Trust schemes (for trusts)
- A ‘trust scheme’ can be used only for a friendly acquisition of a trust, and is frequently used to effect 100% acquisitions.
- A trust scheme resembles a company scheme of arrangement, but without the requirement for court approval.
- Trust schemes are subject to fewer specific rules than takeover bids and are therefore more flexible, but the Takeovers Panel has oversight.
- A standard trust scheme involves:
- an implementation agreement between the bidder and the target;
- the preparation by the target, with input from the bidder, of a draft explanatory memorandum which is sent to ASIC for review before sending to unitholders in advance of the unitholders’ meeting;
- holding the unitholders’ meeting;
- lodging the amended trust constitution with ASIC;
- implementing the trust scheme; and
- de-listing the target from ASX.
9.1 What is a trust scheme?
A ‘trust scheme’ is a transaction structure which has been developed by the market over the past 15 or so years to effect a friendly acquisition of an ASX-listed trust - as an alternative to a takeover bid. The structure is called a ‘trust scheme’ because in some ways it resembles a scheme of arrangement for a company. However, ASX-listed trusts (formally known as listed managed investment schemes) cannot be the subject of a scheme of arrangement under Part 5.1 of the Corporations Act.
In general terms, a trust scheme involves unitholders of the target trust being asked to approve the transaction and also amendments to the trust constitution that will authorise the trustee (or responsible entity) to take steps, the end result of which will be that the bidder owns all of the units in the trust. Each ASX-listed trust must have a ‘responsible entity’ which is a company that under the Corporations Act performs the dual role of trustee and trust manager (though it is not uncommon for a responsible entity to appoint a custodian to hold trust property). In a takeover context, the directors of the responsible entity of a target trust are commonly referred to as the ‘target directors’. In this section 9, the terms ‘target’, ‘target directors’ and ‘target’s responsible entity’ will be used interchangeably.
Generally, there are two kinds of trust schemes: ‘transfer schemes’ and ‘redemption schemes’.
A transfer scheme involves transferring all of the issued units to the bidder (except units already held by the bidder). The transfer price paid (or scrip issued) by the bidder is passed on to the target unitholders.
A redemption scheme involves redeeming (cancelling) all of the issued target units (except units held by the bidder). A key issue is to determine how best to ensure that the trust has the cash (or scrip) needed to pay for the redemptions.
From a practical perspective, the two types of schemes follow similar procedures and have substantially the same effect for the bidder and for target unitholders. Which approach is used in a particular transaction will be determined by a range of factors, including tax (for both investors and the bidder), stamp duty and whether there are any pre-emptive rights over the target’s assets.
The trust scheme structure is frequently used to effect an acquisition of 100% of the units in a target trust. In fact, in a friendly deal the trust scheme structure is much more often used than the takeover bid structure. This is largely because of its ‘all-or-nothing’ outcome and the lower target unitholder approval threshold (similar to a company scheme of arrangement - see section 6.2). As the bidder is not a party to the trust scheme, the target should require the bidder to execute a deed poll in favour of target unitholders undertaking to pay the trust scheme consideration (ie. the purchase consideration) to them upon implementation.
This section 9 focuses on the key trust scheme rules and features. It is prepared on the assumption that the target is a stand-alone trust, not part of a stapled entity structure. Where the trust is part of a stapled entity structure (eg trust stapled to a company), a trust scheme would need to be inter-conditional with a scheme of arrangement for the company side of the structure. See sections 10 and 11 for a discussion of the strategic considerations involved in planning or responding to a takeover proposal.
9.2 Indicative timetable
Below is an indicative timetable for a basic trust scheme, which assumes that the trust schemes proceeds as a transfer scheme, the trust scheme is successful, there is no rival bidder, judicial review is not sought and there are no regulatory actions which affect timing.
9.3 Key trust scheme rules and features
In contrast to a takeover and scheme of arrangement, there is no specific statutory mechanism for a trust scheme. It is based on a combination of s611 item 7 of the Corporations Act (securityholder-approved transactions), Takeovers Panel policy and general trust law. The Takeovers Panel has assumed jurisdiction of disputes regarding a trust scheme.
Below is a summary of the key features of a trust scheme transaction, having regard to the relevant rules.
(a) Implementation agreement
While not specifically required by law, it is universal practice for a bidder and target (specifically, the target’s responsible entity) to enter into an implementation agreement in respect of a trust scheme. This is because the proposal and implementation of a trust scheme requires a joint bidder-target effort. In contrast, a takeover bid involves the bidder and target undertaking discrete roles with specific areas of responsibility.
An implementation agreement will usually contain: the target’s obligations to pursue and recommend the trust scheme, the target’s obligation to convene a meeting of unitholders to vote on the trust scheme, the trust scheme purchase consideration, the bidder’s obligations to provide the trust scheme consideration and assist with the preparation of the trust scheme booklet to target unitholders, the conditions to the trust scheme, and various other provisions dealing with operation of the target prior to trust scheme implementation. It is also common for an implementation agreement to contain deal protection mechanisms such as exclusivity provisions (including ‘no-shop’ and ‘no-talk’ restrictions), rights to match rival bidders and a break fee payable by the target to the bidder in certain circumstances if the trust scheme is not successful.
For the most part, implementation agreements can contain whatever provisions are agreed between the parties. However, the Takeovers Panel’s view is that the takeover bid rules in Chapter 6 of the Corporations Act should apply to trust schemes (eg no collateral benefits, minimum bid price rule and no self-triggering conditions). In practice, though, any departures from the takeover bid rules can largely be addressed through disclosure to target unitholders (eg disclosure of any self-triggering conditions such as bidder due diligence) or the creation of separate classes of target unitholders for voting purposes (eg in situations where certain unitholders will or may receive a benefit from the bidder which is not available to other unitholders). In addition, deal protection mechanisms in an implementation agreement generally need to comply with Takeovers Panel policy (eg no-talk restrictions need to be subject to an exclusion to enable superior proposals to be considered and recommended, and a break fee can usually not exceed 1% of the target’s equity value).
The signing of an implementation agreement triggers an obligation on an ASX-listed target to make a market announcement. The form of announcement should be agreed in advance between the bidder and target. Normally a scheme announcement will contain the key terms and conditions of the deal, the target board’s recommendation that unitholders vote in favour of the trust scheme in the absence of a superior proposal (and sometimes also subject to an independent expert concluding that the terms of the trust scheme are fair and reasonable for target unitholders), and an indicative timetable. It is also common for the implementation agreement to be publicly released in its entirety.
(Note: an implementation agreement is binding only on the target and not on target unitholders. Only if and when a trust scheme is approved by unitholders and the amended target constitution is lodged with ASIC does the trust scheme become binding on target unitholders.)
(b) Explanatory memorandum
After the implementation agreement is signed, the parties complete preparation of the explanatory memorandum which the target responsible entity is required, by law, to send to its unitholders in advance of the scheme vote. An explanatory memorandum must contain information about the trust scheme (including the proposed amendments to the trust constitution to enable the responsible entity to implement the scheme), the target directors’ recommendation and other disclosures – effectively it must contain the same information that would be in a bidder’s statement and a target’s statement if the transaction were effected via a takeover bid instead. The scheme booklet must contain information supplied by both the bidder and target – hence the need for the target to ensure the implementation agreement obliges the bidder to provide the requisite information. If the consideration for the scheme is a security, then the content requirements for offering that type of security must also generally be met.
It is also common practice, and expected by the Takeovers Panel, for an explanatory memorandum to include, or be accompanied by, an independent expert’s report commissioned by the target which states whether, in the expert’s opinion, the terms of the scheme are fair and reasonable to target unitholders.
Where the trust scheme requires unitholder approval under s611 item 7 of the Corporations Act (see paragraph (c) below), a draft of the explanatory memorandum should be given to ASIC for its review at least 14 days before despatch.
(c) Unitholders’ meeting
The meeting of target unitholders to vote on the trust scheme is usually held about 21 to 28 days (depending on the target’s notice of meeting requirements) after the despatch of the explanatory memorandum.
Under a trust scheme that proceeds as a transfer scheme, the target’s unitholders will be required to pass the following two resolutions:
- an ordinary resolution (ie. a majority of votes cast) to approve, for the purposes of s611 item 7 of the Corporations Act, the bidder increasing its voting power in the target above 20%; and
- a special resolution (ie. at least 75% of votes cast) under s601GC of the Corporations Act to amend the target’s constitution to enable the target’s responsible entity to implement the trust scheme.
An ASIC modification is required, and usually given, to enable the unitholders not associated with the bidder to vote in favour of the first resolution (because s611 item 7 would otherwise prohibit any unitholder who is to receive trust scheme consideration to vote in favour of the trust scheme). The bidder and its associates cannot vote in favour of the first resolution.
The target’s responsible entity and its associates are not entitled to vote their interest on either resolution (or on any unitholder resolution) if they have an interest in the resolution or matter other than as a unitholder.
It is the Takeovers Panel’s expectation that, where a target unitholder is treated differently to others (eg receives a benefit from the bidder not available to others), that target unitholder should not vote in favour of the trust scheme or have their votes disregarded.
(d) Effective date and implementation
If the trust scheme is approved by target unitholders and becomes unconditional, the target’s amended constitution is lodged with ASIC and comes into effect on lodgement. There is normally a period of up to 2 weeks between the day the amended constitution becomes effective and the date of implementation of the trust scheme. This is to allow time for the target to close its register, ascertain which persons are registered unitholders as at the record date (usually up to 1 week before the implementation date) and prepare for the provision of trust scheme consideration.
On the implementation date:
- in a transfer scheme, all of the units other than those already held by the bidder are transferred to the bidder and unitholders receive the transfer price paid by the bidder for those units (or, if applicable, securities instead of cash); and
- in a redemption scheme, all of the units other than those held by the bidder are redeemed in exchange for cash (or, if applicable, securities) – in a cash-only transaction the bidder might subscribe for and be issued new units immediately before redemption so as to fund the redemptions.
Following trust scheme implementation, the target is delisted on a date determined by the ASX upon application by the target – normally no more than a few days after the implementation date. The bidder then arranges for the target to be removed as a managed investment scheme. In addition, a bidder will want to replace the target’s responsible entity if the bidder has not separately purchased that entity.
(f) Liability regime
Unlike for takeover bids, there is no specific liability regime for trust scheme explanatory memorandum disclosures, at least where the consideration is just cash. Rather, an explanatory memorandum is subject to the general misleading or deceptive conduct provisions in the Corporations Act.
Under those provisions, if there is a statement or omission in the explanatory memorandum which is misleading or deceptive, any person who suffers loss of damage as a result can recover the loss or damage from the person who breached the obligation. There is no specific defence to liability, but, a person can seek relief from the court from liability to pay compensation on the basis that the person acted honestly and, having regard to all the circumstances, ought fairly to be excused for the breach.
The target has primary liability for a trust scheme explanatory memorandum, though any person who was involved in a breach of the misleading and deceptive conduct provisions will bear liability (eg the bidder will usually bear liability for bidder-provided information). Despite the absence of statutory defences, the directors of a target responsible entity and bidder company can, in practice, substantially reduce their liability exposure by establishing a due diligence and verification system similar to that devised for takeover bid documents.
If securities are included as consideration then the liability regime applicable to the type or types of security will apply to the explanatory memorandum disclosures.
(g) Judicial advice
A target responsible entity can, but is not obliged to, apply to a court for ‘judicial advice’ in relation to the trust scheme. The court is asked to confirm that the responsible entity is justified in convening a meeting of unitholders for the purpose of considering resolutions to approve the trust scheme.
A key advantage to obtaining judicial advice is that it largely removes any practical risk of the responsible entity being liable for breach of trust in proposing and giving effect to the trust scheme (though it does not shield against claims based on other grounds such as breach of duty under the Corporations Act). The principal drawbacks of seeking judicial advice are time and cost, though the court process usually adds at most an extra 1 to 2 weeks to the process.
For trust schemes the customary approach is to first seek confirmation by the court that the responsible entity can call the meetings of unitholders and, if the unitholders pass the required resolutions, then seek confirmation that implementation of the transaction can proceed.
Without judicial advice, in theory, disaffected unitholders would have up to 12 years to attack the transaction. In practice, the chances of a successful challenge should decline steeply if unitholders failed to act promptly.
There is no standard practice regarding seeking judicial advice and trust schemes. However, judicial advice will always be sought if the transaction also involves a company scheme of arrangement to be considered by the same court (eg in relation to a scheme for a stapled group involving a trust and a company). This is because the judge will want to be told about the whole transaction and have all the participants before them.
In the past, judicial advice was not generally sought for a trust scheme where a company scheme of arrangement was not also required. However, it is becoming more common.
Pairing market leading M&A capability with relevant sector expertise to ensure our clients are in a strong position to execute their investment strategy.
Allens is an independent partnership operating in alliance with Linklaters LLP. © 2020 Allens, Australia