Reported Decision : 54 ACSR 687 New South Wales Supreme Court Australand Holdings Limited, Australand Property Limited, Australand Wholesale Investments Limited, Australand Wholesale Investments Limited [2005] NSWSC 835 CITATION : This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 18/08/05 JUDGMENT DATE : 18 August 2005 Equity Division JURISDICTION : Corporations List JUDGMENT OF : Barrett J DECISION : Orders for convening of meeting of members of company to consider scheme of arrangement. Orders that responsible entities of managed investment schemes justified in convening meetings of members of schemes CATCHWORDS : CORPORATIONS - managed investment schemes - merger proposal involving stapling of units of two managed investment schemes to existing stapled securities each consisting of a share in a company and a unit of a managed investment scheme - applications for judicial advice by responsible entities of the three managed investment schemes and for convening of scheme meeting of members of company - exporpriation of all existing units in both of the managed investment schemes to be added - applicability of Gambotto principles - contracts to give effect to arrangement - same company as responsible entity of the two managed investment schemes to be added - whether it may contract with itself in different capacities - voting rights of holders of interests in managed investment scheme - whether such interests "quoted" as referred to in s.253F(a) when stapled securities of which they form part are quoted on financial market Corporations Act 2001 (Cth), ss.9, 253F, 411(1) LEGISLATION CITED : Trustee Act 1925, s.63 Arakella Pty Ltd v Paton (2004) 60 NSWLR 334 Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65 Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd (2000) 49 NSWLR 513 F.T. Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 Gambotto v WCP Limited (1995) 182 CLR 432 Gulland v Federal Commissioner of Taxation (1983) 72 FLR 362 CASES CITED : Heydon v NRMA Ltd (2000) 51 NSWLR 1 Public Trustee v Meyer [1931] WN (Eng) 271 Re HIH Casualty & General Insurance Ltd (2005) 53 ACSR 12 Re Mirvac Ltd (1999) 32 ACSR 107 Walker v Romano [2002] NSWSC 1026 Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 157 FLR 59 Australand Holdings Limited - Plaintiff Australand Property Limited - Plaintiff PARTIES : Australand Wholesale Investments Limited - Plaintiff Australand Wholesale Investments Limited - Plaintiff FILE NUMBER(S) : SC 4293/05; 4294/05; 4295/05; 4296/05 COUNSEL : Mr I.M. Jackman SC - Plaintiffs SOLICITORS : Mallesons Stephen Jaques - Plaintiffs LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J THURSDAY, 18 AUGUST 2005 4293/05 - AUSTRALAND HOLDINGS LIMITED 4294/05 - AUSTRALAND PROPERTY LIMITED 4295/05 - AUSTRALAND WHOLESALE INVESTMENTS LIMITED 4296/05 - AUSTRALAND WHOLESALE INVESTMENTS LIMITED JUDGMENT 1 Australand Holdings Limited, which I shall call "AHL", seeks an order under s.411(1) of the Corporations Act 2001 (Cth) that a meeting of its ordinary shareholders be convened for the purpose of considering and, if thought fit, agreeing to a scheme of arrangement proposed to be made between that company and its ordinary shareholders. 2 Contemporaneously, there are applications by the responsible entities of three managed investment schemes for judicial advice under s.63 of the Trustee Act 1925 to the general effect that each responsible entity is justified in convening a meeting of the members of the particular scheme for the purpose of considering resolutions which form part of the machinery for bringing into effect a sophisticated merger scheme. Those applications are made on the basis enunciated in Re Mirvac Ltd (1999) 32 ACSR 107 and adopted in a number of subsequent cases. 3 The nature of the merger scheme may be understood against the background that shares in AHL and units of one of the managed investment schemes, the Australand Property Trust ("APT"), are, by virtue of arrangements which include a scheme approved by the court under s.411 in 2003, "stapled" together in such a way that a share in the company and a unit of the trust together constitute a tradeable commodity with neither component being separately tradeable. 4 APT (of which the responsible entity is Australand Property Limited, or "APL") is one of the three managed investment schemes to which I have referred. The others are Australand Wholesale Property Trust No 4 ("AWPT4") and Australand Wholesale Property Trust No 5 ("AWPT5"). The trustee or responsible entity of each of these is Australand Wholesale Investment Limited ("AWIL"). 5 The outcome of the merger proposal, if it proceeds to completion, will be that every stapled security now consisting of an AHL share and an APT unit will come to consist of those two elements plus an AWPT4 unit and an AWPT5 unit, in such a way that all shares in AHL, all units of APT, all units of AWPT4 and all units of AWPT5 will be owned by the same persons and in the same proportions, with each such person holding a number of each security corresponding with the number of each other security and with each person (and the issuers) bound by various mechanisms to deal in the respective securities only as part of a stapled parcel consisting of all four. 6 Under the proposal, each holder of one of the pre-existing stapled securities (consisting of an AHL share and an APT unit) will obtain an entitlement to a distribution of 21 cents in respect of that security, being one cent dividend from AHL and 20 cents trust distribution from APT, on the footing that, by virtue of a combination of the scheme of arrangement between AHL and its shareholders and the constitution of APT, the 21 cents will, as it were, be diverted before it reaches the holder of the stapled security, with the diversion being a matter of compulsion arising from the sources I have mentioned. The 21 cents will be diverted in such a way that it becomes, as to about 14.7 cents, subscription monies for new units of AWPT4 and, as to about 6.4 cents, subscription monies for new units of AWPT5. The new units of these two trusts will not be subscribed for or issued, however, unless the existing unit holders (or members) of AWPT4 and AWPT5 have passed the resolutions necessary to cause those trusts to participate in the merger. It is, of course, possible that the resolutions may be passed in one case but not in the other. In that eventuality, the non-assenting trust will not participate and the proposal will proceed in relation to the other alone. The distributions of aggregate 21 cents per unit by AHL and APT would, in such a case, be reduced to 14.7 cents or 6.4 cents according to which of the other two trusts became the non-participant. 7 Each of AWPT4 and AWPT5 has, as I have said, existing unit holders. The funds injected into each such trust by way of the diversion and subscription to which I have referred will be applied in redeeming the pre-existing units of all those holders. In broad concept therefore, the situation will be one in which, at least in a metaphorical sense, the holders of the existing stapled securities represented by AHL shares and APT units purchase the whole of the beneficial interests under each of AWPT4 and AWPT5. I say that this is the result in a metaphorical sense since there is, of course, no direct purchase, but value shifts from the holders of the stapled securities in such a way that it ends up with the existing holders of the units in AWPT4 and AWPT5; and the holders of the stapled securities obtain through AHL and APT the benefit of the ownership of all the units in AWPT4 and AWPT5. 8 An essential element of this part of the proposal is the compulsory buyout by AWIL, as responsible entity of each of AWPT4 and AWPT5, of all of the existing units of each such trust. AWIL will be obliged by the implementation deed between it, AHL and APL to put into effect procedures made available by the constitution of each of AWPT4 and AWPT5 (as the constitution will exist as a result of the proposed meetings) to require every pre-existing holder of units of AWPT4 and AWPT5, as the case may be, to submit to redemption of the holder's units in return for the specified cash price. There are accordingly very clear hallmarks of compulsory acquisition at the level of AWPT4 and AWPT5. As a result, an issue that has been canvassed upon the present applications concerns the applicability to the circumstances of principles discussed by the High Court in Gambotto v WCP Limited (1995) 182 CLR 432. 9 The High Court held in Gambotto that it was an abuse of the statutory power to alter the constitution of a company for the power to be exercised in a way which allowed a majority shareholder to compel sale to it of the shares of the minority, so as to leave the majority shareholder in a position of total control that it would not otherwise have had. Important in the Gambotto case is the observation in the majority judgment (Mason CJ, Brennan, Deane and Dawson JJ) that the applicable principle aims to guard against subversion or circumventing of protections which the Corporations Act gives to minorities to resist compromises amalgamations and reconstructions, schemes of arrangement and takeover offers. The High Court was thus saying that, if there is to be expropriation, it should be expropriation in accordance with procedures which entail adequate protection for the interests of those being expropriated. 10 There is a question whether Gambotto principles apply to the expropriation of units of a unit trust or managed investment scheme as distinct from shares in a company. In Cachia v Westpac Financial Services Ltd (2000) 170 ALR 65, Hely J saw the principle as a principle of company law and expressed the view that it does not extend to interests under a unit trust. That may well be a correct analysis, given that the majority judgment in the High Court confines its analysis to principles derived from company law cases. Even so, there is good reason to think that, if Gambotto principles are capable of applying in the context of a managed investment scheme or unit trust such as the present, they will not operate in such a way as to affect adversely the particular expropriation proposed in this case. 11 This matter was the subject of comprehensive analysis by Austin J in Arakella Pty Ltd v Paton (2004) 60 NSWLR 334. Based on that analysis, there are two factors about the present case which indicate the inapplicability of the Gambotto principle. 12 The first point of importance is that there is no discrimination in this case. It is not a case of a pre-existing and distinct majority using its power to dispense with or dispossess a minority. The decision makers with respect to expropriation or compulsory redemption of units of AWPT4 and AWPT5 will be in each case the general body of unit holders and the mechanism will be a special resolution under s.601GC upon which all have an opportunity to vote and under which all alike will be affected in exactly the same way. The affected group as a whole will thus decide its own fate and will be free, if it so chooses, to decline to succumb to expropriation. 13 As Austin J pointed out in Arakella Pty Ltd v Paton (above), a similar situation of equal and non-discriminatory treatment was assessed, from the Gambotto viewpoint, in Heydon v NRMA Ltd (2000) 51 NSWLR 1. Two members of the Court of Appeal in that case (Malcolm AJA and Ormiston AJA) were of the opinion that there was no expropriation susceptible to objection on Gambotto grounds when the membership rights of all members of a company were extinguished by action taken by the general body of members; and that this was so despite the fact that some members of the body might cast negative votes. Austin J's conclusion on the matter was summarised as follows: "Clearly the scope of the ratio in Gambotto is open to further consideration in Australian appellate courts. Sitting at first instance, however, and bearing in mind the views expressed by other judges at first instance, I should apply what seems to me to be the clear majority opinion in Heydon - namely that the ratio in Gambotto (and in particular, the requirement to distinguish between an amendment for the purpose of promoting the interests of the commercial entity and the general body of corporators, from an amendment to avoid detriment or harm to the company) has no application where the proposed amendment will replace all interests with another species of property in a manner that treats the interest-holders equally, at any rate where (as here) there is no "majority" voting bloc. Consequently my view is that the Gambotto principles are inapplicable to the present case on this ground." 14 The second reason for thinking that Gambotto's case raises no issue of difficulty in the present case is that the mechanisms in this particular instance include a second and subsequent approach to the court by the responsible entity of AWPT4 and AWPT5 for judicial advice. That approach will be made after all necessary resolutions to the various constituencies have been passed (assuming that they are). The court will be asked to advise, at that point, whether the responsible entities of AWPT4 and AWPT5 will be justified in proceeding to implement the overall plan on the basis of the resolutions passed by members. That step of seeking judicial advice is incorporated into the proposals in the form of a condition in such a way that, unless positive advice is given to the responsible entity of AWPT4 and AWPT5 at that point, the scheme of arrangement under s.411 will not take effect and a central plank will therefore be missing and the proposal as a whole will not go ahead. 15 The forum created by the second application for judicial advice can, in my opinion, be seen to represent a sufficient analogy with the safeguards in company law to which the majority referred in Gambotto. In Arakella Pty Ltd v Paton (above), Austin J regarded the fact that the matter had come before the court by way of an application under s.81 of the Trustee Act as a sufficient analogy. In Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 157 FLR 59, Santow J took a similar view where a protective mechanism for minority shareholders was provided by the reduction of capital provisions. 16 It is, of course, not necessary to come to any final and concluded view on these Gambotto matters at this stage. All that need be seen is that the proposal as it effects AWPT4 and AWPT5 is sufficiently cogent and unexceptionable to allow it to go to the meetings of the members of those trusts for decision. If, in the fullness of time, any of them were to come to a view that some form of oppression of the general kind with which the Gambotto principles are concerned were at work, then the second application for judicial advice would represent an opportunity for that matter to be aired; and the court would expect the responsible entity to acquiesce in any reformulation or extension of the proceeding that was necessary to ensure that the form was fully available to any member wishing to take advantage of it. At this stage the matter is sufficiently clear on an ex parte application and on a prima facie basis to enable me to say that the Gambotto considerations should not be regarded as an obstacle preventing the matter going to the members of AWPT4 and AWPT5 for consideration and decision. 17 The second particular matter canvassed this morning arises from the fact that the responsible entity of each of AWPT4 and AWPT5 is, as I have said, AWIL, so that the situation is one in which there is one trustee of each of two trusts. 18 I have been taken through the contracts which form part of the overall proposal. There are two of them in which AWIL purports to contract as trustee or responsible entity of AWPT4 and as trustee or responsible entity of AWPT5. The first is the implementation deed but, upon analysis, it does not appear that AWIL, at least in terms, purports to contract with itself under that document. The other relevant agreement is the stapling deed which forms part of the machinery by which units of AWPT4 and AWPT5 will be added as the third and fourth components of the existing stapled securities. Under that deed, AWIL does purport to contract with itself in its different capacities. 19 Mr Jackman SC has taken me to the decision of Kennedy J in Gulland v Federal Commissioner of Taxation (1983) 72 FLR 362 in which there is discussion of the general question whether a trustee may contract with himself in his non-trustee capacity. The concept that a trustee may sell to himself (or, more precisely, that the trustee may do so if expressly permitted by the trust instrument to do so) is one that is admitted on some views of the case law. The matter is discussed at pp.379-381 of Kennedy J's judgment. His Honour's conclusion in that case was that a contract of employment between a medical practitioner and himself and another as trustees was a valid contract, notwithstanding the dual position of the medical practitioner. He referred to a number of cases and to the doubts that exist in the area, doubts which I had occasion to consider in Walker v Romano [2002] NSWSC 1026, a case which was, however, distinguishable because of the interposition of a custodian. 20 On the whole, and having regard to the authorities, I am disposed to think that it is possible and permissible for a trustee of one trust to contract with himself or herself as trustee of another trust but, of course, with subsequent difficulties of conflict of duty and duty or duty and interest which may in a particular case call for resolution at by way of vacating the field and acquiescence in an arrangement for some other person to become trustee of one of the trusts or two persons to become new trustees of the respective trusts. The Court of Appeal's decision in Cinema Plus Ltd v Australia and New Zealand Banking Group Ltd (2000) 49 NSWLR 513 shows that what the common law may regard as a "conceptual impossibility" may well be viewed differently in an equitable context such as this. 21 In the present case, however, there is no need to come to any concluded view on the question whether AWIL as trustee of one trust may sue AWIL as trustee of the other trust. This is because the stapling deed has other parties as well. The covenants that AWIL as trustee of AWPT4 gives to AWIL as trustee of AWPT 5 (and vice versa) are also given by it, in both its capacities, to AHL and APL. There can be no question, of course, of the efficacy and viability of the latter covenants. Furthermore, AHL and APL as issuers of two of the components of the stapled securities, have an interest in seeing AWIL kept to the covenants in both its capacities, so that, even if it should emerge that AWIL in one capacity cannot sue AWIL in its other capacity, the virtually inevitable reality will be that AHL or APL or both can and will sue to maintain the integrity of the stapled security. There is also the possibility to which I have been referred, by reference to the case of Public Trustee v Meyer [1931] WN (Eng) 271, that in any such proceedings a representative of the unit holders of one of the affected trusts (or both) might become party to the proceedings in place of the trustee. On the whole, therefore, I do not see this as something that need preclude the proposal proceeding to its next stage by way of consideration at the several meetings. 22 The third and last matter I wish to mention concerns voting rights attached to the existing stapled securities, that is to say the securities each of which consists of a share in AHL and a unit of the APT. A question arises there under s.253F of the Corporations Act which is concerned with valuation of interests in managed investment schemes for the purpose of fixing voting strength at meetings of members. That section is as follows: "The value of an interest in a registered scheme is: (a) if it is quoted on a prescribed financial market—the last sale price on that market on the trading day immediately before the day on which the poll is taken; or (b) if it is not quoted on a prescribed financial market and the scheme is liquid and has a withdrawal provision in its constitution—the amount that would be paid for the interest under that provision on the business day immediately before the day on which the poll is taken; or (c) in any other case—the amount that the responsible entity determines in writing to be the price that a willing but not anxious buyer would pay for the interest if it was sold on the business day immediately before the day on which the poll is taken." 23 The method of valuation of an interest in a managed investment scheme for voting purposes thus varies depending upon, among other things, whether the interest in question is "quoted on a prescribed financial market". If it is so quoted, paragraph (a) of s.253F applies; otherwise paragraph (b) or (c) applies. In the present case, the conditions for the application of paragraph (b) do not exist so that it is the default mechanism under paragraph (c) that would apply if the interest was not "quoted on a prescribed financial market" and paragraph (a) therefore did not apply. 24 The units or interests in APT may, in their own right, be regarded as "quoted" on a prescribed financial market at least in one sense: the stapled securities of which they form part are so quoted. But there is no separate and identifiable quotation of units of APT as a discrete form of security. One could not go to a prescribed financial market and purchase or sell a unit of APT as a distinct and discrete item. One could purchase or sell such a unit only in company with and as part of a combined parcel represented by shares in AHL and interests in APT. 25 The Corporations Act contains in s.9 definitions of "quoted ED securities" and "quoted security". There is also a definition of "quotation". The expression "quoted" is itself not defined but it is clear, in my opinion, that its meaning is to be gathered by reference to the concepts reflected in the definitions. The most illuminating of them, in that respect, is the definition of "quotation": "'quotation', in relation to financial products or in relation to a financial market, includes the displaying or providing, on a financial market, of information concerning: (a) if offers to dispose of, purchase or exchange the financial product at particular prices, or for particular consideration, are made or accepted on that financial market—those prices or that consideration; or (b) if offers or invitations are made on that financial market, being offers or invitations that are intended, or may reasonably be expected, to result in the making or acceptance of offers to dispose of, purchase or exchange the financial products at particular prices, or for particular consideration—those prices or that consideration; or (c) in any case—the price at which, or the consideration for which, particular persons, or particular classes of persons, propose, or may reasonably be expected, to dispose of, purchase or exchange the financial products." 26 Central to the "quotation" concept is the feature of a market or facility that displays or provides information about prices at which sellers are willing to sell and prices at which buyers are willing to buy financial products which, within the confines of the market or facility, are capable of being sold and purchased. Because units or interests in APT, standing alone and disconnected from shares in AHL, are not, in a market context, capable of being sold and purchased and no prices applicable to them as separate items are provided to persons resorting to the market, it seems to me that those units or interests, viewed alone, cannot be regarded as the subject of "quotation", with the result that they should not be regarded, for s.253F purposes, as being "quoted on a prescribed financial market". 27 In those circumstances, it seems to me that the default mechanism in paragraph (c) of s.253F should be taken to apply to the APT units forming part of the existing stapled securities. I note that the valuation evidence that has been tendered sets out a method of attributing to the unit element of the existing stapled security a value derived from market prices of the stapled securities. A value of that kind must, by definition, satisfy the description in paragraph (c) provided, of course, that the responsible entity actually makes a determination in line with the methodology that has been outlined. 28 The approach the court takes to applications under s.411(1) is well known and need not be repeated. I had occasion to refer to it recently in Re HIH Casualty & General Insurance Ltd (2005) 53 ACSR 12 at [11] to [15]. It is sufficient to say that an important element turns on the question often associated with F.T. Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, namely, whether the scheme is of such a kind and presented in such a way that, if the necessary majority is obtained or the meeting held in accordance with the court's order, the court is likely to approve it upon a subsequent application for its approval. Where, as here, the trustee or responsible entity of a managed investment scheme seeks judicial advice whether it is justified in placing a proposal before members (but on the footing, secured by scheme conditions, that there will be no implementation without further judicial advice), the same approach is, in my view, appropriate. 29 The court will, at the first stage, decline to permit the matter to go to members if it sees features clearly precluding a positive result if and when the matter comes back before it for approval. It should not decline to act at the first stage on the basis of matters which, while they may perhaps be arguable, do not represent clear inhibitions. The proper forum for resolution of matters of that kind is the second hearing, where they may be argued inter partes, assuming any interested person wishes to do so. 30 The matters I have canvassed are the only ones which in my opinion are of such a nature as to require discussion at this stage when all the court is asked to do is to make s.411(1) orders and to give judicial advice to the trustees of the three trusts to the effect that they are justified in progressing the matter to a point where it is submitted to unit holders for consideration. I will therefore make the orders that have been sought. 31 In 4293 of 2005 I make the orders in the short minutes which I initial and date. 32 In 4294 of 2005, I make the orders in the form of order which I initial and date. 33 In 4295 of 2005, I make the orders in the form of order which I initial and date. 34 In 4296 of 2005, I make the orders in the form of order which I initial and date. 35 All orders may be taken out forthwith. ********** 23/08/2005 - Typographical - Paragraph(s) 20 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.