Teh v Ramsay [2002] NSWSC 456 | Case summary

4135/01 - TEH v RAMSAY CENTAURI PTY LIMITED JUDGMENT Background 1 By his originating process filed on 29 August 2001, the plaintiff seeks an order under s.661E(2) of the Corporations Act 2001 (Cth) that 552,000 shares in the capital of Alpha Healthcare Limited ("Alpha") held by him not be compulsorily acquired by the defendant under s.661A(1). The compulsory acquisition has been initiated by the defendant in the wake of a takeover bid made by it in respect of shares in Alpha. By this I mean that the conditions laid down by s.661A by reference to what might generally be termed the success of the bid, measured by the extent of voluntary acceptances, were satisfied so as to allow the defendant to resort to the statutory procedures for acquiring the shares of non-accepting shareholders without their consent. 2 The takeover bid was initiated by the defendant's bidder's statement dated 12 April 2001 after having been the subject of a public announcement by the bidder on 9 April 2001. The bid was expressed to extend to all Alpha shares on issue at its commencement and any further shares issued during its currency. There were 43,610,260 shares on issue at inception. A further 1,600,000 were issued on 30 May 2001 in consequence of exercise of options held by a director of Alpha. The consideration offered by the bidder was 40 cents cash per share, so that the aggregate price for all shares was $18,084,104. The share capital of Alpha was not divided into shares of different classes. 3 The defendant's compulsory acquisition notice under s.661B was issued on 9July 2001. There is no dispute that the plaintiff's application for an order preventing compulsory acquisition of his shares was made within the time prescribed by s.661E(1) or that the court has jurisdiction under s.661E(2). The latter provision is as follows: "The Court may order that the securities not be compulsorily acquired under subsection 661A(1) only if the Court is satisfied that the consideration is not fair value for the securities." 4 The words "only if the Court is satisfied" are significant. They delineate the sole issue in these proceedings. The discretion to make an order under s.661E(2) does not arise unless it is established to the court's satisfaction that the "consideration is not fair value for the securities". It must follow from s.661E(2) that it is for the party seeking exercise of the jurisdiction to show, by reference to admissible evidence properly adduced, that the "consideration" falls short of "fair value for the securities". I shall come back to this onus question. 5 The "consideration" to which s.661E(2) refers is, clearly enough, that applicable to the compulsory acquisition, being, in light of s.661C(1), the consideration dictated by the terms of the takeover bid immediately before the end of the offer period (or, if the compulsory acquisition notice is given before the end of the period, immediately before it is given). In the present case, it is sufficient to say that the "consideration" is obviously 40 cents per share, that being the price which was specified in the takeover bid at its inception and remained unchanged throughout. 6 The question to which s.661E(2) directs attention as the sole basis of the court's jurisdiction is therefore whether 40 cents multiplied by the number of the plaintiff's shares (ie, $0.40 x 552,000 = $220,800) is "fair value for the securities". The answer will be in the negative only if "fair value for the securities" (ie, the 552,000 shares) is greater than $220,800. As a matter of strict semantics, the consideration is not "fair value for the securities" if it exceeds that "fair value" which, as will be seen, is a calculated sum arrived at without any regard for general notions of what is "fair". But the concern of the legislation is, clearly enough, with situations in which the consideration for the compulsory acquisition falls short of the statutorily calculated "fair value", not those where the consideration exceeds that "fair value". 7 The provisions relevant to this application are in Chapter 6A which was introduced by the Corporate Law Economic Reform Program Act 1999 (Cth) with effect from 13 March 2000. It is important to recognise immediately that, under those provisions, there is no scope for the court to embark upon some general inquiry as to the fairness of the takeover bid or of the proposed compulsory acquisition of the plaintiff's shares. In that respect, the present legislation departs from the pattern of its predecessors derived from s.155 of the Companies Act 1929 (Eng) and based on the findings of the Greene Committee in 1926 (Report of the Company Law Amendment Committee, 1925-26, Cmd 2657). 8 Under those earlier provisions, it was open to a shareholder subjected to a compulsory acquisition proposal after the conclusion of a takeover to attack the proposal on any ground going to fairness - for example, alleged inadequacy of information provided in connection with the takeover offer (Attorney-General v Walsh's Holdings Ltd [1973] VR 137), artificial or contrived conduct to satisfy a statutory pre-condition (In re Bugle Press Ltd [1961] Ch 270; Re Rees' Application [1972] QWN 47), actions alleged to have caused the opposition of a substantial shareholder to evaporate (Re Elders Australia Ltd; Super John Pty Ltd v Futuris Rural Ltd (1997) 25 ACSR 130) or alleged reliance in an expert's report on incorrect valuations (Eddy v W R Carpenter Holdings Ltd (1985) 10 ACLR 316), in addition to grounds based on alleged inadequacy of consideration as such (eg, Elkington v Shell Australia Ltd (1992) 10 ACSR 568). 9 Under the present system, by contrast, a single and narrow avenue of attack is available. It is confined to the particular question of adequacy of consideration posed by s.661E(2); and that question is to be answered solely by reference to the statutory concept of "fair value for securities" defined by s.667C. 10 Several of the recently decided cases on Chapter 6A discuss the genesis of s.667C(1) in the January 1996 report on compulsory acquisition by the Legal Committee of the Companies and Securities Advisory Committee and the political processes which caused s.667C(2) to be added after the relevant Bill had been introduced into Parliament. I do not consider it necessary to resort to the Legal Committee's report or the Parliamentary debates as aids in construing s.667C as it is relevant to this case. The intent of the legislature seems to me to emerge clearly enough for present purposes from the words in which it has chosen to frame the provisions. "Fair value for securities" - s.667C 11 Section 667C lays down the method of determining what is "fair value for securities". It does so in a way which rules out all other possible methods of valuation and excludes from consideration all matters other than those to which it directs attention. Section 667C is in the following terms: "(1) To determine what is fair value for securities for the purposes of this Chapter: (a) first, assess the value of the company as a whole; and (b) then allocate that value among the classes of issued securities in the company (taking into account the relative financial risk, and voting and distribution rights, of the classes); and (c) then allocate the value of each class pro rata among the securities in that class (without allowing a premium or applying a discount for particular securities in that class). (2) Without limiting subsection (1), in determining what is fair value for securities for the purposes of this Chapter, the consideration (if any) paid for securities in that class within the previous 6 months must be taken into account." 12 The whole of s.667C(1) is a command: "To determine what is fair value for securities for the purposes of this Chapter …". That form of expression makes it clear that the directions which follow cover the field, in the sense of prescribing the only possible means of arriving at "fair value". Whether or not the result of following the directions is "fair" in the general sense to which courts (particularly courts of equity) are accustomed is entirely beside the point. The words "fair value" are merely a statutory label whose sole content and meaning come from the application of the section itself. The result would be the same if the section referred to "assessed value" or "prescribed value" or simply "value" instead of "fair value". Use of the word "fair" does not mean that there is to be a search for something which is intrinsically fair according to general notions of fairness. "Value of the company as a whole" - s.667C(1)(a) 13 The directions following the opening command in s.667C(1) are to be followed sequentially. The first step is to "assess the value of the company as a whole". The starting point is thus the "value" of an object or construct referred to as "the company as a whole". This can only refer to the overall enterprise viewed as a profit making structure or a cohesive collection of resources so organised as to produce return through outlay, including such outlay as produces human effort. Attention is thus focussed away from any particular asset or advantage and towards the sum of the component parts, viewed as a productive organisational whole. 14 When it comes to the task of assessing the "value" of this construct, the statute provides no direction or guidance. It seems to me necessary, therefore, to go back to the basic valuation approach long recognised by the law. That approach is explained in the following passage in the judgment of Griffith CJ in Spencer v The Commonwealth (1906) 5 CLR 418: "In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring 'What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together." 15 Isaacs J said: "To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property." 16 The assumed parties to the hypothetical transaction of sale and purchase to which this test directs attention lack personal attributes, aspirations and interests, apart from their assumed willingness to deal and their familiarity with the subject matter and circumstances which might affect its value one way or the other. It follows that, in the s.667C(1)(a) context, the special concern of a particular buyer to obtain synergies or rationalisation benefits through ownership of the company must be disregarded, as must particular concerns of a particular seller to sell because of, for example, a pressing need for cash. Determination of the "value of the company as a whole" looks solely to the stand-alone worth of the particular collection of benefits and detriments represented by the enterprise, viewed through the eyes of the hypothetical buyer and seller whose sole motivations are those related to those benefits and detriments in their own right, unaffected by other considerations. 17 It is important to recognise that s.667C(1)(a) is not concerned with the "value of the company as a whole" to any particular person. It has been said that if something has a particular potentiality which only one person would buy, it is to be valued on the basis of a notional sale to that person: Mordecai v Mordecai (1988) 12 NSWLR 58 per Hope JA. That may well mean that a small parcel of shares which, for a majority owner, means the difference between total freedom to impose its will and the need to be duly attentive to the interests of a minority possesses a special value: Melcann Ltd v Super John Pty Ltd (1994) 13 ACLC 92. But s.667C(1)(a) is not concerned with valuing parcels of shares, whatever may be their strategic significance to a particular person. It is concerned only with valuing the enterprise, with the result that, if some element of value is said to come from a particular potentiality of the kind to which Hope JA referred in Mordecai, it must be an element which, on the evidence, is shown to attach to the overall enterprise, viewed in the commercial context in which it operates. 18 An obvious by-product of the starting point defined by s.667C(1)(a) by reference to "the company as a whole" is to ensure that the total enterprise is viewed as a distinct commodity in its own right in the market for corporate control, isolated from factors relevant to allocation of value among its owners. This means that the "premium for control" - the value component which recognises that total or majority ownership has a value greater than that indicated by the sum of the values of the individual shareholdings - is acknowledged as inhering in the enterprise value from which "fair value for securities" is to be derived in accordance with s.667C. It was this, I think, which caused Santow J to observe by way of obiter dictum in Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 34 ACSR 737: "I therefore consider that s.667C in its particular context is a clear legislative indication in its context that the collective value of the company as a whole, including any special value derived from 100% ownership is to be allocated without attributing a premium or discount to particular securities …" 19 To similar effect are observations of Warren J in Capricorn Diamonds Investments Pty Ltd v Catto [2002] VSC 105: "It is apparent that the subject matter of the valuation, namely, the company as a whole, was selected by the legislature in order that there might be an accommodation of the competing interests of those involved in the compulsory acquisition process. By addressing the value of the company as a whole, the legislature has struck a balance between those interests." 20 The paragraph of Santow J's judgment in Winpar containing the above extract was accepted by Douglas J in Pauls Ltd v Dwyer (2001) 19 ACLC 959 and not disturbed on appeal (Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 40 ACSR 221). 21 It follows, I think, that what Santow J described in Re Goodyear Australia Ltd; Kelly-Springfield Australia Pty Ltd v Green [2002] NSWSC 53 as "a premium for forcible taking" - that is, a special value component extractable by a shareholder who struggles hard not to be dislodged - plays no part in the s.667C(1)(a) determination of "the value of the company as a whole". 22 When it comes to assessing "the value of the company as a whole" thus identified as the first step in giving effect to s.667C, the legislation itself provides no guidance. It is true that s.667C(2) identifies a matter to be taken into account but, since that matter is to be addressed in determining "fair value for securities", being the product of the cumulative steps in s.667C(1), it plays no part in assessing "the value of the company as a whole" in obedience to s.667C(1)(a), unless, of course, it is seen independently of s.667C(2) as a factor relevant to that s.667C(1)(c) assessment. 23 It is here that accepted methods of company or enterprise valuation must come to the fore as reflections of the mental processes in which the hypothetical seller and buyer central to the classic test of value would engage. Experience suggests that one (or probably more likely all) of several basic approaches would be adopted. The first involves a discounted cash flow approach under which expected cash flows are predicated and a discount rate deemed appropriate is applied to arrive at the sum which would change hands in a transaction securing to the buyer the opportunity to receive those future cash flows. A second approach would have regard to the assets and liabilities and, in a notional sense, to the surplus which might be expected to eventuate if the assets were realised in an orderly way and the liabilities discharged. The third method would look to an estimate of future maintainable earnings and the application of a capitalisation factor to reflect the worth of the opportunity to realise those earnings, with all recognisable risk factors reflected in the capitalisation factor. 24 I do not say that these are the only available approaches to assessment of "the value of the company as a whole"; merely that they are, on the basis of experience, the most commonly encountered ones. A party such as the present plaintiff who sought to rely on some other or additional method could, of course, seek to advance a case on that basis. The other elements of s.667C 25 Before turning to the circumstances of this case, I should say something about the elements of s.667C in addition to the s.667C(1)(a) element involving assessment of "the value of the company as a whole". 26 In the present context, I can pass over the detailed aspects of s.667C(1)(b) and (c) which have been the subject of analysis in some of the recent decisions to which I have referred. This is because there is no need here to attempt to apportion overall value among different classes of shares carrying different rights. Alpha has on issue only one class of shares. The only apportionment called for by s.667C(1) is accordingly apportionment among members who hold shares carrying identical rights and ranking in all respects pari passu. Members are thus distinguishable from one another solely on the basis of simple arithmetic dictated by numbers of shares held. 27 It is, however, necessary to consider s.667C(2). That provision identifies a matter which must be "taken into account" in determining "fair value for securities", but which is in no sense derived pursuant to s.667C(1) from the starting point of "the value of the company as a whole" identified in s.667C(1)(a). Section 667C(2) is expressed not to limit s.667C(1). The view I take of the interaction between the two subsections, as derived from their own terms, is that the process in s.667C(1) is to be undertaken first and, after the result it produces has been ascertained, that result is to be reviewed in the light of the material to which s.667C(2) directs attention. A direction that a particular factor "must be taken into account" in "determining" a matter which is the subject of a peremptory command ("To determine what is fair value …") indicates that the peremptory command is to be obeyed in the first instance; and the outcome is then to be checked for consistency with the identified factor so that a decision can be made as to whether that outcome needs adjustment before the statutory result is regarded as having emerged. The relevant date 28 The other matter of construction to which I should refer concerns identification of the date as at which it is necessary for "fair value of securities" to be determined. The relevant date is, I believe, that on which the compulsory acquisition is initiated, that is, when the bidder takes the step which sets in train the statutory mechanisms which may ultimately see it become the holder of the outstanding shares. It is at that point that the bidder, in effect, elects to enter into a relationship with the holders of the outstanding shares and those holders, whether they like it or not, are drawn by the statute into that relationship 29 The point to which I have just referred is effectively the point at which the bidder lodges its compulsory acquisition notice with ASIC under s.661B(1)(b). That is the event which dictates the timing of despatch of copies to the non-accepting shareholders (s.661B(2)(b)) and marks, in a real sense, the start of the new relationship in which challenges mounted by dissenting shareholders play a part. 30 The relevant date in this case is 9 July 2001. The plaintiff's onus in this case 31 Against the background of this analysis of the workings of the relevant provisions, I turn to the particular case. In doing so, I remind myself that the court has power to make the order the plaintiff seeks stopping the compulsory acquisition of his 552,000 shares only if satisfied that the consideration of $220,800 for the compulsory acquisition of those shares is "not fair value for the securities". It must follow that it is the plaintiff who bears the onus of showing what the "fair value for the securities" is and that the consideration of $220,800 falls short of it 32 That the onus should fall in that way is shown by the provisions themselves. The court must be satisfied that the consideration is not "fair value". Some discrepancy must therefore be affirmatively shown. Failure by the bidder to show that the consideration is "fair value" would not establish that the consideration is not "fair value". The task of establishing the negative proposition as to which the court must be satisfied therefore logically falls to the plaintiff non-assenting shareholder. 33 This approach to the question of onus is, in any event, consistent with established thinking about compulsory acquisition in the wake of a takeover bid which has attracted voluntary acceptances in respect of more than 90% of shares on issue. The general philosophy is summed up in an observation in In re Sussex Brick Co Ltd [1961] Ch 289n in relation to an earlier but analogous compulsory acquisition provision. Vaisey J there said that a dissentient in such a case is "faced with the very difficult task of discharging an onus which is undoubtedly the heavy one of showing that he, being the only man in the regiment out of step, is the only man whose views ought to prevail." 34 The question of onus under predecessor legislation was dealt with as follows by Maugham J in In re Hoare & Co Ltd (1933) 150 LT 374: "I have some hesitation in expressing my view as to when the court should think fit to order otherwise. I think, however, the view of the Legislature is that where not less than nine-tenths of the shareholders in the transferor company approve the scheme or accept the offer, prima facie , at any rate, the offer must be taken to be a proper one, and in default of an application by the dissenting shareholders, which includes those who do not assent, the shares of the dissentients may be acquired on the original terms by the transferee company. Accordingly, I think it is manifest that the reasons for inducing the court to 'order otherwise' are reasons which must be supplied by the dissentients who take the step of making an application to the court, and that the onus is on them of giving a reason why their shares should not be acquired by the transferee company." 35 This general approach continues to hold good in relation to an application under the present s.661E(2). In a case of compulsory acquisition following on from a takeover bid in which shareholders have willingly disposed more than 90% of total shares on the bid terms, Vaisey J's parade ground metaphor continues to be apposite despite the permitted scope of the dissentient's challenge having been restricted by reference to the "fair value" criterion in s.667C.

The plaintiff's evidence 36 The plaintiff's evidence is contained in and annexed and exhibited to three affidavits sworn by him and dated 21 August 2001, 8 February 2002 and 20 May 2002. It is appropriate to refer to the salient features of that evidence. 37 The plaintiff's evidence begins by reciting the history of the takeover bid initiated on 9 April 2001 by the defendant, a wholly owned subsidiary of Ramsay Health Care Limited ("Ramsay"), for shares in Alpha. The bid was declared unconditional on 2 May 2001 but thereafter remained available for acceptance. On 3 May 2001, Alpha made application to the Corporations and Securities Panel for a declaration of unacceptable circumstances under s.657A of the Corporations Law and orders under s.657D against the defendant. On 21 May 2001, the panel refused that relief. On 24 May 2001, the defendant extended the offer period to 8 June 2001. On 28 May 2001, the directors of Alpha made a favourable recommendation to shareholders in relation to the defendant's bid. The bid was later extended on two further occasions, first to 22 June 2001 and then to 6 July 2001. On 9 July 2001, the defendant issued a notice of compulsory acquisition, having achieved the position described in s.661A(1)(b). 38 The consideration offered under the takeover bid was 40 cents cash for each Alpha share. That consideration was not increased or otherwise varied. By a target's statement dated 25 May 2001, the directors of Alpha recommended that shareholders accept the defendant's takeover bid in the absence of a higher offer. One director declined to join in that recommendation and made no recommendation. The reasons of the other directors for making the recommendation were as follows: "The Directors are making this recommendation because they consider that there are substantial risks involved in not accepting the Offer. Those risks (apart from the normal risks associated with any investment in a listed company) are: · in the absence of Alpha repaying or successfully refinancing the outstanding debt owed to Ramsay and, in that case, if Ramsay fails to agree to vary the terms of Alpha's outstanding debt, that Alpha's debt restructuring may not be successfully completed by 31 July 2001. Ramsay could then seek to force Alpha to make asset sales leading to a serious destabilisation of Alpha's financial position - see paragraph 6.6 of Section B of this booklet; · that after the close of the Offer, Alpha's share price may fall below Ramsay's offer price of 40 cents per share; · that there may not be a further offer for all Alpha shares at a price greater than 40 cents per Alpha Share in the foreseeable future; · that the liquidity of the market for Alpha's shares may be adversely impacted by the level of Ramsay's ownership in Alpha at the close of the Offer." 39 Three of the directors held shares in Alpha, being Mr Martin (13,000), Mr Elliott (200,000) and Mr Wright (80). The target's statement said that none of them would be accepting the offer. It was also disclosed that Mr Compton, Alpha's managing director, intended to convert all 1,600,000 of his employee options into Alpha shares and to accept the defendant's offer for those shares. 40 The plaintiff's documentary evidence (or, at least, so much of it as was admitted after rulings had been made on objections) consisted principally (although not exclusively) of extracts from Alpha's annual reports and accounts for periods before the bid, announcements by Alpha to the Australian Stock Exchange, extracts from Alpha's target's statement already mentioned, the decision and reasons of the Corporations and Securities Panel dated 21 May 2001 and a paper "annexure A4" prepared for the board of Ramsay before the takeover bid commenced, headed "Acquisition Accounting - Alpha". 41 The plaintiff sought to introduce into evidence a great deal of material to which objection was taken and which I had to rule inadmissible under ss.76(1) and 56(2) of the Evidence Act 1995. In broad terms, this rejected material fell into two categories. One involved newsletters and the like expressing the views of stockbrokers and analysts on matters such as conditions in the private hospital industry in which Alpha is involved and the outlook for operators in that industry. There was also some newspaper commentary in this first category. The material did not qualify to be admitted under s.79 as there was nothing to show either the requisite specialised knowledge based on training, study or experience or that the factual basis for the expressed opinions satisfied the requirements in that respect comprehensively reviewed by Heydon JA in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705. The plaintiff did not seek to put himself forward as a person possessing relevant specialised knowledge based on training, study or experience. 42 The second category of rejected material concerned takeovers of other companies and the conduct of parties in relation to those transactions. That evidence was ruled inadmissible on the grounds of lack of relevance because of the specific and confined nature of the question posed by s.667C, which entails no more than an assessment of the value of Alpha alone and examination of historical information about trading in shares of Alpha alone. The defendant's evidence 43 The defendant's evidence is contained in and annexed and exhibited to four affidavits, two of officers of Ramsay, one of a partner of Ernst & Young and one of an employee of the defendant's solicitors. 44 The first affidavit deals with the course of the takeover bid and related transactions and identifies relevant documents. The second affidavit, sworn by Ms McAuliffe, Ramsay's group financial controller, refers to analyses made by her in advance of the takeover bid to identify the balance sheet that Alpha would be likely to have after acquisition, her work being reflected in the plaintiff's annexure A4 to which reference has already been made. The third affidavit, being that of Mr Wykes, a partner of Ernst & Young, reports on work done in revealing the financial position of Alpha following its acquisition by Ramsay. Annexed to Mr Wykes' affidavit are, first, a due diligence report prepared by Ernst & Young for Ramsay in October 2001 (that is, after completion of the bid) for the purpose of defining the acquisition balance sheet and, second, the financial statements of Alpha and its controlled entities for the year ended 30 June 2001 audited by Ernst & Young. The fourth affidavit is the vehicle for introducing into evidence material supplied by the Australian Stock Exchange regarding share price history. The plaintiff's submissions 45 The plaintiff reduced his submissions to written form and confined his address to supplementary remarks on the question of costs. Omitting the part dealing with costs, the written submissions were as follows: "1. The sitting Takeovers Panel in the matter of the Company, presided by Maxine Rich, did not make a finding of fact that the consideration of 40 cents was fair value for the Company shares. While the Panel decided not to make a declaration of unacceptable circumstances in relation to the defendant's takeover bid, it nevertheless made a finding of fact that Netcare offered to acquire the debt from the Sun group for $100,000 more than the defendant and to acquire the Company shares at 45 cents (Paragraphs 36 and 37 of the Panel's statement of reasons). Even if one accepts that Netcare 'left its offer too late' (Paragraph 41 of the Panel's statement of reasons), Netcare nevertheless must have considered its offer to be either fair or advantageous to itself. Netcare was also likely to be aware of a possible bidding war with the defendant, resulting in the final offer for the Company shares being in excess of 45 cents. It follows that Netcare's offer of 45 cents for the Company shares represents the minimum (floor) fair value, whether the debt was acquired at the defendant's price or Netcare's. 2. The acceptance of the defendant's offer by the receiver of the Sun group has prevented Netcare from offering the Company's other shareholders a consideration of 45 cents per share. 3. The Panel made a finding of fact that the assets of the Sun group were on the market for a year when the negotiations reached their peak (Paragraph 41 of the Panel's statement of reasons). It is relevant to note the fact that it was only in the second half of the financial year 2000/2001 that there was a general consensus that the Australian private hospital sector had definitely turned for the better as the Government's initiatives to encourage membership of private health insurance started to benefit private hospital operators. Prior to this, the sector had been struggling due to margin squeeze from the private health insurance funds, which had suffered from falling memberships. These facts can be inferred from the reports of the chairmen and directors of listed private hospital operators in Australia as contained in their respective annual reports for the periods ending June 2000 and June 2001. These reports are cited in Paragraphs 37 through 51 of my affidavit sworn on 20 May 2002, of 146% and 129%, respectively, as stated in Paragraphs 30 through 33 of my affidavit sworn on 20 May 2002. Over the same period, the All Ordinaries index only increased by 7%, as stated in Paragraphs 45 and 35 of my affidavit sworn on 20 May 2002. To my knowledge, following the acquisition of Australian Hospital Care by Mayne Nickless and the delisting of the Company by the defendant, Healthscope and Ramsay were the only listed pure private hospital operators in Australia. It is unlikely that the inherent business values of Healthscope and Ramsay had more than doubled between 1 April 2001 and 1 April 2002. It was the market values of both companies that had more than doubled during this period as investors recognised that the private hospital operators had been undervalued in the past. I believe that Your Honour is aware of the fact that the market prices of the companies in a certain sector often do not represent anywhere near their respective fair values. Depending on investors' sentiment about the sector (and the stock market), the market prices may significantly overvalue or undervalue all the companies in the sector. The listed private hospital operators in Australia including the Company had been undervalued at least until April 2001 when the defendant launched an opportunistic takeover bid for the Company. In objecting to my affidavit that the market condition for private hospital operators was rapidly improving, the defendant sought to discredit my assertion by saying that I am not qualified to give expert opinion evidence as to the private hospital market. However, it is unequivocally clear from the reports of the chairmen and directors of the listed private hospital operators that the Australian private hospital sector had changed significantly for the better between the years 2000 and 2001. It is also evidence from the more than doubling in the share prices of Healthscope and Ramsay during the period from 1 April 2001 to 1 April 2002 that the private hospital operators had been undervalued at least until April 2001. It is not difficult to see that, had Sun Healthcare Inc not gone into Chapter 11 bankruptcy in October 1999 but instead a year later, it would have been able to obtain a much better offer than the defendant's takeover bid. The Company minority shareholders have the misfortune that Sun Healthcare Inc, a holder of approximately 38% of the Company shares, went into bankruptcy in October 1999 and by April 2001 the receiver was apparently keen to sell off its shares and loan to the Company ('Netcare left its offer too late'), otherwise the shareholders would have either received a higher offer from Netcare or participated in the share price increases as seen with the other listed private hospital operators in Australia. 4. As stated in Paragraph 17 of my affidavit sworn on 21 August 2001, the consideration of 40.0 cents for the Company shares represents a 3.5% discount to the weighted average market price of 41.4 cents during the month prior to the defendant's takeover bid announcement on 9 April 2001. This discount may appear to be a small figure, but it has to be viewed against the background of the significant under-valuation of the share prices of listed private hospital operators in Australia during that period. 5. The discount represented by the defendant's offer for the Company contrasts sharply with the premium offered by Mayne Nickless to the market share prices of Australian Hospital Care, which was announced on 22 November 2000. I respectfully submit to Your Honour that it is a relevant and comparable takeover case as Australian Hospital Care was also a listed private hospital operator like the Company. 6. SalomonSmithBarney was the defendant's financial adviser in the takeover bid. It being a highly reputable broker-dealer and financial adviser, it is reasonable to assume that it has a good estimate of the Company's value. As evident from its report dated 30 July 2001, the relevant page of which is exhibited as 12 to my affidavit sworn on 21 August 2001 and the whole of which as N5 to my affidavit sworn on 20 May 2002, SalomonSmithBarney was of the opinion that the defendant had picked up the Company at a $20 million discount. As this discount itself is equivalent to 44 cents per share, it is difficult to think that the defendant's offer to the shareholders represents fair value. 7. The defendant's board paper dated 27 March 2001, attached to my affidavit sworn on 8 February 2002 as Annexure A4, speaks for itself. It suggests that even if the defendant acquired the Company shares at 43.2 cents, the defendant would still obtain a net discount on total acquisition of $8.96 million. As the defendant's offer is only 40 cents, the discount is equivalent to more than 20 cents per share. It is clear from the board paper that the defendant's offer to the shareholders is not fair value. 8. It is also difficult to think that an offer at a 51.2% discount to the net tangible asset of the Company as fair value. 9. Although the former directors of the Company recommended the shareholders to accept the defendant's offer, they did not commend the offer as fair or reasonable. The directors who owned shares in the Company stated in the target's statement that they did not intend to accept the defendant's offer. This statement is attached to my affidavit sworn on 21 August 2001 as Annexure J. 10. On 17 May 2002 I was informed by the defendant's counsel, Mr Andrew Carter, that the defendant will seek to rely on the financial report of the Company for the year ending 30 June 2001 and the due diligence report entitled 'Alpha Healthcare Limited-Due Diligence-30 May 2001'. The financial report was audited by Ernst & Young and the due diligence report was prepared by Ernst & Young. I respectfully submit to Your Honour that neither of these reports qualify as an independent expert report on the fair value of the Company. They are not expert valuations nor are they audited or prepared by an independent expert. Ernst & Young is the receiver who refused Netcare's higher offer and accepted the defendant's bid in the same month as the date of the due diligence report, and has been the auditor of the defendant's parent company for a number of years. Both reports assume a writedown in the value of the Westmead Private Hospital, which constituted 46% of the Company's consolidated assets as at 31 December 2000, from $56.4 million to approximately $35 million as foreshadowed in the defendant's board paper dated 27 March 2001. This writedown is difficult to justify given the facts that Westmead only started operations in October 2000 and the private hospital sector was turning around for the better." 46 A few points should be added by way of explanation. The reference to "Netcare" in paragraph 1 of the submissions is a reference to a party which, at one point, was a potential bidder for Alpha in competition with the defendant and which had foreshadowed a possible offer at 45 cents per share, compared with the defendant's 40 cents. The Sun group, the company described in paragraph 2 as being in receivership, was the holder of a strategic parcel of Alpha shares which declined to sell to Netcare, preferring to accept the defendant's offer. Virtually the whole of paragraph 3 refers to and seeks to rely on parts of the plaintiff's affidavits which were eventually not read by him or rejected, as well as documentary material falling within each of the two categories of rejected material to which I have already referred. Paragraph 5 refers to another takeover transaction evidence in relation to which was ruled inadmissible for the reason I have previously stated. Paragraph 6 is advanced by reference to opinion evidence that was rejected. The defendant's submissions 47 The defendant's first submission was simply that the plaintiff had failed to discharge the onus cast upon him by the legislation. He had, it was submitted, adduced no evidence to show "the value of the company as a whole" referred to in s.677C(1)(a), on any view of what that expression means. For that reason alone, the defendant maintained that the plaintiff must fail. 48 Mr Bathurst QC, who appeared for the defendant, did, however, go on to deal with certain of the plaintiff's written submissions set out in full above, being submissions 1, 2, 9 and 10. The remainder were not addressed because they were seen to depend on rejected evidence. 49 Submissions 1 and 2 were dealt with together. The defendant's approach to those was that the lack of success of the Netcare proposal at 45 cents and the Sun group's preference for the defendant's proposal at 40 cents were a product of rational market behaviour. That behaviour is detailed in the Panel's decision. Sun was already committed to a pre-bid agreement with the defendant in respect of some of its shares when the Netcare proposal emerged. That proposal was subject to conditions involving approvals under the Foreign Acquisitions and Takeovers Act 1975 (Cth) and under analogous South African regulations. Had Sun elected to sell part of its holding to Netcare at the higher price, it might have been left with the remainder in circumstances where the defendant's bid would no longer be available as a certain vehicle for the disposal of the whole, albeit at a lower price per share. In the end, therefore, a Netcare bid at 45 cents per share never became an established reality and that possibility, to the extent that it had ever existed, had evaporated by the time as at which the questions of value relevant to these proceedings are to be determined. 50 In relation to paragraph 9 of the plaintiff's submissions, the defendant simply says that the attitude of individual directors on the question of acceptance of the defendant's takeover bid as it affected shares owned by them has no bearing on any question arising in relation to the s.667C determination of "fair value for securities". Implicit in this submission is a view, which I accept, that individuals may have many different reasons for what they do in their own affairs where they are perfectly free to be selfish and irrational and that no inference can safely be drawn - even if any such inference were relevant to the s.667C determination, which, on the defendant's view of matters, it is not. 51 In the context of the plaintiff's paragraph 10, the defendant first made the point that it did not put forward the evidence of Mr Wykes and the documents annexed to his affidavit as the work of an "independent expert". That evidence, including the documents, was tendered to show the financial position of Alpha at and around 30 June 2001, that being the period within which the relevant date of 9 July 2001 fell. 52 The due diligence exercise supervised by Mr Wykes involved review on behalf of the defendant of Alpha's draft management accounts as at 31 May 2001. Those management accounts disclosed net assets of $34,063,000. The Ernst & Young due diligence review produced forty adjustments, of which four were positive and 36 were negative, which caused a total negative impact of $42,840,000 on net assets to produce a deficiency of $8,777,000. 53 The audited accounts of Alpha and controlled entities for the year ended 30 June 2001 include a consolidated balance sheet reflecting negative shareholders' equity of $8,955,000 compared with positive of $36,086,000 at 30 June 2000. Net assets are shown at negative $8,955,000 compared with positive $36,086,000 at 30 June 2000. The profit and loss account shows a consolidated net loss attributable to members of Alpha of $45,416,000 for the year, compared with a consolidated net profit of $750,000 for the previous corresponding period. 54 To the extent that the plaintiff sought to rely on his annexure A4 in paragraph 7 of his submissions, the defendant relied on the evidence of Ms McAuliffe by whom annexure A4 was prepared. She explained that the document had been created in March 2001, that is, in advance of the takeover bid, when the defendant's knowledge about Alpha was limited. Her aim was to show, as best she could, what Alpha's balance sheet would be after any acquisition by the defendant She assumed an acquisition at 43.2 cents per share. On that basis, she calculated that the defendant would pay $8.41 million more than the fair value of Alpha's net assets. Her appreciation of net assets may, of course, be assumed to have been derived from sources which did not provide the insights which later led Ernst & Young to identify a need to reduce Alpha's net assets by $42,840,000. 55 Finally, the defendant relied upon the history of trading in Alpha shares obtained from the Australian Stock Exchange. Having regard to s.667C(2), the material tendered covered the period May 2000 to June 2001. Until 7 March 2001, the highest sale price was never above 40 cents. In the period from 7 March 2001 to 23 March 2001 the highest price fluctuated between 40 cents and 46 cents. In the period from 24 March 2001 to 9 April 2001, being the day on which the defendant's takeover bid at 40 cents was announced, the highest sale price was in the range 35.5 cents to 42 cents. On 10 April 2001, it went to 46 cents, rising to 49 cents on 30 April and then settling back to a level around 42 to 45 cents until falling to between 40 and 42 cents for the balance of the period to 30 June 2001. The difference between each day's highest sale price to which I have just referred and the day's lowest sale price was generally not more than two cents.

Teh v Ramsay

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