Reported Decision : 56 ACSR 693 (2006) 24 ACLC 319 New South Wales Supreme Court CITATION : Abacus Funds Management Ltd [2006] NSWSC 80 HEARING DATE(S) : 20/02/06 JUDGMENT DATE : 20 February 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J EX TEMPORE JUDGMENT DATE : 02/20/2006 DECISION : Judicial advice given CATCHWORDS : CORPORATIONS - managed investment schemes - stapled securities - provision for compulsory sale of securities of holders in countries with difficult regulatory regimes - whether Gambotto principles apply - TRUSTS AND TRUSTEES - judicial advice - where no affected beneficiary wishes to be heard LEGISLATION CITED : Trustee Act 1925, s.63(1) Cachia v Westpac Financial Services Limited (2000) 170 ALR 65 CASES CITED : Gambotto v WPC Limited (1994) 182 CLR 432 Re Abacus Funds Management Ltd [2005] NSWSC 1309 Re Australand HoldingsLtd (2005) 54 ACSR 687 PARTIES : Abacus Funds Management Limited - Plaintiff FILE NUMBER(S) : SC 6186/05 COUNSEL : Mr B.A.J. Coles QC - Plaintiff SOLICITORS : Abbott Tout - Plaintiff - 7 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J MONDAY 20 FEBRUARY 2006 6186/05 ABACUS FUNDS MANAGEMENT LIMITED JUDGMENT 1 On 12 December 2005, Campbell J gave judicial advice under s.63(1) of the Trustee Act 1925 to the plaintiff, in its capacity as responsible entity of two managed investment schemes, each of which takes the form of a unit trust: see Re Abacus Funds Management Ltd [2005] NSWSC 1309. 2 The orders made by his Honour were to the effect that the plaintiff, as trustee or responsible entity in each case, was justified in progressing a certain proposal to the point where meetings of members of the managed investment schemes and meetings of members of associated companies had considered and voted upon certain proposed resolutions. The purpose of the resolutions was to cause two sets of stapled securities, one involving the Abacus Trust and the other involving the Abacus Diversified Income Fund, to be further stapled so that each relevant person came to hold units of two trusts and shares in two companies in such a way that the four discrete securities were linked and could only be traded and transferred together. 3 Relevant background is provided by paragraphs [2] to [7] of his Honour's judgment: "[2] Each of those management investment schemes involve property being held on the terms of a unit trust. Each of the units in those unit trusts is stapled to a share in a corporation. The units in one of the unit trusts are stapled to shares in one corporation, the units in the other unit trust are stapled to shares in a different corporation. The stapled security formed by one of the units, and the share to which it is stapled, is listed on the Australian Stock Exchange, with the stapled securities known as Abacus Property Group. The other stapled security, known as the Abacus Diversified Income Fund, is not listed. [3] A proposal has been formulated, which would have the effect of a further stapling taking place, between the components of the listed stapled security, and the components of the unlisted stapled security. [4] The way in which it is proposed that that will happen is by there being, first, a consolidation of the unlisted stapled securities, under which, for each existing stapled security, the holder receives 0.78 restructured stapled securities, which staple together the same two securities as now make up the unlisted stapled security. [5] After that, it is proposed that the trust which is part of each of the respective stapled securities will make a distribution to its respective unit holders, and that the amounts so distributed to each of the unit holders will be used, by each of them, to acquire units in the trust of which they are not presently a member. There will then be a stapling together of the two different types of stapled securities, by amendments to the constitutions of the four relevant entities and the execution of a stapling deed. [6] The proposal is one which has been considered by the managements of the various entities which make up the respective stapled securities, and each of these managements has come to the view that the proposal is in the interests of, in the case of the corporations, the respective corporations, and, in the case of the trusts, the unit holders of the respective trusts. [7] A draft explanatory memorandum has been drawn up, which aims to explain to all holders of both classes of stapled securities how the proposal will operate, and how it will affect them. As well, a separate document has been prepared giving an overview of the proposal insofar as it relates to each of the individual stapled securities. It is proposed that the latter documents will be distributed to the respective holders of the stapled security to which each such document relates." 4 The plaintiff now seeks further orders, by way of judicial advice, following consideration of the proposal at the several meetings which have now been held. The orders sought are to the effect that the plaintiff is justified in acting on the resolutions of the beneficiaries of the trusts and the members of companies and doing all things and taking all steps necessary to implement the proposal thereby endorsed and approved in accordance with its terms. 5 It is appropriate to note, at the outset, that at each meeting there was overwhelming support for the proposal. In the case of the Abacus Trust, there were four resolutions, each of which was approved by more than 99.9 percent of the votes cast in person or by proxy. In the case of the Abacus Income Trust, the level of approval in respect of each of the five resolutions exceeded 98.8 percent. The affected persons have thus pronounced themselves content to see the proposal implemented and that, in an overall sense, satisfies me that the judicial advice sought should be given unless some particular factor indicates otherwise. 6 There is one matter which requires comment. It was referred to in Campbell J's judgment and involves the potential application of the principles discussed by the High Court in the case of Gambotto v WPC Limited (1994) 182 CLR 432. Campbell J referred to the feature of the proposal which involves what can only be described as expropriation and compulsory sale of the resultant stapled securities of holders with addresses in foreign countries having legal regimes presenting impossible regulatory barriers to issue of the new securities or, at least, making it impracticable to comply. There are about a dozen such persons, mainly in the United Kingdom. 7 The proposal in relation to the resultant stapled securities of those persons is that the securities will be sold on their behalf by a stockbroker on the market after listing is achieved, with the net proceeds of sale being remitted to the holders. The relevant stapled securities will be subjected to that process whether or not the holders agree. The plaintiff will thereby avoid the impact of the foreign regulatory requirements. 8 Campbell J canvassed a number of reasons why it is open to conclude that Gambotto principles do not apply in relation to that matter. I quote again from his Honour's judgment, at paragraphs [19] to [23]: "[19] The proposals have, as one element in them, a requirement that foreign holders of stapled securities will have their securities sold, and the proceeds distributed to them, and will not take part in the further stapling of the existing securities. In that way, one class of security holders is being treated in a way which is different to the other. [20] In Cachia v Westpac Financial Services Limited (2000) 170 ALR 65; 33 ACSR 572, Hely J took the view that the principles in Gambotto v WCP Limited (1995) 182 CLR 432 did not extend to interests under a unit trust. That principle is one whereby it can be an abuse of the statutory power to alter the constitution of a company if the power is exercised in a way which allows a majority shareholder to compel the sale of the shares of the minority, so as to leave the majority shareholder with a total control of the company that it would not otherwise have had. [21] For the purpose of today's application, I need not decide whether the Gambotto principle applies to interests under a unit trust. I note that in Re Australand Holdings Limited (2005) 54 ACSR 687 at [10] Barrett J said that: '[Hely J's views]... 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.' Amongst those principles was that the Corporations Act itself gave protection to minorities. [22] In Re Australand Holdings Limited (2005) 54 ACSR 687, Barrett J said that there were two reasons why the Gambotto principle did not apply in the particular case before him. One reason was because there was no discrimination in that case, because each of the unit holders was being treated in the same way. The second was that, in any event, there would be a second approach to the Court for judicial advice, after all the various resolutions had been passed (assuming they were) and that the forum created by the second application provided what Barrett J described in Re Australand at [15] as 'a sufficient analogy with the safeguards in company law to which the majority referred in Gambotto.' [23] By analogy with the principles which are applied in connection with schemes of arrangement, the question to be decided today is not whether final approval should be given to the scheme. Rather, it is a question of 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 for it to be even submitted for consideration. Even though there is an element of discrimination in the present scheme, so far as the foreign unit holders are concerned, the fact that the finding in Cachia v Westpac Financial Services Limited (2000) 170 ALR 65; 33 ACSR 572 has been made, and the second reason adopted by Barrett J in Re Australand Holdings Limited (2005) 54 ACSR 687, are sufficient at the present stage to justify the trustees and the responsible entity in going forward with the proposal. The applicability of the Gambotto principle may need to be given more extensive consideration when and if the second application for judicial advice is made." 9 I respectfully agree. 10 Campbell J was, of course, speaking in prospect before the matter had been put to members for their consideration. It is now possible to consider the matter with the benefit of evidence of what has transpired. 11 No affected person has seen fit to appear upon the hearing of this application. I am satisfied that all of those persons would (or, at least, should) have been aware of it. Their absence is, of itself, highly relevant. It is clear that no one affected has been sufficiently concerned by the proposal for compulsory sale to come to court to complain. 12 One of the aspects to which Campbell J referred was the fact that this hearing today would be, as it were, a surrogate for the kinds of court hearings in the company law context upon which the majority in the High Court had placed emphasis in the Gambotto case. The absence of complaint at this hearing is therefore compelling. 13 It has been put to me this morning by Mr Coles QC that there is, in addition to the matters canvassed by Campbell J, a further reason for thinking that the Gambotto principles do not apply. He pointed to the part of the joint judgment in Gambotto at the bottom of pages 445 and 446 where it was postulated that expropriation of a minority shareholder could be justified if it were necessary in order to ensure that the company could continue to comply with the regulatory regime governing the principal business it carried on. The majority went on to give an example related to media ownership. There is some analogy here, in that the plaintiff is constrained by the foreign regulatory regimes which have given rise to the proposal for compulsory sale of the stapled securities of persons affected by those regimes. It may well be said that expropriation is necessary in order to ensure that the plaintiff does not contravene the foreign regulatory requirements. That would be an added justification. 14 There is also, of course, the question whether the Gambotto principle applies when the medium through which the compulsion is exerted is the constitution of a unit trust. In Cachia v Westpac Financial Services Limited (2000) 170 ALR 65, Hely J was of the view that Gambotto is a principle of company law only. I said in Re Australand HoldingsLtd (2005) 54 ACSR 687 that that may well be a correct analysis, given that the majority judgment in the High Court confined its analysis to principles derived from company law cases. 15 It is sufficient to say that all the considerations to which I have referred leave me with the requisite degree of comfort that barriers of the kind discussed in Gambotto's case do not intrude in this matter in such a way as should cause the court to withhold the judicial advice that is sought. ********** 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.