FT Eastment & Sons Pty Limited v Metal Roof Decking Supplies Pty Limited

REASONS FOR JUDGMENT 1 This is the first court hearing of an application to approve a scheme of arrangement between Doctors Health Fund Limited ("DHF") and its members. 2 The scheme is part of a wider arrangement, the terms of which are recorded in a deed of implementation made between DHF and Avant Group Holdings Limited ("Avant"). The implementation deed contemplates that Avant will acquire DHF by way of a members scheme of arrangement under Part 5.1 of the Corporations Act 2001 (Cth) in the manner to which I will refer shortly. 3 DHF is currently registered under the Private Health Insurance Act 2007 (Cth) as a not for profit restricted access insurer. Avant is a wholly owned subsidiary of Avant Mutual Group Limited ("Avant Mutual"). 4 Avant Mutual is a health services organisation operating in the Australian market providing professional indemnity insurance products, related insurance, and risk products and membership services to medical and allied health professionals and their organisations, employees and associates. 5 Avant Mutual is a not for profit mutual organisation with around 55,000 members throughout Australia. It was formed in July 2007 following a merger of United Medical Protection and the Medical Defence Association of Victoria, both of which carried on their operations for a lengthy period of time prior to the merger. 6 As part of the implementation of the proposed transaction, DHF is to be converted into a proprietary company limited by shares and will become a wholly owned subsidiary of Avant. The conversion application involves a demutualisation of DHF. In consideration of the cancellation of their company memberships under the proposed transaction, existing DHF members will receive payment from DHF, that payment being funded by Avant. Avant will then subscribe $30 million for shares in DHF. 7 The entitlement of each DHF member is to be determined in accordance with an allocation formula determined by DHF's actuaries based upon the member's tenure and type of product purchased. The allocation rules are set out in appendix 4 to the scheme booklet. As I have said, the allocation formula was determined on the advice of DHFs appointed actuary and it has been endorsed as fair and reasonable by the appointed actuary, Messrs KPMG, and also by an independent actuary appointed by DHF. 8 On the implementation of the acquisition of DHF by Avant, the DHF members will have their company membership of DHF cancelled, but they will remain as DHF health insurance policyholders. 9 The proposed acquisition is similar in structure to the model used in other recent demutualisations, including the acquisition by BUPA of MBF, as well as Medibank's acquisition of Australian Health Management. I will refer briefly to the approvals given by judges of the court to those schemes of arrangement. One key difference from the earlier transactions is the intention of Avant to convert DHF to a "for profit" health insurer and to broaden the current restricted access group of DHF. 10 I have referred to most of the key features above, but I should mention again that they include the change of DHF from a public company limited by guarantee to a propriety company limited by shares with Avant as the sole shareholder. The other key features are sufficiently described in subparagraph (a) of section 4.5 of the scheme booklet. 11 The proposed transaction between the parties is regulated under a number of statutes, including the Private Health Insurance Act. In particular, s 126-42(5) requires the Private Health Insurance Administration Council ("PHIAC") to give approval to the proposed scheme as a demutualisation. 12 DHF has applied to PHIAC under that provision for DHF to convert from not for profit to a for profit private health insurer. PHIACs approval of the conversion is a condition precedent to the proposal that must be obtained if the proposed acquisition is to be implemented. 13 DHF wrote to PHIAC on 8 February 2012 making application for approval for DHF to convert to a for profit insurer under the Private Health Insurance Act. However, by letter dated 29 February 2012, the chief executive officer of PHIAC informed DHF that PHIAC has not made any formal determination regarding the grant. The letter states that the council is considering DHFs request for expedition of the preliminary issues and it was expected that this would occur at a council meeting on Friday, 2 March 2012 and, if so, the application would be advertised in accordance with the requirements of the Act. The letter also states that the council is considering DHFs request for expedition of the final determination with a view to written confirmation being available before the second court hearing. 14 However, at the time of the letter, PHIAC had not fixed a date for consideration of the application. DHF has also applied to the Department of Health and Aging for an expansion of its current restricted access group. The proposed expansion (if approved) will enable DHF to issue its health insurance policies to additional selected categories of health practitioners and officers, employees and contractors of Avant and companies that appear to be related to Avant. The approval of DOHA is also a condition precedent to the implementation of the proposal contained in the scheme documents. 15 As I mentioned above, there is a history of demutualisation of health funds under the Private Health Insurance Act. The details of earlier approvals given by judges of the court are referred to in Mr Oakes' written submissions which I will mark as MFI. The most pertinent decisions appear to be the decision in MBF Australia Limited, in the matter of MBF Australia Limited [2008] FCA 428, in particular at [13] to [15], and Australian Health Management Group Limited, in the matter of Australian Health Management Group Limited (No 1) [2008] FCA 1868 at [1] to [6]. 16 The directors of DHF have unanimously recommended that DHF members vote in favour of the scheme at the scheme meeting, and associated resolutions to be proposed at the general meeting of members. 17 The independent expert, Messrs Lonergan Edwards & Associates Limited, have prepared a report which is summarised in appendix 7 at page 97 of the scheme booklet, Messrs Lonergan Edwards, have placed a valuation on the securities that are the subject of the scheme in a table set out at paragraph 15 of the report. The table shows the valuation range from a low of $28.4 million to a high of $31.9 million. 18 Accordingly the scheme consideration of $30 million is within Lonergan Edwards' assessed valuation range for an acquisition of 100 per cent of DHF. Accordingly, Lonergan Edwards conclude that the scheme consideration is fair to scheme members, and being fair, the transaction is also reasonable. 19 Lonergan Edwards also conclude that in their opinion the proposal is in the best interests of scheme members in the absence of a current better proposal. It is to be noted in this regard that the scheme consideration was increased after a competing proposal was made. The competing proposal offered consideration that was higher than Avant's original offer of $28.5 million, but it was subject to conditions that in the view of the DHF board made it less favourable. Eventually the competing proposal was withdrawn, but ultimately DHF increased its offer to the sum of $30 million which is now the consideration for the proposed acquisition. 20 The machinery provisions of the scheme in substance follow those of the Australian Health Management Group Limited Scheme to which I referred above. The scheme documentation requires Avant to pay the $30 million consideration to an independent trustee. The relevant provisions which are contained in clause 4.1 of the scheme demonstrate that the issue of performance risk - which has been the subject of a number of authorities - is sufficiently covered by the arrangements that have been made. The payment of the consideration is provided for in clause 4.2 of the draft scheme. 21 It provides that subject to Avant making payment of the consideration into a trust account in accordance with the implementation deed on the implementation date, DHF will direct the trustee to distribute the entitlement of members as set forth in clause 4.2. That clause provides that within 10 business days after the implementation date DHF will distribute the "initial entitlements" to scheme members, and that no later than 10 business days after 31 July 2012 DHF will direct the trustee to distribute any payments that the review committee has determined are to be made in accordance with the allocation rules and the review committee charter. 22 Provision is also made for the balance, if any, of the residual amount to be dealt with in accordance with the provisions referred to in that clause. 23 The establishment of a review committee is in accordance with the procedures that have been followed in earlier demutualisations. It operates in accordance with the review committee charter. The review committee's function is to determine disputed allocations under the allocation rules. The review committee charter is set out in appendix 5, and will be a schedule to the scheme. The implementation deed contains exclusivity provisions, but they are subject to the usual fiduciary carve-out. There is no break fee in the present matter. 24 The exclusivity provisions are described in paragraphs 15 to 22 of the affidavit of Mr Peter Aroney who sets out in those paragraphs of his affidavit the necessary details of the negotiations and other matters which satisfy the approach taken by Lindgren J to such provisions, see Re APN News & Media Ltd (2007) 62 ACSR 400 at [55]. 25 Provision is also made in the implementation deed for Avant to reimburse DHFs transaction costs, the necessary disclosure and conditions upon which the reimbursement may be triggered are described in section 11.1(l) and (m) of the scheme booklet. 26 In my opinion the matters which have been put to me this morning by Mr Oakes and which are explained in some detail in his written submissions are sufficient to satisfy me that the terms of the scheme are cast in such terms that if the scheme receives the statutory majority at the scheme meeting the court would be likely to approve it on the hearing of the application in accordance with the principle stated in FT Eastment & Sons Pty Limited v Metal Roof Decking Supplies Pty Limited (1977) 3 ACLR 69 at 72. This approach has been consistently followed in the authorities and was referred to by Lindgren J in MBF Australia Limited at [39]. 27 For these reasons, I made earlier today the orders which were handed to me by Mr Oakes. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.