Walsh & Company Investments Limited as responsible entity of Fort Street Real Estate Capital Fund I, Fort Street Real Estate Capital Fund II, Fort Street Real Estate Capital Fund III and Fort Street Real Estate...

[2020] NSWSC 1509

Supreme Court

New South Wales

Medium Neutral Citation:

Walsh & Company Investments Limited as responsible entity of Fort Street Real Estate Capital Fund I, Fort Street Real Estate Capital Fund II, Fort Street Real Estate Capital Fund III and Fort Street Real Estate Capital Fund IV (Plaintiff) [2020] NSWSC 1509

Hearing dates:

29 September 2020

Date of orders:

29 September 2020

Decision date:

28 October 2020

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Direct that the Plaintiff is justified in convening meetings of unitholders in each of four funds to consider proposed trust scheme. Direct that the Plaintiff is justified in distributing the explanatory memorandum. Direct that the Plaintiff is justified in proceeding on the basis that, if approved by unitholders, consequential amendments to the constitution of each fund would be within powers conferred by each constitution and s 601GC of the Corporations Act.

Catchwords:

CORPORATIONS – Managed investments – Judicial advice sought under s 63 of the Trustee Act 1925 (NSW) by responsible entity – Whether to convene meetings of unitholders – Whether to approve explanatory memorandum – Whether justified in treating consequential constitution amendments as within power.

Legislation Cited:

- Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth)

- Corporations Act 2001 (Cth), ss 252Q, 601GB, 601GC, 1362A

- Corporations (Coronavirus Economic Response) Determination (No 1) 2020 (Cth)

- Trustee Act 1925 (NSW), s 63

Cases Cited:

- Macedonian Orthodox Church St PetkaInc v His Eminence Petar (2008) 237 CLR 66

- Re APN News and Media Ltd (2007) 62 ACSR 400

- Re Ardent Leisure Ltd [2018] NSWSC 1665

- Re Commonwealth Managed Investments Ltd [2014] NSWSC 74

- Re DUET Management Company 1 Ltd (2013) 95 ACSR 34; (2013) 95 ACSR 34

- Re DUET Finance Ltd [2017] NSWSC 415

- Re Investa Listed Funds Management Ltd [2018] NSWSC 1766

- Re Mirvac Ltd (1999) 32 ACSR 107

- Re Mirvac Funds Management Ltd [2014] NSWSC 1569

Category:

Principal judgment

Parties:

Walsh & Company Investments Limited as responsible entity of Fort Street Real Estate Capital Fund I, Fort Street Real Estate Capital Fund II, Fort Street Real Estate Capital Fund III and Fort Street Real Estate Capital Fund IV (Plaintiff)

Representation:

Counsel:
J Williams SC (Plaintiff)

Solicitors:
Allens (Plaintiff)

File Number(s):

2020/127441

Judgment

Background and affidavit evidence

1. By Summons filed on 28 April 2020 the Plaintiff, Walsh & Company Investments Limited (“WCIL”), as responsible entity of the Fort Street Real Estate Capital Fund I (“Fund I”), Fort Street Real Estate Capital Fund II (“Fund II”), Fort Street Real Estate Capital Fund III (“Fund III”) and Fort Street Real Estate Capital Fund IV (“Fund IV”) (together, “Funds”) sought orders that it would be justified in convening a meeting of unitholders of each of the Funds for the purpose of their considering and, if thought fit, agreeing to a proposal (“Proposal”) set out in an Explanatory Memorandum and that it would be justified in distributing an Explanatory Memorandum substantially in the form provided to the Court to unitholders of the several Funds. WCIL also sought an order, at the first hearing, that it would be justified in proceeding on the basis that the making of the proposed amendments to the constitution of each Fund contemplated by the resolutions for the relevant meetings, following approval by special resolution at each meeting, would be within the powers of alteration conferred by the constitution of each Fund and s 601GC of the Corporations Act 2001 (Cth). WCIL foreshadowed that, if the Proposal is approved at unitholder meetings, it will seek the Court’s advice at a second hearing on 4 November 2020 that it would be justified in implementing the Proposal including giving effect to certain amendments to the constitution of the Funds.

2. At the first hearing of the application on 29 September 2020, I made orders in the form sought by WCIL, that it would be justified in convening the relevant extraordinary general meetings of the Funds and distributing the Explanatory Memorandum and certain other documents. These are my reasons for making those orders.

Applicable principles

3. Mr Williams, who appears for WCIL, points out that registered managed investment schemes are not Part 5.1 bodies for the purposes of the scheme provisions in Part 5.1 of the Corporations Act. However, he also points out that it is conventional in a “trust scheme” for a responsible entity to seek judicial advice in a two-stage process by analogy with schemes under Part 5.1 of the Act: Re Mirvac Limited (1999) 32 ACSR 107; Re DUET Management Company 1 Ltd [2013] NSWSC 817; Re Sydney Airport Holdings Ltd [2013] NSWSC 1665; Re Investa Listed Funds Management Ltd [2018] NSWSC 1766. Mr Williams also refers to the common practice in an application for judicial advice under s 63 of the Trustee Act 1925 (NSW) (and its analogues in other Australian jurisdictions) in connection with a trust scheme, by which, at a first Court hearing, the responsible entity seeks judicial advice that it is justified in propounding resolutions to implement the scheme and in proceeding on the basis that proposed amendments to the constitution of the registered managed investment scheme to implement the trust scheme would be within the powers of alteration conferred by that document and s 601GC of the Act; that judicial advice, and the right of unitholders to appear at the second hearing and object to the trust scheme, is then disclosed in an explanatory statement sent to unitholders for a meeting to consider the resolutions to implement the scheme; unitholders then meet to consider and vote on the resolutions; and, if unitholders vote in favour of the proposal, the responsible entity seeks judicial advice at a second Court hearing that, having regard to the result of voting at the scheme meeting and any other relevant circumstances, it is justified in implementing the scheme: Re Mirvac Limited above at [47]; Re DUET Management Company 1 Limited above at [9].

Affidavit and other evidence

4. WCIL relied on the affidavit dated 28 April 2020 of its solicitor, Mr Thomas Kavanagh, which referred to WCIL’s role as responsible entity for the several Funds. Mr Kavanagh noted that the Funds have the primary objective of providing investors with access to Australian commercial property, and together have a portfolio of 12 convenience-based retail centres and one A-grade commercial office building. Mr Kavanagh also referred to an announcement published by WCIL on 11 March 2020 on its website to the effect that it was exploring a merger of the Funds.

5. WCIL also relied on the affidavit dated 8 May 2020 of Mr Stuart Nisbett, the independent chairman of its board, who indicated his consent to act as chair of each of the four proposed meetings. By an affidavit dated 7 May 2020, Mr Peter Shear, who is an independent non-executive director of WCIL, indicated his consent to act as alternate chair of each of the relevant meetings if Mr Nisbett was unwilling or unable to do so.

6. By an affidavit dated 24 September 2020, Mr Gavin Reed, who is the general manager for Lumi Technologies Pty Ltd, set out the services which would be provided in respect of the conduct of virtual meetings of the Funds, including the mechanism for access by unitholders and the conduct of polls.

7. By an affidavit dated 27 September 2020, Ms Jaclyn Strelow, who is an executive director of Walsh & Company Asset Management Pty Ltd, the fund manager for each of the Funds, and also a director of Fort Street Real Estate Capital Pty Ltd, the investment manager and property manager for each of the Funds, referred to the role of WCIL as responsible entity for each of the Funds and the Funds’ primary objective of providing investors with access to Australian commercial property. Ms Strelow also set out the proposal, which contemplated that Fund I would acquire all the units in Fund IV from unitholders in that fund, and each of Fund I, Fund II and Fund III would then be restructured to form a stapled group. Ms Strelow also referred to the steps involved in implementing the Proposal and to the scheme consideration in respect of Fund I’s acquisition of units in Fund IV from unitholders in that Fund. Ms Strelow also referred to the terms of the Explanatory Memorandum, the proposed conduct of extraordinary general meetings of unitholders of the Funds and the steps to be taken in despatching copies of the Explanatory Memorandum and other documents to unitholders in the Funds, and to the drafting and verification process which had been adopted in respect of the Explanatory Memorandum `and an associated product disclosure statement and the verification process which had been adopted in respect of the independent expert’s report (“IER”). Ms Strelow also referred to certain conditions precedent to implementation of the Proposal.

8. By an affidavit dated 28 September 2020, Mr Stuart McCulloch, who is a solicitor acting for WCIL in respect of the Proposal, referred to the provision of documents in respect of the trust scheme to the Australian Securities and Investments Commission (“ASIC”) and, in particular, to correspondence with ASIC in respect of the judicial advice sought under s 63 of the Trustee Act in respect of the trust scheme. I will refer to an aspect of that correspondence below.

9. By a further affidavit dated 29 September 2020, Mr Francis Araullo, who is an executive director and the head of compliance of Evans Dixon Ltd, the ultimate parent of WCIL, led evidence of the joint anti-money laundering and counter-terrorism financing program adopted by WCIL, pursuant to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), which includes processes for the identification of persons to whom units were allotted in each of the Funds, both at the point of the initial issue of units and at the point of subsequent acquisition of units through off-market transfers. Mr Araullo noted that no failure to comply with the collection and verification procedures set out in that program has come to his attention. In these circumstances, notwithstanding that the Anti-Money Laundering and Counter-Terrorism Financing Act extends to the issue of units in an unlisted fund, no issue arises as to any risk of non-compliance with the requirements of the Act in respect of the issue of units in Fund I to unitholders in Fund IV as an aspect of the proposal.

10. As is generally appropriate in an application for judicial advice, WCIL also prepared and tendered a statement of facts (Ex SOF).

Steps in the proposal

11. Mr Williams points to the seven steps involved in implementing the proposal. First, each Fund will amend its constitution by resolutions passed by unitholders in accordance with s 601GC(1)(a) of the Corporations Act to facilitate the Proposal. Second, pursuant to the amendments to be made to the constitution of Fund IV, Fund I will acquire all the units in Fund IV from the Fund IV unitholders in consideration for the issue of units in Fund I based on an exchange ratio determined by the net tangible assets (“NTA”) of both Funds at 30 June 2020 (which equates to 0.9286 Fund I units for each Fund IV unit held). Mr Williams notes that this step has the character of a conventional “trust scheme” acquisition of all the units in a registered scheme, of the kind addressed in Re Mirvac Ltd above.

12. Third, units in Funds II and III will be consolidated to vary the number of units on issue in each Fund such that the NTA per unit of both Funds as at 30 June 2020 equals the NTA per unit of Fund I at that date. Fourth, Funds I, II and III will issue promissory notes to each other in exchange for promissory notes of equal value. Fifth, each of Funds I, II and III will make a capital distribution to unitholders of the promissory notes received from the other Remaining Funds (as defined). Sixth, WCIL will apply the relevant capital distribution (in the form of promissory notes) on behalf of each unitholder in Funds I, II and III to subscribe for units in the other of Funds I, II and III, and will then issue the units so applied for and the promissory notes will then be cancelled. Seventh, one unit in each of Funds I, II and III will be stapled to one unit in each other of those Funds to form a “stapled security” in the Stapled Fund.

13. Mr Williams also points out that the proposed amendments to the Funds’ constitutions also include the introduction of a “Liquidity Review” on each 5 year anniversary of the Implementation Date while the relevant Fund is not liquid and unlisted, requiring WCIL as responsible entity to convene a meeting of unitholders to consider a resolution to wind-up the merged fund; if unitholders pass the resolution, WCIL must undertake an orderly winding up of the Fund within two years of the Liquidity Review; and, if unitholders do not pass the resolution, WCIL must give unitholders an opportunity to exit the merged fund by making a withdrawal offer in accordance with the Act within 6 months of the Liquidity Review. Mr Williams also points to other amendments that are proposed to be made to the Funds’ constitutions, as summarised in the Explanatory Memorandum, including an amendment to the redemption price calculation (to introduce a 3% discount to NTA) and changes to the fees payable to WCIL. Mr Williams notes that the Proposal is conditional upon the unitholders of each Fund passing the resolution to amend that Fund’s constitution and related resolutions to facilitate implementation of the Proposal and, if unitholders of any Fund do not pass the applicable resolutions the Proposal will not be implemented. The Proposal is also conditional upon receipt of certain regulatory relief from ASIC and the Court giving the judicial advice to be sought at the second Court hearing.

14. As Mr Williams points out, WCIL’s directors unanimously recommend that unitholders in each Fund vote in favour of the resolutions to effect the Proposal. KPMG Financial Advisory Services (Australia) Pty Limited (“KPMG”) was engaged to prepare an IER in relation to whether the Proposal is in the best interests of unitholders in each of the Funds and that IER appears in Section 14 of the Explanatory Memorandum. KPMG adopted a ‘merger of equals’ analysis assessing the value of each Fund on a consistent basis, namely NTA as at 30 June 2020, and concluded that the Proposal is fair and reasonable to unitholders in each Fund. Mr Williams notes that the primary matter considered by KPMG in assessing fairness is the value of the effective consideration to be received by unitholders in each Fund under the Proposal, relative to the NTA per unit in each Fund, and that KPMG utilised a 'base case', 'worst case' and 'best case' scenario (as supported by independent property valuations as at 30 June 2020) for future COVID 19 impacts on each Fund’s performance in assessing that matter, and also considered enhanced liquidity mechanisms for investors, greater scale and asset diversification, fee savings and costs efficiencies in forming the view that the Proposal was reasonable and therefore in the best interests of unitholders in each Fund. The Explanatory Memorandum also contains a report from Deloitte Tax Services Pty Limited providing unitholders with a general overview of the taxation implications of the transaction, in Section 13 of the Explanatory Memorandum.

Despatch of materials to unitholders and conduct of meetings

15. WCIL will despatch to unitholders of each Fund, as at 28 September 2020, an Explanatory Memorandum and the relevant Notice of Meeting for that unitholder, together with a direct voting form and proxy form and a Product Disclosure Statement for the stapled fund. Mr Williams also draws attention to the process to be adopted for meetings of unitholders of each of the Funds. It is proposed that the meetings be held virtually and that there not be any physical meeting which unitholders can attend. As Mr Williams points out, a physical meeting of unitholders is currently impractical by reason of the COVID-19 pandemic and a virtual meeting of unitholders is permitted by s 252Q of the Act provided the technology used gives members as a whole a reasonable opportunity to participate. Mr Williams points out that amendments were also made to the constitution of Funds I, II and III to facilitate virtual meetings of unitholders and virtual meetings were also expressly authorised by cl 5(1) of the Corporations (Coronavirus Economic Response) Determination (No 1) 2020 made by the Commonwealth Treasurer on 5 May 2020 under s 1362A of the Act, the operation of which has been extended to 21 March 2021. The virtual meetings will be held using the “Meeting Manager” system operated by Lumi Technologies Pty Limited and the procedures for voting and participation in the meetings are disclosed in Section 4 of the Explanatory Memorandum and in the Notice of Meeting for each Fund. Mr Williams points out that WCIL will disregard any votes cast in relation to the resolutions by WCIL, its related entities receiving a financial benefit in relation to the Proposal (including entities performing the role of trustee of holding trusts and investment manager to the Funds) and their associates, unless cast as a proxy for a unitholder otherwise entitled to vote, as noted in Section 11.10 of the Explanatory Memorandum.

Performance risk

16. Mr Williams rightly recognises that the ability of scheme members to enforce entitlements to be received under a scheme is relevant to the exercise of the court’s discretion and a similar consideration can arise in a trust scheme where a third party provides consideration or benefits: Re Sydney Airport Holdings above at [17]; Re Mirvac Funds Management Ltd [2014] NSWSC 1569 at [7]. Mr Williams submits, and I accept, that no third party performance risk arises here, where WCIL is to perform the relevant obligations as responsible entity of each of the Funds pursuant to the amended constitutions of the Funds, and the Proposal is conditional upon all resolutions being passed by unitholders of all Funds. Mr Williams points out, and I accept that, in these circumstances, if the resolutions are approved by unitholders, WCIL in its capacity as responsible entity of each Fund will become obliged to undertake the steps necessary to effect the Proposal and unitholders could compel compliance by enforcement of the contract embodied in the constitution of each Fund in accordance with s 601GB of the Act.

Deemed warranty

17. The proposed amendments to the constitution of Fund IV include a deemed warranty by Fund IV unitholders that they have full power and capacity to transfer their units to Fund I under the Proposal and that those units will be free from encumbrances. Mr Williams submits, and I accept, that appropriate prominence was given to the deemed warranty in section 11.7 of the Explanatory Memorandum: Re APN News and Media Ltd (2007) 62 ACSR 400 at [57]-[63]; Re Ardent Leisure Ltd [2018] NSWSC 1665 at [26].

Constitutional amendments

18. As I noted above, WCIL seeks the Court’s advice under s 63 of the Trustee Act that it would be justified in proceeding on the basis that the making of the proposed amendments to the constitutions of Funds would be within the powers of alteration conferred by those constitutions and s 601GC of the Act. Those constitutions contain amending provisions and, as Mr Williams pointed out, the constitution of a managed investment scheme may also be altered by a special resolution of the members of the scheme under s 601GC(1)(a) of the Act. Mr Williams also points out that the power of alteration under s 601GC(1)(a) of the Act is very wide and is appropriate to enliven jurisdiction under s 63 of the Trustee Act in a trust scheme context, and there is no implied limitation on the Court’s power to give advice pursuant to s 63 of the Trustee Act, nor the discretionary factors the Court may take into account: Macedonian Orthodox Church St Petka Inc v His Eminence Petar (2008) 237 CLR 66 at [55]-[59]; Re Mirvac Limited above; Re DUET Management Company 1 Ltd above at [10]. I am satisfied that WCIL, as responsible entity of the Funds, would be justified in proceeding on the basis that the making of the proposed amendments to those constitutions in connection with the trust schemes, following the requisite approval by unitholders, would be within its powers, including the powers of alteration conferred by those constitutions and s 601GC of the Act.

18. I note, for completeness, that ASIC, by a letter dated 1 July 2020 to WCIL’s solicitors, raised the question why it was necessary for WCIL, in its capacity as responsible entity of the Funds, to seek advice on whether the amendments would be within power following the relevant resolutions instead of simply convening the relevant meetings. By letter dated 9 July 2020, WCIL’s solicitors responded by reference to the common practice, to which I referred above, of seeking judicial advice in relation to proposed amendments to the constitution of a managed investment scheme and referred to the cases which have considered that practice, including Re Mirvac Ltd above; Re Duet Management Company 1 Ltd above; Re Commonwealth Managed Investments Ltd [2014] NSWSC 74; Re Duet Finance Ltd [2017] NSWSC 415 and Re Investa Listed Funds Management Ltd above.

19. There is perhaps a question whether, if this practice had not existed for more than 20 years, it would now be necessary to establish it, although it has advantages including allowing the Court’s oversight of “trust schemes” and conforming the process adopted in respect of such “trust schemes” for that which is adopted for schemes of arrangement under s 411 of the Act, where the two forms of scheme often have a similar commercial effect. In any event, it seems to me that the Court would not now depart from this long established practice without any party submitting that it should do so. It is not necessary to address such a submission here since, by a further letter dated 22 September 2020, ASIC reserved its position as to the matters raised in the correspondence but indicated that it did not have anything it wished to raise with the Court in respect of those matters. No doubt, if ASIC ultimately wishes to challenge the need for the long standing practice in respect of trust schemes, it will appear in an application before the Court in order to do so. It is not necessary to address such a challenge until it is made.

Orders

21. For these reasons, I made orders in the form sought by WCIL at the hearing on 29 September 2020.

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Decision last updated: 29 October 2020