FORECASTS FOR THE COMBINED ENTITY
GIO's complaints under this head in the pleading may be summarised as follows:
(1) The Part A Statement provides no financial forecasts on the assumption that the takeover is successful. In other words, there is no forecast relating to the "combined entity".
(2) The Part A Statement made three specific statements about a combined entity but does not set out the assumptions on which any of them is based. The three statements relate to:
(a) Annual savings of approximately $70 million which may be achieved by eliminating duplication in the operational businesses at head office functions of AMP and GIO.
(b) Restructuring costs of approximately $65 million expected to be incurred in achieving those cost savings.
(c) Positive earnings per share for AMP in the second year.
(3) The failure to quantify the extent to which earnings per share are expected to be positive is said to be a material omission.
GIO contended that the omission from the Part A Statement of a forecast for the combined entity, where that information was available to and acted upon by the Board of AMP, was an omission of information "material to the making of a decision by an offeree whether or not to accept".
In the Part A Statement, AMPII gives three reasons for inability to provide a combined entity forecast as follows:
· "Because GIO has not publicly released a financial forecast";
· "Because of uncertainty as to GIO's prospects following its recent announcements to the ASX about its results for fiscal year 1998"; and
· "The uncertainty of GIO's underwriting margins for its inwards re-insurance business".
GIO contended that those reasons were not credible. First, AMP, being engaged in the same industry as GIO, ought to know a great deal about GIO which would be unknown to the general investing public. Secondly, uncertainty of prospects following GIO's announcement of its loss for the fiscal year 1998 should not be regarded as a relevant factor because an internal memorandum of AMP indicated that AMP had anticipated and factored into its combined entity valuation of 23 July 1998 the very losses which GIO announced in September. Finally, the AMP Part A Statement indicates that AMP had formulated intentions in relation to GIO which include the likely disposal of GIO's re-insurance business following successful completion of the offers.
I do not consider that those considerations lead to a conclusion that the reasons advanced by AMPII should not be taken at face value. Section 1022 requires disclosure of information which would enable an informed assessment of "prospects". In Pancontinental Mining Industries v Goldfields Limited (1995) 16 ACSR 463 Tamberlin J said:
"My conclusion on this aspect of the statement is that a DCF analysis in the present case is not required, but that an earnings forecast for a two year period at least is a material matter which should be included in the Part A statement in the present case....This is not to say that such information is essential under s 750 in every case as a matter of law. What is material in a takeover scheme is a matter for judgment and assessment in the light of all the evidence, facts and circumstances in each particular takeover context and this will necessarily differ from case to case. Differing circumstances can include, for example, matters such as relevant public information available, material already disclosed by the offeror, the activities of the target company and the location of those activities; and the probable knowledge or awareness of the shareholders in the target company as to particular subject matters."
Those observations do not indicate that a financial forecast should always be provided. Clearly enough, whether it is required will depend upon all of the relevant circumstances.
Evidence was called on behalf of both GIO and the respondents as to whether investors and their professional advisers would reasonably require and reasonably expect to find combined entity forecasts in the Part A Statement. I did not find helpful evidence as to what such witnesses considered should be provided in this case.
Forecasting, by its very nature, is prone to error. On the other hand, so long as a forecast is accompanied by appropriate caveats and details of underlying assumptions, a forecast will nevertheless be of greater assistance than no forecast at all. If an offeror has a reasonable basis for giving a combined entity forecast, such a forecast ought to be given. That last proposition is not seriously in dispute and was confirmed, in effect, by Mr William Beerworth, who gave expert evidence at the instigation of the respondents. The real question is whether AMPII had a reasonable basis for publishing a combined entity forecast.
A detailed forecast for the combined entity was put before the Board of AMP at its meeting of 24 August 1998. That forecast was considered sufficiently reliable by the Board for it to be used as the basis for the decision to approve the takeover offer. A presentation was made to the Board at that meeting (exhibit 13A). The accounting model used to prepare the presentation included detailed combined equity projections up to and including the year 2001. The "base case scenario" contained in the presentation to the Board showed estimated earnings per share and return on equity figures for each of the years 1999, 2000 and 2001 for the combined entity.
Mr Scott considered that the projections were based on the best available information and that the calculation of earnings was capable of being relied on. He also considered that the figures for estimated earnings per share were reasonably based and able to be relied on by the Board for the purposes of making its investment decision. He was satisfied that each element in the base case analysis was carefully prepared, was based on public and private information available to AMP and was relied on by AMP's senior management and its Board of Directors for the purposes of making the decision to make the takeover offers.
The investment decision made by the Board of AMP was one of considerable significance involving, as it did, commitment of something in the order of $3 billion of shareholders' funds. There is nothing in the evidence to suggest that the directors of AMP were acting otherwise than in accordance with the onerous duties which they owe to AMP in deciding to proceed with the takeover offers. In other words, there is no reason to conclude that the information upon which the decision was based was not of sufficient reliability for that purpose. That, however, is not the end of the matter.
I am not persuaded by the evidence before me that the combined entity forecasts, coupled with appropriate qualifications and statement underlying assumptions, would be misleading. In other words, so long as the appropriate qualifications and underlying assumptions were stated, I do not consider that publication of a combined entity forecast based on the information available to the AMP board would have been misleading or deceptive or likely to mislead or deceive GIO shareholders.
The AMP board was prepared to countenance disclosure of some information concerning the combined entity. Thus, the Part A Statement makes the following statements:
(a) "The board of AMP currently believe that annual pre-tax savings of approximately $70 million may be achieved by eliminating duplication in the operational businesses and head office functions of AMP and GIO";
(b) "In achieving these costs savings, AMP expects to incur restructuring costs of $65 million";and
(c) "In its press release of 25 August 1998, AMP stated that it expects the acquisition of GIO to be earnings per share positive for the company in the second year".
Those observations indicate that the Board had sufficient faith in the information before it to disclose that aspect of the projections and forecasts to be derived from the accounting model of the combined entity. In other words, the AMP Board had sufficient confidence in the reliability of that information that it was prepared to make some prediction about the combined entity.
The respondents placed some reliance on ASIC Practice Note 67. The Practice Note expresses the view that directors should not include a forecast without a reasonable basis, even if they have used estimates of future performance for internal planning purposes. A forecast that does not have a reasonable basis would be immaterial to investors and investors would not reasonably require or reasonably expect to find in a prospectus a forecast which did not have a reasonable basis. The mere fact that information has been relied on by management for the purposes of making an investment decision does not render the information sufficiently reliable for it to be disclosed to prospective investors.
AMP had received a report from Ernst & Young (page 1470) which included the following statement:
"As a result of the above we do not have available to us sufficient information to provide a report on a financial forecast for GIO for the year ending 31 December 1998 that would permit us to deliver an opinion within the meaning AUS804 'The Audit of Prospective Financial Information'. We therefore agree with the sentiment expressed in the Part A Statement that the Board of AMP is not able to provide a meaningful and reliable financial forecast with respect to GIO or pro forma financial forecast for the combined entity."
That report was the basis for the reason expressed in the AMP Part A Statement for not providing a combined entity forecast. The AMP Part A Statement contains the following:
"The Board of AMP has determined that it is not able to provide meaningful and reliable forecast financial information with respect to GIO or pro forma forecast financial information for the combined entity in this Part A Statement."
The fact that Ernst & Young did not consider that they had available to them sufficient information to provide a report on the financial forecast for GIO would not be decisive as to whether AMPII should provide a combined entity forecast in the AMP Part A Statement.
Mr Scott said that the Due Diligence Committee considered Mr Siviour's report as to whether combined entity forecasts should be included. He rejected the proposition that senior executives decided early in August they would not include a combined entity forecast and then sought Mr Siviour's opinion about the difficulty, if restricted to publicly available information, in providing such a forecast. Mr Scott also rejected the suggestion that AMP had decided not to include a combined entity forecast and sought an opinion from Mr Siviour as justification for that decision. Mr Siviour also rejected the proposition that at the outset there was a decision made that no combined entity forecast would be provided and that Ernst & Young were subsequently asked to provide an opinion to justify that position.
Mr Siviour carried out a review of publicly available information concerning GIO. A document entitled "Summary of Information available on GIO" prepared by Mr Siviour was available to the Due Diligence Committee. That information did not include a financial forecast of any description. No analysts' report published relating to GIO between February 1998 and 14 August 1998 provided any detailed profit and loss forecasts or any breakdown of prospective financial information for separate business units.
Analysts' reports issued between February 1998 and August 1998 projected GIO's profitability for the year ended 30 June 1998 at ranges between $159 million and $181 million yet on 14 August 1998, GIO announced a loss of $27 million for the year. That announcement was unexpected by the investment community, including sophisticated research analysts. Analysts' projections of profits at ranges between $193 million and $211 million for the year ending 30 June 1999 might therefore be regarded as suspect.
The respondents rejected GIO's contention that the accounting model indicated that AMP had a reasonable basis for making a forecast of earnings for the combined entity. Mr Scott said that the accounting model was varied from time to time by changing the assumptions on which it was prepared as AMP management evaluated various acquisition structures, financing and synergy scenarios. The model incorporated projections of AMP's profits for the year ending 31 December 1999 derived from preliminary strategic plan projections which did not represent approved management budgets or forecasts and which had not been reviewed nor approved by the Board of AMP.
The figure for GIO's projected profits in the model was derived from analysts' estimates of GIO's likely financial results for the year ending 31 December 1998 and was reduced following the announcement of GIO's loss for the year ended 30 June 1998. While Mr Scott acknowledged that the assumptions underlying the model were realistic for the purposes of management and board decision making, he considered that the assumptions involved significant uncertainties.
When asked whether anything had occurred to suggest that the trend for GIO profits included in the model was unrealistic, Mr Scott pointed to the announcement of GIO's unexpected loss. He said that there are significant uncertainties in the information available for decision making purposes for management. He referred to variability in investment earnings, claims experience and other factors affecting insurance companies. Even if management of AMP has anticipated losses by GIO, that does not render any more reliable, the speculation which must, of necessity, be involved in estimating GIO's profits for the future.
Whether an offeror should publish a combined entity forecast in circumstances where section 1022 would be applicable is a matter of judgment. The purpose of disclosing information is to enable prospective investors to make a judgment about the prospects of the company whose shares they are being invited to take.
GIO contended that a prejudgment had been made that a combined entity forecast would not be provided and that steps were then undertaken to justify such a stance. Even if such a prejudgment had been made, if it was made in the proper exercise of a judgment as to the reliability of the materials available, it ought not to be criticised. That is to say, in so far as the decision to publish a combined entity forecast, based on the information available to senior management and the Board of AMP, is a matter of judgment, there is a range within which reasonable minds may differ but within which range both publication and non-publication can be justified.
There was no evidence to indicate that AMP sought to withhold information which might dissuade GIO shareholders from accepting the offer or from accepting the AMP share alternative. In so far as the information available to the Board of AMP was such as to induce it to approve the takeover offer, it might be thought that it would also be such as would induce shareholders of GIO to elect to accept the AMP share alternative consideration. If those responsible for the finalisation of the form of the AMP Part A Statement, whether or not it was the Board as a board, exercised judgment as to whether or not they were satisfied that the public information concerning GIO was sufficiently reliable to justify including a forecast of the profits for the combined entity, I am not persuaded by the evidence that that judgment was made wrongly.
As Tamberlin J observed in Pancontinental Mining Limited v Goldfields Limited (at 475) what is material in the takeover scheme is a matter for judgment and assessment in the light of all the evidence, facts and circumstances in each particular takeover context which will necessarily differ from case to case. The volatility of the equity markets was a justifiable and significant consideration for confirming the view that the published information was not sufficiently reliable. I do not consider that there was a failure to comply with Part A of section 750 by reason only of the omission of a combined entity forecast.
GIO contended, in addition, that the AMP Part A Statement was deficient in failing to disclose adequately the assumptions and calculations which led to the limited forecast concerning pre tax savings, restructuring costs and earnings per share. I do not consider that there is any inadequacy in relation to the first two matters. From one point of view, the disclosure of savings and the cost of achieving those savings is of no materiality except as a calculation made in determining projections or forecasts for the combined entity in the future. I do not consider that the furnishing of the assumptions or calculations which underlay the estimate of pre tax savings of approximately $70 million per annum and the restructuring costs of $65 million needed to be incurred to achieve those savings would assist GIO shareholders in deciding whether or not to accept the offers to be made by AMPII.
The statement of expectation concerning earnings per share is in a slightly different category. However, it is important to have regard to the whole of the relevant statement and its context in the AMP Part A Statement. First, there is a reference to the effect of a press release which had been made by AMP. The AMP Part A Statement goes on to indicate the basis upon which AMP formed its expectation concerning earnings per share and refers to what would have been, on a pro forma basis, the earnings per share of the combined entity for the year ended 31 December 1997. It then says that, on an historical pro forma basis, the acquisition of GIO would be earnings per share positive.
The AMP Part A Statement contains pro forma restated consolidated financial information for AMP and GIO groups. AMPII then goes on to say that the objective of AMP in entering into the transaction is so that over a long term it should generate sufficient earnings consistent with the historical pro forma analysis to achieve increases in the earnings per share of the combined entity. The following statement then appears:
"In the second year following the acquisition, without the impact of these restructuring costs, the Board of AMP believes the contribution of GIO to be earnings per share positive based on the historical pro forma analysis outlined above."`
Thus, shareholders of GIO are left in no doubt as to the basis upon which the statement about earnings per share being positive is made. The AMP Part A Statement makes clear that the observations in relation to synergy benefits and earnings per share are based on AMP's judgment with respect to GIO and not on any specific piece of information concerning GIO. It then says:
"It should be noted that the above observations are not based on the preparation of a financial forecast that would meet the criteria of reliability that would permit AMP to release such information publicly."
I have already said that I do not consider the evidence justifies a conclusion that those responsible, whether the Board of AMP or others, made an erroneous judgment in concluding that AMP had no information which was reliable enough to provide a forecast for the combined entity. In the circumstances, I do not consider that the criticism of the AMP Part A Statement relating to earnings per share and synergy benefits has substance.
FOREIGN EXCHANGE HEDGING
The AMP Part A Statement contains the following statement:
"Exchange rate fluctuations during 1998 are not expected to materially impact the reported result due to AMP's hedging policy and current hedging arrangements. This results from AMP's hedging policy to hedge a median of 50% within a band of 30% to 70% of both of the expected UK earnings for a rolling three year period and the gross value of AMP's UK business, back into Australian dollars."
GIO contended that the disclosure in the AMP Part A Statement of AMP's hedging policy and current hedging arrangements is misleading and contains material omissions. The contention was that the description of the policy does not disclose how the policy is carried into effect and what assets are thereby hedged. In addition, GIO contended that, as at the date of the AMP Part A Statement, AMP knew that substantial losses had been incurred and expected that further losses would be incurred in the period to 31 December 1998 after taking account of the hedging policy. In those circumstances, it was said that the AMP Part A Statement is misleading or is likely to mislead.
Various references were made in internal AMP documents to the consequences of fluctuations in the exchange rate between the Australian dollar and the United Kingdom pound since the date of the Prospectus Forecast. Appendix VI also contains an analysis of the sensitivity of the Prospectus Forecast to changes in the exchange rate between the Australian and United Kingdom currencies. The AMP Part A Statement stated that those sensitivities are "materially correct" subject to the "amendment" that "the full implementation of the hedging policy in respect of UK earnings and assets was put in place following the date of the prospectus" with the result that the "impact on the prospectus forecast range of a 5% increase in the average pounds/A$ exchange rate is estimated to be A$(4) million compared to the prospectus forecast sensitivity of A$(13) million".
However, there is no indication in the AMP Part A Statement of the consequences of the fluctuation in that exchange rate which had occurred between the date of the Prospectus and the date of the AMP Part A Statement. GIO contended that various internal AMP documents disclosed that a net loss from hedging operations during 1998 in the vicinity of $72 million, or in the range $65 million to $74 million depending on the assumptions which are made, was expected. Other documents suggest that the loss may be in the range $24 million to $45 million, depending on the assumptions which are made, after translation gains are taken into account. GIO contended that both were material and should have been disclosed.
In a report by Ernst & Young to AMP dated 15 September 1998, a figure of $72 million is included as a forecast of foreign exchange losses, after hedging. However, Mr Siviour rejected the proposition that the forecast figure of $72 million represented the net impact on AMP's profit and loss account. He said that the figure of $72 million did not take into account translation gains which accrued to AMP as a result of exchange rate fluctuations. Mr Siviour said that the translation gains would have an impact of approximately $48 million on AMP's forecast earnings. While he accepted that losses of $72 million would be material, he believed that the $48 million translation gains affected the materiality of the hedge loss and reduced the net impact of the foreign exchange and hedging adjustment to a figure of approximately $24 million after tax. He said that he did not regard that figure as material.
Mr Scott, when asked questions to a similar effect, also said that hedge costs could not be looked at in isolation and that translation gains had to be set off against hedge costs to arrive at an appropriate figure for exchange effects. He said that it was the overall exchange effect which had to be considered in order to determine materiality. He was of the view that the effect would not be material.
Quite apart from the Ernst & Young report, the monthly report tabled at the AMP Board meeting on 24 August 1998 (exhibit 11A page 9) indicated that the overall foreign exchange loss for the year would be in the vicinity of $35 million to $45 million. GIO contended that those figures were material and should have been disclosed.
The overall effect of the evidence on this question was confused and unclear. The materiality of an item in the range $35 million to $45 million in a projected profit in the range $774 million to $977 million is equivocal. The AASB standard indicates that an item in excess of 10% is material while an item below 5% is immaterial. An item in the range 5% to 10% may or may not be material depending on the circumstances. In the light of the evidence of Messrs Scott and Siviour, I am not persuaded, on the balance of probabilities, that the likely effect of exchange rate fluctuations during 1998 on the profit of AMP for the year ending 31 December 1998 is of such materiality as to require any further disclosure than is contained in the AMP Part A Statement.
The alternative contention on behalf of GIO was that, having regard to the selective nature of AMP's hedging policy, the particular assets which are the subject of hedging arrangements should be disclosed. The Ernst & Young report said that the Prospectus Forecast "assumed that the assets and earnings were perfectly hedged and therefore the actual gains and losses would offset the hedge gains and losses". However, internal AMP documents indicated that, whereas certain assets and the income from those assets were hedged as to 100%, other assets were hedged to a significantly lesser extent. The passage set out above as to the overall effect of the hedging policy is strictly correct. GIO contended, however, that the proportion of particular assets hedged and details of the particular assets hedged are relevant to assumptions underlying AMP's profit forecast. In the light of the conclusion which I have reached concerning immateriality of the consequences of projected exchange rate fluctuation, I do not consider it material for prospective investors in AMP to be furnished with particulars of the assets which are hedged and the assets which are unhedged and how the hedge is achieved.
GIO also contended that the passage set out above is misleading in so far as it suggests that AMP's hedging policy and current hedging arrangements have the result that exchange rate fluctuations will not impact materially on AMP's results. To suggest that AMP's hedging arrangements might avoid losses is wrong, as I understand the position. That is because, on the material available to AMP in September 1998, AMP's hedging policy and current hedging arrangements were, as a matter of best estimate, expected to produce a not insignificant full year loss.
To that extent, the passage is misleading. In so far as it was considered that the effect of foreign exchange fluctuations on AMP's position was sufficiently material to warrant mention in the AMP Part A Statement, it was misleading to indicate that the hedging arrangements have had a beneficial effect. They may serve to limit adverse consequences of fluctuations in some circumstances. However, in the present circumstances of AMP, the arrangements have had a deleterious effect, although at this stage not a material effect.
SPECIFIC NON DISCLOSURE ISSUES
GIO also complained about several specific matters in respect of which it was said that the AMP Part A Statement failed to provide appropriate information. I shall deal with each separately.
Index Weighting
The Part A Statement contains the following:
"The price of AMP shares on the ASX and NZSE will change frequently in response to AMP's financial performance and many other facts, including changes in economic and investment market conditions.
On 1 August 1998, AMP was weighted to the extent of 25% in the relevant indices of the ASX. This weighting will be increased to 50% as at 1 October 1998 and 100% with effect from 1 January 1999. It is possible that, until AMP achieves a 100% weighting, this may impact on demand for AMP shares."
The final sentence of that passage appears to have been changed at the last moment after the "in principle sign-offs" by directors. In the draft of 3 September 1998, the final sentence was as follows:
"It is possible that, until AMP achieves a 100% weighting, AMP shares may trade at values higher than could otherwise be expected."
GIO contended that the deleted sentence reflected more accurately the likely effect of achieving 100% weighting.
Weighting relates to the All Ordinaries Index published by ASX. Following the listing of shares in AMP for quotation by ASX, ASX determined that AMP shares should be taken into account in the determination of the All Ordinaries Index. However, because of the magnitude of the capitalisation of AMP, ASX determined to introduce AMP's share price into the index by stages. GIO contended that a likely effect of that progressive weighting process of AMP shares in the index is to cause an increase in share price of AMP shares prior to inclusion followed by a drop in share price shortly after each increase in the weighting.
Both GIO and the respondents adduced expert evidence from economic analysts as to the possible consequences on AMP's share price of the progressive weighting. None of the evidence was dogmatic and the opinions were expressed with some diffidence. Professor Gray concluded:
"It is more probable than not that the share price of AMP is affected by a liquidity premium which arises from its proposed inclusion in the All Ordinaries Index."
Professor Swan expressed the following opinion:
"In the light of limited evidence and the US experience relating to S&P 500 Index inclusion it is difficult to refute the views of GIO and many brokers that demand by institutional investors will have temporarily boosted the demand for AMP shares until a period after complete inclusion of AMP in the All Ordinaries Index on January 1 1999."
Professor Aitken, however, said:
"There is no empirical basis for the arguments put forward by GIO… that AMP's share prices inflated and will remain so until it finally achieves 100% weighting in the All Ordinaries Index."
Professor Aitken acknowledged that he may have misconstrued certain of the materials which he examined in reaching that opinion.
I consider, on balance, that it is more probable than not that progressive increase in the weighting given to AMP's share price for the purposes of the indices has some inflationary effect on the share price. However, it is impossible to quantify that effect and it is quite unclear at what point that effect might be apparent. That is to say, it is by no means certain that the price at the present time is affected by the prospect of progressive weighting.
In any event, I consider that the statement in the Part A Statement referred to above fairly discloses that possibility. A reference to the possibility that the increase in weighting "may impact on the demand for AMP shares" signifies clearly enough the possibility that there may be an increase in demand. It certainly does not suggest the possibility of a decrease in demand. Any increase in demand would only have an upward effect on price, if any effect at all. In the circumstances, I do not consider that there is anything misleading or that there is any relevant omission in relation to the passage in question.
Other Synergy Benefits
GIO contended that the AMP Part A Statement discussion of synergy benefits to be realised through a takeover of GIO is deficient and omits material matters. The synergy benefits accruing to the combined entity are discussed in section 3.4.4 at pages 70 to 71 of the AMP Part A statement, set out in Schedule 2. The basis upon which AMP assessed those synergy benefits is also set out in the AMP Part A Statement at page 72 in Schedule 2.
The working papers relating to the presentation made to the Board on 24 August 1998 disclose that AMP had extensive information about synergistic benefits which might be generated as a result of the proposed takeover. That information was not disclosed to GIO shareholders. Mr Scott confirmed that the synergy information presented to the Board was based on detailed work which had been done by his team, including a final synergy model. He also agreed that the work was as careful and reliable as his team could make it.
In Re Primac Holdings Limited (1996) 22 ACSR 212, Dowsett J (at 224) said:
"As to the assertion that IAMAQ is not in a position to quantify the likely benefits from, "the operational synergies and opportunities to eliminate duplication and improved efficiencies which may occur following the acquisition", it is difficult to believe that no work has been done in this respect. One would have expected a commercial undertaking such as IAMAQ to have identified with some precision the likely advantages and disadvantages inherent in the proposed acquisition. These matters are a significant part of those advantages. It seems most unlikely that the directors of IAMAQ have decided to acquire Primac on the basis that they will discover the advantages of so doing after the acquisition. It may be that IAMAQ is not presently able to give a detailed quantification of such benefits, but it would be appropriate to give the Primac shareholders the benefit of such knowledge as has been derived to date. Section 1022AA requires as much." (Emphasis supplied).
However, the fact that AMP has material upon which it is prepared to base its decision to invest in GIO does not necessarily lead to the conclusion that that information is appropriate for disclosure. As I have indicated above, it is a matter of judgment. I am not persuaded that the need for such information is such that it outweighs the disadvantages of disclosure of information which, to a considerable degree, must be based on speculation in so far as it relates to the operations of GIO.
Acquisition Strategy
GIO contended that the AMP Part A Statement omits material matters relating to the detailed direction and timing of the AMP's key acquisition strategy or the basic nature of any acquisition proposed.
AMP's acquisition strategy is set out in the AMP Part A Statement as follows:
"Deploy surplus capital for expansion
AMP has a large amount of surplus capital and also has the capacity to borrow significant amounts of funds. It is investigating opportunities to increase the return on its surplus capital by making one or more large scale international acquisitions. AMP intends to consolidate its presence in Australia and New Zealand, build its presence in the UK and to seek to enter the market in the United States and Europe. AMP also plans to develop its business in selected Asian countries through strategic partnerships. AMP may also use some of its surplus capital to support and expand its existing business.
AMP will consider other methods of transferring to shareholders the benefit of the surplus capital if, within an acceptable time frame, AMP is unable to deploy this surplus capital in accordance with its strategy." (section 2.1.1 at page 16)
"Risks Associated with AMP's Acquisition Strategy
AMP currently has a substantial amount of capital that is surplus to the requirements of its operating businesses. AMP may invest this surplus capital in one or more major acquisitions in the financial services industry. Any such acquisition would be in addition to the acquisition of GIO.
The successful implementation of AMP's acquisition strategy depends on a range of factors including its ability to: identify appropriate opportunities, complete acquisitions, achieve a rate of return on any acquisition which is higher than returns from alternative investments, and identify structures which minimise any initial earnings dilution. There may also be substantial challenges in integrating, and adding value to, the businesses AMP acquires (such as Henderson and GIO).
To fund its acquisition strategy, AMP may elect to borrow funds or issue new capital, in addition to using the surplus capital. If AMP issues new capital, this may dilute the interest of AMP Shareholders at that time." (section 3.5 at page 76)
To set out in detail all proposals which may be put to AMP's management from time to time, irrespective of the remoteness of potential implementation, could well be misleading in the extreme and would not be required by section 750 or section 1022. No investment adviser could reasonably require AMP or any other offeror to indicate the identity of any particular target to which it has given consideration. There was no evidence to suggest that AMP had formed any fixed view as to how it was going to utilise any surplus capital. I consider that the complaint is ill founded.
Intention Relating to Employees
Clause 20(1) of section 750 requires that there be set out a statement of the offeror's intentions regarding, inter alia, the future employment of the present employees of the target company. GIO contended that the AMP Part A Statement is inadequate in its treatment of that issue. GIO contended that the question is especially significant in the light of the fact that a significant number of GIO employees hold shares in GIO.
Clause 20(2) of Part A of section 750 requires that, if the offeror has not made a decision on a matter but is considering a possible course of action, or two or more possible courses of action, in relation to that matter, there is a requirement to set out that fact and specify the course of action or courses of action concerned in the reason why the offeror has not made a decision on the matter. The AMP Part A Statement deals with AMP's intentions as to the future of GIO's employees, as follows:
"Employees
In relation to the continuation of the employment of GIO's employees (other than as specifically mentioned elsewhere in this section) AMPII, in undertaking its review of the business, assets and operations of GIO, will review the position generally of GIO's employees and, in particular, look to the staffing requirements for the combined businesses. Selection of individuals for new or revised positions will be based on an assessment of the requirements of the position, taking account of all relevant factors. However, no decision is intended to be made on redeployment or redundancy of individual employees until the review is conducted.
No decision on appointments other than that of Mr Peter Corrigan (see "General Insurance" above) have been made. However, AMPII anticipates that staff of the combined entities employed in corporate head office functions, financial services back office roles and some parts of information technology are most likely to have duplicated functions, duties and responsibilities and as such are likely to no longer be required following the successful acquisition of GIO. AMPII anticipates that it would seek to retain the majority of GIO's call centre and sales force.
In combining the businesses of AMP and GIO, AMPII will consult with relevant unions and bargaining agents as appropriate. AMP and GIO employees will be kept fully informed about the process of combining the businesses of AMP and GIO."
The AMP Part A Statement also contains a specific statement as to the future employment of GIO employees engaged in product disposition as follows:
"GIO's employed sales force of Business Insurance Representatives will become an important part of the combined general insurance operations. GIO's Financial Planning Representatives are also a valued asset and will become a part of AMP Financial Services' distribution channels."
The reference to synergy benefits in the AMP Part A Statement indicates that it is not possible for AMPII to be more specific concerning individual employees. The AMP Part A Statement contains the following statement:
10.4 It is not possible for AMPII to be more specific as to the roles of individual employees until it has had the opportunity to conduct its strategic review of GIO. The reference on page 71 of the Part A statement to AMP's assessment of synergy benefits is consistent with this:
"If the offer is successful AMP will carry out a detailed review of GIO's businesses to support or determine AMP's intentions. AMP will not be able to accurately assess the resultant synergy benefits, related restructure costs or the timing of these synergies and restructure costs until that process is complete."
GIO contended that the statement concerning the saving of approximately $70 million through the elimination of duplication in the operational businesses and head office functions of GIO and AMP is suggestive of an actual intention. However, I am not satisfied that the evidence establishes that AMP had any intention which has not been disclosed. Accordingly, this head of complaint must fail.
Director and Executive Remuneration
GIO contended that the AMP Part A Statement inadequately discloses information about director and senior executive remuneration and remuneration policy. In particular, GIO contended that the information contained in the AMP Part A Statement concerning director and executive remuneration should be at least as full as that now required by section 300A(1)(c) of the Law to be disclosed in AMP's annual report to its existing shareholders. Section 300A provides as follows:
"(1) The directors' report for a financial year for a company must also include:
(a) discussion of broad policy for determining the nature and amount of emoluments of board members and senior executives of the company; and
(b) discussion of the relationship between such policy and the company's performance; and
(c) details of the nature and amount of each element of the emolument of each director and each of the 5 named officers of the company receiving the highest emolument.
(2) This section applies only to a company that is:
(a) incorporated in Australia; and
(b) included in an official list of the Exchange.
(3) This section applies despite anything in the company's constitution."
GIO contended that no information is given as to AMP's policy for determining the nature and amount of the emoluments of Board members and senior executives, nor as to the relationship between that policy and AMP's performance. However, there are detailed disclosures of employee entitlements, directors' remuneration and remuneration of key executives to be found in AMP's consolidated restated financial statement in the AMP Part A Statement. That statement, set out in Appendix 1 of the AMP Part A Statement, clearly sets out the total remuneration of AMP's directors and key executives for the six months ended 30 June 1998. That disclosure corresponds to the form of disclosure in Part A statements issued by other offerors.
Section 300A of the Law was introduced on 1 July 1998 and only applies to accounting periods ending after that time. The introduction into the Law of a mandatory disclosure provision for future accounting periods does not imply that that information would be material for disclosure under section 750 of the Corporations Law. The test of what information is material to the making of a decision by an offeree whether or not to accept an offer has no necessary connection with the requirements of the Law for disclosure to existing shareholders. I consider that the complaint is without foundation.
Funding
GIO also contended that the disclosure of funding arrangements for the takeover in the AMP Part A Statement is inadequate because no details are provided as to the terms, enforceability or underlying arrangements of the "undertaking" allegedly given by AMP to AMPII to put AMPII in funds to meet its obligations to GIO shareholders who elect to receive cash consideration. Clause 11(b) of Part A of section 750 would require AMPII to set out: