Supreme Court New South Wales Medium Neutral Citation: In the matter of Spark Infrastructure RE Limited [2021] NSWSC 1385 Hearing dates: 19 October 2021 Date of orders: 19 October 2021 Decision date: 28 October 2021 Jurisdiction: Equity - Corporations List Before: Black J Decision: Order made convening scheme meetings and approving the scheme booklet for distribution to shareholders. Judicial advice given that Spark RE is justified in propounding resolutions to implement the proposed trust scheme and proceeding on the basis that constitutional amendments to implement the trust scheme is within the constitutional powers of alteration conferred and s 601GC of the Corporations Act 2001 (Cth). Catchwords: CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Application under s 411 of the Corporations Act 2001 (Cth) for orders convening meetings of members to consider and, if thought fit, to agree to proposed scheme of arrangement – Whether requirements to order scheme meetings are satisfied. CORPORATIONS – Managed investments – Application for judicial advice by responsible entity under s 63 of the Trustee Act 1925 (NSW) – Whether responsible entity would be justified in propounding resolutions to implement the proposed trust scheme – Whether proposed amendments are within the constitutional powers of alteration and s 601GC of the Corporations Act. Legislation Cited: - Corporations Act 2001 (Cth), Ch 5C; Pt 5.1; ss 411 - Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic), s 4(3) - Trustee Act 1925 (NSW), s 63 Cases Cited: - Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; (1993) 112 ALR 627; (1993) 10 ACSR 230; [1993] HCA 15 - Ballard v Ballard (No 2) [2020] NSWSC 1687 - F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 - Permanent Trustee Co Ltd v National Australia Managers Ltd (Supreme Court of New South Wales, McLelland CJ in Eq, 8 August 1994 - Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309 - Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 - Re Ardent Leisure Ltd [2018] NSWSC 1665 - Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 - Re Atlas Iron Ltd (2016) 112 ACSR 554; [2015] FCA 366 - Re BINGO Industries Ltd [2021] NSWSC 798 - Re BIS Finance Pty Ltd [2017] NSWSC 1713 - Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510; [2007] FCA 2078 - Re Centrebet International Ltd [2011] FCA 870 - Re Citadel Group Ltd [2020] FCA 1580 - Re Coca-Cola Amatil Ltd [2021] NSWSC 270 - Re Cromwell Property Securities Ltd [2006] NSWSC 1449 - Re CSR Ltd (2010) 183 FCR 358; (2010) 265 ALR 703; (2010) 77 ACSR 592; [2010] FCAFC 34 - Re DUET Finance Ltd [2017] NSWSC 415 - Re DUET Management Company 1 Ltd (2013) 95 ACSR 34; [2013] NSWSC 817 - Re Ellerston Global Investments Ltd [2020] NSWSC 879 - Re ERM Power Ltd [2019] NSWSC 1502 - Re Foster's Group Ltd (No 2) [2011] VSC 547 - Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 - Re Gazal Corporation Ltd [2019] FCA 701 - Re GBST Holdings Ltd [2019] NSWSC 1280 - Re Healthscope Ltd (2019) 139 ACSR 608; [2019] FCA 542 - Re Hills Motorway Ltd (2002) 43 ACSR 101 - Re Isentia Group Ltd [2021] NSWSC 910 - Re Kidman Resources Ltd [2019] FCA 1226 - Re Macquarie Private Capital A Ltd [2008] NSWSC 323 - Re Mainstream Group Holdings Ltd [2021] FCA 948 - Re Mirvac Ltd (1999) 32 ACSR 107; [1999] NSWSC 457 - Re Mirvac Funds Management Ltd [2014] NSWSC 1569 - Re Mortgage Choice Ltd [2021] NSWSC 553 - Re Mosaic Oil NL [2010] FCA 985 - Re Navitas Ltd (No 2) [2019] WASC 218 - Re Prime Media Group Limited [2019] NSWSC 1805 - Re QMS Media Ltd [2019] FCA 2172 - Re Rinehart [2020] NSWSC 1624 - Re Rinehart (No 2) [2021] NSWSC 364 - Re RXP Services Ltd [2021] FCA 38 - Re Signature Gold Ltd [2017] FCA 1481 - Re Simavita Holdings Ltd [2013] FCA 1274 - Re Sirtex Medical Ltd [2018] FCA 1315 - Re SMS Management & Technology Ltd [2017] VSC 257 - Re Staging Connections Group Ltd [2015] FCA 1012 - Re Sydney Airport Holdings Ltd [2013] NSWSC 1665 - Re Tatts Group Ltd [2017] VSC 552 - Re Tawana Resources NL [2018] FCA 1456 - Re TPG Telecom Ltd [2020] NSWSC 772 - Re Villa World Ltd [2019] NSWSC 1207 - Re Vocus Group Ltd [2021] NSWSC 630 - Re Windlab Ltd [2020] NSWSC 571 Category: Principal judgment Parties: Spark Infrastructure Re Limited as responsible entity of Spark Infrastructure Trust (Plaintiff) Representation: Counsel: I M Jackman SC (Plaintiff) D Thomas SC (Acquirer) Solicitors: Herbert Smith Freehills (Plaintiff) Allens (Acquirer) File Number(s): 2021/258227 Judgment Nature of application, background and affidavit evidence 1. By Originating Process filed on 9 September 2021, the Plaintiff, Spark Infrastructure RE Limited ("Spark RE") as responsible entity for the Spark Infrastructure Trust ("Trust") seeks orders under s 411 of the Corporations Act 2001 (Cth) "Act" that it convene a meeting of holders of Spark securities to consider a creditors' scheme of arrangement proposed to be made between Spark RE and Spark securityholders (other than Excluded Securityholders, as defined) ("Creditors' Scheme") and consequential orders. 2. Spark RE also seeks the opinion, advice and direction of the Court under s 63 of the Trustee Act 1925 (NSW) that Spark RE (as responsible entity of the Spark Infrastructure Trust) ("SIT") would be justified in convening a meeting of Spark securityholders to consider and, if thought fit, vote on the resolutions to give effect to the resolutions intended to give effect to a trust scheme proposed to be made between Spark RE and scheme securityholders ("Trust Scheme") and proceeding on the basis that the making of the proposed amendments to the SIT constitution contemplated by the Trust Scheme, following the approval by special resolution of Spark securityholders, would be within the powers of alteration conferred by cl 23 of the SIT constitution and s 601GC of the Corporations Act; and other relief. 3. Further orders will in due course be sought at a second Court hearing, if the Creditors' Scheme and Trust Scheme are approved by Spark securityholders. I made the orders sought by Spark RE at the first Court hearing. I have drawn in this judgment on the helpful submissions of Mr Jackman, who appeared for Spark RE in the application. 4. By way of background, the Spark Infrastructure Group is an investor in energy infrastructure assets including electricity distribution, electricity transmission and renewable energy generation. Each unit in SIT is stapled to a loan note issued by Spark RE in its capacity as responsible entity of SIT under a note trust deed to form a stapled security that is quoted and traded on the Australian Securities Exchange ("ASX"). Spark RE in its capacity as responsible entity of SIT owns all of the shares in each of Spark Holdco No. 1 Pty Limited ("Spark Holdco 1"), Spark Holdco No. 2 Pty Limited ("Spark Holdco 2") and Spark Holdco No. 3 Pty Limited ("Spark Holdco 3"). Under the proposed transaction, A class shares in each of Spark Holdco 1, Spark Holdco 2 and Spark Holdco 3 will be distributed and simultaneously stapled to Spark units and Spark notes immediately before implementation of the Creditors' Scheme and Trust Scheme. 5. On 15 July 2021, Spark RE announced to ASX that it, as responsible entity of SIT, had received two conditional and non-binding indicative proposals from Ontario Teachers' Pension Plan Board ("OTPP") and Kohlberg Kravis Roberts & Co. L.P. on behalf of certain of its affiliated infrastructure investment funds, vehicles and entities managed and/or advised by it or its affiliates ("KKR") for the acquisition of Spark RE by way of a scheme of arrangement. The proposals included an initial proposal for all cash implied consideration of $2.6375 per Spark security, to be reduced to the extent that Spark RE paid or declared a distribution to Spark securityholders prior to the implementation of the proposed transaction and a revised proposal for all cash consideration of $2.7375 per Spark security. 6. On 28 July 2021, Spark RE announced to ASX that it, as responsible entity of SIT, had received a further revised proposal from OTPP and KKR for all cash implied consideration of $2.8875 in cash per Spark security. 7. On 23 August 2021, Spark RE announced to ASX that it, as responsible entity of SIT, had entered into a scheme implementation deed (subsequently amended by a deed executed on 1 October 2021) ("SID") with an entity ultimately owned by a consortium comprising funds managed or advised by KKR, OTPP and Public Sector Pension Investment Board ("PSP Investments") (together, "Consortium") under which the parties had agreed that Pika Bidco Pty Ltd ("Consortium Sub" ) would acquire all of the loan notes issued by Spark RE, all of the issued units in SIT and all of the Spark shares by means of the Creditors' Scheme and Trust Scheme. 8. The consideration which Spark securityholders will receive under the proposed schemes is $2.8875 per Spark security that they hold as at 10 December 2021, less the cash amount of any distributions to which scheme securityholders become entitled on or before 22 December 2021, the date that it is currently proposed that the scheme consideration would be paid ("Implementation Date"); and, if the Implementation Date occurs after 15 February 2022, $0.01 per Spark security plus $0.0003333 per Spark security for each day after 15 February 2022 that has elapsed by the date on which the Implementation Date occurs. The implementation of the proposed schemes is subject to conditions precedent, including approval by Spark securityholders, the Court and the Foreign Investment Review Board, as set out in full in cl 3.1 of the SID. Mr Jackman points out that, if the Creditors' Scheme and Trust Scheme are agreed to by the Spark securityholders, approved by the Court, and all other conditions precedent under the SID are satisfied or waived, Consortium Sub will acquire all of the Scheme securities (as that term is defined in the SID) in exchange for the scheme consideration, and the Spark Infrastructure Group will delist from the ASX. 9. KPMG Financial Advisory Services (Australia) Pty Limited ("KPMG"), the independent expert appointed by Spark Infrastructure Group to assess the schemes, has prepared an independent expert's report which assessed the underlying value of a Spark security to be in the range of $2.49 to $2.86 and concluded that the schemes are fair and reasonable and therefore in the best interests of scheme securityholders in the absence of a Superior Proposal (as defined). All directors of Spark RE have unanimously recommended that scheme securityholders vote in favour of the schemes, in the absence of a Superior Proposal and subject to an independent expert continuing to conclude that the schemes are in the best interests of securityholders. Affidavit evidence 1. Spark RE reads the affidavit dated 9 September 2021 of its solicitor, Mr Hastings, which refers to the nature of the application. Mr Hastings notes that Spark Infrastructure Group is admitted to the official list of ASX and refers to Spark RE's announcement on 23 August 2021 to ASX that it had entered into a scheme implementation deed, in its capacity as responsible entity of the SIT, which provided for Consortium Sub to acquire all of the loan notes issued by Spark RE by a creditors' scheme, all of the issued units in SIT by a trust scheme and all of the A class shares in three companies within the Spark Infrastructure Group for a consideration of $2.8875 in cash per stapled security, before franking credits, comprising cash consideration from the Consortium of approximately $2.7675 per stapled security and a franked special distribution expected to be approximately 12 cents per stapled security, subject to specified adjustments if the schemes were not implemented by 31 December 2021 or 15 February 2022. 2. Spark RE also reads an affidavit dated 14 October 2021 of Mr Douglas McTaggart, who is an independent non-executive director and chair of Spark RE and consents to act as chair of the Creditors' Scheme meeting, the trust Scheme meeting and a meeting of Spark securityholders to approve an amendment of the Spark Infrastructure Note Trust Deed in connection with the Creditors' Scheme and Trust Scheme. Mr McTaggart indicates his intention to follow the procedure set out by Barrett J in Re Hills Motorway Ltd (2002) 43 ACSR 101; [2002] NSWSC 897 in respect of convening the relevant meeting. By his affidavit dated 15 October 2021, Mr Gregory Martin, who is also an independent non-executive director of Spark RE, indicates his consent to act as chair of the meeting if Mr McTaggart is unable to do so and indicates that he would follow the same procedure in respect of the conduct of the meeting. 3. By an affidavit dated 15 October 2021, Ms Stacey Spence, who is a manager of Listed Client Services employed by Boardroom Pty Ltd, which maintains the register of Spark securityholders, refers to the services which would be provided by that firm in relation to the dispatch of materials relating to the Creditors' Scheme and Trust Scheme and the provision of means for securityholders to participate in online meetings in respect of the Creditors' Scheme and Trust Scheme. 4. Spark RE also reads the affidavit dated 15 October 2021 of Mr Sean Collins, who is an authorised representative of KPMG and a partner of the KPMG Australia Partnership, and has provided an independent expert's report in respect of the proposed Trust Scheme and Creditors' Scheme. Mr Collins confirms, inter alia, that he holds the opinions expressed in that report at its date and the date of his affidavit, has complied with the Expert Witness Code of Conduct and has had regard to relevant regulatory guidance in respect of the preparation of his report. 5. By her affidavit dated 15 October 2021, Ms Jennifer Faulkner, who is the General Counsel and Company Secretary of Spark RE in its capacity as responsible entity of the SIT, sets out information as to the corporate structure of the Spark Infrastructure Group and identifies the directors of Spark RE. She refers to the development of the proposed transaction, the scheme consideration and the proposed special distribution of 12 cents per Spark security to securityholders in connection with the proposed schemes and to the consideration of the schemes by Spark RE's board. She also addresses the engagement of KPMG to prepare an independent expert's report in respect of the schemes and identifies the conditions precedent to the schemes. 6. Ms Faulkner also addresses the provision, in the SID, for payment of a reimbursement fee of some $52 million by Spark RE to Consortium Sub in specified circumstances and refers to cl 12.4 of the SID which identified the fees and costs incurred by Consortium Sub which the reimbursement fee was intended to address. Her evidence was that Spark RE's board considered the reimbursement fee represented a genuine and reasonable pre-estimate of the costs that would be incurred by Consortium Sub in pursuing the schemes and that she believed that it was appropriate for Spark RE to agree to that reimbursement fee in order to secure the participation of Consortium Sub in the schemes. Her evidence was also that the reimbursement fee was negotiated between the parties in arm's length negotiations in which all parties were independently represented by experienced legal and financial advisors; she was involved in those negotiations on behalf of Spark RE; and she believed it was necessary for Spark RE to agree to those provisions to secure Consortium Sub's participation in the schemes. Ms Faulkner also addresses the position in respect of a reverse reimbursement fee payable by Consortium Sub to Spark RE in specified circumstances, and exclusivity provisions in respect of the schemes. I will address the question of those reimbursement fees and exclusivity provisions below. Ms Faulkner also outlines the steps necessary to implement the schemes and the treatment of certain incentives provided to Spark RE's employees in respect of the schemes. She leads evidence, in common form, as to the process adopted for verification of the scheme booklet and also addresses the manner in which scheme meetings would be conducted as online meetings. 7. By an affidavit dated 15 October 2021, Mr Andrew Jennings, who is a director of the infrastructure team of KKR Australia Pty Ltd, and a director of Consortium Sub, refers to the corporate structure of Consortium Sub and sets out the steps which have been taken to verify the information relating to Consortium Sub contained in the scheme booklet. Mr Jennings also addresses the position in respect of exclusivity provisions and the reimbursement fee payable to Consortium Sub in specified circumstances, noting that it represents either 1.01% or 1.03% of the equity value of Spark RE as calculated on specified bases. Mr Jennings also refers to cl 12.4 of the SID setting out the costs incurred by Consortium Sub to which the reimbursement fee is directed, and sets out the nature of the costs which have been incurred, by way of expenses, time costs, financing costs and opportunity costs by Consortium Sub in respect of the potential scheme. Mr Jennings also confirms that the exclusivity provisions and reimbursement fee were included in the SID following arm's length negotiations between Spark RE and Consortium Sub in which those parties were separately advised by independent legal and financial advisors; confirms that he was closely involved in the negotiations for Consortium Sub; and indicates that the inclusion of the exclusivity provisions and reimbursement fee were material considerations for Consortium Sub in entering into the SID. Mr Jennings also refers to the execution of a deed poll in favour of Spark RE and scheme securityholders by which Consortium Sub has covenanted in favour of Spark RE and scheme securityholders to perform its obligations under the schemes. I will address an issue as to Consortium Sub's capacity to perform those obligations, which depends on the financial support of consortium members, below. By his second affidavit dated 18 October 2021, Mr Jennings exhibits a copy of the Deed Poll executed by Consortium Sub in favour of Spark RE and scheme securityholders, as amended after he had affirmed his earlier affidavit. 8. By an affidavit dated 15 October 2021, Mr Philip Podzebenko, who is a partner in the firm of solicitors that acts for Spark RE in respect of the schemes, addresses correspondence with the Australian Securities and Investments Commission ("ASIC") in respect of the scheme, the approval of Spark RE's board of the draft scheme booklet and several corrections to the draft scheme booklet. By a second affidavit dated 18 October 2021, Mr Podzebenko refers to ASIC's confirmation that it had no further comments on the draft scheme booklet and identifies minor amendments to the scheme booklet that had been made since his earlier affidavit. 9. By an affidavit dated 19 October 2021, Mr Charles Ashton, who is a partner in the firm of solicitors that acts for Consortium Sub in respect of the schemes, addressed the process of negotiation of the SID, the maximum scheme consideration payable by Consortium Sub, which is in the order of approximately AUD$5.16 billion, and referred to equity commitment letters provided by the members of the Consortium to Consortium Sub and the conditions to those commitments. As Mr Jackman pointed out in submissions, those commitment letters provide that they are enforceable by Spark RE, although not by its securityholders, subject to their relevant terms and conditions. Mr Ashton also addressed the terms of a debt commitment letter by which several financiers have committed to provide funding to Consortium Sub in respect of the scheme consideration. I will return to that matter below. Approval of the Creditors' Scheme 1. The Court will order the convening of the Creditors' Scheme meeting and approve a draft explanatory statement if it is satisfied that Spark RE is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the explanatory statement and make submissions and has had 14 days' notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court's approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd (2016) 112 ACSR 554; [2016] FCA 366 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20]. 2. There is evidence that Spark RE is a Part 5.1 body and the proposed Creditors' Scheme is an arrangement within the meaning of s 411 of the Act. There is no reason to doubt that the scheme booklet provides proper disclosure to Spark securityholders. I have referred to evidence of a verification and due diligence process above. Spark RE and Consortium Sub have committed themselves to propounding the Creditors' Scheme under the SID and there is no reason to doubt that the scheme is bona fide and properly proposed. As I noted above, ASIC has advised that it did not currently propose to appear to make submissions or intervene to oppose the scheme at the first hearing. ASIC reserved its position as to a statement under s 411(17)(b) of the Corporations Act that it had no objection to the Creditors' Scheme until the second Court hearing, in accordance with its usual practice. The Court will address that question at that second court hearing. 3. The Court will not ordinarily summon a meeting unless a scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504; (1993) 112 ALR 627; (1993) 10 ACSR 230; [1993] HCA 15. In Re Foundation Healthcare Ltd (2002) 42 ACSR 252; [2002] FCA 742 at [36] and [44], approved in Re CSR Ltd (2010) 183 FCR 358; (2010) 265 ALR 703; (2010) 77 ACSR 592; [2010] FCAFC 34 at [58], French J observed that: "It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court's approval if passed by the necessary majorities, then leave should be given … The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. … The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further." [citations omitted] 1. The Court is concerned at the first Court hearing with whether the scheme is one which is adequately explained to those who have a financial interest in it, and whether there is any obvious flaw in the scheme, such that it would be inappropriate even for it to be submitted for consideration: Re Abacus Funds Management Ltd (2006) 24 ACLC 211; [2005] NSWSC 1309 at [23]. Mr Jackman also referred to my summary of the applicable principles for a first Court hearing in Re Ellerston Global Investments Ltd [2020] NSWSC 879 at [25]-[27] in this respect. The Court is not required to be satisfied that no better scheme could have been proposed, and the question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re DUET Finance Ltd above at [14]. 2. Other than as to Consortium Sub's need for financial support from the Consortium members to perform its obligations under the Deed Poll, which I address below, nothing has emerged from the hearing to suggest that that Creditors' Scheme is not properly put to Sparke RE securityholders for their consideration or could not be approved at the second Court hearing if it receives the requisite securityholder approvals. Application for judicial advice in respect of the Trust Scheme 1. The judicial advice application in respect of the Trust Scheme concerns a proposed amendment to the constitution of the Trust to effect what is commonly referred to as a "trust scheme", consistent with the principles noted in Re Mirvac Ltd (1999) 32 ACSR 107; [1999] NSWSC 457. If approved by unitholders in the Trust, those amendments would provide for the transfer of all units in the Trust to Consortium Sub in consideration for the cash consideration described above. 2. Mr Jackman points to a preliminary issue of jurisdiction, which arises because cl 29.6 and the "Details" section of SIT's constitution provides that the governing law of the SIT constitution is the law of Victoria. Mr Jackman nonetheless submits and I accept that the Court has jurisdiction to provide judicial advice in relation to the Trust Scheme under s 63 of the Trustee Act 1925 (NSW); or, in the Court's inherent equitable jurisdiction to give judicial advice or, in the alternative, relying on s 4(3) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Vic). Mr Jackman points to earlier case law that is consistent with that conclusion, including Permanent Trustee Co Ltd v National Australia Managers Ltd (Supreme Court of New South Wales McLelland CJ in Eq, 8 August 1994), where McLelland CJ in Eq held that the Supreme Court of New South Wales had jurisdiction to provide judicial advice under s 63 of the Trustee Act in respect of a trust governed by the law of Victoria. Mr Jackman points out that that decision has since been followed in Re Mirvac Ltd above and in Re Cromwell Property Securities Ltd [2006] NSWSC 1449, both of which involved trust schemes. Mr Jackman fairly notes that approach has been recently questioned by Parker J (in a different context, and without reference to those decisions) in Re Rinehart [2020] NSWSC 1624 at [111]-[113]; Ballard v Ballard (No 2) [2020] NSWSC 1687 at [29] and Re Rinehart (No 2) [2021] NSWSC 364 at [50], although his Honour also held that, in any event, the Court could exercise the corresponding cross-vested jurisdiction of another state. I do not consider it necessary to determine this question where, on either view, the Court can exercise jurisdiction under s 63 of the Trustee Act or the corresponding Victorian provision. 3. Turning now to the common practice in respect of "trust schemes", registered managed investment schemes are, of course, not Part 5.1 bodies for the purposes of the scheme provisions in Pt 5.1 of the Act. However, it is now common in a "trust scheme" for a responsible entity to seek judicial advice in a two-stage process by analogy with a company scheme under Pt 5.1 of the Act: Re Mirvac Ltd above; Re DUET Management Company 1 Ltd (2013) 95 ACSR 34; [2013] NSWSC 817; Re Sydney Airport Holdings Ltd [2013] NSWSC 1665. This practice typically includes an application by the responsible entity of the trust, at the first Court hearing, for judicial advice that it is justified in propounding resolutions to implement the scheme and in proceeding on the basis that proposed amendments to the constitution of the registered managed investment scheme to implement the trust scheme would be within the powers of alteration conferred by that document and s 601GC of the Act: Re Mirvac Ltd above at [46]–[47]; Re DUET Management Company 1 Ltd above at [9]. That judicial advice, and the right of unitholders to appear at the second Court hearing and object to the trust scheme, is then disclosed in the explanatory statement sent to unitholders for a meeting to consider the resolutions to implement the scheme; unitholders meet to consider and vote on the resolutions; and the responsible entity can seek judicial advice at the second hearing that, having regard to the result of voting at the scheme meeting and any other relevant circumstances, it is justified in implementing the scheme. 4. I will deal with several specific issues that extend to the Trust Scheme below. I am otherwise satisfied that Spark RE, as responsible entity of the Trust, would be justified in proceeding on the basis that the making of the proposed amendments to the Trust's constitution in connection with the Trust Scheme, following the requisite approval by unitholders, would be within its powers, including the power of alteration conferred by the Trust's constitution and s 601GC of the Act. Specific issues arising in respect of the proposed schemes 1. In accordance with the common practice at a first Court hearing in respect of a scheme, Mr Jackman identified several aspects of the schemes which it is appropriate to bring to the Court's attention. Performance risk 1. Mr Jackman rightly recognises that the ability of scheme participants to enforce the entitlements to be received under a scheme is relevant to the exercise of the Court's discretion whether to convene scheme meetings: Re Villa World Ltd [2019] NSWSC 1207 at [22]. He also recognises that a similar consideration can arise in a trust scheme where a third party is providing consideration or benefits: Re Sydney Airport Holdings above at [17]; Re Mirvac Funds Management Ltd [2014] NSWSC 1569 at [7]. He refers to my observation in Re Ellerston Global Investments Ltd above at [29] that a practice has developed to address performance risk, by which the transfer of target shares to an acquirer is conditional on the payment of the consideration to target shareholders, and that numerous cases have endorsed that practice. 2. Mr Jackman points out that that practice has been followed in this case. Clause 4.2 of the SID requires Consortium Sub to pay, or procure to be paid, an amount equal to the aggregate amount of the scheme consideration payable to all Spark securityholders into an Australian dollar denominated trust account operated by Spark RE as trustee for the Spark securityholders by no later than the business day before the Implementation Date and that account will be held with an "authorised deposit-taking institution" within the meaning of the Banking Act 1959 (Cth). Under cl 4.2(c) of the SID, on the Implementation Date, Spark RE must pay, or procure to pay, each Spark securityholder such amount as is due to that Spark securityholder in respect of all of their Spark securities. I accept that the provision for payment of the cash consideration in respect of the schemes to a trust account with an Australian ADI operated by Spark RE as trustee for Spark securityholders entitled to the cash consideration, prior to transfer of their stapled securities, is a safeguard against the risk that Spark securityholders will suffer delay or default in the provision of the scheme consideration after their stapled securities have been transferred to Consortium Sub. 3. Mr Jackman also relied on the Deed Poll executed by Consortium Sub in favour of Spark RE and scheme securityholders, and I have referred to the evidence as to that deed poll above. This Deed Poll reflects another means of managing performance risk by binding a non-party to the scheme to perform its obligations under the scheme by way of deed poll: Re Simavita Holdings Ltd [2013] FCA 1274 at [43]. A potential issue arose in respect of that Deed Poll, because it is apparent that Consortium Sub does not have the capacity to perform its obligations under the Deed Poll without financial support from Consortium members and funding from third party lenders which is presently conditional. Spark RE initially relied on the decisions in Re QMS Media Ltd [2019] FCA 2172 and Re Vocus Group Ltd [2021] NSWSC 630 and submitted that these cases reflect an "established practice" of not obtaining deeds poll from consortium members in addition to the bidding entity, provided that there are binding agreements for the consortium members to provide their agreed share of the scheme consideration. Spark RE submitted that the funding arrangements described in section 8.2 of the scheme booklet and the transaction structure for these schemes are similar to those considered in Re Vocus Group Ltd above. It seems to me that Spark RE's reliance on "binding agreements for the consortium members to provide their agreed share of the scheme consideration" has the difficulty that those agreements may here be terminated on specified grounds and the facility with third party lenders is presently conditional. The decisions on which Spark RE relies also do not seem to me to establish such an "established practice", or explain its basis, although they each did not require that consortium members be party to the deed poll given by the bidding entity. I do not consider this matter is reason not to convene the scheme meetings, although it will require particular attention at the second Court hearing, for the reasons noted below. 4. As I noted in delivering oral reasons for making orders at the conclusion of the first Court hearing, it seems to me that the ordinary practice by which the holding company of a bidding entity becomes party to the deed poll in a scheme is a desirable one. However, I recognise that that there may be practical difficulty in implementing that practice where several independent entities form a consortium in respect of a major acquisition, on terms governing the relationship between themselves, which are likely to be addressed in the funding arrangements as between themselves. Although Consortium members are here not party to the Deed Poll, likely for that reason, the level of performance risk is reduced where the commitment letters are enforceable by Spark RE, although they are not enforceable by individual unitholders and are presently conditional. The Deed Poll will then have greater utility after Consortium Sub has been funded by Consortium members and third party lenders to proceed with the acquisition of notes and units pursuant to the schemes. 5. It seems to me the degree of conditionality that presently attaches to Consortium Sub's funding, and the fact that Consortium members are not party to the Deed Poll, should not lead the Court to decline to convene a scheme meeting at the first Court hearing. As I noted in Re Isentia Group Ltd [2021] NSWSC 910, any issue as to conditionality of that funding can be addressed at the second Court hearing, when the Court can have regard to evidence whether the conditions precedent in respect of the funding to be provided by Consortium members and by third party lenders have then been satisfied. It seems to me that the approach that is adopted here, involving a combination of a deed poll given by the bidding entity, the enforceability of funding commitments by the target entity and, ultimately, the Court's review of whether conditions to the funding have been satisfied at the second Court hearing, will sufficiently protect the unitholders' interests. This matter therefore also does not provide reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme, although the Court will need to be satisfied that Consortium Sub has been funded to perform its obligations under the schemes at the second Court hearing. Deemed warranty 1. Clause 4.4 of the SID provides that each Spark securityholder is taken to have given various warranties to Consortium Sub, including that on the Implementation Date all their Spark securities are free from encumbrances and interests of third parties of any kind. These deemed warranties are disclosed at section 6.10 of the scheme booklet. The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd (2007) 62 ACSR 400; [2007] FCA 770 at [57]–[63]; Re DUET Management Company 1 Ltd above at [23]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]; Re Villa World Ltd [2019] NSWSC 1207 at [25]; Re Windlab Ltd [2020] NSWSC 571 at [21]. This matter also does not provide reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme. Exclusivity provisions and reimbursement fee 1. Mr Jackman points out that cl 11 of the SID imposes "no talk", "no shop" and "no due diligence" obligations (as defined in the SID), and the "no talk" and "no due diligence" obligations are subject to a fiduciary exception as set out in cl 11.4 of the SID. Mr Jackman also submits, and I also accept, that similar "no talk" restrictions have been accepted in Re ERM Power Ltd [2019] NSWSC 1502 at [24]; Re Prime Media Group Limited [2019] NSWSC 1805; Re Windlab Ltd above at [18] and Re TPG Telecom Ltd [2020] NSWSC 772. Although the "no shop" restriction and "matching right" are not subject to fiduciary carve-outs, that approach has also been accepted in the case law: Re DUET Finance Ltd above at [24]. The exclusivity provisions are clearly disclosed in the Frequently Asked Questions and section 12.1 of the scheme booklet. 2. Mr Jackman also refers to my summary of the applicable principles relating to the length of any exclusivity period in Re TPG Telecom Ltd above at [22] as follows: "the Court will be concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve out; and the provisions must be clearly disclosed in the explanatory statement sent to shareholders." 1. Mr Jackman submits, and I accept, that the exclusivity provision period is here defined in the SID and capable of precise ascertainment and lasts from the date of the SID until the earlier of the date on which Spark RE gives notice to the Consortium Sub that it has determined that a Competing Proposal (as defined) is a Superior Proposal having complied with clause 11.6 of the SID; the termination of the SID; the End Date (being 24 May 2022, unless otherwise agreed in writing by the parties); and the Effective Date (as defined). Mr Jackman submits that an exclusivity period of about 9 months between the date of the SID and the End Date is a reasonable period and comparable with exclusivity periods in other schemes that have previously been accepted by the Court: Re Tatts Group Ltd [2017] VSC 552 at [36]–[39]; Re Sirtex Medical Ltd [2018] FCA 1315 at [37]; Re Tawana Resources NL [2018] FCA 1456 at [32]; Re Vocus Group Ltd above at [16]–[17]. I accept the exclusivity period is justifiable given the complexity of the transaction and the need for regulatory approvals for it. 2. Mr Jackman points out that cl 11.8 of the SID provides that, if any non-public information in relation to the Spark Infrastructure Group is made available to any Third Party (as defined in the SID) in connection with an actual, proposed or potential Competing Proposal which has not previously been made available to Consortium Sub, Spark RE must also promptly provide that information to Consortium Sub subject to certain exceptions. I accept that similar restrictions have been accepted in Re Healthscope Ltd (2019) 139 ACSR 608; [2019] FCA 542 at [154]–[158] and in Re Mortgage Choice Ltd [2021] NSWSC 553 at [17]. 3. Clause 12 of the SID in turn provides that an expense reimbursement amount of $52 million (excluding GST) may be payable by Spark RE to Consortium Sub in specified circumstances. That substantial amount reflects the substantial size of the transaction and is not payable on securityholders not approving the schemes with the requisite majorities or the Court's declining to approve the schemes. That fee should not be a disincentive to Spark securityholders taking that approach, if they wish, in their consideration of the proposal: Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513; [2007] FCA 2078. Consortium Sub is also required to pay an expense reimbursement amount of $52 million (excluding GST) to Spark RE if Spark RE terminates the SID as a result of an unremedied material breach of the SID by Consortium Sub that is material in the context of the schemes taken as a whole and the schemes are not implemented. There is evidence, albeit of a common and somewhat formulaic character, that the reimbursement fees were negotiated between the parties in the course of arm's length negotiations, where (as is plainly the case here) all parties were represented by experienced advisers: Re APN News & Media Ltd (2007) 62 ACSR 400 at 411; [2007] FCA 770. 4. Mr Jackman also refers to my observation in Re Coca-Cola Amatil Ltd [2021] NSWSC 270 at [24] that: "The case law has accepted reimbursement (or "break") fees that are a genuine pre-estimate of the internal and external costs that would be incurred by an acquirer in respect of a scheme, including opportunity costs, and that are not payable if the shareholders did not vote in favour of the scheme and are unlikely to be a matter which could influence voting at the scheme meeting: Re Cytopia Ltd [2009] VSC 560; Re Webcentral Group Ltd [2020] NSWSC 1279 at [30]. While there is limited evidence as to the out of pocket or opportunity costs of [the acquire] that support the reimbursement fee, and it seems that it would have been preferable if the components of that fee had been addressed in the affidavit evidence in at least a general way, I recognise that the amount of this fee is significantly less than the 1% guideline figure indicated by the Takeovers Panel, and that fee is payable as the occasion of Independent Amatil Shareholders obtaining the opportunity to consider a substantial transaction at a significant premium. Although the reimbursement fee could have been better justified, it does not seem to me to provide a reason not to make the orders sought." 1. Mr Jackman points out that Mr Jennings' affidavit, to which I referred above, indicates the components of the out of pocket and opportunity costs of Consortium Sub that support the amount of the reimbursement amounts. The reimbursement amounts represent approximately 1% of the total equity value of Spark RE having regard to the value of the cash consideration and is consistent with the Takeovers Panel's Guidance Note 7: Lock-up devices, and payment of break fees of that percentage is also commonplace in schemes of this kind: Re Mosaic Oil NL [2010] FCA 985 at [19]. 2. These matters also do not provide reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme. Treatment of equity incentive rights and Mr Francis' recommendation 1. Mr Jackman draws attention to an issue as to treatment of equity incentive rights and a recommendation made by Mr Richard Francis, who is Spark Infrastructure Group's Managing Director and Chief Executive Officer, in favour of the schemes. Mr Francis will, if the schemes become effective, receive a total of $6,731,331 in respect of Spark Infrastructure performance rights and his holding of Spark securities. Spark RE's other directors consider it is appropriate that Mr Francis make a recommendation on the schemes, given their importance and Mr Francis' role in the management of Spark Infrastructure Group, and Mr Francis also considers that it is appropriate that he make a recommendation on the schemes. 2. I accept that the fact that Mr Francis has made a recommendation, as a director, in favour of the schemes, where he has an interest in the outcome of the votes by reason of the treatment of his equity incentives under the schemes, should not cause the Court to decline to convene the Company Scheme meeting or give the judicial advice sought. I here prefer the approach adopted in Re SMS Management & Technology Ltd [2017] VSC 257; Re Kidman Resources Ltd [2019] FCA 1226, Re Villa World Ltd [2019] NSWSC 1207 and Re GBST Holdings Ltd [2019] NSWSC 1280 to that taken in Re Gazal Corporation Ltd [2019] FCA 701 and Re Navitas Ltd (No 2) [2019] WASC 218. I have more recently taken the former approach in Re Coca-Cola Amatil Ltd above and Re BINGO Industries Ltd [2021] NSWSC 798, Beach J took the same view in Re Citadel Group Ltd [2020] FCA 1580 and Re RXP Services Ltd [2021] FCA 38 and Perram J also took that view in Re Mainstream Group Holdings Ltd [2021] FCA 948. I accept that Mr Francis' interest does not prevent him from making a voting recommendation to securityholders where that interest is sufficiently disclosed in the scheme booklet and securityholders may take it into account in determining the weight to give to that recommendation. 3. Mr Jackman also addressed the wider position in respect of the Spark Infrastructure Equity Incentive Plan under which the Spark Infrastructure Group has issued cash or Spark Infrastructure performance rights as short term incentives, long term incentives and retention incentives, to certain of its executives and employees. I accept that holders of incentive rights who are also Spark securityholders are not in a separate class of securityholders by reason only that they also hold incentive rights: Re Foster's Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Villa World Ltd above at [29]. Dispatch of scheme booklet and other materials 1. Mr Jackman points out that, due to the size of the documents to be sent to securityholders, it is proposed that those securityholders who have elected to receive communications electronically will be notified by email of the meetings, and that email will contain links to online locations where the scheme booklet can be accessed, proxy instructions can be lodged and securityholders can participate in the virtual meetings, to which I refer below. Mr Jackman points out that cl 14 of SIT's constitution permits notice of meetings to be given electronically if the relevant securityholder has nominated an email address for that purpose, and that it is now commonplace for electronic mail-out orders to be made by the Courts in relation to notices of scheme meetings: Re Staging Connections Group Ltd above at [49]-[52]; Re Signature Gold Ltd [2017] FCA 1481 at [55]; Re Ardent Leisure Limited above at [27]; Re ERM Power Limited above at [26]; Re TPG Telecom Ltd above at [32]. Spark securityholders who have not elected to receive communications electronically will be sent a hard copy notice of access letter, again containing links to the online locations where the scheme booklet can be accessed, where proxy instructions can be lodged, and where Spark securityholders can participate in the meetings. They will also be sent a hard copy proxy form, question form and reply paid envelope. Conduct of virtual scheme meetings 1. It is proposed that the scheme meetings be held as a virtual meeting, having regard to the uncertainty and potential health risks associated with large gatherings during the COVID-19 pandemic. Mr Jackman points out that cl 16.29 of SIT's constitution (which applies to meetings of holders of Spark Notes while they are stapled to Spark Units pursuant to cl 1.1 of Schedule 3 of the Note Trust Deed) allows for meetings to be held using technology. The Courts have made orders for virtual meetings throughout the pandemic: Re Vocus Group Ltd above; Re BINGO Industries Ltd above at [29]. I am satisfied that the meeting is properly conducted in that way, and the proposed manner of dispatch of scheme materials to shareholders is appropriate and consistent with that adopted in recent case law. As I noted above, Mr McTaggart (or, in his absence, Mr Martin) intends to follow the procedure set out by Barrett J in Re Hills Motorway Ltd above at [22] in conducting the meetings. Section 411(17) of the Corporations Act 1. In accordance with the usual practice, the Court will address the question raised by s 411(17) of the Act on an application to approve a scheme at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37]. Orders 1. For these reasons, I was satisfied that the Creditors' Scheme was an arrangement for the purposes of s 411 of the Corporations Act and that, having regard to the evidence and matters to which I referred above, an order should be made convening the scheme meeting and approving the scheme booklet for distribution to shareholders. I was also satisfied that judicial advice should be given that Spark RE is justified in propounding resolutions to implement the proposed Trust Scheme and proceeding on the basis that the constitutional amendments to implement the Trust Scheme would be within the constitutional powers of alteration and s 601GC of the Corporations Act. For these reasons I made the orders sought by Spark RE at the conclusion of the first hearing. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 October 2021