Tower Australia Group Limited, in the matter of Tower Australia Group Limited [2011] FCA 224

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 234 of 2011

IN THE MATTER OF TOWER AUSTRALIA GROUP LIMITED (ABN 79 003 401 698) TOWER AUSTRALIA GROUP LIMITED (ABN 79 003 401 698)

JUDGE: STONE J DATE: 16 MARCH 2011 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 By application under s 411(1) of the Corporations Act 2001 (Cth) filed on 3 March 2011, the plaintiff, Tower Australia Group Limited (Tower), seeks orders for it to convene a meeting of its shareholders, other than Dai-ichi Life Insurance Company Limited (Dai-ichi) or any of its associates, (Scheme Shareholders). The purpose of the meeting is for Shareholders to consider a Scheme of Arrangement (Scheme), and if thought fit to agree to the Scheme (with or without modification) pursuant to which Dai-ichi will acquire all of the Shareholders' shares in Tower. The plaintiff also seeks directions as to the conduct of the meeting. At the conclusion of the first Court hearing on 11 March 2011 I made the orders sought by the plaintiff. These are my reasons for making those orders.

Evidence 2 The details of the Scheme were established by evidence tendered at the hearing including by the following affidavits and their exhibits, which were read in support of the application: Two affidavits of Ralph Benjamin Pliner each affirmed on 4 March 2011. Mr Pliner is and has been a director of Tower since 19 December 2006; Affidavit of Sarah Jane Dulhunty, sworn on 9 March 2011. Ms Dulhunty is a partner of Blake Dawson, solicitors for Tower and has had the principal carriage of the present matter; Affidavit of Toru Nagashima affirmed on 9 March 2011. Mr Nagashima is the General Manager for Australia, International Business Management Department, of Dai-ichi Life Insurance Company Limited. He is also an alternate director of Tower; Affidavit of Craig Lloyd Edwards sworn on 3 March 2011. Mr Edwards is an accountant and the Managing Director of Lonergan Edwards & Associates Limited; Affidavit of Robert Bain Thomas sworn on 3 March 2011. Mr Thomas is a director and Chairman of Tower;

The Scheme and the Scheme Booklet 3 The Scheme Booklet, which was exhibited to the affidavit of Ms Dulhunty, provides detailed information concerning the Scheme and annexes a copy of the Scheme. It is proposed that it constitute the explanatory statement for the Scheme for the purpose of s 412(1) of the Corporations Act to be registered with the Australian Securities Investments Commission (ASIC) pursuant to s 412(6). 4 The Scheme provides for Shareholders to receive a cash consideration of $4.00 for each Tower share that they own at the Scheme Record Date. The letter from the Chairman of Tower advises that this price represents a "substantial premium" to the company's average historical trading prices and states that the Independent Directors of Tower "unanimously recommend" that Shareholders vote in favour of the Scheme "in the absence of a Superior Competing Proposal". 5 Tower is a public company listed on the Australian Securities Exchange (ASX). Its main business is the provision of life and related insurance products in the personal and corporate markets as well as related investment products such as superannuation. As at 2 March 2011, it had approximately 37,729 shareholders holding approximately 419,652,394 ordinary shares. 6 Dai-ichi was founded in Japan in 1902. It is one of the world's top ten life insurance companies and provides individual and group life insurance. Declining birth rates and an aging population in Japan have led the company to seek to adapt its products to this changing demographic. According to the Scheme Booklet, which was exhibited to the affidavit of Ms Dulhunty, the company aims to diversify its earnings geographically and "maintain a solid and stable earnings structure in order to achieve sustainable growth". In October 2008 the company acquired approximately 29.7% of Tower from the Guinness Peat Group. It currently owns approximately 28.96% of Tower's issued share capital. The proposed acquisition of the remaining shares in Tower to bring Dai-ichi's holding to full ownership is consistent with this strategy. 7 The Scheme Booklet contains a list of questions and answers concerning aspects of the Scheme. By this device the Scheme Booklet explains aspects of the proposal that may not be apparent to some Shareholders and summarises information that is provided in more detail in other parts of the Booklet. 8 The Scheme Booklet outlines why the directors of Tower have recommended that Shareholders vote in favour of the proposed Scheme and identifies the following: the premium represented by the cash consideration; the value and certainty of cash; the absence of a competing superior proposal; the likelihood that the share price will fall if the Scheme is not implemented; no brokerage or stamp duty to be paid by Shareholders on transfer to Dai-ichi; the views of the Independent Expert; see below at [17]. 9 These advantages are explained in more detail in other parts of the Scheme Booklet. The Booklet also identifies potential disadvantages. These include: the inability to participate in benefits of being a Tower shareholder; individual shareholders may believe that the Scheme Consideration does not reflect the long-term growth prospects of Tower; the "tax consequences of the Scheme for you may not be optimal for your financial position"; non-participation in future Tower dividends. 10 My only concern with the Scheme Booklet was in relation to the statement about tax consequences. While the bald statement that tax consequences "may not be optimal" literally would include adverse tax consequences, the language diverts attention from this possibility and, in my view, has the capacity to mislead. The problem is easily addressed by amending the clause to read: "tax consequences of the Scheme for you may not be optimal, and may even be adverse, for your financial position". The plaintiffs raised no objection to this amendment.

Performance risk 11 The potential risk for Scheme Shareholders of non-performance by Dai-ichi has been dealt with in the Scheme itself and in the Deed Poll executed by Dai-ichi. Together they provide that the transfer of the Scheme Shares is subject to Dai-ichi providing the Scheme Consideration "in the manner contemplated by the Deed Poll" and having provided written confirmation to Tower. The Deed Poll provides that payment of the Scheme Consideration is to be made into a trust account operated by Tower Australia on trust for the purpose of paying the Scheme Consideration to the Scheme Shareholders. 12 As the plaintiff points out the all-cash nature of the transaction and the trust arrangements means that there is no significant performance risk. In addition it is disclosed in the Scheme Booklet that, at 30 September 2010, Dai-ichi had cash and deposits of JPY203 billion (A$2.4 billion) and that the Scheme Consideration and related transaction costs will be fully funded by these cash reserves.

The deemed warranty and no encumbrance clauses 13 The Scheme of Arrangement contains the usual deemed warranty and no encumbrance provisions. By the deemed warranty the Scheme Shareholders are treated as having warranted that on the date of the transfer the Scheme Shares will be "fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and other interests of third parties of any kind" and that they have full power to sell and transfer their shares to Dai-ichi. 14 A clause to the effect of the deemed warranty was explained and approved by Lindgren J in APN News & Media Limited (2007) 62 ACSR 400 at 412-413. His Honour's approach has been followed in numerous decisions of this Court. See for instance Re Sylvastate Limited [2011] FCA 211 at [24] Re Provet Holdings Limited [2010] FCA 1388 at [14] and Re Adelaide Bank Limited [2007] FCA 1582 at [33]. 15 In Re Investa Properties Limited [2007] FCA 1104 Lindgren J approved a no encumbrance provision qualified, as is the case here, by the phrase "to the extent permitted by law". His Honour discussed, at [25]-[28] the limits of such a clause and, in a statement with which I respectfully agree, concluded at [30]: I regarded the opening words "To the extent permitted by law" as giving adequate notice that a third party would not suffer the extinguishment of an interest in shares if Morgan Stanley Bidco had had notice of that interest. I therefore took the view that those words overcame the difficulty referred to in WebCentral 58 ACSR 742, which was that the presence of a vesting free of encumbrances term might give the impression to third parties that their interests had been extinguished by the presence of the term where they would not have been in its absence.

Independent Expert's Report 16 Tower commissioned Lonergan Edwards & Associates Limited as independent experts to review the proposed acquisition of shares under the Scheme and to provide an Independent Expert's Report. A concise version of the Report is included in the Scheme Booklet. The full version of the Report is contained in the Scheme Booklet Supplement; see below at [19]. The authorised representatives of the Independent Expert state the conclusion of the report in a letter to the Independent Directors of Tower dated 15 February 2011 : In our opinion the Scheme is fair and reasonable and in the best interests of Tower Australia shareholders in the absence of a superior proposal. 17 In reaching this conclusion the Independent Expert took into account that the Scheme Consideration is equal to or greater than the value of the shares to be acquired under the Scheme. The report estimated the value of Tower shares on the basis of 100% acquisition as between $3.73 and $4.09 per share and concluded that as the Scheme consideration of $4.00 per share falls within that range the Scheme is fair and reasonable and consequently in the best interests of shareholders, "in the absence of a superior proposal". The report notes that "as Dai-ichi Life already owns approximately 29.0% of Tower Australia shares there is little realistic likelihood that a superior proposal … will be received prior to the Scheme meeting".

Verification of Scheme Booklet 18 Each of Tower and Dia-ichi has verified the information it has provided and included in the Scheme Booklet. The due diligence and verification procedures followed by each party are described, in respect of Tower, in the affidavit of Ms Dulhunty and, in respect of Dai-ichi, in the affidavit of Mr Nagashima. I am satisfied that in each case the procedures have been comprehensive and thorough and that the process of verification provides an adequate basis for the deponents' respective assertions as to the accuracy of the statements in the Scheme Booklet.

Scheme Booklet Supplement 19 Tower has prepared a Scheme Booklet Supplement which contains the Implementation Deed and the full version of the Independent Expert's Report. It is proposed that the Supplement be made available on Tower's website and by telephoning Tower's information line.

Implementation Deed 20 The Scheme Booklet summarises the key features of the Implementation Deed. The Deed stipulates conditions precedent to the implementation of the Scheme. These include: approval by the requisite majority of Scheme Shareholders at the Scheme Meeting to be held on 18 April 2011; specified Australian and Japanese regulatory approvals; and approval by the Court in accordance with s 411(4)(b) of the Corporations Act.

'No shop' and 'no talk' provisions 21 The Implementation Deed also contains exclusivity provisions that, during a defined exclusivity period, restrict Tower and its representatives from encouraging or engaging with any proposal competing with the proposal put by Dai-ichi. These obligations are common in schemes of arrangement such as the present Scheme. They recognise the commercial reality that a company such as Dai-ichi wishes to protect the investment it makes in putting together a scheme proposal from the directors of the target using that bid "as a stalking horse for a better one"; Re Arthur Yates & Co Ltd (2001) 36 ACSR 758 at [11] per Santow J. The protection given to the bidder must be proportionate and must not conflict with the Directors' fiduciary obligation. 22 The period during which the restrictions apply is from 28 December 2010 to the earliest of three dates, namely, the date when the Scheme becomes effective, the termination of the Implementation Deed in accordance with its terms and 31 July 2011, the End Date of the Scheme. The period is therefore a minimum of four months if the Scheme becomes effective and a maximum of seven months if it does not. While the period of seven months is arguably rather longer than ideal, the plaintiff submits that it is a 'backstop' date designed to give the parties time "to deal with any unforseen circumstances that could arise in implementing the proposed scheme, and does not result in an unreasonably long exclusivity period". 23 In accepting this submission I have attached weight to the fact that the Deed provides an exception to the restrictions where conformity with them would involve a breach of a fiduciary duty. As summarised in the Scheme Booklet the exception is as follows: The 'no talk' and 'no due diligence' restrictions and the notification obligation do not apply to the extent that they restrict TOWER Australia or the Independent Directors from taking or refusing to take any action with respect to a bona fide Competing Proposal (which was not solicited or invited, or initiated by TOWER Australia or the Independent Directors in contravention of the 'no shop' restriction) where: (i) the Independent Directors determine that the Competing Proposal is, or may reasonably be expected to lead to, a Superior Competing Proposal; or (ii) the Independent Directors determine in good faith, after receiving written advice from their external counsel, that taking or refusing to take such action would or would be likely to constitute a breach of a director's fiduciary or statutory obligations. 24 Given the extent of the exceptions and that the restrictions are properly disclosed in the summary in the Scheme Booklet, I am satisfied that they do not present an obstacle to the Scheme's eventual approval by the Court.

Duty of Disclosure 25 In an application under s 411, the plaintiff has a duty of disclosure as described by Barrett J in Re Permanent Trustee Co Ltd (2003) 43 ACSR 601 at [7]: The fact that the application is ex parte is not without some significance. The absence of any defendant or contradictor sharpens the duty of the [Plaintiff]. While a case such as the present is distinguishable from one where an interlocutory injunction is sought in the absence of the defendant (in that there is here no defendant as such) I think it is fair to say that [a plaintiff] in this kind of situation, like [a plaintiff] ex parte for an injunction, carries the responsibility of bringing to the court's attention all matters that could be considered relevant to the exercise of its discretion. 26 In accordance with this duty the plaintiff brings to the attention of the Court aspects of the proposed Scheme that have been discussed above. These include the provisions in respect of, the deemed warranty; no encumbrances; no liability when acting in good faith; no performance risk for Scheme Shareholders; 'no talk' and 'no shop'; and funding arrangements. For reasons given above, I accept that none of these provisions provide an obstacle to the Court's approval, in due course, of the proposed Scheme.

Evidence necessary for a first court hearing 27 I am satisfied from the evidence before me that the requirements necessary to be proved at a first court hearing in relation to an application under s 411(1) of the Corporations Act 2001 (Cth) have been met. In particular I am satisfied that the plaintiff is a Part 5.1 body, that the proposed Scheme is an "arrangement" within the meaning of s 411, that Mr Thomas has consented to act as Chairman of the Scheme Meeting and Mr Pliner has consented to act in his absence. 28 I am satisfied that the Scheme is bona fide and properly proposed and that ASIC has been given an opportunity to examine the proposal and adequate notice of the first Court hearing date. The plaintiff has tendered a letter dated 10 March 2011 from ASIC stating that it does not propose to appear at the first Court hearing or to oppose the Scheme at that time.

Conclusion 29 On the basis of the evidence tendered by the plaintiff and for the reasons given above, I was satisfied that the orders sought by the plaintiff should, with one amendment as discussed above at [10] be made. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.