By Partner Marina Raulings, Partner Craig Gibson, Lawyer Elinor Riley, and Lawyer Namita Gosai

The recent Victorian Supreme Court of Appeal decision of Oliver Hume Property Funds (Broad Gully Rd) Diamond Creek Pty Ltd v Commissioner of State Revenue [2024] VSCA 175 (Decision) highlights the landholder duty risks associated with capital raising arrangements, and the type of circumstances under which share or unit acquisitions made by unrelated investors in response to a genuine capital raising involving multiple prospective investors can still be treated as “one arrangement” triggering landholder duty.
Fund managers and investors seeking to undertake or participate in a capital raising or any other equity transaction involving multiple investors, should be mindful of this Decision and carefully consider its implications on the proposed capital raising (including the timing of fundraising relative to land ownership).

A brief overview of the Victorian landholder duty regime

• Broadly, a person is liable to pay landholder duty in Victoria where they make a “relevant acquisition” in a “landholder”.
• A “landholder” includes a company or unit trust which owns land holdings in Victoria with a total unencumbered value of $1 million or more
• Land holdings include land, certain leases, and items fixed to the land.
• A person will make a “relevant acquisition” in a landholder where they acquire a “significant interest” in the landholder (either entirely as a result of that acquisition, or when combined with interests already held by the person prior to the acquisition). A “significant interest” involves an interest of 50% or more for companies or 20% or more for unit trusts.
• Relevantly, the extent of an interest in a landholder held by a person is calculated inclusive of the interests of: “associated persons”; and
  other investors in an “associated transaction”. Acquisitions are “associated transactions” if they arise from multiple persons acting in concert, or arise from substantially one arrangement, one transaction or a series of transactions.
• The Decision analyses the concept of an “associated transaction” in the landholder duty context – specifically, when acquisitions arise from substantially one arrangement or one transaction

Background to the Decision

• The facts concerned a special purpose vehicle (SPV) established for the purpose of undertaking a property development project in Diamond Creek.
• The SPV required funding and circulated an Information Memorandum to investors for the issue of 1.8 million shares at $1 per share.
• If the full 1.8 million shares were not subscribed for by the relevant date, all application money would be returned to the applicants and the project would not proceed.
• 18 unrelated investors acquired shares in the SPV in accordance with the Information Memorandum, amounting to a 99.99% acquisition in aggregate, but no investor individually acquired more than 50%.
• The identities and details of the investors remained confidential to all other investors throughout the entire application process.

The Court of Appeal’s findings

• The Victorian Supreme Court of Appeal unanimously held that the issue of shares in the SPV was liable to landholder duty and that the 99.99% interest acquired by the 18 investors was to be aggregated on the basis the acquisitions formed an “associated transaction”. This was despite the investors having not met or communicated with one another and each parcel of shares being separately and independently subscribed for.
• The Court reached this conclusion on the basis that there was a “oneness” and a range of “unifying factors” which caused an interdependent connection between the purchase of shares by each of the investors.
• The Court stated that the concept of an “associated transaction” is determined based on objective circumstances, and is not focused on the individuals involved in the transaction. Rather, it is the relationship between the relevant acquisitions and the nature of the transaction itself that is important.
• Four key “unifying factors” were cited by the Court as resulting in an “associated transaction” in the relevant circumstances:
• the requirement of a minimum capital raise of $1.8 million before any share issue could proceed, meaning that the share acquisitions were not independent of each other;
• the investors all bound themselves to the SPV’s constitution, which formed a statutory contract between the investors and the SPV (noting however that this factor on its own was not determinative);
• the terms of the SPV’s constitution (which the Court stated was “highly significant”) pointed to a “oneness of purpose”, being a single land development project, particularly given the SPV was to be wound up after the project was complete; and
• the acquisition of the shares in the SPV all occurred on the same day and in the same manner, and resulted in a 99.99% change in ownership.
• Were it not for the aggregation of each of the investors’ interests, each of the acquisitions by the investors would separately have been below the 50% “significant interest” threshold, and the issue of shares would not have resulted in landholder duty. However, the aggregation of interests resulted in a 99.99% acquisition in the SPV, and therefore significant landholder duty was payable (with the investors jointly and severally liable to pay it).

Implications of the Decision and practical observations

• Any party seeking to be involved in any of the following transactions (including investors) should be mindful of the Decision and the potential for the Commissioner to aggregate investor acquisitions triggering landholder duty:
• a capital raising, either under an Information Memorandum, or similar document, such as a product disclosure statement, or prospectus; and
• any equity transaction involving multiple investors, particularly if there is an overarching shareholder’s or unitholders agreement governing the terms of the investment.
• The Decision unfortunately fails to provide clear parameters around which of the unifying factors was itself critical, and which (if not present) may have led to an alternative outcome. Some of the factors are unfortunately inevitable in any equity raise – such as the issuing of securities all on the same day and in the same manner, and the investors subscribing to be bound by the terms of the constitution / trust deed of the investment vehicle. However, the bespoke nature of the constitution of the SPV the subject of the Decision, and the minimum subscription requirement, represent commercial factors that may be able to be addressed differently in other fundraising structures. Therefore, what is clear from the Decision is that an objective factual analysis of the circumstances and relevant documents of each capital raise is necessary, to manage landholder duty exposure.
• Fund raisers should therefore take particular care in:
• undertaking appropriate structuring prior to any initial capital raise, to better manage the risk during the capital raising phase(s). If possible, all capital raising phases should look to issue additional securities pro-rata, to take advantage of the relevant landholder duty exemption (even if the acquisitions are considered one arrangement); • where pro-rata capital raising over the life of a development project is not reasonably likely, then the timing of the initial seeding should be navigated carefully relative to the deemed date of ownership of the proposed development land by the fundraising vehicle. It is likely that the use of call options (without a consecutive put option) may become more prevalent as a means of securing project land pre-seeding, as a right under a call option alone is not a landholding for Victorian landholder duty purposes. This would manage the risk of double duty exposure (i.e. duty on both the land acquisition and on the underlying security issue), but whether or not the use of call options (which has been traditionally more prevalent in other States) will become the norm remains to be seen – dictated by vendors’ willingness to share some risk of progress uncertainty;
• if pre-capital raise structuring is not available and/or subsequent stages do not involve pro-rata participation by existing investors, then investigating whether the proposed transaction can be structured in a manner that does not reflect the “unifying factors” set out in the Decision, and that transaction documents do not objectively indicate a “oneness of purpose”; and
• highlighting in any offering document any risk of landholder duty exposure to investors – such liability being one of joint and several liability for all investors (no matter how small each individual investor’s interest may be on its own).
• The Decision also highlights the care that taxpayers should have relying on Revenue Rulings or website materials published by the Commissioner of State Revenue (Commissioner), which do not have the force of law. In 2012, the Commissioner published Revenue Ruling DA.057 (Ruling), which clarified the circumstances under which he would treat (or not treat) a genuine public offer as resulting in an “associated transaction” for landholder duty purposes. In the Ruling, the Commissioner takes the view that such an offer would not trigger aggregation unless other factors support some connection between the investments (for example, where one investment was conditional upon another investment). The Ruling has historically been used by taxpayers to move forward with comfort when issuing an Information Memorandum or other public document. However, in the earlier VCAT proceeding relating to the Decision, VCAT noted that the Ruling is not binding and that the Commissioner is not specifically authorised to provide such comfort to taxpayers. Therefore, investors should be wary when relying on the Ruling in the future.
• Private Rulings are technically non-binding in nature. However, the receipt of a Private Ruling provides some comfort as to how the Commissioner is likely to administer the law in respect a particular equity raise. Fundraisers are encouraged to consider seeking a Private Ruling in respect of their typical fundraising structures, or as a measure of comfort for any new (or existing) equity raises, to avoid duty surprises for their investors at a later stage and to
  ensure any disclosure documents are not misleading around the tax implications of an equity subscription. • While the Decision is not binding in other States and Territories, it will be influential in jurisdictions whose landholder duty provisions have similar aggregation rules, and will likely encourage revenue offices to take a more aggressive administrative approach.
• Advice should be sought regarding the circumstances of any capital raising or equity transaction involving a landholder (whether the offer documents are intended to be registered with ASIC or not), to determine whether the transaction has the potential to trigger landholder duty