Capricorn Diamonds Investments Pty Ltd v Catto and Ors [2002] VSC 105

Supreme Court of Victoria|2002-04-10|Before: Warren J

CORPORATIONS - compulsory acquisition - minority interests - majority interests UNIT TRUST - minority unitholders' interests VALUATION - methodology - inclusion of additional factors - special benefits - premium for forcible taking - "fair value" - foreign exchange rates - time of distribution - method of distribution NOTICE - compulsory acquisition - adequacy of notice to minority unitholders - disclosure - material information PARTIES - representation - minority unitholders - representative defendants WORDS AND PHRASES - "fair value" - "materiality" - "just terms" THE CONSTITUTION (Cth) - s.51(xxxi) CORPORATIONS ACT 2001 - ss.664, 664A, 664B, , , , , , , , , , , , .

For the Attorney-General of the Commonwealth intervening

The plaintiff made an offer to compulsorily acquire the remaining minority units in a company in which the plaintiff held over 90 per cent of the units in the company. The plaintiff issued these proceedings relying upon new provisions of the Corporations Act 2001, namely ss.664(3) and 664F(1), to seek court approval of the proposed compulsory acquisition of the remaining minority units in the company.

The defendants, being the minority unit holders, oppose the application to the Court principally on the basis that the offer made for the units did not give fair value. The defendants contended, also, that the statutory provisions relied upon by the plaintiff were unconstitutional and, therefore, invalid. The defendants were Robert John Charles Catto, John Warwick Cox, John David Joshua, Ian Edward Morton, Terranora Securities Pty Ltd, Susan Marcia Benny and Colbern Fiduciary Nominees Pty Ltd. The parties called witnesses, tendered evidence and made extensive submissions in support of their respective positions. The Attorney-General of the Commonwealth of Australia intervened to make submissions to the Court on the constitutional issues. The Australian Securities and Investments Commission ("ASIC") provided written submissions to the Court on the construction of the subject legislation. The submissions on behalf of the Attorney-General and ASIC supported the plaintiff's position.

At the outset, it is appropriate to set out the background facts.

The plaintiff is a subsidiary of Rio Tinto Ltd, ("Rio Tinto") a company engaged in multi-national mining projects, including mines located in Zimbabwe. By way of background, in November 2000 Rio Tinto acquired another mining entity, Ashton Mining Ltd.

The plaintiff and its related entities own 96.95 per cent of the units in the Western Australian Diamond Trust ("WADT"). WADT in turn owns a 5 per cent interest in the Argyle Diamond Mine Joint Venture and has other assets. The responsible entity or manager of WADT is AML Nominees Ltd ("AML"). It receives a trust management fee for its services. On 9 May 2001 the plaintiff gave notice of compulsory acquisition to the 927 holders of the minority 3.05 per cent of the WADT units offering $2 per unit.

Capricorn's offer was $2.00 for each unit covered by its compulsory acquisition notice. This amount was $0.78 above the highest valuation in the range of values for the units determined by an independent expert appointed under the statute, AMC Corporate Pty Ltd (the independent expert or "AMC"). It is also $0.84 higher than the independent expert's preferred value of $1.16.

Of the 927 unit holders, 323 unit holders objected. The objectors hold approximately 60 per cent of the minority units. By way of this proceeding the plaintiff seeks an order approving the acquisition to compulsorily acquire all of the minority, including the 323 objectors. The plaintiff selected the first five defendants as representatives of the entire body of 323 objectors. The sixth and seventh defendants sought to be joined as separate defendants and were joined by order of the Court.

The plaintiff, Capricorn, seeks the Court's approval of the terms set out in its notice for the compulsory acquisition of those units in Western Australian Diamond Trust ("WADT") that are not already owned by Capricorn or a related body corporate of Capricorn pursuant to s.664F(1) Corporations Act 2001.

The Legislative Scheme - Part 6A.2 Division 1 of the Corporations Act

Part 6A.2 Division 1 of the Corporations Act provides for the compulsory acquisition of minority securities by a 90 per cent holder of securities in the subject entity. The procedure is novel and took effect from 13 March 2000. The legislative scheme provides that within a specified period of six months after becoming that holder, a 90 per cent holder can give a notice of compulsory acquisition setting out a cash price for the minority securities (see ss.664AA(6); 664C(1)). The price must only be cash and not differentiate between minority holders (see s.664B). No benefit outside the price formally notified can be offered to any individual holder at any time (see s.664D). Under the statutory regime, minority holders are entitled to object to the acquisition (see s.664E). Where persons who hold at least 10 per cent of the minority securities object to the acquisition then the acquisition can proceed only if the Court gives approval (see ss.664F; 664A(3)(b)). The Court must approve the acquisition if the 90 per cent holder establishes that the terms set out in the notice "give a fair value for the securities" (see s.664F(3)). Where fair value is not established the Court must confirm that the acquisition will not take place (see s.664F(3)).

Specifically, the relevant sub-sections of s.664F of the Corporations Act provide:

"664F The Court's power to approve acquisition (1) If people who hold at least 10% of the securities covered by the compulsory acquisition notice object to the acquisition before the end of the objection period, the 90% holder may apply to the Court for approval of the acquisition of the securities covered by the notice. (2) The 90% holder must apply within 1 month after the end of the objection period. (3) If the 90% holder establishes that the terms set out in the compulsory acquisition notice give a fair value for the securities, the Court must approve the acquisition of the securities on those terms. Otherwise it must confirm that the acquisition will not take place. ..... (4) The 90% holder must bear the costs that a person incurs on a legal proceedings in relation to the application unless the Court is satisfied that the person acted improperly, vexatiously or otherwise unreasonably. The 90% holder must bear their own costs."

Section 667A provides that the report of the expert must be prepared by a person nominated by ASIC. The section provides, also, that the expert report must state whether in the opinion of the expert the terms proposed in the notice give a fair value for the securities and set out the reasons for that opinion (see s.667A(1)). In this matter AMC was the expert nominated by ASIC and generally referred to as "the independent expert".

Section 667C of the Corporations Act prescribes the method of valuation. It provides:

"667C Valuation of securities (1) To determine what is fair value for securities for the purposes of this Chapter: (a) first, assess the value of the company as a whole; and (b) then allocate that value among the classes of issued securities in the company (taking into account the relative financial risk, and voting and distribution rights, of the classes); and (c) then allocate the value of each class pro rata among the securities in that class (without allowing a premium or applying a discount for particular securities in that class). (2) Without limiting subsection (1), in determining what is fair value for securities for the purposes of this Chapter, the consideration (if any) paid for securities in that class within the previous 6 months must be taken into account."

Part P6A.2 of the former Corporations Law was inserted in the law of the Australian Capital Territory by the Corporate Law Economic Reform Programme Act 1999 (Cth) ("the CLERP Act"). The amendment was adopted and applied as Victorian Law by virtue of s.7 of the Corporations (Victoria) Act 1990 (Vic). Following on from references of power from the States to the Commonwealth under s.51(xxxvii) of the Constitution, in particular by Victoria under the Corporations (Commonwealth Powers) Act 2001 (Vic), the Corporations Act re-enacted the provisions of the former Corporations Law as a law of the Commonwealth. Part 6A.2 of the Corporations Act is cast in the same terms of Part 6A.2 of the former Corporations Law of Victoria. The Corporations Act commenced operation on 15 July 2001.

The transitional provisions of the CLERP Act are relevant because the present proceeding was pending as of 15 July 2001, the date when the new legislative scheme came into operation. There was agreement between the parties in the present proceeding such that the rights under the Commonwealth Corporations Act were recognised as being substituted for rights that existed before 15 July 2001 as a result of the application of s.1383 of the Corporations Act. Arising from s.1383 a new proceeding is taken to have been brought in this Court exercising Federal jurisdiction under Part 6A.2 of the Corporations Act. The proceeding brought under Part 6A.2 of the former Corporations Law of Victoria is terminated by virtue of the effect of s.7(3) of the Corporations (Ancillary Provisions) Act 2001 (Vic) ("the Ancillary Provisions Act").

The Originating Process in the proceeding brought under the former Corporations Law of Victoria was filed by the plaintiff on 13 July 2001. Clearly, s.1383 of the Corporations Act applies to a proceeding other than a "federal corporations proceedings" that was commenced in a court before 15 July 2001, that was under a provision of the former Corporations Law of a State or Territory in "this jurisdiction",[1] was not an enforcement, appeal or review proceeding in relation to an order of a court, had not been terminated before 15 July 2001, and was a proceeding in respect of which no final determination of any of the existing rights or liabilities at issue in the proceeding had been made before 15 July 2001.[2] Thus, all the pre-requisites of s.1383(1) were satisfied in the present case.

Furthermore, the proceeding brought under the former Corporations Law of Victoria was not as at 15 July 2001 a "federal corporations proceeding" as that phrase is used in s.1383(1) of the Corporations Act. The expression "federal corporations proceeding" is defined in s.1382(1) of the Corporations Act.[3] Paragraphs (a), (b), (ba), (bb), (bd) and (c) of that definition clearly did not apply. Paragraph (bc) of that definition also did not apply,[4] even though the defendant raise a constitutional issue. Reliance on a provision of the Constitution as a basis for invalidity means that a proceeding involves a matter "arising under [the] Constitution, or involving its interpretation" for the purposes of s.76(i) of Constitution.[5] Accordingly, a proceeding involving reliance on such a provision involves the exercise of federal jurisdiction. In the present case, however, there was no reliance on a provision of the Constitution as a basis for invalidity immediately before the commencement of the Corporations Act. Consequently, as at that date, the proceeding brought under the former Corporations Law of Victoria could not have been characterised as being within federal jurisdiction. The proceeding, therefore, was not a "federal corporations proceeding" within the meaning of ss.1382(1) and 1383(1) of the Corporations Act.

The effect of s.1383 in the present case is that a new application has been brought to this Court exercising federal jurisdiction under s.664F of the Corporations Act. Further, the parties to the proceeding are taken to be the same and all steps taken in the former proceeding are treated as having been taken in the new proceeding.[6] Section 7(3) of the Ancillary Provisions Act terminates the previous proceeding.

It is relevant to consider the explanatory memorandum for the Corporations Bill 2001. Paragraph 2.4 of the explanatory memorandum provided:

"The Bill will, in effect, re-enact the Corporations Law as a Commonwealth Act capable of operating throughout Victoria ... Explanatory material for the provisions of the Corporations Law on which the Bill is based may be found in explanatory memoranda for the legislation that enacted or amended those provisions."

Section 15AB of the Acts Interpretation Act 1901 (Cth) applies to the interpretation of the Corporations Act (see s.5C of the Corporations Act). The explanatory memorandum to any Bill amending the former Corporations Law, any relevant report of the Company and Securities Advisory Committee and any relevant report of a Parliamentary committee may be considered in the interpretation of a provision of the former Corporations Law.[7]

Section 15AA of the Acts Interpretation Act expressly requires a court to adopt a construction of legislation which would promote the purpose or object of that legislation in preference to one which would not do so.[8] Section 15AA does not require, as a prerequisite to its operation, any ambiguity in the legislation.[9]

The legislative history reveals that it was the primary intention of the new provisions to:

"make it easier for 90 per cent holders to acquire the benefit; and discourage 'greenmailing'."

The Explanatory Memorandum to the Corporate Law Economic Reform Bill[10] ("the explanatory memorandum"), in paragraph 4.4, states that an aim of the reforms was to "make it easier for majority shareholders to obtain the benefits of 100 per cent ownership".

The explanatory memorandum identifies the purpose of the legislative amendments as follows:

"7.30 The Bill will extend the current legislative mechanisms for the compulsory acquisition of securities. These are intended to balance the interests of facilitating changes in corporate ownership with the need to protect the rights of minority shareholders.

7.31 Extending the power to compulsorily acquire securities will:

* discourage minority shareholders from demanding a price for their securities that is above a fair value (often referred to as 'greenmailing')

7.45 The issue of valuing companies for the purposes of compulsory acquisition is a difficult one and the draft provisions provides (sic) guidance to experts as to how they should go about valuing a company ... It is proposed that experts would not account for premiums on account of the special value of the outstanding securities to the acquirer, or discounts on account of the lack of a market for particular securities."[11]

It is also relevant to consider the Report by the Legal Committee on Compulsory Acquisitions for the Companies and Securities Advisory Committee ("the Legal Committee Report"). It expressed the view that compulsory acquisitions:

" ... can be a necessary and desirable means of corporate rationalisation. They may produce considerable economic, administrative and taxation benefits including: * facilitating financial restructuring * permitting the transfer of tax losses between wholly owned grouped companies; * reducing administrative and reporting costs; * avoiding greenmailing; * protecting the confidentiality of commercial information and otherwise eliminating possible conflicts of interest in partially owned companies."[12]

The committee considered, also, that the regularity objective was " ... to balance the interests of all shareholders, to avoid either minority oppression or minority dictation".[13]

In relation to the new compulsory acquisition power the Report states:

It would assist a controlling entity to achieve the legal and economic advantages of full ownership, ensure equal and fair treatment of minorities and reduce the opportunity for greenmailing.

In determining fair value, an independent expert should:

* Assess the value of the company as a whole and determine the value of each class of issued security, taking into account its relative financial risk and its distribution rights;

* Expressly disregard whether the remaining securities of the offer class should attract a premium or discount".

Thus, the issue of special benefits was specifically discussed in the Explanatory Memorandum[14], the Legal Committee Report[15] and also by the Parliamentary Joint Committee Report.[16]

In particular, it is evident from the explanatory memorandum[17] that the legislature was seeking to balance the interests of the two groups of parties that is, the interests of facilitating changes in corporate ownership with the need to protect the rights of the minority shareholders. Part of the process was the discouragement of minority shareholders from demanding a price for their securities that is above a fair value, the practice of greenmailing. The explanatory memorandum[18] shows that part of the objective of the legislative scheme was to remove that potential that is, to remove the matters that would otherwise operate to force a price above fair value were there to be the ordinary commercial bargaining context in which consent of both parties is required before a transaction can be concluded. Furthermore, in the explanatory memorandum[19] the provisions of s.667C are explicitly addressed and it is stated that it is proposed that experts would not account for premiums. It is to be noted that the expression "premiums" is cast in the plural. The memorandum refers to premiums on account of the special value of outstanding securities to the acquirer, that is, the extent to which the acquirer may be prepared to pay a sum above fair value in order to secure its objective. This is the classic situation of the anxious buyer rather than non-anxious buyer of the Spencer[20] formulation.

Against this legislative background I turn to consider the issues in the present proceeding.

The first and primary question in the proceeding is whether the terms proposed by Capricorn in the compulsory acquisition notice give "a fair value" for the units covered by the notice. If a finding is reached that the terms proposed give a fair value for the securities then the Court must approve the compulsory acquisition in accordance with ss.664(3) and 664F(1) of the Corporations Act. The defendants, in their exploration of the meaning of "fair value" expanded the question to include does "fair value" permit or require allowance to be made for "special benefits" to the prospective acquirer or allowance for the benefits of "forcible taking" on the prospective vendor. In determining whether the terms give a "fair value", s.667C prescribes that "fair value" is to be determined by assessing the value of the company as a whole (see s.667C(1)(a)), by allocating "that value" among the classes of issued securities in the company (taking into account the relative financial risks, and voting and distribution rights, of the classes) and by allocating "the value of each class pro rata among the securities in that class (without allowing a premium or applying a discount for particular securities in that class)."

The second question concerns the constitutional validity of Part 6A of the Corporations Act. The defendants raised the question that depending upon the answer to the primary question, that is, what is the proper meaning of "fair value", do the relevant provisions provide for the acquisition of property on "just terms"? The defendants contended that if the statutory scheme precludes or inhibits a proper allowance for "special benefits" and the consequences of forcible acquisition on the prospective vendor and allocate those allowances in a way which is unjust in the circumstances then the relevant provisions contravene s.51(XXXI) of the Constitution.

The defendants raised additional matters. They asked, what information is "material" to be disclosed within the meaning of s.664C? They asked, are "special benefits" to the prospective acquirer and potential detriments to the prospective vendor information that is "material"? They asked further, what is the consequence of a failure to disclose material information? In addition, the defendants asked whether the compulsory acquisition notice served by Capricorn disclosed all information that was material within the meaning of s.664C?

A remaining issue was whether there had been compliance with the requirements of Part 6A. Capricorn answered that it had complied with all the requirements of Part 6A. In any event, Capricorn submitted it should be relieved if needs be from the effects of any alleged non-compliance by orders under sections 1322 and 1325D of the Corporations Act as sought by Capricorn in the application which it has made in its interlocutory process filed in this proceeding.

By way of overview, evidence was given for the plaintiff at trial by Stephen Ernest Creese, a solicitor and director of Capricorn; Geoffrey Robert Appleyard, a geologist and a director of AMC, the independent expert; Gary Michael Wingrove, a chartered accountant and a director of KPMG Corporate Finance Pty Limited ("KPMG"), who provided assistance to the independent expert; and Paul Perry, an equity partner and director of corporate finance at JB Were Limited, a licensed securities dealer and investment adviser. An affidavit of Dr Stephan Meyer, geologist, was also relied upon by Capricorn, but Dr Meyer was not required to attend for cross-examination. Wayne Richard Lonergan, a chartered accountant and a director of LEA, was called as the defendants' expert.

More specifically, the plaintiff relied upon the independent expert's report retained pursuant to s.667A of the Corporations Act as prepared by AMC dated 4 May 2001 ("the May report"). The principal author of the report was Geoffrey Robert Appleyard of AMC. The plaintiff relied, also, upon a supplementary report dated 8 November 2001 prepared by the independent expert, AMC ("the November report"). Appleyard was the principal author of this report, also. The plaintiff relied also upon a report prepared by JB Were Limited dated 7 November 2001 ("the Were report"). Mr Paul Perry was the principal author of the Were report. The plaintiff relied further upon a report of KPMG Corporate Finance P/L. (Mr Gary Wingrove was the principal author of that report.)

The defendants relied upon the report of Lonergan Edwards & Associates ("LEA"), generally known as "the LEA report". Mr Wayne Lonergan was the principal author of that report. The defendants also filed a number of affidavits setting out their particular interests and exhibiting the various notices of objection. These were adverted to in submissions. The defendants further relied upon internal documents of Capricorn and Rio Tinto, in particular, memoranda of one Albart-Diaz, as to cost savings arising from the acquisition. These matters were referred to in submissions.

I turn then to consider the three primary issues of fair value and constitutional validity and thereafter address my findings on the expert evidence.

The submissions on fair value may be conveniently broken up into three sections: (1) the concept of fair value; (2) the time of determination of fair value; and, (3) the distribution of fair value. I consider each of these sections in that order.

With respect to the conceptual approach to fair value, it was the case of the defendants that the criteria relevant to determining fair price and fair value generally include five aspects. First, a premium for the acquisition of 100 per cent control of an entity or enterprise. Secondly, a special value of a purchase to a particular purchaser. Thirdly, consideration of the exchange market as evidence of the true market value of the particular shares. Fourthly, the allocation of a liberal estimate compensating a compelled vendor for expected future benefits. Lastly, the recognition of the achievement of total control and the commensurate administrative advantages to the acquirer.

Mr S. Wheelan QC who appeared with Ms J. Dodds-Streeton SC for the defendants, relied upon the observations of Santow J in Holt v Cox,[21] and as approved by the Court of Appeal[22] for the submission that the usual meaning for the fair value of an asset constitutes:

"Its fair equivalent in money ascertained by a supposed sale by a voluntary bargaining between vendor and purchaser, each of whom is both willing and able, but not anxious, to trade and with a full knowledge of all circumstances which might affect value."

For the defendants it was argued that where there is a market it can be reasonably expected that fair value would be equivalent to market value. Santow J in Holt v Cox[23] observed:

"It is thus appropriate to look at matters first from the vendor's point of view, in considering the rights of the shares, and what, to the vendor, they may be expected to yield him in the future by way of benefits, for loss of which a fair sale price is compensation. This is particularly when, as here, the vendor has no choice but to sell. It is necessary to ask what a willing, but not anxious vendor would consider a 'fair price' for being deprived of the shares and all [their] existing advantages and with all [their] possibilities ...... not what the purchasers with their greater bargaining power might in reality be able to exact on a compulsory sale ... A liberal estimate of the shares in the approach to be taken. Furthermore, their value to the purchaser, ignoring the purchaser's expropriatory power (except as justifying a liberal estimate) must reciprocally be taken into account in determining a fair price. This is precisely as [the vendors] continued shareholding rights do detract from the value of the remaining shares."

In Holt v Cox Santow J concluded that while he would not go so far as to hold that the forced sale justified a premium for forcible taking, nevertheless, the concept of a fair price in circumstances of expropriation required the valuer to make an estimate on "the liberal side".

The defendants relied on the observations in Holt v Cox to support the proposition that the assessment of the value to the purchaser involves the question of special benefit. A special benefit is "some special potentiality which only one person would buy [which] is to be valued on the basis of a notional sale to that person": see Mordecai v Mordecai [24].

The argument for the defendants placed much reliance on the observations of McClelland J in Melcann Limited v Super John Pty Ltd.[25] In that case the company sought to acquire a 100 per cent holding in a target company pursuant to a selective reduction of capital. One of the advantages for the acquiring company was that it would achieve synergies from the merger of its activities with substantial elements of the activities of the target company. McClelland J concluded[26] that such synergies would entail "substantial advantages" for the acquiring company if it obtained 100 per cent ownership so that costs of distribution, integrated marketing and the elimination of a separate board would secure substantial cost savings. McClelland J concluded, therefore, that 100 per cent ownership would give rise to a special value for the acquiring company of considerable significance. The learned judge concluded that the special benefit should be taken into account for the purposes of determining the fair value of the shares that were to be acquired for the very purpose of conferring such special benefits on the acquiring company.

In Winpar v Goldfields Kalgoorlie[27], Santow J revisited the subject of "special value" where it is derived from 100 per cent ownership through acquisition. Santow J considered that such special benefit should be included in calculating the total value of a company. In Winpar the Court was concerned with events surrounding an extraordinary general meeting of a company to consider a selective reduction of capital. The capital reduction proposed involved the cancellation of shares of particular shareholders in consideration of payment to them of a nominated sum per share. The resolution for the capital reduction was passed. Winpar brought proceedings challenging the validity of the capital reduction on a number of grounds. Santow J dismissed the proceeding. The judgment was subject to an appeal to the New South Wales Court of Appeal.[28] Consideration of the judgment at first instance in Winpar and subsequently on appeal reveals that the matter was concerned entirely with a selective reduction of capital and, further, was subject to the provisions of the Corporations Law as in force prior to 15 July 2001.[29]

At first instance Santow J in Winpar was concerned with the requirements of s.256C of the then Corporations Law relating to reduction of capital, whether a scheme of arrangement was required under s.411 of the Law, whether the acquisition arising from the reduction of capital was "fair and reasonable to the company's shareholders as a whole" pursuant to s.256B(1)(a) of the Law, whether the Gambotto principles were met, whether the capital reduction was not shown to be "fair and reasonable" by reason of the receipt of less value and the non-distribution pro rata of "special benefits", whether "special benefits" had been identified and taken into account, whether there had been satisfactory disclosure of matters relating to value and valuation methods and whether the capital reduction was "fair and reasonable" where a single dominant shareholder could determine the outcome of the vote on the capital reduction and related matters.

For the defendants in the present case it was argued that the construction placed by Santow J in Winpar was more in accord with the goals and equitable application of Part 6A.2 of the Corporations Act. It was argued that s.667C(1)(a) does not proscribe any particular method for the assessment of the value of a company as a whole. Consequently, it was urged, the method of valuation is at large and hence the fair value crucial to approval under s.664F(3) could be determined by reference to any matter that may reasonably relate to the value of the company. As a consequence, it was argued that all relevant factors could be taken into account including assets, market value dividends, the nature of the corporation, its likely future and any other elements that affect the intrinsic or inherent value of the stock. In this way reliance was placed upon the Gambotto principles: see Gambotto v WCP Limited[30].

The defendants urged, also, the apportionment of special benefits. It was argued on their behalf that while permitting special benefits accruing to a 100 per cent holder to be taken into account when assessing the value of the company as a whole, Santow J in Winpar considered that s.667C required the value of any such special benefit to be allocated pro rata within the relevant class. The defendants relied upon the following observations of Santow J:[31]

"It is true this premium, or reciprocal discount, may reflect particular special benefits for the acquirer in getting 100% ownership. But I consider that the references to premium (and discount) is primarily directed to the situation where a key holding within the acquired minority (say QBE in this present case) might command a 'premium' price to acquire; that is, absent the statutory definition in s. 667C of 'fair value' which precludes such circumstances in favour of a pro rata allocation of the total value including any such special benefits ... In that sense, pro rata allocation of value reflected in price paid is certainly the invariable norm within classes where 10% or less is being acquired... But by parity of reasoning, the acquirer's 90% or more is not allowed to command any (notional) premium as against the minorities'] 0% or less, in calculating what is paid for the minority under s. 667C".

"I therefore consider that s. 667C in its particular context is a clear legislative indication in its context that the collective value of the company as a whole, including any special value derived from 100% ownership is to be allocated without attributing a premium or discount to particular securities first within a class (including for example, a key holding from within this minority holding compulsorily acquired) and second as between majority or minority. Thus that the value should be allocated pro rata though clearly the acquirer may chose to be more generous. Thus while an expert is ordinarily required to take into account the special value 100% ownership may have to be to a majority holder in working out the total value of the company, fairness requires that special value should be allocated pro rata".[32]

Hence, in Winpar Santow J, considered that "special benefits" should be taken into account. In that context, the learned judge did not appear to distinguish between the "normal" special benefit of acquiring 100 per cent control and the particular special benefit to an individual acquirer. Santow J referred to both kinds of special benefit. He noted:

"An example would be where the special value derives not only from 100% ownership but also extraordinary efforts on the part of the 100% parent such as to exploit a particular resource. There is also the converse case where 100% ownership is of such unique value to the 100% parent, that it may be arguable that more should be attributed to the minority than the pro-rata amount. Even so one would not expect 100% to go to the minority."[33]

His Honour distinguished between special benefits that should lead to the minority shareholders receiving more than a pro rata proportion and the normal advantages of having a wholly-owned subsidiary as against partial ownership. These advantages include the ability to group tax losses for tax purposes and the rationalisation savings derived from combining head offices.

On appeal the leading judgment of the Court in Winpar was delivered by Giles JA with whom Beazley JA and Davies AJA agreed. The appeal was dismissed. Giles JA in his reasons was predominantly concerned with the application of s.256C of the Corporations Law. He considered, also, the application of s.1322 of the Corporations Law to the circumstances of the matter refer to those observations later in these reasons in the context of the application of s.1322 of the Corporations Act to the present proceeding.

The New South Wales Court of Appeal in Winpar, held that there was no impropriety in the meeting procedure or non-compliance for the purposes of s.256C(2) of the Law and, therefore, the challenge to the capital reduction by force of s.256D(2) failed. It was held also that in so far as necessary, if non-compliance with statutory requirements had occurred such non-compliance constituted a procedural irregularity capable of remedy by virtue of s.1322. In the leading judgment Giles JA held, further, that in any event such irregularity did not cause substantial injustice. It was also held that it was not necessary that the capital reduction be achieved by way of a scheme of arrangement provided the requirements of s.256B(1) of the Law were satisfied or more was not required under the Gambotto principles. Giles JA held that the Gambotto principles did not have to be satisfied because the relevant section of the legislation, namely s.256A(b) of the Law ensured fairness between shareholders. Giles JA held, in addition, that the matter of inadequate disclosure was not made out because factors relating to subjects such as special value were capable in the context of the case of ready calculation and further detail was unnecessary. For the purposes of the appeal the New South Wales Court of Appeal held that the special value attributable to a factor such as single ownership is an advantage to both the acquiring majority and the acquiring minority as on acquisition the latter obtain an enhanced price for their shares; hence, no unfairness or unreasonableness arose because the advantage is shared. It is to be emphasised that in his judgment in Winpar, Giles JA did not specifically consider the application of special value in a valuation context.

For present purposes, the judgments in Winpar both at first instance and on appeal have no or limited application to the present case. This is so primarily because Winpar was concerned with a capital reduction and thereby the construction and application of an entirely separate section, namely s.256C of the Law, as distinct from s.667C of the Corporations Act. In addition, the allocation of special value at first instance in Winpar prompted observations by way of obiter only. Santow J was not faced by the same statutory regime and imperative as applies here. On appeal in Winpar the Court of Appeal did not consider the relevance of special benefits in the context of a valuation under s.667C of the Corporations Act. Hence, whilst Giles JA described and adverted to special benefits he did so on a different basis and for another purpose than that which applies in the present case.

It was argued for the defendants that if a pro rata allocation of special benefits was an invariable, inflexible rule, it would allow expropriation on unjust terms. It was said that circumstances might arise where there is a very small minority but there are significant special benefits to be obtained. It was said that in such circumstances the allocation of special benefits pro rata would distort and undermine the fundamental requirement that fair value should be a fair equivalent in money based on a supposed sale by a voluntary bargaining between vendor and purchaser according to general principles.

However, the special benefits do not form part of the value of the trust as a whole. The defendant's expert, Lonergan, accepted that the special benefits which he said he had identified were not part of the enterprise that was being valued. The benefits do not exist unless the transaction is consummated and do not exist until after the transaction is consummated. On that basis they cannot be part of the value of the company (here the trust) as a whole. The special benefits are external to the value of trust and they do not exist at the time at which the value is to be established. Nor does the premium for forcible taking form any part of the value of the trust as a whole. It is founded upon idiosyncratic features of particular unit holders not on elements of their unit. Still less is it founded on the assets or elements of the trust as a whole. The alleged premium is, in truth, compensation to a unit holder suffering divestment of the units. The content of the premium must vary according to the characteristics of the unit holder whereas those characteristics form no part of the subject-matter of the valuation addressed by s.667C. The suggested premium is akin to the solatium allowed on the occasion of compulsory acquisition of land: solatium is compensation for the distress caused by the taking. It is not part of the value of the land taken; it is a separate amount by way of allowance for inconvenience: see March v City of Frankston.[34] Part 6A confines fair value to the subject matter which is acquired and no allowance for inconvenience or distress is included. Indeed, the express ouster of premia from Part 6A of the Corporations Act ensures that any such ingredient is removed even if it would otherwise have been included.

However, any special value derived from 100 per cent ownership that arises because that is the purpose of the acquisition in this case ought be disregarded when determining the "value" of the company for the purposes of s.667C(1)(a). Such assessment is consistent with the long-standing common law principle,[35] reflected in Commonwealth land acquisition legislation dating back to federation[36] to the effect that the value of that which is acquired pursuant to a compulsory acquisition should be determined without regard to the purpose for which the acquisition occurs.

In any event, authority on the meaning of "fair" or "fair and reasonable" or "fair price" has limited relevance for the construction of s.667C. Santow J in Winpar[37] recognised that "fair value" in s.667C had a different connotation to the concept of "fair and reasonable" and the like used elsewhere in the Corporations Act. The meaning of "fair value" in s.667C was addressed by Douglas J in Pauls Limited v Dwyer and (in obiter dicta) by Santow J in Winpar. Further general guidance on the question of fairness may be found in Holt v Cox[38] (at first instance) and the cases to which it refers. Consideration of the authorities enables the extraction of a number of principles.

First, fair value of an asset is its fair equivalent in money ascertained by a supposed sale by voluntary bargaining between vendor and purchaser, each of whom is both willing and able, but not anxious, to trade and with a full knowledge of all the circumstances which might affect value: Holt v Cox[39]; Gregory v FCT[40]; McCathie v FCT[41]. Secondly, the fact that the units must be disposed of at a fair value should not be a factor leading to a discount or lower valuation than would otherwise obtain: Holt v Cox.[42] Conversely, it should not be a factor leading to a premium or higher valuation. Thirdly, a fair value does not require that any amount should be included in respect of ransom value or a power of veto: Edwards v Minister of Transport.[43] Fourthly, the value of special benefits to the acquirer is not properly to be included in the calculation of the value of the company as a whole: Pauls Limited.[44] Fifthly, generally, apart from s.667C, fairness requires that the value of any special benefits should be allocated pro rata amongst securities in the same class: Winpar.[45] Sixthly, if the value of special benefits is to be included under s.667C, their value should be allocated pro rata under s.667C: Winpar[46]; Pauls Limited.[47]

The seventh principle to be extracted from the authorities is that when deciding whether the consideration is fair the proper approach is to consider whether it is fair to all shareholders, rather than whether it is fair to a particular shareholder or class of shareholders in the peculiar circumstances of the case: Elkington v Vockbay Pty Ltd.[48] Consequently, a shareholder's individual taxation position and like matters said to give rise to a premium for forcible taking are not relevant to the value of the company as a whole. Nor are the acquirer's individual circumstances relevant. Further, the market price cannot be a safe indicator of fair value as the market may not provide a fair indication of the value of shares in circumstances of limited trading: Catto v Ampol.[49] In addition, the market may not be a fair indicator of value because of the effect of a takeover offer on the market: Kingston v Keprose Pty Ltd [No 2].[50]

Finally, the eighth principle to be extracted from the cases is that fair value may require a more liberal estimate of value within a range of possible values where there is a compulsory acquisition of property (Commissioner of Succession Duties (SA) v Executor Trustee & Agency Co of SA Ltd (Re D Clifford).[51] Nevertheless, it does not permit or require a premium for forcible taking: Holt v Cox.[52] The Australian authorities have not adopted the Canadian concept of a forcing out premium (instead applying a more liberal estimate of value), and indeed that concept has more recently lost support in Canada_._[53]

Turning then to the statute itself, s.667C(1)(a) requires an assessment of "the value of the company as a whole". Hence, no allocation of value may be made that is not included in "the value of the company as a whole". Only that which is within the concept of "that value" is to be allocated among the different classes of securities where there are different classes. The value for each class is then to be allocated among the holders of securities in the different classes of securities concerned. No addition to that value may be made upon the allocation of value among classes of securities and among the holders of securities in a particular class. No additional share of the value to be allocated may be allocated to units held by minority holders disproportionately to the share to be allocated to units held by the majority holders. Section 667C(1)(c) by its express terms does not allow any premium or discount for particular securities in a class of securities and expressly provides that the allocation must be pro rata amongst all the holders of securities of the class concerned.

Section 667C addresses the determination of fair value for securities, not the securities themselves, but the value of the company as a whole and that value is then dealt with in particular ways. It is apparent that the subject matter of the valuation, namely, the company as a whole, was selected by the Legislature in order that there might be an accommodation of the competing interests of those involved in the compulsory acquisition process. By addressing the value of the company as a whole the Legislature has struck a balance between those interests. When the value of the company as a whole is valued the departures from fair value that a compulsory acquisition is capable of producing are avoided.

It might be suggested that valuing the company as a whole can give rise to disadvantages to minorities for two reasons. First, there is the discount that might be said to attend the minority holding because of the fact it is a minority that lacks the controls over management decisions and the like. Secondly, there is the potential factor for a discount for limited negotiability. By selecting the valuation of the company as a whole the potential disadvantages to the minority are avoided. By addressing the value of the company as a whole the entirety of the advantage that the enterprise is capable of generating for the totality of the shareholder base is derived. Further, by selecting the value of the company as a whole the position of the company as an enterprise, its assets and potential revenues are taken into account. In this respect taking the value of the company as a whole excludes the additional greenmail value that might otherwise have been extracted. Thus, the essential role performed by s.667C(1)(a) is to achieve this effect.

In applying s.667C(1) regard must be had to the consideration paid for the securities in the preceding six months: s.667C(2). If the trading price has more likely than not been driven by the prospect of a compulsory acquisition at an inflated price, or if there has been insufficient trading to render the trading price a proper indicator of value, or if takeover activity has distorted the market price, or if the trading in the securities has been too thin to provide any reliable indicator even of market value, no adjustment to the value determined in accordance with s.667C(1) is required.

Section 667C is concerned with the adjustment of entitlements between the acquirer and the other holders of securities upon a compulsory acquisition proposal. The section leaves to the expert the determination of the appropriate valuation methodology to assess the value of the company as a whole. The independent expert determined the fair market value of the underlying assets of WADT and used well-accepted standard valuation methodology in doing so. The independent expert was entitled to adopt the fair market value of the underlying assets of WADT as the means of determining the value of the company as a whole in the context of determining fair value as required by s.667C(1): see BTR plc v Westinghouse Brake & Signal Co (Aust) Ltd;[54] Holt v Cox.[55]

Furthermore, where there are different classes of securities, s.667C(1)(b) requires an allocation amongst the different classes according to the criteria stated in that paragraph. No such allocation falls for consideration in this case. The WADT units are all of the same class and all enjoy the same rights. Section 667C(1)(b) requires an allocation amongst different classes of securities according to the criteria stated in that paragraph. The allocation may result in one class having a disproportionate share of the value of the company as a whole than another as recognised by Santow J in Winpar.[56] Here the WADT units are all of the same class and all enjoy the same rights. Santow J in Winpar took the pro rata allocation requirement of s.667C as being a fairness aspect of the concept of fair value in s.667C, because s.667C eliminated any minority discount and any majority premium within a class of securities.[57]

In addition, it is to be observed that the prohibition in s.667C(1)(c) on allowing any premium for particular securities in a class does not mean that fair value compensation is not full compensation for that which has been lost.[58] Rather, in my view, the prohibition serves to prevent the compensation becoming artificially inflated to take into account the ransom value that minority security holders might otherwise be able to extract for their securities by reason of their minority status. In Edwards v Minister of Transport,[59] it was held that compensation payable in respect of a compulsory acquisition of land was not required to take into account the ransom value to which a person having a power of veto over an acquisition might hold the person acquiring the property. The application of Edwards to the determination of compensation for injurious affection pursuant to s.20 of the Acquisition of Land Act 1967 (Qld) was disapproved by the High Court in Marshall v Director-General, Department of Transport,[60] on the basis that the application of Edwards was inconsistent with the plain meaning of the Queensland statute. Marshall did not deal with the so-called ransom value able to be asserted by a person having power of veto. Clearly here s.667C(1) requires pro rata allocation of the value of the company as a whole in accordance with paras (b) and (c) of the sub-section, so that shares in the same class are treated in the same way whether held by the 90 per cent holder or the minority holders.[61]

Section 667C(1)(c) requires that the value allocated to a class of securities should be allocated on a pro rata basis amongst the securities in that class without any premium or discount. It adopts the ordinary basis as being the fair basis for such an allocation. Both Douglas J in Pauls Limited[62] and Santow J in Winpar[63] were of the view that the allocation of value under s.667C was required to be made pro rata to all the securities in the relevant class and not disproportionately in favour of either the securities to be acquired or the securities of the acquirer.

For the defendants it was argued that s.667C(1) of the Corporations Act provides non-exhaustive legislative guidance. Reliance was placed upon an extract of the the Legal Committee Report:

"There should be some non-exhaustive legislative guidance for independent experts on determining fair value in these compulsory acquisitions, given the current uncertainty in the case law."[64]

It was argued that s.667C(1) is differently expressed from s.667C(2) in that the language of sub-s.(1) directs a sequential process. It was argued that consistent with its status as a non-exhaustive guide, the sub-section does not address a number of issues which are highly significant to the valuation of the company as a whole under s.667C(1)(a). It was argued, further, that s.667C(1)(a) does not state the perspective from where the value of the company as a whole is to be assessed. Reliance was placed upon the fact that the sub-section does not proscribe a particular method of valuation, state whether or not special benefits to a particular purchaser is to be allowed for, state whether a premium for control is to be considered or whether compensation may or must be taken into account.

It is appropriate to give consideration to the function of sub-s.(2) of s.667C. The defendants by virtue of their arguments seek to breathe into sub-s.(2) a role and operation that is not sustainable. Sub-section (2) works together with sub-s.(1). The function of sub-s.(2) is to cast light on the value of the company as a whole by having regard to the consideration paid for securities of the relevant class within the previous six month period. The sub-section does not subvert in any way the carefully formulated structure and operation of sub-s.(1) of s.667C. Further, sub-s.(2) does not disturb the goal of balance described in the explanatory memorandum. This is borne out by the introductory language of sub-s.(2) that explicitly disavows any limitation on sub-s.(1) by reason of sub-s.(2). It follows that the assessment of the value of the company as a whole, as proscribed by s.667C(1)(a) is not supplanted or eroded by sub-s.(2). By virtue of the words used in sub-s.(2) the Legislature has provided other subject matter to which reference must be had in determining what is fair value.

The legislative history of s.667C shows that the intention of Parliament was to preclude synergies or special benefits from the determination of fair value.[65] The inclusion of s.667C is a legislative indication that premiums attaching to minority holdings should not affect an assessment of the fair value of a minority's securities. The explanatory memorandum supports this view, namely that experts determining fair value should not account for premia arising from the special benefits of the outstanding securities to the acquirer or discounts on account of the lack of a market for particular securities.

It is to be observed that special benefits are benefits that do not reside in and are not embodied in the company as a whole. They are not part of the asset or the enterprise that is to be valued under s.667C(1)(a). They are properly construed as external to that asset for they do not exist at the time when the valuation occurs. Special benefits will only ever exist after the transaction has taken place, if it takes place at all. Accordingly neither an expert reporting in accordance with s.667C, nor the Court, would be required, or permitted, to take into account the special value which 100 percent ownership may have to a majority holder in assessing a fair value for a minority's securities in compulsory acquisitions and buyouts under the provisions of Chapter 6A of the Corporations Act. Further, a requirement to attribute value to what might be described as "Melcann" special benefits would be contrary to the intention, demonstrated by s.667C(1)(a) that, in determining what is fair value for securities for the purposes of Chapter 6A, an assessment must be made first of the value of the company as a whole.

Significantly, recommendation 14 of the Legal Committee Report provided that court appraisal "expressly disregard whether remaining securities of the offer class should attract a premium or discount". This suggests that the exclusion of premiums in s.667C was intended to carry with it the exclusion of Melcann type special benefits.[66] The Legal Committee Report recommendation 14 was adopted by Parliament in that the court assessment of a compulsory acquisition procedure under s.664F(3) is effectively confined to determining whether the acquisition is for fair value. For that purpose the court, and the relevant expert, must apply the definition of fair value set out in s.667C. The definition does not allow for premium referable to the particular value of the outstanding securities to the majority shareholder and which requires an assessment of "the value of the company as a whole". Accordingly it is apparent that Parliament settled upon the particular definition of fair value for the purposes of Chapter 6A of the Corporations Act because it promoted fairness and equity among all shareholders and acted to prevent the exploitation by one or a few shareholders of their minority status.

The language of s.667C(1)(c) is plain. Neither the value of synergies, nor the value of any other special benefits that might be available to a particular acquirer should be taken into account in the valuation required by s.667C. In Pauls Limited[67] Douglas J relied on the legislative history of s.667C in deciding that synergies were not to be taken into account in determining the fair value of securities under s.667C. I consider I should adopt the same approach as Douglas J in Pauls Limited and should not adopt the obiter dicta of Santow J in Winpar to the contrary. In doing so I adopt the approach that promotes uniformity of interpretation of the Corporations Act: Australian Securities Commission v Marlborough Gold Mines Ltd;[68] Hamilton Island Enterprises Pty Ltd v FCT.[69]

The most recent authority on s.667C and its constitutional validity is Kelly-Springfield Australia Pty Ltd v Green and Ors.[70] There Santow J was concerned with a challenge to the compulsory acquisition of some preference shares. The issues to be determined were whether the price proposed under the acquisition constituted fair value under the statute and, also, whether the provisions of Part 6A.2 of the Corporations Act permitted compulsory acquisition of shares that fell short of just terms. The subject company in Kelly-Springfield was Good Year Australia Limited, an unlisted Australian public company. About 93.16 per cent of the relevant preference shares in the company were owned by the plaintiff, Kelly-Springfield Australia Pty Ltd. The remaining preference shares, over 20,000 in number, were owned by 23 other shareholders. The defendants in the Kelly-Springfield proceeding launched similar arguments to those pressed by the defendants in the present proceeding. Further, the defendants relied upon the expert evidence of Lonergan who, in essence, postulated the same approach to valuation as in the present case. In Kelly-Springfield Santow J observed the divergent view taken by Douglas J in Pauls case with respect to special value. Santow J acknowledged that in Winpar Holdings his judgment was in the context of a selective reduction of ordinary capital involving no allocation of value between classes such as ordinary and preference shares.[71] As a matter of analysis, Santow J in Kelly-Springfield was generally dismissive or at least allocated little weight to the extrinsic material associated with the legislative scheme.[72]

In Kelly-Springfield, Santow J concluded that an allocation of special value should be made albeit under a different name. He held that as the intended outcome of the compulsory acquisition is a single shareholding there will usually be a cost saving e.g. ASX expenses. As a consequence Santow J held:[73]

"These savings are as much benefits to the company as they are to the would-be 100% shareholder, whose shareholding will be enhanced in value thereby to the extent such savings are material. In that sense, the special value of the purchase to a particular purchaser is simply the reciprocal of the enhanced value of the company, hence my calling it reflexive value. It is clearly to be taken into account under general principle in determining fair value. Section 667C(1)(a) simply reflects that reality."

Further, in the judgment in Kelly-Springfield Santow J adopted the approach that the exclusion of "reflexive value" arising from 100 per cent ownership would not accord with the valuation principles for determining fair value. He held:[74]

"Moreover, to exclude what I will hereafter call in this judgment the reflexive value derived from 100% ownership would not be in accordance with valuation principles for determining fair value. These require a 'liberal estimate' to compensate a compelled vendor for deprivation of its ownership interest and of the capacity to share in any future benefits to the extent those benefits would otherwise enure to that vendor. ... ".

The Gambotto principles were considered both at first instance and on appeal in Winpar and to some extent provided the foundation to the reasoning of Santow J in his judgment in Kelly-Springfield. It is appropriate to give consideration to the nature of the matter with which the High Court was concerned in Gambotto. In that case a special resolution passed at a general meeting of the particular company amended the Articles of Association in order to enable a shareholder with 90 per cent or more of the issued shares to compulsorily acquire for a declared price per share the shares of the minority shareholders. The High Court held that the amendment was invalid. The principal judgment was the joint judgment of Mason CJ and Brennan, Deane and Dawson JJ. In the joint judgment focus was placed upon whether the amendment was oppressive and, therefore, beyond the scope and purpose of the power of alteration of the Articles of Association. The principles generally referred to as the Gambotto principles are largely set out in the joint judgment (at 444-7). Having considered the power to amend a company's constitution it was held in the joint judgment:

" ... But it is another thing when a company's constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority ... In our view, such a power can be taken only if (i) it is exercisable for a proper purpose and (ii) its exercise will not operate oppressively in relation to minority shareholders. In other words, an expropriation may be justified where it is reasonably apprehended that the continued shareholding of the minority is detrimental to the company, its undertaking or the conduct of its affairs - resulting in detriment to the interests of the existing shareholders generally - and expropriation is a reasonable means of eliminating or mitigating that detriment."

Consideration turned then in the joint judgment to the topic of fairness:

"As noted in the preceding paragraphs, an alteration to the company's articles permitting the expropriation of shares will not be valid simply because it was made for a proper purpose; it must also be fair in the circumstances. Fairness in this context has both procedural and substantive elements. The first element, that the process used to expropriate must be fair, requires the majority shareholders to disclose all relevant information leading up to the alteration [Re John Labatt Ltd (1959) 20 DLR(2d) 159, at p.163] and it presumably requires the shares to be valued by an independent expert ... The second element, that the terms of the expropriation itself must be fair, is largely concerned with the price offered for the shares. Thus, an expropriation at less than market value is prima facie unfair [Nova Scotia Trust Co v Rudderham (1969), 1 NSR(2d) 379, at p.398, but cf Phillips v Manufacturers' Securities Limited (1917), 116 LT 290], and it would be unusual for a court to be satisfied that a price substantially above market value was not a fair value [Re Sheldon; Re Whitcoulls Group Ltd L (1987), 3 NSCLC 100,058 at p.100,060]. That said, it is important to emphasise that a shareholder's interest cannot be valued solely by the current market value of the shares [Weinberger v UOP Inc (1983), 457 A 2d 701]. Whether the price offered is fair depends on a variety of factors, including assets, market value, dividends, and the nature of the corporation and its likely future [ibid, at p.711]."

On appeal in Winpar, Giles JA held that the subject capital reduction did not have to satisfy the Gambotto principles "because the legislature had sought to ensure fairness between the shareholders, in accordance with s.256A(b) of the Corporations Law."[75] Giles JA held in this respect[76]:

"So far as the Gambotto principles called for procedural and substantive fairness, as well as seeking to ensure fairness between the shareholders the legislature had required disclosure of all material information (s.256A(c)); and it had required that the capital reduction be fair and reasonable to the company's shareholders as a whole (s.256B(1)(a)), thereby providing its own test of substantive fairness which looked to the whole rather than to the class selectively affected and leaving it to that class to make its decision upon fairness through the class meeting. A discontented shareholder was not without curial protection, and could apply for relief pursuant to s.1324 of the Law: s.1324(1B)(a) specifically referred to contravention of s.256B(1)(b). The approach to fairness was not identical to that which would flow from the Gambotto principles. But it was comprehensive, and superadded Gambotto principles would be conflicting and confusing".

It is apparent that the Gambotto principles are of no or limited application to cases such as the present because the High Court was concerned with a different statutory regime and was not constrained by the particular legislative command enshrined in s.667C of the Corporations Act.

Ultimately in Kelly-Springfield, Santow J concluded, after placing much reliance upon the observations of the High Court with respect to future events in Gambotto[77]:

"Thus what could be more central to the nature of this corporation and its 'likely future' than that it would become 100% owned by the intended compulsory acquirer of the remaining preference shares? To the extent 100% ownership in the corporate parent would bring about consequential reflexive benefits such as cost savings and other synergies, it is part of fair value. Nor does it follow that attributing such reflexive benefits to the value of the company is in conflict with such inhibition on greenmailing as the statute lays down."

Starting from such analysis, therefore, Santow J in Kelly-Springfield considered the allocation of reflexive benefits or special benefits and concluded that the price proposed under the compulsory acquisition included an ample margin such as to accommodate such portion of the special value, if any, as should be allocated to the preference shares.[78] Finally, having qualified the allocation of a reflexive benefit or special benefit by allocating it on a non-discriminatory basis, Santow J concluded:[79]

"This analysis thus leads to three conclusions. First is that there can be no discrimination in favour of the shares to be compulsorily acquired, as against other shares in the same class. Second is that the allocation of a reflexive benefit is allowable, but only if carried out non-discriminatorily, pro rata within the relevant class and fairly between classes. Third, and in consequence, no premium for forcible taking of the kind Mr Lonergan held to be mandatory is in fact required in order to pay fair value or is indeed allowable, if discriminatory. Such a premium is, on Mr Lonergan's analysis, only to be paid to the shares to be compulsorily acquired. That immediately contravenes the directive in sub-paragraph (c) not to allow a premium for particular securities in the class being acquired. That means here, the shares being compulsorily acquired as compared to the shares of the same class earlier acquired or already owned. Such a premium for forcible taking is the very premium by another name which the greenmailer seeks to exact. It does not lose that character as a greenmail exaction because dressed up as a 'premium for forcible taking'."

Santow J in Kelly-Springfield approached the matter of fair value in the context of compulsory acquisition from a different perspective to that which I have adopted. In Kelly-Springfield the special benefit or reflective value was of no consequence in light of the price that was the subject of the compulsory acquisition. In the present matter the circumstances are different. In addition, for the reasons already set out, I remain of the view that there is no allowance in the statute for the payment of special benefit or premium for forcible taking payable to the minority shareholders.

Before finally disposing of the topic it is appropriate to give some consideration to the role of s.667D. It was suggested on behalf of the defendants that s.667D performs the work required to dispose of greenmailers and that, as a consequence, s.667C should not be regarded as taking on that task. In this respect it was urged that s.667C allows a premium for forcible taking and special benefits. I do not accept that submission. Section 667D addresses the position where an acquirer seeks to give some benefit outside the offer for compulsory acquisition that yields a differential advantage between those who fall within the class of minority security holders. The section is not concerned with the elements that an offer to acquire can or must incorporate.

It was submitted on behalf of the defendants that fair value must be assessed at the date of the approval by the court of the acquisition under s.664F of the Corporations Act. It was submitted that this is the natural meaning of the language in s.664F(3). It was said that under the sub-section, the 90 per cent holder must establish that the terms set out in the compulsory notice "give a fair value" (emphasis added). It was submitted for the defendants, also, that the procedure under Part 6A.2 is closely analogous to a scheme of arrangement where changes or matters that come into existence after the class meeting may be relevant to approval. It was urged for the defendants that the procedure under Part 6A.2 is more draconian than a scheme of arrangement because of the security holders under a compulsory acquisition do not have the benefit of the safeguard of a meeting and a vote. It was said, also, that the role of the court in protecting the minority from expropriation on terms that have become unfair due to matters arising since the date of the compulsory acquisition notice is of particular significance.

The independent expert, Appleyard, made the determination of fair value in early May 2001 in the May report, immediately prior to the date on which Capricorn lodged its compulsory acquisition notice with ASIC. Whether the terms set out in the compulsory acquisition notice give fair value for the securities covered by the notice must be assessed at or about the date the compulsory acquisition notice was lodged with ASIC and the notice was dispatched to unit holders as at or about 9 May 2001. Such proposition is supported by the construction of the provisions of Part 6A of the Corporations Act. It seems to me that the new provisions would be unworkable if it were otherwise.

The independent expert's report was addressed to the same issue as the Court is required to decide under s.664F. The issue of fair value arises under s.664F(2), because the issue to be determined by the Court is whether "the terms set out in the compulsory acquisition notice give a fair value for the securities". It also arises under s.664C(2)(b)(ii) and s.667A(1)(b) because the expert's report is required to state whether, in the expert's opinion, "the terms proposed in the notice give a fair value for the securities concerned". Section 667C provides a common methodology to determine what is fair value for the purposes of Chapter 6A, including ss.664F, 664C and 667A. Because the inquiry as to fair value is directed to the terms set out in the compulsory acquisition notice both in the case of the expert's report and in the case of the Court's determination, the time of the notice is the time at which the issue of "fair value" is to be tested. It is the preparation of the notice that initiates the procedure for compulsory acquisition under s.664A(3), and it is the securities to be acquired outstanding at that time that comprise "the securities covered by the compulsory acquisition notice". The fair value inquiry is in relation to those securities.

The issue arose as to whether distributions made after 9 May 2001 were relevant. The consideration for the compulsory acquisition of the WADT units was inclusive of distributions that might be made after 9 May 2001. The time when the court should determine the fair value of the consideration is the effective date of the compulsory acquisition. If that date is before a distribution is declared, the right to the distribution may be treated as accruing to the acquirer as the acquirer of the securities as at the effective date. In addition, if the consideration proposed by the acquirer is read in an analogous way to the way in which an offer to purchase securities would be construed, it would be the case in any event that the equivalent monetary benefit of a distribution accrues to an acquirer by way of a reduction in the proposed consideration by the amount of the benefit, unless the provisions of Chapter 6A require otherwise.

Clearly there is nothing in s.664A to s.664G or in ss.667A or 667C of the Corporations Act that excludes from the term "securities" the right to distributions and other rights attached to them. Accordingly, the benefit of distributions that are undeclared at the time of a compulsory acquisition notice accrues to an acquirer under s.664A. The benefit should be seen to have accrued by force of the completion of the compulsory notice procedure under Part 6A.3.

For the plaintiff it was argued that in the alternative the terms set out in the compulsory acquisition notice are properly to be read as stating a cash sum (s.664C(1)(a)) which is cum benefits for which the 90 per cent holder proposes to acquire the securities. The cash sum therefore automatically abates to the extent of and commensurately with any distributions made before the compulsory acquisition procedure is completed. In light of my observations and findings as to the time of determination of fair value it is unnecessary for me to consider the alternative argument of the plaintiff as to cum benefits. However, in the event the argument became relevant it is appropriate that I give it consideration.

The WADT units are listed on the Australian Stock Exchange ("the ASX"). The terms set out in the compulsory acquisition notice are appropriate for the acquisition of the securities covered by the compulsory acquisition notice cum distributions rather than ex-distributions. The ASX Listing Rules provide in Rule 6.24 that "an entity must comply with Appendix 6A". The rules provide in paragraph 1 of Appendix 6A for specified time limits. Furthermore, at least in the case of listed securities, where a purchase is made on the basis of the quoted price at least 4 business days before the record date announced for a distribution, the purchase is taken to be on a cum basis. That applies where a distribution has been announced. Logically, it also applies where there has been no dividend announced on the basis that the critical time is that from which the securities are quoted on an ex basis, because at all earlier times the market quotation is on a cum basis. However, the issue does not, in substance, arise where the purchase is completed before a dividend is announced. The purchaser is entitled to the later announced dividend because of ownership of the shares, not because the purchase offer was cum any future announced dividends, see also: Chase Securities Ltd v GSH Finance Pty Ltd;[80] Black v Homersham.[81]

Accordingly, the ordinary construction of an agreement or offer to buy shares, whether in a listed or unlisted company, is that the purchase or offer is made cum dividend in cases in which the dividend has been declared before the agreement or offer is made.

In this case the proposed consideration was for the units in WADT that were the subject of the notice. It was for the whole of the holders' interest in the trust, including the holders' right to distributions and in the corpus and income of the trust. In Charles v FCT[82] the High Court considered a unit trust that was similar to WADT. The Court (Dixon CJ, Kitto and Taylor JJ) in a joint judgment said:[83]

"[A] unit held under this trust is fundamentally different from a share in a company. A share confers upon the holder no legal or equitable interest in the assets of the company; it is a separate piece of property; and if a portion of the company's assets is distributed among the shareholders the question whether it comes to them as income or as capital depends upon whether the corpus of their property (their shares) remains intact despite the distribution: Inland Revenue Commissioners v Reid's Trustees [1949] A.C. 361, 373. But a unit under the trust deed before us confers a proprietary interest in all the property which for the time being is subject to the trust of the deed: Baker v Archer Shee [1927] UKHL 1; [1927] A.C. 844; so that the question whether moneys distributed to unit holders under the trust form part of their income or of their capital must be answered by considering the character of those moneys in the hands of the trustees before the distribution is made."

Thus, whereas a share comprises separate property from the debt that arises when a dividend is declared, the distinction does not exist in the case of a unit trust of the Charles v FCT type.

Such analysis is consistent with the Constitution of WADT, the ASX Listing Rules and with the authorities. It is also consistent with a construction of Part 6A.2 of the Corporations Act in that it avoids the unfair result that a compulsory acquirer would be exposed to increases in the cash sum proposed for the units or shares as the case may be by reason of distributions made during the course of the compulsory acquisition procedure.

Consequently, where a compulsory acquisition of units is approved by the Court it is effective from the time of the acquisition notice and such an acquisition is inherently the compulsory acquisition of the entire interest of the unitholder in the beneficial interest in the Trust, including the unitholder's interest in the fund at that time. On this basis, therefore, the compulsory acquisition notice can be regarded as a notice to acquire the whole of each relevant unitholder's interest in the beneficial interest in the trust at the time of the notice, including the unitholder's interest in the fund and the unitholder's present entitlement to a share of the net income of the Trust and any distributions made after the giving of the notice and before completion of the compulsory acquisition.

In this case, a distribution has been paid to the present holders as the WADT Constitution allows. Capricorn is entitled, therefore, to "set off" the amount distributed against its liability to pay the consideration. Sections 666A(1)(a) and 666B(1)(a) of the Act require the payment of "the consideration" rather than some lesser amount. That is because Capricorn is entitled to a substantive equitable set-off of the amount distributed against the amount otherwise payable. That being so, payment of the amount owing after deducting the amount to be set off would count as payment of the gross amount because in equity the moneys due and payable by it would be only so much of the amount owing as remains after the operation of the equitable set-off.[84] Further, the term used in s.666A(1)(a) and s.666B(1)(a) is "the consideration" and not the cash sum to which the notice under s.664C must refer. The consideration stated in the notice is the cash sum less the amount of any distributions rather than the gross cash sum.

In any event the topic of distributions was not really developed in final addresses on behalf of the defendant. Nevertheless the position was not abandoned. I observe that the offer made was an offer for the entirety of the rights that attend the units and that captures subsequent distributions including a distribution that happens to be made before the acquisition issue is resolved and is available to the offeror. There were two ways of dealing with the circumstance. Either the plaintiff paid $2 and recovered the distribution from the unitholder or, alternatively, the plaintiff set off the amount of the distribution against the acquisition price of $2. For the reasons stated it seems to me that the appropriate course is the latter.

From these reasons I derive my primary conclusions as to fair value in the present context. It is based upon willing and informed but not anxious parties; there is no allowance for special or ransom value but any such value may be distributed pro rata; the value must be fair to all shareholders; and, there is no premium for forcible taking. Furthermore, the time of the notice of compulsory acquisition is the time when fair value is to be assessed. Finally, the benefit of distributions undeclared at the time of the notice of compulsory acquisition accrue to the acquirer, particularly in the present case.

The constitutional arguments are capable of dissection. The first issue is whether s.667C of the Corporations Act permits unjust terms. The second issue is whether s.1350 of the Act can be relied upon if required.

The defendants contended that s.51(xxxi) of the Constitution constitutes a constitutional guarantee of just terms, the purpose of which is to ensure "full compensation for what is lost": Smith v ANL Limited;[85] Georgiadis v Australian and Overseas Telecommunications Corporation.[86]

The defendants contended that, properly construed, s.667C prescribes a non-exhaustive process and requires the taking into account of factors that will produce a fair price and, hence, it was argued, just terms. It was urged that there is no statutory exclusion of factors that are ordinarily relevant to fair price such as special benefits to the purchaser.

In the alternative it was argued for the defendants that s.667C dictates a valuation process that excludes factors ordinarily relevant to the assessment of a fair price so that the statutorily defined "fair price" in s.664F is in substance unfair according to received criteria. On this basis, the defendants contended that s.667C is invalid.

Section 51(xxxi) of the Constitution allows the Commonwealth Parliament to make laws with respect to the acquisition of property on just terms from any state or person or for any purpose for which the Parliament has a power to make laws. Authority has it that while s.51(xxxi) is framed as an empowering provision, it operates to fetter the legislative power of the Commonwealth by preventing it from making laws that facilitate acquisition of property on terms that are not just: Bank of New South Wales v Commonwealth.[87] It is established, also, that the object of s.51(xxxi) reflects a basic principle that the owner of property compulsorily acquired is not required to sacrifice property for less than true worth: Commonwealth v Western Australia.[88]

For the defendants it was emphasised that whether compensation is just is determined by considering the fairness of compensation as between the owner of the property in question and the person acquiring that property: Grace Bros Pty Ltd v The Commonwealth[89]; Smith v ANL Ltd;[90] Cf. Commonwealth of Australia v State of Western Australia.[91] It was argued that the process of ensuring just terms involves placing an objective determinator of value on both sides of the transaction and specifically that of the hypothetical willing, informed and not anxious buyer and seller: Spencer v the Commonwealth.[92] It was contended for the defendants that in this context, special value to the vendor or the purchaser must be taken into account[93]: Pastoral Finance Association Ltd v the Minister)[94]; Melcann Ltd v Super John Pty Ltd.[95]

The defendants relied upon Commonwealth v Western Australia where Kirby J stated[96] that the language of the Constitution requires that federal law should include appropriate terms to ensure economic fairness to the State or person whose property is acquired and that the true costs of the acquisition must be taken into account. The defendants contended that if on its proper construction, s.667C precludes a taking into account of special benefits and related matters then it does not require compensation on just terms.

Furthermore, it was submitted for the defendants that shares in a company are not fragile statutory rights incapable of existence at common law. A share comprises a "collection of rights and obligations relating to an interest in a company of an economic and proprietary character, but not constituting a debt'': see Borland's Trustee v Steel Brothers & Co Limited[97] approved by McHugh, Gummow, Hayne and Callinan JJ in Pilmer v The Duke Group (in liquidation).[98] Thus, it was said, the rights and obligations are derived not only from statute but also from the agreement of the parties.[99] It followed, as the argument was advanced on behalf of the defendants, that it is erroneous to assert that s.51(xxxi) is excluded from application because the defendants' interests are created solely by a law of the Commonwealth or pursuant to a legislative scheme which are merely subject to modification or qualification by s.667C of the Corporations Act.

I turn to consider the just terms argument. In Austrim Nylex Limited v Kroll,[100] I observed:

" ... s.664F of the Corporations Law expressly provides for the payment of compensation to the persons from whom the shares are acquired. There is no basis whatsoever for the argument that the compensation there specified is other than 'just'." [101]

In Austrim I adopted the views stated by Douglas J in Pauls Limited v Dwyer & Ors[102]. Whilst at that point in Austrim I was concerned with an interlocutory application by minority shareholders to stay the proceeding, the fundamental view taken remains appropriate.

It is primarily for Parliament to determine that which is the appropriate compensation for a compulsory acquisition. Unlike, for example, legislation concerned with compulsory acquisition of property,[103] here the law allows limited compensation and makes no provision for special compensation over and above value such as solatium. The High Court has stated that the role of the courts is to determine whether that compensation might reasonably be regarded as just: "[i]f that compensation satisfies the requirement of 'just terms', the Court will not declare the terms unjust and the law in excess of power for the reason that the Court entertains an opinion that other terms would have been fairer or more appropriate".[104] Again, as the High Court has made clear, whether compensation is just is determined by reference to whether the compensation is fair as between the owner of the property and the person acquiring the property.[105] From a fundamental perspective there is no statutory solatium provision expressly or impliedly contained in Part 6A.2.

Necessarily, if the minority security holders could require a premium for their securities, Parliament's express intention to provide for the compulsory acquisition of property on just terms would be frustrated. In particular, the inclusion of a premium in the determination of "fair value" would suggest a capacity in the minority security holders effectively to veto the compulsory acquisition process by seeking prohibitive prices (based solely on the security holders' minority status) for the acquisition of their securities. In my view, it would run counter to the clearly expressed words of the section and the legislative intent as clarified by the explanatory memorandum to the legislation.

An additional point is to be made. Any value beyond "fair value" said to attach to the defendants' securities was validly extinguished in 1999 upon enactment of Part 6A.2 of the former Corporations Law. The securities compulsorily acquired under Part 6A.2 of the Corporations Act therefore do not have any value other than "fair value" and just terms cannot require any value other than "fair value" to be given for them. I observe that neither Part 6A.2 of the former Corporations Law of the ACT nor Part 6A.2 of the former Corporations Law of Victoria was subject to s.51(xxxi) of the Constitution or to any equivalent requirement.[106] By reason of ss.3 and 5 of the Corporations Act 1989 (Cth), Part 6A.2 of the Corporations Law of the ACT was a law made solely for the government of a territory. Part 6A.2 of the Corporations Law of the ACT could not, therefore, be invalid for failure to provide for the compulsory acquisition of property on just terms. As stated by McPherson JA (with whom Williams JA and Jones J agreed) in Pauls Limited v Elkington:[107]

" ... the notion that, without just terms, rights of private property in Australia are constitutionally immune from acquisition under State legislation plainly received its quietus in Durham Holdings Pty Ltd v New South Wales (2001) 75 ALJR 501. To the many authorities cited there, it is perhaps worth adding a reference to what was said in Jerusalem-Jaffa District Governor v Suleiman Murra [1926] AC 321, 328. A 'right' of private property is certainly recognised, but is is not one that prevails against a statute enacted in the exercise of the plenary power to legislate like that invested in the Parliament of Victoria."

In any event, it is usually the case that the Commonwealth can acquire property only under s.51(xxxi) of the Constitution. It is well settled that there are some acquisitions of property to which s.51(xxxi) does not apply.[108] For example, the Commonwealth is not required to provide "just terms" for any property acquired by a tax or a penalty. Presumably this is because the provision of just terms would defeat the whole purpose of a law for either of these purposes. In a similar vein, in Nintendo Co Ltd v Centronics Systems Pty Ltd[109], the High Court held that s.51(xxxi) did not apply when persons were adversely affected by legislation that created new intellectual property rights because[110]:

"It is of the nature of [laws made under s.51(xviii) of the Constitution] that they confer [intellectual property] rights on authors, inventors and designers ... and that they conversely limit and detract from the proprietary rights which would otherwise be enjoyed by the owners of affected property. Inevitably, such laws may, at their commencement, impact upon existing proprietary rights. To the extent that such laws involve an acquisition of property from those adversely affected by the intellectual property rights which they create and confer, the grant of legislative power contained in s.51(xviii) manifests a contrary intention which precludes the operation of s.51(xxxi)."

On the authorities it is apparent that as a fundamental approach to legislation, a law that enables the acquisition of property is not to be characterised as a law with respect to the subject matter of s.51(xxxi) if the law constitutes no more than the means appropriate for the achievement of an objective where the acquisition of property without just terms is a necessary[111] or characteristic feature of the means prescribed.[112] Furthermore, a law concerned with acquisition does not simultaneously become a law subject to s.51(xxxi) where the law merely adjusts the competing rights or claims of persons in a particular relationship or area of activity.[113] In this respect Part 6A.2 is a law concerned with the adjustment of competing rights. It is not properly characterised as a law with respect to the acquisition of property for the purposes of s.51(xxxi).

This view is borne out by consideration of the extrinsic materials to the legislation. They spell out that the principal objects of Part 6A.2 are to enhance corporate efficiency and to discourage greenmailing[114]. Both of these objects appear to fall squarely within the power conferred on the Commonwealth Parliament by s.51(xx) of the Constitution. Section 51(xx) of the Constitution empowers the Parliament to make laws with respect to "[f]oreign corporations, and trading and financial corporations formed within the limits of the Commonwealth". Hence, any acquisition of property otherwise than on just terms is a necessary incident of the means selected to achieve these objects.

Furthermore, the extrinsic materials to the legislation show that Part 6A.2 is directed towards balancing the competing interests of persons in a particular relationship, they being the minority and the majority security holders of a company regulated under the Corporations Act. In particular, the Part is designed "to balance the interests of facilitating changes to corporate ownership with the need to protect the rights of minority shareholders".[115] Hence, in my view, Part 6A.2 can be regarded strictly as "a means of resolving or adjusting competing claims, obligations or property rights of individuals as an incident of the regulation of their relationship"[116].

Properly construed, in my view, Part 6A.2 is not a law with respect to s.51(xxxi) and the requirement to provide "just terms" does not apply. Accordingly, in my view, the constitutional requirement of "just terms" is not triggered and the invalidity argument of the defendants fails.

(2) The Section 1350 Argument

The defendants argued, that s.667C is constitutionally invalid unless preserved by s.1350 of the Corporations Act which provides for compensation by the acquirer and the institution of proceedings by the person whose property is acquired where the acquisition would otherwise be constitutionally invalid. Even so, the defendants contended that s.1350 did not provide a solution. In the event it was necessary to determine the application of s.1350 in the present context I do so.

It was argued for the defendants that s.1350 suffers from the fatal deficiency that it does not provide a right of action against the Commonwealth. It was said that this is significant for a number of reasons. First, because a private acquirer may not have the capacity to meet its liability for compensation. Secondly, because the entitlement to compensation is a right arising from acquisition and of itself is not a ground upon which to resist or delay acquisition. Thirdly, because the liability is determined, in the absence of agreement, by a court proceeding occurring after the acquisition is complete. Thus, it was argued, the right to compensation is not equivalent to the just value of the property lost in contrast to the position that may obtain where the Commonwealth has the obligation to make compensation. see: Commonwealth v Western Australia[117]; Minister for Primary Industries v Davey.[118]

I do not accept these arguments. Even if Part 6A.2 was subject to s.51(xxxi) the validity of the Part is assured by virtue of s.1350 of the Corporations Act. Under s.1350(1), if the operation of Part 6A.2 of the Act would result in an acquisition otherwise invalid by reason of s.51(xxxi) of the Constitution, "[the acquirer of the securities] is liable to pay compensation of a reasonable amount to [the minority security holder] in respect of the acquisition". In the absence of agreement on the amount of compensation, by virtue of s.1350(2) of the Corporations Act the minority security holder may institute court proceedings to recover from the acquirer "such reasonable amount as the court determines".

In my view, s.1350 plainly gives effect to the requirements of s.51(xxxi) of the Constitution. In this respect I am assisted by the statements of Williams JA in Pauls Limited v Elkington:[119]

"The provision [ie, s.1350], in my view, has the effect that if in law the acquisition must be on 'just terms' because of the provision of the Constitution, that is how the compensation payable must be assessed. In other words the legislation is not rendered invalid by operation of s.51(xxxi) of the Constitution, but rather if the provision of the Constitution applies appropriate compensation must be paid."

Section 1350 should be interpreted as consistent with rather than contrary to constitutional requirements see eg Residual Assco Group Ltd v Spalvins.[120] Furthermore, the Full Court of the Federal Court held in Minister for Primary Industries and Energy v Davey that a similarly-worded provision was consistent with s.51(xxxi).[121] Yet again, in The Commonwealth v Western Australia,[122] Kirby and Callinan JJ confirmed that a right to seek reasonable compensation in a court provides "just terms".

The fact that s.1350 (unlike the provision in Davey) requires the compensation to be provided by the acquirer, and not the Commonwealth, is entirely consistent with s.51(xxxi). Under Part 6A.2, securities will often be acquired by private persons and the obligation to provide compensation will fall therefore on those private persons. In the context of this matter, s.1350 imposes an obligation to provide compensation on an acquirer that has already paid "fair value" for the securities, as assessed under Part 6A.2.[123] Even if there is any difference between "fair value" and "just terms", the possibility that an acquirer could afford to pay "fair value" but could not pay "just terms" is unlikely. There is no question it seems, therefore, of the right to compensation conferred by s.1350 being empty or without substance. Section 1350 does provide for "just terms" and that, in turn, means that Part 6A.2 of the Corporations Act is not invalid by reason of s.51(xxxi) of the Constitution.

It follows, therefore, that the arguments of the defendants challenging the constitutional validity of s.667C of the Corporations Act and the correlative argument that s.1350 of the Corporations Act did not apply have failed.

Separate from my findings on the issues of fair value and constitutional validity it is appropriate to consider the evidence and the various key components of the expert evidence in the particular case. I turn first to a description of the evidence.

Creese is a director of Capricorn and a solicitor. He gave evidence on affidavit setting out the general background circumstances to Capricorn, Rio Tinto and WADT. He also described the general history of the offers made for the acquisition of the shares. These matters have been summarised already and were not the subject of dispute between the parties. Creese gave evidence, further, as to the manner in which compulsory acquisition notice forms were served on the defendants and the surrounding circumstances including, notice to ASIC and the eventual retainer of the independent expert. Creese was cross-examined at length about potential cost savings and benefits to Rio Tinto arising from the compulsory acquisition. Essentially, he considered that there would be little or no savings.

Appleyard had formal qualifications including qualifications in geology. He had been engaged in the mining industry for almost 40 years and had extensive experience as a geologist valuer.

In assessing the value of WADT Appleyard considered a range of valuation methods. A practice note of ASIC[124] provides that an independent expert for the purposes of the statute is able to consider, among other methods of valuation, asset-based methodologies, the application of earning multiples or discounted cash flow analysis. Appleyard did not apply earnings-based methodologies because of the nature of the interest of WADT. He observed that the principle assets of WADT comprised interest in mining projects and mineral exploration. He noted that mining assets as such are finite and that future profitability depends on the outcome of exploration programmes that are not predictable. He observed, also, that some of the mineral assets of WADT remain at an exploration stage and have not recorded any earnings as yet. For these reasons, Appleyard did not apply the earnings-based methodologies permitted by the ASIC Practice Note. In the opinion of Appleyard the most appropriate method for determining the value of entities such as WADT is based on the fair value of the underlying net assets with the principal assets being valued by way of using the DCF analysis.

Whilst Appleyard was the primary author of the main report produced by AMC he was assisted by KPMG Corporate Finance (Aust) Pty Ltd ("KPMG") in relation to prices, exchange rates, discount rates and taxation implications. He was further assisted by Dr Stephan Meyer.

In the May report, Appleyard of AMC concluded that the cash payment of $2 for each WADT unit that is not fully beneficially owned by Rio Tinto is fair value for the units the view was premised on the fact that the payment of $2, being the offer price, exceeded the range of assessed value for WADT as a whole of $1.06 to $1.22 per unit. The principal factor Appleyard took into account in forming the opinion was the valuation of the assets of WADT. Appleyard included in the valuation of the assets of WADT its interest in the Argyle Diamond Mine. The value of the WADT interest in the Argyle Diamond Mine was assessed by Appleyard at a low figure of $73,250,000 up to a high value of $82,800,000.

In addition, the valuation assessment by Appleyard did not provide for any premium or apply any discount. He noted the primary asset of WADT as being its interest in the Argyle Diamond Mine. Appleyard valued the interest in that mine on a discounted cash flow ("DCF") basis. Appleyard noted that the basis of valuation implied a 100 per cent ownership of the asset and, therefore, inclusion of any control premium. The valuation by Appleyard was not adjusted for any synergies or cost savings that might accrue to Rio Tinto as a result of the acquisition of the remaining WADT units. He observed, also, that the annual management cost of WADT was in the order of $0.5M. He estimated that of the management costs about $.03M might be saved by Rio Tinto if it acquired 100 per cent of WADT. Hence, Appleyard concluded that the impact of the savings on the value of a WADT unit was in the order of $.03. Importantly, Appleyard noted that without the Rio Tinto offer the minority unit holders would be unable to access such management savings.

An additional matter considered by Appleyard was the performance of WADT units on the ASX. He noted that the price of WADT units varied between $2.01 and $2.30 during the period from 1 October 2000 to 6 April 2001. He observed, also, that during the period approximately 80,000 units were traded representing 0.13 per cent of the units of WADT. Consequently, Appleyard concluded that the volume of trade was so small and irregular that the recent trading price could not be relied upon to fairly reflect the underlying value of WADT units.

Later, Appleyard completed the November report wherein he largely responded to a report prepared on behalf of the defendants. The additional expert evidence given by Perry and Wingrove was largely responsive to the report of the defendants' experts. It is necessary, therefore, to turn next to the expert evidence on behalf of the defendants given by Lonergan.

Lonergan holds formal qualifications in economics and has 30 years' experience as a chartered accountant. He practises presently as an independent valuer. He has given valuation evidence on a number of occasions in takeover and acquisition matters over the years. Lonergan has, also, published works concerned with the valuation of shares and related matters.

Lonergan was the sole expert witness called on behalf of the defendants. He was the author of the LEA report. The LEA report was prepared partly in response to the May report of Appleyard and, also, for the purposes of evidence at trial. Lonergan rejected the offer price by Rio Tinto of $2 per unit as representing fair value. Rather, Lonergan assessed the fair value of the WADT units at either $2.65 or $2.80 per unit depending upon certain assumptions.

Lonergan rejected the assessment of fair value by Appleyard as being too low on eight grounds:

(1) The valuation was based on an exchange rate of the Australian dollar and the US dollar that was too high;

(2) there was no allowance in the valuation for the special benefit likely to result from the compulsory acquisition of the WADT units;

(3) failure to allow for the cost savings resulting from the compulsory acquisition;

(4) non-consideration of payment of a proportion of the value of special benefits to minority shareholders;

(5) the lack of provision of a premium value for the minority unit holders for the forced sale;

(6) the failure to attribute a value to the voting rights of the minority shareholders;

(7) insufficient regard to the high income yield of the units;

(8) insufficient allowance for the trading price of WADT units on the ASX in the preceding 12 month period.

It was the opinion of Lonergan that the fair value of the units comprised three elements. First, a base value. Secondly, a share of the "special benefit" arising from the acquisition of the remaining units. Thirdly, a premium for forcible taking. The latter two elements were additional to the first element, namely, the base value. the gravamen of the evidence of Lonergan was that it would be unfair if the minority unit holders did not share in the special benefits created by the acquisition of their units and receive a premium for forcible taking by way of compensation for the financial and other disadvantages they would suffer.

Lonergan attributed a total value of special benefits in the order of $3.4M to $4.5M consisting of management cost savings of between $3.1M and $4.1M and restructuring benefits between $0.3M to $0.4M. Combined with the advantage of Rio Tinto no longer being required to meet ASX disclosure requirements, Lonergan expressed the opinion that Rio Tinto should be expected to pay a premium above the base value of the units. It was his opinion, also, that the fair share of the value of the special benefits to which the minority unit holders ought be entitled should take account of four factors. First, that the special benefit would not exist without the compulsory acquisition. Secondly, that the minority unit holders would not share in the special value benefit otherwise. Thirdly, the consent of minority shareholders is required so that the majority unit holder can gain access to the benefits of the special value. Fourthly, the majority unit holder is entitled to receive the special value benefits only through the compulsory acquisition process and accordingly they should share the special benefits with minority unit holders. Ultimately, Lonergan concluded that " ... It would be commercially reasonable to apportion the special value benefits equally between controlling and minority unit holders."

Lonergan expressed the opinion that the construction imposed by the courts thus far on s.667C of the Corporations Act has been inappropriate and in some respects erroneous. Throughout his written report a number of opinions were expressed with respect to the proper construction of the relevant provisions of the Corporations Act. This was an unusual course for an economic expert to pursue, particularly so when the expert was required to give evidence with respect to economic matters as distinct from legal matters. Nevertheless, Lonergan asserted that the objective of the Corporations Act requirements is to ensure that minority unit holders receive "fair compensation" in the circumstances of compulsory acquisition. Starting from such premise Lonergan asserted the opinion that it was appropriate that the allocation or distribution of value between both minority and majority unit holders take into account "all relevant matters". Lonergan regarded as "relevant matters" base value, special benefits value and compensation for forcible taking. He postulated that base value and special benefits value form the total entity value of WADT and that compensation for forcible taking represents compensation for the disadvantages that unit holders may suffer as a result of the compulsory acquisition. These have been outlined already. In his evidence Lonergan acknowledged the difficulty in quantifying the value to be attributed to the consequences of forcible taking. He postulated that it was clear that fair value should incorporate a premium above the base value plus a share of special value.

Lonergan concluded that it was commercially reasonable to apportion special value benefits between buyer and seller on a 50:50 basis. On that basis, he postulated that the fair value of each unit could fall in the range between $2.68 and $3.08, well above the offer figure by Rio Tinto to the minority unit holders of $2.

Lonergan placed particular emphasis, also, upon the time at which the estimate of fair value was made. He relied upon the fact that the highest price paid for WADT units on the ASX in the preceding six months was $2.39 per unit.

Perry gave evidence on the topic of valuation methodology. Perry is a partner and director of Corporate Finance at JB Were Limited. He has formal qualifications in economics and extensive experience in valuation and the application of exchange rates.

Perry was of the opinion that the main valuation methodologies applied by the market place are DCF, capitalisation of earnings and dividend discount models ("DDM"). His evidence was to the effect that the accuracy of these accepted methodologies vary according to the nature of the forecast cash flows or earnings that are expected to arise from the assets of the entity. It was the opinion of Perry that when considering projects in the extractive industry the cash flows are forecast to cease within a finite period it is generally accepted by the financial community that the DCF method is the most appropriate. The foundation for such preference lies with the fact that the DCF method considers the forecast cash flow of each specific year until the relevant project ceases whilst other methodologies usually value cash flows on the assumption that such flows continue into perpetuity. Furthermore, Perry observed that the DCF method lends itself to cross-checking by alternative methodologies in relation to larger companies. However, with respect to WADT Perry considered that the trust was a specific purpose investment vehicle for a single finite asset and, therefore, alternative methodologies would be inappropriate.

Perry noted that the DCF method of valuation valued a security using the present value of estimated future cash flows by taking into account the time value of money. He gave the example that cash flows that are one year away in time are more heavily weighted in the aggregate valuation than cash flows such as those ten years away. He noted that it is generally accepted market practice to adopt the weighted average cost of capital ("WACC") as the discount rate that takes into account the capital structure of the company. He observed that the use of a WACC reflects a weighted average of the required returns for an equity interest in the entity and the required returns of lenders to the equity. He described that the cost of funds is weighted by the proportion of the capital structure of the entity that is represented by each element. Perry gave the example that if an entity has 20 per cent of its capital base in debt then the WACC would equate to 20 per cent of the cost of debt plus 80 per cent of the cost of equity. Perry described in considerable detail the manner in which accepted market practice applies the WACC. He described that the methodology is used by the global financial community and at universities and business schools around the world. He observed that the calculation of the DCF valuation involves a series of projections of the levels of free cash a company will have available after payment of all outgoings and is limited by the finite life of the particular asset, in this case, the Argyle Diamond Mine. Perry said that based on his experience with an entity such as WADT where the main asset is an interest in a project with a finite life the cash flow should be forecast for each year until the cessation or completion of the project. He described that forecast cash flows are then discounted to a present value applying the WACC. Based on such analysis the resulting valuation is taken, the value of liquid assets is added and debt is deducted to determine the residual estimated equity value. On that basis, Perry considered that an assessment could be made as to whether the unit price was over-valued, of fair value or is under valued.

In summary, Perry stated the following with respect to the methodology of valuation of WADT:

"We believe that the DCF methodology for the valuation of WADT is the most appropriate as it takes into account the fact that WADT's interest in the Argyle Diamond Mine, which is the main asset of WADT, has a finite life. The forecast of future cash flows allows for the inclusion of the variability of the returns of the operation over its life, and does not magnify errors that might arise from compounding a single year's cash flow. Further, other methods of valuation ... contain implicit assumptions that cash flows will continue into perpetuity, which we believe is clearly not valid in the case of WADT."

Perry accepted that the analysis of Lonergan commenced with the DCF valuation of Appleyard but made certain input assumptions and elements derived from methods other than the DCF method. These elements were the base value to which is added a special benefit together with a premium for forcible taking. Perry was of the opinion that the DCF valuation represented the value of a unit in WADT because it fully reflected the value of all future cash flows from the entity which are derived from the underlying assets adjusted for the time value of money. Perry observed that the assumptions and elements inserted by Lonergan to the DCF method included changes to the future estimates of diamond pricing and exchange rates. Certain confidential evidence was lead from Perry as to exchange rates. In order to preserve the confidentiality sought by the plaintiff, and agreed to by the defendants, the evidence is hereafter referred to as the confidential evidence.

Perry was critical of a number of aspects of the valuation by Lonergan. He considered the Lonergan valuation did not reflect the lower price for future periods adopted in the draft mine plan on the basis that the economic environment will not suffer following the terrorist events in New York of 11 September 2001. Perry placed particular significance upon the fact that the draft mine plan was dated 5 October 2001, that is, post 11 September 2001. Furthermore, Perry disagreed with the assumption of Lonergan that economic activity would rebound quickly post events of 11 September 2001. Perry said:

" ... It is our opinion that the global economy was already under pressure at the time of the attack [ie 11 September 2001], and that the global uncertainty resulting from the attacks will negatively impact consumer confidence at this already vulnerable time. ... we note the surge in the US unemployment rate in October to 5.4% as businesses slashed payrolls by 415,000 jobs. The broad-based cut was the deepest in the last 21 years. Given that gem quality diamonds tend to be a high-end discretionary item, it would seem proven to revise down future price forecasts - at least for the period forecast by Argyle themselves."

"The issue open to debate is, of course, the likely timeframe for recovery. In our opinion, the level of concern within Argyle regarding this issue is evident from the longer-term pricing assumptions contained in the Draft Mine Plan."

Mr Perry considered, also, the exchange rate assumptions adopted by Lonergan with respect to the Australian dollar and the US dollar. He stated the current assumptions adopted by his firm, JB Were, and also another firm, Access Economics Pty Ltd. Perry proceeded to criticise the Lonergan method of incorporating a long-term exchange rate of 0.51 for the Australian dollar against the US dollar. He stated it was inappropriate to do so because of the inconsistency with the estimates derived by market specialists (such as JB Were and Access Economics). Perry said that the DCF valuation derived by Lonergan was inflated as a result of the inappropriate application of the assumption of the exchange rate between the two currencies.

As a result of these matters, Perry stated that he preferred the DCF based valuation of Appleyard of a valuation range of $1.06-$1.22 but that his preferred value was $1.16 as representing the value of a WADT unit. Perry was critical, also, of the value of $1.59 chosen by Lonergan as the preferred valuation. He observed that it was usual market practice for an expert to estimate a low and high case value and then adopt a preferred value within the range or identify a mid point. Lonergan did not adopt such an approach, rather, chose the high case value as the preferred valuation. Finally, with respect to the base value, Perry observed that Lonergan assumed an increment to the value of WADT from the utilisation by Rio Tinto in future Argyle Diamond sales. Lonergan made an allowance for undeveloped diamond projects of Rio Tinto in Canada and Zimbabwe. Perry expressed dissatisfaction with this approach but, in any event, observed that the assumption by Lonergan equated to one half of one cent per WADT unit and concluded that it was immaterial.

Arising from the assessment by Perry of the various assumptions and elements adopted by Lonergan, Perry rejected the base value of the WADT units as adopted by Lonergan. Perry proceeded, also, to consider the other components of the valuation by Lonergan, namely, special benefits and the premium for forcible taking.

With respect to the allocation of special benefits by Lonergan, Perry examined the allowance for management cost savings and restructuring benefits and the apportionment of special benefits. Perry rejected the quantifications by Lonergan of a profit margin charged by Rio Tinto in relation to the WADT management fee. In any event Perry was of the view that it ought be excluded from the calculation of synergies because it represented foregone profit for Rio Tinto as the acquirer of the WADT units. He observed, also, that the actual profit margin received by Rio Tinto could vary significantly from year to year depending upon the net income received by the trust in any given year. As a consequence, Perry rejected the assumption by Lonergan of a 33 per cent profit margin and the saving of the management fee. Furthermore, Perry was critical of the Lonergan approach in that its valuation of synergies reflected special benefits to the majority unit holder in perpetuity. He observed that the assets from which WADT receives its income stream have a finite life, that is, being the life of the Argyle Diamond Mine until the project cease. On that basis, therefore, Perry considered the assumption of perpetuity to be invalid. There were other matters taken into account by Lonergan that were rejected by Perry as being savings that would be available only if WADT was wound up after acquisition.

In relation to restructuring benefits, Perry observed that it was unusual for an expert to quantify the internal employee costings of an acquirer and to attempt to value time savings. Perry considered that the savings could have been counted previously under synergies considered elsewhere and were tantamount to double counting. In any event, on the basis of experience, Perry regarded the quantification of restructuring benefits by Lonergan as unusual and speculative. Again, Perry observed that the valuation ascribed to the restructuring benefits elements were equated to approximately one half of one cent per WADT unit and therefore, was immaterial.

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Judgment (422 paragraphs)

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Cases Cited (44)