Reported Decision : 43 ACSR 101 (2003) 21 ACLC 35 New South Wales Supreme Court CITATION : Hills Motorway [2002] NSWSC 897 CURRENT JURISDICTION: Equity Division Corporations List FILE NUMBER(S) : SC 4500/02; 4501/02 HEARING DATE(S) : 25/09/02 JUDGMENT DATE : 25 September 2002 PARTIES : The Hills Motorway Limited - Plaintiff The Hills Motorway Management Limited - Plaintiff JUDGMENT OF : Barrett J COUNSEL : Mr M B Oakes SC - Plaintiff SOLICITORS : Mallesons Stephen Jaques - Plaintiff CATCHWORDS : CORPORATIONS - arrangements and reconstructions - scheme of arrangement between company and members linked with arrangement affecting managed investment scheme - determination of classes - observations on telephone communication with members - sequence of meetings discussed - appropriateness of case for judicial advice LEGISLATION CITED : Corporations Act 2000 (Cth) Trustee Act 1925 Re Australian Consolidated Press Ltd (1994) 4 ACSR 639 Cullen v Galloway Cattle Society of Australia Inc (1998) 27 ACSR 648 Re Foundation Healthcare Ltd (2002) 42 ACSR 252 Re GIO Building Society Ltd (2001) 39 ACSR 77 CASES CITED : Re Homemaker Retail Management Ltd (2001) 40 ACSR 117 Re Mirvac Ltd (1999) 32 ACSR 107 MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000 35 ACSR 440 Re NRMA Ltd (2000) 33 ACSR 523 Re Ranger Minerals Ltd [2002] WASC 207 Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 DECISION : Orders convening meeting; advice and direction given - 11 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J WEDNESDAY 25 SEPTEMBER 2002 4500/02 - THE HILLS MOTORWAY LIMITED 4501/02 - THE HILLS MOTORWAY MANAGEMENT LIMITED JUDGMENT 1 The Hills Motorway Limited, which I shall call "the company", seeks orders under s.411 of the Corporations Act 2001 (Cth) for the convening of a meeting of its members to consider a proposed scheme of arrangement under Pt 5.1 between the company and its members. Each member, as well as holding shares in the company, holds a parcel of units in a managed investment scheme or trust under a stapled security arrangement. The trust is constituted by a trust deed dated 18 August 1994 as subsequently supplemented and amended. The Pt 5.1 scheme of arrangement will be accompanied by and interlinked with amendments to and actions under the constitution of the trust. 2 The responsible entity of the trust is The Hills Motorway Management Limited, which I shall call "the manager". It seeks the opinion, advice and direction of the court under s.63 of the Trustee Act 1925 that it is justified in convening a meeting of the unit holders of the trust to consider resolutions to give effect to the proposal and in taking certain other steps. 3 The effect of the scheme of arrangement and the interlinked actions involving the trust, as well as steps to be taken at a general meeting of the company, will be to cause the shares of each holder of stapled securities to be transferred to a new company called The Hills Motorway Holdings Limited ("the holding company") and the linked trust units to be transferred, pursuant to new provisions in the trust constitution, to the trustee of a new trust known as The Hills Motorway Holdings Trust ("the holding trust"). Each holder of stapled securities will receive in return a parcel of stapled shares in the holding company and units of the holding trust equivalent in number to the stapled securities consisting of shares in the company and units of the trust. 4 The result will be the superimposing of the holding company and the holding trust which will come to own, respectively, all the existing shares and all the existing units, with the existing holders of stapled securities translated to that higher level where they will hold, in the form of new stapled securities, shares in the new company and units of the new trust. The rationale is related to restrictions to which the company and the trust are subject in their ability to expand their business activities. It is foreseen that expansion opportunities otherwise denied will be available at the upper level if the new structure is put in place. 5 The task of the court, in deciding whether to make orders under s.411 convening a meeting of members, has been expressed in various ways. According to the formulation adopted by Santow J in Re NRMA Ltd (2000) 33 ACSR 523, the court must see, on the material placed before it, that the proposal fits within the statutory concept of arrangement or compromise, that there will be available to members all the main facts relevant to the exercise of their judgment, that ASIC has had a reasonable opportunity to examine the proposal and that the scheme is so conceived and presented as to that structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it should not, in due course, receive the court's approval if the necessary majority of members' votes is achieved. To substantially similar effect are the recent observations of Austin J in Re GIO Building Society Ltd (2001) 39 ACSR 77, French J in Re Foundation Healthcare Ltd (2002) 42 ACSR 252 and Parker J in Re Ranger Minerals Ltd [2002] WASC 207. 6 There are, in this case, no matters causing concern in relation to any of these criteria but it is appropriate to comment on three issues that were raised by Mr Oakes SC (who appeared on the applications) and were the subject of consideration by the court in reaching the position to which I have just referred. 7 First, there is the question of classes. The Pt 5.1 scheme has been prepared on the basis that the relevant compromise or arrangement is one between the company and its members as a whole, there being no classes of members and no scheme or sub-scheme between the company and any class of members. To the extent that all shares are identical and the rights of all members under the constitution are identical, the view that there are no distinct classes is justified. But there are two provisions of the scheme itself that involve differentiation and it has been necessary to consider whether these result in the creation of classes. 8 One provision singles out a particular member for differential treatment. That member is the person who, as a matter of convenience, already holds the two existing shares making up the share capital of Holdings which, at this stage, has no other substance and is in the nature of a shell awaiting the injection of substantial value through implementation of the scheme. Under the scheme, this member will receive, as consideration, two fewer shares in Holdings than he would have received on a strictly one for one basis. The reality here is, in a sense, that the person concerned has received two of his shares in advance of the scheme. Once it is implemented, assuming that it is, he will have the same number of stapled securities as the scheme would have given him had it treated him on the same basis as all other holders, even though the scheme itself gives him, as I have said, two fewer shares. 9 The other aspect relevant to classes is the provision of the scheme having the effect that stapled securities issued as consideration for the compulsory transfer made by certain holders will be issued not to them but, rather, to a nominee who will sell those securities and account to the holders for the net proceeds of sale. The holders concerned are those with addresses in certain foreign countries where distribution or receipt of the new securities would or might contravene domestic law. 10 I am satisfied that neither of these features should at this stage be regarded as entailing the consequence that the member or members singled out for different treatment constitutes a separate class for the purposes of s.411. Resolution of class questions in this statutory context must always be undertaken in accordance with the principles laid down in Sovereign Life Assurance Company v Dodd [1892] 2 QB 573. Although that case dealt with a creditors' scheme, the principles are equally applicable to a members' scheme such as the present. Lord Esher MR said: "The Act says that the persons to be summoned to the meeting (all of whom, be it said in passing, are creditors) are persons who can be divided into different classes – classes which the Act of Parliament recognizes, though it does not define them. This, therefore, must be done: they must be divided into different classes. What is the reason for such a course? It is because the creditors composing the different classes have different interests; and, therefore, if we find a different state of facts existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes." 11 To similar effect was the observation of Bowen LJ that "class" "… 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." 12 The test is thus not one of identical treatment. It is one of community of interest. The court must ask itself whether the rights and entitlements of the different groups, viewed in the totality of the scheme's context, are so dissimilar as to make it impossible for them to consult together with a view to their common interest. The focus is not on the fact of differentiation but on its effects. The extent and nature of the differentiation must be measured in terms of the effect on the ability to consult together in a common interest or, in other words, the ability to come together in a single meeting and to debate the question of what is good or bad for the constituency as a whole and where the common good lies. Only if the differentiation destroys that ability - the word used by Bowen LJ is "impossible" - does class distinction come to prevail. 13 In this case, neither of the differentiations can be said at this point to have any such effect. Intrinsic value assured to members if the scheme is approved and implemented is the same for those specially singled out as it is for all others. There are also practical considerations underlying the differentiations that give them a rationale that would be readily understood and accepted in the single forum to which the Sovereign Life test directs attention. As things now stand, I am sufficiently content with the notion that there is no class distinction to see it as appropriate that the scheme go forward for members' consideration in its present form. 14 The second aspect that has been expressly brought to the court's attention concerns the matter of telephone communication by representatives of the company and the manager with members. The orders sought do not contemplate any form of monitoring of such activities. Mr Oakes has given me an outline which refers to some cases in recent years in which the court has seen fit to impose a requirement that telephone contact between representatives of the company propounding the scheme and its members should be monitored by the recording of telephone conversations (of course, with consent), with the tapes being available to the court should they be required. It is convenient to set out in full the written submissions of Mr Oakes and his instructing solicitor Mr Forbes on this aspect: "1 Pursuant to section 411(1) the Court is asked to approve the Explanatory Statement which accompanies the Notices of Meetings. Naturally, the Court is concerned to ensure that the Explanatory Statement speaks for itself and that other communications between representatives of the company and is members are, in the relevant sense, 'neutral': Re NRMA Insurance Limited (2000) 33 ACSR 595 at 599; Re Australian Co-operative Foods Limited (2001) 38 ACSR 71, 186 ALR 21 at para [89]. 2 In the instances where a scheme of arrangement has been used to implement a transaction akin to a takeover it has sometimes been thought by this Court to be desirable, having regard to section 411(17)(a), that the proponent of the scheme mirror procedures broadly analogous to those required under Part 6.5D of the Corporations Act : Re Archaen Gold NL (1997) 23 ACSR 143 at 147. A relevant aspect of this approach has been having available details of communications with scheme participants outside the Explanatory Statement, particularly on the telephone. The matter was first adverted to in May 2001 in Re Australian Co-operative Foods Limited (2001) 38 ACSR 71, 186 ALR 21 at paras [89]-[91]. In James Hardie Industries Ltd (3967/2001) in August 2001 it was dealt with by order 13 in the first court hearing minutes. In Homemaker Retail Management Ltd it was dealt with by undertaking. The James Hardie approach was followed in Delta Gold in the Federal Court. In later matters the scheme proposers have chosen not to have a help-line, so there was no order. 3 It is not, however, an invariable rule of practice of this Court that an order made under section 411(1) for the convening of a scheme meeting should make any particular provision concerning the manner in which communication with members (otherwise than by means of the Explanatory Statement) are to be conducted, the content of those communications or the extent to which, or way in which, those communications are to be scripted, monitored, recorded or reported to the Court. It is recognised that, should an issue arise concerning such communications, the plaintiff will be at risk unless it can discharge the evidentiary burden which may be cast on it. 4 In the present case, the Information Memorandum and accompanying letter from the Chairmen state: ' If you have any questions, or if you need further explanation of the Restructure, please call the Registrar on (telephone number), or consult your financial or other professional adviser ." The Information Memorandum pages 3 and 5. 5 The Registrar, ASX Perpetual Registrars Limited, is not in any sense an interested party. 6 It is proposed that all such telephone communications relating to the scheme will be conducted in accordance with a script approved by the plaintiff's solicitors. Should the Court direct or require, the conversations will be taped and a report concerning those communications may be provided to the Court at the second hearing. 7 It is submitted that having regard to the nature of the scheme, the identity of the person to whom enquiries have been directed, and the plaintiff's capacity to report to the Court on the nature and content of all relevant communications, should that become necessary, the Court need not make any order, give any direction to seek any undertaking from the plaintiff, concerning this matter." 15 I think it can fairly be said that at least one of the cases in which monitoring was ordered was a case in which it was clear, even at the meeting convening stage, that the proposal was particularly controversial and likely to raise significant differences of opinion among the membership, so that there might well have arisen particular sensitivity about the maintenance of the integrity of the explanatory statement and its ability to speak for itself. In saying that, I mean to emphasise that it is a fundamental premise of Pt 5.1 that the documents which go to members in accordance with the orders of the court (including, in a case such as this, those which concern them in their related capacity as holders of trust units) should be the only vehicle by which there is communication of the substantive message relevant to members' decision making. Registration of the explanatory statement by ASIC and its examination by the court are steps taken with a view to validating its integrity as a suitable communication vehicle. 16 The reality nevertheless remains that, in matters of this kind, it can be helpful to members and conducive to their taking advantage of their rights to engage in decision making that they have a point of contact to which they can refer if uncertain about how to proceed in order to participate or about the core aspects of the scheme. It is proposed in this case that such a means of communication should be available through the share registry. The personnel at the registry who deal with enquiries will be restricted in what they can say and will work from a script which will be so tailored that it does not add to what is said in the explanatory statement and other documents which are only permitted vehicle for substantive communication. There is no harm in that confined and structured approach; indeed, it is a helpful one. 17 The recording of telephone communication is, as the submissions note, now addressed by statute in the takeover context: see ss.648J to 648U of the Corporations Act, inserted by the Financial Services Reform Act 2001 (Cth) with effect from 11 March 2002. The legislature made no attempt to impose corresponding requirements in relation to schemes of arrangement between a company and its members. That, to my mind, is a point of significance indicating, as it does, that the analogy that is seen as most apt in cases such as the present is not the analogy with a Chapter 6 takeover but the analogy with a meeting of shareholders, that being the medium for the expression of members' wishes that is central to s 411. 18 It may be that, in some controversial or other special cases, it would be desirable for the court to order that telephone communications be recorded. Nothing that has been put before the court in this case suggests that it is controversial or special; and of its nature it is hard to see how it would be. That being so, there is no need for the positive imposition of such precautions. 19 It should nevertheless be said that if controversy does arise and there has been communication with members outside the formal documentary channels, that may become a matter which needs to be addressed upon any application for the court's approval of the scheme. Absence of an order for the monitoring of telephone communications with members relevant to the scheme says nothing about the attitude that would be taken to any particular contact, conversation or message, should it become the subject of complaint or submission at the approval stage. Nor does it say anything about any argument based on s.411(17) – referred to in the submissions – that might be advanced at that stage. 20 The third matter concerns the meetings. The proposal here is, I consider, a sensible one, given that three meetings involving exactly the same group of persons must be held to bring the total plan to fruition: the s 411 meeting of members of the company, a general meeting of members of the company and a meeting of holders of units of the trust. As there are no classes, every holder of stapled securities will have an entitlement to attend or be represented at each of those meetings. In a practical sense, therefore, there is, it might be said, only one occasion for decision-making. Technically, however, there must be three meetings and, as Mr Oakes has pointed out, some emphasis was laid upon the need to keeping meetings separate in Re Australian Consolidated Press Limited (1994) 4 ACSR 639. One rationale is that expressed by Young J in Cullen v Galloway Cattle Society of Australia Inc (1998) 27 ACSR 648 to the effect that, if any significant number of outsiders attends, the decision-making of those entitled to participate may be overborne, even if the outsiders do not actually purport to vote. But that danger is not present in a case such as the present where membership of the three constituencies coincides. 21 There is a need dictated by statute and by good sense for an appropriate degree of separation to be maintained. There must be separate deliberation within each forum on the matters that are the concern of that forum. There must also be independent expression of a decision on each matter for deliberation so that it can be separately recorded and reported to the court. At the same time, because each meeting will, in a commercial sense, cover the same ground because it will deal with one or more of the components of the overall proposal (with each component being essentially meaningless except in combination with all the others), there is merit in avoiding unnecessary repetition and overlap where to do so will not compromise the opportunities for separate deliberation at separate meetings. 22 The present proposal will be progressed on the footing that all three meetings will be declared open at the same time and the persons then and there assembled together will have outlined to them the procedure the chairman proposes to adopt thereafter, following which there will be an overall presentation and explanation of the proposal as a whole as it will emerge if all necessary resolutions are passed and the approval of the court is eventually granted. Two of the meetings will thereafter be adjourned and the third of them will proceed to debate. At the conclusion of that debate, the meeting at which debate has been completed will be adjourned for the taking of a poll (or polls) at a subsequent time on the same day. Another of the meetings will then be reopened and will proceed to debate on the issues before it, with the taking of a poll or polls again being adjourned. The same procedure will then be undertaken in relation to the third and last meeting. Each separate poll will then be separately taken at the same time as each other poll after the conclusion of debate on the third occasion. 23 The important point is that, under this proposal, each constituency, even though it happens to consist of the same persons, will have its own opportunity to consult together in its own interests on the separate issues which are of concern to it in relation to the subject matter of the particular meeting. Such consultation is, of course, the essential purpose of such meetings. The proposal as I have outlined it preserves the essential element of separate consultation by each constituency. I should only add that the conduct of any meeting is very much in the hands of its chairman and that, in the final analysis (and subject to the governing rules), the meeting is the master of its own procedure. The sequence of events I have described therefore cannot be regarded as anything more than a proposed or intended format. 24 Referring briefly to the application under the Trustee Act, I should say that the procedures and precautions which attend the Pt 5.1 scheme will also be applied to and in relation to the processes involving the trust deed and the meeting of the holders of the stapled trust units. This is a result of the integrated nature of the proposal as a whole and the use of a single booklet for all relevant material to be sent to holders of the stapled securities. In a real sense, therefore, the effects of the Pt 5.1 procedures and precautions will provide a sufficient basis for the view that the trustee is justified in convening that meeting and placing the relevant matters before it by means of the same channels as will be followed under Pt 5.1 and for the purposes of the general meeting of the company. The judicial advice sought does not go beyond the convening and conduct of the meeting, the intention being that there will be a second s.63 application as to implementation by the trustee if and when the Pt 5.1 scheme is brought back for approval. The availability of the jurisdiction in relation to responsible entities of managed investment schemes is confirmed by Re Mirvac Ltd (1999) 32 ACSR 107, MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000) 35 ACSR 440 and Re Homemaker Retail Management Ltd (2001) 40 ACSR 117. 25 Short minutes have been handed up in both matters, that is, 4500/02 in relation to the Pt 5.1 scheme and 4501/02 in relation to the Trustee Act application. I shall, in due course, make orders in accordance with the short minutes but there are two things to be dealt with before that is done. The first is that the scheme documents in exhibit A are to be amended in the manner set out in exhibit B, which I have reviewed and which is in order. A new set of documents incorporating those amendments will be delivered to my chambers with a certification that it incorporates the amendments in exhibit B. That new set will be made exhibit C and I shall make orders by reference to it. The other thing that is needed before orders are made is evidence of the grant of the ASIC waiver referred to in clause 9.11(a) of the explanatory memorandum, which is expected very soon and will also be delivered to my chambers. Upon receipt of both those items I will make the orders. 26 The originating process is stood over to 14 November 2002 at 9.15am before me. ********** Last Modified: 10/01/2002 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.