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

COUNSEL : T Bathurst QC with D Ryan SC (P) K Cuneo (ASIC) SOLICITORS : Minter Ellison (P) Jan Redfern, Solicitor for ASIC CATCHWORDS : CORPORATIONS LAW - scheme of arrangement - building society with shareholder and members by guarantee - court's role at first hearing - principles of valuation of non-shareholder members' interests - allocation of special value LEGISLATION CITED : Corporations Act 2001 (Cth) s 411 FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 Holt v Cox (1994) 15 ACSR 314 CASES CITED : Melcann Ltd v Super John Pty Ltd (1995) 13 ACLC 92 Pauls Limited v Dwyer, QSC, 13 March 2001 Winpar Holdings v Goldfields Kalgoolie Limited (2000) 34 ACSR 737 DECISION : Orders made for convening meetings to consider proposed scheme

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2406/01 GIO BUILDING SOCIETY LIMITED (APPLICATION OF)

1 HIS HONOUR: This morning I made orders for the convening of meetings of the two classes of members of GIO Building Society Ltd. This morning's hearing was the last of a series of seven short hearings before me during which I communicated concerns about various drafts of the explanatory statement and independent expert's report for the proposed scheme, and the plaintiff responded to those concerns in various ways. 2 Such a process of iteration is not unprecedented in the Equity Division, in cases where the proposed scheme is out of the ordinary, particularly where what is involved is the extinguishment of memberships in a company by way of demutualisation or some analogous process. In the present case the company is not a mutual society but the proposed scheme involves the extinguishment of memberships by guarantee. 3 An application for the convening of meetings to approve a scheme of arrangement is typically an ex parte application in which the plaintiff seeks the Court's authorisation to begin a process which will involve, at later stages, consideration of a proposed scheme by the members and if they agree to it, an application to the Court for approval of the scheme. At the first hearing, the issue for the Court is whether to make orders that a meeting or meeting of members be convened. In the present case, the issue arises under s 411 (1) of the Corporations Act 2001 (Cth). The proceedings were initiated before the commencement of the Commonwealth Act, which commenced on 15 July 2001, but they are to be treated as proceedings under the new legislation by virtue of s 1383 of the Act. If the members approve the proposed scheme, the application for the Court's approval will be made under s 411 (4) (b) of the Act. 4 Because the first hearing is conducted ex parte, and the Court's function of approving the scheme is reserved by s 411 for the second hearing, after the members have considered it and any objections have emerged, the Court is always careful not to decide issues at the first hearing which may later become matters of contention. Nevertheless, the first hearing is important because the Court reviews the scheme and explanatory statement (and other relevant documents such as the independent expert's report in this case), and invites the plaintiff to attend to any matters which seem to the Court to require attention before the distribution of the documents. This is the process that led to the present case coming before the Court, briefly, on seven occasions. While expressing opinions on the drafts, the Court does not commit itself to any particular view of the scheme. 5 It has been said that 'the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the [members'] meeting the court would be likely to approve it on the hearing of a petition which is unopposed': FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 72 per Street CJ; and see the other cases cited in Ford's Principles of Corporations Law (looseleaf), paragraph [24.071]. What applies to the scheme document itself should also apply, in principle, to the draft explanatory statement and independent expert's report. But this principle should not be pushed too far. The fact that the Court has reviewed the draft explanatory statement before making an order for the convening of meetings does not prevent an objector from contesting the adequacy or accuracy of the disclosure made in that document. Equally, the fact that the Court has reviewed an independent expert's report before making the order does not limit the scope of challenges to the adequacy of the report at the second hearing. 6 Among the issues that I raised in the present case were issues about the expert's report by Andersen Corporate Finance Ltd. The scheme proposal is that all non-shareholder memberships will be cancelled in consideration of a payment, in most cases, of $100 per membership. The independent expert addressed the question whether that proposal is in the best interests of the members. That raised questions of valuation. The non-shareholder members have no right to economic benefits except for an entitlement to participate equally with the shareholder member in the distribution of surplus assets on winding up. Additionally, the draft explanatory statement makes it plain that there are benefits to be gained by the shareholder member and the AMP Group (which controls the shareholder member) once the non-shareholder memberships have been extinguished. 7 At the hearing of 29 June 2001 I made the following observations with respect to questions of valuation, referring at that stage to much earlier drafts than the ones before me today: 'It seems to me there are two key issues on the question of valuation. The first relates to the relevance of the entitlement of members equally to participate in the distribution of the surplus assets on the winding up of the plaintiff, under paragraph 79.3 of the constitution of the company. The materials suggest that this entitlement would yield $2,100 per member on winding up, as compared with the proposed consideration of $100. In Holt v Cox (1994) 15 ACSR 314 Santow J usefully summarised the relevant principles of the law of valuation. His judgment was substantially approved by the Court of Appeal at 23 ACSR 590. As the matter emerges, it seems a critical question in assessing the significance of participating in the surplus on the winding up is to make an assessment of the degree of likelihood that winding up may occur in any foreseeable circumstances. In a typical commercial company, if a winding up is unlikely, that fact will normally imply that an appropriate valuation method would be discounted cash flow or some similar method - assuming there is no real market for the securities in question and perhaps even if there is. The assessment of the degree of likelihood of winding up seems to depend on a question of fact which, as far as I can see, is not disclosed in the materials before me.

At two points in the second revised draft of the independent expert's report, there are references to the attitude of the directors. Thus, it is said on page 2 of the expert's draft letter that the directors have expressed the view that there is very little chance of an order being made for the winding up of the company on the just and equitable ground or on grounds of oppression or unfair prejudice. Again, it is said on the same page that the directors have expressed the view that there is very little chance of the company becoming insolvent. Furthermore, it is said on page 4 of the expert's draft letter that there are potentially alternative structures that could be adopted that could result in the realisation of the vast majority of the benefits which the majority shareholder seeks without extinguishing the members' rights or requiring the approval of members.

It seems to me those three statements of fact are relevant to the question of assessing whether the right to participate in surplus on the winding up should be treated as conferring substantial value on the guarantee memberships. But the disclosed facts give no indication of the directors' basis for expressing their view as to the unlikelihood of winding up on the stated grounds and do not, so far as I can see, identify the potential alternative structures that would confer the vast majority of the benefits which the majority shareholder seeks. There is an indication on page 6 of the letter that the directors, prior to selecting the scheme, have investigated other options, but those other options are not identified as the ones which would confer the vast majority of the benefits which the majority shareholder seeks.

In my opinion, further evidence is needed, on affidavit, as to the content of the relevant resolutions of the directors and as to the grounds upon which the directors have formed their view.

So far as winding up on the just and equitable and similar grounds are concerned, unless there are substantial, so far as undisclosed grounds supporting the directors' opinion, their opinion may have little or no weight. It would simply be an assertion that they do not intend to act unfairly. On one view of the matter, if the guarantee members remain in a company of this kind, there will be a continuing risk of unfairness to them, especially if the assets of the entity are depleted at any time. It may therefore be, unless the directors have identified some solid grounds, that the risk of winding up at some future time on the just and equitable and similar grounds is a matter of significance.

So far as insolvency is concerned, there is some evidence of the company's financial position in the draft report, but it falls well short of a statement by the directors that in future there is very little chance of the Building Society becoming insolvent. Assuming that the directors have made such a bold statement, their grounds for making it will need to be set out clearly.

So far as the alternative structures are concerned, on the point under consideration now, their relevance is to investigate whether any of them involve either the winding up of the Building Society or leaving the Building Society as merely a shell containing cash after the sale of its assets. If the latter is a proposal, there will be real questions as to the continuing viability of a corporation of that kind, suggesting again that winding up at some stage is a significant possibility.

All in all, on the state of the evidence before me now, I am far from convinced that the winding up rights of the guarantee members should be so disregarded or discounted as to justify a payment of only $100.

The other matter of valuation relates to special value. I refer to the observations by McLelland J in the Melcann case, [ Melcann Ltd v Super John Pty Ltd (1995) 13 ACLC 92] at the bottom of second column of p93 through to first column of p94. Those observations indicate, in my view, that there must be some similar special value present in this case.

Indeed, the explanatory statement places great emphasis, in its consideration of the advantages of the scheme, on the corporate benefits to be derived by the AMP group (including the Building Society) should the scheme be implemented. The scheme will extinguish the guarantee memberships so that the Building Society will become a wholly-owned subsidiary, and it will then transfer its business to another location within the AMP group. The benefits said to flow from these steps are very notably corporate benefits, rather than benefits enduring to individual members. They are benefits which, in principle, must have a value.

In the Melcann case and in Winpar Holdings v Goldfields Kalgoolie Limited [(2000) 34 ACSR 737], there was some evidence attributing a value to those benefits in the circumstances of those cases. So far as I can see, there is no such evidence here - except for the assertion by the independent expert, for reasons set out in his report, that considerations relating to 'special value' do not materially impact on the appropriate value of members' rights.

It seems to me that in addition to the other evidence to which I have referred, there will need to be evidence either on affidavit or by the valuer giving an estimate of the value to the majority shareholder and the AMP group of implementation of the scheme - including the benefits which will arise upon rationalisation of the corporate structure in the manner proposed by the scheme. When that evidence is to hand, it will be significant information for members to consider in assessing the proposed scheme.

Once the value of the advantage which the AMP group and majority shareholder will derive from the scheme's implementation is available, then the question will be one of appropriate allocation of that value. Here the observations of Santow J in the Goldfields Kalgoolie case are of particular relevance. Some of his Honour's remarks were dissented from by Douglas J in his judgment in Pauls Limited v Dwyer , QSC, 13 March 2001. However, the point of disagreement seems to me to be confined to the appropriate approach to valuation in the case of compulsory acquisition under Ch 6A Pt 2 of the Corporations Law and in particular, the meaning of the words in s 667C(1)(c), 'without allowing a premium'.

This is an issue that does not arise when the Court's task is to assess the fairness to members of a proposed members' scheme. However, Santow J's remarks do not directly cover the position in the present case. Here there are two clearly defined classes of members. The guarantee members are to have their memberships cancelled in full and the holder of fixed shares will survive unaffected after the scheme.' 8 Subsequently the draft explanatory statement and the independent expert's report were amended to address more fully the questions of valuation arising out of the non-shareholder members' right to participate in surplus on winding up, and the distribution of special value. Eventually the report, dated 16 August 2001, contained the material with respect to valuation which I set out in Appendix 1 to these reasons for judgment. The draft explanatory statement sets out separate presentations of the advantages and disadvantages of the proposed scheme. The presentation of the disadvantages contains, in the final form of the document, the material in Appendix 2. 9 It will be seen with that some of the statements in the report and the draft explanatory statement relate to questions of law and valuation which may well be contentious, and could well be challenged in proceedings inter partes. It would be wrong for the Court to express any view on those questions, beyond saying that they are not obviously erroneous, and that a reasonable valuer in the shoes of Andersen Corporate Finance Ltd might form the opinions that the report expresses. While orders have been made for the convening of meetings upon the application of the plaintiff, the Court has not purported to resolve these questions, any of which could be placed in contention if there is an objection to the approval of the proposed scheme at the second court hearing. 10 In my observations at the hearing on 29 June 2001 I expressed tentatively the opinion that the distinction between the present case and the Goldfields Kalgoorlie case pointed to the conclusion that the non-shareholder members in the present case were prima facie entitled to a greater share of the special value than in a case where there is only one class of shares, the vast majority of which are held by one party (at paragraph 26). In their final form, the draft explanatory statement and the independent expert's report are inconsistent with that view. By making my orders for the convening of meetings, I have effectively withdrawn from any expression of opinion on the point, the resolution of which should not be undertaken unless the point is the subject of argument at a contested hearing. * * * * * * * * *

Appendix 1 Extract from Independent Expert's Report 1.2. Members' Rights Rights of Members Members of the Building Society are not shareholders of the Building Society and have limited rights under the Constitution. These rights are generally of a governance rather than economic or financial nature and are of a fundamentally different nature to the rights of GIO Personal Investment, the holder of all of the fixed shares in the Building Society. Entitled Persons have no rights under the Constitution until such time as they become Members. Key points of contrast between Members and GIO Personal Investment, as the holder of all of the fixed shares, are: · GIO Personal Investment paid valuable consideration for its shares, being an amount of $28 million. This represents all of the contributed capital of the Building Society. Upon any sale of the fixed shares, GIO Personal Investment would receive consideration reflecting the value of those fixed shares at the time. By contrast, Members have not had to outlay any capital to acquire their membership rights. Rather, their membership rights were incidental to their commencing a customer relationship with the Building Society and will cease when that customer relationship ends. If in the interim the Members receive consideration under the Scheme, or any alternative proposal, this will in effect represent a windfall gain; · the holder of the fixed shares (ie. GIO Personal Investment) is entitled to receive dividends. Members do not have any such entitlement; · the rights of the shareholder is embodied in the fixed shares, which are capable of being sold. The Constitution does not place any practical restriction on the ability of shareholders to sell the fixed shares other than the requirement for the Directors to approve the registration of a transfer of shares. By contrast, membership rights are personal to individual Members and are not capable of being sold or transferred; and · each Member who meets defined eligibility criteria has one vote. The Information Memorandum indicates that as at 28 February 2001 there were approximately 9,794 Members that potentially had the right to vote at a general meeting. By contrast, the holder of the fixed shares has one vote per share. As a consequence of there being 28 million fixed shares on issue, the Members are locked into a minority position holding less than 0.04 percent (approximately) of all votes that may be cast at a general meeting of members of the Building Society. Generally, they do not have any real influence over the operations of the Building Society (except in very limited circumstances, such as the current proposal to restructure the Building Society by implementing the Scheme). We understand that this structure has in effect existed since the formation of the Building Society. We believe it relevant to note that Members accepted their membership rights on this basis, rather than having ended up in this position as a consequence of any transactions involving the fixed shares undertaken by the holders of those securities. However, all members (including GIO Personal Investment as a single member) share equally in any surplus upon winding up of the Building Society. Therefore, on any winding up, substantially all of any surplus goes to the Members and not to GIO Personal Investment. It is relevant to note that Members have the basic right not to have their rights prejudiced or oppressed. Therefore, to avoid actions by Members alleging such conduct, and potentially pursuing remedies including winding up, the Directors and GIO Personal Investment will always need to be cognisant of these rights in making any major decisions (including matters affecting the operations and financial structure of the Building Society). It is also relevant to note that: · we are advised that the Building Society charges out its products and services based on competitive market forces rather than as a traditional mutual body, where members may receive pricing and other benefits depending upon the financial position and performance of the mutual body. These could be at below prevailing market rates; and · the rights of Members can also be contrasted to the rights of former members of now demutualised bodies, such as those now known as AMP Limited, Colonial Limited and AXA Limited. In those cases, members controlled each organisation and there was no stakeholder (such as shareholders) that, in effect, had a prior claim on the dividends. In this situation, the shareholder and not the Members controls the Building Society and, via a prior claim on dividends, in the absence of the likelihood of a winding up, effectively hold the real economic value of the Building Society. Value of Members' Rights The assessment of the value of the Members' rights being surrendered is subjective, due to the nature of the rights. In our view, there is no objective and reliable methodology to value these rights. Ultimately, in our view, a valuer must form a commercial view in all of the known circumstances having regards to the characteristics of the rights. We note that one could, in theory, undertake a discounted cash flow valuation based on a hypothetical winding up. However, in our view such a methodology would fail to provide any realistic or objective assessment of value due to the major subjective assessments required. For example, in adopting such an approach one would need to make assumptions in relation to: · the probability of a winding-up occurring; · the likely timing of a winding up; · the likely surplus available on a winding-up; · the number of members that would exist at the time of winding-up and whether existing members would remain; and · the appropriate discount rate to apply to the forecast cash flows taking into account all relevant risk factors, the lack of marketability of the rights and the very nature of the rights themselves. While it is possible that by applying such a methodology one could derive a value attaching to the rights being surrendered, for the reasons outlined above, we do not consider that it is appropriate to assess the value of the rights being surrendered on that basis. To do so would suggest a level of objectivity that does not exist. In summary, apart from the right to participate in a surplus on winding up, the rights of Members are generally limited to the right to attend and vote at a general meeting of members of the Building Society which, bearing in mind the relative voting power of GIO Personal Investment (28 million votes compared to approximately 9,794 votes), gives them little practical influence over the Building Society. This, combined with our assessment in Section 1.3, that a winding-up is unlikely, has led us to conclude that, in the ordinary course of events, excluding proposals such as this Scheme, the value of the rights is nominal only. 1.3. Winding Up All members have a right to share in any surplus assets upon a winding up of the Building Society. A winding up of the Building Society would result in all of the Building Society's residual net assets being distributed on an equal basis to all members. Based on the Building Society's net asset position of approximately $36.3 million at 31 December 2000, such a distribution to the membership base of 17,596 could be in the order of $2,100 per member, which in the case of GIO Personal Investment would compare to capital contributed of $28 million. If the business of the Building Society was sold prior to a wind-up of the Building Society, the amount that could ultimately be distributed could exceed $2,100 per member. Therefore, a wind-up would result in a substantial loss of capital value for GIO Personal Investment. The three key circumstances that could give rise to a winding up of the Building Society are: (a) voluntary winding-up. This would require the majority approval of 75 percent of all those entitled to vote. As GIO Personal Investment has the right to exercise 28 million votes and all the Members collectively have the right to exercise only approximately 9,794 votes, this could not occur without the support of GIO Personal Investment. As a consequence of the loss of capital that GIO Personal Investment would incur on a winding up, we do not believe that GIO Personal Investment, acting rationally, would support a winding up. This is confirmed in the Information Memorandum, where the Directors indicate that GIO Personal Investment has advised that "….it is extremely unlikely that it would ever vote, and has no current intention of voting in favour of a winding up that resulted in it recovering anything less than the value of its investment in the Building Society". (b) winding-up by an order of the Court in a case of insolvency, or on the application of a member on the basis that it is just and equitable that the Building Society be wound up. The Directors have advised us that they consider winding up on the basis of insolvency to be unlikely. The Directors have expressed a view that a winding up on the basis of oppressive or unfair conduct is unlikely. It is our understanding that such an order would only be made where the Court concluded that the Building Society's affairs were being conducted in an oppressive or unfair manner. It would appear entirely sensible to us that GIO Personal Investment ensures that the Building Society does not undertake any actions that may be regarded as oppressive or unfair given the significant capital loss that may result in the event that the Court ordered a winding-up of the Building Society on this basis. While acknowledging that there can be no certainty that there will be no grounds to wind up the Building Society on these bases, we consider that these outcomes must be assessed as having a very low likelihood of occurring. (c) APRA could seek to wind up the Building Society pursuant to its powers under the Banking Act 1959 (Commonwealth). Such an application would, however, need to be based upon the Building Society being insolvent. As discussed above, the Directors have informed us that a winding up on this basis is unlikely. On the basis of these factors, it appears unlikely that the Building Society will be wound up. In our view, the probability of this occurring is low and, therefore, commercially would not attract significant value. Therefore, we conclude that, while the right to share in any surplus arising on a winding up may have some theoretical value, this value is also effectively nominal. 1.4. Benefits to be Realised by AMP Existence of Special Value As disclosed in the Information Memorandum, AMP may benefit from the Scheme and the integration of the business of the Building Society into AMP Bank. These benefits arise from the realisation of cost savings, economies of scale and from the ability to manage capital in a more efficient manner. The Directors of the Building Society have provided us with an estimate of the benefits that may be derived from the integration of the business of the Building Society with AMP Bank and the costs that may be incurred in order to generate those benefits. Based on the information provided, we have determined the net present value of the benefits, making a distinction between those which may be able to be realised in the absence of the Scheme and those which the Scheme helps to create. Key information and assumptions include: · a discount rate of 11 percent; · a tax rate of 30 percent; · assumed benefits to increase at an assumed inflation rate of 2.4 percent per annum; · a terminal value at the end of 5 years based on the discount rate of 11 percent but converted from a nominal to a real discount rate; · costs include the costs of implementation of the Scheme and integration costs required to give rise to the benefits; and · benefits which have been split between those which are being pursued at the present time and those which will not be pursued until after the outcome of the Scheme is known. Key points to note include: (i) the assessed value of the net benefits to be derived from the implementation of the Scheme and the full integration of the business of the Building Society into AMP Bank is in the order of $26 million; (ii) the assessed value of the net benefits of $26 million includes various cost savings which, we are advised, are either able to be realised at present or would be able to be derived by shared services arrangements without the need to integrate the business of the Building Society into AMP Bank; (iii) the assessed value of the net benefits that are not necessarily able to be derived in full without the implementation of the Scheme and the transfer of the business of the Building Society to AMP Bank is in the order of $12 million; (iv) of the $12 million in benefits referred to in (iii), a proportion of these benefits may be able to be realised over time without full integration, but via systems integration projects that seek to bring Building Society customers onto AMP Bank systems. This is in contrast to the integration strategies involving the transfer of the business of the Building Society to AMP Bank, which over time would see a rationalisation of product lines including customers being offered AMP Bank products; (v) the Scheme, in effect, increases the likelihood of obtaining, and reduces the timeframe and cost of obtaining, the residual benefits referred to in (iii) and (iv). However, while increasing benefits may be realised over time, there will be a level of benefit that will not be able to be realised, for example, additional administration costs associated with maintaining two separate trading names and the costs of maintaining the legal structure; and (vi) the majority of the cost reductions arise from integration of the business of the Building Society into AMP Bank, with only a small part directly relating to the maintenance of the Building Society structure (eg. cost of maintaining a separate Board, legal entity etc). We note that AMP may also derive benefits through increased flexibility in managing its capital structure. However, having considered this matter, we do not consider this to be material for the purposes of the present analysis. This reflects: · in the absence of the Scheme it is possible that part of the Building Society's surplus capital may be able to be returned to GIO Personal Investment as a dividend. The retained earnings of the Building Society at 31 December 2000 were $8.3 million; · the transfer of the business of the Building Society to AMP Bank would cause AMP Bank to either increase its own capital base or absorb its own surplus capital to maintain required capital adequacy ratios on its expanded asset base; and · any surplus capital within the Building Society is already generating a return to which GIO Personal Investment is effectively entitled by virtue of its rights to receive dividends. It is only any incremental return that AMP would generate that would provide a further benefit. Allocation of Special Value We have considered whether the existence of the above benefits to AMP ought to impact upon the value of Members' rights in the Building Society. Key factors considered include: · in ordinary circumstances an independent expert will not make direct reference to "special value". Rather, the benefits available to a purchaser will be taken into account via either: - the addition of a control premium to the assessed value of traded securities. This is generally expressed as a percentage of the value of the traded securities; or - the application of an earnings multiple based on observed transactions that implicitly include synergies and benefits to purchasers in the market place. Using either of these approaches, no significant component of the special value would attach to the rights of Members as: - we assess any underlying value of the rights to be nominal and therefore a percentage based control premium would also be nominal; and - as a consequence of the shareholder holding all dividend rights, they are in effect the only member entitled to a distribution of profits. Therefore, a valuation of those profits would attach predominantly to the shareholder rather than the Members. · normal valuation practice would require a valuer valuing multiple classes of securities to take into consideration the different rights of each class including, for example, voting rights, dividend rights and rights on a winding up, or factors affecting the marketability of securities; · most guidance dealing with "special value" relates to circumstances where special value is being allocated between different holders of the same class of security, with limited guidance as to how special value ought to be allocated between different classes of securities. We are not aware of any guidance as to how special value ought to be allocated between a class of securities and the rights of "members" who do not hold securities; · the legal guidance dealing with how "special value" should be allocated within a class indicates that special value should generally be allocated on a pro rata basis. The present situation involves an allocation between classes of members, each class having very different characteristics. An allocation based on the number of issued shares or voting rights would deliver substantially all of any special value to GIO Personal Investment. An allocation based on the number of members (with GIO Personal Investment being counted as one member) would deliver substantially all of the special value to the Members. In our view, the only appropriate way to determine an appropriate allocation of special value is to re examine the underlying nature of the rights attaching to the fixed shares in the Building Society, and compare these with the rights of the Members of the Building Society; · the very limited rights of Members as compared with the much more significant rights of the shareholder (summarised and discussed in Section 9 of this Report) again lead us to conclude that substantially all of any special value ought to reside with the holder of the fixed shares. In particular we note that the benefits referred to above will be expected to result in improved profitability of the Building Society and / or AMP Bank, depending upon the circumstances. As Members have no rights to receive dividends, and therefore no ability to share in profitability, the value of the benefits ought to reside with the holder of the fixed shares, who is entitled to receive profits by way of dividends. This result is also consistent with the relative benefits that the two classes of members have brought to the Building Society. In particular, GIO Personal Investment has in effect funded the Building Society and contributed 100 percent of the capital of the Building Society. Therefore, it bears virtually all of the risks and benefits of owning and operating the Building Society. This can be compared with the Members, who have very limited rights, who contributed no capital and whose liability on winding up is limited to $2 for each Member; and · for the reasons outlined previously, we remain of the view that the nature of Members' rights in the Building Society do not display the characteristics of assets of significant value. While we regard the value of Members' rights as being nominal in the ordinary course of events, the existence of the potential financial benefits to AMP provides AMP with an incentive to implement the Scheme and transfer the business of the Building Society to AMP Bank. It is for this reason that AMP has offered Members consideration (aggregating approximately $1.9 million) for the cancellation of the rights of Members which, under ordinary circumstances, we consider to be of only nominal value. Consideration of $1.9 million represents approximately 16 percent of the value of the benefits that may be able to be realised by AMP as a consequence of the Scheme. In our view, having regard to all of the circumstances, we consider this to be a reasonable allocation of the special benefits being offered for the cancellation of the rights. 1.5. Frustration or Nuisance Value As noted above, the existence of potential benefits for AMP in practice creates an element of "frustration" or "nuisance" value in that Members have the potential to frustrate initiatives of the Building Society or AMP Bank, including those intended to realise the benefits outlined above. This is why, in effect, AMP has offered consideration of $100 or $124.25, as applicable for rights that we assess to be of only nominal value. In reaching our conclusion not to attribute greater value to the rights of Members due to the ability of Members to frustrate the Scheme, we have considered the following key factors: · the Scheme will ultimately result in the elimination of a Building Society structure which is consistent with the rationalisation of the sector in general. This objective in our view makes sound commercial sense and the resulting cancellation of rights (which were only ever incidental to customer relationships) is very different to a situation where a majority shareholder, having acquired control, seeks to acquire the interests of minority shareholders; · Members rights are largely administrative and were obtained by the Members as a consequence of depositing funds or acquiring loans rather than having been purchased by them for consideration with the objective of making a profit. In many respects, any consideration for surrendering their membership rights represents a windfall gain for Members; · in effect, services to Members are being rolled over into AMP Bank, initially based on the current terms and conditions. In the highly competitive financial services sector Members have the opportunity to move to another financial institution if they so desire. Therefore, we are not aware of any reason to believe that Members may receive diminished service levels as a consequence of the Scheme; · in most corporate transactions there must be a benefit for both parties for them to transact. As the benefits to one of the parties are diminished through negotiation, the likelihood of a transaction being completed are progressively diminished until, particularly having regards to the time and effort and risk involved, the point at which it is unlikely that the transaction will occur; · GIO Personal Investment has provided 100 percent of the capital for the Building Society and in effect has assumed the risks of operation; · recent amendments to the Corporations Act 2001 (Cth) in the context of compulsory acquisitions have, in effect, been designed to deter attempts by minority shareholders from demanding a price for their security that is above a fair value (often referred to as greenmailing); · a successful attempt to frustrate the Scheme or similar proposals will most likely result in some current Members ceasing to be Members and not receiving any consideration. This will occur where, for example, a Member ceases to be a Member as a consequence of ceasing to hold a deposit or repaying a loan prior to the Scheme or any subsequent proposal involving the payment of consideration being effected; and · Members have the opportunity to vote in relation to the Scheme (GIO Personal Investment cannot vote). Therefore if sufficient Members oppose the Scheme, it will not proceed.

Appendix 2 Extract from Information Memorandum REASONS WHY YOU MAY CONSIDER VOTING AGAINST THE PROPOSAL AND DIRECTORS' RESPONSES TO THOSE REASONS Although the Directors recommend the Proposal and the Independent Expert has concluded that it is in the best interests of Members, the reasons why you may consider voting against the Proposal include those set out below.

You should also take into account the information set out on pages [] and [] relating to the future of the Building Society if the Proposal is not approved and implemented.

It is important for you to understand that even if you vote 'No', the Proposal will still apply to you if it is approved and implemented. If the Proposal is approved by the relevant majorities of Members, Personal Investment Services and the Court (and the consent of the Commonwealth Treasurer is obtained), you will cease to be a Member of the Building Society and the other elements of the Proposal will come into effect, even if you vote against it.

The Directors have carefully considered the perceived disadvantages of the Proposal and the concerns Members may have. The Directors believe that the advantages of the Proposal strongly outweigh the disadvantages. The Directors' response to each disadvantage is set out in italics after each disadvantage. The Proposal Payment is not large enoughYou may believe that you ought to receive a higher amount than $100 (or, in some cases, $124.25) if the Proposal is approved and implemented, for example, because: · you consider that the value of the Members' interests in the Building Society is greater than the nominal amount assessed by the Independent Expert due to the ability of Members to frustrate the Proposal and that no attempt has been made to estimate the maximum amount that Members would be able to extract from the AMP Group in return for their support of the Proposal; · you consider that the value of the Members' interests in the Building Society is greater than the nominal amount assessed by the Independent Expert because you believe that there is a real likelihood of receiving an amount on the winding up of the Building Society); · you consider that you should receive a higher proportion of the 'special value' accruing to the AMP Group than 16% (this figure is explained on page []) or that you should receive a share of all the benefits that the AMP Group may derive; or · you consider that the methodology adopted by the Independent Expert was otherwise defective.

A more detailed explanation of the latter three concerns is set out in following sections on pages [ to ]. Directors' response: The Directors believe that the Proposal Payment is fair and reasonable compensation for the cancellation of the membership interests of Proposal Members (see the Message and Recommendation from Directors on pages to ). Although Members are able to frustrate the Proposal and potentially prevent the AMP Group from realising some of the benefits of merging the business of the Building Society with the business of AMP Banking, there is no reason to believe that the AMP Group is prepared to offer any more than the Proposal Payment. Practically, it is not open to Members, collectively, to negotiate for an increased payment; the only choice available to Members is whether or not to approve the Proposal and receive the Proposal Payment. If they reject the Proposal, there is no suggestion that a better offer will be made and there is no guarantee that a similar proposal would be submitted to Members at any later time. Further detailed responses are given in the following three sections. You believe that you would receive more if the Building Society were wound upIf the Proposal is not approved by Members, Personal Investment Services or the Court, your rights as a Member would remain the same and you would have the opportunity to share equally in any surplus (and perhaps receive more than the Proposal Payment) if the Building Society is wound up. As at 31 December 2000, the amount of net assets (the amount by which total assets exceeded total liabilities) of the Building Society was $36.346 million. This amount represents the value of Personal Investment Services' investment in the Building Society.

The amount of net assets is only an approximate measure of the amount of surplus that might be available if the Building Society were wound up. For example, in a winding up, the value the Building Society would receive for its assets will depend on market conditions at the time. They might be sold for more or less than the value of those assets in the Building Society's accounts. Also, the net assets would be reduced by the costs of the asset sales and of the winding-up.

However, if current net assets are used as a rough estimate for surplus in a winding up, then if the Building Society was wound up at 31 December 2000, (under its present Constitution), each Member would receive approximately $2,100. (As at 28 February 2001, there were [17,596] Proposal Members.)

Members may enquire whether there currently exist grounds for the Directors, acting in the best interests of all members (including Personal Investment Services), to cause the affairs of the Building Society to be wound up. In particular, the possibility that in the medium to long term the Building Society may not be able to maintain a competitive position in the market place (as discussed on pages [] and []) suggests that it would be better for the Directors to cause the Building Society to be wound up promptly so that Members receive the highest possible return on the winding up. Directors' response: Although the figure of $2,100 seems attractive, Members should be aware that Personal Investment Services, as holder of the Fixed Shares, is able to prevent any voluntary winding up, by exercising the votes attached to the Fixed Shares. Personal Investment Services has advised the Directors that it is extremely unlikely that it would ever vote, and has no current intention of voting, in favour of a winding up that resulted in it recovering anything less than the value of its investment in the Building Society.

Members should also be aware that Personal Investment Services, as holder of the Fixed Shares, has the sole right to receive dividends. Thus, while the Building Society is a going concern, any distribution of profits or surplus will go to Personal Investment Services and not to other Members.

In any case, the Directors believe, for the reasons set out below, that there is no real likelihood of the Building Society entering into winding up in the foreseeable future for any other reason.

The Building Society is solvent, intends to continue to trade if the Proposal is not approved and will continue to meet its regulatory requirements and obligations. In this respect, the Directors note:

· the financial position of the Building Society as set out in the audited accounts of the Building Society as at 31 December 2000 (see the Overview of the Building Society's Financial Position on pages [] to []) which show an excess of assets over liabilities of approximately $36.346 million. In preparing the financial statements, the Directors formed the view that the financial statements (and related notes) gave a true and fair view of the Building Society's financial position for the financial year ended 31 December 2000;

· on 19 February 2001, AMP Group Holdings Limited gave an undertaking to the Directors that it will provide funding support to the Building Society in the event it is unable to raise funds to meet its financial obligations over the ensuing period of 12 months. Given the substantial excess of the assets of the Building Society over its liabilities, the practical effect of this undertaking is to assist the Directors to form the view that the Building Society will be able to satisfy liabilities that fall due in that period, even though assets of the Building Society may not be able to be liquidated readily at the times the liabilities fall due - for example, because the duration of loans exceeds the period for which deposits were made;

· the Directors believe that it is reasonable to assume that AMP Group Holdings Limited will extend the term of this undertaking if the Building Society's assets continue substantially to exceed its liabilities (including any interest charged on funding support). Even if, contrary to the economic interests of the AMP Group, AMP Group Holdings Limited is not prepared to extend the term of the undertaking and it is impossible to arrange alternative funding, the Directors believe that, because the assets of the Building Society exceed its liabilities, it would be feasible to sell some or all of the business or assets of the Building Society within a reasonable period (prior to expiration of the undertaking) so that there are sufficient funds for the Building Society to satisfy all its financial obligations. Possible other outcomes are referred to in more detail on pages [ and ];

· the undertaking referred to above includes a requirement that AMP Group Holdings Limited ensure that the Building Society is able to meet APRA's solvency and liquidity requirements over the ensuing 12 months; and

· the Directors are not aware of any fact, matter or circumstances which might cause them reasonably to suspect that the Building Society is unable to pay all of its debts as and when they become due and payable, or that this state of affairs might exist at any time in the foreseeable future. Even if, contrary to the Directors' expectations, the Building Society is, in the future, wound up because it becomes insolvent, the return to Members may be substantially less than $2100. If liabilities exceed assets at that time, the return would be nil. It is possible for the Building Society to be wound up by an order of the Court, on the application of a member, on the basis that it is just and equitable that the Building Society be wound up. Essentially, such an order would only be made where the Court concluded that the Building Society's affairs were being conducted in an oppressive and unfair manner. The Directors believe that there is very little chance of any such order ever being made, and note that it would be reasonable to expect that Personal Investment Services will not undertake any actions that may be regarded as oppressive or unfair having regard to the significant capital loss that may result in the event that the Court ordered a winding up of the Building Society on this basis.

The view that there currently exist grounds for the Directors, acting in the best interests of all members (including Personal Investment Services), to cause the affairs of the Building Society to be wound up promptly, is not correct. As discussed above, Personal Investment Services, as holder of the Fixed Shares, is the only member with a right to receive dividends and, assuming that the Building Society remains solvent, the only member entitled to the retained profits of the Building Society. The whole of the net assets of the Building Society which exceed its share capital (that is, as at 31 December 2000, $36.346 million less $28 million) represents retained profits. Until there is actual evidence that Members interests would be prejudiced, there is no reason for the Directors to cause the Building Society to be wound up.

Indeed, the Directors consider it would be oppressive and unfair to Personal Investment Services to wind up the affairs of the Building Society. This is because the result of that course of action would be that Personal Investment Services would get an equal return with other Members based on the current net assets of the Building Society, even though it has invested the whole of the $28 million share capital of the Building Society and is effectively entitled to the profits of the Building Society (at least while the Building Society continues to trade). In this regard, the Directors note that the risks of operating the Building Society have been borne almost entirely by Personal Investment Services.

It is also possible that APRA could seek to wind up the Building Society pursuant to its powers under the Banking Act 1959 (Commonwealth). Such an application would, however, be based upon the Building Society being insolvent. A creditor can also apply to the Court for an order that the Building Society be wound up on the same ground under the Corporations Act 2001 (Commonwealth). The Directors believe that there is very little chance of any such order ever being made, for the reasons outlined above. You believe that you should receive a larger share of the 'special value' accruing to the AMP GroupProposal Members may consider that, having regard to the 'special value' which will accrue to the AMP Group if the Proposal is approved and implemented, the amount of the Proposal Payment should be higher. The concept of special value refers to the particular value which property may have to a specific purchaser and, in the context of the Proposal, refers to the value of the benefits which would accrue to the AMP Group from integration of the business of the Building Society with AMP Banking and which would not otherwise be realisable.

The Independent Expert has concluded that the estimated value of the net benefits from the implementation of the Scheme and the full integration of the business of the Building Society with AMP Banking is in the order of $26 million. Various cost savings are, however, able to be realised at present or through shared service arrangements without integration of the business. The estimated value of the net benefits which can be realised only through full integration of the business of the Building Society with AMP Banking is in the order of $12 million (see pages [5757 and 5858#]). The Independent Expert has calculated that the aggregate payment of approximately $1.9 million under the Proposal (to be divided among Proposal Members, of whom there were approximately [17,596] at 28 February 2001) will represent approximately 16% of the amount of $12 million (see page [6060#]). In this context, Proposal Members may consider that they should receive a greater proportion of the 'special value' amount. Support for this view might be found in judicial statements made in the context of selective reductions of capital that a pro rata allocation between majority and minority shareholders of any special value or benefits accruing to the acquirer arising from 100% ownership would ordinarily be fair and reasonable in the absence of special circumstances. For this reason, Proposal Members may disagree with the Independent Expert's conclusion on page [5959#] that special value should be allocated by reference to the underlying nature of the rights attaching to the Fixed Shares when compared with the rights of Members. In addition, although the Independent Expert has formed the view that the aggregate payment to Proposal Members of approximately $1.9 million is a reasonable allocation of the special value (see page [6060#]), the Independent Expert has indicated that it is not aware of any guidance as to how special value ought to be allocated between a class of securities (namely, the Fixed Shares held by Personal Investment Services) and the rights of members who do not hold securities (namely, Members) - see page [5959#]. It is possible that other valuers would form an assessment different from that of the Independent Expert. Proposal Members may also consider that they should receive a proportion of the amount of $26 million referred to above rather than a proportion of $12 million. Directors' response: There is no justification for Members to form the view that they should receive a proportion higher than 16% of the net benefits which the AMP Group may derive from implementation of the Scheme and transfer of the business of the Building Society to AMP Banking. This is because the Directors believe, and the Independent Expert concludes (see page [5959#]), that substantially all of the special value ought to reside with Personal Investment Services, as holder of the Fixed Shares (carrying more than 99.96% of the current voting entitlements in the Building Society) and contributor of all the Building Society's share capital. Judicial statements in favour of pro rata allocation of special value do not appear to apply where members hold different rights. Thus, there is no justification for allocating more than a minimal amount of the special value to Members. The Court on the application to convene the Scheme Meetings neither agreed nor disagreed with this proposition. The Proposal Payment is not primarily intended to represent an allocation of special value. Instead, it is believed by the Directors to be appropriate compensation for the membership rights of Members and is primarily intended to act as an incentive to Members to vote in favour of the Proposal. There is no justification for Members to form the view that they should receive a proportion of all (as distinct from part) of the net benefits which the Independent Expert considers that the AMP Group may derive from implementation of the Scheme and the full integration of the Building Society with AMP Banking ($26 million - see page [5757#]. This is because the Building Society and the AMP Group are either already able to realise some of these benefits or can do so by shared services arrangements. The Directors believe that the assessment of the benefits which could be achieved without full integration is fairly set out in that portion of the Independent Experts' Report that appears at pages [57 to 58#], particularly subparagraphs (ii) to (v) inclusive of paragraph 1.4. To the extent that the benefits would accrue to the Building Society, this would result in increased profitability for the Building Society and thus the potential of greater dividends (which will benefit Personal Investment Services as holder of the Fixed Shares). The Methodology adopted by the Independent Expert was defectiveProposal Members may consider that the methodology adopted by the Independent Expert to value the membership interests was defective.

The Independent Expert has stated (see page [5555#]) that there is no objective and reliable methodology to value the rights of Members, and that a valuer must form a commercial view in all of the known circumstances having regard to the characteristics of the rights. It is possible that other valuers would form an assessment different from that of the Independent Expert. Directors' response: The Directors acknowledge that another valuer may value the rights of Members differently to the Independent Expert, but they have no reason to believe that any other valuer would value the membership interests in an amount greater than the Proposal Payment. In this respect, the Directors note that the inclusion of the Independent Expert's Report is a result of a requirement of the Corporations Regulations that the explanatory statement contained in this Information Memorandum must be accompanied by a report of an expert who is not associated with Personal Investment Services. This provision is intended to provide Members with independent guidance as to whether the Proposal is in the best interests of Members. As far as the Directors are aware, the Independent Expert has formed its own views as to the value of membership interests and has not been influenced in that regard by Personal Investment Services or the Building Society. Members will lose their membership interest in the Building SocietyIf the Scheme is approved and implemented, all of the Building Society's Members (other than Personal Investment Services) will cease to be members of the Building Society and will lose all of their rights as Members. This means that Members will only be customers of the Building Society (then, later, of AMP Banking) in their capacity as a depositors with, and or borrowers from, the Building Society.

Members (other than Personal Investment Services) will no longer have the following rights:

· the right to attend and vote at meetings of Members of the Building Society including the right to vote on the election of Directors (if they are depositors who hold a Qualifying Interest) but casting collectively less than 0.04% of the votes which can be ca st at a general meeting of the Building Society; and · the right to share equally in any surplus if and when the Building Society is wound up.

Members who become members of the Building Society after 14 November 2000 may have to pay up to $2 to the Building Society in the event that the Building Society is wound up and is unable to meet its liabilities at that time.

Last Modified: 09/04/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.