FEDERAL COURT OF AUSTRALIA

URB Investments Limited, in the matter of URB Investments Limited [2019] FCA 1977

ORDERS

THE COURT ORDERS THAT:

1.    Grant leave to the plaintiff to file an amended originating process in the form provided by the solicitors for the plaintiff appearing at tab 2 of the court book to be filed electronically by 5.00 pm today.

2.    Pursuant to ss 411(1) and 1319 of the Corporations Act 2001 (Cth) (Corporations Act), the plaintiff convene and hold a meeting (Scheme Meeting) of its holders of fully paid ordinary shares, excluding 360 Capital FM Limited ACN 090 664 396 as responsible entity of the 360 Capital Total Return Active Fund, (Scheme Shareholders) for the purpose of considering, and if thought fit, agreeing to (with or without modification) a scheme of arrangement proposed to be entered into between the plaintiff and the Scheme Shareholders (Scheme), the terms of which are contained in Schedule 2 of Exhibit C as provided to the Court on 4 November 2019 (Scheme Booklet).

3.    The Scheme Meeting be held on Friday, 6 December 2019 at Brickworks Design Studio, 2 Barrack Street, Sydney NSW 2000, commencing at 9.00 am (Sydney time), subject to Order 5(b).

4.    The Scheme Shareholders who are eligible to vote at the Scheme Meeting will be those whose names are recorded in the register of members of the plaintiff (Register) at 7.00 pm (Sydney time) on 4 December 2019 (Voting Record Date).

5.    Pursuant to s 1319 of the Corporations Act:

(a)    Warwick Martin Negus or, failing him, Robert Bruce Dungey be Chairperson of the Scheme Meeting;

(b)    the Chairperson of the Scheme Meeting has the power to adjourn the Scheme Meeting in his or her absolute discretion to such time, date and place as he considers appropriate;

(c)    at the Scheme Meeting, two Scheme Shareholders, present and entitled to vote, in person or by proxy, or by an attorney under power, or in the case of corporate Scheme Shareholders, by corporate representatives, shall constitute a quorum;

(d)    at the Scheme Meeting, each Scheme Shareholder, present and entitled to vote, will be entitled to one vote for each fully paid ordinary share in the capital of the plaintiff that the Scheme Shareholder is registered as holding at the Voting Record Date; and

(e)    except for procedural motions, all voting at the Scheme Meeting will be conducted by way of a poll.

6.    The following documents are approved for distribution to Scheme Shareholders:

(a)    the Scheme Booklet, substantially in the form of Exhibit C as provided to the Court on 4 November 2019, and modified in accordance with the Court's directions (which Scheme Booklet be and is hereby approved for the purposes only of s 411(1) of the Corporations Act); and

(b)    the proxy form for the Scheme Meeting substantially in the form of the document at Schedule 4 of the Scheme Booklet referred to in Order 6(a) above,

(together, Scheme Documents).

7.    Subject to registration of the Scheme Booklet with the Australian Securities and Investments Commission pursuant to s 412(6) of the Corporations Act, on or before 7 November 2019 the Scheme Documents be dispatched to each Scheme Shareholder whose name is recorded in the Register as being a shareholder as at 7.00 pm (Sydney time) on 5 November 2019 (Register Time):

(a)    in the case of Scheme Shareholders who have nominated an electronic address for the purpose of receiving communications from the plaintiff - by email to that address containing a link to a website at which the Scheme Documents can be accessed. An email substantially in the form of Tab 17 of Exhibit WN-1 to the affidavit of Warwick Negus affirmed on 1 November 2019 is approved for this purpose;

(b)    in the case of Scheme Shareholders, other than those in paragraph (a) above, with a registered address in Australia – by regular post to those addresses as set out in the Register and a reply paid envelope addressed to Link Market Services Limited (Link), PO Box 1519, Sydney South New South Wales 1234; and

(c)    in the case of Scheme Shareholders, other than those in paragraph (a) above, with a registered address outside Australia – by airmail to those addresses as set out in the Register and a return envelope addressed to Link.

8.    With respect to Order 7(a) above, if the plaintiff receives an email notification of a failure to deliver an email to a Scheme Shareholder's nominated electronic address, the Scheme Documents are to be dispatched by the plaintiff to those Scheme Shareholders as follows:

(a)    where the Scheme Shareholder has a registered address in Australia, in the manner described in Order 7(b); and

(b)    where the Scheme Shareholder has a registered address outside Australia, in the manner described in Order 7(c).

9.    The time by which proxy forms must be returned or lodged online in accordance with the instructions given on the proxy form is at 9.00 am (Sydney time) on 4 December 2019.

10.    Rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules) does not apply to the Scheme Meeting, save in respect of the application of Rule 75- 15(2) of the Insolvency Practice Rules (Corporations) 2016 (Cth).

11.    The plaintiff be relieved of compliance with r 3.4 of the Corporations Rules in respect of the Scheme, subject to the plaintiff publishing once in The Australian newspaper, on or before 2 December 2019, an advertisement substantially in the form of Annexure A to these Orders.

12.    The originating process be adjourned to 10.15 am on 10 December 2019.

13.    The plaintiff be given liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MARKOVIC J:

1    On 4 November 2019 on the application of the plaintiff, URB Investments Limited (URB), I made orders including an order pursuant to s 411(1) of the Corporations Act 2001 (Cth) (Act) convening a meeting (Scheme Meeting) of the holders of fully paid ordinary shares in URB, other than 360 Capital FM Limited (360 Capital FM) as responsible entity of the 360 Capital Total Return Active Fund (TOT Active Fund), (Scheme Shareholders) to consider and, if thought fit, agree to (with or without modification) a scheme of arrangement proposed between URB and the Scheme Shareholders (Scheme) and orders for the approval and distribution of the scheme booklet, being the explanatory statement required by s 412(1)(a) of the Act, for the Scheme (Scheme Booklet).

2    These are my reasons for making those orders.

background

3    URB is a public company listed on the Australian Stock Exchange (ASX). It is a research driven investment company focused on capturing long-term value by investing in a diversified portfolio of assets with exposure to urban renewal and regeneration.

4    As at 29 October 2019 URB had 73,959,549 ordinary shares on issue held by 2,295 shareholders. This included 17 overseas shareholders, five of which are (or are acting on behalf of) a citizen or resident of a jurisdiction other than Australia, its external territories or New Zealand or whose registered address is outside those places (Ineligible Overseas Shareholders). As at 29 October 2019 Ineligible Overseas Shareholders held 162,439 shares in URB which equates to approximately 0.22% of URB shares on issue as at that date.

The Scheme

5    On 14 October 2019 URB announced to the ASX that it had entered into a scheme implementation deed (SID) with 360 Capital FM as responsible entity for the TOT Active Fund and 360 Capital Total Return Passive Fund (TOT Passive Fund) (together TOT) by which it is proposed that 360 Capital FM as responsible entity for the TOT Active Fund will acquire 100% of URB’s issued capital.

6    The Scheme, if approved, will effect a transfer by Scheme Shareholders of all of their shares in URB to 360 Capital FM as responsible entity for the TOT Active Fund. The consideration for the transfer will be the issue of 0.9833 of a newly issued stapled security in TOT consisting of a fully paid unit in the TOT Active Fund and a fully paid ordinary unit in the TOT Passive Fund (Scrip Consideration) in exchange for each URB share held at the “scheme record date” (as defined in the Scheme Booklet).

7    URB shareholders are expected to have an entitlement to the TOT December 2019 quarterly distribution, forecast to be 2.25c to the unit on the basis that the “Scheme implementation date” will occur prior to the record date for the TOT December distribution. The TOT December distribution is not part of the Scheme.

8    If the Scheme implementation date occurs after the record date for the TOT December distribution, the Scheme Shareholders will, subject to URB granting a loan to TOT on the terms set out in Sch 4 to the SID, receive additional Scheme consideration in cash, of $0.0225 per share (Cash Consideration). If the SID is terminated or the Scheme is approved and implemented prior to the TOT December 2019 quarterly distribution record date, URB will not enter into the loan with TOT.

9    The directors of URB recommend that Scheme Shareholders vote in favour of the Scheme, in the absence of a superior proposal and subject to the independent expert, Lonergan Edwards & Associates Limited (Independent Expert), continuing to conclude that the Scheme is in the best interests of the Scheme Shareholders. Subject to that same proviso the URB directors each intend to vote all of their URB shares in favour of the Scheme.

Independent Expert

10    The URB directors appointed the Independent Expert to assess the merits of the Scheme. The Independent Expert has assessed the value of URB at between $1.07 and $1.11 per share and noted that the value of the Scrip Consideration at between $1.05 and $1.16 per share is consistent with the value of URB shares which represents a premium of between 2.9% and 7.4% to the likely listed market value of URB shares in the absence of the Scheme. The Independent Expert has also identified other advantages of the Scheme, namely that:

(1)    there is a modest increase in the NTA position of URB shareholders as a result of the Scheme;

(2)    the TOT Active Fund has historically paid higher annual distributions than URB, which is expected to continue; and

(3)    the market capitalisation of the TOT Active Fund post implementation of the Scheme (Merged Entity) will be more than twice the market capitalisation of URB, which should result in improved share liquidity for both URB shareholders and TOT Active Fund members. In addition, the increased size of the Merged Entity should result in a more diversified investment portfolio.

Novation of the investment management agreement

11    The Scheme is conditional upon the conditions precedent set out in cl 3.2 of the SID, which includes URB delivering to 360 Capital Group Limited (360 Capital Group), the ultimate holding company of 360 Capital FM, a duly executed counterpart of a deed of novation (Deed of Novation) signed by URB in respect of the investment management agreement (IMA) between URB and Contact Asset Management Pty Ltd (Contact).

12    The Deed of Novation was executed and delivered by all parties to it on 14 October 2019.

13    Pursuant to the IMA, Contact provides a number of services to URB, including the day-to-day management and investment of its portfolio. Contact’s shares are owned as to:

(1)    40% by Fireman Investments Pty Ltd (Fireman). Fireman is the trustee of a family trust. It does not hold URB shares. However, Thomas Millner owns 100% of the shares in Fireman and has a relevant interest in 229,995 URB shares through TOMCIL Pty Ltd (TOMCIL) and a personal shareholding. Mr Millner owns 100% of the shares in TOMCIL;

(2)    40% by Stayer Holdings Pty Ltd (Stayer), an entity indirectly controlled by Will Culbert. Mr Culbert and his wife each own 50% of the shares in Stayer. Stayer is the trustee of a family trust. Stayer does not hold URB shares. However, Mr Culbert has relevant interest in 258,995 URB shares through Culbert W & E Pty Ltd (Culbert W&E). Mr Culbert and his wife each own 50% of the shares in Culbert W&E; and

(3)    20% by Washington H Soul Pattinson and Company Ltd (WHSP). WHSP holds 12.35% of URB’s shares with a value of approximately $10m.

14    Conditional on completion of the Scheme, Contact will be replaced by 360 Capital Group in accordance with the terms of the Deed of Novation (Contact Transaction). 360 Capital Group will pay Contact $2.5m for novation of the IMA (Novation Price) and Contact will be paid an additional $300,000 for transitional services to be provided to 360 Capital Group for a six month period following implementation of the Scheme (Transitional Services Fee).

15    Neither Warwick Negus, a non-executive director and the chairman of URB or, to his knowledge, the URB board were involved in or apprised of details of the negotiations between 360 Capital Group and Contact for the novation of the IMA, other than Mr Negus initially being informed that 360 Capital Group had approached Contact to negotiate the novation of the IMA to it and being informed from time to time that those negotiations were continuing in parallel to the negotiations between 360 Capital Group and URB.

16    URB is a party to the Deed of Novation by necessity because it is a party to the IMA. URB was involved in documenting the terms of the Deed of Novation to the extent that those terms included releases and other terms affecting it. However, Contact engaged its own lawyers to advise it in relation to the Deed of Novation.

17    On 29 October 2019 TOMCIL, Culbert W&E and Mr Millner each entered into a deed poll in favour of URB undertaking not to attend the Scheme Meeting and not to vote any URB shares they hold at the Scheme Meeting.

18    On 30 October 2019 Contact disposed of its 100 URB shares, with a value of just over $100.

19    The steps referred to at [17]-[18] above were taken as a result of an exchange of correspondence between URB and the Australian Securities and Investments Commission (ASIC) in relation to the issue of collateral benefits (considered further below).

20    As set out at [10] above, URB engaged the Independent Expert to prepare a report as to whether the Scheme was fair and reasonable and in the best interests of Scheme Shareholders. In its report the Independent Expert considered the Novation Price and, in summary, is of the opinion that:

(1)    the market value of Contact’s management rights under the IMA are in the range of $1.3m to $1.9m;

(2)    the value of Contact’s management rights under the IMA to Contact are in the range of $2.1m to $2.5m;

(3)    the value of Contact’s management rights under the IMA to 360 Capital Group are likely to be materially higher than their value to Contact;

(4)    the most likely acquirer of Contact’s management rights is an entity with an existing funds management business;

(5)    as a valuation cross-check to other transactions which have involved the acquisition of interests in fund managers, the market value range implies a value of 1.5% to 2.1% of URB funds under management. The payment to be made to Contact of $2.5m represents approximately 2.8% of funds under management;

(6)    while the Novation Price is consistent with the top end of the assessed value of the management rights to Contact, it exceeds the estimated market value range, which implies that Contact is receiving a sale price for the management rights in excess of market value by $600,000 to $1.2m; and

(7)    thus, the Contact Transaction represents the receipt by Contact of a net benefit when measured by reference to the market value of the management rights.

21    The Independent Expert also considered the Transitional Services Fee and, in summary, is of the opinion that:

(1)    the extent of the transitional services required and thus the level of costs to be incurred by Contact is unknown; and

(2)    as the fee is equal to the full management fee payable by 360 Capital Total Return Fund to 360 Capital Group for the six-month period, it is likely to provide Contact with a high profit margin, which would indicate that the Transitional Services Fee also provides a net benefit to Contact.

22    Tony Robert Pitt, the managing director of 360 Capital FM and of 360 Capital Group, gave evidence about, among other things, the Deed of Novation. Mr Pitt said that the consideration to be paid to Contact for the Contact Transaction was negotiated and agreed between Contact and 360 Capital Group, without any involvement by URB, through arm’s length negotiations. Mr Pitt was involved in those negotiations together with James Storey, head of real assets at 360 Capital Group. Mr Pitt described the relevant negotiations, including that 360 Capital Group remained in discussions with Contact in relation to the novation of the IMA and on 23 August 2019 it approached Contact with a written indicative non-binding proposal to acquire the IMA by way of novation.

23    Mr Pitt also gave evidence that, based on 360 Capital Group’s significant experience in corporate acquisitions and disposals, it considered the Novation Price of $2.5m to be fair value because:

(1)    360 Capital FM’s appointment as responsible entity is in perpetuity;

(2)    360 Capital Group is entitled to charge a management fee rate of 0.65% per annum, being 0.15% higher than Contact’s management fee rate under the IMA;

(3)    360 Capital Group has recently sold the majority of its funds management platform for the equivalent of the value of 6.9% of funds under management. In comparison, the purchase of the management rights under the IMA equates to a value of 2.8% of managed funds proposed under the Scheme; and

(4)    Contact has agreed to provide transitional services and support to 360 Capital Group for a period of six months following the implementation of the Scheme in exchange for consideration of $300,000.

24    Finally, Mr Pitt notes that 360 Capital Group considers that the value of the management rights is higher to it than the market value as determined by the Independent Expert.

legal principles

25    The principles governing the exercise of the Court’s discretion to make an order convening a scheme meeting are well settled and were summarised in Re Capilano Honey Ltd (2018) 131 ACSR 9; [2018] FCA 1568 at [32] by Farrell J as follows:

The Court will order that a scheme meeting be convened and approve a draft explanatory statement to be sent to shareholders if it is satisfied that:

   (1)    The plaintiff is a Pt 5.1 body;

(2)    The proposed scheme is a compromise or (relevantly) an “arrangement” within the meaning of s 411. …

   (3)    The scheme booklet will provide proper disclosure to shareholders;

   (4)    The scheme is bona fide and properly proposed;

(5)    ASIC has had a reasonable opportunity to examine the terms of the scheme and the scheme booklet and make submissions and it has had at least 14 days’ notice of the proposed hearing date;

(6)    The procedural requirements of the Federal Court (Corporations) Rules 2000 (Cth) have been met; and

(7)    The scheme is of such a nature and cast in such terms that, if it receives a statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed.

26    In relation to item (7) above, in Associated Advisory Practices Limited, in the matter of Associated Advisory Practices Limited [2013] FCA 761 (Associated Advisory Practices) at [22] Farrell J said:

The Court will not ordinarily convene a meeting of members to consider a scheme of arrangement unless the Court is satisfied that the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting of members, the Court would be likely to approve the scheme on the hearing of an unopposed application: Re Central Pacific Minerals NL [2002] FCA 239 at [8]; Re CSR Ltd (2010) 183 FCR 358 at [12]; Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 504. By granting leave to convene the meeting, the Court does not give its imprimatur to the proposed scheme or foreshadow its approval at the second court hearing for the purposes of s 411(4)(b): Re Foundation Healthcare Ltd (2002) 42 ACSR 252 at [36]; Australian Securities Commission v Marlborough Gold Mines Limited at 504-505. The question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed as being beneficial to members: In re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 at 243; Re CSR Ltd at [80]. The Court does not need to be satisfied that no better scheme could have been proposed: Re Foundation Healthcare Ltd at [44]. Ultimately, the question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72.

27    As identified in Associated Advisory Practices, the question for the Court is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: see also Re CSR Ltd (2010) 183 FCR 358 at [80]; Centrebet International Ltd, in the matter of Centrebet International Limited [2011] FCA 870 at [29]. Ultimately, that question is for the members themselves: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72.

28    At the first court hearing the plaintiff has an ex parte disclosure obligation which carries with it “the responsibility of bringing to the court’s attention all matters that could be considered relevant to the exercise of its discretion”: Re Permanent Trustee Co Ltd (2002) 43 ACSR 601 at [7].

consideration

Matters for the Court’s satisfaction

29    Having regard to the evidence before me I was satisfied that:

(1)    URB is a Pt 5.1 body as defined in s 9 of the Act;

(2)    the Scheme is a “compromise or arrangement” within the meaning of s 411(1) of the Act;

(3)    copies of the draft Scheme Booklet together with notice of the date of the first court hearing were first given to ASIC more than 14 days before the first court hearing and ASIC has had a reasonable opportunity to examine the terms of the Scheme and the draft Scheme Booklet. The letter from ASIC is set out in further detail at [30] below;

(4)    subject to an amendment made following the first court hearing, the Scheme Booklet provides adequate disclosure to members. In particular the Scheme Booklet sets out the key features of the Scheme, its advantages and disadvantages and provides proper disclosure in relation to the IMA, the Deed of Novation and the benefit that will accrue to Contact (see [33]-[43] below) . The evidence also established that steps were taken by URB and 360 Capital FM, including each member of the consortium which it represents, to verify the statements and information appearing in the draft Scheme Booklet;

(5)    the Scheme is bona fide and properly proposed; and

(6)    the other procedural requirements set out in Div 3 of the Federal Court (Corporations) Rules 2000 (Cth), which apply to arrangements between a Pt 5.1 body and its members, have been met.

30    URB tendered a letter from ASIC dated 4 November 2019 in which, among other things, ASIC:

(1)    said that it did not currently propose to appear to make submissions or intervene to oppose the Scheme at the first court hearing, but also stated:

However, as you are aware, in reviewing the draft explanatory statement and scheme terms, ASIC identified aspects of the Scheme which initially raised concerns as to whether URB’s shareholders will be afforded equality under the Scheme and associated arrangements overall, consistent with the principles that apply to takeovers under section 602 of the Corporations Act. On the basis of responses provided and actions taken by URB, ASIC does not seek to raise any further concerns with the Scheme at this time.

(2)    referred to the Contact Transaction, the Independent Expert’s conclusions in relation to the Novation Price and the Transitional Services Fee and the ownership of Contact and that, based on proportionate shareholdings in Contact, the relevant maximum indirect collateral benefit to each underlying Contact Shareholder is $480,000 to each entity with a 40% interest in Contact and $240,000 to WHSP;

(3)    referred to ASIC Regulatory Guide 60: Schemes of Arrangement (RG 60) which sets out the matters it will take into account when considering the structuring and terms of a scheme that has a similar effect to a takeover and noted that it considered it important to examine “collateral benefits in any takeover transaction, consistent with the view of the Takeovers Panel, which notes ‘The Panel starts from the idea the unacceptable circumstances will be likely to exist whenever a bidder provides a security holder something of value which it does not offer to other security holders’”;

(4)    noted that accordingly it had considered whether the payment to Contact may result in Contact shareholders receiving a benefit which may raise issues as to fairness to URB shareholders as well as class composition;

(5)    noted that on the basis that Mr Millner, Culbert W&E and TOMCIL will not vote and thus the additional benefits they receive should not impact the final conclusion as to the will of URB’s shareholders on the Scheme (as would be the case if they had been placed in a separate class) and the entry into of the deed polls it did not consider it necessary to press for the placement of those shareholders in an additional class to address the concerns raised by it and accordingly expressed no opinion on that question; and

(6)    said that it had particular regard to the materiality of the benefit that might be received by WHSP in inducing its acceptance of the Scheme, a key consideration in terms of the collateral benefit test in s 623 of the Act. ASIC noted that given that WHSP’s interest in URB is valued at in excess of $10m, it appeared to it that the maximum collateral benefit of $240,000 that may be received by WHSP may not constitute an unacceptable inducement for it to vote in favour of the Scheme. It said in that regard:

While, as with any collateral benefit, this nonetheless remains a matter of some concern, on balance and in all the circumstances ASIC does not express an objection to the Scheme on this basis at this time. ASIC nonetheless notes that the voting of [WHSP] has been tagged so that further consideration of this question may be had in the event the votes of [WHSP] are determinative.

31    Despite the matters raised by ASIC in its letter, which had also been the subject of correspondence with URB as noted at [30(1)] above, it indicated that it did not intend to appear at the first court hearing to make submissions or intervene. It was apparent that the issues raised by ASIC had been addressed by URB.

Other matters

32    In discharging its disclosure obligation, URB brought several matters to the Court’s attention, including ineligible overseas shareholders, exclusivity provisions in the SID and the break fee payable by URB in particular circumstances. Having considered each of the matters raised by URB, I was of the opinion that none of them justified the Court declining to make the orders sought by it. It is only necessary to set out the issues relating to two of the matters raised and, in relation to those matters, my reasons for concluding, as I did, that they did not preclude the Court from making the orders sought.

Collateral benefit

33    An issue arose as to whether a collateral benefit accrued to the shareholders of Contact, who either have a direct or indirect interest in URB, as a result of the Contact Transaction. As noted above, this issue was the subject of detailed correspondence between URB and ASIC. A related issue also arose (discussed below) as to whether the terms of the Contact Transaction are such as to create a separate class of URB shareholders for the purpose of convening separate scheme meetings.

34    The issue of collateral benefit was considered in Re David Jones Ltd (No 2) (2014) 101 ACSR 381; [2014] FCA 720 (David Jones (No 2)) and in David Jones Ltd, in the matter of David Jones Ltd (No 3) [2014] FCA 753 (David Jones (No 3)). In that case notice had been given after the first court hearing that Mr Lew was a substantial shareholder in David Jones Ltd. Relevantly, the bidder had also announced that it would make a bid for all of the remaining shares in Country Road Ltd, of which Mr Lew owned 11.8%. That bid was subject to the scheme proposed by David Jones Ltd being approved and taking effect. In David Jones (No 2) at [18]-[19] Farrell J said:

18.    The offering of a collateral benefit designed to induce a shareholder to accept a takeover bid conducted under Ch 6 of the Corporations Act or to dispose of shares in the same class as those the subject of a bid would be prohibited under s 623(1). In its consideration of whether unacceptable circumstances may exist, the takeovers panel looks at whether a bidder provides a security holder something of value which it does not offer to other security holders: see Takeovers Panel Guidance Note 21: Collateral Benefits at [5].

19.    Although there is no equivalent provision to s 623 relating to schemes of arrangement effected under s 411 of the Corporations Act, it is ASIC’s policy to have regard to these principles in relation to a scheme effecting a change of control: see ASIC Regulatory Guide 60 Schemes of Arrangement (RG 60) at [RG 60.18]. ASIC says to do otherwise has the potential to undermine the integrity of the scheme procedure as a method of effecting a control transaction.

35    At [30]-[31] her Honour referred to the practice of providing an additional expert report when an issue of collateral benefit may arise as follows:

30.    ASIC’s primary concerns are substantial matters. Where an issue emerges of whether a shareholder in a scheme company may receive some benefit different from other shareholders if the scheme is approved, the best information for shareholders or the court in considering whether to approve the scheme is an appropriately qualified independent expert’s report which identifies the nature and extent of the benefit.

31.    It is for this reason that it has become usual for proponents of a scheme which may benefit a shareholder, director or other related party differently from other scheme participants to provide an expert’s report concerning the nature and extent of the likely benefit at the first court hearing to assist the court in making orders convening a scheme meeting under s 411(1). iSOFT, Texon and Aston are all cases of this kind. The court did not require the provision of the report in those cases, it was proffered. It is undoubtedly logistically easiest to arrange for an expert’s report at the time of the first court hearing and it is appropriate that it occur then (where it is possible) so that shareholders have time to consider any issues before they vote. However, while provision of an expert’s report may be the best way to satisfy the court on this issue, it does not mean that it is the only way.

36    RG 60 at RG 60.23 provides that ASIC will closely consider a scheme if:

(1)    some holders in a class of security in the target (Target Security) receive a collateral benefit in connection with the scheme; or

(2)    there are collateral benefits associated with the consideration offered for each different class of Target Security (whether that consideration is offered under the scheme or under a separate agreement between the acquirer and the holder of the Target Security).

37    In David Jones (No 3) at [12]-[13] Farrell J observed that:

12    Both David Jones and ASIC made submissions concerning when a “collateral benefit” may be taken to exist by reason of the Country Road Bid. It is unnecessary in these reasons to canvas in detail the technicalities which are called into consideration in determining this issue under s 623 of the Corporations Act, breach of which is an offence or may give rise to “unacceptable circumstances”. The transaction under consideration is a scheme of arrangement to which s 623 does not apply. The relevance of the principles set out in s 602 goes to the question of fairness and the desirability of there being, so far as relevant and possible, neutrality between “acquisition” schemes and Chapter 6 takeovers.

13    However, one of the reasons for the continued existence of the s 411 avenue for effecting mergers is that it is a flexible way of accommodating differences in the treatment of shareholders. It is for this reason that it is not illegal for a collateral benefit to be offered or given. Nor is it necessarily inappropriate for there to be differential consideration or collateral benefits subject to how the related questions of fairness and adequacy of disclosure to shareholders who will not participate in a benefit are addressed. The “fairness” issue is usually dealt with in one of two ways: first, by deciding whether there are differences which are “class creating” or, second (and arguably more appropriately where the issue is collateral benefits), by enquiring whether processes have been established by the scheme company to “tag” votes of interested shareholders or for interested shareholders to abstain from voting. Either approach allows appropriately informed shareholders who will not share in a benefit to determine the outcome of the approval resolution and prevents shareholders with greater bargaining power from being advantaged over shareholders with less bargaining power without the consent of the less powerful shareholders.

38    The facts relating to the Contact Transaction are set out at [14]-[24] above. The Independent Expert has provided an opinion on the market value of the management rights under the IMA and whether a net benefit is being provided and concluded that the Contact Transaction represents the receipt by Contact of a net benefit when measured by reference to the market value of the management rights as required by Takeovers Panel Guidance Note 21: Collateral Benefits (TPGN21). In David Jones (No 3) at [15] Farrell J accepted that the appropriate measure of whether a benefit exists is the net benefits test adopted in TPGN21 in determining whether unacceptable circumstances exist because of the existence of such an interest. Her Honour continued:

15    … This test was posited by Santow J in Boral Energy Resources Ltd v TU Australia (Queensland) Pty Ltd (1998) 43 NSWLR 638 at 680:

The preferred holistic view instead takes into account whatever rights or benefits are conferred by each transaction, to be netted off against whatever rights or benefits are thereby given up, to the extent such benefits are commensurable at least in an approximate sense. The resultant net benefit is to be compared under each transaction. Only if there is overall disparity in favour of the party to the non-bid transaction is s 698(1) [now s 623] contravened. This is in the sense of a balance of advantage, profit or good in favour of the party to the non-bid transaction.

16    I also accept that, as contemplated by GN 21 at [32], there may be “inducement” arising from collateral benefits which should be taken into account where there is no material “net benefit” but a shareholder is offered the opportunity to acquire or dispose of an asset for which there is no ready market or easily ascertainable value.

39    There are a number of factors that are relevant to a consideration of whether a collateral benefit arises in the context of the Contact Transaction.

40    First, as already observed, the evidence establishes that the negotiations for the Contact Transaction were at arm’s length, did not involve the board of URB and the price that 360 Capital Group is prepared to pay reflects its view as to the value of the management rights, notwithstanding that that value is higher than the value determined by the Independent Expert.

41    Secondly, URB accepts that the benefits that may flow indirectly to entities controlled by Messrs Millner and Culbert may not be de minimis relative to the value of the shareholding in URB held by other entities controlled by those gentlemen. For that reason, and following discussion with ASIC, Mr Millner, TOMCIL and Culbert W&E have entered into deed polls and will not vote at the Scheme Meeting. Relevant parties not voting is an appropriate course to adopt in the circumstances: see David Jones (No 3) at [13] (at [37] above).

42    Thirdly, the position of WHSP is different. It will vote at the Scheme Meeting. As the evidence establishes, it has a 12.35% interest in URB valued at approximately $10m. Contact is receiving a sale price for the management rights which, according to the Independent Expert, exceeds their market value by $600,000 to $1.2m. URB submitted, and I accepted, that having regard to WHSP’s shareholding in Contact the benefit which may indirectly flow to it, relative to its 12.35% shareholding in URB, is de minimis: approximately $120,000-$240,000 for the Novation Price and an unspecified amount, likely to be no more than $60,000, in respect of the Transitional Services Fee. There are two further relevant aspects to WHSP’s position: as URB observed, it is not known whether the full amount of the Novation Price will be distributed by Contact to its shareholders, given that Contact will continue to be an operating business following implementation of the Scheme; and WHSP’s votes will be tagged at the Scheme Meeting.

43    Finally, the Contact Transaction was disclosed in the Scheme Booklet and, subject to one amendment made as a result of the first court hearing, I was satisfied that the transaction and its effect is fully and properly disclosed in the Scheme Booklet.

Classes

44    In David Jones (No 2) at [33] Farrell J noted that the second court hearing is the time for the court to determine whether or not a collateral benefit has been received and, if so, its relevance to the court’s discretion to approve the scheme, having regard to the voting at the scheme meeting and the disclosure provided. However, where one or more members of a target receive a net benefit, in addition to full and frank disclosure of the benefit, a related issue arises as to whether it is appropriate for those members to be placed into a separate class. That is an issue properly addressed at the first court hearing: see First Pacific Advisors LLC v Boart Longyear Ltd (2017) 320 FCR 78; [2017] NSWCA 116 at [40]-[41].

45    In Sovereign Life Assurance Company v Dodd [1892] 2 QB 573 at 583 Bowen LJ set out the test for identifying a class for scheme of arrangement purposes as follows:

It seems plain that we must give such a meaning to the term “class” as will prevent the section being so worked as to result in confiscation and injustice, and that it 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.

46    In Perpetual Custodians Ltd (as custodian for Tamoran Pty Ltd (as trustee for Crivelli)) v IOOF Investment Management limited (2013) 304 ALR 436; [2013] NSWCA 231 at [51] Leeming JA (with whom McColl and Gleeson JJA agreed) said:

Fourth, the legislation has long contemplated meetings of classes of members. The point of requiring members to vote in separate classes is to ensure that members can consult so as to determine their common interest. That is what drives class definition. Where the interests of members are so different as to make it impossible for them to consult with other shareholders, separate classes may be required: Sovereign Life Assurance Co v Dodd [1892] 2 QB 573 at 583 (Sovereign Life Assurance) per Bowen LJ; Re NRMA Ltd (2000) 33 ACSR 595; [2000] NSWSC 82 at [76] per Santow J; Re Cashcard Australia Ltd (2004) 48 ACSR 738; [2004] FCA 223 at [5] per Jacobson J; Re Sino Gold Mining Ltd (2009) 74 ACSR 647; [2009] FCA 1277 at [52]–[57] per Lindgren J. As Barrett J said in Hills Motorway at [12] after referring to the statements by Lord Esher MR and Bowen LJ in Sovereign Life Assurance:

[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.

47    As noted at [33] above, in this case an issue arises as to whether the Contact Transaction is class creating. URB provided extensive submissions in relation to that issue.

48    In the circumstances of this case I accepted URB’s submissions that the Contact Transaction is not class creating given, in particular, that:

(1)    Contact is not a shareholder in URB and two of the three shareholders in Contact, Fireman Investments and Stayer Holdings, are not shareholders in URB;

(2)    neither the Scheme nor the Deed of Novation affects the legal rights of any of the shareholders of Contact in a way that is different to the legal rights of any other shareholder in URB;

(3)    neither the Scheme nor the Deed of Novation affects the legal rights of Mr Millner, TOMCIL or Culbert W&E in a way that is different to any other shareholder in URB;

(4)    in any event, Mr Millner, TOMCIL and Culbert W&E will not vote at the Scheme Meeting;

(5)    the value of any net benefit that may flow indirectly to WHSP, the third shareholder in Contact, as a result of the Contact Transaction is de minimis relative to the value of its shareholding in URB. That de minimis net benefit does not destroy the community of interest between WHSP and other shareholders;

(6)    importantly, WHSP’s votes at the Scheme Meeting will be tagged;

(7)    the Deed of Novation was negotiated at arm’s length without URB’s involvement; and

(8)    while the Independent Expert concluded that the Novation Price was above market value, the Independent Expert also concluded that it represented the top end of the range of value to Contact and that the value of the management rights are likely to be materially higher to 360 Capital Group. In that regard, the evidence discloses that the price 360 Capital Group is prepared to pay reflects its board’s view as to the value of Contact notwithstanding that it is higher than the value determined by the Independent Expert.

conclusion

49    Based on the evidence before me and submissions made on behalf of URB, I was satisfied that the Scheme is of such a nature and is cast in such terms that if it achieves the requisite statutory majorities at the Scheme Meeting I would be likely to approve it.

50    For those reasons I made the orders sought by URB.

Associate:

Dated:    25 November 2019