F T Easement & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd [2002] FCA 913 | Case summary

REASONS FOR JUDGMENT 1 The Hibernian Friendly Society (NSW) Pty Limited ("Society") was registered in New South Wales as a friendly society on 7 September 1880. As in the case of other long established and well known friendly societies operating in Australia, the Society has a proud tradition of establishing and maintaining for its members medical, dental, hospital, funeral and other social security benefits on the basis of mutuality, in the sense of membership contributions to a common fund or funds for the payment of claims of members for those benefits. In comparatively more recent times, the Society's activities have extended to a significant extent in the establishment and operation of retirement villages. 2 Strikingly impressive has been the role in society traditionally performed by entities such as the Society during periods of economic depression and global hostilities. Disciplined administration has brought about the accumulation over decades of substantial surplus funds, now in the order of $74 million, which have served the purpose not only of establishment of reserves to cope with unanticipated levels of claims, but also of providing finance for homes for members at reasonable interest rates. 3 The friendly society movement in Australia has enjoyed historically favourable taxation treatment, but in more recent times, there have been legislative and industrial changes which reduced the scope of that treatment, in the context of the expanding growth of government social services. Moreover mutual society constituent structures, whereof the Society is an example, have constitutionally limited the opportunity for recognition of the value created by their members by way of cash distributions to members analogous to the payment of dividends, and have also limited the society's capacity to raise externally the capital required to expand business activities. Hence the belief has been generated by the Society's directors and management to convert the current mutual structure to a demutualised structure taking the form of a publicly listed company, so that if so desired, members can realise the value or part of the value of their respective memberships in the Society, yet maintain their policies or fund memberships relating to the traditional provision of medical etc benefits. 4 In the result, on 1 July 1999, the Society converted to corporate status under the Corporations Law as a public company listed by shares and guarantee, and on 15 September 1999, the public company became registered as a life insurance company under s 16C(1)(b) of the Life Insurance Act 1995 (Cth), by virtue of item 11 of Schedule 8 to the Financial Sector Reform (Amendments and Transitional Provisions) Act (No. 1) 1999 (Cth). I shall hereafter refer to the company as the "Hibernian Company". One of the first acts of recognition of the value which has been created by members of the Society and of their contribution to the success of the Society was the extension of the opportunity to members of the Society to participate in the issue of redeemable preference shares at a price of one cent each; redemption for an average of $8.39 per share was thereafter effected, involving a total sum distributed to members of about $7.4 million. 5 At the present time, the Society employs 137 full time or part time employees, which operate under the direction of a board of directors. The activities of the Society presently include: (i) the development and operation of retirement village complexes and aged care facilities; (ii) funds management; (iii) management and operation of benefit (medical etc) funds; and (iv) ownership and operation of dental clinics. The board directors are presently seven in number. 6 If the Scheme of Arrangement presently before the Court and proposed for implementation becomes effective, then on the so-called Implementation Date, that is to say, the day when the Society becomes solely a company limited by shares: (i) the membership rights and interests of all members at that time will be extinguished and replaced with shares in the Hibernian Company in numbers to be determined in accordance with the share allocation rules stipulated by the scheme (and annexure B thereto in particular); (ii) the Hibernian Company will adopt its new corporate constitution as a company limited only by shares; (iii) the Hibernian Company will issue a certain number of shares to each member whose membership in the Society becomes extinguished on the Implementation Date, or to the extent appropriate, to the trustees respectively of the Verification Trust and of the Overseas Members Trust, and will also issue a certain number of shares to each director and each other existing employee. A Dispute Resolution Committee will have power to issue shares to any person who has not been already issued the correct number of shares. 7 The Verification Trust will be established to hold shares in respect of the unverified membership for the time being on the basis of certain specified steps being taken to identify those members within two years, whereafter unverified members will no longer be able to claim share entitlements. The Overseas Members Trust will be established to hold shares in respect of members having registered addresses outside Australia, on the basis that best endeavours will be undertaken to sell those shares, once listed on the Australian Stock Exchange, whereafter there will be an accounting to those overseas members. 8 In summary as to the abovementioned share allocation rules, the same are to specify the number of shares to be allocated to members of the Society, depending on the following factors: (i) the type of policies held by a member; (ii) the number of policies held by a member; (iii) the size of policies held by a member; (iv) the duration of policies held by a member; and (v) a minimum and maximum allocation per member. 9 By so-called Originating Process filed on behalf of the Applicant (that is, the Hibernian company), the claims are made as follows: (i) An order under s 411(1) of the Corporations Act 2001 (Cth) convening meetings of the members of the Society for the purpose of considering, and if thought fit, approving the Scheme of Arrangement between the Society and its members; (ii) Directions as to the convening of the meetings of the members; (iii) an order approving of the scheme; (iv) an order pursuant to s 411(12) of the Corporations Act 2001 (Cth) exempting the Applicant from compliance with s 411(11) of that Act in relation to the Scheme; and (v) such further or other orders as may be just. 10 Sub-sections (1) and (2) of section 411 of the Corporations Act read as follows: "411(1) [Court's power to order meeting] Where a compromise or arrangement is proposed between a Part 5.1 body and its creditors or any class of them or between a Part 5.1 body and its members or any class of them, the Court may, on the application in a summary way of the body or of any creditor or member of the body, or, in the case of a body being wound up, of the liquidator, order a meeting or meetings of the creditors or class of creditors or of the members of the body or class of members to be convened in such manner, and to be held in such place or places (in this jurisdiction or elsewhere), as the Court directs and, where the Court makes such an order, the Court may approve the explanatory statement required by paragraph 412(1)(a) to accompany notices of the meeting or meetings. 411(2) [Notice to ASIC] The Court must not make an order pursuant to an application under subsection (1) or (1A) unless: (a) 14 days notice of the hearing of the application, or such lesser period of notice as the Court or ASIC permits, has been given to ASIC; and (b) the Court is satisfied that ASIC has had a reasonable opportunity: (i) to examine the terms of the proposed compromise or arrangement to which the application relates and a draft explanatory statement relating to the proposed compromise or arrangement; and (ii) to make submissions to the Court in relation to the proposed compromise or arrangement and the draft explanatory statement." The Corporations Act defines a "body" as "a body corporate or an unincorporated body and includes, for example, a society or association". 11 With the prior assistance of Senior Counsel for the Applicant, I have perused comprehensive documentation incorporated together and called "Proposal to Demutualise", which is proposed for submission to members of the Society, and in particular: Section 4 headed "The Proposal" Section 5 headed "Advantages and Disadvantages of the Proposal" Section 6 headed "Share Allocation Rules" Section 9 headed "Tax and Society Security Implications" Section 10 headed "Experts' Reports" Section 11 headed "Members' Scheme of Arrangement". 12 I am satisfied that I should in principle make the orders sought in paragraphs 1 and 2 of the Summons, particularly in the light of the following matters disclosed in the documentation produced in evidence: (i) The existing Society structure does not permit the distribution of any of the substantial retained profits of the Society, in the order of $74 million, except to the extent applied to meet the various benefits provided for by the Society's rules and regulations, unless of course the Society was to engage in further redeemable preference share issues, and thereafter undertake further redemption; (ii) Substantially more value will therefore be delivered to members in a more comprehensive and modern structure than merely pursuant to the status quo of existing membership rights; (iii) The care and consideration that has been implicitly given to the quantification of shares to be attributable to the various types of policies presently issued by the Society, and their size duration; and (iv) The existing schemes for medical etc benefits will be maintained, including the retirement villages. 13 In arriving at those conclusions, I have been guided by the following expert reports incorporated within the "Proposal to Demutualise", each bearing date 25 June 2002: (i) The Actuarial Report of the New South Wales Government Actuary's Office relating to the ongoing security of Benefit Fund entitlements in the context of implementation of the proposed demutualisation. (ii) The Report of Ernst & Young Actuarial Business Consultations as to the fairness and reasonableness of the basis for allocating shares between members. (iii) The Report of Deloitte Touche Tohmatsu as to whether the policy rights of Members would be affected by the Scheme, and if so in what respect or respects. 14 The Actuarial Report of the New South Wales Actuary's Office contained the following: "In my 30 June 2001 and earlier investigations I have concluded that each benefit Fund was in a sound financial condition. The Benefit Funds are operated in a stable environment and so I expect that this sound financial condition will still apply when I examine them as at 30 June 2002. Policyholders have entitlements arising both from being Benefit Fund policyholders and from being members of Hibernian. With the current structure it is not possible to adequately or fairly allocate the value of these entitlements to policyholders, but demutualisation provides a mechanism for adequate and fair allocation of value to policyholders in respect of their membership rights, without jeopardising the security of Benefit Fund entitlements. The current Proposal to Demutualise allocates value from the non Benefit Fund parts of Hibernian by the issue of shares. The assets in the Benefit Funds are adequate for meeting Benefit Fund liabilities and will not be affected by the demutualisation. Benefit Funds will continue to be operated in the same way after demutualisation and in my view the security of Benefit Fund entitlements will not be jeopardised by the demutualisation." 15 The report of Ernst & Young Actuarial Business Consultants contains the following: "The proposed demutualisation is a mechanism to give the members of Hibernian a means to access the value built up in Hibernian. Hibernian is a mutual friendly society owned by the members and is a company limited by guarantee. The Constitution of Hibernian, however, does not provide for any surplus to be distributed to its members on the winding up of Hibernian. Instead the Constitution provides that, on the winding up of Hibernian, any surplus is to be transferred to another friendly society or association of friendly societies as the Court approves. Hence the members, although owning Hibernian, cannot obtain any real value from that ownership. This situation is not common in most mutual organizations. The proposed demutualisation therefore results in a windfall gain to current members, even more so than in many other demutualisations where the members had a right to the surplus on winding up. The value in Hibernian has been built up over a number of years and has been created not in the Benefit Funds but in the Management Fund as a result of the successful development and management of a number of retirement villages and associated facilities. It is not possible to relate these profits back to the Benefit funds and the members of those funds with any accuracy. As a result of the windfall nature of the Proposal and the process through which the value has built up in the Management Fund, there is no clear basis on which to allocate Shares to members. Therefore the allocation basis was set having regard to a number of principles in an attempt to ensure an appropriate outcome." The Report continued by describing at length the allocation principles adopted in relation to Hibernian membership and sickness etc policies. As to allocation to employees including directors, the report said as follows: "The allocation to Employees, including Directors, has been set by management in recognition of the contribution of Employees to the success of the Society and noting that the remuneration arrangements for Directors have until 2001 been significantly lower than the market average and that it is important Hibernian retain a consistent board of directors with a detailed knowledge of Hibernian's business during the period before Listing. The allocations to staff and directors are 0.49% and 0.19% respectively and are a minor part of the total Shares issued. For this reason I do not consider the allocation to Employees is unfair to members as a whole." The Ernst & Young Report concluded with the following opinion: "Having considered that the allocation principles are appropriate for the Proposal, that the allocation rules to members reflect those principles, and the minor allocation to Employees, it is my opinion that: (a) The Share Allocation Rules provide a fair and reasonable basis for allocating Shares as between members; and (b) The share allocations to Employees is not unfair to members as a whole." 16 The report of Deloitte Touche Tohmatsu (Deloitte Corporate Finance) is lengthy and complex. The Executive Summary of the Deloitte report contains the following indicia of its contents: "In forming our opinion as to whether or not the Proposal is in the best interests of Members as a whole, we have considered whether or not: · the likely advantages of the Proposal to Members as a whole will outweigh the likely disadvantages; · the share allocation rules are fair and reasonable to the Members as a whole; · Members' benefit fund entitlements will remain secure under the Proposal; and · Members will be better off with this Proposal than with the alternatives to the Proposal. We have examined the Proposal as a whole in the context of our findings on the above considerations in order to form our opinion. Deloitte Corporate Finance considers that the Proposal will be in the best interests of Members as a whole if, on balance, the Members as a whole will be better off if the Proposal proceeds than if it does not." Then follows the foreshadowed opinion of Deloitte in the following terms: "In our opinion, the Proposal is in the best interests of Members as a whole. We have based our conclusion on our findings which are summarised below." 17 The Deloitte report concluded by setting out a list of so-called "advantages" and "disadvantages", picking up thereby the expressions foreshadowed in [16] above, which are respectively set out below: "Advantages · There will be a release of value to the current Members through the issue of Shares. Members will be able to realise the value of their Shares upon Hibernian obtaining a listing on the ASX. · Members will obtain all the rights generally associated with share ownership. · Members will maintain the benefits of share ownership even after they cease holding a Hibernian policy. · Shares issued pursuant to the Proposal will provide Members with the right to participate in surplus assets upon any winding up of Hibernian. · Hibernian will be able to raise equity capital and have improved access to debt markets, should these steps be required to implement its future strategy. · The board of Hibernian will be required to provide a greater level of disclosure to its shareholders on a regular basis. Disadvantages · Members will relinquish their current membership rights, which are of negligible value. · Certain elements of Hibernian's governance such as the collegiate voting system will be changed and it will lose its status as a mutual. · Upon demutualisation of Hibernian, management would need to consider the interest of both policyholders and shareholders. In normal circumstances, management may place greater importance on maximising the returns to shareholders, potentially at the expense of policyholders. · Except in limited circumstances, shareholders will not be able to realise the value of their Shares for a period of up to two years between demutualisation and the listing date. Should Hibernian not list, the market for the Shares will be less liquid than if the Shares were listed on the ASX. · As a consequence of listing on the ASX, the value of the Shares will be subject to fluctuations due to changes in stock market sentiment in relation to Hibernian and the industry in which it operates. · Any realisation of Shares other than by takeover is likely to occur at a discount to the pro rata value of Hibernian on a full control basis. This discount has been factored into our estimate of the likely market price of each Share. · Hibernian is likely to incur additional ongoing administration costs as a result of listing on the ASX. · A consequence of obtaining an ASX listing is that there is a greater possibility of a change of control of Hibernian via a friendly or hostile takeover. · As a result of the Proposal there may be adverse tax consequences and social security implications. In addition, Members may incur brokerage costs on the sale of their Shares." 18 That so-called "disadvantage" lastly enumerated above in particular warrants reproduction in full below: "Impact on the individual circumstances of Members We have considered advantages and disadvantages to Members as a whole. Nevertheless, a number of factors may impact the individual circumstances of Members, including tax obligations, social security considerations and brokerage costs. The Proposal may give rise to capital gains and income tax liabilities as a consequence of selling the Shares, and/or receiving dividends. Members should consider their own individual taxation circumstances and consult an independent advisor if necessary. Receipt of Shares by Members may adversely impact means-tested entitlements to social security entitlements as affected Members will be deemed to have greater assessable assets and income. Members should consider their own circumstances in relation to social security before voting on the Proposal. Members are likely to incur transaction or brokerage costs upon the sale of Shares on the ASX. Conclusion In our opinion, the likely advantages to Members as a whole if the Proposal is approved outweigh the likely disadvantages." 19 The dichotomy of "advantages" and "disadvantages" the subject of regulatory requirement tends to present to the authors of expert reports something of a conceptual dilemma, as is exemplified by what I have extracted in the preceding paragraph. Thus in the present context, the circumstance that implementation of the scheme will confer a new asset of value upon each Society member in the form of a shareholdings of value in the Hibernian Company, which may well produce taxable income or a taxable gain prior to and ultimately upon subsequent realisation in whole or in part, can hardly be described forensically as a disadvantage, given that capital gains tax applies in principle only to profitable realisations in the first place. What the shareholders will receive by way of share allotments may be described as being in the nature of a windfall. In making that observation, I make no criticism of the thorough and lengthy Deloitte report, and in particular its postulation of "disadvantages". It is just that I think it would contribute materially to the utility of the relevant regulatory requirement if the same was framed in terms of "advantages or disadvantages, or other consequential implications", rather than merely of "advantages and disadvantages". Experts would not then find themselves compelled to categorise features of a proposal in such potentially limited terms, and unnecessarily erring on the side of caution in possibly a potentially misleading or confusing way. 20 In Central Pacific Minerals NL [2002] FCA 239, Emmett J summarised the principles that should guide me in my consideration of the present application. For ease of reference, I set out the same below: "8. Those principles require that the Court will not convene a meeting unless the arrangement proposed is of such a nature and is cast in such terms that, if the arrangement receives approval by the statutory majority at the relevant meeting, the Court will be likely to approve the arrangement on the hearing of any application that is unopposed. At the stage of convening a meeting, the Court will give consideration to compliance with such preliminary matters as are relevant to the holding of the meeting. Of paramount importance at that stage is the need to ensure that there will be sufficient disclosure, to those who will be affected by the arrangement, of its details and effect. The Court will also need to be satisfied, at that stage, that there has been reasonable opportunity for the Commission to examine the terms of the arrangement. 9. In exercising its discretion whether to convene a meeting, the Court will have regard to such matters as the acceptability of the documentation of the proposed arrangement, the commercial viability and morality of the arrangement, the likely acceptability of the arrangement, the bona fides of the proposals, whether the proposals could be achieved by another method and any objections or submissions by the Commission. It is always the practice of the Court, at the first stage, to go through the proposed arrangement, to raise matters as to the drafting of the documentation, to ascertain whether the arrangement complies with the substantive requirements of the law and to ensure that the arrangement, if given effect, will not involve any unfair or oppressive result. 10. In considering whether to convene a meeting, the Court will taken into account questions of public policy as well as commercial morality. The Court will have regard to the interests of parties who will be bound by the arrangement and who might be careless of their own best interests. While security holders of a company may be considered to be better judges than the Court could be of what is to their commercial advantage, that does not extend to the technical or mechanical aspects of an arrangement. Security holders are likely to be influenced largely by their understanding of the broad economic consequences of an arrangement. However, they are entitled to rely on the Court's approval as a sufficient safeguard against defects at the technical or mechanical level. 11. Accordingly, for the purposes of protecting the interests of security holders who have not agreed to an arrangement and yet will be bound by it, the Court will ordinarily seek to ensure that the terms of the arrangement would be enforceable by all persons bound by it against those who are seeking to implement it or obtain benefits from it. The Court will also seek to ensure that the arrangement does not, without sufficient reason, include provisions that may create inroads upon or modify the benefits that a security holder bound by it might legitimately expect to obtain under it. The mere fact that the Court has convened a meeting does not, however, necessarily mean that the Court will approve the arrangement, even if the arrangement is unopposed at the third stage. 12. In considering whether to approve an arrangement at the third stage, the Court must first be satisfied that the second stage has been fully completed. It must be satisfied that the resolutions have been passed in accordance with the statutory requirements. Secondly, however, the Court must then consider the exercise of its discretion whether to approve the arrangement. While the primary task of the Court is to see that the procedure whereby the arrangement has been approved by security holders is formally correct, it has the further duty of satisfying itself that the arrangement is fair and equitable between different classes of security holders, and as between security holders and those who will benefit from it. 13. The jurisdiction of the Court in relation to an arrangement is supervisory, in the sense that the Court is concerned to be satisfied that there has been an absence of oppression and that the arrangement is one that is capable of being accepted. For example, the Court will withhold its approval where a majority's acceptance is in the nature of a fraud on the minority. The Court will, of course, generally take the view that the shareholders are the best judges of whether an arrangement is to their commercial advantage and will be reluctant to make decisions contrary to the views of security holders expressed at meetings. The function of the Court does not extend to usurping the views of the relevant security holders. 14. Nevertheless, the Court is not a mere rubber stamp and it will look at the arrangement to ensure that it is a reasonable one. If the Court concludes that there is an objection to the arrangement, such that a reasonable person might not approve it, then the Court may refuse to approve the arrangement. The Court must be satisfied that the proposal is at least so fair and reasonable that an intelligent and honest person, who is a member of the class of security holders bound by the arrangement acting alone in respect of his or her interests, as such security holder, might approve it." I have taken the foregoing principles into account in my consideration of issues which nevertheless do not tend to entirely arise in the unusual circumstances, such as here of non-traditional corporate structures, and particularly where, as also here present, no circumstances of insolvency arise or intrude. The principles enunciated by Emmett J have been said by Senior Counsel to be referrable in part to dictum of Street CJ (with whom Hutley and Samuels JJA agreed) in FT Easement & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977-1978) 3 ACLR 69 at 72, as follows: "The function of the court when considering an application under [s 181 of the Companies Act 1961 (NSW)] is not in doubt… The approach taken upon a summons is that the court will not ordinarily summon a meeting unless the scheme is of such a nature and cost in such terms that, if it achieves the statutory majority at the creditors' meeting the court would be likely to approve it on the hearing of a petition which is unopposed." The Chief Justice thereafter described the scheme there involved as comprising "… clearly enough matters of compromise", an element usually involved in the context of a scheme relating to an insolvent corporation, but which is not of course the situation here. 21 I have reached the opinion that the proposals the subject of the present scheme of arrangement for the demutualisation of the Society are of such a nature, and are cast in such terms, that if the arrangement receives the approval of the requisite majority at the meeting of members, the Court would be likely to approve the scheme of arrangement on the hearing of any subsequent application that is unopposed. I am clearly of the view that there would be adequate disclosure of the substance and implications of the arrangement to all those members or policyholders who will be affected thereby, including the proposed allocation of shares to the directors and employees (as to which see [15] above). In reaching that opinion, I have placed particular reliance upon the expert views adduced in evidence concerning the so-called Allocation Rules addressed respectively by Ernst &Young and Deloitte (see [15] and [16] above). The quantification of the allocations proposed to be made by the Society necessarily reflect an expertise possessed by the Society's directors and employees. 22 I therefore make orders in terms of the Short Minutes which have been presented to me by Senior Counsel. In so far as the quorum of any so-called Meeting of Demutualisation Nominee or any so-called Meeting of Income Beneficiary may be constituted by one member or proxy for one member, I record that I have been referred to the reasons for judgment of Kearney J in Re Hastings Deering Pty Limited (1985) 3 ACLC 474 at 475 based upon precursor legislation. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Conti.

F T Easement & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd

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