Re Aveo Group Ltd and Aveo Funds Management Ltd

[2019] NSWSC 1348

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Aveo Group Limited and Aveo Funds Management Limited [2019] NSWSC 1348
Hearing dates:	27 September 2019
Date of orders:	27 September 2019
Decision date:	04 October 2019
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Order made convening scheme meetings and approving the scheme booklet for distribution to shareholders. Judicial advice given that Aveo Funds RE is justified in propounding resolutions to implement the proposed Trust Scheme and proceeding on the basis that constitutional amendments to implement the Trust Scheme is within the constitutional powers of alteration conferred and s 601GC of the Corporations Act 2001 (Cth).
Catchwords:	CORPORATIONS – arrangements and reconstructions – schemes of arrangement or compromise – application under s 411 of the Corporations Act 2001 (Cth) for orders convening meetings of members to consider and, if thought fit, to agree to proposed scheme of arrangement – whether requirements to order scheme meetings are satisfied. CORPORATIONS – managed investments – application for judicial advice by responsible entity under s 63 of the Trustee Act 1925 (NSW) – whether responsible entity would be justified in propounding resolutions to implement the proposed trust scheme – whether proposed amendments are within the constitutional powers of alteration and s 601GC of the Corporations Act.
Legislation Cited:	- Corporations Act 2001 (Cth) Ch 5C; Pt 5.1; ss 411, 411(1), 411(17), 411(17)(b), 601GC, 611 - Corporations Regulations 2001 (Cth) Sch 8, reg 8301(a) - Supreme Court (Corporations) Rules 1999 (NSW) r 2.15 - Trustee Act 1925 (NSW) s 63
Cases Cited:	- Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 - F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 - Re Abacus Funds Management Ltd [2005] NSWSC 1309; (2006) 24 ACLC 211 - Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 - Re Ardent Leisure Ltd [2018] NSWSC 1665 - Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 - Re Atlas Iron Ltd [2015] FCA 366; (2016) 112 ACSR 554 - Re Bigair Group Ltd [2016] FCA 1296 - Re BIS Finance Pty Ltd [2017] NSWSC 1713 - Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 - Re Capilano Honey Ltd [2018] FCA 1568 - Re Centrebet International Ltd [2011] FCA 870 - Re CSR Ltd (2010) 183 FCR 358 - Re DUET Finance Ltd [2017] NSWSC 415 - Re DUET Management Company 1 Ltd [2013] NSWSC 817; (2013) 95 ACSR 34 - Re eircom Holdings Ltd [2009] FCA 1418 - Re Foster’s Group Ltd (No 2) [2011] VSC 547 - Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 - Re Gazal Corporation Ltd [2019] FCA 701 - Re GBST Holdings Ltd [2019] NSWSC 1280 - Re Hills Motorway Ltd (2002) 43 ACSR 101 - Re Kidman Resources Ltd [2019] FCA 1226 - Re Macquarie Goodman Funds Management Ltd (2004) 52 ACSR 194 - Re Macquarie Private Capital A Ltd [2008] NSWSC 323 - Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107 - Re Mosaic Oil NL [2010] FCA 985 - Re Navitas Ltd (No 2) [2019] WASC 218 - Re SAI Global Ltd [2016] FCA 1312 - Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 - Re SMS Management & Technology Ltd [2017] VSC 257 - Re Staging Connections Group Ltd [2015] FCA 1012 - Re Sydney Airport Holdings Limited [2013] NSWSC 1665 - Re Villa World Ltd [2019] NSWSC 1207 - Re Viralytics Ltd [2018] FCA 637
Category:	Principal judgment
Parties:	Aveo Group Limited (First Plaintiff) Aveo Funds Management Limited (Second Plaintiff) Hydra RL BidCo Pty Ltd and Hydra RL TopCo Pty Ltd (Interested Party)
Representation:	Counsel: J Williams (Plaintiffs) S Nixon SC/N Bender (Interested Party)   Solicitors: Herbert Smith Freehills (Plaintiffs) Allens (Interested Party)
File Number(s):	2019/285476

Judgment

Nature of application, background and affidavit evidence

1. By Originating Process filed on 12 September 2019, the First Plaintiff, Aveo Group Limited (“AGL”) seeks orders under s 411 of the Corporations Act 2001 (Cth) convening a meeting of its members to consider a scheme of arrangement between AGL and its members and, subsequently, for approval of the scheme (“Company Scheme”). The Second Plaintiff, Aveo Funds Management Limited (“Aveo Funds RE”), which is the responsible entity of the Aveo Group Trust (“Trust”), also seeks judicial advice to the effect that it is justified in convening a meeting of its unitholders to consider an amendment to the constitution of the Trust to facilitate a transfer of all units in a manner consistent with the Company Scheme proposed by AGL (“Trust Scheme”). Further orders will in due course be sought at a second Court hearing, if the Company Scheme and Trust Scheme are approved by shareholders in AGL and unitholders in the Trust. I have drawn in this judgment on the helpful submissions of Mr Williams, who appeared for the Plaintiffs in the application.

2. By way of background, AGL and Aveo Funds RE (“Aveo”) own, operate and manage over 90 retirement communities across Australia with approximately 14,000 residents under the terms of the constitutions of AGL and the Trust and a Stapling Deed by which each share in AGL is stapled to a unit in the Trust, and vice versa, to form an “Aveo stapled security”. Aveo stapled securities are quoted and traded on the Australian Securities Exchange (“ASX”). The proposed Company Scheme and Trust Scheme provide for the acquisition of all of the Aveo stapled securities by Hydra RL BidCo Pty Ltd (“BidCo”), an entity controlled by Brookfield Asset Management Inc on behalf of its managed funds (“Brookfield”). Brookfield is a global alternative asset manager and is listed on the New York Stock Exchange, the Toronto Stock Exchange and Euronext Amsterdam.

Affidavit evidence

3. The application was supported by an affidavit of Mr Luke Hastings, a solicitor acting for AGL and Aveo Funds RE in the application. Mr Hastings referred to the background of the application, arising from an announcement made by Aveo to the ASX on 14 August 2019 that it had entered into the Scheme Implementation Deed for the proposed acquisition of all of its outstanding securities by the Trust Scheme and Company Scheme by two entities controlled by Brookfield. The terms of the schemes contemplate that securityholders would be entitled to receive total cash of $2.195 per security. Mr Hastings also referred to an alternative of conditional scrip consideration which would provide eligible Aveo securityholders with the possibility of participating in a “stub equity” vehicle which would give them future exposure to Aveo. I will refer further to that matter below.

4. Mr Hastings also referred to the structure of Aveo and its role as an operator and manager of retirement communities across Australia, to corporate information concerning AGL and Aveo Funds RE and to the fact that the Trust was registered as a managed investment scheme under Ch 5C of the Corporations Act. Mr Hastings also referred to the strategic review undertaken by Aveo which was the genesis of the schemes and to a recommendation made by an independent board committee that the boards of AGL and Aveo Funds RE approve entry into the Scheme Implementation Deed and put the schemes to the Aveo securityholders for consideration, and to the unanimous recommendation of the directors of AGL and Aveo Funds RE in respect of the schemes.

5. The Plaintiffs also read the affidavit dated 26 September 2019 of Ms Anna Wyke, who is the group company secretary, legal counsel and compliance manager of the Plaintiffs. Ms Wyke refers to information concerning AGL and Aveo Funds RE; to the background of the transaction and the nature of the proposed scheme consideration, including the scheme consideration of $2.15 cash or 2.15 units in AOG LP (to which I refer further below) for each Aveo security held, and the terms on which the scrip consideration was offered, which included both a minimum and maximum number of securities issued under that arrangement. Ms Wyke also referred to the treatment of certain securities that were on issue at the date of the schemes and to terms of the Scheme Implementation Deed, including provisions dealing with exclusivity and an amount payable to Brookfield if the schemes did not proceed for specified reasons. Ms Wyke also referred to relief which had been sought from the Australian Securities and Investments Commission (“ASIC”) in respect of the proposed schemes, to the independent expert’s report provided by KPMG Financial Advisory Services (Australia) Pty Ltd (“KPMG”) in respect of the schemes and to the process adopted for verification of the explanatory statement in common form.

6. The Plaintiffs also read an affidavit dated 26 September 2019 of Ms Roopa Paresh, who is a senior relationship manager employed by Computershare Investor Services Pty Ltd, which has been retained by AGL and Aveo Funds RE to provide services in relation to the administration of the proposed Company Scheme and Trust Scheme. Ms Paresh set out the arrangements which would be adopted in respect of email transmission of documents to shareholders and unitholders in respect of the proposed schemes.

7. The Plaintiffs read an affidavit dated 26 September 2019 of Ms Rebecca Maslen-Stannage, a solicitor acting for them in respect of the schemes, which referred to correspondence with ASIC in respect of the schemes. ASIC has advised the Plaintiffs’ solicitors (Ex RMS-1, Tab 4), that it had had a reasonable opportunity to review the draft scheme booklet and did not currently propose to appear to make submissions or intervene to oppose the schemes at the first Court hearing. The exhibit to Ms Maslen-Stannage’s affidavit also included a draft of the scheme booklet, prior to several amendments made in the course of the hearing, and a proposed ASX and media release to be made by the Plaintiffs on registration of the scheme booklet with ASIC.

8. The Plaintiffs read the affidavit dated 26 September 2019 of Mr William Allen, an authorised representative of KPMG and a partner in the KPMG Australian partnership, who set out his background and experience and his role in preparing an independent expert’s report in relation to the proposed Company Scheme and Trust Scheme. Mr Allen confirmed that the opinions expressed in that independent expert’s report were opinions that he held and he had not become aware of any facts, matters or circumstances since the date of that report which would cause him to change the opinions expressed in it, and that he had prepared that report in accordance with ASIC Regulatory Guide 111, Content of expert reports and ASIC Regulatory Guide 112, Independence of experts.

9. The Plaintiffs read an affidavit dated 26 September 2019 of Mr Nicholas Britten-Jones, who is a senior vice-president at Brookfield and a director of BidCo. Mr Britten-Jones referred to the steps taken in respect of verification of the information included in the scheme booklet in respect of BidCo and also referred to Brookfield’s requirement as to the inclusion of exclusivity provisions and a break fee in respect of the proposed schemes.

10. The Plaintiffs also read the affidavit dated 24 September 2019 of Mr Alan Bossin, who is a partner in the firm of Appleby Global (Bermuda) Limited, which represents AOG LP in relation to the proposed acquisition by the several entities controlled by Brookfield of shares in AGL and units in the Trust. Mr Bossin referred to the scope of the obligations of AOG LP under a Deed Poll executed in respect of the schemes and his affidavit exhibited a legal opinion which he had provided in respect of the enforceability of those obligations under the law of Bermuda. Mr Bossin expressed the view, inter alia, that the Deed Poll had been duly executed and delivered by the general partner of the relevant partnership and constituted valid and binding obligations of that company acting in that capacity, which were enforceable against that company and the partnership. Mr Bossin also addressed provisions which would permit enforcement in Bermuda of a final and conclusive judgment of a New South Wales Court.

11. The Plaintiffs also read the affidavit dated 24 September 2019 of Mr Walter McDonald, a non-executive director of AGL and of Aveo Funds RE, who consented to act as chair of each of the Company Scheme meeting and the Trust Scheme meeting. The Plaintiffs also read the affidavit dated 26 September 2019 of Mr James Frayne, who is a non-executive director of AGL and of Aveo Funds RE, and consented to act as alternate chairperson of the Company Scheme meeting and Trust Scheme meeting if Mr McDonald was not able to act in that capacity.

12. The application for judicial advice in respect of the Trust Scheme was also supported by a Statement of Facts (Ex SOF-1) and bundle of documents supporting that Statement of Facts (Ex SOF-2), which corresponded to the documents tendered in respect of the Company Scheme.

Terms of the schemes, Scheme Implementation Deed, directors’ recommendation and independent expert report

13. The proposed schemes provide for a straightforward alternative of cash consideration payable to Aveo securityholders of $2.15 cash for each Aveo stapled security or a more complex conditional scrip alternative, by which an Aveo securityholder can elect to receive 2.15 units (“LP Units”) in AOG LP, a Bermudan limited partnership which will hold Class B securities in Hydra RL TopCo Pty Ltd (“TopCo”), an Australian company which will indirectly hold the shares in BidCo which, as I noted above, will in turn hold the shares in AGL and the units in the Trust. There are conditions to an election by Aveo securityholders to take up the scrip alternative and Ineligible Foreign Securityholders (as defined) may only elect the cash consideration.

14. Aveo securityholders who elect the scrip consideration alternative and who are issued LP Units under the schemes will hold those units subject to the terms of an AOG LP Partnership Agreement. AOG LP will in turn hold its interest in Aveo through B class securities in TopCo (with Brookfield holding the A class securities), and the rights of Aveo securityholders who elect the scrip alternative will also be affected by the terms of TopCo’s constitution and a TopCo Shareholders Deed. These include restrictions on transfer including rights of first refusal, limited rights to information, limited rights to appoint directors of TopCo and rights and obligations to sell (through “drag along” and “tag along” rights) if Brookfield initiates an exit from its investment in Aveo. These matters would plainly warrant close consideration by a shareholder considering taking up the scrip alternative.

15. The rights and obligations of holders of LP Units under the AOG LP Partnership Agreement, TopCo’s constitution and the TopCo Shareholders Deed are summarised in section 10.1 of the scheme booklet, and these documents are included as annexures to the scheme booklet. The different regulatory regime applicable to LP Units and a comparison with the regime applicable to Aveo stapled securities is also set out in sections 10.2 and 11.4 of the scheme booklet. The scheme booklet discloses in clear (and, at least in its original form, somewhat repetitive) terms the significant risks involved in an investment in AOG LP as a foreign unlisted limited partnership.

16. Under the terms of the Scheme Implementation Deed, AGL, Aveo Funds RE, BidCo and AOG LP (acting through its general partner, AOG GP Ltd) agreed to implement the schemes subject to satisfaction, or waiver, of various conditions precedent, including Aveo securityholder and Court approval. The Scheme Implementation Deed provides for BidCo to deposit an amount equal to the aggregate cash consideration payable to Aveo securityholders who elected to receive the cash consideration, in cleared funds in a trust account operated by AGL as trustee for the Aveo securityholders, no later than the business day before the Implementation Date (as defined) for the schemes. Appropriately, that trust account is an account in Australia with an Australian authorised deposit-taking institution (Wyke 26.9.19 [18]).

17. On the Implementation Date, AGL must pay the cash consideration to each Aveo securityholder who is entitled to receive cash consideration from the trust account. On the Implementation Date, TopCo must also issue TopCo Class B securities to AOG LP equivalent to the number of LP Units to which Aveo securityholders who elect the scrip alternative are entitled under the schemes; AOG LP must issue LP Units to each Aveo securityholder who made a valid election to receive the scrip consideration. On that date, all of the shares in AGL and units in the Trust will be transferred to BidCo. The obligations of BidCo, TopCo and AOG LP (acting through its general partner, AOG GP Limited) under the schemes are supported by a deed poll to be given by them in favour of the Aveo securityholders.

18. Mr Williams points out that three resolutions are proposed to give effect to the schemes. Two are to be considered by unitholders of the Trust at a general meeting of Trust unitholders. These resolutions would amend the constitution of the Trust in accordance with the Aveo Group Trust Supplemental Deed to give effect to the Trust Scheme and would authorise the acquisition of all the units in the Trust by BidCo under item 7 of s 611 of the Act. The third resolution, to be considered by AGL securityholders at the scheme meeting to be convened under s 411(1) of the Act, would, if passed, approve the Company Scheme. The Court-ordered Company Scheme meeting under s 411 of the Act would be held concurrently with the Trust Scheme meeting.

19. On implementation of the proposed schemes, Aveo will become wholly owned by BidCo, which would be either wholly owned by Brookfield (if a 10% minimum scrip election condition is not met) or majority owned (between 70% and 90%) by Brookfield with a minority interest (of between 10% and 30%) held by those Aveo securityholders who elect the scrip consideration, and Aveo Group would de-list from the ASX.

20. Aveo’s directors have unanimously recommended that Aveo securityholders vote in favour of the schemes, in the absence of a superior proposal, and subject to the independent expert continuing to conclude that the schemes are in the best interests of Aveo securityholders (scheme booklet, section 3.2). Those directors have expressly made that recommendation based on the cash consideration, and made no recommendation in relation to the scrip consideration, noting the speculative nature of the LP Units and the fact that the appropriateness of LP Units for Aveo securityholders will depend significantly on the characteristics and risk profile of individual investors.

21. In their independent expert’s report (scheme booklet, Annexure A), KPMG have also had regard to the cash consideration, as the default consideration available to all Aveo securityholders, in expressing their view as to the schemes. KPMG has concluded, with reference to the cash consideration, that the schemes are fair and reasonable and in the best interests of Aveo securityholders, in the absence of a superior offer, having regard to their assessed value of an Aveo stapled security, the amount of the cash consideration offered under the schemes and the alternatives to the schemes available to Aveo securityholders. That report also records KPMG’s view that it is not possible reliably to estimate the value for which the LP Units issued as scrip consideration might ultimately be realised; that there are a number of disadvantages and risks associated with that scrip consideration; and that, if KPMG had assessed the fairness of the schemes based wholly on the scrip consideration, it would likely have concluded that the transaction was not fair (scheme booklet, section 7.10). Plainly, Aveo securityholders would be well advised to assess the implications of those matters in determining whether to elect the scrip consideration in preference to the cash consideration.

The Company Scheme

22. Mr Williams submits, and I recognise that, the Court will order the convening of the scheme meeting and approve a draft explanatory statement if it is satisfied that the plaintiff is a Part 5.1 body; the proposed scheme is an arrangement within the meaning of s 411 of the Act; the scheme booklet will provide proper disclosure to members; the scheme is bona fide and properly proposed; ASIC has had a reasonable opportunity to examine the terms of the scheme and the explanatory statement and make submissions and has had 14 days’ notice of the proposed hearing date; the procedural requirements of the Supreme Court (Corporations) Rules 1999 (NSW) have been met; and there is no apparent reason why the scheme should not, in due course, receive the Court’s approval if the necessary majority of votes is achieved: Re Staging Connections Group Ltd [2015] FCA 1012 at [19]-[20]; Re Atlas Iron Ltd [2016] FCA 366; (2016) 112 ACSR 554 at [30]; Re DUET Finance Ltd [2017] NSWSC 415 at [15]; Re BIS Finance Pty Ltd [2017] NSWSC 1713 at [20].

23. There is evidence that AGL is a Part 5.1 body and the proposed scheme is an arrangement within the meaning of s 411 of the Act. There is no reason to doubt that the scheme booklet provides proper disclosure to Aveo securityholders, and I will address its content further below. I have referred to evidence of a verification and due diligence process above. AGL and Brookfield have committed themselves to propounding the Company Scheme under the Scheme Implementation Deed and there is no reason to doubt that the scheme is bona fide and properly proposed. As I noted above, ASIC has advised the solicitors for AGL that it had been given at least 14 days’ notice of the hearing of the application and had had a reasonable opportunity to examine the terms of the scheme and draft explanatory statement and did not currently propose to appear to make submissions or intervene to oppose the scheme at the first hearing. ASIC reserved its position as to a statement under s 411(17)(b) of the Corporations Act that it had no objection to the Company Scheme until the second Court hearing, in accordance with its usual practice. The Court will address that question at that second court hearing.

24. As Mr Williams also points out, at the first Court hearing, the Court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it receives the statutory majority at the meeting, the Court would be likely to approve it on the hearing of a petition which is unopposed: F T Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 at 72, approved in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 504. Mr Williams in turn refers to Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252 at [36] and [44], approved in Re CSR Ltd (2010) 183 FCR 358 at [58], where French J observed that:

“It is however important to bear in mind that, by granting leave to convene the meeting, the court does not give its imprimatur to the proposed scheme. If the arrangement is one that seems fit for consideration by the meeting of members or creditors and is a commercial proposition likely to gain the court’s approval if passed by the necessary majorities, then leave should be given … The court is not required to give close consideration to the effects of the scheme upon individual members of the classes of members or creditors affected. …

The court at the stage of ordering a meeting to approve a scheme does not ordinarily go very far into the question of whether the arrangement is one which warrants the approval of the court … That question is to be answered when the scheme returns to the court for final approval. That is not to exclude the possibility that a scheme may appear on its face so blatantly unfair or otherwise inappropriate that it should be stopped in its tracks before going any further.” [citations omitted]

25. As Mr Williams points out, the Court is concerned at the first Court hearing with 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 even for it to be submitted for consideration: Re Abacus Funds Management Ltd [2005] NSWSC 1309; (2006) 24 ACLC 211 at [23]. The Court is not required to be satisfied that no better scheme could have been proposed, and the question is whether it is reasonable to suppose that sensible business people might consider the arrangement proposed is of benefit to members: Re Centrebet International Ltd [2011] FCA 870 at [29]; Re SAI Global Ltd [2016] FCA 1312 at [18]; Re DUET Finance Ltd above at [14]. I will address several specific issues in respect of the Company Scheme below. Nothing has emerged from the hearing to suggest that that scheme is not properly put to Aveo securityholders for their consideration or could not be approved at the second Court hearing if it receives the requisite securityholder approvals.

Application for judicial advice in respect of the Trust Scheme

26. The judicial advice application in respect of the Trust Scheme concerns a proposed amendment to the constitution of the Trust to effect what is commonly referred to as a “trust scheme”, consistent with the principles noted in Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107 and in Guidance Note 15 issued by the Takeovers Panel. If approved by unitholders in the Trust, those amendments would provide for the transfer of all units in the Trust to BidCo in consideration for the cash or scrip consideration described above.

27. As Mr Williams rightly points out, registered managed investment schemes are not Part 5.1 bodies for the purposes of the scheme provisions in Pt 5.1 of the Act. However, it is now common in a “trust scheme” for a responsible entity to seek judicial advice in a two-stage process by analogy with a company scheme under Pt 5.1 of the Act: Re Mirvac Ltd above; Re Macquarie Goodman Funds Management Ltd (2004) 52 ACSR 194; Re DUET Management Company 1 Limited [2013] NSWSC 817; (2013) 95 ACSR 34; Re Sydney Airport Holdings Limited [2013] NSWSC 1665. Mr Williams also rightly notes that the principles and practice for an application for judicial advice under s 63 of the Trustee Act 1925 (NSW) in connection with a trust scheme are now well settled, in decisions following Re Mirvac Ltd above. That practice typically includes an application by the responsible entity of the trust, at the first Court hearing, for judicial advice that it is justified in propounding resolutions to implement the scheme and in proceeding on the basis that proposed amendments to the constitution of the registered managed investment scheme to implement the trust scheme would be within the powers of alteration conferred by that document and s 601GC of the Act: Re Mirvac Ltd above at [46]–[47]; Re DUET Management Company 1 Limited above at [9]. That judicial advice, and the right of unitholders to appear at the second hearing and object to the Trust Scheme, is then disclosed in the explanatory statement sent to unitholders for a meeting to consider the resolutions to implement the scheme; unitholders meet to consider and vote on the resolutions; and the responsible entity can seek judicial advice at the second hearing that, having regard to the result of voting at the scheme meeting and any other relevant circumstances, it is justified in implementing the scheme.

28. I will deal with several specific issues that extend to the Trust Scheme below. I am otherwise satisfied that Aveo Funds RE, as responsible entity of the Trust, would be justified in proceeding on the basis that the making of the proposed amendments to the Trust’s constitution in connection with the Trust Scheme, following the requisite approval by unitholders, would be within its powers, including the power of alteration conferred by the Trust’s constitution and s 601GC of the Corporations Act.

The scheme booklet

29. As I noted above, the scheme booklet tendered at the hearing contained detailed disclosure, at several points, of the risks involved in Aveo securityholders choosing to invest in AOG LP, as an unlisted entity in Bermuda, as an alternative to accepting the cash consideration for the schemes. That risk disclosure is fulsome and addresses a number of the issues which would be involved in an investment in a security in another jurisdiction, which include legal and liquidity issues arising from the fact that that security will not be listed.

30. There is, of course, a need for balance in explanatory material in respect of a scheme between adequacy of risk disclosure and the aspiration of clear and concise disclosure to securityholders. That balance may, in particular cases, be difficult to achieve. In this case, disclosure of these risks is made in the chairman’s letter, which one would expect may well be the first document read by Aveo securityholders who wish to properly understand the schemes, and also, in detail, in the scheme booklet. That disclosure was made in substantially the same form at several points in the scheme booklet, raising a question whether the extent of repetition of that disclosure might undermine the objective of clear and concise disclosure in the scheme booklet.

31. It would be preferable if some of the risk disclosures repeated in the same form were replaced by summary statements and cross references, if that is acceptable to ASIC, and it would be open to the scheme proponents to take that course under the orders that the Court will make. That might be particularly desirable in circumstances where those risk disclosures are repeated in close proximity, on one occasion, occurring at length within three pages of each other. I recognise that is a matter that is not wholly within the Plaintiffs’ control, given ASIC’s role in respect of the review of scheme booklets. For that reason, and because Aveo securityholders plainly have an interest in receiving the opportunity to consider the transaction proposed by the schemes, I approved the scheme booklet in its present form, while leaving open the possibility that those amendments may be made with ASIC’s agreement.

32. Secondly, it seemed to me desirable that, where the scheme booklet addresses the risks attached to the business and operations of Aveo in the middle and long term, it should also cross-refer to specific risks in the near term, which were disclosed in summary form in the chairman’s letter and in some detail in the independent expert’s report. A disclosure was proposed, in the course of the hearing, which seems to me appropriately to address those matters, by a summary of those risks and by cross references to where they are addressed in the chairman’s letter and the independent expert’s report.

Specific issues arising in respect of the proposed schemes

33. In accordance with the common practice at a first Court hearing in respect of a scheme, Mr Williams identified several aspects of the schemes which it is appropriate to bring to the Court’s attention.

Scrip consideration alternative

34. I have referred above to the somewhat complex alternative of scrip consideration which is available to Aveo securityholders under the schemes. Mr Williams notes that the structure adopted for the issue of that scrip consideration takes a form that is colloquially referred (I interpolate, possibly not in wide public usage) as “stub equity”, which involves a minority equity interest offered to shareholders of a scheme company or a takeover target by an acquiring entity or bidder. Mr Williams points out that the rationale for the offer of “stub equity” is to allow existing shareholders in the target entity an opportunity to continue to have an equity interest in that entity, on terms that allow the acquirer control over that entity and the ability to deal with the company or its assets. Mr Williams also notes that offers of “stub equity” are “not uncommon” in schemes where an acquirer is a private equity investor, and such an offer will then be made (as here) on terms that ensure that the acquirer can “exit” its investment at a time of its choosing by dealing with all of the equity at the same time, by providing “drag along” and “tag along” rights, and typically limiting the rights of minority equity interests to participate in management.

35. Mr Williams fairly recognises that ASIC has expressed concern about offers of “stub equity” consideration in “control transactions”, at least where the consideration offered is shares in an Australian proprietary company and/or accepting shareholders are required to hold the offered scrip consideration through a custodial arrangement: ASIC Consultation Paper 312, Stub equity in control transactions (June 2019); Re Capilano Honey Ltd [2018] FCA 1568 at [35]-[53]. Mr Williams submits, and I accept, that these issues do not arise here, where the proposed “stub equity” comprises units in a Bermudan limited partnership, and there is no requirement that Aveo securityholders which take up the scrip alternative hold LP Units through a custodian. There is no suggestion in ASIC Consultation Paper 312 that ASIC seeks to prevent offers of securities in an unlisted foreign body being made to target securityholders (ASIC Consultation Paper 312, [40(a)(ii)]), and ASIC has not opposed the making of orders convening the scheme meeting or the giving of judicial advice in the terms sought. No doubt, an investment of securities in an unlisted foreign body carries its own risks, but those are, as I have noted above, fully disclosed by the scheme booklet.

36. As Mr Williams points out, there is no public policy reason why an acquirer ought not be able to offer scrip consideration in the form of securities in a foreign entity, provided adequate disclosure is made of the terms of issue and the risks of an investment in such securities. The Act permits the offer within Australia of securities of foreign bodies, including unlisted issuers, and takeovers of Australian companies under which the bid consideration consists of securities in a foreign body are permitted, and are not uncommon. Other Pt 5.1 schemes have also been approved where the consideration payable to scheme shareholders included securities in a foreign body not subject to the Australian continuous disclosure or takeover provisions: Re eircom Holdings Ltd [2009] FCA 1418.

37. For these reasons, I accept that the fact that the scrip consideration alternative is made available to Aveo securityholders, with disclosure of its risks, does not warrant the Court declining to convene the scheme meeting or give the judicial advice sought in respect of the Trust Scheme.

Treatment of equity incentive rights and Mr Grady’s recommendation

38. Second, Mr Williams draws attention to an issue as to treatment of equity incentive rights and a recommendation made by Mr Grady, an executive director and chief executive officer of Aveo.

39. Mr Williams points out that Aveo has issued, in addition to ordinary shares which are subject to the Company Scheme, a number of performance rights, “growth rights” and “short term incentive deferred securities” issued under the Aveo’s long term and short term management incentive plans. Holders of these incentive rights include Mr Grady and Mr Hunt, the chief financial officer of Aveo. An independent committee of Aveo’s board has determined that, pursuant to the terms of the Aveo Employee Share Scheme, these incentive rights will vest on or after the Effective Date (as defined) and their holders will be entitled to the consideration under the schemes in respect of the Aveo stapled securities to which they would be entitled upon vesting of the incentive rights.

40. Mr Williams also submits that the fact that Mr Grady has made a recommendation, as a director, in favour of the schemes, where he has an interest in the outcome of the votes by reason of the treatment of his equity incentives under the schemes, should not cause the Court to decline to convene the Company Scheme meeting or give the judicial advice sought. Mr Williams refers to my decision in Re Villa WorldLtd [2019] NSWSC 1207, where I preferred the approach adopted in Re SMS Management & Technology Ltd [2017] VSC 257 and Re Kidman Resources Ltd [2019] FCA 1226 to that taken in Re Gazal Corporation Ltd [2019] FCA 701 and Re Navitas Ltd (No 2) [2019] WASC 218, and accepted that there is no general rule or principle that a director should not make a recommendation on the basis of an interest in the outcome of the scheme arising from incentive or performance rights, provided adequate disclosure of that interest is made: see also Re GBST Holdings Ltd [2019] NSWSC 1280.

41. Mr Williams submits that reg 8301(a) of Sch 8 of the Corporations Regulations 2001 (Cth) contemplates that Mr Grady as a director should make a recommendation in respect of the schemes unless he does not feel justified in doing so; Aveo securityholders would likely benefit from Mr Grady’s recommendation, where the chief executive officer would ordinarily be well placed to express an opinion on the desirability of the schemes; and there is appropriate disclosure of the nature of Mr Grady’s interest in the schemes to allow securityholders to assess the weight to be given to Mr Grady’s recommendation (scheme booklet, section 3.2). Mr Williams also submits that, consistent with the approach adopted in Re Villa WorldLtd above, where Mr Grady was entitled to and did participate in Aveo’s decision to enter into the Scheme Implementation Deed and to propose the schemes to Aveo securityholders, there would be little utility and real inconsistency in then preventing him from making a recommendation to Aveo securityholders consistent with the view he took as a member of Aveo’s board. Mr Williams also points out that, in the several cases that have addressed this issue, no Court has declined to convene a meeting or approve a scheme by reason of an interested director’s recommendation where full disclosure is given.

42. For these reasons, I am satisfied that the fact of Mr Grady’s recommendation to Aveo securityholders is not a reason not to convene the scheme meeting or give the advice sought in respect of the Trust Scheme. Mr Williams submits, and I accept, that holders of incentive rights who are also Aveo securityholders are not in a separate class of Aveo securityholders by reason only that they also hold incentive rights: Re Foster’s Group Ltd (No 2) [2011] VSC 547 at [38]-[43]; Re Villa World Ltd above at [29].

Treatment of Ineligible Foreign Securityholders

43. Mr Williams points out that Aveo securityholders whose address are recorded in the share register as outside Australia, New Zealand, Malaysia, British Virgin Islands or Bermuda are treated as “Ineligible Foreign Securityholders” under the schemes, unless BidCo and Aveo agree in writing that it is lawful and not unduly onerous or impractical to issue LP Units to them under the schemes. Ineligible Foreign Securityholders will receive the cash consideration under the schemes and any election by them to receive the scrip consideration will be invalid. Sections 4.3 and 14.6 of the scheme booklet disclose that matter. Mr Williams also points out that it is not proposed that “Ineligible Foreign Securityholders” constitute a separate class: Re Hills Motorway Ltd (2002) 43 ACSR 101 at 104; Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 at [8]. These matters also do not give rise to any reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme.

Exclusivity provisions and reimbursement fee

44. Mr Williams points out that cl 12 of the Scheme Implementation Deed is an exclusivity provision which includes a “no shop”, a “no talk”, and a “no due diligence” restriction and “notification” and “matching right” obligations. Mr Williams submits, and I accept, that exclusivity provisions in this form are now commonplace in schemes of arrangement and not inconsistent with Guidance Note 7: Lock-up devices issued by the Takeovers Panel: Re Villa World Ltd above at [23]. Mr Williams also submits that the Court will be concerned to ensure that any exclusivity period should be for no more than a reasonable period capable of precise ascertainment; an exclusivity clause directed at dealing with an unsolicited alternative merger proposal should be subject to a fiduciary carve out; and the provision must be clearly disclosed in the explanatory statement sent to shareholders: Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 at [9]. Each of these requirements is satisfied here and, although the “no shop” restriction and “matching right” are not subject to fiduciary carve-outs, that approach has been accepted in the case law: Re Bigair Group Ltd [2016] FCA 1296 at [21]; Re DUET Finance Ltd above at [24].

44. Mr Williams also points to a reimbursement fee of $13 million potentially payable by Aveo to Brookfield or its nominee, as set out in cl 13 of the Scheme Implementation Deed and summarised in sections 5.4(d) and 14.1(e) of the scheme booklet. That fee is only payable in specified circumstances and is not triggered solely by Aveo securityholders failing to approve the schemes and should not be a disincentive to shareholders taking that approach, if they wish, in their consideration of the proposal: Re Bolnisi Gold NL (No 2) (2007) 65 ACSR 510 at 513. There is evidence (Wyke 26.9.19 [54]; Britten-Jones 26.9.19 [20]), albeit of a common and somewhat formulaic character, that the reimbursement fee was negotiated between the parties in the course of arms’ length negotiations, where (as is plainly the case here) all parties were represented by experienced advisers: Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at 411. As Mr Williams points out, the reimbursement fee represents approximately 1% of the total equity value of Aveo of $1.3 billion having regard to the value of the cash consideration and is consistent with the Takeovers Panel’s Guidance Note 7: Lock-up devices, and payment of break fees of that percentage is also commonplace in schemes of this kind: Re Mosaic Oil NL [2010] FCA 985 at [19].

45. These matters also do not provide reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme.

Performance risk

47. The Courts generally also consider the extent of any performance risk as to whether a bidder will comply with its obligation to pay the scheme consideration to scheme members. Several cases have identified the need to address performance risk by ensuring that there is a mechanism for scheme participants to enforce the right to entitlements that are to be received under a scheme: Re APN News & Media Ltd above; Re DUET Finance Ltd above at [18]. Mr Williams submits, and I accept, that the provision for payment of the cash consideration in respect of the schemes to a trust account with an Australian ADI operated by AGL as trustee for Aveo securityholders entitled to the cash consideration, prior to transfer of their Aveo stapled securities, is a safeguard against the risk that Aveo securityholders will suffer delay or default in the provision of the scheme consideration after their Aveo stapled securities have been transferred to BidCo. The provision for the issue of LP Units to Aveo securityholders entitled to receive such units prior to the transfer of their Aveo stapled securities similarly addresses that issue. This matter also does not provide reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme.

Section 411(17)

48. Mr Williams rightly points out that the Court will address the question raised by s 411(17) of the Act on an application to approve a scheme at the second Court hearing: Re Macquarie Private Capital A Ltd [2008] NSWSC 323 at [25]-[37]. It is therefore not necessary for the Court, at the first Court hearing, to address that question. In any event, as I noted above, ASIC has not indicated that it intends to appear and make submissions on this issue at this hearing. This matter does not provide reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme.

Deemed warranty

49. The schemes also provide for a deemed warranty by Aveo securityholders that their Aveo stapled securities will be free from encumbrances (Company Scheme, cl 8.2(b); Trust Constitution, cl 27.11(b)). That matter is disclosed in the scheme booklet at section 7.14. The case law has recognised the legitimacy of deemed warranty provisions, provided that appropriate disclosure is made, since their purpose and effect is to ensure that a scheme participant whose shares are subject to an encumbrance is not unfairly advantaged: Re APN News & Media Ltd above at [57]–[63]; Re DUET Management Company 1 Ltd above at [23]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26]. This matter also does not provide reason not to order the convening of the scheme meeting or give the advice sought in respect of the Trust Scheme.

Orders

50. For these reasons, I was satisfied that the Company Scheme was an arrangement for the purposes of s 411 of the Corporations Act and that, having regard to the evidence and matters to which I referred above, an order should be made convening the scheme meeting and approving the scheme booklet for distribution to shareholders. I was also satisfied that judicial advice should be given that Aveo Funds RE is justified in propounding resolutions to implement the proposed Trust Scheme and proceeding on the basis that the constitutional amendments to implement the Trust Scheme would be within the constitutional powers of alteration and s 601GC of the Corporations Act.

51. For these reasons I made the orders sought by the Plaintiffs at the conclusion of the first hearing. For completeness, I note that order 6 provides for dispatch of the scheme booklet by electronic means to those Aveo securityholders who have an electronic address for the purposes of receiving notification of notices of any meeting, and such an order is commonly made. The orders largely exclude the operation of r 2.15 of the Supreme Court (Corporations) Rules and also seek dispensation from specified provisions of the Insolvency Practice Rules (Corporations) 2016 (Cth), which should be given consistent with the approach taken in Re Viralytics Ltd [2018] FCA 637 at [37]-[40]. Order 15 also varies the prescribed form of advertisement of the second Court hearing to permit that advertisement to be published prior to the date of the Company Scheme meeting and to incorporate notice of Aveo Funds RE’s application for judicial advice to be made at the second Court hearing.

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Decision last updated: 13 October 2019