Oliver Hume decision – Independent investors charged with aggregated landholder duty on capital raising

The Victorian Court of Appeal has recently handed down its unanimous decision in Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue [2024] VSCA 175. The Court of Appeal found that 18 independent and unrelated investors who subscribed for shares under a publicly available information memorandum were held to have each made a relevant acquisition and thereby each triggering landholder duty. The Court determined that, despite no one investor having a greater than 11.1% interest and some interests being as small as 2.8% (well under the 50% threshold), they were associated transactions under section 78(1)(a)(ii)(C) of the Duties Act 2000 (Vic) (the Act), because the acquisitions formed, evidenced, gave effect to or arose from substantially one arrangement or alternatively ‘one series’ of transactions.

The case highlights:

• some of the potential issues with raising capital or restructuring in entities that have interests in land (which can include uncompleted contracts of sale, put and call options, fixtures and economic entitlements);
• investors finding themselves jointly and severally liable for landholder duty liabilities from the aggregation of interests acquired by independent investors;
• the importance of understanding the entire transaction (or series of transactions), its purpose, the documentation and parties to the transactions and identifying whether there is any interconnectivity or interdependence between the investors or the transactions; and
• the focus on the economic outcome or substance of entire transactions.

Background

The Applicant was a special purpose vehicle established for a property development project in Diamond Creek. The land was acquired by the Applicant in 2011. In 2014 the Applicant circulated an Information Memorandum (IM) seeking to raise $1.8 million through an issue of 1.8 million shares. The IM was circulated widely, including publicly through Oliver Hume’s website to investors on its database and other referrers. The investors were all independent, unrelated and were not aware of who else had invested in the project.

The key terms of the IM for the purposes of this case was:

• it was a condition that the target subscription of 1.8 million ordinary shares be achieved by 26 June 2014 and if this condition was not satisfied, then all application funds would be returned to the potential investors;
• the investors delegated operations and investment decisions to the Applicant’s board of directors and management team;
• investors agreed to the appointment of a manager (an associated entity of the Applicant) to manage the day-to-day affairs of the Applicant and to act as project manager of the project; and
• the constitution of the Applicant contained specific provisions that:
  • property management agreements and investment management agreements entered into with associated entities of the Applicant could not be terminated unless shareholders holding 90% of fully paid shares passed a resolution; and
  • shareholders must promptly do all things necessary or desirable to wind up the Applicant on completion of the project.

On 2 July 2014, the Applicant issued and allotted 1.8 million shares at a price of $1.00 per share to the 18 investors. This equated to an aggregate 99.99% interest in the Applicant. The transactions were not disclosed as a relevant acquisition to the Commissioner of State Revenue, but the Applicant was later issued an assessment notice whereby each investor was deemed to be acquiring an interest in the Applicant. The Applicant appealed the assessment of the Commissioner to VCAT. VCAT upheld the Commissioner’s assessment and the Applicant then appealed the decision to the Court of Appeal of the Supreme Court of Victoria.

Decision

The Court of Appeal unanimously upheld the Commissioner’s assessment and found that the allotment of the shares in the Applicant on 2 July 2014 to the 18 investors was liable to landholder duty as they were associated transactions under section 78(1)(a)(ii)(C) of the Act, because the acquisitions form, evidence, give effect to or arise from substantially one arrangement or alternatively ‘one series’ of transactions.

The Court of Appeal considered the following were important factors for the definition of associated transactions and what constitutes “substantially one arrangement” under the Act:

• what constitutes an associated transaction turns on the words used, as well as the context and purpose of the legislation – that purpose was that Parliament intended to ensure that, not just people, but dealings, are taxed consistently and equitably, regardless of the form and in accordance with the ‘substance’ of the transaction;
• this Parliamentary intention of the landholder duty provisions in the Act meant that for the purposes of this case, a 99.99% change in the shareholding of a landholder should be taxed in the same way as an acquisition of 99.99% interest in land (regardless of the transaction or number of parties involved or the relationship of the parties);
• the focus is not on the individuals concerned but on the relationship between the acquisitions and the objective terms and circumstances surrounding the transactions to identify the singular ‘arrangement’ or ‘transaction’ (or ‘series of transactions’); and
• the test requires an objective characterisation of all surrounding circumstances to determine if there is any relevant ‘oneness’ between the acquisitions, to consider whether there is some connection or interdependence by which the persons acquired their interests.

In applying the above findings, the Court of Appeal found that the following three factors combined together formed, evidenced, gave effect to, or arose from, substantially ‘one arrangement’, or alternatively ‘one series’ of transactions:

• first, the acquisitions by the 18 investors were interconnected in circumstances where no individual acquisition would arise unless a total of $1.8 million was raised;
• second, the entry into the constitution by the investors on being issued their respective shares created a statutory contract under section 140 of the Corporations Act 2001 (Cth) between each member of the Applicant, and between the Applicant and each member of the Applicant – this was considered highly relevant, because the terms of the constitution provided that the investors, together, had an interest in an entity which was to undertake a single land development project, through an entrenched management structure and agreement to wind up the Applicant at the end of the project; and
• thirdly, the effect of the acquisitions of the shares on the same day, and in the same way, was to substantively alter the shareholding in the landholder from being an Oliver Hume entity to an entity owned by a group of private investors (as to 99.99 per cent).

The Court didn’t determine whether any one of the above three factors on its own was sufficient to satisfy the “associated transaction” test, only that together they did.

Commentary

The outcome and reasoning of the decision opens a number of potential considerations that may be relevant to whether an associated transaction is triggered as part of a capital raise.

• Although the Applicant was a company, there is equal potential application to a unit trust or fund structure where the investors acquisitions of units or interests may form substantially one arrangement.
• Altering the terms of a capital raise to remove a conditional minimum or maximum capital raise threshold or a discretion on the issuer to accept or deny any application or progressively accepting subscriptions over a period of time may still result in a finding of interdependence or interconnectivity between the investors given the shared purpose and documentation – it will require careful consideration.
• The court admitted that the investors becoming bound by a constitution on its own may be of marginal relevance, but the contents of the specific constitution was highly significant and relevant – the problem with this conclusion is that most property developments are subject to some form of bespoke documentation (e.g. shareholders or unitholders agreement and development management agreements) that prescribe the terms of the project or development outside of a generic constitution or trust deed which often includes the purpose of the vehicle, development and pooled investment, voting resolution thresholds for particular decisions and the process on termination or winding up as well many other terms.
• The Court also considered there was little relevance to investors having only a shared objective to obtain equity as part of a capital raising – however that is usually one of many objectives, particularly in circumstances of property developments where there is a shared objective to undertake a property development and return of profit. It may mean that this will be difficult in practice to negate as an element of singularity or oneness.
• There are similar provisions in Duties legislation of some other States and Territories and it may be that analogous capital raisings are reviewed in those jurisdictions.

If you have any comments or questions about this article, or the decision and its implications, please contact our team.

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Authored by:
Sean Prater, Partner
Lachlan Walsh, Associate