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.