Re Permanent Trustee Co Ltd

[2002] NSWSC 1177

Reported Decision: 43 ACSR 601
(2003) 21 ACLC 525

New South Wales

Supreme Court

CITATION:	Permanent Trustee Company [2002] NSWSC 1177
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 4535/02
HEARING DATE(S):	06/12/02
JUDGMENT DATE:	6 December 2002
PARTIES :	Permanent Trustee Company Limited - Plaintiff
JUDGMENT OF:	Barrett J

COUNSEL :	Mr M B Oakes SC - Plaintiff
SOLICITORS:	Mallesons Stephen Jaques - Plaintiff
CATCHWORDS:	CORPORATIONS - Part 5.1 scheme of arrangement - nature of fairness criterion against which scheme is judged upon application for court's approval
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	Re Adelaide Air Conditioning & Domestic Engineering Ltd (1972) 6 SASR 603 Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213 Re Arnotts Ltd (1997) 16 ACLC 423 Re A W Allen Ltd [1930] VLR 251 Re Central Pacific Minerals NL [2002] FCA 239 Re Challenge Bank Ltd (1995) 19 ACSR 421 Re Simeon Wines Ltd (2002) 42 ACSR 454 Thomas A Edison Ltd v Bullock (1912) 15 CLR 679
DECISION:	Scheme of arrangement approved

- 9 -

IN THE SUPREME COURT REVISED
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

FRIDAY 6 DECEMBER 2002

4535/02 - PERMANENT TRUSTEE COMPANY LIMITED (APPLICATION OF)

JUDGMENT

1 The plaintiff, Permanent Trustee Company Limited (which I shall call “the company”), seeks the approval of the court under s.411(4)(b) of the Corporations Act 2001 in relation to a scheme of arrangement between the company and its members. The scheme has been propounded by the company and placed before its members for approval at a meeting convened in accordance with orders previously made by the court. This has happened in a context also involving a general meeting of members and certain contractual arrangements between the company and Trust Company of Australia Limited (“Trust Company”).

2 The effect of the scheme, upon implementation of its terms and those of the relevant contracts, will be that all shares held by each member of the company will be transferred to Trust Company after payment of a special dividend of $1 per share by the company to the member, with the member receiving an allotment of Trust Company shares in return for the transfer of his or her shares in the company. The exchange ratio will be 1.1856 Trust Company shares for each share in the company. The result will therefore be that the company becomes a wholly owned subsidiary of Trust Company and each former member of the company, having received from the company the special dividend of $1 per share, will become a member of Trust Company, taking his or her place beside the existing members of Trust Company.

3 The evidence adduced this morning establishes satisfaction of all procedural requirements necessary to enable the exercise of the court's jurisdiction to grant approval under s.411(4)(b) in respect of the compromise or arrangement between the company and its members. I refer principally to the requirements with respect to the convening and holding of the necessary meeting of members and the passing of the necessary resolution by the majority referred to in s.411(4)(a)(ii). The affidavit of the secretary of the company, to which are annexed the minutes of the meeting, shows that the necessary majority was obtained in terms of both number of members and number of votes. Of the members voting in person or by proxy or representative, 97.25 per cent voted to approve the scheme. The positive votes represented 99.15 per cent of all votes cast.

4 As to s.411(17), which forbids the grant of the court’s approval unless either the court is satisfied as to the matters specified in s.411(17)(a) or there is produced to the court a statement by the Australian Securities and Investments Commission as mentioned in s.411(17)(b), there has been placed before me, as an annexure to the affidavit of Mr Lang sworn 6 December 2002, a statement by ASIC of the kind contemplated by the latter provision. The statement is contained in ASIC’s letter to Mallesons Stephen Jaques dated 5 December 2002. Section 411(17) therefore does not operate as an obstacle to the grant of the s.411(4)(b) approval by the court.

5 When the proceedings were before the court at the meeting convening stage, I noted that the operation of the substantive provisions of the scheme was subject to a number of preliminary conditions and that it would be necessary for the court to be informed of the status of those conditions if and when an application for the court’s approval of the scheme was made. That matter has been dealt with in the evidence today by means of a certificate from both the company and Trust Company confirming the satisfaction of conditions, as well as the affidavits of Mr Oriti and Mr Sweeney, both sworn 6 December. All conditions have been satisfied. The position is, therefore, that the court is not asked to approve a scheme which is contingent or uncertain. It can proceed to grant its approval knowing that the scheme, as approved, will be self-executing in the sense that no discretions or other external acts are to play any part in its due implementation according to its terms.

6 It is also established by the evidence that this application was advertised in accordance with the rules, with the result that there has been widely disseminated notice that it would be before the court this morning. The matter was called outside court and, apart from the company as applicant, there has been no appearance, although I understand that the legal representatives of Trust Company are in attendance.

7 In a technical sense, the application proceeds ex parte, which is a common enough occurrence in cases of this kind. The fact that the application is ex parte is not without some significance. The absence of any defendant or contradictor sharpens the duty of the applicant. While a case such as the present is distinguishable from one where an interlocutory injunction is sought in the absence of the defendant (in that there is here no defendant as such) I think it is fair to say that an applicant in this kind of situation, like an applicant ex parte for an injunction, carries the responsibility of bringing to the court's attention all matters that could be considered relevant to the exercise of its discretion. The principles do not need elaboration. It is sufficient to refer to the judgment of Isaacs J in Thomas A Edison Ltd v Bullock (1912) 15 CLR 679. I am entitled to be confident that all relevant material is before the court.

8 I proceed to the central question whether the court should exercise its discretion in favour of approving the scheme. There is no exhaustive statement of the matters as to which the court must be satisfied before granting approval. Indeed, courts have been reluctant to attempt any comprehensive or compendious statement of relevant criteria. I refer to the judgment of MacFarlan J in Re A W Allen Ltd [1930] VLR 251:

“In my opinion nothing can be more dangerous than to attempt to determine the conferring or withholding of the Court’s sanction by the application of any formula. … The Authorities relied on are all useful as directing the attention of the Court which is asked for sanction to considerations which have occurred to, or have been brought to the minds of, other judges and which they have properly held to be of importance. Considerations which are of the greatest weight in one class of case may be outweighed by circumstances not present in the former. If the Legislature had desired to say that the Court should sanction an arrangement if the necessary majorities were obtained and the conditions of reasonableness and absence of oppression (or any others definable in advance) existed, it would have been easy to say so. It has chosen not to do so.”

9 It is nevertheless clear that the court must form a favourable view as to the reasonableness of the compromise or arrangement. This was established in Re Alabama, New Orleans, Texas and Pacific Junction Railway Company [1891] 1 Ch 213. Fry LJ said in that case:

“Under what circumstances is the Court to sanction a resolution which has been passed approving of a compromise of arrangement? I shall not attempt to define what elements may enter into the consideration of the Court beyond this, that I do not doubt for a moment that the Court is bound to ascertain that all the conditions required by the statute have been complied with; it is bound to be satisfied that the proposition was made in good faith, and, further, it must be satisfied that the proposal was at least so fair and reasonable, as that an intelligent and honest man, who is a member of that class, and acting alone in respect of his interest as such a member, might approve of it. What other circumstances the Court may take into consideration I will not attempt to forecast”.

Lindley LJ said (at 238):
“What the Court has to do is to see, first of all, that the provisions of that statute have been complied with; and, secondly, that the majority have been acting bona fide. The Court also has to see that the minority is not being overridden by a majority having interest of its own clashing with those of the minority whom they seek to coerce. Further than that, the Court has to look at the scheme and see whether it is one as to which persons acting honestly, and viewing the scheme laid before them in the interests of those whom they represent, take a view which can be reasonably taken by business men. The Court must look at the scheme, and see whether the Act has been complied with, whether the majority are acting bona fide, and whether they are coercing the minority in order to promote interests adverse to those of the class whom they purport to represent; and then see whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it.”

Bowen LJ said (at 243):

“I do not think myself that the point of jurisdiction is worth discussing at much length, because everybody will agree that a compromise or agreement which has to be sanctioned by the Court must be reasonable, and that no arrangement or compromise can be said to be reasonable in which you get nothing and give up everything. A reasonable compromise must be a compromise which can, by reasonable people conversant on the subject, be regarded as beneficial to those on both sides who are making it.”

10 These observations have been accepted for over a century by courts exercising this jurisdiction. A modern expression of the relevant principle will be found in the judgment of R D Nicholson J in Re Challenge Bank Limited (1995) 19 ACSR 421:

“The court is required to consider and to be satisfied whether the proposals in the schemes are at least fair and reasonable from the viewpoint of an intelligent and honest person, that is a person who might approve of it.”

It is, of course, the scheme as a whole - the totality of the give and take that is the compromise or arrangement between the company and its members - that falls to be assessed in this way.

11 I mention this implicit effect of the court’s approval under s.411(4)(b) because this court’s order effecting such approval is, I am told, likely to be relied upon for the purposes of s.3(a)(10) of the Securities Act 1933 of the United States. That section is in the following terms:

“Except with respect to a security exchanged in a case under title 11 of the United States Code, any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court or by any official or agency of the United States or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval.”

12 Australian courts have, in two recent cases, had occasion to refer to similar proposals to make use of s.411(4)(b) approval for the purpose of this United States statutory provision. In Re Central Pacific Minerals NL [2002] FCR 239, Emmett J of the Federal Court of Australia said:

“The securities in SPP that will be issued as consideration are subject to the Securities Act 1933 (U.S.). However, s 3(a)(10) of the Securities Act 1933, contains certain exemptions from compliance with that Act. The relevant requirement for the exemption for any security that is issued and exchanged for bona fide securities, is that the terms and conditions of such issuance and exchange have been approved by a court after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange have had the right to appear.
One of the requirements for the operation of s 3(a)(10) is that the proposed issuer of securities in respect of which the exemption is to be claimed must advise the court whose order will be relied upon, that the issuer will rely on s 3(a)(10) on the basis of the court’s approval. That requirement has been satisfied.

The evidence before me indicates that for the exemption to be effective, the court in question must have sufficient information before it to determine the value of both the securities to be surrendered and the securities to be issued in the proposed transaction. The exemption will be available only if the court in question both holds a hearing to determine whether the proposed terms and conditions are fair to all those who will receive securities in the exchange and to approve the fairness of the terms and conditions of the proposed exchange. Such a hearing must be open to everyone to whom securities would be issued in the proposed exchange and notice of the hearing in appropriate terms must be provided in a timely manner.

It is not for this Court to express any view as to whether the procedures or processes of the Court are sufficient to satisfy the requirements of the exemption in s 3(a)(10). However, it is clear that, on the hearing of an application for an order approving the arrangement under s 411(4)(b) of the Corporations Act, any security holder is entitled to be heard. The application for approval takes place in open court after formal notification and advertisement in daily newspapers circulating in Australia. Applications for approval may be opposed and indeed, there are instances of approval being refused in the light of opposition and submissions advanced at a hearing at the third stage to which I have referred.”

13 In Re Simeon Wines Limited (2002) 42 ACSR 454, Lander J of the Supreme Court of South Australia said:

“The merger will affect persons who are resident in the United States. The issue by Brian McGuigan Wines Ltd of its shares to scheme shareholders who are United States citizens or residents pursuant to the proposed scheme will be in breach of the registration requirements of the Securities Act 1933, (United States and Federal) unless the issues fall within an exemption. Brian McGuigan Wines Ltd will seek to bring its offer in issue of shares to scheme shareholders who are United States citizens or residents within the exemption which is provided for in s3A(10) of Securities Act (supra).

The requirements of that Act would be met if the following matters occur:


1. The securities, the subject of the exemption in the scheme, are issued in exchange for other securities.

It is the fact that the scheme of arrangement does contemplate that the securities which would form part of the exemption will be issued in exchange for other securities.

2. The issuer [will] advise the court whose order will be relied upon, that the issuer itself will rely on s3A (10) on the basis of the court's approval.

Mr Bagot, who appeared today on behalf of Brian McGuigan Wines Ltd, has advised this court that the order which I will make today will be relied upon by Brian McGuigan Wines Ltd to seek an exemption under s3a(10) of the Securities Act (supra).

3. The court has sufficient information before it to determine the value of the securities to be surrendered and those to be issued in the proposed transaction.

This court has been fully informed of the value of the securities to be surrendered and the valuation placed upon the securities to be surrendered, and the expected valuation to be placed on those to be issued in the proposed transaction. That information is contained in the explanatory memorandum which has been tendered to this court as an exhibit to Mr Noack's affidavit.

4. The court holds a hearing to determine whether the terms and conditions of the transaction are fair to all those who will receive securities and approval of the terms of the exchange.

It is an obligation in an application under s411(6) for this court to consider the fairness and reasonableness of the proposed scheme of arrangement. I have done that and in those circumstances there has been a hearing of the kind referred to in the fourth condition.

5. The hearing is open to everyone to whom the securities would be issued in the proposed exchange and a notice of the hearing in appropriate terms has been provided in a timely manner.

R3.4 of the Federal Court (Corporations) Rules 2000 (Cth) (the Rules) requires that advertisements be placed in accordance with form 6 of the Rules and published in accordance with r2.11 of the Rules at least five days before the date fixed for the hearing of the application.

Mr Noack has exhibited to his affidavit a notice appearing in The Advertiser newspaper, which is a newspaper circulating in this State, and a notice appearing in The Australian newspaper, which is a newspaper circulating throughout Australia, which conforms with r6. All members have therefore been given notice of the hearing in the appropriate terms and in accordance with the Rules of this Court.

The hearing has been heard in public, but nobody, apart from Simeon Wines Ltd, Brian McGuigan Wines Ltd and ASIC have appeared.

It is not for this Court to determine whether the matters to which I have referred to will satisfy the appropriate regulators in relation to the exemption sought under the Securities Act (supra), but these reasons will be available to any regulator who might wish to rely upon them if any application is made.”

14 In general, I agree with and adopt what was said by both Emmett J and Lander J, although with this qualification or note of explanation, namely, that Lander J's comments under items 1 to 5 of paragraph 23 of his judgment were, of course, dictated by the particular circumstances of that case and that, when his Honour refers at item 4 to a court exercising the s.411 approval jurisdiction having an obligation to consider the fairness and reasonableness of the proposed scheme of arrangement, he is not, I think, in any sense suggesting that the court in some way actively enters into matters of valuation or embarks upon an examination of the question whether a particular price or consideration is or is not a fair and reasonable quid pro quo. The court does not act as a valuer.

15 That said, however, the court will, in making its decision, derive considerable assistance in a case such as the present from the existence of the report called for by clause 8303 of Schedule 8 to the Corporations Regulations 2001 (Cth), coupled with the knowledge that, in light of s.411(2) of the Act, ASIC will have had an opportunity to examine the report before the application to the court for orders for the convening of the scheme meeting. The central feature of the report is a statement of opinion by an unaligned expert whether the scheme is “in the best interest of the members”. In ASIC’s view, as stated in its Policy Statement 75, the inquiry whether a scheme is “in the best interest of the members” is in essence the equivalent of an inquiry whether it is “fair and reasonable”. Although that view of equivalence between the two concepts has been the subject of critical comment by at least one commentator (see S E K Hulme QC, “Section 640 of the Corporations Law: Independent Experts’ Reports and the RTZ Ltd Takeover of Comalco Ltd” (2001) 19 C&SLJ 134 at 143-4), it is a view to which an expert may pay attention.

16 In this case, the report included in compliance with clause 8308 of Schedule 8 is a report of Lonergan Edwards & Associates Ltd. I quote paragraphs 8 to 13 of that report under the heading "Summary of opinion” (omitting footnotes):

“8 In LEA’s opinion the proposed Merger between Permanent and Trust Co is in the best interests of Permanent shareholders.
9 Based on our valuation of the shares in Permanent and Trust Co on a standalone basis the Merger terms are fair and reasonable to Permanent shareholders. This is because Permanent shareholders receive approximately 50% of the shares in the merged company and contribute approximately 49% of the value of the merged group.
10 Based on the share market values of each company (adjusted to take into account the dividends payable on completion of the Merger) the Merger terms are consistent with the relative values being contributed, as is evidence from the table below:

Permanent Trust Co

% %
Share of Merged company 50 59
Relative market capitalisation
One day prior to announcement
of the Merger 52 48
One month prior to announcement
of the Merger 50 50
Three months prior to
announcement of the Merger 49 51
Six months prior to
announcement of the Merger 51 49
One year prior to
announcement of the Merger 57 43

11 In our opinion, the Merger is also in the best interest of Permanent shareholders because the Merger is expected to create significant value due to the significant costs savings likely to be generated. Such benefits, if achieved, are likely to have a value of some $35 million, or $1.08 per share on a merged basis.
12 There is also potential for re-rating of the shares in the Merged company and other benefits, such as greater market liquidity and balance sheet strength etc, are likely to arise.
13 LEA believes that Permanent shareholders are likely to be significantly better off if the Merger proceeds. Accordingly, LEA has concluded that the Merger is in the best interests of Permanent shareholders.”

17 Each of Mr Lonergan and Mr Edwards, the principals of Lonergan Edwards & Associates Ltd, has sworn an affidavit, read on the present application, confirming that he holds the opinions stated in the report. Those opinions must be understood in the context of the approach adopted in the preparation of the report as described in the report itself. After referring to the “best interest” criterion in clause 8303 of Schedule 8 and the interpretation of it in ASIC’s Policy Statement 75, Lonergan Edwards & Associates describe in explicit terms the way in which they have approached that criterion:

“In our opinion, the meaning of ‘in the best interests [sic]’ involves a judgment as to the overall commercial effect of the transaction. The expert must weigh up the advantages and disadvantages of the proposal and form an overall view as to whether the shareholders are likely to be better off if the proposal is implemented than if it is not.
In LEA’s opinion, the most appropriate basis upon which to evaluate the Merger is to assess its overall impact on the shareholders of Permanent and to form a judgment as to whether the expected benefits to Permanent shareholders outweigh the disadvantages and risks that might result.”

18 It is in the light of that statement as to the approach or basis they have adopted that the opinions expressed by Lonergan Edwards & Associates are to be interpreted. It is made clear that the report is concerned with the scheme as a whole so that, for example, the positive views expressed in it as to the “best interest” of members of the company take into account the special dividend of $1 per share that the company itself will pay to its members, as well as the Trust Company shares that will be issued to them in return for their shares in the company at the exchange ratio of 1.1856 to one.

19 The existence and content of the Lonergan Edwards & Associates report (viewed in the context of the requirement of clause 8303 of Schedule 8), the sworn evidence of Mr Lonergan and Mr Edwards which confirms and underwrites the report itself, the fact that the report was put into the hands of shareholders as part of material sent to them in accordance with the orders previously made by the court and that shareholders, having received it, voted by such overwhelming majorities to approve the scheme and the fact that no member has sought to advance before the court today any view contrary to those expressed in the report are compelling factors relevant to the court’s decision whether it should give its approval under s.411(4)(b). I should add, in relation to this last aspect, that it is by no means unknown for members to appear before the court to argue that a report of this kind is in some way unreliable or defective: see, for example, Re Arnotts Ltd (1997) 16 ACLC 423. There has been no such move by any member in this case.

20 As was made clear by both Emmett J the Central Pacific Minerals case and Lander J in Simeon Wines, it is not for the court considering a s.411(4)(b) application to express any view as to whether the procedures and processes under the Corporations Act 2001 (Cth) are sufficient to satisfy the requirements for exemption laid down by the United States legislation. Some of the questions arising under that legislation will, no doubt, be readily answered merely by reference to the terms of the scheme. Relevant to others will be the matters concerning notice of this hearing to which I have earlier referred and the fact, which I formally record, that Mr Oakes SC, who has appeared for the company on the application, has informed me that any approving order the court makes in relation to the scheme will be relied upon in seeking an exemption under the United States legislation. The observations I have made as to the approach taken by the court at the approval stage and the role played by the report of Lonergan Edwards & Associates (which has not been the subject of any objection or dissent) may further assist.

21 The evidence shows that, in the circumstances of this case, it is appropriate that the court grant, in relation to the scheme of arrangement between the company and its members, the approval envisaged by s.411(4)(b) of the Corporations Act. There is, however, one final matter. The form of scheme in respect of which approval is sought differs in certain respects from the form sent to members in accordance with the orders previously made by the court. It is clear, however, that the changes or differences are of a minor and technical kind and that their effect is to improve the smooth working of the scheme. They in no way impinge upon or affect the spirit and intendment of the scheme as a whole or detract from the rights and entitlements of the members. They are peripheral only, so far as matters of substance are concerned and are therefore appropriate to be dealt with under s.411(6): Re Adelaide Air Conditioning & Domestic Engineering Ltd (1972) 6 SASR 603. The form of scheme that was before members contemplated the possibility of modification at this stage, subject to the consent of Trust Company (which Mr Oakes confirms has been given) and, of course, the approval of the court. ASIC has been informed of the matter and, by the letter dated 5 December to which I have already referred, says that it has noted the departures which, while they may raise statutory compliance issues, are not seen by ASIC as of such a quality as to cause it to oppose the grant of approval by the court.

22 I make orders in accordance with the short minutes of order which I initial and date. I direct that the orders may be taken out forthwith.

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Last Modified: 12/11/2002