First published on 27 April 2021.
Trust schemes have become an increasingly popular means in recent years to effect the acquisition and privatisation of REITs and business trusts.
The ‘one-proxy’ rule is often used in trust scheme meetings in order to bind unitholders – including custodian banks or nominees – to submit only 1 proxy vote, even if each of these banks/nominees may represent thousands or millions of units under their care. This effectively restricts the banks/nominees to vote only one way and thus fails to reflect the votes accurately.
In March 2021, the Singapore High Court considered the potential prejudices caused by the one-proxy rule during the acquisition and privatisation of Soilbuild Business Space REIT. It also raised its doubts as to whether there is sufficient legal basis for a REIT trust scheme to be carried out.
Find out more about what the High Court had to say on these issues.
Background
On 14 December 2020, the manager of Soilbuild Business Space REIT (“SB REIT”) and Clay Holdings III Limited jointly announced the proposed acquisition and privatisation of all issued SB REIT units at S$0.55 in cash per unit.
The proposed privatisation and delisting of SB REIT was to be effected by way of a trust scheme (“Trust Scheme”). In order for the Trust Scheme to be approved, a simple majority in the number of unitholders (known as the “Headcount Test”) representing at least three-fourths in value of the units held by unitholders (known as the “Value Test”) present and voting either in person or by proxy at a Trust Scheme meeting is required.
The Trust Scheme must also be finally sanctioned by the Court before it can take effect. This final court application provides a voice to any objectors validly upset with any aspects of the Trust Scheme that they find improper.
On 8 February 2021, SB REIT’s manager and trustee jointly obtained leave of Court to convene the Trust Scheme meeting.
SB REIT’s manager then obtained the approval of unitholders at an Extraordinary General Meeting (“EGM”) on 11 March 2021 to amend SB REIT’s Trust Deed. The amendments allowed, in particular, for the appointment of only one proxy to vote at the Trust Scheme meeting by relevant intermediaries, such as custodian banks or nominees.
Trust Scheme meeting results
The Trust Scheme meeting was conducted via electronic means on 11 March 2021, the same day as the EGM. The final vote was, ostensibly, in favour of approving the Trust Scheme.
427 out of 755 SB REIT unitholders, or 56.56%, had voted in favour of the Trust Scheme for the purposes of the Headcount Test. That translated into 234,299,582 out of 262,324,727 SB REIT units represented, or 89.32%, for the purposes of the Value Test.
No breakdown, however, was provided by the SB REIT manager as to how each relevant intermediary – meaning custodian banks and nominees, whose single proxy vote could represent thousands to millions of SB REIT unit votes – had voted at the Trust Scheme meeting.
Concerned with the potential distortion of the ultimate vote by the one-proxy rule, one unitholder stepped forward to object to the final court application by the SB REIT’s manager and trustee to sanction the Trust Scheme.
Our firm represented the dissenting unitholder in objecting to the sanctioning of the Trust Scheme in the High Court.
What are the potential problems with the one-proxy rule?
The unitholder’s objections to the one-proxy rule can be summed up into 5 key arguments.
First, the one-proxy rule can be an unjust and unfair representation of the unitholders’ votes at the trust scheme meeting. The one-proxy rule forces a relevant intermediary to vote only one way in favour of its majority unitholders, which in turn quashes the votes of dissenting or abstaining unitholders.
As an illustration, assume for the moment that there are 1,000 unitholders in a REIT represented by a single relevant intermediary. If 600 unitholders voted FOR the scheme, and 400 unitholders voted AGAINST it, the relevant intermediary would have had to cast all 1,000 votes FOR the scheme based on a simple majority rule even though 40% of them consisted of dissenting votes. In such scenario, there are 400 additional majority votes which would not have come about if not for the automatic operation of the one-proxy rule.
If we add in the third option of abstaining votes, a potentially more extreme picture emerges: if 400 unitholders had voted FOR, 200 unitholders had voted against and 400 unitholders had voted ABSTAIN, the relevant intermediary would again have had to cast all 1,000 votes FOR the scheme, even though this time only 40% of the unitholders voted in favour.
Such a mechanism, it was argued, effectively squeezes out dissenting votes when a relevant intermediary first casts its single-proxy vote, so that even if the final vote tally appears to have swung one way, the reality in which each and every unitholder had voted underneath could present quite a different picture.
Second, the one-proxy rule effectively converts a unitholder’s vote into a ‘roll of the dice’. Whether or not a unitholder’s vote would be added to the final vote tally is no longer based on how he or she had voted, but is instead based on how other unitholders under each relevant intermediary had voted. If 1 unitholder out of 1,000 unitholders by happenstance found himself in the wrong ‘pool’ where the other 999 unitholders voted the other way, his vote would not be ‘counted’ in the single-proxy vote simply because the relevant intermediary would have been forced to vote in line with the majority and against his wishes.
Third, there was no clear consensus on how relevant intermediaries should determine their vote. Some may vote via a simple majority. Others may have applied the ‘off-setting’ rule, where they take the difference between the majority and the minority votes. There was no known unanimity as to which rule applied to proxy votes at the Trust Scheme meeting.
On this issue, even the SB REIT’s manager had, in response to a unitholder’s question on 4 March 2021, previously acknowledged that:
“[h]ow a nominee company or custodian intends to vote on the Trust Scheme would depend on the rules of such nominee company or custodian. The SB Manager is not privy to and has no control over the internal processes which nominee companies and custodians have in place to determine how votes are to be cast. As such, the SB Manager is not in a position to comment on the practices of such nominee companies or custodians.”
Fourth, there also appeared to be an anomaly between, on the one hand, the use of the one-proxy rule in the Trust Scheme meeting, and on the other hand, the permitted appointment of two or more proxies in all other meetings of the SB REIT. This led to obvious concerns on procedural fairness.
The unitholder argued that there was no proper justification for such a distinction; if anything, he took the view that the Trust Scheme meeting ought to have implemented even stronger legal safeguards than a general meeting of the REIT, especially where the Trust Scheme contemplated the acquisition of SB REIT units against the wishes of dissenting unitholders.
Fifth, trust schemes are not designed to replace a compulsory take-over of REITs.
Ordinarily, a compulsory acquisition of dissenting holders’ REIT units is permitted under section 295A of the Securities and Futures Act only if the offer has been approved by 90% of the total number of units to be transferred, excluding those units already owned by the offeror.
The Headcount Test and the Value Test for a trust scheme however are far lower thresholds than that of a compulsory acquisition, so the dissenting unitholder argued that these thresholds ought to be stringently observed and not be ridden roughshod over by the improper adoption of the one-proxy rule.
What happened at the High Court hearing?
The sanction application for the Trust Scheme was first heard in the Singapore High Court on 25 March 2021.
Originally scheduled for only 1 hour, the sanction application eventually morphed into a full-day chambers hearing as the High Court recognised the unitholder’s concerns which could not be dismissed summarily.
The High Court thus adjourned the hearing and directed SB REIT’s manager and trustee to produce further documents. In particular, the Court was interested in the voting instructions received by each relevant intermediary before casting their proxy votes.
As confirmed later in his oral grounds of decision, the High Court accepted the points made by the dissenting unitholder’s lawyer that the SB REIT’s manager and trustee, as the applicants, bore not only the burden of proof for the sanction application, but also the burden to make full and frank disclosure, including the additional documents it had been to produce.
The hearing resumed next on 30 March 2021, during which the information ordered by the High Court was furnished.
How did the High Court eventually decide?
The High Court took the view that, with the additional information presented by the SB REIT’s manager and trustee, their burden to make full and frank disclosure in the sanction application had been discharged.
As for the one-proxy rule, the High Court acknowledged the unitholder’s argument that “the one-proxy rule has the potential to cause prejudice”, and accepted that that that proposition is “true in the general sense”.
Nevertheless, the High Court held that based on the information available in the present case, it was unable to make any finding that the outcome of this particular Trust Scheme meeting would have been different if the one-proxy rule had not been adopted given that examination of the votes one level down the relevant intermediaries still showed sufficient support for the Trust Scheme.
Twist in the plot: Is there even a sufficient legal basis for a REIT Trust Scheme?
During the course of the sanction application, the High Court also took great interest in a separate question as to where the legal basis of a REIT trust scheme can be found.
After all, it was observed that while a scheme of arrangement among creditors to stave off corporate insolvency and bind dissenting minority creditors can be found in section 210 of the Companies Act, a REIT trust scheme is, remarkably, not found in any of our statutes.
Instead, the only reference to a REIT trust scheme is found in Singapore’s Code on Take-Overs and Mergers, but the Code is neither primary nor subsidiary legislation.
Thus, the High Court added that it was “mindful of the fact that [it had] doubts about the basis on which the rights of unitholders can be expropriated, even under a trust scheme.” However, the High Court reserved judgment on this issue, adding that it had not heard full submissions on the matter, so it remains to be seen whether how this issue would be resolved, if raised in the future.
Concluding commentary
The High Court’s observation of the “potential prejudice” of the one-proxy rule is a clarion call for trust scheme managers to adequately consider the appropriateness of the one-proxy rule for the purposes of a trust scheme meeting.
Although the one-proxy rule may have been common practice, its potential inability to reflect all unitholders’ votes properly in a trust scheme has now been thrust into the spotlight by the efforts of a concerned unitholder.
If the one-proxy rule is adopted in future trust scheme meetings, unitholders ought to stay vigilant as to whether its adoption could affect the outcome of that meeting. If actual prejudice is caused by the one-proxy rule, that could form the basis for the High Court to deny the sanctioning of a trust scheme, even if it may have been ostensibly approved by unitholders at a trust scheme meeting at first blush.
This case also presents a timely reminder that trust scheme managers have the burden to make full and frank disclosure of all relevant information in the sanction application. Even if the sanction application may be unopposed, the Court retains the discretion in appropriate cases to order the production of further information if that burden has not been fully discharged in the Court’s eyes.
Finally, there now also appears to be a fundamental, yet not fully answered, question as to the legal basis for a REIT trust scheme. It remains to be seen how the High Court will treat this issue in future REIT trust scheme cases.
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Disclaimer
The information in this article is correct as of the date of this article. The article does not constitute legal advice in any way. If you require advice in relation to the contents of this article, please approach us for further assistance.
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Authors: Lim Ming Yi, Yeo Shan Hui, Jaryl Lim, Gabriel Kwek.