Member Article

Hedge funds failed in their attempt to get EDT Retail Trust (EDT) wound-up after EPN EDT Holdings II, LLC (EPN) bid for EDT.  EPN succeeded in voting down the threat.  The hedge funds' attempt is a reminder that A-REIT bids present unitholders with avenues to challenge a bid which are not available to shareholders in a company.  It is also a reminder that it is an approach that is not without risk.

• an avenue of attack on a REIT bid which is not available to shareholders in a company for which a bid is made
• how willing hedge funds are to use aggressive legal strategies
• how a bidder can use its own legal strategies to defeat an aggressive hedge fund
• how an unconditional cash bid can attract support from unitholders because it presents a clear path to liquidity
• how a failed aggressive response to a takeover bid can be a catalyst for increasing the flow of acceptances into the bid.

Background

EPN held approximately 48% of EDT before it launched its unconditional cash takeover bid for the remainder of EDT.  EPN also had an indirect 50% economic interest in EDT's responsible entity (RE), and certain rights under RE's constitution, including the right to appoint several of RE's directors.

EDT's underlying assets comprised a number of community shopping centres in the US..  The value of these centres was firming, but the US. economy was fragile and the Australian and US dollar exchange rate was volatile.  

EPN expected that some unitholders would find its bid, being at a significant premium to market, an attractive liquidity opportunity — but it did not necessarily expect to pass the 90% compulsory acquisition threshold, and its bid was not conditional on crossing that threshold.

Requisitioned wind-up meeting

Certain hedge funds holding more than 5% of the units in EDT requisitioned a meeting of unitholders to consider a resolution to wind-up EDT.  The hedge funds alleged that this would produce a better return per EDT unit than EPN's initial bid price of 7.8 cents per unit.  They also alleged that RE was an associate of EPN, that EPN had an interest in the winding-up resolution other than as a member of EDT, and that EPN was therefore prohibited by section 253E of the Corporations Act from voting on the winding-up resolution.

Company shareholders are not prohibited from voting on a shareholders' resolution due to a conflict of interest, unless the resolution is proposed pursuant to regulation which specifically provides that the conflicted shareholder cannot vote.  But section 253E does prohibit a unitholder in a REIT (or other registered managed investment scheme) from voting if the unitholder is an associate of the responsible entity and has an interest in the resolution other than as a member of the trust.

EPN took steps to ensure that it was not, or had ceased to be, an associate of RE.  It proposed amendments to the constitution of the RE, which when made, removed EPN's ability to appoint a majority of the RE board and veto certain decisions so that EPN would not 'control' the RE.  After a thorough investigation, senior counsel engaged by the RE also determined that EPN could vote: the section 253E prohibition did not apply because the RE was not an associate of EPN.

While the hedge funds were agitated and aggressive at the unitholders meeting to consider the winding-up resolution, they did not bring legal proceedings to challenge the correctness of the determination that EPN could vote its units.  EPN did vote its units against the winding-up of EDT, and the winding-up resolution was defeated.

EPN was subsequently flooded with acceptances, and moved quickly from holding 58% to 96% of EDT units.  EPN is now proceeding with the compulsory acquisition process.

EPN was advised by Minter Ellison and eminent senior counsel on this transaction.

This article is from our September 2011 edition of Mergers & Acquisitions newsletter.