After consultation, the Takeovers Panel (Panel) has released amendments to guidance note 15 (GN15) which sets out the Panel's approach to the use of trust schemes to effect mergers by listed trusts and managed investment schemes.
'Fair and reasonable', 'best interests' or both?
The Panel's consultation draft requested comments in relation to Independent Expert's Reports (IERs) by asking whether:
"the practice of getting an expert's report on both the 'fair and reasonable' test and the 'best interests' test, which is not uncommon, should continue."
In the amended GN15, the Panel has confirmed the validity of this practice by explicitly noting that, despite the Panel's general requirement that the IER state whether, in the expert's opinion, the terms of the trust scheme are "fair and reasonable" for non-associated unitholders:
"it is also not uncommon for the expert to opine on whether a transaction is in the 'best interests' of holders."
This practice can be seen, for example, in the 2011 trust scheme relating to the Challenger Wine Trust in relation to which the independent expert found that the proposal was not fair but reasonable and was in the best interests of the non-associated unitholders and in the 2010 trust scheme by which Mirvac acquired all the units in Westpac Office Trust where the independent expert found that the proposal was fair and reasonable and in the best interests of the non-associated unitholders.
IERs compulsory for trust schemes
GN15 states that all trust scheme notices should contain an IER. This is the case even though an IER is only strictly required for a takeover bid if the bidder and target have a shared director or the acquirer has over 30% voting power in the target (in a class). Materially similar threshold tests apply in the context of a scheme of arrangement.
The Panel states that the requirement to obtain an IER in all trust schemes is supported by practice, the absence of the judicial and ASIC scrutiny which accompanies a members' scheme and the fact that all trust schemes are recommended by the relevant responsible entity of the target, even though that responsible entity technically has an interest in the transaction as its management rights will be affected.
As an overriding principle, in GN15 the Panel states that trust schemes should be governed by similar policies and protections as those set out in Chapter 6 of the Corporations Act, applied consistently with the way the courts apply those safeguards when considering section 411(17) in relation to members' schemes of arrangement. GN15 follows this principle by stating that the IER should set out whether in the opinion of the expert, the terms of the trust scheme are 'fair and reasonable' for the non-associated holders of the target. Requiring the expert to opine on whether the proposal is 'fair and reasonable' means that unitholders are being provided with the same level of information as they would receive under a takeover bid (in which case section 640 of the Corporations Act requires an expert to opine on whether a bid is 'fair and reasonable').
In setting out this requirement, GN15 does not, however, define what constitutes 'fair and reasonable'. As a result, it is relevant then to consider ASIC's Regulatory Guide 111 "Content of expert reports" (RG111) which sets out ASIC's guidelines in respect of IERs.
Is there any practical difference between the two tests?
RG 111 notes that where a transaction is implemented by way of a scheme of arrangement, the form of analysis undertaken by the expert should be substantially the same as that for a takeover bid, even though the wording of the opinion will also be whether the transaction is 'in the best interests of the members of the company'. It is important to note that this requirement for an opinion on 'best interests', which is set out in Schedule 8 of the Corporations Regulations, applies to members' or creditors' schemes of arrangement under section 411 rather than to trust schemes.
RG111 states that "where an expert report is required in a scheme of arrangement involving a change of control, the expert is expected to apply the analysis and provide an opinion as to whether the proposal is 'fair and reasonable'...as if the 'bidder' was the 'other party' and the 'target' was the company that is the subject of the proposed scheme."
RG 111 goes on to state that "If an expert would conclude that the proposal was 'fair and reasonable' if it was in the form of a takeover bid, it will also be able to conclude that the scheme is in the best interests of members of the company. If an expert would conclude that the proposal was 'not fair but reasonable', it is still open to the expert to conclude that the scheme is 'in the best interests of the members of the company'. A recent example of this is the trust scheme involving MacarthurCook Industrial Property Fund, where the independent expert considered the transaction to be in the best interests of unitholders despite assessing the proposal to be unfair because the offer price was at a discount to NTA.
As a result, the analysis undertaken by an independent expert to determine whether a trust scheme is fair and reasonable will also support an opinion as to whether it is in the best interests of non-associated unitholders. Therefore, if directors of a responsible entity affected by a trust scheme wish to ensure that unitholders are provided with an opinion as to whether the proposal is in their best interests, the independent expert they instruct will be able to opine on this based on the analysis they have undertaken to satisfy the GN15 obligation to determine whether, in the expert's view, the transaction is fair and reasonable.
This therefore supports the practice of IERs opining on whether a transaction is both 'fair and reasonable' and in the 'best interests' of holders, and consequentially the logic of this practice being recognised by the Panel's revised GN15.