Re DUET Finance Ltd

[2017] NSWSC 415

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of DUET Finance Limited; In the matter of DUET Company Limited; In the matter of DUET Investment Holdings Limited; In the matter of DUET Finance Limited as responsible entity of DUET Finance Trust [2017] NSWSC 415
Hearing dates:	8 March 2017
Decision date:	08 March 2017
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The Court orders pursuant to s 411 of the Corporations Act 2001 (Cth) that the First to Third Plaintiffs convene meetings of shareholders for the purpose of considering and, if thought fit, agreeing to proposed schemes of arrangement and makes ancillary orders. The Court gives judicial advice that the Fourth Plaintiff, as responsible entity for a managed investment scheme, would be justified in propounding resolutions to unitholders to implement a corresponding scheme and proceeding on the basis that the amendments to be made to the constitution of the managed investment scheme to implement the corresponding scheme would be within the powers of alteration conferred by that document and s 601GC of the Corporations Act 2001 (Cth).
Catchwords:	CORPORATIONS – Arrangements and reconstructions – Schemes of arrangement or compromise – Applications 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 schemes of arrangement – where schemes of arrangement involve the Plaintiffs’ shareholders transferring their shares to another company for cash consideration – 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 convening a meeting of unitholders to approve amendments to the trust constitution to give effect to a proposed scheme – whether proposed amendments are within the powers of alteration conferred by the constitution of the managed investment scheme and s 601GC of the Corporations Act 2001 (Cth).
Legislation Cited:	- Corporations Act 2001 (Cth), Pt 5.1, ss 411, 601GC - Supreme Court (Corporations) Rules (NSW) - Trustee Act 1925 (NSW), s 63
Cases Cited:	- Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 - Cleary v Australian Cooperative Foods Ltd [1999] NSWSC 991; (1999) 32 ACSR 701 - FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 - Re ACM Gold Ltd; Re Mt Leyshon Gold Mines Ltd [1992] FCA 89; (1992) 34 FCR 530 - Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 - Re Archean Gold NL (1997) 23 ACSR 143 - Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 - Re Aspen Group Ltd [2015] NSWSC 1718 - Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 - Re BigAir Group Ltd [2016] FCA 1296 - Re Brambles Industries Ltd (2006) 59 ACSR 501; [2006] FCA 1273 - Re DUET Management Company 1 Limited [2013] NSWSC 817; (2013) 95 ACSR 34 - Re Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 137 - Re Intecq Ltd [2016] NSWSC 1429 - Re Investa Properties Limited [2007] FCA 1104; (2007) 25 ACLC 1186 - Re Macquarie Capital Alliance Ltd [2008] NSWSC 745; (2008) 67 ACSR 484 - Re Macquarie Communications Infrastructure Group [2009] NSWSC 487 - Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107 - Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 33 ACSR 595 - Re Orion Telecommunications Ltd [2007] FCA 1389 - Re Prime Infrastructure Holdings Ltd [2010] NSWSC 1104; (2010) 80 ACSR 193 - Re SAI Global Ltd [2016] FCA 1312 - Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 - Re The Trust Company Ltd [2013] NSWSC 1680 - Re Toll Holdings Ltd [2015] VSC 123 - Re Veda Group Ltd [2015] FCA 1506 - Re Webcentral Group Ltd [2006] FCA 937 - Re Wridgways Australia Ltd [2010] FCA 1187
Texts Cited:	- T Damian & A Rich, Schemes, Takeovers and Himalayan Peaks: The use of schemes of arrangement to effect change of control transactions, 3rd ed, 2013
Category:	Principal judgment
Parties:	2017/63852 DUET Finance Limited (Plaintiff) 2017/63853 DUET Company Limited (Plaintiff) 2017/63854 DUET Investment Holdings Limited (Plaintiff) 2017/66399 DUET Finance Limited as responsible entity of DUET Finance Trust (Plaintiff)
Representation:	Counsel: I M Jackman SC (Plaintiff – in each proceeding) D F C Thomas (CK William Australia Bidco Pty Ltd – in each proceeding)   Solicitors: Allens (Plaintiff – in each proceeding) King & Wood Mallesons (CK William Australia Bidco Pty Ltd – in each proceeding)
File Number(s):	2017/63852; 2017/63853; 2017/63854; 2017/66399

Judgment

1. After a first court hearing in respect of these four inter-conditional schemes, I made orders in accordance with those sought by the Plaintiffs and delivered short reasons for judgment, on the basis that I would deliver more detailed reasons in due course. These are my more detailed reasons for making those orders. I have drawn on the helpful submissions made by Mr Jackman, who appeared for the Plaintiffs, in support of the application in this judgment.

The nature of and background to the application

2. These four proceedings are concerned with four inter-conditional schemes, being three company schemes under s 411 of the Corporations Act 2001 (Cth) and a trust scheme in respect of which judicial advice is sought under s 63 of the Trustee Act 1925 (NSW), which would implement the acquisition of all issued securities in the DUET group (“DUET”) by CK William Australia Bidco Pty Ltd (“Bidco”). These proceedings were heard together at this first hearing and an order was made that evidence filed in one proceeding be evidence in all of the proceedings. Although there is a degree of legal complexity in the application, its commercial structure is relatively straightforward. It involves a proposal for a cash acquisition of the three companies and the trust by a special purpose entity. That special purpose entity presently has one shareholder which, depending on events, may acquire, indirectly, the whole of the interest in the companies and the trust, if that acquisition is approved by shareholders and unitholders at meetings ordered by the Court, and orders approving the company schemes and giving advice in respect of the trust scheme are made at a second court hearing. The structure also provides, depending upon the outcome of shareholder meetings involving two other acquiring entities, which will occur in the near future, for those two other entities to acquire interests in that special purpose entity. I will expand on these matters below.

3. Each of DUET Finance Limited (“DFL”), DUET Company Limited (“DUECo”) and DUET Investment Holdings Limited (“DIHL”) seeks orders under s 411(1) of the Corporations Act that there be convened a meeting of all holders of fully paid ordinary shares of DFL, DUECo and DIHL respectively for the purpose of considering and, if thought fit, agreeing to the proposed company schemes and approving for distribution an explanatory statement (“scheme booklet”) proposed by those entities to accompany the notices of meeting for the scheme meetings.

4. DFL, as responsible entity of DUET Finance Trust (“DFT”), also seeks the opinion, advice and direction of the Court under s 63 of the Trustee Act that DFL would be justified in convening a meeting of all holders of fully paid units of DFT for the purpose of considering and, if thought fit, approving amendments to the DFT constitution contemplated in the resolutions to be put at that meeting to give effect to a proposed trust scheme; distributing the scheme booklet to all registered DFT unitholders; and proceeding on the basis that the making of the proposed amendments to DFT's constitution contemplated in the resolutions to be put at that meeting would be within the powers of alteration conferred by DFT's constitution and s 601GC of the Corporations Act.

5. By way of background, DUET owns and operates a portfolio of energy utility and infrastructure assets in Australia, the United States, the United Kingdom and Europe. It is a four-stapled structure listed on the ASX, consisting of three Australian-resident companies, namely, DFL in its personal capacity and as responsible entity of DFT, DUECo and DIHL, and a registered managed investment scheme, namely DFT. The shares in DFL, DUECo and DIHL and units in DFT are “stapled” together on a 1:1:1:1 basis and are traded together on the Australian Securities Exchange as one “DUET Security”.

6. On 14 January 2017, DUET entered into a scheme implementation agreement (“SIA”) with a consortium comprising Bidco, Cheung Kong Infrastructure Holdings Limited (“CKI”), Power Assets Holdings Limited (“PAH”) and Cheung Kong Property Holdings Limited (“CKP”), under which DFL, DUECo and DIHL each agreed to propose the schemes to their respective members and the unitholders of DFT, and under which Bidco would acquire all of the issued securities of DUET.

7. The proposal contemplated that, if the schemes are approved and all conditions precedent are satisfied, scheme participants (as defined in the scheme booklet) will receive, for each DUET Security held as at the “Scheme Record Date” (as defined in the scheme booklet, currently scheduled for 5 May 2017), $3.03, comprising the scheme consideration paid by Bidco of up to $3.00 per DUET Security and a special distribution from DFT of at least $0.03 per DUET Security prior to any withholding. The proposal contemplated that, if that special distribution was more than $0.03, the cash consideration payable by Bidco would be reduced by an equivalent amount, so that the total cash proceeds to scheme participants were $3.03 per security. On the other hand, if that special distribution and any Permitted DUET Distribution (as defined in the SIA) was less than $0.03 (prior to any withholding) per DUET Security, then DUECo and/or DIHL would determine to pay an unfranked dividend or dividends so that the special distribution plus any Permitted DUET Distribution would be equal to $0.03 (prior to any withholding) per DUET Security.

8. The proposal provides for Bidco to acquire all of the issued securities of DUET by way of the schemes, so that each DUET entity would become a wholly-owned subsidiary of Bidco. At the date of the SIA and the first court hearing, Bidco was indirectly wholly-owned by CKP. However, it was intended that CKI and PAH would also participate in the schemes, by obtaining an indirect ownership interest in Bidco before the date of implementation of the schemes. CKP, CKI and PAH are each listed on the Hong Kong stock exchange, and CKI and PAH each needed to obtain the approval of their respective shareholders to participate in the schemes, at shareholder meetings that were scheduled to be held on 14 March 2017. If those shareholder approvals were not obtained by CKI and PAH, then, subject to the Court’s orders and the satisfaction of all other conditions precedent, the schemes would still proceed with CKP as the sole owner of Bidco. The interests ultimately obtained by CKP, CKI and PAH would vary depending on the outcome of those meetings.

9. Mr Jackman submits, and I accept, that these arrangements are not an impediment to the making of the orders sought, because the schemes are not conditional on the shareholder approvals by CKI or PAH, and would be implemented by CKP alone, through Bidco, if those approvals were not obtained. Those arrangements are sufficiently disclosed in the scheme booklet. Those arrangements are not a matter which is likely to be of any real practical concern for shareholders and unitholders, because the structure of the schemes provides that their securities would not be transferred until monies were held in trust, providing appropriate security for their receipt of those monies, and second, because the structure of the Schemes is such that, if the two other entities do not participate in the bid vehicle, then CKP will fund the entirety of the consideration for the acquisition. The scheme booklet makes clear the sources of funding and there is no reason to doubt CKP’s capacity to fund that acquisition.

10. The evidence establishes that the scheme booklet (Ex LPP2) prepared by DUET has been the subject of a due diligence and verification process of a now common structure (Pickering 6.3.17 [27]–[35]) and that information in the scheme booklet which was provided by the members of the bidding consortium was also the subject of a verification process. KPMG Financial Advisory Services (Australia) Pty Ltd (“KPMG”) was engaged by DUET to prepare an independent expert's report, a draft of which is contained in Annexure A of the scheme booklet. That report expresses the view that the proposal comprising the DFL scheme, DUECo scheme, DIHL scheme and trust scheme is in the best interests of DUET securityholders. In his affidavit affirmed on 6 March 2017, Mr Ian Jedlin of KPMG, who had the overall responsibility for preparing that report, confirms that he holds the opinions in that report and intends (subject to any matters raised by the Court) to sign a copy of the report in its current form for inclusion in the final form of the scheme booklet, and was not aware of any facts or circumstances which would cause him to change the opinions expressed in that draft report.

11. PricewaterhouseCoopers Securities Ltd (“PwC”) was also engaged by DUET to prepare a summary of the Australian income tax implications of the schemes for inclusion in the scheme booklet and section 8 of the scheme booklet contains a draft version of that summary. By his affidavit sworn on 6 March 2017, Mr Mark Edmonds of PwC, who had overall responsibility for preparing that summary on behalf of PwC, confirmed that he held the opinions expressed to be those of PwC in that summary, and was not aware of any facts or circumstances which would cause him to change the opinions expressed in the draft summary.

12. Mr Jackman points out that arrangements have also been made with DUET's registry services provider, Computershare Investor Services Pty Ltd (“Computer-Share”) for the despatch of the scheme booklet, a personalised proxy form (Pickering 6.3.17, Ex LPP 1, tab 14) and the relevant foreign resident declaration form, as applicable, to DUET securityholders on the register as at 8 March 2017. Arrangements have also been made with Computershare for a further despatch of the scheme documents on a date closer to the scheme meetings to additional securityholders who have come on the register and copies of the scheme documents will be available for download from DUET and Computershare's websites until the date of the scheme meetings.

13. The appropriate consents to act as chair and alternative chair of the scheme meetings, in accordance with the requirements of the Supreme Court (Corporations) Rules (NSW), have been given (Halley 3.3.17, Goodwin 3.3.17).

Applicable principles

14. As I have noted above, three of the schemes in issue are company schemes within the scope of s 411 of the Corporations Act. It is, of course, well-established that the Court will generally approve the convening of a meeting of shareholders to consider a proposed scheme if it seems fit for consideration by a meeting of members and a commercial proposition that, if passed by the requisite majorities, is likely to be approved by the Court on an uncontested application: Re ACM Gold Ltd; Re Mt Leyshon Gold Mines Ltd [1992] FCA 89; (1992) 34 FCR 530 at 535; Re The Trust Company Ltd [2013] NSWSC 1680 at [5]. Mr Jackman rightly notes that the Court's approach at the first hearing is that it “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”: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1997) 3 ACLR 69 at 72; Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at 504. Mr Jackman also points out that, at the first hearing, the Court exercises a “supervisory jurisdiction” to review the scheme and raise any queries with the plaintiff, and the Court will intervene at the first hearing if it has any concerns, since the market will have regard to the orders made by the Court at the first hearing: Re Archean Gold NL (1997) 23 ACSR 143 at 146; Cleary v Australian Cooperative Foods Ltd [1999] NSWSC 991; (1999) 32 ACSR 701 at [46]. The Court does not substitute its commercial judgment for that of the members to whom the scheme is directed, but considers whether the scheme is one that sensible businesspeople might conclude is of benefit to members: Re Prime Infrastructure Holdings Ltd [2010] NSWSC 1104; (2010) 80 ACSR 193 at [13]; Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [13]; Re Aspen Group Ltd [2015] NSWSC 1718 at [11].

15. The matters that must be established at the first hearing include that the relevant plaintiff is a “Part 5.1 body”; that the proposed scheme is an “arrangement” within the meaning of s 411 of the Corporations Act; that the explanatory statement or scheme booklet will provide proper disclosure to members; that the scheme is bona fide and properly proposed; that ASIC has had a reasonable opportunity to examine the proposed scheme and explanatory statement and to make submissions, and has had at least 14 days’ notice of the date of the first court hearing; and that any other procedural requirements have been met: Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 33 ACSR 595 at [14]–[26]; Re Aspen Group Ltd above at [10]–[11]; Re Intecq Ltd [2016] NSWSC 1429 at [11].

16. The fourth scheme is a trust scheme. As Mr Jackman points out, it is now common practice in a trust scheme for the responsible entity to seek judicial advice in a two-stage process by analogy with schemes of arrangement under Part 5.1 of the Corporations Act: Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107; Re Macquarie Capital Alliance Ltd [2008] WSWSC 745; (2008) 67 ACSR 484; Re Macquarie Communications Infrastructure Group [2009] NSWSC 487; Re DUET Management Company 1 Ltd; [2013] NSWSC 817; (2013) 95 ACSR 34. A responsible entity may seek judicial advice at the first hearing that it is justified in propounding resolutions to implement the trust scheme and proceeding on the basis that the amendments to be made 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 Corporations Act: Re Mirvac Ltd above at [47]; Re Macquarie Capital Alliance Ltd above at [19]. That judicial advice, and the right of any unitholder in the managed investment scheme to appear at the second court hearing and object, is disclosed in the explanatory statement sent to unitholders for a meeting of unitholders to consider the resolutions to implement the trust scheme; and further judicial advice is sought at the second hearing that the responsible entity is justified in implementing the trust scheme: Re Mirvac Ltd above at [48].

Particular issues addressed in submissions - foreign resident capital gains tax

17. Mr Jackman points out that, under Australian foreign resident capital gains tax withholding rules, Bidco is required to assess whether a registered DUET securityholder is a “relevant foreign resident” and, in specified circumstances, must remit a specified percentage of the cash consideration otherwise payable to that securityholder to the Commissioner of Taxation for capital gains tax purposes. Mr Jackman draws attention to the process that Bidco will adopt to obtain such a declaration about residency or interest where appropriate, and that process is sufficiently addressed in the scheme booklet and scheme documentation.

Performance risk

18. Several cases have identified the need to address performance risk by ensuring that there is a mechanism for scheme members to enforce the right to entitlements that are to be received under a scheme: Re WebCentral Group Ltd [2006] FCA 937; Re Brambles Industries Ltd [2006] FCA 1273; (2006) 59 ACSR 501; Re APN News & Media Ltd [2007] FCA 770; (2007) 62 ACSR 400 at [23].

18. Mr Jackman submits, and I accept, that that issue is sufficiently addressed by the terms of the schemes and proposed cl 31.6 of DFT’s constitution if amended by the Supplemental Deed. Those provisions require that the cash consideration payable by Bidco be paid to a Trust Account (as defined in the Supplemental Deed), and provide for DFL, as trustee for the scheme participants, to make or procure the payment amounts due from that trust account to scheme participants. Mr Jackman points out that that arrangement is also supported by the deed poll by which each member of the bidding consortium covenants in favour of the scheme participants to observe, or procure that Bidco observe, their obligations under the schemes, which include the obligation to pay the relevant cash consideration into the trust account; that each member of the bidding consortium also indemnifies scheme participants in respect of this obligation; and that the DUET Securities will not be transferred to Bidco unless and until the cash consideration has been paid to the trust account. This structure avoids the risk that scheme participants would be left to a claim under the deed poll on breach of these obligations.

19. Mr Jackman recognises, in this context, that each consortium member's obligations under the deed poll are limited to the extent of its participation in the transaction. However, CKP's participation is 100% less the percentages of CKI’s and PAH’s participation, so that CKP assumes all of this liability if CKI and PAH do not obtain shareholder approval and participate in the transaction. As Mr Jackman points out, the result is that, if DUET securityholders are left to enforce the deed poll, they will have recourse at least to CKP and in any event to consortium members whose liability is, in aggregate, the total consideration payable. I am satisfied that the question of performance risk is not an obstacle to the Court ordering the convening of the scheme meetings or giving the advice sought in respect of the trust scheme.

Provisions dealing with competing proposals

21. Mr Jackman also points out that cll 12.2, 12.3 and 12.4 of the SIA contain, respectively, “no shop”, “no talk” and “no due diligence” restrictions on DUET. Mr Jackman points out that the “no talk” restriction in cl 12.3 and the “no due diligence” restriction in cl 12.4 of the SIA are subject to a “fiduciary carve-out”, which applies where not taking the relevant actions would likely be inconsistent with the DUET directors' duties under applicable law. Clause 12.8 of the SIA contains an acknowledgment by the parties that Bidco required DUET to agree to these measures in consideration for it proceeding with the transaction.

22. Mr Jackman refers to Re Arthur Yates & Co Ltd [2001] NSWSC 40; (2001) 36 ACSR 758 at [9], where Santow J observed that:

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

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

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

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

23. Mr Jackman submits, and I accept, that the “Exclusivity Period” (as defined) is capable of precise ascertainment and is properly defined, and is a reasonable period in the circumstances; the “no talk” and “no due diligence” restrictions are subject to directors’ fiduciary or statutory duties under cll 12.3 and 12.4 of the SIA; and the exclusivity provisions are sufficiently disclosed in the scheme booklet. Provisions of this kind have now been accepted in many cases: Re Orion Telecommunications Ltd [2007] FCA 1389 at [7]; Re AXA Asia Pacific Holdings Ltd above at [26]–[30]; Re The Trust Company Ltd above at [19]. I am satisfied that this matter should not prevent the Court ordering the convening of the scheme meetings or giving the advice sought in respect of the trust scheme.

Matching Right

24. Clause 12.5 of the SIA requires DUET to notify Bidco of third party approaches and confers on Bidco a matching right in respect of a “Competing Proposal” (as defined in the SIA). Mr Jackman rightly recognises a potential concern that matching rights can be anti-competitive, by deterring competing bidders, recognised in Takeovers Panel, Guidance Note 7 at [13]–[18] and in Re Wridgways Australia Ltd [2010] FCA 1187 at [13]–[25], although Jacobson J there held (at [21]) that the “overall effect” of the matching provision in that scheme was “pro-competitive”. Mr Jackman submits, and I accept, that, although cl 12.5 of the SIA requires DUET to communicate details of a Competing Proposal (as defined) to Bidco, and the clause in Wridgways provided that the target “may” communicate those details to the bidder, the terms of a Competing Proposal would likely need to be disclosed in any event, by reason of DUET’s continuous disclosure obligations. It seems to me unlikely that this provision would deter competing bids that might otherwise be made, since the process under this clause corresponds to the course that a prospective bidder would expect DUET to take, even without such a provision, in order to obtain the best possible offer if competing bidders emerged.

25. I also note that notification and matching rights of this kind have become reasonably common in schemes of arrangement since Re Wridgways Australia Ltd above: Re The Trust Company Ltd above at [19]; Re Veda Group Ltd [2015] FCA 1506 at [10]; Re Toll Holdings Ltd [2015] VSC 123 at [35]–[36]; ReBigAir Group Ltd [2016] FCA 1296 at [20]; Re SAI Global Ltd [2016] FCA 1312 at [61]; see also T Damian & A Rich, Schemes, Takeovers and Himalayan Peaks: The use of schemes of arrangement to effect change of control transactions, 3rd ed, 2013, [7.3.5]. I am satisfied that this matter should not prevent the Court ordering the convening of the scheme meetings or giving the advice sought in respect of the trust scheme.

Break fee

26. As Mr Jackman points out, cl 13.2 of the SIA provides that DUET must pay Bidco a very substantial reimbursement fee of $72.991 million in certain circumstances and details of that fee are set out in section 9.3.2.2 of the scheme booklet. A more modest reimbursement fee of $5 million is also payable by Bidco to DUET in certain circumstances, as set out in cl 14.2 of the SIA.

27. Mr Jackman refers to Re SFE Corporation Ltd [2006] FCA 670; (2006) 59 ACSR 82 at [6]–[7], where Gyles J observed that he would be dissuaded from allowing a reimbursement fee if the amount “was such that it could influence voting at the meeting to be convened or if there were some other unusual circumstances”. He also points to Guidance Note 7 issued by the Takeovers Panel which indicates that a reimbursement fee should not exceed 1% of the equity value of the target. Mr Jackman points out that the reimbursement fee here represents approximately 0.91% of the equity value of DUET (having regard to the value of the cash consideration payable by Bidco of $3.00 per DUET Security) and approximately 0.90% of the equity value of DUET if the special dividend of at least $0.03 (for total cash proceeds of $3.03 per DUET Security) is also taken into account.

28. Mr Jackman submits that payment of reimbursement fees of this magnitude is commonplace in schemes of this kind. He also refers to Ms Pickering’s evidence (Pickering 6.3.17 [40]) that the exclusivity provisions and reimbursement fee were included in the SIA as the result of vigorous commercial negotiations, and to cl 13.1 of the SIA by which the parties acknowledge that Bidco requested the inclusion of the reimbursement fee and would not have entered into the SIA without it. He submits that the DUET boards believe that the reimbursement fee provision was reasonable for securing Bidco's participation and the reimbursement fee represents a reasonable amount to compensate the costs incurred by Bidco in the event that the schemes are not implemented.

29. Mr Jackman submits that the Court should not be dissuaded from making the orders sought by the Plaintiffs by reason of the reimbursement fee. The break fee in this case is large in absolute terms, although in percentage terms it is a little less than the figure which the Takeovers Panel has contemplated would generally be permissible. There is evidence, in a form which has now become customary in these applications, that the break fee reflected vigorous negotiations which (like many other such vigorous negotiations) appear to have reached a figure that is broadly in line with the Takeovers Panel’s guidance. Having said that, it is by no means implausible that an acquisition of this scale would have involved lost opportunity costs of the kind which Bidco and consortium members identify to support the size of the break fee, given the size of the transaction and the international scale of the business of the entities that are participants in Bidco. The Court may take comfort as to the existence of the opportunity costs to which reference is made, by the fact that Bidco, which itself adopted a verification process at least in respect of the materials concerning it in the scheme booklet, has been prepared to disclose the existence of such costs in the scheme booklet. From the perspective of the DUET entities, and their shareholders and unitholders, it is apparent that their boards could readily form a view that an agreement to pay a break fee of this size was in the interests of shareholders and unitholders, so far as it would allow them the opportunity to consider a substantial proposal which some or many of them may find commercially attractive, and so far as that proposal might well not have been available, absent agreement to pay that break fee. I am satisfied that this matter also should not prevent the Court ordering the convening of the scheme meetings or giving the advice sought in respect of the trust scheme.

Deemed warranty and transfer free of encumbrances

30. Clause 8.4 of each of the schemes provides that scheme participants in the DFL scheme, DUECo scheme and DIHL scheme are deemed to have warranted to Bidco that their shares are transferred fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and other interests of third parties. The amendments to the DFT constitution pursuant to the draft Supplemental Deed (cl 31.29) similarly provide that each DFT unitholder eligible to participate in the trust scheme is deemed to have warranted that all of their DFT units, including any rights or entitlements attaching to them, which are transferred under the trust scheme will, at the time of such transfer, be fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and other interests of third parties of any kind, and that the unitholders have full power and capacity to transfer their units pursuant to the trust scheme. The deemed warranties are disclosed in section 3.5 of the scheme booklet. Mr Jackman submits, and I accept, that the balance of the case law has recognised the legitimacy of such 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 Hostworks Group Ltd [2008] FCA 64; (2008) 26 ACLC 127 at [41]; Re DUET Management Company 1 Ltd above at [23]; Re Intecq Ltd above at [17].

31. Clause 31.28 of the DFT constitution if amended by the Supplemental Deed also provides that, “to the extent permitted by law”, relevant units transferred pursuant to the trust scheme will be transferred free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind, whether legal or otherwise. Clauses in materially identical terms have also been accepted in the case law: Re Investa Properties Limited [2007] FCA 1104; (2007) 25 ACLC 1186 at [30]; Re DUET Management Company 1 Ltd above at [23].

32. I am satisfied that these matters also should not prevent the Court ordering the convening of the scheme meetings or giving the advice sought in respect of the trust scheme.

Conclusion

33. I am satisfied that each of the relevant companies is a company within the meaning of the Corporations Act and is a Part 5.1 body for the purposes of s 411(1) of the Corporations Act. The concept of an “arrangement” is a broad one, the proposed schemes concern the rights and obligations of shareholders, and a scheme for shareholders to transfer their shares to another entity in exchange for cash is a relatively common form of an “arrangement” for the purposes of the Corporations Act. No question of an ultra vires transaction or any special procedure or restriction imposed by the Corporations Act arises in this case. The proposal involves the payment of a premium to the last traded prices of the entity, prior to the announcement of the proposal, and the independent expert's report has concluded that the offer is both fair and reasonable. There is otherwise detailed evidence led as to the process which has been adopted in respect of the preparation and verification of the explanatory memorandum, and the process which has been adopted by the independent expert who expresses a view as to whether the offer is fair and reasonable, and a further independent expert who provides general tax information to shareholders and unitholders which will be included in the scheme booklet which confirms the views expressed in their respective reports. Having regard to the evidence and matters to which I referred above, I am satisfied that an order should be made convening the scheme meetings and approving the scheme booklet for distribution to shareholders in the DUET companies.

34. Having regard to the evidence and matters to which I referred above, I am also satisfied that judicial advice should be given that DFL, as responsible entity of DFT is justified in propounding resolutions to implement the trust scheme and proceeding on the basis that the amendments to be made 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 Corporations Act.

35. For these reasons I am satisfied that I should make the orders which are sought. In each of proceedings 2017/63852, 2017/63853, 2017/63854 and 2017/66399, I make orders in accordance with the short minutes of orders initialled by me and placed in the file.

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Decision last updated: 19 April 2017