Under the heading "Bidding Consortium", Mr Facioni said:
Macquarie is seeking two to three co-investors to participate in the transaction through an equity investment in BidCo, the independently capitalised vehicle that would acquire AXA Health. Equity would also include around $65 million of deferred, contingent consideration which would be payable to AXA in the event certain financial targets are achieved. The amount and terms of deferred consideration are yet to be agreed with AXA.
Macquarie would be retained as financial advisors to BidCo, and, as such would receive fees in regard to financial advice and debt and equity arranging. Costs incurred by BidCo, including legal fees and consulting fees charged by an industry expert, are to be shared equally between consortium investors.
Finally, Mr Facioni set out what he described as "exit options", namely an immediate IPO, a deferred IPO within 2-3 years and a trade sale within 2-3 years.
16 Meantime, the applicant was still considering a sale of AXA Health to MBF. Indeed, in a memorandum to Mr Owen on 11 February 2002, Mr Penn as good as expressed a preference for such a sale over the proposal then offered by MBL PTG. Mr Penn said that he had had MBF confirm that they were "working to a deal based on $590m on completion plus $10m on approval of 2003 price increase and a marketing agreement". Mr Penn also said:
[MBF] are targeting the end of the month for the above at which point it is contemplated we could go straight to contracts subject only to regulatory approvals, confirmatory due diligence identifying something of a very material nature and some limited conditions around financing. I had to negotiate them back from early March to end of Feb although I am not convinced they will meet the timetable. I have warned them we are advancing other options and timing is an issue if they take too long they may miss out.
In the same memorandum, Mr Penn said that the "LBO team" (ie MBL PTG) had "come back below their indicative value range" and that, in his view, this had much to do with the internal rate of return which had been built into the assumptions used by that team. Mr Penn said that he had extended "their timetable" to 22 February 2002, and that he did not want an offer from MBL PTG "too much before we are able to get something concrete" from MBF. He concluded his memorandum with the following paragraph:
[F]inally regarding structure I have now had a chance to get my own head around this. I will brief you verbally. At this stage however I am not convinced that their [sic] is any upside in the LBO deal over and above that available in the [MBF] deal after taking all risks and probabilities into account. I am therefore only comparing the gross value of the two deals at the moment. On this basis [MBF] is looking better but we have a way to go.
17 An internal briefing note prepared within MBL PTG on 22 February 2002 identified the members of the consortium that was then proposed to make up the participation in BidCo. They were MBL and three "equity participants", one of which was BUPA. Mr Facioni considered it to be advantageous to have as a member of the proposed consortium a company that operated in the health insurance industry. The same briefing paper referred to the fees that MBL then expected to derive from the overall transaction which was proposed, including a "structuring fee" of up to $10m and a "consortium advisory fee" of up to $10m.
18 In February 2002, drafts of what was then described as an "indicative bid" for AXA Health were prepared within MBL PTG. In a draft of 25 February 2002, under the heading "Bidder Details", it was said that the acquisition would be undertaken through a special purpose company, "99.9% owned" by MBL, called Macquarie Health Acquisitions Pty Ltd ("MHA"). A diagram representing the proposed structure and transaction is as follows:
An annexure to the document, titled "Terms of Vendor Shares" identified the issuer of the vendor shares as MHA, "a non-wholly owned member of the Macquarie group".
19 A later draft of the same document, prepared on 27 February 2002, stated that the consideration for the acquisition would take the form of a deposit (then suggested to be $50m), a special dividend payable by AXA Health to the applicant, and vendor financing in the form of converting vendor shares in AXA Health. Under the heading "Bidder Details", it was said that the acquisition would be undertaken through MHA, but there was no reference in the text to the extent to which it would be owned by MBL. However, a diagram represented the proposed structure and transaction as follows:
Beneath that diagram, Mr Facioni wrote: "Do we need to show 'Outside Equity' above? It looks a little contrived." Under cross-examination, Mr Facioni said that he could not recall making that endorsement, but accepted that it was a reasonable assumption that he did so because "MHH" (a company which had not then been introduced into the structure and to which I shall refer further below) had no role other than to hold shares in MHA. Further, beneath the diagram, under the heading "Pre-Signing Steps", it was stated that MHA would be established with nominal ordinary equity "with Macquarie holding 99%". Mr Facioni crossed out that last quoted passage. Mr Facioni did not, however, make changes to the annexure, which still stated that MHA would be a non-wholly owned member of the Macquarie group.
20 At the time of these events, Mr Patrick Upfold was an executive within MBL PTG. He and those who worked with him were responsible for devising the details of the structure by which AXA Health would be acquired (if there were to be an acquisition). His instructions from Mr Facioni were to structure the transaction in a way that would facilitate a commercially attractive offer to the applicant and enable MBL to on-sell its stake in AXA Health in an efficient manner as soon as possible following completion, preferably at a profit, and with minimal risk to MBL. Mr Upfold had very little recollection of the details of discussions involving the development of the structure for the proposed acquisition of AXA Health. He thought it likely that he would have followed his usual practice of conducting "brainstorming" sessions with staff, with ideas being formulated, drawn on a whiteboard and debated. In his evidence, Mr Upfold referred to the feature of the structure then being developed which involved the holding of 1% of a company, otherwise owned by MBL, by outside interests. He said:
I do not now recall the particular reasons at the time for deciding upon those shareholdings. I have not been able to locate any contemporaneous document recording any such reasons that would assist me to refresh my memory. However, I do recall that it was a feature of the structure that it could provide the applicant with the choice of obtaining for [sic] scrip for scrip roll-over relief under the income tax legislation.
Something else which Mr Upfold did recall was that the process of structuring the transaction did not involve any input from the applicant.
21 Mr Upfold said that the proposed structure of MHA - by which 1% would be held outside the MBL Group - had the additional "feature" that MHA would not form part of the MBL tax consolidated group when it was formed. In his affidavit sworn on 23 September 2009, Mr Upfold said:
At the time the structure for the transaction was being developed, the tax consolidation regime had been announced but legislation had not yet been finalised. I recall at that time that there was still some uncertainty as to the details of the final legislation. I also recall that MBL was contemplating forming a tax consolidated group during the period covered by the transaction. I was concerned that MHA and AXA Health should not form part of the consolidated group, and that the transaction should not affect the timing of the decision to form the group. I was aware that it was MBL's intention to on-sell AXA Health at the earliest opportunity. I was also aware that there was no intention for MBL to integrate the AXA Health business, staff or systems within the broader MBL business. In those circumstances, it was desirable that the tax outcomes associated with AXA Health should remain isolated from MBL. Furthermore, I was concerned that if MHA or AXA Health were consolidated with MBL for tax purposes, MBL would be required to provide tax indemnities to any third party purchaser of AXA Health. Having to provide such indemnities would have been commercially undesirable and would have entailed risk to MBL
22 Returning to the applicant's consideration of the proposals for the sale of AXA Health, on 27 February 2002 Mr Owen prepared a paper for consideration at the meeting of the Board. Both MBF and MBL PTG were expected to submit offers within the ensuing days or weeks. Mr Owen concluded his paper as follows:
We continue to make progress, albeit slow, on both options for the sale of our health business.
Whilst the MBF deal offers a higher gross value on the face of it, they have not yet finished their commercial due diligence and we believe, based on experience to date, that there is significant completion risk associated with this option.
The LBO team look to be very well placed to put in their offer on 22 February and we believe that were we to accept their offer there would be a very high probability of completion. Their offer is however, likely to be at a value which is unacceptable to us.
It is feasible that we will be able to lift the value of the LBO offer through some economic exposure however this may also expose us to some downside risk.
The recent speculation regarding our strategy for our health business has not exposed any other interested parties and we therefore remain convinced that the best options for the sale of the business are those currently under consideration.
Our strategy is to continue to work with both parties with a view to maximising the value of their respective offers and getting them to a position where completion risk on either option is at a minimum. At that point we would proceed with the preferred offer. Managing this situation and keeping "both balls in the air at once" is, however, extremely delicate.
The minutes of the Board meeting record the following:
Discussion turned to the leveraged buy out proposal. The Macquarie Bank team appear to have strong lines of equity participation with possible participation by BUPA, a substantial United Kingdom based private health company. It seems likely that the LBO team is intending to realise their investment through a subsequent IPO. We are seeking to ensure participation in any excess over the offer from the LBO team.
23 On 1 March 2002, MBL made a "non-binding bid" for AXA Health. The form of the bid was devised by MBL PTG and other groups within MBL, not including MBL Advisory. The applicant had no input into the structure or the form of the bid. By the bid, MBL proposed to acquire 100% of the shares in AXA Health "by way of unconditional underwriting". The bid provided:
Macquarie is not a strategic acquirer nor a long-term owner of AXA Health. Macquarie understands that AXA wishes to divest AXA Health and is seeking certainty regarding the timing and price of such a sale within a relatively short timeframe. Macquarie believes that Macquarie Unconditional Underwriting achieves these objectives for AXA, whilst providing AXA with some continued upside exposure to any IPO of AXA Health in the short-term. Under the Macquarie Unconditional Underwriting, Macquarie would assume the risk of on-selling AXA Health.
Macquarie proposes to sell-down all or a substantial share of its investment in AXA Health … within 6 months of Completion Date…. It is envisaged that the Macquarie Sell-down would be undertaken either by way of an on-sale to a private equity consortium … or an IPO on the Australian Stock Exchange.
The bid provided for the applicant to receive a minimum of $550m for the sale of AXA Health, plus "up to a further $10 million if AXA Health is subsequently sold by way of an IPO within 12 months." An attractive feature of the arrangement, so it was said, was that the applicant would have to deal with one party only (MBL), and MBL would assume the risk of failure of the proposed IPO. The consideration proposed by the bid was -
- $65 million Deposit; plus
- 485 million Vendor Shares issued by MHA with a face value of $1 each; plus
- an additional payment of up to $10 million in the event that AXA Health is sold by way of an IPO within 12 months of Completion Date, calculated as 30% of the net proceeds received from an IPO (ie. net of IPO costs) above $575 million.
24 Because MBL did not intend to be a long-term equity owner of AXA health, the bid was structured to provide MBL with a period of six months during which it would have effective control of AXA Health without the applicant yet having received full consideration for the sale. The idea was, however, that it would be MBL which would bear the risk of there being no third party investor interested in acquiring AXA Health. Broadly, that was done in two ways: first, by providing for a cash payment of $65m by way of non-refundable deposit, and secondly, by giving the applicant a range of options exercisable at the end of the six-month period that would enable it either to require MBL to proceed with the acquisition for the total price of $550m or to resume full ownership of AXA Health.
25 In its non-binding bid, MBL proposed that the acquisition of AXA Health would be by way of a "special purpose company", MHA. That company (which was the company previously referred to as "BidCo"and which did not then exist) would be established as a subsidiary of MBL with a nominal capital (suggested to be $100). It would issue 65,000,000 $1 redeemable preference shares to MBL. By subscribing for these shares, MBL would put MHA in funds to the extent necessary to enable it to pay the $65m non-refundable deposit for AXA Health to the applicant. The remaining component of the consideration passing from MBL to the applicant - to make up the total price of $550m - would be 485,000,000 convertible $1 "vendor shares" in MHA. During the six-month period to which I have referred, these shares would carry voting rights only on the basis of one vote for every 100 shares. By reason of its 100 ordinary shares and its 65,000,000 redeemable preference shares (which were to carry ordinary voting rights), therefore, MBL would control MHA on the proposed figures; (the applicant's vote at a general meeting would be of the order of 6.9%). MHA, in turn, would own 100% of the shareholding in AXA Health. The commercial effect of this was that the applicant would - save to the extent of the $65m deposit - be providing vendor finance for the sale of AXA Health to MBL.
26 At the end of the six-month period, it was proposed that the applicant would have the option to convert its vendor shares in MHA into ordinary shares with full voting rights. It could then either keep them, or put them to MBL at a price of $1 per share. Should the applicant exercise the put option, it would have effectively disposed of its interest in AXA Health for a total consideration of $550m. Alternatively, should the applicant retain its shareholding in MHA, it would control whatever assets MHA then had, which would in turn depend on MBL's measure of success in selling the business of AXA Health to a third party (or parties). Effectively, the applicant would have either a cash box company or the continuing business of AXA Health.
27 The arrangements just described were depicted schematically in the bid document as follows:
Macquarie AXA Choice AXA Outcomes
Sell-down
28 The entities involved in the transactions contemplated by the bid, and the movement of shares and funds, were represented by the following diagram:
29 Although the bid document no longer (ie since Mr Facioni's deletions from the draft of 27 February) contained any explicit reference to the 1% outside shareholding, the annexure (now Annexure 1) identified the issuer of the vendor shares, MHA, as "a non-wholly owned member of the Macquarie group". It was put to Mr Upfold that there was an inconsistency between that indication and the above diagram. He rejected that, saying that the words "group company" in the diagram was "an accounting concept rather than a legal concept", and that the diagram did not tell him too much about the legal ownership of MHA by MBL. By contrast, the annexure was "essentially a … sheet of legal terms" which served a different purpose.
30 Mr Upfold said that he was, in April and May 2002, familiar with the requirements for scrip-for-scrip rollover under the tax legislation. He also had a recollection, albeit not a specific one, that, in the transaction which he and his colleagues were preparing, it was necessary for the vendor shares to be issued by a company that was an ultimate holding company. He accepted that the need to satisfy that requirement was a factor in the decision to insert a small component of outside equity into the structure.
31 MBL was, of course, a financial institution with no long-term desire to operate the business of a health insurance fund. It seems that it saw the sale of AXA Health as an opportunity to earn revenue from a facilitation of that sale, in part by the assumption of risk that third party equity investors could not be found. Thus it described the proposed transactions referred to above as "underwriting". In the bid, MBL proposed that the applicant would pay an "underwriting fee" of $10m on completion of the transaction. As it happened, at the time of the bid MBL already had non-binding commitments from a number of investors (including BUPA), and indications from other banks of a preparedness to provide debt finance to the extent necessary.
32 Mr Penn informed Mr Owen of the receipt of the non-binding bid from MBL in an email sent on 2 March 2002. He referred, in summary, to the features of the bid. In the course of that email, Mr Penn said:
There is a $10m structuring fee proposed, you know what this is for. It is not conditional on the actual structural outcome, it is payable on our acceptance of the offer which incorporates the proposed structure.
Mr Penn was asked about this in cross-examination. He accepted that, in the light of his comment in the email, MBL PTG most probably described the fee to him as a "structuring fee", adding:
I understood it to be a fee for the overall structure of the transaction, which included the on-sale and the shifting of risk to Macquarie during a period of six months, and then the potential clawback of the business to us.
As to the passage "you know what this is for", Mr Penn at first said that he had previously spoken to Mr Owen about the fee, and that the latter did indeed know what it was for. When pressed, he offered the view that it was "a fee associated with us accepting the offer from Macquarie in relation to this transaction". When it was put to him that it was a payment for devising the structure, rather than a payment for underwriting as such, Mr Penn did not agree. He said:
It was a payment which was associated with accepting the transaction, and Macquarie were shifting risk to them. It was a fee associated - it was a fee which was - that the transaction was conditional on accepting.
33 By letter dated 8 March 2002, the applicant gave limited, provisional and somewhat cautious support to the MBL bid. It required a number of issues to be addressed. It required the voting entitlements of the vendor shares in MHA to be increased to a level which was greater than 25% and the distribution entitlements to match the voting entitlements. This was (although not then expressed in the letter in terms) because the applicant wanted to be in a position, during the period when MHA would be controlled by MBL, to block the passage of any resolution at a general meeting which required 75% shareholder approval. The applicant required certain amendments to be made to the constitution of MHA, and indicated that it may require representation on the Board. It also required an adjustment to the rights associated with the put option attaching to the vendor shares, and the creation of a call option over MBL's shares in MHA, as follows:
d) Vendor Option - Amend the rights to reflect that in the event of a successful sell-down for an amount less that [sic] the underwritten amount, the option is to act as a guarantee to AXA to top up to the underwritten amount; and
e) Call Option - AXA will require a call option over Macquarie Bank's ordinary shares in MHA with an exercise price of $1.00 per ordinary share. In the event that AXA converts its Vendor Shares, AXA will require total control of AXA Health.
In its letter of 8 March 2002, the applicant also proposed a number of other modifications to MBL's bid. Included amongst them was a requirement for a "base" price of $560m and a requirement that the applicant share, to the extent of 50%, in any profit made from the on-sale of AXA Health (under certain conditions).
34 Also on 8 March 2002, Mr Facioni wrote to four potential investors in the proposed consortium, including BUPA. He attached a summary of the applicant's response to the non-binding bid of 1 March 2002. I infer that those investors were already privy to the details of that bid. In his letter, Mr Facioni said that the applicant's comments on the bid fell into three broad categories: bid value, process and structure. He gave brief details of the response under each of these headings. He set up a teleconference with representatives of the investors for 12 March 2002.
35 On 16 April 2002, MBL submitted a revised non-binding bid for AXA Health, which followed the same general approach as the original bid of 1 March 2002, but was more favourable to the applicant in a number of respects. The total price was now to be $560m, made up of a $65m cash deposit and convertible vendor shares to the value of $495m. The applicant was to be entitled to a share of 50% (reducing pro-rata to 30% over 12 months) of the profit made from any on-sale of AXA Health for more than $575m (net of costs) within 12 months of the completion date agreed as between MBL and the applicant. The revised bid contained further details about MHA: it was to be majority-owned by MBL, "with the other shareholder … being a non-wholly owned subsidiary of [MBL] that is controlled by [MBL]". As MHA would be controlled by MBL, it would be "a member of the [MBL] consolidated accounting group". The applicant was to have the call option on which it had insisted in its letter of 8 March 2002. The way that option was expressed gave an indication of the ownership structure which MBL had in mind for MHA. As to 99 ordinary shares in MHA, the call option would be granted by MBL. As to one ordinary share, it would be granted by a company not otherwise mentioned in the revised bid, and not then incorporated, Macquarie Health Holdings Pty Ltd ("MHH"). It was also proposed that, subject to negotiation, the applicant would have 25% of the voting power at a general meeting of MHA, and would have one seat on the Board.
36 On 17 April 2002, the Board of the applicant considered the options that were then potentially available for the disposal of AXA Health. Two of those options were the sale to MBF and the non-binding bid from MBL. The documents which were then before the Board leave little doubt but that the capital gains tax consequences of proceeding by way of a scrip-for-scrip roll-over were a significant matter for consideration. One of those documents was a detailed briefing paper, in which a table headed "Impact on AXA APH financials" compared the overall financial impact of the various options, in each case showing the best and worst case scenarios. For the "LBO" option (ie the one being proposed by MBL) there were best and worst cases of $-17m and $-133m respectively shown with respect to "Tax paid by AXA APH". Mr Richard Allert, the chairman of the applicant, accepted that, at its meeting on 17 April 2002, the Board understood that the way an LBO might be structured could bring about the consequence that less tax was payable. Indeed, a notation on the final page of the briefing paper (not referred to Mr Allert by counsel for the Commissioner) was as follows:
Tax & Accounting
- No CGT payable by AXA on transaction as consideration for AXA Health shares equals cost base of shares
That comment did, of course, reflect a technical misunderstanding of what was being proposed by MBL PTG, but it at least demonstrated an awareness of the undoubted circumstance that the proposal was structured in a way that delivered capital gains tax benefits. In his evidence, Mr Owen made it clear that he then understood what was being proposed. He said:
I understood that under the offer we have received from Macquarie that there would be roll-over relief on the capital gain. We took counsel's opinion to, as far as possible, satisfy ourselves that that would be the position. I guess we always knew that that may be contested by the ATO and therefore we were looking at both scenarios. We were pointing out to the board what might happen in the worst case.
He acceded to the proposition that the difference between $17m and $133m was either getting the roll-over relief or not getting the roll-over relief.
37 On 17 April 2002 the Board of the applicant also had before it a document headed "Note to the Board" which contained a very brief comparison of the options which were then under consideration. Quite clearly, this short note dealt only with the most fundamental of factors involved in the various options. The note opened as follows:
The purpose of this note is to illustrate to the Board the key structural implications of each option regarding the possible sale of AXA Health as set out in the Board paper for April's meeting.
It includes an opinion from Counsel. Given the "privileged" nature of this document we have deliberately separated it from the Board papers. Directors will find it helpful to reference this document during the presentation planned for the meeting.
It is clear from that passage, and from other parts of the note, that the Board had the advice of counsel about the matters under consideration. Again, a table showed the tax consequences of the options: the MBL proposal would involve the applicant paying anything from $118m to $139m less tax than the other options. According to the document, a feature of the MBL bid was -
The LBO structure takes advantage of the "scrip for scrip" Capital Gains Tax roll-over provisions. The effect of the structure is to defer CGT of $122m. The period of deferral is indefinite.
Although Mr Penn said that he could not recall the document, he accepted that the availability of the scrip-for-scrip roll-over provisions would have been covered in his presentation to the Board on 17 April 2002. The Board resolved that the bid from MBL should be progressed to the point of having a heads of agreement, and that MBF should be informed that it was no longer the preferred buyer (but also that negotiations with MBF should continue). From this point, the applicant and MBL proceeded to prepare the documentation necessary to give effect to the sale of AXA Health according to the revised bid of 16 April 2002.
38 Mr Lewis Culliver, the Group Tax Manager of the applicant, was present at Board meetings at which the proposal from MBL PTG was considered, and advised the Board in relation to taxation issues connected with it. In April and May 2002, he gave specific consideration to the requirements of the scrip-for-scrip roll-over relief provisions of the 1997 Act. He took advice, and thereby satisfied himself, that those requirements would be met in the transaction being proposed. He does not now recall giving specific consideration to whether MHA would be an ultimate holding company, but he said (in his evidence) that "it was always the case that [MHA] would not be a wholly owned subsidiary of the Macquarie Group". He accepted that he was looking closely at the requirements of s 124-780 of the 1997 Act in April and May 2002.
39 By this stage, all of the potential members of an equity consortium previously identified by MBL, save BUPA, had lost interest. On 18 April 2002, Mr Julian Davies, Director Corporate Finance of BUPA, wrote to Mr Facioni to confirm ("so far as I can") BUPA's participation in the equity consortium to acquire AXA Health, adding "and indeed to the possible acquisition of the entire share capital" of AXA Health. He said that he and Mr Holden had "had a succession of discussions and followed the due diligence process in detail". He said that they (Mr Holden and himself) were "fully supportive of the proposed bid valuing [AXA Health] at A$560 million subject to the terms and conditions set out in your bid document". Mr Davies said that he did not then have the approval of the BUPA Board to participate in the bid, but the terms of his letter made it clear that he expected that approval to be forthcoming. He concluded by saying that funding was available and that, "indicatively although not contractually", that funding would be sufficient for the acquisition of a 47% stake in the consortium.
40 In April 2002, the applicant was concerned to ensure that MBL PTG not on-sell AXA Health to BUPA alone without itself participating substantially in any profit arising from such a transaction. This concern was amongst a number of things discussed at a meeting on 29 April 2002 between representatives of MBL PTG, BUPA and MBL Advisory (representing the interests of the applicant) which was, in my perception of it, important, if for no other reason because it seems to have been the first occasion upon which such a tripartite coming together had occurred in the context of the applicant's attempts to sell AXA Health.
41 Mr John Green (from MBL Advisory) opened the meeting by summarising the background to BUPA's level of involvement in the proposed LBO. Then the BUPA representatives said that they were very serious. There was to be a BUPA Board meeting on 9 May 2002 to give formal approval to participation in the LBO, as to which no problems were anticipated. The representatives said that they had had "first class" access to the management of AXA Health, and that they had found "strong cultural similarities and similar ways of doing business". They referred to other recent acquisitions by BUPA. They said that BUPA's first acquisition in this region had to be "a really strong business" and that BUPA was keen to have a base in the region from which to approach other opportunities. They said that funding was not a concern. After some discussion of the possibility of a sale to MBF, the applicant's concern about the potential embarrassment that might arise if AXA Health were on-sold by way of an IPO at a profit, or were effectively sold to BUPA, was raised by the representatives of MBL Advisory. As recorded in the minutes of the meeting, the response of the BUPA representatives was:
- BUPA are very much a long term player in market
- BUPA's capacity to act earlier in year was limited but its appetite to participate has been increasing and hence the increased equity stake, and preparedness to continue in consortium whilst others have dropped out.
However, the BUPA representatives did not go so far as to say that they were contemplating an outright acquisition of AXA Health.
42 On 7 May 2002 Mr Owen sent an email to Mr Green in which he said that he understood that BUPA was "getting more excited and [was] taking a larger equity stake". He said that the applicant would "not be at all happy" if a trade sale to BUPA took place. He said of BUPA: "…if they are changing their position on their interest in the whole business I think we should be talking to them direct". Mr Green replied on 8 May 2002. He referred to the history of BUPA's involvement in the consortium, and said that, at the meeting "a week or so ago" (which I infer was the meeting of 29 April 2002), there was no indication that BUPA would acquire 100% of AXA Health. Mr Green's email continued (and concluded) as follows:
- The news yesterday that BUPA has offered Macquarie a put option over a proportion of Macquarie's stake in AXA Health (taking MBL down to a $50m exposure as I understand it) is something that was also news to us and needs to be explored to AXA's satisfaction.
- Bear in mind that it is in the context of Macquarie Bank now taking 50% of the equity (with Bupa alone the other equity player). ie because of the withdrawal of other equity, the MBL and Bupa positions have each increased to $112.5m, an amount of equity beyond Macquarie's expressed 'natural' position of $50m.
- I see a put in two ways here:
- 1 it could be a positive for AXA if it keeps the bid alive by giving Macquarie Bank sufficient comfort that its exposure is ultimately limited to its comfort level of equity (before it seeks further institutional investors). Please tell me if you disagree.
- 2 BUT, to my thinking it may depend on the terms of the put. If Macquarie is covering downside and it is not a closet method of selling to Bupa, that is one thing. If it is a way for Macquarie to sell to Bupa and realise further profit, that is quite another. (I note that you have been assured before that a trade sale to Bupa is not the intention.)
- Mark and I are also taking up the issues as to BUPA's current level of interest and the put terms with the Huey team this morning and will revert to you.
- We also believe that a way to address this may be for Huey to agree that if there is any sale to Bupa in the short term that AXA gets the lion's share of benefit of it if it is as a profit
In his affidavit affirmed on 8 December 2008, Mr Green said that he could not recall any subsequent conversations on this subject. Neither could Mr Owen.
43 The process of drafting a heads of agreement was the responsibility of the applicant, and its solicitors produced a first draft on 3 May 2002. The parties to the agreement were to be the applicant, MBL, MHA and MHH. Sections of the draft set out the warranties that were to be given by the applicant and MBL. The only one presently necessary to mention is the following, to be given by MBL:
[I]mmediately prior to Completion:
(1) the issued share capital of MHA will comprise 100 ordinary shares and 65 million RPS;
(2) 99 ordinary shares of MHA and all the RPS will be legally and beneficially owned by MBL and one ordinary share of MHA will be legally and beneficially owned by MHH;
In a mark-up of that draft done on 7 May 2002, MBL's solicitors deleted the reference to "99" and to the one share to be held by MHH, and converted the provision into a requirement that all the shares in MHH be held by MBL or a "related party", defined so as to include a company that was controlled by MBL. However, in the second draft prepared by the applicant's solicitors on 10 May 2002, the original wording was restored, and that wording was thereafter retained.
44 On 8 May 2002, Mr Bob Herbert, an executive within MBL who worked with Mr Upfold, sent an email to many others (within MBL) including Mr Facioni and Mr Andrew McWhinnie, an Executive Director of MBL and head of its taxation division. It attached a draft of a transaction description by which AXA Health was to be acquired. It is an important document, as it set out compendiously, yet in some detail, a description of the whole arrangement, including aspects which had been negotiated with the applicant and aspects that had been negotiated with BUPA.
45 Mr Herbert's draft said that prior to "announcement", MBL would establish "the following acquisition structure to facilitate a scrip-for-scrip bid for AXA Health". The following diagram was set out:
The details of the companies and relationships in the diagram were explained. It was said the "individual" referred to was to be an "unrelated individual (expected to be a partner of Blake Dawson Waldron, [MBL's] legal advisers)". The structure would be capitalised by MBL (through MHH) subscribing for 65,000,000 $1 redeemable preference shares in MHA. The funding of that was to be assisted by an interest-free capital injection of $35m by BUPA.
46 According to the draft, at "financial close" FundCo would enter into a sale and purchase agreement under which it would acquire all the shares in AXA Health for a price of at least $560m, consisting of $65m paid in cash and $495m in convertible shares issued by MHA to the applicant. A further element of the consideration was that the applicant would have the right to share in any profit made on the on-sale of AXA Health by MHA.
47 The draft referred next to the means by which MBL would sell down its interest in AXA Health. There was to be a consortium constituted by a company ("NewCo") owned 50/50 by MBL and BUPA. MHA would on-sell its shareholding in FundCo (and thereby its recently-acquired interest in AXA Health) to NewCo. The arrangements made as between MBL and BUPA were described as follows:
Macquarie has entered into arrangements with BUPA governing the equity and debt contributions of the Consortium to reduce Macquarie's initial exposure to AXA Health.
Prior to announcement, Macquarie and BUPA will execute the [Equity Participation Agreement ("EPA")]. The EPA will legally bind BUPA to sub-underwrite $120 million of the equity (being 50% of total equity) in the Consortium. BUPA will also grant Macquarie a put option over $70 million of Macquarie's equity with an exercise price of $70 million ("Macquarie Put"). The Macquarie Put will expire within 6 months from financial close.
This leaves Macquarie with an equity risk exposure of $50 million and a risk on BUPA's performance of $190 million. This BUPA performance exposure will be secured by a letter of credit from HSBC or similar financier prior to Financial Close. Due to the importance of BUPA to the Consortium, Appendix 1 [to the proposition summary] sets out some information about BUPA.
Macquarie will grant BUPA a pre-emptive right ("BUPA Pre-emptive Right") to acquire the remaining equity held by Macquarie (ie the $50 million in the event that the Macquarie Put has been exercised or Macquarie sells to institutional investors and $120 million in the event that it has not). The BUPA Pre-emptive Right will be exercisable for market value at the earlier of:
- the Consortium proceeding with an IPO; or
- 18 months after Financial Close.
Macquarie will grant BUPA a call option ("BUPA Call") over Macquarie's residual $50 million exposure. The BUPA Call will have an exercise price of $60 million and will expire six months from the financial close.
Thus it will be seen that MBL's maximum net exposure was $50m, but it was contemplated, but not then agreed, that BUPA would call for MBL's residual interest in NewCo which represented that exposure.
48 Mr Herbert wrote another memorandum on 8 May 2002, this time jointly with Mr Greg Pahek, another executive who worked with Mr Upfold. Mr McWhinnie was one of the recipients. The purpose of the memorandum was to seek approval for the establishment of three special purpose companies required for the transaction which, as was then contemplated, would involve the acquisition of AXA Health. The first was MHH. Of its 100 ordinary shares, 99 were to be held by MBL and one was held by BDW Nominees Pty Ltd, a special purpose holding company owned by the partners of MBL's legal advisers, Blake Dawson Waldron. The second was MHA. Of its 100 ordinary shares, 99 were to be held by MBL and one was to be held by MHH. The third was Macquarie Health Funding Pty Ltd ("MHF"), which was to be wholly-owned by MHA. The memorandum contained the same diagram as was set out in the email of the same date (see par 45 above), save that "Individual" had been replaced by "BDW Co" and "FundCo" had been replaced by "MHF". On 10 May 2002, those companies were incorporated as requested.
49 Mr McWhinnie said that the memorandum from Messrs Herbert and Pahek was his first written notification of the intended structure of the MBL side of the entities proposed to be involved in the acquisition of AXA Health. He gave no evidence about, and was not asked about, Mr Herbert's email, but it is a fair inference that he read that also on 8 May 2002. He said that, in the first half of 2002, one of the principal matters engaging his attention was the proposed introduction of the tax consolidation regime, which was eventually introduced in October of that year with effect from 1 July 2002. The regime would have allowed a wholly-owned group of companies to elect to be treated as a single taxpayer for income tax purposes. In February 2002, an exposure draft of the legislation had been released, and it had been announced that it would take effect from 1 July. In his affidavit affirmed on 10 September 2009, Mr McWhinnie continued:
One of the key consolidation issues that I was considering in and after February 2002, was the treatment of entities upon the formation of (or upon joining) a tax consolidated group. Because the ownership structure of a subsidiary member would be ignored, and the head company would be treated as if it were the owner of the subsidiary member's assets, the tax cost of those assets would need to be ascertained. It was proposed that for the entities joining a pre-existing group the tax value of assets would be "reset", effectively by attributing the costs to the head company of its interest in the subsidiary entity across the assets of that subsidiary entity. This method of determining the tax cost of a subsidiary member's assets is commonly described as a "push down" of the head company's ownership costs. On the other hand, if an entity entered a consolidated group upon formation it was permissible for the head entity to adopt the entity's pre-existing tax values. I recognise that the ascertaining of the tax cost of an entity's assets upon its entry into a tax consolidated group could be an administratively burdensome process involving external valuation costs. I was also mindful that the calculations required upon the exit of a member from a consolidated group could be equally administratively burdensome and expensive (these calculations would be required to be done in order to calculate the amount of any gain or loss arising as a result of the company's exit from the group).
One of the other issues of the consolidation regime which I was considering at around that time was the liability of subsidiary members and former subsidiary members of a consolidated group for the tax debts of the entire group. One of the effects of the proposed legislation was that a member of a consolidated group would be jointly and severally liable for the tax debts of the group as a whole in circumstances where those debts were not met by the head company by the time they became due and payable. In effect, this meant that an entity which had left a group could still be held liable for the group's unpaid tax debts to the extent that those debts were incurred while it was a member of the group. While joint and several liability is now managed through the implementation of tax sharing agreements, which have the effect of displacing the general rule, prior to the introduction of the consolidation regime tax sharing agreements had not been tested and their operation and effect was generally unknown. The prospect of ongoing joint and several liability issues was expected to further complicate the exit of entities from consolidated groups.
Mr McWhinnie said that MBL had decided to consolidate its group for tax purposes with effect from 1 October 2002 (the commencement of its 2002/2003 substituted accounting period). Mr McWhinnie was not involved in the early development of the proposals for the acquisition of AXA Health by MBL. When he received the memorandum of 8 May 2002 in which the proposal was explained in outline, he turned his mind to the question whether the incorporation of special purpose companies with the shareholding then proposed would give rise to any significant tax risks, particularly from a consolidation perspective. He concluded that it would not do so. Because MHA would not be owned 100% by MBL, Mr McWhinnie was satisfied that it would not form part of the consolidated group.
50 Although not specifically referred to in the evidence, I infer that the Board of BUPA did give approval to participation in the MBL consortium at its meeting on 9 May 2002.
51 By 16 May 2002, the heads of agreement being prepared by the applicant's solicitors had reached its fourth draft. Of the drafts in evidence, that was the first to contain the subject of "Consolidation" amongst the warranties to be given by the applicant (but I note that the text contains mark-up, from which I infer that the subject had been introduced in the third draft). By these warranties, the applicant undertook not to make any choice or election that had the effect of causing AXA Health to be a member of a consolidated group for the purposes of the 1936 Act or the 1997 Act. It was also as a result of this (fourth) draft that the heads of agreement came to be called the "Underwriting Agreement".
52 On 19 May 2002, a sixth draft of the Underwriting Agreement was prepared. On 20 May 2002, this was marked up by MBL's solicitors, thereby becoming the seventh draft. No changes to the warranties to be given by the applicant were then made, but a new warranty was to be given by MBL in the following terms:
MHH will not be a wholly-owned subsidiary of MBL either at Completion or at any time whilst MHH owns ordinary shares in MHA.
Mr Culliver said that this provision was inserted on his insistence. In his affidavit sworn on 10 September 2009, he said:
I insisted that the warranty be included in the transaction documents because I was concerned about the implications that the proposed tax consolidation regime may have on the Applicant's interest in AXA Health in the event that MBL was unsuccessful in its attempts to on-sell AXA Health and the Applicant decided to regain ownership of the company (by converting its vendor shares in MHA and exercising its call options). At the time, the Federal Government had announced that the tax consolidation regime would be introduced with effect from 1 July 2002, and that on and from that date the parent company of a wholly owned group would be able to elect to form a tax consolidated group irrespective of its accounting period. While the introduction date of the new regime had been announced, it was far from clear what form the provisions would ultimately take or what consequences they would have for the purchasers of companies that were members of such groups. At the time I recall that I was aware that there were concerns held generally among tax professionals that companies exiting a consolidated group would remain jointly and severally liable for the tax debts of their former group after the leaving time. Adding to this concern, and to the general uncertainty around the operation of the provisions, was the fact that an election to form a tax consolidated group could be made retrospectively or with effect from an earlier date. This meant that the purchaser of a wholly owned company of a consolidatable group faced the prospect of having the tax attributes of the company significantly altered as a result of an election being made following completion of the acquisition.
In the context of the LBO, I was mindful of the possibility that through the exercise of its rights attaching to the vendor shares and the call options, the Applicant may end up as the owner of MHA. MHA would hold significant assets, being either the proceeds of the on-sale of AXA Health or the shares in AXA Health. At the time I was concerned that if that happened and MHA had been a wholly owned subsidiary of MBL during the underwriting period, then an election by MBL to form a tax consolidated group from a date within that period could cause MHA and its wholly owned subsidiary, AXA Health, to become members of the MBL tax consolidate group. In that case, MHA and AXA Health, if it had not then been on-sold, would have been leaving members of the MBL tax consolidated group upon MHA ceasing to be a wholly owned subsidiary of MBL. I wanted to ensure that this could not occur. It was for that reason that I sought the warranty referred to above. That warranty together with the changes to the constitution of MHA required by the Underwriting Agreement and the terms of the vendor shares (refer to Schedule 3 of the Underwriting Agreement) meant that without the consent of the Applicant, MHA could not become a wholly owned subsidiary of MBL for the entire underwriting period. With that warranty I was satisfied that there could be no circumstances in which a transaction contemplated by the Underwriting Agreement would fall within the proposed tax consolidation regime.
Mr Culliver was cross-examined on this evidence. It was put to him that the purpose of this new warranty in the seventh draft was to ensure that the ultimate holding company requirement in the scrip-for-scrip roll-over relief provisions was satisfied. He denied it. He said:
This was one instruction that I gave to have in [the agreement] to cover the tax consolidation issue. This was a warranty that ensured that Macquarie Health Acquisitions maintained its financial condition and its governance during the underwriting period. It had nothing to do with scrip-for-scrip rollover.
53 On 22 May 2002, MBL and BUPA Australia Pty Ltd ("BAPL") (the wholly-owned subsidiary of BUPA) procured the incorporation of a company called MB Health Holdings Pty Ltd ("MB Health"). It was jointly owned by MBL and BAPL. It was to be the entity referred to in Mr Herbert's draft as "NewCo".
54 By 22 May 2002, the price being offered by MBL had risen to a total of $595m, made up of a deposit of $57.6m and vendor shares in MHA to the value of $537.4m. Meanwhile, the applicant continued to deal with MBF as a possible, although no longer the preferred, buyer.
55 On 27 May 2002, Mr Facioni put the proposal for the acquisition of AXA Health to senior executives in MBL for approval. It was proposed that MBL would enter into the following transactions:
(a) a binding conditional underwriting agreement with the applicant;
(b) a binding equity participation agreement with BUPA and BAPL;
(c) two put options granted by BAPL to MBL, and one call option granted by MBL to BAPL, the net effect of which was to reduce MBL's gross equity exposure (before fees) to $20m plus "contingent acquisition exposures"; and
(d) credit-approved commitments from two named banks.
56 Mr Facioni's proposal explained that the overall transaction would be undertaken in four stages, namely, the establishment of the transaction entities (which had already been done), the announcement of the transaction, what was called "financial close" (about August 2002) and completion (about February-April 2003). The entities which would participate in the transaction were represented as follows:
The one share owned by BDW Nominees Pty Ltd in MHH made the latter a non-wholly owned subsidiary of MBL controlled by MBL. The entity called "Fundco", which would actually acquire the applicant's shares in AXA Health, was MHF. The entity called "NewCo" was MB Health. Its role would be to acquire AXA health either by the exercise of a put option by the applicant to provide the applicant with a "fallback" method of completing the sale of AXA Health, or, in the event that that option were not exercised, by the acquisition of MHF from MHA. MB Health would also have the task of raising debt funding from the banks, and equity funding from MBL and BAPL, to fund the acquisition of AXA Health.
57 There were, of course, many other elements to the proposal put by Mr Facioni to the executives of MBL on 27 May 2002. A number of them are disclosed in the documents executed as between MBL and the applicant on 4 June 2002, to which I refer below. Others of them related to MBL's own financing of the proposed transactions, to its risk and benefit analyses and to the interface between MBL and BUPA (and BAPL). It is not necessary to refer to them here. The executives approved the proposal, subject to 14 conditions, one of which (insisted on by Mr McWhinnie) was "receipt of all tax advices in final in accordance with verbal indications/drafts".
58 On 30 May 2002, MBL, BAPL, MB Health and BUPA entered into an "Equity Participation Agreement". The recitals referred to the Underwriting Agreement which was then shortly to be executed as between MBL and the applicant, and noted that MBL and BAPL had agreed to establish a consortium to own and operate AXA Health, and had established MB Health as the "vehicle" through which they would do so. A central term of the agreement was the following:
Subject to the terms of this document, Macquarie and BAPL establish themselves as a consortium to complete the Consortium Acquisition and for the other purposes described in this document.
The term "Consortium Acquisition" was defined as:
(a) if the Vendor Put Option is not exercised, the acquisition by MB Health of 100% of the issued shares in Fundco, subject to Fundco having been since MHA Close, the legal, equitable and beneficial owner of 100% of the issued shares in AXA Health and otherwise on the terms set out in the Consortium Acquisition Agreement; or
(b) if the Vendor Put Option is exercised, the acquisition by MB Health of 100% of the issued shares in MHA, subject to MHA having been since MHA Close, the legal, equitable and beneficial owner of 100% of the issued shares in Fundco and Funco having been since MHA Close, the legal, equitable and beneficial owner of 100% of the issued shares in AXA Health and otherwise on the terms of the Vendor Put Option and the MHA Acquisition Agreement.
The agreement defined "MHA Close" as "completion under the Underwriting Agreement" (as to which, see para 66 below). The "vendor put option" was the put option proposed to be granted to the applicant under the Underwriting Agreement in relation to its shares in MHA. By the Equity Participation Agreement, MB Health agreed to be nominated by MBL to grant that option.
59 In the Equity Participation Agreement, the "Interests" of the consortium members were identified as 50% for each of MBL and BAPL. That reflected their then shareholding in MB Health, the consortium vehicle. The word "Interest" was defined as:
… the agglomeration of interests and rights subject to the obligations and liabilities to or by which each of the Consortium Members is entitled or bound under this document, expressed as a percentage of 100% ownership. With effect from completion of the Consortium Acquisition, the Interests of the Consortium Members will be reflected in their respective holdings of MB Health Shares.
The interests of the consortium members were to be adjusted to take account of factors which included "any sell-down" by MBL under the agreement. As to that aspect, the agreement provided:
Macquarie, as a financial investor, intends to reduce its Equity Share by the Settlement Date. It may do this:
(a) by exercise of its put Options under clauses 11.1 and 11.3 (or as a result of exercise by BAPL of its call Option under clause 11.2); or
(b) by introducing additional financial investors (who are not Industry Participants) to the Consortium.
As the provisions just set out suggested, the Equity Participation Agreement provided for two put options (granted by BAPL to MBL) and for one call option (granted by MBL to BAPL) in relation to MBL's shareholding in MB Health. Of those options, Mr Facioni said (in his affidavit sworn on 8 December 2008):
Under the restated EPA, BAPL granted MBL two put options and MBL granted BAPL a call option and certain pre-emptive rights. The put options allowed MBL to sell its shares in MB Health to BAPL at a discount. The first put option allowed MBL to sell approximately 60 per cent of its shares in MB Health at a discount. The second put option allowed MBL to sell the remaining 40 per cent of its shares in MB Health at a greater discount.
In the event that an IPO of AXA Health or other divestment option could not be achieved, MBL could, by exercising its put options, sell its interest in MB Health to BAPL at a pre-determined maximum loss. In the same circumstances, BAPL could, by exercising its call option, buy MBL's interest in MB Health at a pre-determined price which would generate a profit to MBL. If an IPO could be achieved, the pre-emptive rights would allow BAPL to acquire MBL's interest in MB Health (and thereby AXA Health) at a price set by reference to a broker valuation of the IPO.
60 The Equity Participation Agreement also required MB Health to enter into a "Consortium Acquisition Agreement", the conditional terms of which were set out in a schedule to the agreement. By that conditional agreement, MHA would sell to MB Health all of the issued share capital in MHF. Such an agreement was in due course entered into, and I shall refer further to its terms below.
61 Also on 30 May 2002 (which was a Friday), MBL forwarded its "proposed offer" for the sale of AXA Health to the applicant, attaching agreements in executable form, in which it made its preparedness to execute those agreements conditional upon the applicant confirming in writing, by 7.00 pm on Monday 3 June 2002, that it (the applicant) had ceased discussions and negotiations with all other prospective bidders, including MBF. Indeed, MBL's letter of 30 May stated that, absent the applicant indicating its intention to "proceed with [the] proposal" by 7.00 pm on 3 June, the proposal would be withdrawn. The applicant's sub-committee met on the afternoon of 3 June 2002. It considered a further letter of that day from MBL which pointed out certain benefits which the MBL proposal involved for the applicant, and which extended the 7.00 pm deadline for acceptance to midnight. On the same day, Mr Owen wrote to Mr Conde indicating a preparedness to sign an agreement for the sale of AXA Health to MBF that day, so long as certain conditions could be met. Mr Owen spoke to Mr Conde by telephone on the evening of 3 June, in the course of which it became clear that the applicant would be unable to conclude an agreement with MBF. Mr Owen so informed the sub-committee at about 9.15 pm. The sub-committee then decided that the applicant should accept the offer from MBL.
62 MBL was informed of that decision. Negotiations between the applicant and MBL re-commenced at about 11.30 pm on 3 June 2002, an in-principle agreement was reached at about 9.00 am on 4 June 2002, the transaction documents were circulated for comment at about 1.00 pm, and the documents were executed at about 8.00 pm. The transaction documents so executed were the Underwriting Agreement, to which the parties were the applicant, MBL, MHA and MHH, and an "Equity Sell Down Agreement", to which the parties were the applicant, MBL and MHA.
63 By cl 3.1 of the Underwriting Agreement, the structure thereof was explained as follows:
This agreement:
(a) gives effect to various rights in and imposes various obligations upon the parties which will subsist up until Completion. The rights and obligations are documented in the body of this agreement;
(b) requires AXA to exchange the Shares and MHA to acquire the Shares;
(c) requires the parties agree to enter into a number of subsequent commercial agreements (Subsequent Agreements); and
(d) sets out the broad commercial principles and terms which will form the basis of the Subsequent Agreements between the parties. These agreements will come into effect on Completion and include:
(1) an acknowledgement of the exchange of the Shares by AXA and purchase of the Shares by MHA (the Share Exchange Agreement) which will provide for an acknowledgement by AXA of receipt of the Purchase Price payable on Completion and an acknowledgement by the parties that the obligations of the parties that are required to be performed on Completion have been performed, but without prejudice to the parties' rights under the Covenant Agreement;
(2) an agreement containing warranties, indemnities, undertakings and other rights and obligations of the parties that reflect the commercial and other terms contained in schedule 1 (the Covenant Agreement);
(3) documents recording the terms of the Vendor Put Option and the Call Options;
(4) a new constitution of MHA that reflects the provisions of schedules 2 and 3;
(5) the marketing and distribution agreement, service level agreement and head office lease agreements referred to in clauses 10, 11 and 14 respectively;
(6) an agreement reflecting the commercial and other terms in the Equity Sell Down Agreement.
By cl 3.2, the parties were to use their reasonable endeavours to negotiate and to enter into the "transaction documents" on or before 7 August 2002. The "transactions documents" were the binding agreements listed in cl 3.1(d), set out above. If the parties did not execute those documents by 7 August 2002, a dispute resolution procedure was to be invoked. That process would involve a mediator, whose function was to resolve disputed matters and to determine, not later than 4 October 2002, the form of the transaction documents which the parties were required to execute. The parties were, in such an event, required to execute the necessary documents no later than 11 October 2002.
64 Central provisions of the Underwriting Agreement were cll 4.1 and 4.2, which provided for the exchange of shares in AXA Health, as follows:
4.1 Exchange of Shares
The parties agree that on the Completion Date, AXA will exchange and MHA will buy the Shares for the Purchase Price free of Encumbrances and other third party rights.
4.2 Purchase Price
In exchange for the Shares:
(a) MHA will pay $57,600,000, which will be paid in cash to AXA on Completion, subject to adjustment in accordance with clause 4.3; and
(b) MHA will issue to AXA 537,400,000 fully paid Vendor Shares on Completion, which the parties agree will have a value of $537,400,000.
65 The Underwriting Agreement contemplated that, before completion, AXA Health might make an inter-company loan to the applicant of $25m. If no such loan were made, or if one were made yet repaid before completion, the applicant was obliged to procure AXA Health to reduce its capital and to pay a dividend to the applicant (such that the net tangible assets of AXA Health did not fall below $108m). In such an event, it was provided that a range of amendments would be deemed to have been made, including the substitution of the figures of $57m and $513m for the figures of $57.6m and $537.4m set out above. As events transpired, these amendments became active, such that the total price to be paid for AXA Health was $570m.
66 By the Underwriting Agreement, "completion" was defined as completion of the exchange of shares and, by cl 6, this was required to occur on the latest of 31 August 2002 (later amended to 30 August 2002), 20 days after the satisfaction of all conditions precedent and 20 days after the execution of the "transaction documents" (being the documents referred to in subcl (d) of the extract set out in par 63 above). It was provided that, on completion, the applicant was to transfer the shares in AXA Health to MHA, and MHA was to pay the sum of $57.6m to the applicant, and to deliver to the applicant a share certificate in respect of 537,400,000 vendor shares.
67 The Underwriting Agreement required MBL, on completion, to "procure that a Qualifying Person grants a put option on the terms set out in Schedule 4". A "Qualifying Person" was defined as -
… a company which holds sufficient collateral in the form of cash on deposit or has procured the provision of one or more letters of credit issued by OECD banks with a minimum rating of BBB- from Standard & Poors or Baa3 from Moody's in favour of [the applicant] which, if enforced, would enable that company to fulfil its obligations under the Vendor Put Option in a timely manner ….
Schedule 4 provided that the put option might be exercised at any time after "commencement" and before "expiry", subject to certain presently irrelevant conditions. "Commencement" was defined as the earlier of six months after the grant of the option and the liquidation of MHA. It was provided that the option would "expire" if it had not been exercised within eight months of grant or by the time a notice of conversion of the vendor shares had been given by the applicant to MHA (whichever first occurred).
68 The Underwriting Agreement also required MBL and MHH, on completion, to grant to the applicant a call option over their ordinary shares in MHA (99 shares in the case of MBL and one share in the case of MHH). These options could be exercised only if the vendor shares were converted, and would expire if not exercised within two months after conversion or upon the exercise of the vendor put option (whichever first occurred). The exercise price under the call options was $1 per share. There was to be a "nominal consideration" paid by the applicant for the grant of these options.
69 The "vendor shares" were to be "convertible ordinary shares" in the capital of MHA, with the rights set out in Sch 3 to the Underwriting Agreement. The shares were to have an issue price of $1 each. The schedule defined an "initial period" as six months after completion, and provided:
At any time after the Initial Period, upon giving not less than 18 days notice to MHA the holder of a Vendor Share may irrevocably elect to convert each Vendor Share into one ordinary share in MHA, provided that conversion shall not be effected before cancellation redemption or buy-back of the RPS.
The "RPS" were the redeemable preference shares in MHA, to which I shall refer in the following paragraph. Schedule 3 further provided that the holder of the vendor shares would have four votes for every 100 such shares held at a general meeting. This would have given the applicant a 27.2% or, under the amendments referred to in para 65 above, a 26.5% vote at a general meeting of MHA. Holders of vendor shares were to have no entitlements on a distribution of the income or capital of MHA, save to the extent of four cents per share on a liquidation. The holders of the vendor shares were to be entitled to appoint one person as a non-executive director of MHA. It was also provided in Sch 3 that the constitution of MHA would be amended to provide for an extensive list of things that could not be done unless first approved by a special resolution of that company.
70 Schedule 2 of the Underwriting Agreement dealt with the redeemable preference shares to be held by MBL in MHA. There were to be 57,600,000 (or, under the amendments referred to in para 65 above, 57,000,000) such shares, carrying the same voting rights as ordinary shares. They were to mature on the earliest of the conversion of the vendor shares, the exercise of the vendor put option and the passing of eight months and one day after the date of issue. Upon maturity, the shares were to be cancelled, redeemed or bought back by MHA in consideration for MHA paying (presumably to MBL) the "maturity amount", which was a sum which might vary depending upon which of certain events occurred. It is sufficient for present purposes to say that if MHA were liquidated or the vendor put option were exercised, the sum of $57.6m (or $57m) was to be paid. Otherwise, there would be no consideration.
71 By the Underwriting Agreement the applicant also agreed to pay MBL an "underwriting fee" of $5m on the completion date.
72 As provided in cl 3.1(d)(2) of the Underwriting Agreement, Sch 1 thereto set out the provisions that were to be the subject of a further agreement called the "Covenant Agreement". The warranties - by the applicant and by MBL - referred to in the fourth and seventh drafts of the Underwriting Agreement were covered by this schedule. The only other provision presently necessary to note is par 11.3 of the schedule as follows:
11.3 Introduction of Newco
(a) The parties agree that MHA may, on Completion, direct [the applicant] to execute an instrument of transfer of the Shares to a wholly owned subsidiary (Newco) of MHA. The Transaction Documents will allow for this and, if required by MHA, will provide for Newco to be a party to the Transaction Documents and for Newco to enjoy such rights of MHA as are specified by MHA. The Transaction Documents will also ensure that no party is prejudiced by the introduction of Newco (including by ensuring that the arrangements in the Equity Sell Down Agreement operate in a manner which return the same profit to [the applicant]).
(b) If MHA gives a direction in accordance with paragraph 11.3(a) the duly executed instruments of transfer to be delivered by [the applicant] on Completion must be in favour of Newco.
73 The other document executed on 4 June 2002 was the Equity Sell Down Agreement, made between the applicant, MBL and MHA. The first three recitals thereto give an indication of its subject matter:
A. The parties have agreed in principle that [the applicant] will exchange and MHA will buy the Shares in accordance with the Underwriting Agreement.
B. The parties have also agreed to enter into a separate arrangement whereby MBL will procure that, in the event of a subsequent Sale or IPO and subject to certain conditions applying, an Equity Sell Down Payment may be made to [the applicant].
C. [the applicant] has agreed to make a payment to MBL in consideration for MBL procuring that MHA satisfies its obligations as set out in this agreement.
74 The agreement referred to the "transaction documents" which were later to be executed (being the documents set out in cl 3.1(d) of the provision referred to in para 63 above) and required that those documents contain detailed provisions governing the making of "equity sell down payments" in accordance with principles set out in the agreement. The agreement stated the circumstances in which a payment would, or would not, be made and how the level of the payment would be calculated. It is not necessary to refer further to the detail of these provisions. It is sufficient to say that they were calculated to enable the applicant to participate in such profit as may be made by the on-sale of AXA Health, while at the same time allowing MBL a return on its investment. The agreement treated differently a direct on-sale by MHA itself and a subsequent on-sale by any consortium which obtained AXA Health shares from MHA. The agreement also expressly allowed for the possibility that MHA might wish "to interpose a wholly owned subsidiary (Newco) between itself and [AXA Health]": in such a case, the applicant was not to be any the worse off for that interposition such that, in general terms, its entitlements as against "Newco" would be no inferior to those which it would otherwise have as against MHA. The applicant also agreed to pay MBL an "equity sell down fee" of $5m "in consideration for MBL procuring that MHA satisfies its obligations under this agreement…." The fee was payable six months after the completion date.
75 The parties' activities between 4 June 2002 and 30 August 2002 were explained in the affidavit of Ms Birch:
Following the execution of the Underwriting Agreement and the Equity Sell Down Agreement on 4 June 2002, there was a period of intense negotiations between the parties. These negotiations were in respect of the subsequent legal agreements to be entered into by the parties on or before 30 August 2002 as a condition to completion of the transaction….
The most important transaction document was the Covenant Agreement. I recall that there were a number of negotiations and disputes between the parties in relation to the warranties to be provided by the parties under the Covenant Agreement. The warranties to be provided by MBL had the purpose of ensuring that the profitability of AXA Health would be maintained throughout the underwriting period. This would safeguard the Applicant's position in the event that an on-sale of AXA Health could not be successfully achieved and the Applicant chose to re-acquire AXA Health. The negotiations continued right up to 30 August 2002 and were both intense and vigorous until the transaction documents were executed. During August 2002, the parties and their advisors worked around the clock in order to have all the transaction documents negotiated and drafted in time for settlement.
76 It seems that the last week before execution of the transaction documents was a very busy time for all concerned. On 25 August 2002, the parties on the BUPA side of MBL, as it were, executed a deed to amend the Equity Participation Agreement. In relation to MBL's shareholding in MB Health, BAPL granted to MBL a put option and MBL granted to BAPL a call option, the exercise of which in each case was tied to the exercise by the applicant of its right to convert its vendor shares in MHA, the exercise by the applicant of its put option over those shares, or the expiry of that put option, as the case required. On the same day, those parties executed a shareholders' deed to regulate the operation and governance of MB Health.
77 On 26 August 2002 the applicant, MBL, MHA and MHH by deed amended the Underwriting Agreement. One of the amendments was to replace cl 4.1 with the following:
"4.1 Exchange of Shares
(a) The parties agree that on the Completion Date, AXA will exchange and MHA will buy the Shares for the Purchase Price free of Encumbrances and other third party rights.
(b) MHA may, on Completion, direct AXA to execute an instrument of transfer of the Shares to Newco or other nominee company.
(c) Where MHA gives a direction in accordance with clause 4.1(b), the duly executed instruments of transfer to be delivered by AXA on Completion must be in favour of Newco or other nominee company."
On the same day, the applicant, MBL, MHA and MHF by deed replaced the Equity Sell Down Agreement. At least to the extent relevant for present purposes, what I have written in para 74 may likewise be said about the deed of 26 August (save for the fact that "NewCo" had by then been interposed in the form of MHF, and was itself a party to the deed). On the same day, the applicant, MBL, MHA, MHH and The National Mutual Life Association of Australasia Limited executed the Covenant Agreement. It contained a range of provisions calculated to govern the parties' obligations in the intervening period while the commercial business of AXA Health was effectively under the control of MBL, but might (depending on how matters turned out) ultimately be returned to the applicant. They included a provision substantially to the effect of the non-consolidation warranty in the Underwriting Agreement (see para 51 above) and a provision in the same terms as that set out in para 52 above. They did not, however, include the provision which had been par 11.3 of Sch 1 to the Underwriting Agreement, since a provision to substantially the same effect had now become part of the Underwriting Agreement itself (the replacement cl 4.1 to which I have referred above).
78 On 29 August 2002, MHA and MHF entered into what was described as "MHA Undertaking". By it, MHA agreed to direct the applicant to execute an instrument of transfer of its shares in AXA Health to MHF, and agreed to pay the applicant the purchase price for those shares. MHA assigned to MHF certain benefits, or expected benefits, arising under detailed provisions of other instruments then executed or expected to be executed. The consideration passing from MHF to MHA was an agreement to issue to MHA, upon completion under the Underwriting Agreement, 240,000,000 ordinary shares in MHF (of a value, it seems, of $240m). MHF also agreed to pay to MHA, on the "settlement date", the sum of $330m, described as "deferred consideration". The "settlement date" was the earlier of two dates, one of which was the date specified by the applicant for the conversion of its vendor shares in MHA in a notice of intention to convert (if one were given) in that behalf. As will appear, the combination of these sums ($240m and $330m) represented the agreed sale price of AXA Health ($570m).
79 On 29 August 2002, MHA and MB Health executed an agreement called "Consortium Acquisition Agreement". A condition precedent to the operation of that agreement was that the applicant was no longer able to exercise the put option granted to it by MB Health in relation to its vendor shares in MHA. The terms of the put option were such that, if the applicant had given a notice to convert the vendor shares into ordinary shares, it could no longer be exercised. The effect of these provisions was, therefore, that the giving by the applicant of a notice of conversion in relation to the vendor shares would bring the Consortium Acquisition Agreement into operation. Under that agreement, MHA agreed to sell and MB Health agreed to buy all of the issued share capital in MHF.
80 On 30 August 2002, MHA directed the applicant to execute an instrument of transfer of its shares in AXA Health to MHF, such a transfer took place, MHA paid the applicant the sum of $57m in cash, MHA issued 513,000,000 $1 convertible preference shares to the applicant, MBL and MHH granted to the applicant call options over the ordinary shares held by them in MHA, and MB Health granted to the applicant a put option over the convertible vendor shares. The applicant also paid to MBL the underwriting fee of $5m. MBL subscribed to 57,000,000 $1 redeemable preference shares in MHA, and paid $57m to MHA in respect of that issue. The particular aspect of these transactions which is controversial in the present proceeding is that by which the applicant divested itself of its shares in AXA Health and received 513,000,000 shares in MHA by way of partial consideration.
81 On 7 February 2003 the applicant gave notice of the conversion of its vendor shares in MHA, effective on 28 February 2003. On the same date, the applicant also exercised the call options granted by MBL and MHH. As explained above, the former event triggered the operation of the consortium acquisition agreement as between MHA and MB Health and the "MHA Undertaking" as between MHA and MHF. MHA's shareholding in MHF was acquired by MB Health for the sum of $240m, and MHF paid MHA the "deferred consideration" which, after adjustment, amounted to $317.85m. In the result, MHA's only asset was cash in the sum of $557.85m. MHF, which owned all the shares in AXA Health, was in turn owned by MB Health.