Sunset Amber Investments Pty Ltd v Rural Funds Management Limited
[2013] VSC 692
•13 December 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2013 05849
IN THE MATTER OF RFM RIVERBANK (ARSN 112 951 578)
B E T W E E N
| SUNSET AMBER INVESTMENTS PTY LTD (ACN 101 720 683) | Plaintiff |
| v | |
| RURAL FUNDS MANAGEMENT LIMITED (ACN 077 492 838) AS RESPONSIBLE ENTITY OF RFM RIVERBANK (ARSN 112 951 578) | Defendant |
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JUDGE: | FERGUSON J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 9 December 2013 | |
DATE OF JUDGMENT: | 13 December 2013 | |
CASE MAY BE CITED AS: | Sunset Amber Investments Pty Ltd v Rural Funds Management Limited | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 692 | |
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CORPORATIONS – Proposed merger of three unregistered managed investment schemes – Meetings of each scheme scheduled for purpose of voting on merger – One fund to acquire units in other funds – Members of acquired funds to be issued units in acquiring fund – Constitution provided discretion for setting amount of transaction costs to be taken into account in calculating application price for units in acquirer – Proposed exercise of discretion to reduce figure for transaction costs – Permitted under Constitution when properly construed – No improper exercise of discretion – Exercise of discretion in interests of members – Responsible entity should not be restrained from putting resolution to approve merger except on basis that transaction costs would be borne by members of funds to be acquired – Corporations Act 2001 (Cth) ss 601FC(1)(b),(c), 601GAB.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T Woodward SC with Mr M Kennedy | Mills Oakley Lawyers |
| For the Defendant | Mr P Anastassiou SC with Mr A McClelland | McCullough Robertson Lawyers |
TABLE OF CONTENTS
Introduction......................................................................................................................................... 1
The proposal for merger................................................................................................................... 3
Issue 1: Properly construed, does the Constitution permit RFM to deem the transaction costs to be less than their actual cost?........................................................................................................................ 6
Issue 2: Is what RFM proposes to do an improper exercise of its discretion?..................... 11
Conclusion......................................................................................................................................... 19
HER HONOUR:
Introduction
Rural Funds Management Limited (“RFM”) is the responsible entity of three registered but unlisted managed investment schemes: RiverBank;[1] the Chicken Fund;[2] and the Wine Fund (collectively referred to as “the Funds”).[3]
[1]RiverBank ARSN 112 951 578.
[2]RFM Chicken Income Fund ARSN 105 754 461.
[3]RFM Australian Wine Fund ARSN 099 573 485.
RiverBank owns horticultural assets (principally almond orchards), water entitlements and infrastructure and leases them to third parties. The Plaintiff, Sunset Amber Investments Pty Ltd (“Sunset”), is a unitholder of Riverbank, holding over 50,000 units.[4]
[4]Sunset also holds units in the Chicken Fund and in the Wine Fund, but it does not seek any relief in respect of them.
The Chicken Fund owns poultry growing farms in New South Wales and Victoria.
The Wine Fund owns vineyards which are leased to Treasury Wine Estates.
The Funds are illiquid as there is no market for units in them. This affects their investment performance. It is common ground that improving liquidity through listing on a stock exchange would be beneficial to Fund members. RFM considers that the best way of achieving this would be to merge the three Funds. It has issued an explanatory memorandum containing a proposal for merger. The process of a merger is referred to in the explanatory memorandum as ‘Revaluation’.
In broad terms, the merger proposal involves RiverBank being used as the head fund. Members in the Chicken Fund and the Wine Fund will exchange their units for units in RiverBank. RiverBank will be renamed the Rural Funds Group, and RFM will apply to list the units in the merged fund on the ASX.[5]
[5]Australian Securities Exchange.
RFM has called meetings of the members of each of the Funds to consider resolutions to approve the merger and, in the case of the Chicken Fund and Wine Fund, resolutions to amend each of their constitutions to provide for implementation of the merger. There is no requirement under the RiverBank Constitution that a meeting be held, as there is power under the Constitution for RFM to issue units to new members. However, as a matter of good policy, RFM intends to hold a meeting of members of RiverBank.
The meeting of each of the Funds was to have taken place on 18 November 2013 but, as a result of this proceeding, the meeting was adjourned first to 9 December 2013, and further again to 16 December 2013. Sunset brought this proceeding initially seeking an injunction to restrain the holding of the meeting of the members of RiverBank, claiming that the price to be struck for the issue of units by RiverBank to the Chicken Fund and the Wine Fund members would be in breach of the Constitution. After this proceeding was commenced, RFM accepted this criticism. Consequently, RFM has issued a supplementary explanatory memorandum and supplementary product disclosure statement which it contends correct its error. Sunset disputes this, but no longer seeks to restrain the holding of the meeting.
At the heart of the dispute is the amount of the proposed merger transaction costs that are to be taken into account in fixing the unit price for the RiverBank units that are to be issued to the Chicken and Wine Fund members. The assets which are the subject of the merger have a total value of $249 million. The total transaction costs of the merger will be approximately $3.8 million. The current proposal put forward by RFM would see RiverBank bear approximately $2 million of those costs. This equates to approximately four cents per RiverBank unit. RFM proposes to achieve this outcome by exercising a discretion to deem the transaction costs to be a different amount to the actual costs. Sunset contends that this proposal would be an improper exercise of a discretion given to RFM under the Constitution if the amount of the transaction costs taken into account in the unit price calculation is less than the actual amount necessary to avoid an adverse impact on RiverBank’s existing members.
As I have noted above, Sunset no longer seeks to restrain the holding of the meeting. Rather, Sunset (by way of its Amended Originating Process) now seeks an injunction to restrain RFM from putting to the members of RiverBank any resolution to approve the merger other than on the basis that all the merger transaction costs be borne by the Chicken Fund and Wine Fund. It also seeks a declaration that what RFM proposes would be in breach of the Constitution and/or an improper or invalid exercise of RFM’s power.
The issues for determination are:
1.Properly construed, does the Constitution permit RFM to deem the transaction costs to be less than their actual cost?
2.Would the proposed exercise of the discretion by RFM be improper or invalid because RFM has misconceived how the discretion is to be exercised and it would be in breach of its obligations to act in the best interests of members and to exercise the degree of care and diligence that a reasonable person would exercise if they were in RFM’s position?[6]
[6]Corporations Act 2001 (Cth) s 601FC(1)(b)–(c).
I will deal with each of these questions in turn. Before doing so, I will describe the proposed merger and how it is to be effected in a little more detail.
The proposal for merger
If the merger proposal is successfully passed at the meetings of the members in the Chicken Fund, the Wine Fund and RiverBank, the merger will be implemented as follows:
(a)The Chicken Fund will be demerged and RFM Poultry will be created.
(b)The units in the Chicken Fund and the Wine Fund will be transferred to, and vest in, RFM.
(c)The application price (“Application Price”) for RiverBank units will be calculated. Part of this calculation will involve RFM estimating the merger transaction costs. RFM proposes to deem those costs to be less than their actual cost.
(d)RiverBank units will be issued to Chicken Fund and Wine Fund members at the Application Price calculated in step (c).
(e)RFM will ‘reset’ the RiverBank units to a notional value of $1.00. This will be done by dividing or consolidating the number of issued RiverBank units, such that the net asset value of the merged fund, divided by the number of RiverBank units on issue, equals $1.00. This is for administrative convenience, so that once the merged fund is listed, units will have a par value of $1.00.
(f)RiverBank will be renamed ‘the Rural Funds Group’ (“RFF”).
(g)RFF will be listed on the ASX.
(h)RFM Poultry will be listed on the NSX.[7]
[7]National Stock Exchange of Australia.
Sunset’s complaint is directed at the proposed calculation of the Application Price for RiverBank units (step (c) above). Subject to limited exceptions which are not relevant here, clause 4.1 of the Constitution provides that the following formula must be used for calculating the Application Price for a unit issued in RiverBank:
(Net Asset Value + Complying Transaction Costs) + Marketing Fee
number of Units on issue
The elements of the formula are defined in clause 25 of the Constitution. Only the definition of ‘Complying Transaction Costs’ (“CTCs”) is relevant to the present dispute. That term is defined as follows (so far as relevant):
Complying Transaction Costs:
(a)when calculating the Application Price of a Unit, the Manager's reasonable estimate of the actual amount necessary to avoid an adverse impact on other scheme members because of a particular acquisition of an Assets (sic); …
provided that any such estimate is made in line with the requirements of the Corporations Act, published ASIC policy, and any relevant industry standards, and that subject to the Corporations Act the Manager may in connection with any particular application … deem these costs to be a lesser sum or zero.[8]
[8]Citation omitted.
RFM has a written unit pricing policy which was last updated in January 2012 (“Pricing Policy”). There are a number of purposes of the Pricing Policy, including to ensure that RFM provides unit prices in a fair and equitable manner to all members and in accordance with the relevant fund constitution. The Pricing Policy explains how RFM, as responsible entity of various funds, exercises discretions to calculate unit prices. The Pricing Policy states that the transaction costs associated with acquiring an asset (referred to as the “Buy Spread”), are up to three percent for funds open to investment and zero percent for funds not open to investment. The Pricing Policy also states that the Buy Spread may be waived, reduced or increased where transaction costs associated with the purchase of an asset are ‘out of line with expectations’.
If the merger goes ahead, RFM does not intend to apply the Pricing Policy to set the unit price for the units to be issued to Chicken and Wine Fund members. Rather, what RFM proposes is that CTCs incurred after the merger will be apportioned rateably among the three Funds. Those costs are essentially the loss of a deferred tax asset of approximately $2.1 million and stamp duty of approximately $700,000. RFM intends that pre‑merger CTCs ($932,000) be treated as zero in the calculation. Consequently, instead of the pre‑ and post‑merger costs of approximately $3.8 million being borne by the Wine Fund and Chicken Fund members, RiverBank will bear approximately $2 million of those costs. This effect will come about because RFM intends to deem RiverBank’s CTCs to be $1.8 million for the purposes of the calculation which it will undertake on the implementation date, if the members of the three Funds vote in favour of the merger. This is referred to in the supplementary memorandum as ‘Scenario 1’. The supplementary memorandum refers to three other scenarios. Scenario 4 is the only other scenario relevant to the dispute and I deal with that scenario later in these reasons.[9]
Issue 1: Properly construed, does the Constitution permit RFM to deem the transaction costs to be less than their actual cost?
[9]See below [48].
Section 601GA(1)(a) of the Corporations Act requires constitutions of registered managed investment schemes to make adequate provision for the consideration that is to be paid to acquire an interest in the scheme. Before the introduction of s 601GAB, ASIC’s Regulatory Guide 134[10] provided guidance on how ASIC would assess a scheme’s constitution. In respect of s 601GA(1)(a), the Regulatory Guide provided that ASIC considered that adequate provision had been made when a constitution provided for an independently verifiable price.[11] ASIC did not require that there must be a fair price because the Corporations Law (in force at the time) did not require any duty of fairness to applicants for interests. In ASIC’s view, applicants were protected in relation to price by the relevant legislative disclosure requirements.
[10]Australian Securities and Investments Commission, Managed Investments: constitutions, RG 134, September 2000. (‘ASIC, Managed Investments’). This version of Regulatory Guide 134 is now superseded.
[11]Ibid RG 134.19.
Against this background, Sunset submitted that the rationale for making an acquirer bear the costs associated with purchasing interests in a managed investment scheme can be traced back to ASIC Consultation Paper 54, which was released in October 2004.[12] In that paper, ASIC stated that the purpose of imposing the burden on the acquirer was to ensure that existing scheme members were not disadvantaged. The Consultation Paper was followed by ASIC Class Order 05/26 which, as I have noted above, resulted in the insertion of s 601GAB into the Corporations Act.
[12]Australian Securities and Investments Commission, Proposed relief for constitutions of registered managed investment schemes, Consultation paper 54, October 2004, [15]–[16].
Sunset also referred to the current version of Regulatory Guide 134[13] which provides:
we consider it acceptable for the constitution to permit the responsible entity to use an estimate of the acquisition or disposal costs to determine the transaction cost amount. If a responsible entity uses an estimate, we consider that the estimate should seek to provide equity and fairness among members.
Note 1: If the responsible entity uses estimates, it should take into account its duties under s 601FC.
Note 2: A responsible entity has duties to act honestly and to act in the best interests of members. In our view, a responsible entity may not be complying with these duties if it attributes costs to the acquisition or disposal of scheme assets when there is no relationship between those costs and the costs of acquisition or disposal of scheme assets.[14]
[13]Australian Securities and Investments Commission, Managed Investments: constitutions, RG 134, June 2013.
[14]Ibid RG 134.52.
Sunset submitted that the corollary of note 2 is that, in ASIC’s view, a responsible entity may not be complying with its duties if it fails to attribute the actual costs of the acquisition of units, when it is clear that such costs are related to the acquisition.
Sunset is of the view that the Pricing Policy[15] evinces a correct construction of the discretion conferred by the definition of CTCs in clause 25 of the Constitution but that RFM’s proposal for merger does not.
[15]See above [16].
Sunset contended that it is clear that the expression ‘lesser sum’ in the last line of the definition of ‘Complying Transaction Costs’ in clause 25 of the Constitution refers to the estimate, not the CTCs themselves, and should therefore be read as if it provided that, in the case of a particular application, RFM can deem the CTCs ‘to be a lesser sum [than the estimate] or zero’. Sunset’s argument rests on its contention that the estimate referred to in the definition is the figure that results from applying the Pricing Policy. Whilst the Constitution came before the Pricing Policy, Sunset submitted that the Constitution contemplated that there would be a generally applicable default estimate (such as the Pricing Policy) based on experience and in line with legislative and regulatory requirements that would apply to all applications for units. On Sunset’s case, it is only if the figure for CTCs that results from applying the Pricing Policy exceeds the adverse impact actually created in a particular transaction such that it is out of line with expectations, that RFM has a discretion to treat the CTCs as something less than the estimate or to waive it altogether. Thus, the argument ran, the discretion is conferred to further the overriding purpose reflected in clause 4.1 and the definition of CTCs, not subvert it.
Sunset submitted that consistently with this, the word ’deem’ in clause 25 should be construed as meaning ‘judge’ or ‘regard’, not ‘make true’ or as otherwise enabling RFM to create a fiction.
The Macquarie Dictionary[16] defines ‘deem’ as:
1. to form or have an opinion; judge; think 2. to hold as an opinion; think; regard.
[16]Susan Butler (eds), Macquarie Dictionary (Macquarie Dictionary Publishers, 5th ed, 2009).
Osborn’s Concise Law Dictionary[17] defines ‘deemed’ as ‘to be treated as’. Similar definitions are found in other legal dictionaries.[18]
[17]Mick Woodley (ed), Osborn’s Concise Law Dictionary (Sweet and Maxwell, 12th ed, 2013).
[18]Bryan A Garner (eds), Black’s Law Dictionary (West Group, 9th ed, 2009): “1. To treat (something) as if (1) it were really something else, or (2) it had qualities that it does not have <although the document was not in fact signed until April 21, it explicitly states that it must be deemed to have been signed on April 14>. 2. To consider, think, or judge <she deemed it necessary>.” Trischa Mann (eds), Australian Law Dictionary (Oxford University Press, 2010): “deem, deemed (adj) Assumed to be the case, by operation of law. See DEEMING.” “deeming Treating or regarding a thing, event, or proposition in a particular way that may differ from ordinary usage and may even differ from actual fact.”
Sunset relied on Hunter Douglas Australia Pty Ltd v Perma Blinds[19] in which Windeyer J observed:
In Muller v Dalgety & Co Ltd, Griffith CJ said that “deemed” is commonly used “for the purpose of creating ...a ‘statutory fiction’...that is, for the purpose of extending the meaning of some term to a subject matter which it does not properly designate. When used in that sense it becomes very important to consider the purpose for which the statutory fiction is introduced.” This passage has often been quoted in Australian courts. It is a recognition that the verb “deem”, or derivatives of it, can be used in statutory definitions to extend denotation of the defined term to things it would not in ordinary parlance denote. This is often a convenient device for reducing verbiage of an enactment. But that the word can be used in that way and for that purpose does not mean that whenever it is used it has that effect. After all, to deem means simply to judge or reach a conclusion about something. A judge, or a juryman, is a deemster, although, except in the Isle of Man, that name has long been archaic. The words “deem” and “deemed” when used in a statute thus simply state the effect or meaning which some matter or thing has – the way in which it is to be adjudged. This need not import artificiality or fiction. It may be simply the statement of an indisputable conclusion, as if for example one were to say that on attaining the age of twenty-one years a man is deemed to be of full age and no longer an infant. Hundreds of examples of this usage of the word appear in the statute books.[20]
[19](1970) 122 CLR 49.
[20]Ibid 65 (citations omitted).
In conclusion, Sunset submitted that the context of the definition of CTCs in clause 25 (both within the Constitution as a whole, as well as the legislative and commercial context), and the words of the definition itself, all point strongly to the conclusion that the use of the word ‘deem’ does not entitle RFM to create the fiction that the CTCs are zero or a lesser sum, when the facts show otherwise. Sunset urged that the whole purpose of the definition of CTCs and clause 4.1 is to avoid the CTCs having an adverse impact on the existing members and, for this reason, the actual costs must be used.
The Court’s task is to construe the words in the Constitution using an objective approach. In this case, there is no basis for looking beyond the language of the Constitution to extraneous material.[21] Consequently, the construction task is not aided by an examination of ASIC’s Consultation Paper 54, nor by consideration of the Pricing Policy. Regulatory Guide 134 is also not relevant to the construction question. Its only relevance would be if it set a requirement as to how the estimate is to be made. That is, it might be relevant to consideration of whether RFM’s estimate is in line with the requirements of the Guide.[22] I will deal with this below[23] when considering whether RFM proposes to improperly exercise the discretion.
[21]Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.
[22]See the words in the proviso of the definition of CTCs: ‘provided that such estimate is made in line with the requirements of … published ASIC policy’. The full text is set out above [15].
[23]See below [48].
Similarly, there is no basis for having regard to how RFM has previously calculated the CTCs in other transactions. That will not inform the proper construction of the Constitution.
Sunset’s argument requires the Court to construe the definition of CTCs such that the ‘estimate’ must be an ‘estimate’ set by using a general or default policy for setting the Application Price for all units and that it is only that generally applicable estimate that may be reduced. However, that requires the words used in the definition to do much more than their ordinary and natural meaning would have them do. It would, in effect, require additional words to be read in obliging RFM to use the Pricing Policy to make the estimate in each case. But nowhere does the clause contain such wording, and the construction contended for by Sunset forces the meaning of the clause beyond the words used. Further, as counsel for RFM submitted, what would one do if an application of the general or default pricing policy were to result in a lesser sum than is required to avoid an adverse impact?
If one does not interpret the ‘estimate’ as the estimate given at a general policy level (for example, the Pricing Policy) then, as RFM submitted, Sunset’s submissions are circular. The estimate is the ‘amount necessary to avoid an adverse impact on other scheme members because of a particular acquisition’. As such, there is no scope for RFM to arrive at a higher ‘estimate’, and then reduce it because (as Sunset puts it) ‘the estimate results in an allowance for CTCs that exceeds the adverse impact actually created in a particular transaction’. If (as Sunset describes it) the estimate ‘results in an allowance for CTCs that exceeds the adverse impact actually created in a particular transaction’, then the estimate has not been properly made in the first place.
In the context of the Constitution as a whole and, in particular, the context of CTCs being one of the components for setting the price of a unit, it seems to me that the word ‘deem’ is not used in the sense described by Windeyer J in Hunter Douglas Australia Pty Ltd v Perma Blinds.[24] Rather, in my opinion, the word ‘deem’ is used in the sense of ‘regard’ or ‘treat as’.
[24](1970) 122 CLR 49, 65: see above [27].
I can see no justification for unnecessarily restricting the discretion conferred on RFM. The words used do not suggest that that was intended. That is not to say that there are no limits on the exercise of the discretion. There are. For example, if the discretion were exercised in bad faith, then that would not be permitted, nor does the definition permit the discretion to be exercised in a way that would result in the estimate being not ‘in line with’ the requirements of the Corporations Act, ASIC policy and relevant industry standards.
It seems to me that the natural reading of the definition of CTCs contemplates a two‑step process, if the discretion is to be exercised. First, RFM must estimate the actual amount of the transaction costs to avoid an adverse impact on existing RiverBank members. There is no discretion to be exercised in respect of this step. Rather, RFM must make an informed assessment of the actual costs. It may do so using the Pricing Policy, but there is no obligation on it to do so. Second, RFM may exercise its discretion to reduce that amount for the purposes of the calculation of the Application Price. RFM does this by treating the transaction costs as if they were a lesser sum or zero for the purposes of the calculation of the Application Price under clause 4.1.
Issue 2: Is what RFM proposes to do an improper exercise of its discretion?
Section 601FC(1)(b) and (c) of the Corporations Act require RFM to exercise the degree of care and diligence that a reasonable person would exercise if they were in RFM’s position and to act in the best interests of the RiverBank members. Responsible entities, as trustees, also have duties when exercising discretionary powers. Jacobs’ Law of Trusts in Australia describes these duties as follows:
Their first duty is to act honestly and in good faith … Their second duty is to act ‘upon genuine consideration’, that is, to take an informed view of whether or not to exercise their discretion, and not to act irresponsibly, capriciously or wantonly. Their third duty is to exercise their power with due consideration for the purpose for which it was conferred, and not for some ulterior purpose. While it is irrelevant whether or not their decision proves beneficial or prudent, and equally irrelevant whether the court would exercise the power in the same way, a grotesquely unreasonable result may be evidence of a miscarriage of duty.[25]
[25]Heydon, JD and Leeming, MJ, Jacobs’ Law of Trusts in Australia, (LexisNexis Butterworths, 7th ed, 2006) [1608] (citations omitted).
Courts will only interfere in the exercise of a discretion by a trustee in limited circumstances. For example, in Karger v Paul,[26] McGarvie J noted the general principle that the exercise of a trustee’s discretion is not to be examined or reviewed by a court if the trustee has acted in good faith and not for an ulterior purpose.[27] The exception which his Honour noted, is where trustees of their own volition disclose their reasons.[28]
[26][1984] VR 161.
[27]Ibid 165. See also Finch v Telstra Super Pty Ltd (2010) 242 CLR 254 [28]–[66]; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405.
[28]Ibid 165, 166.
At the outset, I would note that there is no suggestion that RFM has acted in bad faith, nor that RFM has acted on insufficient information, nor that RFM proposes to exercise the discretion for extraneous purposes. Rather, it is plain that the process for proposing a merger has been lengthy and detailed. Much thought and work has gone into it. From very early on in the process, the concept of the merger transaction costs being shared rateably between the three Funds has been contemplated.
RFM contends that it is entitled to do what it proposes as Scenario 1 in the exercise of the discretion afforded in the definition of CTCs in clause 25 of the Constitution. It says that in doing so, it will comply with s 601GAB of the Corporations Act. ASIC Class Order 05/26 varied the Corporations Act to insert that section. It enables a registered scheme to include in its constitution a formula for setting the issue price of a unit with the responsible entity having a discretion to decide matters affecting elements of the formula or the method.
Section 601GAB(6) requires the responsible entity to document matters relating to the exercise of such discretion. In this regard, RFM has prepared a document dated 27 November 2013 recording what it intends to do in respect of the Application Price calculation. In that document, RFM states that it is reasonable to exercise the discretion in the manner that it proposes because the acquisition of the units in the Chicken Fund and the Wine Fund combined with listing on the ASX, provides a net benefit rather than net adverse impact on RiverBank’s existing unitholders. It says that the key factors that contribute this net benefit are:
· an increase in the market value of RiverBank units by virtue of the listing on the ASX;
· the ability for individual members to sell their units on the ASX, as compared to the present situation where the sale of units is restricted by the absence of a market;
· increased diversification of assets and income streams;
· higher forecast distributions for RiverBank unitholders;
· greater interest cover with only marginal increase in loan to value ratio; and
· $1 million per annum in cost savings generated by merger synergies.
Turning then to Sunset’s submissions, it contended that the discretion must be exercised in consideration of matters relevant to the purpose of the discretion and that the purpose is found in RFM’s Pricing Policy. As I have said, under that policy, the transaction costs for buying an asset are stated to be up to three percent with the policy noting that RFM may waive or reduce that percentage where the transaction costs are out of line with expectations. Sunset submitted that this policy permits RFM to exercise the discretion by reducing or waiving the estimate (that is, reduce it to a lesser sum) where RFM holds the opinion that the three percent figure is not a true representation of the actual costs. This argument rests on the construction of the definition of CTCs that Sunset advanced. For the reasons already given, I am not persuaded that that is the proper construction of the clause.
Whilst I accept that the discretion ought be exercised in a manner that is consistent with the purpose for which it has been bestowed, I do not accept that the Pricing Policy determines the purpose. Rather, I would take the purpose from the wording of the Constitution. Doing this, I accept that the starting position is that the transaction costs associated with the issue of units ought be borne by the acquirer to avoid an adverse impact on the existing RiverBank members. However, RFM may exercise its discretion to alter that position. It must do so in line with the legislative requirements (which includes its obligations under s 601FC(1)), regulatory policy and industry standards. Provided that there is no bad faith and that the discretion is not exercised for an ulterior purpose, there are no other restrictions on the exercise of the discretion. As RFM contended, embedded within the discretion is the assumption that RFM may consider implications to RiverBank members beyond the immediate cost impact of issuing units to an acquirer, when deciding to reduce CTCs to zero or some lesser sum.
Sunset submitted that in this case, the Court may look more closely at what RFM proposes to do, because RFM has given reasons in respect of its intended exercise of the discretion. Sunset submitted that RFM’s reasoning shows that the proposed exercise of the discretion to implement Scenario 1 if the merger is approved by the members of the three Funds would be improper.
It pointed to the following passage in the supplementary explanatory memorandum:
The intent of this deeming, once exercised, is that the costs of Revaluation are shared between the Unitholders of the three Funds on a pro rata basis relative to their NAVs [net asset values]. RFM considers that it is just and equitable that RiverBank should bear some of this cost as RiverBank Unitholders will receive benefits from Revaluation going forward, as well as the benefits of what AWF [the Wine Fund] and CIF [the Chicken Fund] are bringing to the Merger.
Sunset also pointed to RFM’s written submissions which stated first, that the issue of units in implementation of the merger ‘cannot be characterised as typical issuance of RiverBank units’ and second, that:
The transaction is a merger between all three funds, which entails the benefits to all unit holders of the funds, including RiverBank…. It would be inequitable, in those circumstances, for the members of the Chicken and Wine Funds to bear the entirety of the costs of the Merger, and the members of RiverBank to ‘free ride’ by avoiding those costs.
Sunset submitted that those sentiments demonstrate the misconception in RFM’s approach. It contended that any inequity suffered by members of the Chicken Fund or the Wine Fund do not become relevant to RFM’s exercise of its duties as responsible entity of RiverBank merely because RFM chose RiverBank to be the Fund to issue units as part of the merger. In this regard, it noted the reference in ASIC’s superseded Regulatory Guide that fairness to the acquirer is not a relevant consideration and the principle that trustees may have to act dishonourably (though not illegally) if the interests of their beneficiaries require it.[29]
[29]Cowan v Scargill [1985] Ch 270, 288.
Sunset submitted that RFM as trustee of RiverBank should only be considering the interests of RiverBank members, yet it is clear that it has an eye on what is just and equitable between the three Funds. Here it contended, the only proper thing for RFM to do in the best interests of the RiverBank members is not to exercise the discretion at all but rather to apply the estimate of the actual costs necessary to avoid an adverse impact on those members.
Sunset submitted that the benefits that RFM believes will accrue to RiverBank members as a result of the merger[30] are not benefits that will accrue as a result of the exercise of the discretion and thus they cannot be relied on to justify the exercise of the discretion in circumstances where it is otherwise contrary to the interests of RiverBank members. In this regard, Sunset observed that the supplementary memorandum informs members of the Wine Fund and the Chicken Fund that they should consider that a possible outcome (dependent on the outcome of this proceeding) will be that the whole of the transaction costs must be borne by those Funds, such that the Application Price will be higher. This is referred to in the supplementary memorandum as ‘Scenario 4’. The supplementary memorandum says that the Chicken and Wine Fund members should make their decision on whether to support or reject the merger based on Scenario 4. Mr Bryant, who is the managing director of RFM, gave evidence that a Scenario 4 merger is still in the interests of Chicken and Wine Fund members. Sunset submitted that RFM should have taken this into account in deciding whether to reduce the figure for transaction costs. It contended that RFM could persuade members of those Funds to vote in favour of the merger on this basis.
[30]See above [40].
Accordingly, Sunset submitted that as now proposed, if the requisite majority of Chicken Fund and Wine Fund members support the merger, they will do so on the basis that they pay all the CTCs. Thus, it says:
(a)benefits that may flow to RiverBank members from implementation of the merger (if any) will not do so because RFM has purported to exercise a discretion imposing a rateable proportion of the CTCs on RiverBank members;
(b)only Chicken Fund and Wine Fund members will benefit from that exercise of discretion; and
(c)RiverBank members will be worse off than if the discretion had not been so exercised (the implied consideration received by RiverBank members for their units on implementation of the merger will be $1.02 per unit assessed on Scenario 1 at low value, compared with $1.06 per unit assessed on Scenario 4).
Put another way, Sunset says that while it is clear that members of the Chicken Fund and the Wine Fund will benefit from the purported exercise of the discretion, there is no evidence that it will confer any benefit on RiverBank members that would not otherwise accrue to them. On the other hand, Sunset posits that there is clear evidence that, under Scenario 1, RiverBank members will suffer a material adverse impact from the imposition of CTCs arising directly from the acquisition of the units in RiverBank, being the very impact that clauses 4.1 and 25 of the Constitution seek to avoid.
There must be a question as to whether RFM has given reasons voluntarily and whether the Court may have regard to them. RFM is obliged to make disclosures to the members in compliance with its duties under the Corporations Act. It seems to me that in providing some of its reasoning in the supplementary memorandum, it has done no more than seek to comply with that obligation. I would not categorise the provision of reasons in those circumstances as voluntary.
In any event, it seems to me too narrow a view of the reasons given to limit them (as Sunset seeks to do) to the passage set out above from the supplementary explanatory memorandum.[31] In my view, RFM’s more meaningful and fulsome reasons are set out in the statement made pursuant to s 601GAB set out in [40] above. If one does have regard to those reasons, I do not think that RFM ought be criticised.
[31]See above [44].
There is a significant assumption that underlies Sunset’s submissions. This is that the Chicken and Wine Fund members will vote in favour of the merger if they are to bear all of the transaction costs. However, there is no certainty in that regard. Whilst the Chicken and Wine Fund members have been told by RFM that it is possible that the Court might impose that burden on them, they have also been told that in the absence of such an imposition by the Court, the discretion will be exercised by RFM in a way that would see the transaction costs borne rateably between the Chicken, Wine and RiverBank Funds. In those circumstances, it would be pure conjecture to assume that the Chicken and Wine Fund members will vote in favour of the merger if they have to bear all of the transaction costs.
Once the assumption is removed, Sunset’s submissions lose much of the force which they might have had. Put simply, it is not at all clear that the RiverBank members will gain the benefits of the merger if Scenario 1 does not eventuate and Scenario 4 does.
Further, there is nothing that supports the proposition that because the allocation of the transaction costs as proposed benefits the members of the Chicken and Wine Funds that there is not also a benefit to RiverBank from the whole transaction. Whilst there might be an adverse impact in respect of the Application Price of about four cents per unit if Scenario 4 ensues, that is only part of the broader merger transaction which is proposed. RFM is certainly of the view that overall RiverBank members will benefit if the merger is implemented. Whether that view is correct or not is not to the point. It is an honestly held view and is not so obviously wrong that the Court should interfere.
In essence, what RFM has done is to tailor the exercise of its discretion in respect of this particular transaction. Whilst the Pricing Policy might operate as a general policy to apply to less complex transactions, it seems to me that there is nothing improper nor in breach of s 601FC(1)(b) and (c) if RFM acts in the manner it proposes in a significant transaction such as the proposed merger. In exercising its discretion, it is legitimate for RFM to take an overarching view of the benefits likely to flow to RiverBank if the merger goes ahead and to permit RiverBank to bear a proportion of the transaction costs because, in its opinion, the net benefits outweigh any adverse impact of RiverBank bearing those costs. That is not in contravention of the legislation. Nor does it offend any ASIC policy. Regulatory Guide 134 notes that a responsible entity may not be complying with its duties if it attributes costs to the acquisition when there is no relationship between those costs and the costs of acquisition.[32] Accepting, for present purposes, that it follows that ASIC’s view is that a responsible entity may fail in its duties if it does not attribute the actual costs to the acquisition of units, it does not follow that this will always be the case. In this case, RFM has come to the view that the merger is in the interests of the members of the three Funds, that is, they have a common interest in the merger being approved and implemented. In those circumstances, it is natural that RFM will make what it considers to be appropriate adjustments to ensure that the proposal is attractive to members of all funds.
[32]See above [20].
In my opinion, this is the type of case where the Court should be slow to interfere with the exercise of the discretion unless it is very clear that the power is to be exercised improperly and in breach of the obligations under s 601FC(1). I am not satisfied that that is the case here. It cannot be said that RFM has very obviously formed the incorrect view that there is a net benefit rather than net adverse impact if the merger proceeds on the basis it proposes. It is not the Court’s role to review the merits of the decision to which RFM has come honestly and in good faith to exercise a discretion. Nor is it the Court’s task to impose its own views on the responsible entity, nor to make commercial decisions in place of the responsible entity. Here, there has been disclosure to the members of RiverBank, that it is proposed that that Fund bear some of the transaction costs. The members will have their chance to vote on the merger in full knowledge that that is how the discretion is to be exercised. They should be permitted to do so.
Conclusion
On its proper construction, the Constitution empowers RFM to treat the merger transaction costs at zero or a lesser sum than the actual amount of them. There will be no improper exercise of that discretion if in the proposed merger transaction, RFM treats the transaction costs as being $1.8 million as opposed to $3.8 million.
The proceeding will be dismissed. I will hear the parties as to the costs of the application.
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