IN THE MATTER OF AIRTRAIN HOLDINGS LIMITED ACN 113 062 463 

REASONS FOR JUDGMENT

1    On 12 February 2013, I made orders under to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (the Act) providing for the convening of meetings of each of the classes of shareholders of the plaintiff, Airtrain Holdings Ltd (Airtrain), for the purpose of considering a scheme of arrangement (the Scheme) between Airtrain and its members. On the same date, I also made orders approving the explanatory statement entitled “scheme booklet” required by s 412(1)(a) of the Act. On 22 February 2013, I made some additional orders approving a supplementary explanatory statement clarifying an aspect of the original explanatory statement.

2    These are my reasons for making those orders.

Background

3    Airtrain is an unlisted public company limited by shares. It has one wholly-owned subsidiary, which is also an unlisted public company: Airtrain Citylink Ltd. Airtrain Citylink Ltd was created for the purpose of a project involving the financing, design, construction, operation, maintenance and repair of the Brisbane Airport Rail Link.

4    Construction of the Brisbane Airport Rail Link was completed in 1999 on land leased from the State of Queensland. The Brisbane Airport Rail Link is an elevated railway with stations at Brisbane Airport’s international and domestic terminals. To facilitate its integration with the Queensland Rail suburban network, Airtrain Citylink has agreements with a number of parties, including Queensland Rail and Translink Transit Authority. Airtrain Citylink holds the concession for the Brisbane Airport Rail Link until 2036.

5    Airtrain has 65 shareholders, made up of various financial institutions, infrastructure related businesses and other sophisticated and professional investors.

6    All the shares in Airtrain are fully paid. They are comprised of the following three classes:

(a)    125,200 Class A Shares;

(b)    24,000 Class B Shares; and

(c)    101,200 Class C Shares.

7    Airtrain’s current ownership structure is the result of a creditors’ scheme of arrangement and a members’ scheme of arrangement that were implemented in 2005.

8    If the Scheme is approved and implemented, it will result in a company called USS Axle Pty Ltd (USS Axle) acquiring the entire issued share capital of Airtrain.

9    USS Axle is a propriety company whose shares are wholly owned by Universities Superannuation Scheme Limited. Universities Superannuation Scheme Limited is the sole corporate trustee of the Universities Superannuation Scheme: the principal pension scheme for higher education institutions in the United Kingdom.

10    USS Axle has stated that, if the Scheme is implemented, it intends:

(a)    to continue the business of Airtrain;

(b)    not to make any changes to the business of Airtrain or to redeploy any of Airtrain’s assets; and

(c)    to continue the employment of Airtrain’s present employees.

The Scheme

11    Since Airtrain is an unlisted public company with over 50 members, the general takeover prohibition contained in s 606 of the Act applies. Airtrain and USS Axle have therefore entered into an implementation agreement whereby both companies have agreed to implement the Scheme. Due diligence has been conducted and both Airtrain and USS Axle have received independent legal advice.

12    Under the Scheme, the members of Airtrain are to receive consideration of $437.50 for every share held (regardless of the class of that share) as at the record date. The total payment will amount to $109,550,000. Airtrain, rather than its members, is responsible for procuring that payment from USS Axle no later than two business days before the implementation date. It will then hold those funds on trust for the participating members. USS Axle’s responsibility to make that payment will be secured by a deed poll.

13    As proposed, the Scheme is to be achieved by way of three interdependent schemes of arrangement, with one scheme for each of Airtrain’s three classes of shares (see [6] above). Because the ultimate purpose of the Scheme is for USS Axle to achieve 100% ownership of Airtrain, USS Axle must acquire all of the issued shares in all of Airtrain’s three share classes. This will require a meeting to be convened for each share class and: at least 50% of the members to be present (by proxy or otherwise) and voting; as well as at least 75% of the votes cast to be in favour of the resolutions: s 411(4)(a) of the Act.

14    Accordingly, Airtrain proposes to hold successive meetings for each class of shareholders on 11 March 2013 at their solicitors’ offices. Each shareholder that appears on Airtrain’s register of members at 10.00 am on 9 March 2013 (exactly 48 hours prior to the commencement of the proposed first meeting time) will be entitled to vote.

15    The Scheme has the unanimous support of Airtrain’s current board of directors. Further, the following shareholders have indicated that they support the Scheme:

(a)    91.67% of Class A Shareholders;

(b)    100% of Class B Shareholders; and

(c)    76.57% of Class C Shareholders.

The initial explanatory statement and the supplementary explanatory statement

16    As noted above (at [1]), Airtrain put forward an explanatory statement to shareholders in the form of a “scheme booklet”. I approved that explanatory statement in the orders I made on 12 February. Under those orders, it was to be sent to Airtrain’s shareholders by 15 February. It contained cl 11.2(b)(iv) as follows:

Airtrain will not be making any payment or giving any benefit to any current member of the Airtrain Board, the company secretary or any executive officer as compensation for loss of, or as consideration for, or otherwise in connection with, their resignation or retirement from office, if the Schemes become Effective and the Airtrain Board is reconstituted. Should the Schemes become Effective and the Airtrain Board is reconstituted, Airtrain will provide for the effective continuation of its existing directors and officers insurance coverage by way of a run off policy of insurance.

17    However, on 13 February, Airtrain learned of an additional matter that had not been disclosed in this clause: that its company secretary’s employment contract contained a clause to the effect that, if all of Airtrain’s issued share capital was acquired by a third party, he could terminate his employment and receive up to one year’s salary. For convenience, I will refer to this as “the payout clause”.

18    In an attempt to comply with the 12 February orders and at the same time ensure that full and proper disclosure was made in the explanatory statement, Airtrain amended cl 11.2(b)(iv) of its own initiative and sent that amended form of the explanatory statement to the shareholders by Friday, 15 February (the amended explanatory statement). The amended form of cl 11.2(b)(iv) provided:

Airtrain will not be making any payment or giving any benefit to any current member of the Airtrain Board, the company secretary or any executive officer as compensation for loss of, or as consideration for, or otherwise in connection with, their resignation or retirement from office, if the Schemes become Effective and the Airtrain Board is reconstituted except if the company secretary exercises his existing right to elect to terminate his employment as a consequence of the Schemes becoming Effective and to receive 12 months’ salary (less tax and reduced by any other redundancy payment) as compensation. Should the Schemes become Effective and the Airtrain Board is reconstituted, Airtrain will provide for the effective continuation of its existing directors and officers insurance coverage by way of a run off policy of insurance.

(Emphasis added)

19    Airtrain asked to have this matter relisted in the week commencing Monday, 18 February so that it could apply retrospectively for orders approving the amended explanatory statement. At the initial hearing of that application, I was not willing to make those orders until:

(a)    I was informed of the amount of the potential payout to the company secretary;

(b)    a copy of the company secretary’s employment contract containing the payout clause was provided; and

(c)    evidence was produced that Airtrain had made all reasonable inquiries to ensure that no similar provisions existed in any other employment or similar contracts it had entered into.

20    Airtrain’s application was adjourned to allow it to attend to these matters. At the adjourned hearing, I was provided with evidence addressing all of them. That evidence showed that the salary of the company secretary, and therefore the amount of the potential payout, was approximately $250,000. In addition, it disclosed that the burden of the payout, if it were to occur, would be borne by USS Axle, as the new owner of Airtrain, rather than the existing members.

21    After considering this additional evidence and some further submissions made by Mr O’Donnell QC, for Airtrain, I decided that the preferable course in all of the circumstances was for Airtrain to provide a supplementary explanatory statement to its members that contained a clear and comprehensive explanation of the position with the payout clause. The factors that I took into account in making that order included the following. First, I was informed by counsel for Airtrain that, given the small number of shareholders involved, it would not involve significant costs for Airtrain to provide that supplementary explanatory statement. Secondly, I was also informed that, if it were required to provide that supplementary explanatory statement, Airtrain would not need to alter any of the arrangements it had made for the shareholders’ meetings on 11 March.

22    Thirdly, and most importantly, I did not consider that the amended explanatory statement frankly and fully disclosed all the relevant information in relation to the payout clause. To begin with, I considered the structure of cl 11.2(b)(iv) in its amended form (see [18] above) was potentially misleading. This was so because it contained an unequivocal statement at the outset that there would be no payments, followed by a statement buried in the middle of the paragraph to the opposite effect. Further, it did not contain any information about the amount of the potential payout. Finally, it did not make it clear that, in any event, the potential payout would be borne by USS Axle and not the existing members of Airtrain.

Consideration – general matters

23    Based on the substantial affidavit material filed by Airtrain in this matter, I am satisfied that Airtrain is a Part 5.1 body and the Scheme, as a scheme designed to effect the acquisition of shares of one company by another, is a “compromise or arrangement” within the meaning of s 411(1).

24    I am also satisfied that, as required by s 411(2)(a), the Australian Securities and Investments Commission has received 14 days notice of the hearing of Airtrain’s application and had a reasonable opportunity to examine the details of the Scheme. I note that ASIC chose not to file submissions or material and did not appear at the hearing. I also note that ASIC has been sent the proposed explanatory statement, including the amended and supplementary versions (see at [16]–[22] above).

25    Having examined the proposed explanatory statement and the supplementary explanatory statement, I am satisfied that together they made a proper disclosure as required by s 411(3): see the discussion in Re NRMA Ltd No 5131 of 1999 (2000) 33 ACSR 595; [2000] NSWSC 82 at [15]–[19] per Santow J.

26    I note that Mr Michael Pelly, a director of Airtrain, has agreed to act as chairperson of the meetings on 11 March. Mr Pelly does not hold any shares in Airtrain and has deposed that he will receive no benefit from the implementation of the Scheme. Mr Philip Howe, another director of Airtrain, has agreed to act as an alternate chairperson at those meetings. Mr Howe has similarly deposed that he will receive no benefit if the Scheme is approved.

Consideration – particular matters

27    In addition to these general matters, it is appropriate that I briefly comment on five particular matters that affect the approval of the Scheme. Those matters are:

(a)    the presence of three schemes and only one explanatory statement;

(b)    the break fee;

(c)    the lack of an independent expert’s report;

(d)    the exclusivity provision; and

(e)    the application of s 411(17) of the Act.

Three interdependent schemes and one explanatory statement

28    As noted above (at [13]), the Scheme comprises three interdependent schemes – one for each of the three classes of shareholders. Nonetheless, it is proposed that each class is to receive an identical explanatory statement.

29    On these aspects, Airtrain submitted that while all three classes had the same rights and ranked equally in relation to voting, dividends and return on capital, it was appropriate to have three separate schemes of arrangement because some of the rights carried by each class of shares were different. Specifically, each class had different rights as to the appointment and removal of directors and different requirements for a quorum at directors’ meetings. Further, under Airtrain’s constitution, these class rights could not be varied without the written approval of 75% of the shareholders within that class, or by way of a special resolution passed at a meeting of the shareholders within that class.

30    Airtrain submitted that, notwithstanding these differences, as each class had the same economic rights and would receive the same consideration under the Scheme (see [12] above), there was sufficient commonality of interest for an identical explanatory statement to be provided to the members of all three classes of shareholders.

31    In determining whether there should be three separate schemes and therefore three separate meetings, the Court must ask itself whether the rights of the members of the different classes are “so dissimilar as to make it impossible for them to consult together with a view to their common interest”: Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583 per Bowen LJ.

32    In Re Professional Golfers Association of Australia Ltd [2007] FCA 1571 (Professional Golfers), Lindgren J was unwilling to order that separate meetings be held where: the scheme of arrangement proposed would have had the effect of merging two companies; there were 27 classes of shareholders involved, some of which contained very few members; and the members were to become members of the new merged entity in classes closely resembling the existing classes. This situation is quite different to the present case.

33    While there is a number of similarities between all the three classes of shareholders in Airtrain, the rights held by each class are sufficiently different as to warrant a separate scheme for each class. In particular, the differing rights pertaining to the appointment and removal of directors are significant (see [29] above). Unlike in Professional Golfers, the shareholders in each class are to receive equal rights under the Scheme. Thus, those shareholders that hold class rights that they consider may be more favourable than the rights of the other classes may wish to discuss whether it is acceptable to them that, under the Scheme, they are to receive the same consideration per share as those other classes. For these reasons, there is, in my view, sufficient potential for a divergence in the interests of the three classes to justify three separate schemes and three separate meetings being held.

34    Notwithstanding this conclusion, I am satisfied that the three Schemes are so similar that it was appropriate for an identical explanatory statement to be distributed to all three classes.

The break fee

35    USS Axle had indicated to the Board of directors of Airtrain (the Board) that it wanted a break free included as a necessary component of any agreement to acquire Airtrain. Given the structure of Airtrain’s shareholdings, where no single shareholder could deliver the necessary votes to approve the Scheme and, conversely, a small number of shareholders could defeat it, the Board of Airtrain considered this proposal was reasonable. Accordingly, the implementation agreement between Airtrain and USS Axle (see [11] above) provides that Airtrain is obliged to pay a $1,100,000 “break fee” to USS Axle if the Scheme is not approved.

36    It appears from the affidavit material that the Board formed the view that there was a high probability that the shareholders would accept the offer for the company at the price proposed by USS Axle. Airtrain pointed to the indications of support received from the majority of the three classes of shareholders (see [15] above) as evidence that this view was well-founded. The Board therefore contended that it would be contrary to the shareholders’ interests to reject USS Axle’s proposal because of the break fee.

37    In the Fourth Issue of the Australian Government Takeovers Panel “Guidance Note 7 – Lock-up Devices” issued on 11 February 2010, the Takeovers Panel expressed the view that: “in the absence of other factors, a break fee not exceeding 1% ... is generally not unacceptable.” Airtrain contended that, since the break fee was within the parameters of this guideline and it could easily be funded from Airtrain’s existing cash reserves, it was not “so large as to be likely to coerce the shareholders into agreeing to the scheme, rather than assessing the offer on its merits”: Re Bolnisi Gold NL (No 2) (2007) 165 FCR 45; [2007] FCA 2078 (Re Bolnisi Gold) at [12] per Lindgren J.

38    Break fees, like the present one, have become relatively commonplace in schemes of arrangement. In Re Bolnisi Gold, Lindgren J went on to observe (at [12]) that:

[T]he court should not readily find that the target company’s directors have committed the company to an arrangement that will have the impermissible coercive effect on the company’s shareholders, and nor should the court seek to substitute its view of the best interests of the company for that of the directors.

39    In this matter, I consider the Board has properly weighed these factors in deciding to include the break fee in the implementation agreement. I also accept that it is appropriate, in the absence of any other material factors, to have regard to the 1% threshold identified by the Takeovers Panel: see, for example, Re Golden Circle Limited (ACN 054 355 618) [2008] QSC 298 per McMurdo J.

40    For these reasons, I consider that the present break fee is not excessive and the Board was justified in agreeing to its imposition.

No independent expert’s report

41    There is no intention to provide Airtrain’s shareholders with an independent expert’s report containing an analysis of the Scheme. This is so because the Board concluded that the provision of an independent expert’s report was not appropriate in the circumstances. Airtrain gave four broad reasons for that conclusion.

42    First, it contended that an independent expert’s report was not required under the Act. Schedule 8 item 8303  of the Corporations Regulations 2001 (Cth) provides that an independent expert’s report is required if:

(a)    the other party to the proposed reconstruction or amalgamation of the company the subject of the Scheme has a prescribed shareholding in the company; or

(b)    a director of any corporation that is the other party to the proposed reconstruction or amalgamation is a director of a company the subject of the Scheme.

43    As USS Axle does not hold shares in Airtrain and none of USS Axle’s directors is a director of Airtrain, neither (a) nor (b) is applicable.

44    Secondly, it contended that the shareholders will receive sufficient information to allow them to assess USS Axle’s proposal without an independent expert’s report. In support of this, Airtrain pointed out that the explanatory statement included: audited balance sheets for the two previous financial years and an unaudited balance sheet for the half year ended 31 December 2012, together with a statement that compares the premium proposed by USS Axle to the value of Airtrain’s net assets. In addition to this information, Airtrain contended that the competitive sale process undertaken prior to securing USS Axle’s bid served as an indicator to shareholders of Airtrain’s overall worth.

45    Thirdly, Airtrain contended there were limited reference points that an independent expert could use to make any useful analysis. It pointed to the fact that Airtrain’s shares were essentially illiquid. The Board was only aware of eight transfers of shares in the past two years, accounting for only 1.1% approximately of the issued share capital and each of those transfers was between related parties for a price lower than the Scheme consideration. It also contended that Airtrain had such a unique investment profile that reliable trading and transaction comparisons were not available.

46    Finally, Airtrain contended that the need for an independent expert’s report was reduced in circumstances where there was significant shareholder support for the Scheme and most of the shareholders were sophisticated or professional investors.

47    In the circumstances outlined above, I consider that there is no need for an independent expert’s analysis of the Scheme. Airtrain’s shareholders will receive ample information to allow them to assess whether to accept USS Axle’s offer. Furthermore, I accept that where Airtrain’s shares are traded so infrequently and reliable comparisons do not exist, any independent analysis of the Scheme is unlikely to illuminate.

The exclusivity provision

48    The implementation agreement between USS Axle and Airtrain (see [11] above) contains an exclusivity provision (cl 9) which prohibits Airtrain from soliciting a competing offer (the no-shop restriction) or negotiating or entering into a competing agreement (the no-talk restriction) during the “Exclusivity Period”. The Exclusivity Period is defined to extend from the commencement of the implementation agreement until the date the implementation agreement is terminated, or the “end date”. The end date is defined as 30 June 2013 or “such other date as is agreed by USS [Axle] and Airtrain”.

49    There is an exception to the no-talk restriction where: there has been an unsolicited approach by a third party and the Board of Airtrain has determined, acting in good faith, that the offer made is superior and legal advice has been received that failing to respond to that offer would constitute a breach of the directors’ duties.

50    It is necessary for the Court to approach exclusivity provisions with caution because, among other reasons, such provisions have the potential to impose restrictions that conflict with the fiduciary duties owed by the directors of the target company: Re Arthur Yates & Co Ltd (2001) 36 ACSR 758; [2001] NSWSC 40 (Re Arthur Yates) at [6]–[8]; and Adamus Resources Ltd, in the matter of Adamus Resources Ltd [2011] FCA 1324 at [12]. Because of this potential conflict, in Re Arthur Yates, Santow J observed (at [9]):

It is important that an exclusivity clause satisfy the following concerns:

(a)    it should be for no more than a reasonable period capable of precise ascertainment, hence the need to ensure that any exclusivity period is properly defined;

(b)    while an exclusivity clause may differentiate between actively soliciting an alternative merger proposal or simply dealing with an unsolicited one, in either case it is important that such an exclusivity clause be framed so that it is subject to the overriding obligation not to breach the directors’ fiduciary duties or be otherwise unlawful; and

(c)    there should be adequate prominence given to that constraint in the explanatory memorandum sent to shareholders.

51    Given that the exclusivity provision in this case is confined to the Exclusivity Period and the Exclusivity Period is clearly defined and of reasonable length, I consider (a) has been satisfied. The exception to the no-talk restriction described above (at [49]) clearly satisfies (b). Finally, I have reviewed the explanatory statement and consider that the exclusivity provision is adequately presented in it. For these reasons, I do not consider the inclusion of the exclusivity provision in the implementation agreement interferes with the fiduciary duties owed by the directors of Airtrain.

Application of section 411(17) of the Act

52    Section 411(17) of the Act provides:

The Court must not approve a compromise or arrangement under this section unless:

(a)    it is satisfied that the compromise or arrangement has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6; or

(b)    there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;

but the Court need not approve a compromise or arrangement merely because a statement by ASIC stating that ASIC has no objection to the compromise or arrangement has been produced to the Court as mentioned in paragraph (b).

53    In Mincom Ltd v EAM Software Finance Pty Ltd (2007) 61 ACSR 266; [2007] QSC 37 (Mincom), Fryberg J stated that (at [28]):

The first point to be made about that subsection is that it is expressed in the negative. In other words the default position is non-approval. Unless there is proof of compliance with one or other of the lettered paragraphs, the court must not grant its approval at the second hearing. Such proof is not required at the first hearing. However, that does not mean that the subsection can be ignored. There is an onus at this stage on the applicant to demonstrate that at the second hearing the court would be likely to approve the arrangement if the application be unopposed. That onus cannot be satisfied if there is a complete absence of evidence in respect of either lettered paragraph [of s 411(17)].

54    This approach has not been followed in a number of subsequent decisions: see Re Symbiosis Group Limited [2008] QSC 297 per McMurdo J; Re Lonsdale Financial Group Ltd [2007] VSC 394 per Robson J at [31]–[41]; Re Symbion Health Limited (No 1), (No 2), (No 3) & (No 4) [2007] VSC 571 per Robson J at [10]; Re Golden Circle Limited (ACN 054 355 618) [2008] QSC 298 per McMurdo J; and Macquarie Private Capital A Limited [2008] NSWSC 323 (Macquarie Private Capital) per Barrett J at [24]–[27]. For example, in Macquarie Private Capital, Barrett J made the following observations about it (at [25]–[27]):

That approach is somewhat at odds with the approaches that had been taken to that point … The s 411(17) issue as a whole is one that, as the Act itself states, is to be addressed at the time of application for the court’s approval under s 411(4)(b). It should be addressed in the light of the circumstances that exist at that time.

55    I agree with and adopt the view of Barrett J, for the reasons his Honour has stated, and respectfully disagree with the view expressed by Fryberg J. Consequently, I will leave any consideration of the question of whether s 411(17) has been satisfied until the second hearing of this matter.

Conclusion

56    For these reasons, I consider it is appropriate to make the orders sought by Airtrain to convene meetings of the shareholders of Airtrain to consider the Scheme and to distribute the requisite documentation for that purpose.

Associate:

Dated:    12 March 2013