished from a scheme containing machinery which could lead to variation of its terms. Courts will generally not approve schemes which carry within themselves machinery for variation of their own terms: see, eg, Re R M Eastmond Pty Ltd (1972) 4 ACLR 801; Re Telford Inns Pty Ltd (1985) 10 ACLR 312; Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263. The reason for that is stated in Leamon (at 265): In my opinion, a scheme … ought not to be approved unless the creditors and the court can see very clearly at the time that the scheme is proposed what it is that they are being asked to accept, and, in the case of the court, what it is that it is being asked to approve. (29) Clarity and certainty are thus the touchstones. Provided that clarity and certainty are present on the face of the scheme and no new decision making process intrudes after court approval, it does not matter that different results may emerge in different (but clearly identified) eventualities. A key question is whether the scheme is, according to its own terms, self-executing in the sense that certain results follow in certain defined events. 107 In this case, the condition subsequent contained in cl 3.4 of the scheme document satisfies the touchstones of clarity and certainty and provides no impediment to my making the necessary convening orders. 108 First, the condition is clearly disclosed to ISPT shareholders in the transaction booklet. 109 Second, the terms of the condition are clear, and the clause inserts no new decision-making process or mechanism for scheme variation after the time of Court approval. 110 Third, given the complexity of both the structure of the ISPT group and the business that it conducts of which the ISPT operations trust and the ISPT qualifying trusts form part, and the steps required to implement the proposed transaction, there are sound commercial reasons for having the implementation of the scheme conditional upon successful implementation of the purchase. 111 Fourth, although failure to satisfy the condition subsequent will not result in a complete reversion to the current status quo, as a failure to satisfy the condition subsequent entitles IFM to terminate the transaction implementation deed and be paid the reimbursement fee, this does not stand in the way of my making an order convening the scheme meeting and potentially later approving the scheme. Information to be given to shareholders 112 Let me turn to the question of the adequacy of the information to be provided to ISPT shareholders regarding the proposed scheme. 113 The transaction booklet, which contains the relevant explanatory statement, is required to essentially set out sufficient detail such as will enable shareholders to exercise their judgement on the proposed scheme. Section 412(1) and the applicable sub-ordinate legislation set out the disclosure requirements of the explanatory statement. Ordinarily, if the statutory disclosure requirements are met in respect of the explanatory statement, it will be the case that information to be provided to shareholders is adequate for the purpose of exercising the court's discretion to order the convening of a scheme meeting. In considering the explanatory statement, it is not for me to substitute my commercial judgment for that of properly informed shareholders. Rather, all that is necessary is that I be satisfied that there is to be proper disclosure to ensure that the shareholders can make an appropriate and informed decision based on their own commercial interests. I am so satisfied. 114 ISPT shareholders are to be presented with an appropriately verified and detailed explanation of the proposed scheme in the transaction booklet. The transaction booklet provides ISPT shareholders with a fair and proper ability to understand the transactions, their commercial and legal advantages and disadvantages, and the risks which attend the voting options which are available to them. It contains diagrams to summarise the key steps and dates involved in the proposed transaction. Further, ISPT shareholders also have the benefit of the annexures and attachments to the transaction booklet including the independent expert's report. 115 In all of the circumstances, I am satisfied that ISPT shareholders will be properly informed for the purpose of making an informed choice concerning voting at the scheme meeting. Conclusion 116 I am satisfied that the scheme is of such a nature and cast in such terms that if it achieves the statutory majorities at the proposed scheme meeting, I would be likely to approve it at the second hearing. 117 First, the independent expert has concluded that the proposed scheme is fair and reasonable and in the best interests of ISPT shareholders. 118 Second, it would seem that all relevant disclosures have been made and relevant information has been included in the transaction booklet. 119 Third, an adequate due diligence and verification process has been undertaken by both ISPT and IFM in respect of the contents of the transaction booklet. 120 Fourth, the scheme is the subject of a unanimous recommendation by the ISPT board. 121 Finally, it could not be said that the proposed scheme appears on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further. 122 In those circumstances I made the necessary convening orders earlier this afternoon. I certify that the preceding one hundred and twenty-two (122) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Beach. Associate: Dated: 11 November 2024