In the matter of Novion Limited

[2015] NSWSC 1295

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Novion Limited [2015] NSWSC 1295
Hearing dates:	14 April 2015
Date of orders:	14 April 2015
Decision date:	14 April 2015
Jurisdiction:	Equity - Corporations List
Before:	Brereton J
Decision:	Orders made convening scheme meeting and approving (subject to amendments) explanatory statement, and advising that trustee would be justified in putting resolution to meeting of unit holders and that amendment of trust deed within power
Catchwords:	CORPORATIONS – arrangements and reconstructions – schemes of arrangement or compromise – application for order convening meeting of members to consider scheme of arrangement – whether scheme sufficiently explained and whether any obvious flaw – where no commercial reason why scheme could not be approved – where explanatory statement involves comprehensive disclosure of requisite matters – where notification given to ASIC.   TRUSTS – trustees – trustees’ applications – judicial advice – managed investment scheme – proposal to amend trust deed in conjunction with corporate scheme of arrangement – whether trustee justified in making constitutional amendment to enable scheme.
Legislation Cited:	(Cth) Corporations Act 2001, s 411, s 411(2), s 411(17), s 412(6), s 601GC
Category:	Procedural and other rulings
Parties:	In proceedings 2015/88147: Novion Limited (ABN 79 167 087 363) (plaintiff) Federation Limited (interested party)   In proceedings 2015/88363: Novion RE Limited (ABN 33 084 098 190) as responsible entity of the Novion Trust (ARSN 090 150 280) (plaintiff) Federation Limited (interested party)
Representation:	Counsel: P M Wood SC w J Williams (plaintiffs) J Lockhart SC (Federation Limited)   Solicitors: Ashurst Australia (plaintiffs)
File Number(s):	2015/88147; 2015/88363

Judgment (ex tempore)

1. HIS HONOUR: Novion Limited – a company limited by shares, registered in the State of Victoria but having its registered office in Sydney – together with the Novion Trust, constitute the Novion Property Group, the stapled securities in which comprise a single share in Novion Limited and a single unit in the Novion Trust, and trade on the Australian Stock Exchange (“ASX”). As at 8 April 2015, there were approximately 3,077,214,058 securities on issue to 17,000 holders of Novion securities. They were trading on the ASX at a price of $2.55 and the market capitalisation of the group on that basis was $7,846,895,847. Novion Property Group holds interests valued at $9.1 billion in 27 directly owned retail assets across Australia, and manages 19 assets on behalf of wholesale funds, third parties and other strategic partners.

2. Federation Centres is another real estate investment trust group which, like the Novion Property Group, specialises in the ownership, management and redevelopment of Australian retail property assets. Its stapled securities are also listed for quotation on the ASX, and comprise a single share in Federation Limited and a single unit in the Federation Centres Trust No 1. As at April 2015, there were 1,427,641,565 Federation securities on issue to approximately 7,000 security holders. Those securities were trading on the ASX at a price of $3.06, and the market capitalisation of Federation Centres on that basis was $4,368,583,188.

3. On 3 February 2015, Novion Property Group and Federation Centres announced that they had entered into a merger implementation agreement to merge their respective businesses, subject to certain conditions. In essence, the merger involves a scheme of arrangement by which Federation Limited will acquire all the shares in Novion Limited (“Scheme shares”) after they have been destapled from the units in the Novion Trust, and the acquisition by the Federation Centres Trust No 1 of all units in the Novion Trust, after they have been destapled from the Scheme shares.

4. Before the Court are two applications. In proceedings 2015/88147, Novion Limited applies for orders under (Cth) Corporations Act 2001, s 411, convening a meeting of the members of Novion to consider a scheme of arrangement between Novion and its members, and subsequently for approval of the scheme (“the company scheme”). In proceedings 2015/88363, Novion RE Limited, as the responsible entity of the Novion Trusts, seeks judicial advice to the effect that it is justified in convening a meeting of unit holders to consider an amendment to the constitution of the Novion Trust to facilitate the transfer of all units in a manner consistent with the company scheme (“the Court scheme”).

5. This is the so-called first hearing of both applications, and it has been ordered that the matters be heard together and that evidence in one be evidence in the other. On an application under Corporations Act, s 411, for an order convening a meeting, the Court's approach is that it will not summon a meeting, at least ordinarily, unless the scheme is of such a nature and in such terms that, if approved by the requisite majority at the meeting, the Court would likely approve it, if unopposed.

6. However, the Court is not concerned with whether final approval should be given for the scheme, but essentially with whether it could be approved on a final basis and there is any obvious flaw such that it ought not even be submitted for consideration, the scheme is sufficiently explained to those who have an interest in it, and the explanatory statement is an appropriate one for distribution to the proposed scheme participants. The Court must also be satisfied that the various preconditions to making an order referred to in s 411(2) in respect of notification to ASIC have been met.

7. The company scheme proposed for the purposes of s 411 involves the acquisition by Federation Limited of all the shares in Novion Limited. Two meetings are to be convened. First, a concurrent extraordinary general meeting of the members of Novion Limited and the unit holders in the Novion Trust; and subsequently, immediately thereafter, a scheme meeting convened pursuant to s 411 to approve the scheme.

8. The consideration to be received by the Novion security holders is 0.8225 units in the Federation Trust for each unit held in the Novion Trust, and 0.8225 shares in Federation Limited for each Novion share held. The evidence suggests that, based on the trading prices of Novion securities and Federation securities immediately prior to the announcement of the proposed merger, that provides a premium for Novion security holders.

9. The principal disadvantage of the scheme, as identified by the independent expert, appears to be a reduction in the net tangible asset backing of Novion securities; but that does not extend to net asset backing, which is said to be increased, and is thought unlikely to impact on the trading price of the securities, which is more likely to be informed by revenue flow than by net asset or net tangible asset backing.

10. There is no obvious commercial reason why the scheme could not be approved. It is recommended unanimously by Novion's directors, and the independent expert has concluded that it is fair and reasonable and in the interests of Novion security holders.

11. Mention should be made of some of those provisions which are typically referred to in this context. Provision is made in respect of so-called ineligible foreign security holders – being security holders resident outside Australia, New Zealand, the United States, the United Kingdom, Hong Kong, Singapore and Papua New Guinea, which appear to constitute less than 0.1 per cent of all securities and 0.09 per cent of all security holders – in that, to the extent that Federation is not satisfied that the consideration can be issued to them, then it will be issued to a nominee for sale and the consideration then distributed to the relevant ineligible foreign security holder. That makes appropriate provision for the financial interests of those security holders.

12. There appears to be no performance risk, as the shares in Federation and the units in the Federation Trust are to be issued to Novion security holders before transfer of their shares and units.

13. The merger implementation agreement includes no shop, no talk, no due diligence restrictions, and a notification and matching right obligation. The no talk and no due diligence restrictions are subject to fiduciary carve outs. Such provisions are now conventional in arrangements of this kind. Novion's directors have explained that the transaction could not have been achieved with Federation but for their agreement to the inclusion of such provisions.

14. The merger implementation agreement also includes a break fee of $40 million, which the Novion directors explain was essential if the agreement were to be achieved. In this case, there is a reciprocal break fee of the same amount payable by Federation in the event that the agreement is terminated for default by Federation. The Novion break fee is not triggered merely by security holders failing to approve the scheme, and thus does not serve as a disincentive to shareholders in their consideration of the resolutions to be submitted to them. Again, break fees of this magnitude – that is to say less than 1 per cent of the equity value of the group – are not uncommon in schemes of this kind.

15. The scheme also includes a deemed warranty by the security holders that their securities will be free from encumbrance. Such deemed warranties are reasonable to ensure that security holders are dealt with on an equal basis, and appropriate disclosure of the deemed warranty is given in the draft scheme booklet.

16. There are, as it seems to me, no apparent reasons why the scheme, if approved at the meeting, could not be approved by the Court at the second hearing. Mr Haddock, and failing him, Mr Hay, directors of Novion, have consented to act as chair of the scheme meeting, and appear to have no interests that would make it inappropriate for them so to act.

17. For the purposes of s 411(2), ASIC has been given and acknowledges that it has been given 14 days' notice of the hearing of the application, and has had a reasonable opportunity to examine the terms of the proposed arrangement and the draft explanatory statement and to make submissions to the court if so minded. The explanatory statement has been lodged with ASIC for registration, and in its final form will have been registered before it is distributed so as to comply with s 412(6).

18. The draft explanatory statement in the form of the scheme booklet contains comprehensive – some might fear too comprehensive – disclosure of all requisite matters, save those in respect of which an exemption has been granted by ASIC. In any event, it appropriately sets out, both in the body, and – perhaps in the context of so large a document, more importantly – in the introductory chair's letter, the perceived advantages and disadvantages of the proposed scheme, so as to enable security holders to make an informed decision.

19. The evidence establishes that it has been the subject of a rigorous verification process, by which each material statement in the explanatory statement has been allocated to a relevant officer of the Novion Property Group or, in the case of material that is attributable to Federation, to a relevant officer of Federation, who has been required to confirm the accuracy of the statement and to provide written confirmation to that effect and that there is no omission or misstatement in the relevant parts of the explanatory statement.

20. The explanatory statement informs security holders as to their options in responding to the proposal, and how to act in response to it. As I have indicated in the course of the hearing, I do consider it important that an explanatory statement, which in many ways serves as the only notice that security holders will personally receive of the application to the Court, clearly draws to their attention their right to appear at the second Court hearing and to be heard in support of, but more particularly in opposition to, approval of the scheme. With some minor amendments that have been agreed, the draft explanatory statement now meets that requirement.

21. In the course of its scrutiny of the draft explanatory statement, ASIC has made a number of observations and suggestions which have been accommodated and ASIC has expressed the view that it has no further comment to make in respect of the draft explanatory statement. Although, in accordance with its usual practice, ASIC does not provide a statement under s 411(17)(b) until the second Court hearing, it has provided its usual letter for use at the first hearing in which it advises that it does not currently propose to appear to make submissions or intervene to oppose the scheme at the first hearing.

22. As to the associated trust scheme, the application follows the conventional path of seeking judicial advice in connection with the trust scheme in parallel with and following the same procedure as an application under s 411, in effect proceeding by analogy with a Part 5.1 scheme.

23. The advice sought is first, whether the plaintiff, as the responsible entity of the Novion Trust, is justified in convening a meeting of the unit holders for the purpose of considering and, if thought fit, voting on the resolutions set out in the scheme booklet; secondly, whether it is justified in distributing the scheme booklet; and, thirdly, whether it is justified in proceeding on the basis that the proposed amendments to the constitution of the trust would be within the powers of alteration conferred by the constitution of the trust or by Corporations Act, s 601GC.

24. I have sufficiently covered, in the above observations concerning the s 411 application, why the plaintiff would be justified in convening a meeting of the unit holders and in distributing the scheme booklet in the form to be approved. As to the third question, an ample power of amendment of the constitution is conferred on the responsible entity by the constitution of the Novion Trust, and a similarly ample power is conferred by Corporations Act, s 601GC. It is not seriously open to doubt that the proposed amendments, albeit extensive, are within either of those very ample powers. Accordingly, I am prepared to give the advice sought.

25. In proceedings 2015/88147, I have altered paragraph 2 of the draft order by deleting the words “behind tab 2 of exhibit PXO2”, and substituting “comprised in exhibit PX10”. Subject to that amendment, I make orders in accordance with the document entitled “Order” initialled by me, dated this day and placed with the papers.

26. In proceedings 2015/88363, I make orders in accordance with the document entitled “Order” initialled by me, dated this day and placed with the papers.

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Decision last updated: 03 September 2015