Supreme Court New South Wales Medium Neutral Citation: In the matter of E&P Investments Limited as responsible entity for CD Private Equity Fund I, CD Private Equity Fund II, CD Private Equity Fund III and CD Private Equity Fund IV [2022] NSWSC 1442 Hearing dates: 7 October 2022 Date of orders: 7 October 2022 Decision date: 24 October 2022 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 responsible entity of four registered schemes is justified in propounding resolutions to implement the proposed trust schemes and proceeding on the basis that constitutional amendments to implement the trust schemes are within the constitutional powers of alteration and s 601GC of the Corporations Act 2001 (Cth). Catchwords: 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: - Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) - Corporations Act 2001 (Cth) Ch 5C, Ch 6D Trustee Act 1925 (NSW), s 63 Cases Cited: - Re Australian Leisure and Entertainment Management Ltd [2021] NSWSC 1421 - Re DUET Finance Ltd [2017] NSWSC 415 - Re Ellerston Global Investment Ltd [2020] NSWSC 879 - Re Irongate Funds Management Ltd [2022] NSWSC 723 - Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484; [2008] NSWSC 745 - Re Magellan Asset Management Ltd (as responsible entity of Magellan Global Fund) (2020) 150 ACSR 23; [2020] NSWSC 1535 - Re Mirvac Ltd (1999) 32 ACSR 107; [1999] NSWSC 457 - Re Simavita Holdings Ltd [2013] FCA 1274 - Re Spark Infrastructure RE Limited [2021] NSWSC 1385 - Re Sydney Airport Holdings Ltd [2013] NSWSC 1665 - Re Walsh & Company Investments Ltd as responsible entity of Fort Street Estate Capital Fund I & Ors [2020] NSWSC 1509 - Re Walsh & Company Investments Ltd as responsible entity of Fort Street Estate Capital Fund I & Ors [2020] NSWSC 1746 Category: Principal judgment Parties: E&P Investments Limited as responsible entity for CD Private Equity Fund I (First Plaintiff) E&P Investments Limited as responsible entity for CD Private Equity Fund II (Second Plaintiff) E&P Investments Limited as responsible entity for CD Private Equity Fund III (Third Plaintiff) E&P Investments Limited as responsible entity for CD Private Equity Funds IV (Fourth Plaintiff) Representation: Counsel: M A Izzo SC (Plaintiffs) Solicitors: King & Wood Mallesons (Plaintiffs) File Number(s): 2022/274813 Judgment Nature of the application 1. By Originating Process filed on 14 September 2022, E&P Investments Ltd ("E&P") as responsible entity for several funds seeks judicial advice in respect of a proposed transaction by which all units in those funds would be transferred to E&P as responsible entity for CD Private Equity Fund III by way of trust schemes and in respect of associated consequential amendments. E&P tenders a statement of facts (Ex A1) which summarises the structure of the scheme, on which I have drawn in outlining that structure below. 2. By way of background, E&P is the responsible entity of four registered managed investment schemes under Ch 5C of the Corporations Act 2001 (Cth): CD Private Equity Fund I ("Fund I"), CD Private Equity Fund II ("Fund II"), CD Private Equity Fund III ("Fund III"), and CD Private Equity Fund IV ("Fund IV"). Fund I, Fund II and Fund III are listed on the Australian Securities Exchange ("ASX") and the units in those Funds are fully paid. Fund IV is not listed on the ASX. The units in Fund IV were issued on a partly paid basis, up to the fully paid amount of $1.60 per unit, to be paid in five instalments of $0.32. The first two instalments were called during FY19, the third and fourth instalments were called in FY20 and FY21 respectively, and the fifth instalment of $0.32 was called in July 2022 and was offset by a 16 cent per unit distribution. 3. E&P, as responsible entity of each of the Funds, has determined (subject to receiving judicial advice in these proceedings) to put to the unitholders of the Funds a proposal to combine the four Funds to create a single fund ("Proposal"). As I noted above, that would be implemented by Fund III acquiring the units in Fund I, Fund II, and Fund IV to form the "CD Private Equity Fund" ("Merged Fund") and the conversion of Fund III from a closed-ended listed trust to an open-ended unlisted unit trust structure ("Restructure"). If the trust schemes are implemented, each of the unitholders in Fund 1, Fund II and Fund IV will respectively receive 0.6285, 0.9144 and 1.0569 units in Fund III for each unit in the respective Funds held at the record date, although the consideration for Fund IV unitholders may increase slightly to a maximum of 1.0583 units in Fund III. When the calculation of the number of Fund III units issued as scheme consideration would result in the issue of a fraction of a security, the fractional entitlement will be rounded to the nearest whole number of Fund III units. It is proposed that the units in Fund III that would have been issued to a Foreign Unitholder (as defined) will instead be issued to a third party sale nominee who will sell them on market and pay the net proceeds of the sale to the Foreign Unitholder, although, at present, only a small number of unitholders in Fund II will be affected by this arrangement. 4. E&P proposes that, after implementation of the trust schemes, E&P will continue to be the responsible entity of the Merged Fund. E&P will apply for the quotation of the new units issued in Fund III on the ASX and they will, for approximately six months from implementation, continue to be tradeable on the ASX, allowing unitholders to sell their units in that period. Unitholders in Fund III will also be asked to consider a resolution approving the buyback of up to 10% of the number of units on issue in Fund III after implementation of the Proposal, within the approximately 6 months following implementation of the Proposal ("Buyback Resolution"). 5. The proposed Restructure involves converting the Merged Fund from a closed-ended to an open-ended unit trust structure by amending Fund III's constitution and, after a six month period, making an application to ASX for Fund III to be delisted. It is expected that a withdrawal facility would then be made available in December 2023 and, subsequently, withdrawal offers to the value of approximately 5% of the Merged Fund's issued units would be made at six-monthly intervals. The proposed amendments to the Fund III constitution also provide that, if there is at the relevant time a specified level of unmet demand to redeem from the Merged Fund, members of the Merged Fund will have the opportunity to vote every 7 years, commencing from November 2029, on a special resolution as to whether the Merged Fund should be wound up and capital returned as assets are progressively sold in an orderly manner. 6. The implementation of the proposal is subject to the satisfaction or waiver (where applicable) of a number of conditions precedent, as summarised in the explanatory memorandum and set out in cl 3.1 of the Scheme Implementation Deed ("SID"). Amendments are also proposed to be made to the constitutions of the Funds in connection with the proposal, as set out in supplemental deeds and summarised in sections 3.1 and 11.1 of the explanatory memorandum. The proposed amendments to the constitution of Fund IV provide, inter alia, for partly paid units that have been forfeited under the existing provisions of the constitution to be cancelled so that all units are of the same class when they are transferred under the relevant trust scheme. Affidavit evidence 1. E&P reads the affidavit dated 14 September 2022 of its solicitor Mr Alexander Morris, which provides basic corporate information concerning E&P. 2. E&P also reads the affidavit dated 5 October 2022 of Mr Patrick Broger, who is a director, funds management, at E&P Funds, which sets out the elements of the proposed trust scheme which I have summarised above. Mr Broger also refers to the role of "E&P Wealth", which operates a client-facing brand through Evans & Partners and provides advice through an adviser network. The possibility that advisers within that network will give advice which extends beyond information contained in the explanatory booklet for the trust scheme raises significant issues for the scheme, which may arise prior to the second Court hearing if E&P seeks approval for such communications, or will otherwise be relevant to whether the trust schemes should ultimately be approved at the second Court hearing. 3. Mr Broger also outlines the proposed process for the dispatch of disclosure documents in respect of the schemes which will be undertaken by Boardroom Pty Ltd ("Boardroom") which maintains the register of each Fund. In the case of some unitholders, the information will be provided to an Evans & Partners' post office box, which is recorded as the unitholder's address in the register for the relevant fund, and then sent without further comment by Evans & Partners to that unitholder. In the case of other unitholders who hold their investment by an investment platform, information will be provided to a custodian. Mr Broger also addresses proposed announcements to ASX in respect of the scheme, and a proposal for communication by advisers within the E&P advice network to clients. I have referred to the potential issues arising from such communications above. Mr Broger also explains the process adopted for verification of the scheme documents, which was conventional and raises no particular difficulties. 4. The exhibits to Mr Broger's affidavit included the SID and supplemental deeds in respect of each of the four funds, and I was taken to significant provisions in those deeds by Mr Izzo, who appears for E&P, in submissions. The proposed explanatory memorandum for the schemes and a product disclosure statement in respect of the offer of units in Fund III are also exhibited to Mr Broger's affidavit and Mr Izzo also referred to the detail of the explanatory memorandum in submissions. 5. E&P also reads the affidavit dated 4 October 2022 of Mr Stuart Nisbett, who is an independent, non-executive director of E&P and consents to act as chair of the unitholder meeting. By his affidavit dated 4 October 2022, Mr Warwick Keneally, who is an executive director of E&P, consents to act as chair of the unitholder meetings if Mr Nisbett does not do so. 6. By his affidavit dated 6 October 2022, Mr David Eliakim, who is a partner in the firm of solicitors acting for E&P, addresses correspondence with the Australian Securities and Investments Commission ("ASIC") and ASX in respect of the scheme and regulatory relief which is necessary for implementation of the scheme. 7. By his affidavit dated 4 October 2022, Mr Ian Jedlin, who is a managing director of Kroll Australia Pty Ltd in its valuation advisory services practice, addresses his independent expert report in respect of the scheme. By his affidavit dated 4 October 2022, Mr Alfred Nehama, who is a partner at Deloitte Touche Tohmatsu addresses the preparation of an independent limited assurance report concerning financial information in respect of the funds, which is contained in the scheme booklet. By her affidavit dated 4 October 2022, Ms Nari Kye, who is also a partner Deloitte, addresses the preparation of the Australian taxation report which is also contained in the scheme booklet. 8. By his affidavit dated 5 October 2022, Mr Geoffrey Noonan, who is a client service manager of Boardroom, refers to the manner in which unitholder meetings concerning the schemes would be conducted, namely by using a virtual platform provided by the Lumi software. Applicable principles 1. Mr Izzo points out that it is commonplace for a responsible entity of a registered managed investment scheme to seek judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) in connection with a trust scheme. Mr Izzo submits and I accept that, in giving such advice, the Court will proceed by analogy with the approach governing the exercise of its discretion under section 411(1) of the Corporations Act: Re Mirvac Ltd (1999) 32 ACSR 107; [1999] NSWSC 457 at [47]; Re Macquarie Capital Alliance Ltd (2008) 67 ACSR 484; [2008] NSWSC 745 at [19]; Re Sydney Airport Holdings Ltd [2013] NSWSC 1665 at [2], [6], [19]; Re DUET Finance Ltd [2017] NSWSC 415 at [16] ("DUET"); Re Magellan Asset Management Ltd (as responsible entity of Magellan Global Fund) (2020) 150 ACSR 23; [2020] NSWSC 1535 at [17]; Re Spark Infrastructure RE Limited [2021] NSWSC 1385 at [26]. He refers to my summary of the applicable principles in DUET at [16] as follows: "[I]t is now common practice in a trust scheme for the responsible entity to seek judicial advice in a two-stage process by analogy with schemes of arrangement under Part 5.1 of the Corporations Act ... A responsible entity may seek judicial advice at the first hearing that it is justified in propounding resolutions to implement the trust scheme and proceeding on the basis that the amendments to be made 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 Corporations Act ... That judicial advice, and the right of any unitholder in the managed investment scheme to appear at the second court hearing and object, is disclosed in the explanatory statement sent to unitholders for a meeting of unitholders to consider the resolutions to implement the trust scheme; and further judicial advice is sought at the second hearing that the responsible entity is justified in implementing the trust scheme ..." [citations omitted] 1. Mr Izzo also points to my summary of the principles that have developed with respect to schemes under s 411 of the Corporations Act, as applied by analogy in DUET at [14] as follows: "It is, of course, well-established that the Court will generally approve the convening of a meeting of shareholders to consider a proposed scheme if it seems fit for consideration by a meeting of members and a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court on an uncontested application … [T]he Court's approach at the first hearing is that it "will not ordinarily summon a meeting unless the 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". … [A]t the first hearing, the Court exercises a "supervisory jurisdiction" to review the scheme and raise any queries with the plaintiff, and the Court will intervene at the first hearing if it has any concerns, since the market will have regard to the orders made by the Court at the first hearing ... The Court does not substitute its commercial judgment for that of the members to whom the scheme is directed, but considers whether the scheme is one that sensible businesspeople might conclude is of benefit to members …" 1. Mr Izzo submits that the Court should provide the judicial advice sought at this hearing. He submits that the proposed trust schemes are fit for consideration by meetings of Fund unitholders and reflect a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court, and that there are no discretionary reasons why the Court would refuse to grant the judicial advice sought by E&P. He points out that the trust schemes have received the unanimous support of the board of E&P; the independent expert retained by E&P to consider the trust schemes has concluded that terms of the trust schemes for unitholders in the Funds are fair and reasonable and accordingly the proposal is in the best interests of the unitholders of each of those Funds; and the independent expert's report has been verified by affidavit. He also submits that the Court should be satisfied that the trust schemes have been accurately and fairly described in the explanatory memorandum, and that the information contained in the explanatory memorandum and product disclosure statement has been the subject of verification. He submits that the Court should be satisfied that E&P, as responsible entity of the Funds, would be justified in proceeding on the basis that the making of the proposed amendments to the Fund constitutions in connection with the trust schemes, following approval unitholders, would be within E&P's powers as trustee and responsible entity of the trusts, including the powers of alteration conferred by the trust constitutions and s 601GC of the Corporations Act; acting upon the resolutions in doing all things and taking all necessary steps to implement the trust schemes; and reimbursing out of the assets of the Funds (or the Merged Fund) all costs and expenses incurred by E&P in its capacity as responsible entity of each of them in relation to this proceeding. 2. I will deal with several specific issues that extend to the trust schemes below. I am otherwise satisfied that E&P, as responsible entity of the Funds, would be justified in proceeding on the basis that the making of the proposed amendments to the Funds' constitutions in connection with the trust schemes, following the requisite approvals by unitholders, would be within its powers, including the power of alteration conferred by the constitutions of the Funds and s 601GC of the Corporations Act, and that the order sought as to the costs of the proceedings should be made. Particular issues 1. Mr Izzo draws attention to several specific issues in respect of the trust schemes. First, he points out that cl 28.2 of the supplemental deeds for Funds I and II and cl 14.3 of the supplemental deed for Fund IV contain power for E&P to give on behalf of each member a warranty as to good and unencumbered title to the units to be transferred, and those warranties are disclosed in section 11.1.3 of the explanatory memorandum. He submits and I accept that such warranties are recognised as legitimate in the case law, provided appropriate disclosure is made of them: Re Australian Leisure and Entertainment Management Ltd [2021] NSWSC 1421 at [29] ("Australian Leisure"); Re Irongate Funds Management Ltd [2022] NSWSC 723 at [28]. 2. Second, Mr Izzo submits and I accept that no issue of performance risk (namely, the risk that an acquirer does not comply with its obligation to provide the scheme consideration) arises in this transaction, since it involves a merger of four managed investment schemes which have a single responsible entity. That responsible entity is to perform the relevant obligations as responsible entity of each of the Funds pursuant to the amended constitution of the Funds, where the proposal is conditional upon all resolutions (except the Buyback Resolution) being passed by unitholders of all funds. The Court accepted that no performance risk arises in substantially similar circumstances in Re Walsh & Company Investments Ltd as responsible entity of Fort Street Estate Capital Fund I & Ors [2020] NSWSC 1509 at [16] and the same conclusion should be reached here. Mr Izzo also points out that, in any event, E&P has given an undertaking in cll 2 and 4.4 of the SID, which is a deed poll made for the benefit of members of each fund, to implement the schemes and pay the scheme consideration to each member in consideration for the transfer to it of each unit in Fund I, II or IV, and that is also a recognised means of managing performance risk: Re Simavita Holdings Ltd [2013] FCA 1274 at [43]; Australian Leisure at [28]. 3. Third, Mr Izzo submits and I accept that, even if the concept of separate classes of members could apply in a trust scheme, foreign unitholders which are subject to the sale facility noted above would not constitute a separate class, where the units they would have received will be sold on the market by a sale nominee and the net proceeds paid to them: Australian Leisure at [23]. 4. Fourth, Mr Izzo notes that a proposed "general advice client email" to be sent by the EAP Advice Network is similar in nature to the "Evans Dixon Email" referred to in Re Walsh & Company Investments Ltd as responsible entity of Fort Street Estate Capital Fund I & Ors [2020] NSWSC 1746 at [15] ("Walsh 2"). He submits that the process to be adopted by the EAP Advice Network in connection with the general advice client email has been reviewed in advance by E&P's lawyers with particular regard to the decision in Walsh 2, and that matter has been noted by the board of E&P; he draws the Court's attention in advance to the likelihood that such a communication or a variation of it will be sent; and he submits that the Court will be provided with any proposed general advice client email once the Investment Committee of E&P Wealth has formed a general view on the proposal as a whole, after the explanatory memorandum and product disclosure statement is issued. He submits that the Court will then have an opportunity to be satisfied that the proposed general advice client email is a balanced communication which fairly describes the proposal and discloses any relevant corporate relationships. Mr Izzo also draws attention to the number of unitholders who might receive the general advice client email (or a variation of it), if their individual advisor chooses to send it, and notes that there are some 2,581 unique unitholders across all four Funds in this category. He also notes that there are 6,251 unitholders who will receive the dispatch materials by email and 976 who will receive them by post, although these do not represent numbers of unique unitholders across all four funds. 5. I note these matters and there was discussion of them in the course of submissions at the first Court hearing. I also note that the question of a related entity's communications with unitholders, in the nature of financial advice, gave rise to real difficulty in Walsh 2; unbalanced communications with shareholders recently gave rise to real difficulty in Re ResApp Health Ltd [2022] NSWSC 1353; and it will be a matter for E&P Wealth whether it proceeds with communications with unitholders expressing a view as to the merits of the trusts schemes propounded by an associated party in a manner that may undermine the integrity of voting at the unitholder meetings and have the result that the Court does not give the advice sought at the second Court hearings. E&P and E&P Wealth are squarely on notice of these matters and will have no cause for complaint if that advice is declined by reason of the content of, or uncertainty as to the content of, comments that E&P Wealth or its advisers make in respect of the proposed schemes. I need not and should not reach any concluded views as to E&P Wealth's proposed communications with unitholders, which will need to be addressed in any application by E&P for approval of such communications or otherwise at the second Court hearing. 6. Fifth, by supplementary submissions, Mr Izzo addressed the application of "Know Your Client" ("KYC") requirements to the issue of units in Fund III. He notes that Fund III, the registered scheme in which units will be issued under the proposed trust scheme merger, is to remain listed on ASX for approximately six months following implementation of the merger, as described in the explanatory memorandum and noted in the evidence. Fund III will therefore be listed at the time when the relevant units are issued at the date of implementation of the trust schemes. The units in Fund III will be issued under the product disclosure statement ("PDS") which is part of the scheme booklet for the trust schemes. 7. Mr Izzo submits and I accept that an exception from the requirement for the scheme participants to whom units will be issued to provide KYC information will apply, since s 247(3) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) ("AML/CTF Act") states that "[t]his Act does not apply to a designated service that is of a kind specified in the AML/CTF Rules." Paragraph 21.3(3) of the Anti-Money Laundering and Counter-Terrorism Financial Rules Instrument 2007 (No.1) (Cth) ("AML/CTF Rules") in turn provides as follows: "21.3 For subsection 247(3) of the AML/CTF Act, the following designated services provided in any of the following circumstances are specified: … (3) an issue of an interest in a managed investment scheme (including an option to acquire an interest in a managed investment scheme) where the managed investment scheme is quoted or to be quoted on a prescribed financial market, in the following circumstances: (a) the issue is in accordance with relevant requirements in the [Corporations Act] pursuant to fundraising (including an initial public offering and a rights issue); and (b) the interest is to be quoted on a prescribed financial market." 1. Mr Izzo points out that units in Fund III are currently quoted on the ASX and will continue to be quoted for approximately 6 months following the relevant issue of units in Fund III to scheme participants. The PDS, which complies with the fundraising requirements of the Corporations Act, is to be given to all scheme participants and the units will be issued under it. The particular units in Fund III that are issued under the trust schemes will be the subject of an application for quotation on ASX within 7 days of their issue, in accordance with ASIC Instrument 2022-0861 and are therefore "to be quoted on a prescribed financial market". 2. I accept that, as Mr Izzo submits, the term "fundraising" as used in paragraph 21.3(3) of the AML/CTF Rules extends to an issue under a PDS as well as an issue under a prospectus prepared for the purposes of Ch 6D of the Corporations Act (which is titled "Fundraising"). I also accept that, although there are differences in content requirements between a prospectus and a PDS, each document provides disclosure to investors who are contributing value, be it in the form of cash or other property, to acquire an interest in the issuing vehicle. 3. For these reasons, I accept that the present case is different to Re Ellerston Global Investment Ltd [2020] NSWSC 879, where the Court noted (at [30]) that the acquirer was obliged to comply with s 32 of the AML/CTF Act before issuing Class B units to the target company's shareholders because the relevant fund was not listed and the Class B units would not be quoted on any prescribed financial market, meaning that the concessions available to listed funds under the AML/CTF Act were not applicable. Orders 1. For these reasons, I made the orders sought by E&P at the first Court hearing on 7 October 2022. ********** 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: 26 October 2022