JUDGMENT No, .Qabmp mal 44S Massy sees CATCHWORDS TRADE PRACTICES - misleading or deceptive conduct - proposal for corporate reorganisation - "demutualization" and issue of "free" shares or cash - prospectus - reasonable expectation of members of full and fair disclosure for the making of properly informed judgment on the proposal. CORPORATIONS - "control" of corporation - meaning thereof. Broadcasting & Television Act 1942 (Cth) s.90G(1), 92D(1) Companies Act 1899 (NSW) Corporations Law s.172(1) & (5), s.176, s.199(1) & (2), s.995, s.1005, s.1022, s.1323, $.1324, s.1325 Trade Practices Act 1974 s.51A, s.52 Baillie v Oriental Telephone and Electric Company Ltd {1915] 1 Ch 503 (CA) Beach Petroleum NL v Johnson (1993) 43 FCR 1 Book of the Month Club v Federal Trade Commission 202 F 2d 486, 488 (2nd Cir. 1953) Bulfin v Bebarfalds Lid (1938) 38 SR NSW 423 Chequepoint Securities Ltd v Claremont Petroleum NL (1986) 11 ACLR 94 Cumbrian Newspapers Group Ltd. v Cumberland and Westmorland Herald Newspapers and Printing Co. Lid [1987] 1 Ch 1 Demagogue Pty Lid v Ramensky (1992) 39 FCR 31 Devereaux Holdings Pty Lid v Pelsart Resources NL (No. 2) (1985) 9 ACLR 956 Federal Commissioner of Taxation vy Commonwealth Aluminium Corporation Ltd (1980) 143 CLR 646 Federal Trade Commission v Standard Education Society 302 US 112, 116-117 (1937) Garvie v Axmith (1962) 31 DLR (2d) 65 Goldex Mines Lid v Revill (1974) 54 DLR (3d) 672 (Ont CA) Gramophone & Typewriter Lid v Stanley [1908] 2 KB 89 Jackson v The Munster Bank Ltd (1884) 13 LR Ir 118 Kolotex Hosiery (Australia) Pty Lid v Federal Commissioner of Taxation (1973) 130 CLR 64 Mendes v Commissioner of Probate Duties (Victoria) (1967) 122 CLR 152 National Roads & Motorists' Association v Parker (1986) 4 ACLC 609 Pacific Coast Coal Mines Lid v Arbuthnot [1917] AC 607 (PC) Parkdale Custom Built Furniture Pty Lid v Puxu Pty Ltd (1982) 149 CLR 191 Peel v London & North Western Railway {1907] 1 Ch 5 (CA) Peters' American Delicacy Co. Lid v Heath (1939) 61 CLR 457 Re Application of The News Corporation Ltd (1987) 15 FCR 227 Re Dorman Long & Company Lid [1934] 1 Ch 635 Re Ingleburn Horse and Pony Club Ltd [1973] 1 NSWLR 641 Re National Grocers Co. Lid [1938] 3 DLR 106 27 JAN 1995 FEDERAL COURT OF AUSTRALIA Peart RY Re NFU Development Trust [1972] 1 WLR 1548 Re N Slater Co. Lid [1947] 2 DLR 311 Rhone Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477 Taco Co. of Australia v Taco Bell Pty Lid (1982) 42 ALR 177 at 202! Tiessen v Henderson [1899] 1 Ch 861 Warner v Elders Rural Finance Lid (1993) 41 FCR 399 Wentworth v NSW Bar Association (1992) 176 CLR 239 DAWN FRASER and RICHARD JAMES TALBOT v NRMA HOLDINGS LIMITED, NRMA LIMITED and NRMA INSURANCE LIMITED No. NG3479 of 1994 BEFORE: BLACK CJ, VON DOUSSA & COOPER JJ PLACE: SYDNEY DATE: 27 JANUARY 1995 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY "No. NG3479 of 1994 Net Nee Ne Ne ee" GENERAL DIVISION Application for leave to appeal from the judgment of Gummow J. BETWEEN: DAWN FRASER First Applicant (Respondent on the Application for leave to appeal) RICHARD JAMES TALBOT Second Applicant (Respondent on the Application for leave to. appeal) AND: NRMA HOLDINGS LIMITED First Respondent (Applicant on Application for leave to appeal) NRMA LIMITED Second Respondent (Applicant on Application for leave to appeal) NRMA INSURANCE LIMITED Third Respondent (Applicant on Application for leave to appeal) MINUTES OF ORDER JUDGES MAKING ORDER : BLACK CJ, VON DOUSSA AND COOPER JJ WHERE MADE : SYDNEY DATE OF ORDER ; : 27 JANUARY 1995 THE COURT ORDERS THAT: 1. Leave to appeal be granted to the applicants. 2. The application be relisted in Sydney at 12.00 noon on Monday 30 January 1995 to receive submissions as to the orders to be made for the disposal of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) ) GENERAL DIVISION soe No, NG3479 of 1994 Application for leave to appeal from the judgment of Gummow J. BETWEEN: DAWN FRASER First Applicant (Respondent on the Application for leave to appeal) RICHARD JAMES TALBOT Second Applicant (Respondent on the Application for leave to appeal) AND: NRMA HOLDINGS LIMITED First Respondent (Applicant on Application for leave to appeal) NRMA LIMITED Second Respondent (Applicant on Application for leave to appeal) NRMA INSURANCE LIMITED Third Respondent (Applicant on Application for leave to appeal) Coram: Black CJ, von Doussa and Cooper JJ. Place: Sydney Date : 27 January 1995 REASONS FOR JUDGMENT THE COURT: NRMA Limited ("the Association") is a company limited by guarantee and not having a share capital. It was incorporated in 1920 under the Companies Act 1899 (NSW) 'as National Roads & Motorists' Association Limited. As its objects make clear, the Association was formed to promote the interests of motorists and other road users and to provide services to motorists, including an emergency or breakdown road service and insurance. As at 31 August 1994 there were in excess of 1.8 million members of the Association. As at 31 March 1994 the Association wholly owned or was the majority shareholder in eight companies and had assets under its management of $457m. NRMA Insurance Limited ("Insurance") is also a company limited by guarantee and not having a share capital. It was incorporated on 7 July, 1926 under the Companies Act 1899 (NSW). Insurance has carried on business as an insurer and provider of financial services. It has 1.3 million members who are both members of the Association and policyholders. It owns or has the majority interest in ten companies and as at 31 March 1994 had assets of $4.401b, under management. NRMA Holdings Limited ("Holdings") is a public company limited by shares. It was incorporated by registration under the Corporations Law ("the Law") on 15 July 1994. Holdings was incorporated as part of a plan approved by the majority of each of the boards of directors of the Association and Insurance for Holdings to acquire ownership and_ control of the Association and Insurance from the members of each company in exchange for "free shares" in Holdings, or, through the sale of those shares, a money sum in lieu of shares. In August 1994-Holdings.was--admitted-.as.-a member..of both the Association and Insurance. On 23 August 1994 Holdings and Perpetual Trustee Company Ltd issued a booklet entitled "PROSPECTUS". The booklet, to which we shall refer as "the prospectus", was sent to members of the Association by mail in a clear. plastic cover. Included in the booklet were notices of general meetings of the Association and of Insurance to be held on 19 October 1994. On top of the prospectus, visible through the plastic cover, was a coversheet bearing the words "Important Information Inside". It was accompanied by a second sheet on which there were printed proxy voting papers for the general meetings. These two sheets, to which we refer in more detail later, were referred to in argument as an "onsert". On 22 September 1994 Ms Fraser and Mr Talbot filed an application seeking declaratory and injunctive relief in relation to the contents of the prospectus and the holding of the proposed general meetings on 19 October 1994. Ms Fraser and Mr Talbot are directors and members of the Association and are opposed to the proposal to "demutualize" the Association and Insurance. In the present context "demutualization" occurs when a company operated for the mutual benefit of its members, and usually limited by guarantee, changes its status and becomes a corporation limited by shares and seeking to make profits and distribute them to its shareholders. Such a change involves a fundamentally different approach to corporate organisation. Holdings, the Association and Insurance were respectively the first, second and third respondents. It is convenient to continue to refer to Ms Fraser and Mr Talbot as the applicants and to the companies as the respondents. On 5, 6 and 7 October 1994 Gummow J heard argument on separate issues raised on the pleadings and on 13 October 1994 made the following declaration and orders: "THE COURT DECLARES THAT: By distributing to members of the second and third respondents the documents copies of which are Exhibits A, B and C, the first respondent, in trade or commerce, engaged in conduct which is misleading or deceptive or likely to mislead or deceive. AND THE COURT ORDERS THAT: Q) The respondents, by themselves, their servants and agents, and the servants and agents of each of them, be restrained from distributing to members of the second and third respondents copies of the documents Exhibits A, B and Cc. (2) The second respondent, by itself, its servants and agents, be restrained from, without the leave of the Court, proceeding with any business at the general meeting of members, iaentified in the Notice of General Meeting, a copy of which is contained in Exhibit C, other than by the taking of such steps as are necessary or appropriate to adjourn the meeting. (3) The third respondent, by itself, its servants and agents, be restrained from, without the leave of the Court, proceeding with any business at the general meeting of members, identified in the Notice of General Meeting, a copy of which is contained in Exhibit C, other than by the taking of such steps as are necessary or appropriate to adjourn the meeting. (4) There be liberty to apply. (5) The respondents pay the costs of the applicants of the proceeding up to and including 13 October 1994. (6) | Order (1) be suspended until noon on 14 October 1994, and the proceeding stand over to 9.30 a.m. on 14 October 1994 for the parties to speak to the form of orders (1), (2) and (3). (7) The proceeding otherwise stand over to 9.30 a.m. on 25 October 1994 for directions as to the further conduct of the balance of the proceeding which remained after the order under 0.29 r.2 made 27 September 1994." Exhibits A and B were the front page of the onsert and the members proxy form respectively. Exhibit C was the prospectus. On 14 October 1994 his Honour made further orders as follows: "@) (2) (3) (4) (5) Order (2) of the orders pronounced 13 October 1994 be amended by inserting after 'Exhibit C' the words 'and from relying upon any proxies obtained or given in respect of that meeting'. Order (3) of the orders pronounced 13 October 1994 be amended by inserting after 'Exhibit C' the words', and from relying upon any proxies obtained or given in respect of that meeting'. Order (7) be varied by adding at the end thereof 'and to consider variation of order (5) to provide for costs on a solicitor/client basis'. Any affidavits in support of the costs application be filed and served on or before 20 October 1994, The declaration be amended by deleting the words 'the first respondent' and 7" inserting 'the respondents and each of them'. The respondents have sought leave to appeal from the declaration and orders made. Leave to appeal is required because the orders made do not dispose of the whole proceeding brought by the applicants; they are interlocutory in nature. In the circumstances, the Court heard full argument on the merits of the appeal during the course t of the application for leave to appeal. Mr Rares, Senior Counsel, instructed by the Australian Securities Commission ("the ASC"), sought and was granted leave to appear on the application as amicus curiae. We mentioned earlier that the prospectus had a cover sheet bearing the words "Important Information Inside". It also carried the words, printed in red' in large type, "How to Vote!" and "How many shares you will be given!". On the back of the cover sheet, opposite a marginal heading "What the enclosed form is and why you should fill it in" appeared the following: "It is proposed that NRMA change its status and: issue Free Shares* to members. The NRMA Boards are recommending that you vote in favour of this and take the Free Shares. Details about the proposed resolutions and the reasons for the Boards' recommendations are explained in the enclosed prospectus." The asterisk after "Free Shares" referred the reader to a marginal note at the foot of the page. The note read: "The Free Shares. (or cash alternative) are in exchange for membership under the Articles of each of NRMA Ltd and NRMA Insurance Ltd. Whether you accept the Free Shares or the cash alternative, Road Service and policies continue as usual." Behind the "Important Information Inside" cover sheet in the package sent to members there was a second sheet. On one side of the second sheet was a members' proxy voting paper for the members meeting of the Association on 19 October 1994, Beneath it was a form headed "Acceptance of Free Shares". The form asked members to "Cross a box to tell us if you want the shares or the cash alternative". The form also contained particulars completed for each addressee of the prospectus and in each case the form specified the number of shares in Holdings to which the addressee was said to be 'entitled", and stated what the directors estimated as the approximate market value of those shares. On the other side of the second sheet was a policyholder's proxy voting paper for the members' meeting of Insurance on 19 October 1994. The trial judge observed, and we agree, that the booklet was, in a visual sense, attractively presented and: well laid. out.- "It-was-a~substantial..booklet,.divided .into nine sections and containing in total 100 pages, together with an eight page application form for shares in Holdings. It also contained on page 18, towards the end of Section 1, a 'notice of general meeting of the Association to be held at 10.00 am on Wednesday, 19 October 1994 at the Sydney Convention and Exhibition Centre, Darling Harbour, Sydney. On the following page there was a similar notice. of general.meeting for. Insurance, this meeting being called for 3.30 pm on the same date and at the same place as that proposed for the Association. Section 1 of the prospectus was entitled "Information to Members" and was stated as being provided by the boards of the Association and Insurance. Prominently on page 1 of the prospectus appeared the following statement: THE BOARDS * The Boards of the Association and NRMA RECOMMEND Insurance recommend that: - members of each of the Association and NRMA Insurance vote in favour of the proposal; - members of the Association choose the Free Shares. Later in the "Information for Members", at p.15, it is disclosed that the recommendation was that of the majority of each board. On page 3 of the prospectus there appeared a letter from the President of NRMA Holdings Ltd addressed to "Dear Member". The opening paragraphs of the letter read: "Dear Member As a member of the NRMA you are facing one of the most important decisions in the proud history of the organisation. The NRMA, like many other mutual organisations, has reached a crossroads. It is time to decide: + whether we continue to operate within our current structure - which has been successful but which does not permit the members to share in the wealth and financial successes of the organisation; or ' whether we adopt a new structure which will build on the current successes and permit members to share in the wealth and future financial successes of the organisation. In short, the proposal is to unlock the wealth of the organisation by giving members Free Shares: The Proxy Voting Paper that came on the outside of this prospectus will have told you the number of Free Shares you will receive and an estimate of their value. The proposal and its implications for you are detailed in Section 1 of this prospectus. If the proposal is adopted, members' financial ownership of the NRMA will be formalised. The Boards of the Association and NRMA Insurance have each considered the options and have concluded that the share issue is in the best interests of members and policyholders. The restructure will not affect the way we operate. The NRMA will continue to provide efficient Road Service and competitive insurance. There will be no change in the road patrols. The restructure will however give us. greater flexibility in developing businesses for the benefit of all members and policyholders. The Boards therefore strongly recommend that you vote in favour of the proposal and accept the Free Shares..." It will be seen that "the proposal" was described in the President's letter as being, in short, to "unlock the wealth of the organisation by giving members Free Shares". The expression was further explained on the first page of the section "Information for Members" which followed the President's letter. Under the heading "THE PROPOSAL" the following appeared: "Members have the opportunity to become shareholders of NRMA Holdings Ltd, a new company which will own the NRMA businesses. If you were a member of the association on 16 March 1994, you are being offered Free Shares in NRMA Holdings Ltd. You may choose to take the Free Shares or to take the cash alternative. If you choose to take your Free Shares, you will become a shareholder of NRMA Holdings Ltd.". The frequent use in the prospectus of the expressions "Free Shares" and "Free Share" should be mentioned at this point. The phrases appeared throughout. the prospectus. In the first 31 pages, "Free Shares" and "Free Share" together appeared 100 times. In the prospectus as a whole they appeared 117 times. On the proxy form and the "Important Information Inside" leaflet, they appeared 13 times. The causes of action tried before Gummow J were confined to the alleged contraventions of s.52 of the Trade Practices Act 1974 ("the TPA"). Broadly stated, the applicants alleged that the prospectus, the notices of general meeting and the forms of proxy did not put members in possession of information appropriate to enable them to make an informed and critical assessment of the proposal, or to make an informed decision as to their response. The applicants alleged that if proper regard were had to what was said and left unsaid, contraventions of s.52 were demonstrated. In his reasons his Honour noted that the proceedings did not turn directly upon a failure to distribute what might be described as a "no" case, but pointed out that had the Association and Insurance been corporations limited by shares with members who were shareholders the proposal, insofar as it included offers by Holdings to allot shares, might be characterised as one to acquire the shares of the Association and Insurance in exchange for shares in Holdings or a cash alternative. His Honour observed that if the proposal had, as a matter of law, been framed in that way there could have been no suggestion that the shares in Holdings .were. free shares. and, .furthermore,..the...proposal would. have .attracted the provisions of Part 6.12 of the Law which required the issue of, among other statements, a Part B statement. Clause 1 of Part B requires that the Part B statement set out certain material including, in the case of each director of the target company, if the director desires to make, and considers himself or herself justified in making, a recommendation in relation to the offers, whether the director recommends the acceptance of offers made or to be made by the offerer or recommends against such acceptance and, in either case, the reasons for so recommending. His Honour also noted that whilst the applicants relied only on s.52 of the TPA, the whole complex of arrangements dealt with in the prospectus would have attracted the operation of s.995(2) of the Law, which relevantly provides that a person shall not in or in connection with any dealing in securities, or any prospectus issued in relation. to securities, "engage in conduct that is misleading or deceptive or is likely to mislead or deceive". The principal complaints of the applicants at trial fell into three groups. The first concerned alleged inadequate treatment of the Association and Insurance as distinct entities and included complaint about the statement in the prospectus that the interests of members of the Association and Insurance were "similar"; the second concerned allegations that what was on offer was not truly "Free Shares"; and the third concerned statements to the effect that there would be "business as usual" after the restructure, and no change in the nature of services presently provided to members. In addition, the applicants alleged that the treatment in the prospectus of the consequences of acceptance of the proposal by persons in receipt of social security benefits, and of taxation considerations for individual shareholders, were inadequate, but his Honour rejected each of these complaints. In relation to the first group of principal complaints, his Honour said in his reasons: "The applicants make the point, which I accept, that before members make their decision to choose to take the shares or cash,' and. to. further invest. in. Holdings; they would reasonably expect information dealing with the worth to them of their present membership of the mutual organisations. There is, after all, at issue the translation of a mutual form of ownership to that of a shareholding, each, no doubt, having benefits and detriments. It is only from some of the Notes to the report (e.g. Notes 8 and 11 at pp.74-75) that there may be discerned separate treatment of the investments of Insurance and the Association, and of the members' equity and reserves of each body. Hence the importance to the reader of the prospectus who concentrates upon the 'Information for Members' of the statement in the first paragraph on p.12. This States: 'Members' approval will mean members of the Association and members of NRMA Insurance will no longer be members of those companies. The Association presently controls NRMA Insurance _by appointing its Board. For an NRMA Insurance policyholder to be eligible to have become a member of NRMA Insurance, the policyholder must have been a member of the Association. Members of the Association are, therefore, being offered an automatic entitlement to Free Shares, with an additional allocation if that membership was linked to an NRMA insurance policy (other than Life or Travel). For these reasons the Boards consider that_ members of NRMA Insurance have interests similar to those of the members of the Association.' [Emphasis added] The applicants point to this passage as illustrative of the failure in dealing with the affairs of three corporations in the one document with no full identity of membership between them, to make to members an adequate disclosure which differentiates between the impact of the proposal. They make the following points, which I accept: (i) That the Association appoints the Board of Insurance may mean that for some statutory purposes it 'controls' Insurance but the ultimate control of Insurance rests with the members 75% of whom must — agree to a change in the memorandum or Articles; indeed, it is the favourable exercise of that ultimate control which is solicited from members.of Insurance by the prospectus. itself. (ii) The circumstance that any member of Insurance must be a member of the Association does not mean that the interests of the two bodies of members are relevantly similar, because, as the facts show, not all members of the Association are members of Insurance and the information later given at p.75 shows that the total members' equity of Insurance exceeds that of the members of the Association in a ratio of about 7.5:1. (iii) In the present context, it is likely to mislead for the Boards to state that they consider that the two bodies of members have interests which are 'similar' without going on to make clear whether the Boards consider that the similarity of interest extends to the purposes and effects of the proposed restructuring outlined in the prospectus. The applicants also complain of the treatment in the prospectus of the criteria used by the Boards for the differing scales of entitlement to Free Shares as between membership of the Association and membership of Insurance. They say that the criteria inadequately. reflect. the value of the assets and: undertaking of Insurance and the rights of members of Insurance and the value of their membership. The criteria (pp. 8-9) favour long-standing members, as a reward for their loyalty and on the footing that they tend to have more business with the organisations. The criteria expressly do not contain any weighting in favour of those members of the Association with many vehicle subscriptions; as I have said, 85% of all members have only one car covered by their membership. The allocation of shares is doubled in respect of those members with one or more policies (with Insurance) not being Travel or Life policies; there is no weighting in favour of those members with multiple policies. The reasoning which led to the adoption of these criteria is explained. It may be that the applicants are correct in taking the next point that the criteria of issue to members of Insurance are inadequate because they do not make allowance for the comparative value of the assets of Insurance and the Association. Nor, it is said, is allowance made to reflect adequately the rights of members and the value of their membership of Insurance. I have referred earlier to the apparent disparities between the 'wealth' of Insurance and the Association to which they point. The applicants submit that the prospectus suggests that the criteria which are used are adequate, contrary to the true situation. That, it is said, involves contravention of s.52., It is unnecessary to decide this point. What is important is that the apparent discrepancy to which the applicants point would properly be a matter of interest and concern to those members of the Association who were also members of Insurance. Counsel for the respondents says that this should not be so because the body of policyholders is a fluctuating one and terms of policies may vary. That may be so, but the scheme for the offering of Free Shares to certain policy holders who are members operates by linkage'to-length-of membership of-the Association. The point taken by the applicants is a significant one, and whether it be correct or not, it is a subject upon which members would expect disclosure to enable them to make a properly informed judgment as a step: to deciding whether to accept the proposal. It is in this sense that, in my view, there is a contravention of s.52, by the dissemination of the prospectus in its present form." His Honour had earlier expressed the. view that the statement in the prospectus that the Association "presently controls NRMA Insurance by appointing its Board" in its context was at best a half truth and, as such apt to mislead or deceive. In relation to the use of the phrase "free shares", his Honour said: "No doubt one adjectival use of 'free' is to describe that which is provided without, or not subject to, a charge or payment. Counsel for Holdings submits that that is what is meant in the prospectus with the use of the phrase 'Free Shares'. He pointed, in particular, to the use, on p.21, the first page of Section 2, of the heading: 'Details of the Members Free Offer and the Sale Offer.' But, as I have indicated, the particular phrase is 'Free Shares' and this is used in the prospectus on many occasions. In particular, as counsel for the applicants pointed out, the first two Sections of the prospectus are replete with use of 'Free Shares' which is not in any apposition to the 'Sale Offer'. Rather, the phrase is used to identify and attract the reader by suggesting there are available for acquisition dividend yielding shares at no outgoing to the member. This accords with another adjectival use of 'free', to identify that which is given without consideration and as a gift. 3 It is true that in several places in Exhibits A, B and C, including the passage identified by the asterisk on the leaflet headed 'Important Information Inside' and on p.12 of the prospectus, it is said that the 'Free Shares' are in exchange for membership or that membership is to be given up on condition of the offer of the 'Free Shares'. Nevertheless, the effect of the persistent reiteration of the phrase 'Free Shares' is to engender in the reader the notion that the shares may be acquired without any significant-loss or outgoing to-the-offeree who accepts-them. Counsel for the respondents pointed to the provisions in the memoranda of Insurance and the Association which would deny the members a distribution of assets on a winding-up. That, as I understood the submissions, was used to support the submission that, in truth, there could be no significant consideration moving from the members, so that the shares were 'free'. I have referred earlier to what might be called the ultimate control of Insurance by the members, notwithstanding the manner in which the Board is appointed. The Board of the Association is in a different position, it. being responsible for its election to the members. Furthermore, Article 26 of the present Articles of the Association obliges the Board on the written requisition of 200 or more members forthwith to convene a meeting of members to be held as soon as practicable and, in any case, not later than 2 months after the date of the requisition. The relinquishment of membership thus, in a legal 'sense, involves the relinquishment of significant rights to the control of the affairs of the two corporations. Further, 'demutualization' removes the possibility of further enjoyment of the advantages described earlier in these reasons. A basic question for members to decide, as pointed out earlier in. these reasons, is whether they will be better off remaining as. members. or becoming-shareholders or recipients of the proposed cash distribution in lieu of shares. It is a matter of weighing the respective advantages and disadvantages of each course of action. In that setting, in my view it is likely to mislead or deceive to describe repeatedly in the prospectus, particularly in the passages most likely to be studied by the ordinary reader, that which is offered to members in connexion with their consent to the reorganisation as 'Free Shares'." In their application for leave to appeal the respondents submitted that the statements in the prospectus of which his Honour was critical in these passages from his reasons were correct, and, as statements of colloquial and plain English they correctly reflected the underlying legal position. It was submitted that it was istated on the back of the "onsert", in the notices of meeting and at page 12 of the prospectus that what was to occur was the giving up of membership of the Association and Insurance in exchange for shares to be issued in Holdings or for cash in lieu of shares. Thus, it was submitted, nobody could be mislead that the shares offered were free in the sense that nothing had to be given up for the shares. ~ Additionally, -it-was-submitted that the-rights of-membership - were in an economic sense valueless so that little, if anything, was being given up by a member in relinquishing the rights which attached to membership of either the Association - or Insurance. The respondents' submissions do not. challenge. the. correctness of observations made by his Honour in the course of his reasons as to the principles to be applied where a contravention of s.52 of the TPA is alleged. After referring to Demagogue Pty Lid v Ramensky (1992) 39 FCR 31 at 32, 40-41, Warner v Elders Rural Finance Limited (1993) 41 FCR 399 at 401-402 and Beach Petroleum NL v Johnson (1993).43 FCR.1 at. 44-45, his Honour observed that a partial disclosure of a state of affairs may contravene s.52; so also may. silence itself if the circumstances are such as to give rise to a reasonable expectation that silence would be broken if particular matters exist. Later in his reasons his Honour concluded that: "The fundamental issue is whether by reason of what was said and left unsaid in the prospectus, there was, in all the circumstances, a contravention of s.52. In that regard, members of the Association and of Insurance were entitled, in relation to such a significant proposal, reasonably to expect that what was put before them involved no 'half-truths' and contained a full and fair disclosure of matters to enable them to make a properly informed judgment on the proposal." Mr Rares made submissions on questions of law relating to the application of s.52 to the circumstances of this case. He submitted that in considering whether a contravention of s.52 had been established the Court should take a substantially similar approach to that which it would take were the claim based on s.995 of the Law. Mr Rares submitted that to achieve this end established principles of company: law and provisions of the Law~insofar as they may 'affect the-characterisation of the conduct complained of, should be taken into account in determining whether any contravention of s.52 of the TPA or s.995 of the Law had been established. It was submitted that applicants should not be able to avoid an unfavourable construction of s.995 in connection with a dealing in securities by resorting to s.52. With that submission we agree and we do not understand anything said by the learned trial judge to. suggest otherwise. As Brennan J said in Parkdale Custom Built Furniture Pty Lid v Puxu Pty Lid (1982) 149 CLR 191 at 225: "Section 52 operates in a milieu of the external legal order, so that the character of conduct which falls for consideration under s.52 is to be determined by reference to the external legal order as it exists when the conduct is engaged in." That observation is equally applicable to s.995. At the trial it was conceded that the conduct of the respondents in question was conduct which occurred "in trade or commerce". That is not a requirement of s.995, but s.995 in its operation is confined to the circumstances prescribed by paragraphs (a) and (b) of s.995(2); whereas s.52 in the case of corporations is a section of much wider application. In the circumstances of the present case each section had application. In each section the relevant proscription is expressed in identical terms, and had the applicants sought to rely on s.995(2) the issues for determination would have been substantially the same. The scope of the remedies available under ss.1005, 1323, 1324 and 1325 of the Law in the event of a contravention of s.995 may be greater than in the case of s.52 of the TPA but that difference is not presently material. Mr Rares also questioned whether his Honour, in saying that members of the a full and fair disclosure, was intending to apply the concept of reasonable expectation introduced by s.1022 of the Law. That section relevantly provides: "1022(1) In addition to the information required by section 1021 to be included in a prospectus in relation to securities of a corporation, such a prospectus shall, subject to subsection (2), contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find-in the prospectus, for the purpose of making an informed assessment of: (a) the assets and liabilities, financial position, profits and losses, and prospects of the corporation; and (b) the rights attaching to the securities. 1022(2) The information to be included by virtue of this section is. such of the information mentioned in subsection (1) as is known to: (a) if the prospectus is a primary prospectus - any person referred to in any of paragraphs 1006(2)(b) to (h), inclusive; or or such of the information so mentioned as it would be reasonable for such a person to obtain by making enquiries. 1022(3) In determining what information is required to be included in a prospectus by virtue of this section, regard shall be had to: (a) the nature of the securities and of the corporation; (b) the kinds of persons likely to consider subscribing for or buying the securities; (c) the fact that certain matters may reasonably be expected to be known to professional advisers of any kind whom those persons may reasonably be expected to consult; (d) whether the persons to whom the offers or invitations are to be made or issued are the holders of shares in the corporation and, if they are, to what extent (if any) relevant information has previously been given to them by the corporation under any law, any requirement of the business rules or listing rules of a securities exchange, or otherwise; and (e) any information known to investors or their professional advisers by virtue of any Act, State Act or law of a Territory." Although the issues tried before Gummow J were 'confined to - alleged contraventions of s.52 of the TPA, one of the particulars of alleged contravention read: — "The prospectus does not comply with the requirements of Section 1022 of the Corporations Law, The Applicants rely on sub-sections 1022(1)(a) and (b), (2) and (3)(a) and (b), the Prospectus' contents, and the composition, nature. and size of and widely held membership of the Association and Insurance." His Honour in his reasons made no reference to s.1022. For the purpose of s.1022(1) "the corporation" to which the prospectus related was Holdings. The complaints made by the applicants related not to disclosures about Holdings, but to the information relating to the Association and Insurance and the disclosures relevant to the resolutions proposed in the notices of general meetings of. members of those two corporations. The provisions of s.1022 were not relied on by counsel for the applicants before this Court, and in any event do not appear to be relevant to the complaints made by the applicants. It is understandable that his Honour has not referred to s.1022 of the Law. His Honour, by the references in particular to Demagogue, Warner, and Beach Petroleum, made it clear that he was intending only to apply the statements of principle in those decisions, and that the reasonable expectation to which he referred was one arising out of the particular factual circumstances of the case. Those decisions, and Rhone Poulenc Agrochimie SA v UIM Chemical Services Pty Lid (1986) 12 FCR 477 at 490 to which his Honour also made reference, emphasise that in determining disputes arising under s.52 of the TPA, to inquire whether an independent "duty to disclose" has arisen is to digress from the-application of -the-terms of 6.52. -His.Honour.-had earlier observed .in Demagogue (at p.40) that the use of the term "duty" was apt to suggest a necessary connection with the general law which does not necessarily exist and is not required by s.52. Nevertheless a particular relationship between the parties, where that relationship gives rise to fiduciary or other duties under the general law, may assist in. determining whether in the circumstances of the case s.52 is contravened by a. failure to give information, or by the provision of information only to a limited extent. It was in this context that his Honour referred to the general law requirement that directors make to members what Latham CJ described in Peters' American Delicacy Co. Lid. v Heath (1939) 61 CLR 457 at 486 as a "proper and accurate disclosure", and to Chequepoint Securities Limited v Claremont Petroleum NL (1986) 11 ACLR 94 at 96-97. Each of those decisions approved the following statement as to the duties of directors by Long Innes CJ in Eq. in Bulfin v Bebarfalds Lid (1938) 38 SR NSW 423 at p.440: " .when directors are advising or urging a particular action or course of conduct upon members, or a particular class of members, of the company, the authorities previously mentioned establish, in my opinion that they are under a duty to make full disclosure of all facts within their knowledge which are material to enable the members, or class of members, to determine upon their action." His Honour in referring to these decisions was not postulating that s.52 created an independent "duty" to disclose information based on a notion of reasonable expectation. A duty to make disclosure of relevant information arises as part of the fiduciary duties of the directors to the company and its members in relation to proposals to be Tue considered in general meeting and under s.1022 of the Law in respect of the contents of a prospectus. "The fiduciary duty -is'a duty to-provide such-material.information as. will fully and fairly inform members of what is to be considered at the meeting and for which their proxy may be sought. The information is to be such as will enable'members to judge for themselves whether to attend the meeting and vote for or against the proposal or whether to leave the matter to be determined by the majority attending and voting at the meeting: Jackson v The Munster Bank Ltd (1884) 13 LR Ir 118 at..136-137; Tiessen v Henderson [1899] 1 Ch 861 at 866-867, 869-871; Peel v London and North Western Railway [1907] 1 Ch 5 (CA) at 12-14, 16-17, 31; Baillie v Oriental Telephone and Electric Company Limited [1915] 1 Ch 503 (CA) at 514-515, 518; Pacific Coast Coal Mines Lid v Arbuthnot [1917] AC 607 (PC) at 618; Goldex Mines Ltd v Revill (1974) 54 DLR (3d) 672 (Ont CA) at 679 and the cases there cited. Examples of a failure to provide sufficient information to enable a member to make an informed decision as to the worth or otherwise of a proposed reconstruction or amalgamation can be found in Garvie v Axmith (1962) 31 DLR (2d) 65; Re National Grocers Co. Ltd [1938] 3 DLR 106; Re N Slater Co. Lid [1947] 2 DLR 311. A proper discharge of the duty may require that the directors take reasonable steps to ascertain relevant information for communication to members if that information is not known to the board. Directors must not consciously refrain from seeking relevant information or turn a blind eye to relevant material in order to avoid placing before members information which may contradict or qualify any particular position taken or advocated by the directors or a majority of them. Although s.52 gives rise to no duty to provide information, when information is in fact given in purported discharge of the fiduciary duty, s.52 requires that the information given is not misleading or deceptive or likely to mislead or deceive. Additionally, the section 'requires: that the conduct: of the directors.:in-withholding. certain information. is. not itself conduct which is misleading or deceptive or likely to mislead or deceive. It is in the area of the proper discharge of the fiduciary duty to. provide relevant information that there is an overlap between discharge of the duty and the operation of s.52: .a failure properly to discharge the duty may itself constitute a contravention of s.52 as well as a contravention of s.995 of the Law. Thus, the Ontario Court of Appeal in Goldex Mines Lid v Revill said (at 679): "In Charlebois et al v. Bienveau [1967] 2 OR 635 at p 644, 64 DLR (2d) 683 at p 692, Fraser J., held that the holding of an annual meeting and the election of directors after the sending out of a misleading information circular was.a breach of the directors' fiduciary duty to the company. We hold that such an act is also breach of duty to the other shareholders. If the directors of a company choose, or are compelled by statute, to send information to shareholders, those shareholders have a right to expect that the information sent to them is fairly presented, reasonably accurate, and not misleading." Examples of the courts' intervention where incomplete and misleading information was given or the notice and accompanying circular could be described as "tricky" can be ~ found in Jackson v The Munster Bank Lid and Baillie v Oriental Telephone and Electric Company Limited. Whilst s.52 does not by its terms impose an independent duty of disclosure which would require a corporation or its directors to give any particular information to members asked to consider a motion in general meeting, where information for that purpose is promulgated, unless the information given constitutes a full and fair disclosure of all facts which are material to enable the members to make a properly informed decision, the combination of what is said and what is left unsaid may, depending on the full. circumstances, be likely to mislead or deceive the membership. In the present case the membership of Association to whom the prospectus and accompanying documents were addressed comprised some 1.8 million people, a large proportion of the adult population of New South Wales and the Australian Capital Territory. The common bond between them is that they are motorists. It is difficult to envisage a wider cross-section of the community and in determining the likely effect of conduct that is alleged to be misleading or deceptive it is of course relevant to consider the class of persons likely to be exposed to that conduct. As the learned trial judge observed, the addressees of the prospectus may be expected to include significant numbers of people who, whilst quite astute in dealing. with their day to day financial affairs, have no experience in dealing with shares, with corporate reorganisation, 'or with a prospectus. Moreover, "demutualization" is an unusual form of corporate reorganisation, even to many experienced investors. It is also relevant to note that the addressees may be expected to include not only those who have no experience in dealing with shares or with corporate reorganisation, but also people in that category who are, as well, less astute, less intelligent or less well-informed than the average member of the community: see Parkdale Custom Built Furniture Pty. Lid. v Puxu Pty. Ltd. (1982) 149 CLR 191 at 199; Taco Co. of Australia v Taco Bell Pty. Lid. (1982) 42 ALR 177 at 202. The question whether conduct is misleading or deceptive or is likely to mislead or deceive has to be judged objectively and we agree with the trial judge that the objective assessment required is whether by reason of what was said and what was left unsaid there was in all the circumstances a contravention of s.52. This is not necessarily the same question as the one which would have arisen if the applicants had alleged breaches of directors' duties under the general law. For example, if the applicants had sought relief for a breach of the directors' duties described in Bulfin a question would have arisen whether the directors had knowledge or must be taken to have had knowledge of facts said not to be disclosed, whereas for the-purposes of s.52, if by reason of what was said and what was left unsaid the conduct of the corporation is misleading and deceptive or likely to mislead or deceive, a contravention would occur even if the corporation through its directors and officers did not have knowledge of the undisclosed facts which rendered the conduct in breach of s.52. A contravention of s.52 may occur without knowledge or fault on the part of the corporation, and notwithstanding the exercise of reasonable care: Parkdale Custom Built Furniture Pty Lid v Puxu Pty Lid at 197. Where the contravention of s.52 alleged involves a failure to make a full and fair disclosure of information, the applicant carries the onus of establishing how or in what manner that which was said involved error or how that which was left unsaid had the potential to mislead or deceive. Errors and omissions to have that potential must be relevant to the topic about which it is said that the respondents' conduct is likely to mislead or deceive. The need for an applicant to establish materiality is of particular importance in a case like the present one where the proposal is complex, and involves difficult questions of commercial judgment and matters of degree and conjecture as to the future about which there is room for a range of honestly and reasonably held opinions. If every possible formulation of the commercial objective of the proposal, and arguments for "and against every theoretical possibility, were set forth the total package of information to members would be likely to confuse rather than to illuminate the issue for decision, even for people having a familiarity with corporate law and commerce. The need to make full and fair disclosure must be tempered by the need to present a document that is intelligible to reasonable members of the class to whom it is directed, and is likely to assist rather than to confuse: see Devereaux Holdings Pty Lid v Pelsart Resources NL (No.2) (1985) 9 ACLR 956 at 959; In re Dorman Long & Company Lid [1934] 1 Ch 635 at 665-666. In complex cases it may be necessary to be selective in the information provided, confining it to that which is realistically useful. Clearly the present case was one of this kind. However the proposal was formulated, and however the information to members was drafted, it is likely that some criticism could be levelled at it. For example, criticism is made that the prospectus incorporates'-notices of general meetings: of members of the Association and Insurance and fails adequately to recognise them as separate entities - it is said that there should have been a separate explanatory memorandum for each meeting. Yet if three separate documents had been produced it is not difficult to imagine that criticism could be made that the documents were repetitious with the result that the length of the total package was too great, and the interrelationship of transactions separately discussed too difficult, to be understood by ordinary reasonable members. It is important that the adequacy of the information provided by the prospectus and supporting documents be assessed in a practical, realistic way having regard to the complexity of the proposal. In the circumstances the Court should not be quick to conclude that a contravention of s.52 has occurred because other information could have been provided that was not. The need for the applicants to establish the materiality of "errors. and 'omissions is an important-step in-the proof-of their claims....It-will be.necessary to return to this topic as the reasons of the learned trial judge are considered. We tum now to consider the submissions of the respondents about his Honour's findings as to the inadequacy of the disclosures concerning the separate identities of the Association and Insurance, and the use of the phrase "Free Shares". It must; of course, be' remembered that the Association and Insurance, though having a close historical association, are in fact separate legal entities with distinct and separate assets and liabilities: Walker v Wimborne (1976) 137 CLR 1; ANZ Executors & Trustee Co. Ltd v Quintex Australia Lid. (receivers and managers appointed) [1991] 2 Qd.R. 360 at 365. The reasons given in the prospectus for the claimed similarity of interests of members of the Association and Insurance were: (a) approval of the proposals would mean that members of the Association and Insurance would no longer be members of those companies; (b) the Association controlled Insurance by appointing its Board; (c) policyholders of Insurance to become members of Insurance must also have been members of the Association; _ (d) the common element between members of the Association and Insurance was that they were all members of the Association and therefore had an automatic entitlement to shares; (e) an additional allocation to members of the Association was justified if that membership was linked with an insurance policy issued by Insurance. The extent of rights attaching to membership of the Association and Insurance and ~ the determination | of the - question.:of control...of..Insurance..are central issues to the contention of the respondents that the statements in the prospectus concerning the relationship and the use of the phrase "Free Shares" are correct. The view of the Boards of the Association and Insurance, as expressed at page 12 of the prospectus, that the starting point to address the interests of members was from the perspective of membership of the Association because the Association controls Insurance, and that some members should be rewarded by reference to a link with an Insurance policy, carries with it the message that membership of Insurance in itself carries no rights or benefits above those already held as members of the Association, that membership of Insurance. carries with it no valuable rights, and.that the interests of Insurance: are: not independent of or different to those of the Association. His Honour was of the opinion that as a matter of ordinary usage and for some statutory purposes control of a company rested with those who by the exercise of voting power can control the decisions of a general meeting and he referred to the decision of the High Court in Mendes v Commissioner of Probate Duties (Victoria) (1967) 122 CLR 152 at 160-165 to support this opinion. Counsel for the respondents submitted that the decision in Mendes has no application to a company of the type of Insurance. It was submitted that this followed because there is no power in the membership of Insurance to appoint the directors of that company. Further it was submitted that the power of appointment was vested in the Association as a class right which attached to-the-Association's-membership of-Insurance and could not be altered by the requisite majority of members amending the relevant articles of association of Insurance without the consent of the Association (s.199(2) of the Law). Aside from the application of the decision in Mendes to Insurance, it was submitted that the prospectus does not purport to give an explanation of control of Insurance for company law purposes. Rather, what the statement did, in plain English, was to convey that the Association had practical control of Insurance because it controlled the appointment of the directors of Insurance. To state what was factually and practically correct was not to mislead or deceive nor, it was submitted, was it likely to mislead. We do not accept that the statement conveyed no more than that the Association had practical control over the business and affairs of Insurance because it appointed the Board of that company. The statement was made twice in that part of section 1 of the prospectus bearing the side heading "Legal Steps Involved in Change". The statement after setting out why the boards considered the interest' of members in the Association and Insurance to be similar continued: "The legal elements of approval by members of the Association and members of NRMA Insurance are: * changing the legal status of the Association and NRMA Insurance from companies limited by guarantee to companies limited by shares and guarantee; - adopting new Articles for each company, the central element of which means that members (other than NRMA Holdings) agree to give up their membership of the Association and NRMA Insurance on condition that Free Shares are offered by NRMA Holdings. This leaves NRMA Holdings as the 'only member of the Association, «and» NRMA-'Holdings~and the Association. as.the-only members of NRMA Insurance, and hence each is under the control of NRMA Holdings. By a resolution of the Boards, NRMA Holdings was admitted as a member of the Association on 4 August 1994 and as a member of NRMA Insurance on 16 August 1994. The special resolutions (if passed) constitute an agreement which binds all members of the Association and of NRMA Insurance, even if they voted against the proposal or did not vote at all; - approving, first, the allocation of entitlements to Free Shares as described earlier (people who are being allocated entitlements to Free Shares are referred to as 'those entitled' in this paragraph), second, the allotment by NRMA Holdings of the Free Shares to those entitled who elect to take up the Free Shares and, third, the allotment to the NRMA Offer Trust of shares not so taken up. The Trust will sell the shares and distribute the net proceeds of sale to both those entitled who choose the cash alternative and those entitled from whom we do not receive a valid Acceptance of Free Shares form; - in the case of the Association, approving changes to the memorandum and Articles of NRMA Insurance so that the Association ceases to control NRMA Insurance with the result that NRMA Holdings controls NRMA Insurance; and ' approving the overall changes in the structure of the NRMA so that each of the Association and NRMA Insurance is owned and controlled by NRMA Holdings." In the context in which the statement was made, it would convey to the reader that the Association had legal control of Insurance - not just practical control - because it appointed the Board. The control of Insurance by the Association was to pass to Holdings by the Association approving changes to the memorandum and articles of Insurance "so that the Association ceases to control NRMA Insurance with the result that NRMA Holdings controls NRMA Insurance". The articles of Insurance in respect of directors, so far as are relevant, provide: "25. The President for the time being of the N.R.M.A. shall during his tenure of that office be ex officio a Director, and the Chairman of Directors of the Company, and the Council of the N.R.M.A. shall, subject to the provisions of this Article and of Article 27, from time to time appoint the Directors, and may at any time terminate the appointment of any Director other than the Chairman PROVIDED THAT only a member of 'the N.R.MA. may be appointed a Director and PROVIDED -THAT -at -all-times. a.-majority-of Directors. shall:.be members. of the Council of the N.R.M.A. 26. The Council of the N.R.M.A. shall appoint each Director for a period of office ending not later than at the conclusion of:the second annual general meeting after his appointment takes effect and shall notify the Company in writing of each appointment and termination by it of an appointment. 29. | The Council of the N.R.M.A. may from: time to time, if the office of any Director is vacated by his death or otherwise, appoint another Director in his place. Any director so appointed shall hold office only for so long as the Director whose office was vacated would have held office had his office not been vacated. 30. The remuneration of the Directors shall from time to time be determined by the Company in general meeting and shall be deemed to accrue from day to day. The Directors may also be paid all travelling, hotel and other expenses properly incurred by them in attending and returning from meetings of directors or any committee of the directors or general meetings-of the Company or in connection with the business of the Company. Any Director who serves on any committee or devotes special attention to the business of the Company or otherwise performs services for the Company may be paid such extra remuneration by way of a sum of money or otherwise as the Directors may determine if in their opinion by so doing he has performed services which are outside the scope of the ordinary duties of a Director and shall so be paid by the Company provided that the payment of such extra remuneration is approved by the Council of the N.R.M.A. 31.(a) The Council of the N.R.M.A. may appoint any Member of that Council to act as an Alternate Director in the place of a Director for any period during which such Director is for any reason unable to act. In the event of an Alternate Director being absent or of no appointment having been made, the Chairman may appoint a Member of the said Council to act as an Alternate Director. The Alternate Director while acting in the place of the other Director shall exercise and discharge all the duties and have all the rights and powers of that other Director. 32. The office of a Director shall become vacant: (a) if he ceases to be a Director by virtue of the Council of the N.R.M.A. terminating his appointment and so notifying the Company;". The power of appointment, it may be noted, is not one vested in the Association as such. It is a power vested in the Council of the Association as a body. Although the Council is constituted by elected members of the Association and has no separate legal identity to that of the Association, it may nonetheless exercise specific powers which are given to it, and the exercise of such powers is not an exercise of those powers by the Association: see Wentworth v New South Wales Bar Association (1992) 176 CLR 239 at 248, 253. The articles confer no power of appointment on the Association and it could not, for example, appoint the directors of Insurance by resolution of the members of the Association in general meeting. The powers of the directors of insurance include the power, expressed in the following terms, to conduct the business of Insurance: "38. The business of the Company shall be managed by the Directors, who may exercise all such powers of the Company as are not by the Act or by these Articles required to be exercised by the Company in general meeting, subject nevertheless to the provisions of the Act and of these Articles and to any regulations not being inconsistent with the aforesaid provisions as may from time to time be prescribed by the Company in general meeting; but no regulation made by the Company in general meeting shall invalidate any prior act of the Directors which would have been valid if that regulation had not been made." This article is in similar terms to Article 25 of the Articles of the Association as they stood in 1986 although they have changed since that time. In National Roads & Motorists' Association v Parker (1986) 4 ACLC 609 at 613 McLelland J said in relation to the former Article 25:- "..It is clear that, in general, a power vested by the constitution of a company exclusively in the directors cannot be effectively exercised, nor can its exercise by the directors be effectively controlled or interfered with, by a resolution of members in general meeting, and that a power of control and management of the business and affairs of a company vested in directors in terms similar to those of Art. 25 in the present case is within this principle (see e.g. Howard Smith Lid v Ampol Petroleum Lid (1974) CLC-40-101; (1974) -AC.821 at p.837;.F.C. of Tv. Commonwealth Aluminium Corporation Lid 80 ATC 4371; (1979-1980) 143 CLR 646 at pp.660-661; John Shaw & Sons (Salford) Lid v Shaw (1935) 2 KB 113 at p.134; Salmon v Quinn & Axtens (1909) 1 Ch 311 affirmed (1909) AC 442). (It is not relevant in the present case to consider whether in exceptional circumstances some reserve or default power resides in the general meeting as discussed in Winthrop Investments Lid v Winns Ltd (1975-1976) CLC 40,238; (1975) 2 N.S.W.L.R. 666 at pp.674, 682 and 683)." It should also be noted that. the power of the Council. to appoint the board of Insurance does not arise under the directors' power of management given by the Association's articles; such a power of appointment does not form part of the ordinary business or affairs of the Association of which the Council has control and management. The Council's power of appointment comes solely from the articles of Insurance because the Council is designated as the repository of the power. So too in the present case the members of Insurance cannot direct the Board as to the discharge of the directors' functions nor interfere in the way the directors are managing the business of Insurance. In this situation the Council has a greater immediate control over the composition of the board of Insurance than the members of that company have and is better placed to influence directly the direction of business policies and decisions taken by the board of Insurance in its management of the business and affairs of Insurance. However, under Article 38 it remains open to the members of Insurance in general meeting to make regulations (articles) not inconsistent with the provisions of the Law and the existing articles or to amend the existing Articles. But, this power may only be exercised where the necessary majority of votes is obtained and where the changes do not 'vary or abrogate any special rights attaching to a class of members without the requisite consent of the class, and where the exercise of the power would not amount to a fraud or oppression of a minority of members: It is important therefore to distinguish between control of a company on the one hand and control of the management of its business on the other. The distinction between the control of individual corporators and management of the business was described by Fletcher Moulton LJ in Gramophone and Typewriter Lid v Stanley [1908] 2 KB 89 at 98: "This legal proposition that the legal corporator cannot be held to be wholly or partly carrying on the business of the corporation is not weakened by the fact that the extent of his interest in it entitles him to exercise a greater or less amount of control over the manner in which that business is carried on. Such control is inseparable from his position as a corporator and is a wholly different thing both in fact and in law from carrying on the business himself.. The directors and employees. of the corporation are not his agents, and he has no: power of giving directions to them which they must obey. It has been decided by this Court, in the case of Automatic Self-Cleansing Filter Syndicate Co. Ltd v Cunninghame [1906] 2 Ch. 34, that in an English company, by whose Articles of association certain powers are placed in the hands of the directors, shareholders cannot interfere with the exercise of those powers by the directors, even by a majority at a general meeting. Their course is to obtain the requisite majority to remove the directors and put persons in their place who agree to their policy. This shows that the control of individual corporators is something wholly different from the management of the business itself." The distinction drawn by Fletcher Moulton LJ was cited with approval by Stephen, Mason and Wilson JJ in their joint judgment in Federal Commissioner of Taxation v Commonwealth Aluminium Corporation Lid (1980) 143 CLR 646 at 661. As to the distinction between control of a company and control of the business of a company, their Honours said (at 659-660): ody 7 "Article 62 of the taxpayer's Articles of association, in accordance with usual practice, vests the management of the company's business in the board of directors 'and: there--was -no. delegation. of the.-board's. powers.to.a. managing director or any other person. Although control and management are not synonymous terms, any distinction that may be made between them does not lead to the conclusion that an article such as art.62 constitutes the directors as mere managers and leaves the shareholders in de facto control of the business of the company. It is idle to suggest that it is the shareholders who ordinarily control the business and the business activities of a company. Their participation is generally limited to the receipt of annual accounts and reports of directors, to the approval of these accounts and reports and to the election of directors at the annual general meeting. Important decisions, whether involving questions of policy or not, are. invariably taken by the directors who are ultimately responsible to the company in general meeting for the conduct of the company's business operations. The shareholders, through their power to control the company in general meeting and perhaps through their power to elect directors, may be said to 'control' the company, but as a general rule they do not exercise de facto control of the company's business. Of course, there will be cases in which the evidence establishes that some shareholders or outsiders do exercise de facto control of the business and possibly there may be cases in which shareholders exercise control of the business at general meetings. This is not such a case. In the context of s.136 little assistance is to be derived from the many cases which examine such concepts as control of a company and 'controlling interest' in a company, viz. Mendes v Commissioner of Probate Duties (Vict,).(1967) 122 CLR 152; Kolotex Hosiery (Australia) Pty Lid v Federal Commissioner of Taxation (1975) 132 CLR 535; British American Tobacco Company Lid v Inland Revenue Commissioners [1943] AC 335; and Barclays Bank Lid v Inland Revenue Commissioners [1961] AC 509. They reflect in varying degrees the different notion of capacity to control which, on the view which we have expressed, is not an element in par.(a). It has been suggested that control of a company may be inferred from the existence of a power to control its business (British American Tobacco Company Lid v Inland Revenue Commissioners [1943] AC, at p.339), but this is another question. As Kitto J observed in Mendes (1967) 122 CLR, at p.161, when 'a statute makes the fact that 'the company' was controlled by a deceased person a critical fact in respect of duty upon the estate of the deceased the prima facie meaning must be that the company in general meeting was controlled by the deceased in the only way in which it could be so controlled', namely by the exercise of a majority power at such a meeting. Section 136(a) is directed not to the control of the company, that is, of the company in general meeting, but to the control of the business carried on by the company with respect to which the decisions are made by the directors 'for the company, not dy it', to use the words of Kitto J (Mendes dee (1967) 122 CLR, at p.160: see also per Windeyer J (1967) 122 CLR, at pp.169- 170))." In Kolotex Hosiery (Australia) Pty Lid v Federal Commissioner of Taxation (1973) 130 CLR 64, Mason J said (at 77): "Central to the concept of control of a company is the capacity to control a general meeting. That capacity rests on majority voting power and it matters not whether the majority voting power is, or is not, attached to shares." (See also on appeal 132 CLR at 572-573 per Gibbs J and at 580-581: per Stephen J). That de facto control of a company can be achieved without controlling the voting in a general meeting was acknowledged by a Full Court of this Court (Bowen CJ, Lockhart and Beaumont JJ) in Re Application of The News Corp. Lid (1987) 15 FCR 227. The Court was concerned with the meaning of "being in a position to exercise control directly or indirectly of a company" within the meaning of ss.90G(1) and 92D(1) of the Broadcasting and Television Act 1942 (Cth). Bowen CJ, with whom Lockhart J agreed, said (at 242-243): "I have already stated my view that ss 90E and 92B do not define exhaustively the meaning of the expression 'in a position to exercise control of a company' for the purposes of the Act. That being so, there is no logical reason to read down the meaning of the expression by reference to ss 90E and 92B. 'Still less should it be read down by reference to the common law test of control laid down in cases such as Mendes (supra). Sections 90E and 92B were themselves enacted to widen the common law test. In my opinion, control of the board of directors of a company falls within the expression 'in a position to exercise control of a company'. Such a result is consistent with general company law principle. For example, a company is resident at the place where its 'central management and control abides', which is the place where the board of directors meet: see Swedish Central Railway Co Lid v Thompson [1925] AC 495 at 503; North Australian Pastoral Co Lid v Federal Commissioner of Taxation (1946) 71 CLR 623 at 628. The second argument advanced by counsel for both groups of applicants was that, even if control of the board of directors be relevant, TNCL's power was only to appoint half of the board of NTHL and did not put it in a position to exercise control of that company. It was argued that a power of veto does not constitute control in the relevant sense. Control, it was said, exists only where there is a power to get one's own will. ' I do not agree that the concept of control is so limited. The Oxford English Dictionary defines 'control' as 'to exercise restraint or. direction'... A power to veto is a power to restrain, and hence to control. This view of control accords, in general, with the view of the concept recently taken by the New South Wales Court of Appeal in North Sydney Brick & Tile Co Lid v Darvall (1986) 5 NSWLR 681 at 689; see also Re Kornblum's Furnishings Lid; Blair v Wade [1982] VR 123 at 132-134; and Re Herald and Weekly Times Lid; TVW Enterprises Pty Lid v Queensland Press Lid (1983) 7 ACLR 821 at 838." His Honour continued (at 244-245): "Counsel for both groups of applicants contended, however, that in order to hold that TNCL was in a position to exercise control of NTHL the Court would have to assume that the appointed directors would vote en bloc at the direction of TNCL. This was to assume that the direci.r: would act in breach of their' fiduciary obligations to the company. It would also, it was said, involve a possible finding of criminal misconduct under s 229(4) of the Companies Code. Strictly speaking, the issue of the directors' adherence to their fiduciary duty is irrelevant to this question. It is TNCL's power to appoint directors, not its control of what they do, which is determinative of whether it is thereby in a position to exercise control of NTHL. But were any assumptions needed to be made as to the conduct of the appointed directors, I would think it realistic to assume that they would act generally in the interests of the company which appointed them. Such behaviour would not, of itself, constitute a breach of duty 'unless it can also be inferred that the directors, so nominated, would so act even if they were of the view that their acts were not in the best interests of the company': Re Broadcasting Station 2GB Pty Lid [1964-65] NSWR 1648 at: 1663 per Jacobs J. As was pointed out in the 2GB case, it would make the position of a nominee or representative director an impossibility to require that he approach each company problem with a completely open mind. It is both realistic and not improper to expect that such directors will follow the interests of the company which appointed them subject to the qualification that they will not so act if of the view that their acts would not be in the interests of the company as a whole. In my opinion, it may be assumed that the nominee directors of NTHL will act in such a way. Such an assumption does not, however, lead to the assumption they will act in breach of their fiduciary duty .as.directors. The applicants' arguments. must. therefore be rejected." Beaumont J, after a review of the cases dealing with control under the general law, the legislative provisions then in issue deeming control to exist with. shareholdings of less than 50%, and the ministerial statement that the government was desirous of ensuring that the legislation operated to cover commercial control as well as legal:control, continued (at 254): "...The evident object of s 92B(1) is to fix, at 15 per cent, certain percentages of voting power and shareholding interests as a conclusive statement of the existence of control of the company where control is achieved by one of those means. But there is nothing in the language of the Division or in the policy sought to be achieved by its provisions which suggests that it is not possible for a foreign person to be in a position to exercise control by other means for the purposes of the Division, including s 92D(1). On the contrary, when the Division is read-as a whole bearing in mind the history of the legislation, it appears that what s 92B(1) is intended to do is to put beyond argument the issue of control where one of the criteria (a), (b) or (c) in that subsection has been satisfied - it has nothing to say on the different question whether, even if none of those criteria is satisfied, a foreign person is, nonetheless, in a position, by other means, to exercise control of the company within the meaning of s 92D(1). Such a construction is consistent with the policy intended to be achieved by the statute, as explained in the ministerial statements, that de facto control can be exercised in various ways other than owning or voting shares and that the objective of the legislation is to ensure that only Australian citizens and companies in which Australian citizens hold more than 50 per cent of the votes or shares may be in a position to control a licensee company." The prospectus does not purport to claim only. a de facto control of Insurance by the Association based on commercial control, as opposed to legal control, through the power to appoint the directors of Insurance. In the context, what is claimed is legal control. Nor does the prospectus purport to limit control to the control of the business and management of Insurance because of the power to appoint a board which has control of such business and management. free-from.interference from.the members of_Insurance. The Association does not have legal control ofInsurance. The Association does 'not control the voting of Insurance in general meeting... Under the articles of Insurance all members including the Association have one vote which is of equal value. In the event that the vote is tied, the chairman has a second and casting vote. Because there is no issued share capital in Insurance it is impossible for any individual corporator to control the company. Control on any particular issue which arises in general meeting depends upon a requisite majority of members present at a general meeting voting for or against a proposition. It was submitted on behalf of the respondents. that the membership articles of Insurance put it within the power of the directors to so conduct the business of Insurance to exclude all other members save the Association and the directors. The articles presently provide: "3. The members of the Company shall be: (a) the N.R.MLA. (b) any Director appointed by the Council of the N.R.M.A. (c) subject to Article 4, every person who becomes a policyholder provided that at the time when the policy is issued that person gd) is a life, ordinary or honorary member of the N.R.M.A., or (ii) has lodged with the N.R.M.A. the fees for membership of the N.R.M.A. and an application for membership, or (iii) is within the meaning of the Act a subsidiary or related company of the N.R.M.A. or is an employee of any such company or of the N.R.M.A. or of any company which is declared by the N.R.M.A. to be an associated company for the purpose of this sub-paragraph of this article, or (iv) is a member of any body corporate or unincorporate which ~ ~the Council of the-N:R.M:A. has: by resolution recognised as affiliated with or kindred to the N.R.M.A., or as having as one of its objects the protection of the interests of motorists, and (2) has agreed in writing to be bound by the Memorandum and Articles of Association of the Company. 4. Where a policy is held by more than one person the policyholders other than the policyholder first named in the policy shall for the purposes of paragraph (c) of Article 3 be deemed not to become policyholders. 5. The number of every policy held by a policyholder member shall immediately upon the policyholder becoming a member be entered in the Register of Members in conjunction with the name of that member, and shall be removed therefrom immediately upon the determination of the policy by expiration non-renewal cancellation forfeiture or any other means. 6. If at any time the observance of Article 5 would result in there being no number of any policy remaining in the Register of Members in conjunction with the name of a policyholder member he shall at that time immediately cease to be a member." The articles give no power to the directors to control the membership of Insurance by exercising a discretion whether or not to admit persons to membership. Any person who satisfies the criteria for membership and agrees in writing to be bound by the memorandum and articles of Insurance becomes a member of Insurance by virtue of the operation of the articles. The only power of the directors of Insurance to refuse to recognise a person as a member of Insurance is where that person does not satisfy the criteria for membership. Likewise membership terminates by operation of the articles and not by any act on the part of the directors of Insurance: Woodford v Smith [1970] 1 WLR 806 at 813-814, It was submitted by the respondents that the Association could obtain control of eT sa Insurance by conducting the insurance business through subsidiaries or by failing to obtain ~the agreement in-writing of a new- policy. holder-to.-be-bound .-by..the memorandum. and articles of Insurance such that no new members would be created. As each policy lapsed due to the effluxion of time or for any other reason, membership would cease because of the operation of Articles 3(2), 5 and 6. The combined effect of admitting no new members and the termination of membership with the lapsing of insurance cover would mean that within twelve months the Association and the directors. were the only members and in a position to control Insurance. If necessary the appointment of the directors could be terminated by the Council of the Association. This would leave the Association as the only member of Insurance. Such a submission loses sight of the fact that the use of the management power to favour one member or class of members and to exclude other members from enjoyment of their rights as members in a company limited by guarantee may constitute oppressive behaviour sufficient to justify relief under s.260 of the Law (see for example Re Ingleburn Horse and Pony Club Ltd [1973] 1 NSWLR 641). It is unnecessary to determine in the present case whether such conduct would be witra vires the powers of the directors of Insurance because the ability to engage in such conduct requires that the directors are safe from removal at the behest of the requisite majority of members of Insurance voting in general meeting. The answer to that question depends upon whether the members of Insurance may amend the articles to delete from Articles 25, 26, 29, 31 and 32 the power of the Council of the Association to appoint and terminate the appointment of the directors of Insurance and to pass an article vesting such power in the members of Insurance voting in general meeting. The respondents submitted that the articles giving power to the Council of the Association are special rights within the meaning of s.199(2) of the Law attaching to the -Association. by -virtue. of its membership..of.a class.of. members. In consequence, it was submitted, the power of appointment could not be taken away by alteration of the articles without its consent. It was submitted that the power of appointment was that of the Association acting through its Council. The Court was referred to the decision of Scott J in Cumbrian Newspapers Group Ltd v Cumberland & Westmoreland Herald Newspapers & Printing Co. Lid [1987] 1 Ch. 1 at 16-17 as authority for the proposition that rights or benefits were capable of being conferred on a beneficiary in the capacity of a member of a company and that the power to appoint a director was a right capable of protection under s.199(2) of the Law. As to the first proposition, that depends on the terms of s.199(2); the second proposition depends, in our view, upon the terms of the articles, the source of the rights and the nature of them. Sections 199(1) and (2) of the Law provide: "199(1) This section applies to a company not having a share capital. 199(2) Where: (a) members of the company included in a class of members have special rights; (b) _no provision is made by the Memorandum or Articles for the variation or abrogation of those rights; and (c) neither the Memorandum nor the Articles declares or declare those rights to be unalterable; the company may, with the consent in writing of three-quarters of the members included in that class or with the sanction of a special resolution passed at a meeting of members included in that class, vary or abrogate those rights or alter the Memorandum or Articles so as to authorise the variation or abrogation of those rights." In.our.view the. power. of appointment of the directors of Insurance is not a night given to the Association as a member of Insurance or at all. The conferring by the articles of the power on the Council is not in terms as. agent for the Association. Rather, the power is conferred on the Council as a body persona designata, the likelihood being that at the time of incorporation of Insurance it was thought that such a mechanism gave the Council of the Association the flexibility to ensure that at all times a majority of directors of Insurance were members of the Council of the Association as required by Article 25, and to ensure consistency of approach by the two boards of directors having regard to the close relationship between the two companies. The Association, qua member of Insurance, is in exactly the same position as the other members as to appointing directors of Insurance; it has no right to appoint the board of directors of Insurance. The consequence is that the power may, in our opinion, be taken from the Council of the Association and reposed in such persons or body as a requisite majority of the members of Insurance in general meeting determine. Section 199 of the Law has no relevant operation in relation to the power to appoint and remove directors of Insurance. On an analysis of the strict legal position, then, the statements about control were not wholly correct. At the theoretical level the reasoning of the Boards as expressed on page 12 of the prospectus for claiming similarity of interests of members of Association and Insurance was flawed insofar as it conveyed that the Association had legal control of Insurance. However it does not inevitably follow that the making of the statement as to control renders the conduct of the corporations a contravention of s.52. As earlier indicated, it is necessary in a case such as this concerning a complex commercial proposal to take a practical, realistic view of the effect of the statement in the overall circumstances. If, so--viewed, -the: claimed. similarity..of -interests.is. not misleading or deceptive or likely to mislead or deceive, the fact that the statement as to control is not strictly correct in the legal sense will not be a material error. The Council of the Association is elected by the membership of the Association. The success of the Association and Insurance, particularly of Insurance, over many years has no doubt been due in part to the close relationship between them. If a substantial part of the membership of Insurance were to become so disillusioned with its administration as to vote in favour of abandoning the traditional practical tie between the two corporations achieved by the provisions of clause 25 of the articles of Insurance, is it not more likely that the members would express their disillusionment as members of the Association by changing the membership of the Council of the Association - a course available to them without amendment of the articles of either corporation? Furthermore what is the chance, as a matter of practical reality, that the diverse membership of Insurance could be rallied together to constitute a 75% majority to pass a special resolution to change the articles of Insurance if the incumbent Board were opposed to the change? The evidence is silent on this question and we do not think the Court should assume that it is a realistic possibility. In a practical sense it is difficult to envisage that the statement that Association controls Insurance is not a fair statement of the situation. If it is, to confront:the membership with an explanation of the strict legal position - an explanation that is likely to be long and technical - is not likely to be useful to them in making a properly informed judgment. The claimed similarity of interests is not said to depend solely on questions of control. Another factor contributing to this claim is the common element between members of the Association and Insurance-in that all are members of the Association and are to be offered an automatic entitlement to "Free Shares". This reason for the claimed similarity was criticised by the trial judge who considered that the applicants might be correct in taking the point that the criteria of entitlement to members of Insurance were inadequate because they did not make allowance for the comparative values of the assets of the Association and Insurance. His Honour thought that it was unnecessary to decide the point saying: "What is important is that the apparent discrepancy to which the applicants point would properly be a matter of interest and concern to those members of the Association who were also members of Insurance." Particularly having regard to the complexity of the proposal and the bulk of the information given to members in the prospectus we think it was necessary for the Court to decide this point. If it were the case that the members of Insurance could not, by alteration of the memorandum or articles of Insurance or otherwise, gain access to the wealth of Insurance the applicants' criticism of the allocation criteria on that ground was unjustified. Clause 5 of the memorandum of Insurance presently provides: "5, If upon the winding up or dissolution of the Company (otherwise than for the purposes of reconstruction) there shall remain any surplus assets after payment of all the Company's liabilities and the expenses of winding up, or dissolution, the same shall be applied or given or transferred to the National Roads and Motorists' Association (N.R.M.A.) or in the event of the National Roads and Motorists' Association (N.R.M.A.) for any reason having ceased to exist then to such other Association or Associations having objects similar to the National Roads and Motorists' Association iv (N.R.M.A.) or such other Company having objects similar to those of this Company as shall be determined by the members of this Company at or .. before the. time of winding up.or-dissolution and-in.default-thereof by any . Judge of the Supreme Court in New South Wales in its Equitable Jurisdiction." It would not be helpful or relevant to the members in making, a properly informed Judgment to be confronted with a lengthy and theoretical paper on the legal possibility that the members had the capacity to amend clause 5, and to change the past policy of accumulating profits in Insurance, if this were not a realistic possibility. At trial, and before this Court, the respondents contended that clause 5 of the memorandum of Insurance created special rights within the meaning of s.199(2) of the Law attaching to the Association by virtue of its membership of a class of members, with the result that clause 5. could not be varied or abrogated except with the consent of the Association. As to that contention the trial judge considered that it was unnecessary to decide the point saying: "The immediate point is that it is at best unclear whether, as matters stand, the body of members of Insurance may, without the consent of the Association, change the Memorandum or Articles of Insurance so as to abrogate or vary the special position in the affairs of Insurance now given to the Association. This uncertainty is a significant matter in any reasoned evaluation of a community or disparity of interests in a commercial or legal sense between those members of the Association who are, and those who are not, also members of Insurance. The point for the applicants is that the matter is nowhere adverted to in the prospectus." The disparity in value between the assets of the Association and Insurance was central to many of the complaints made by the applicants about the prospectus. The complaints rested on the assumption that the members of Insurance had the power to vary clause 5, and also to overturn the policy of accumulating profits in Insurance, so as to permit the members to gain access to the wealth -of-Insurance..-In-our opinion.it was. also necessary for the Court to determine whether this assumption was justified, or at least whether it was a realistic possibility. If the assumption underlying the applicants' complaints were not 'correct, the complaints failed, and to qualify the statements in the way. suggested by his Honour would add unnecessary complexity to an already long and complex bundle of information. In our opinion the contention of the respondents about clause 5 are correct. The Association was created a member of Insurance by Article 3(a) on its incorporation. By clause 5 of the memorandum of Insurance, the Association was given the right to any surplus in a winding up. No other member was given by the memorandum or articles any such right. The right-of the Association to any surplus continues:-for so-long as the Association continues to exist. Thus the right is coterminous with its membership of Insurance. In our opinion the right to any surplus in a winding up is a special right vested in the Association as a member of Insurance and one to which s.199(2) of the Law applies; the Association is a class of member having special rights. It follows that the power to amend the memorandum provided in s.172(1). of the Law may not be exercised by members of Insurance to take away the right of the Association to any surplus in a winding up (s.172(5) of the Law) without the consent of the Association to any such amendment. The memorandum and articles of Insurance make no provision for the distribution of profits to members. But it was submitted on behalf of the applicants that it was within the power of the members of Insurance by special resolution in general meeting to amend the 'objects and articles-of Insurance~to- provide: for the-payment of -the-trading profits of Insurance to the members of that company by the declaration of dividends. The basis of the submission was that s.172 of the Law provided for the amendment of the memorandum of Association and s.176 for the amendment of the articles and, further, that the decision in Peters' American Delicacy Co. Lid. v Heath (1939) 61 CLR 457 at 479- 480 was authority for the proposition that there was an implied term in the statutory contract constituted by the memo and articles of association that the same could be amended as provided for by the Law. Such a submission ignores the power of equity to restrain conduct, otherwise authorised, where to engage in such conduct would be entirely outside what can fairly be regarded as having been within the general intention-and common understanding of the members when they become members. Observations in Re Tivoli Freeholds [1972] VR 445 at 468, In re Wondoflex. Textiles Pty Lid [1951] VLR 458 at 468. and H.A. Stephenson & Son Lid (In liquidaiton) v. Gallanders, Arbuthnot & Co. (1931)'45 CLR 476 at 487 show that conduct of this nature will empower a court to wind up a company on the just and equitable ground and there is no reason in principle why equity: should not intervene at an earlier point to restrain that conduct. In the case of Insurance the general intention and common understanding, demonstrable from a consideration of the memorandum and articles of association, was that the property and profits, if any, arising from the conduct of the business of Insurance after its incorporation in 1926 would be used for the purposes identified in the objects, including the advancement of the interests of the Association, and not distributed by way of dividetid for the' personal" financial benefit of individual- members -of Insurance from time to time. It is unrealistic to suggest that the members: of Insurance could, as a practical matter, amend the memorandum and articles of that company because it would be expected that any attempt to do so. would either be restrained on the application of the Association or would found a winding up in order that the Association could take the benefit of cl. 5 of Insurance's memorandum. Without the consent of the Association the wealth of Insurance therefore remained "locked" away from the members of Insurance. The motions proposed to be put before the general: meetings of members of the Association and Insurance to "unlock the wealth of the organisation" (i.e. the wealth of the Association and Insurance and their subsidiaries) required the approval by special resolution of the members of each company. To use the analogy of senior counsel for Holdings, the situation was as if two keys were needed to unlock the wealth - one key being held. by the members of each of the Association and Insurance. In this practical sense the rights of the members of each company were similar: the members of each had the power to consent or to block the proposal, and unless both agreed, neither group could turn to their direct financial benefit the wealth of the organisation. It is perhaps theoretically possible that the members of Association in general meeting could alter clause 5 of the memorandum of the Association so as to permit them to obtain some direct financial benefit from the wealth of the Association. Clause 5 " presently provides. that upon winding -up.a dissolution. of the Association any surplus shall not be paid to or distributed among the members but shall be given or transferred to some other institution having similar objects to the Association. However the prospect of such an alteration happening otherwise than as part of a major reorganisation of the structure of the whole jorganisation, such as that proposed in the prospectus, does not appear on the evidence before the Court as a realistic or open one. The prospectus has endeavoured to explain the proposal in simple, colloquial language. To describe the interests of members of the Association and Insurance as "similar" in the context of the proposal being put to the members of both companies in our opinion has not been shown to be misleading or deceptive or likely to mislead or deceive, and this is so. even though as a matter of strict legal analysis it is not completely correct to say that the Association controlled Insurance. We also. consider the various criticisms made by the applicants, based on the assumption that members of Insurance had the capacity by amending the memorandum and articles of Insurance to share in the income and surplus assets of Insurance, to be unfounded. The applicants' complaints 'about the phrase "Free Shares" were also based substantially on the contention that the members of Insurance could turn the assets and income of Insurance to their direct financial advantage by changing the memorandum and articles of Insurance, and that this was a valuable right. That contention has not been made good. However complaint was also made on other grounds, and it was on other grounds that the trial judge found that the use of the phrase contravened s.52. ta The trial judge found inthe applicants'~favouron-the-"Free Shares". complaint essentially because he considered that the persistent repetition of the phrase in the context engendered or was likely to engender the notion that the shares might be acquired without significant loss or outgoing and to suggest that such rights of membership as were given up to participate in the affairs of Association and Insurance were of no value and were not material to a decision to vote for or against the proposal. .We turn now. to consider that issue. His Honour noted that the proposal, by requiring the relinquishment of the rights of the members of Association to control Association, and through their power to appoint the Council of Association to control the appointment of the board of Insurance, involved "the relinquishment of significant rights to the control of the affairs of the two corporations". Further, his Honour held that "demutualization" would remove the possibility of further enjoyment of advantages of subsidised road services and other members' services of Association, and of insurance rebates given to policyholders on certain classes of policy available through Insurance. His Honour held that the relinquishment of these substantial rights was incompatible with the notion that the shares might be acquired without significant loss or outgoing. In this connection, the respondents contended: before this Court that his Honour erred as a matter of fact in his conclusion that the road services were subsidised. We think his Honour's finding in that regard was justified by the financial information on p.52 of the prospectus to which he referred. The respondents also pointed out that the prospectus at pp. 53 and 70 recorded that the rebates on insurance which had been provided in the past were not expected to-continue past 31 July 1995. His Honour did not overlook those statements. He referred expressly to them when considering a statement in the prospectus that the option of continuing insurance rebates had been examined and rejected for several reasons, one of which was that "rebates only benefit policyholders - and not the some 30% of members who do not hold insurance policies". As this reason disclosed, the benefit of rebates had arisen in the past from being 'a policyholder rather than a member of Insurance, but rebates had been one of the traditional benefits of the mutual character of the organisations which would certainly disappear if the "demutualization" proceeded. The respondents also contended that his Honour's criticism that the shares were not "free" because valuable rights were being given up was unjustified because, it was submitted, it must have been crystal clear to even the least sophisticated reader of the prospectus that membership of the Association and Insurance was being given up in exchange for shares in Holdings or for the cash alternative. We agree that statements to that effect are made in the margin on the back of the first sheet of the onsert, in the notices of meeting, and on p. 12 of the prospectus, but to the reader who was previously unfamiliar with the nature of a mutual organisation and the process of "demutualization" those statements, simple as they were, were liable in our view to be overwhelmed in their impact by the far more prominent and persistent reference to "Free Shares". This impact was enhanced by the packaging of the prospectus. Before opening the package the addressee would have been likely to be attracted by the messages "Share the Future", "How to Vote!" and, especially, "How many shares you will be given!" notwithstanding i fee the additional words "There is MORE information on the back of this page". But in any event, these statements: that membership will be relinquished do.not.answer the conclusion reached by the trial judge which was, in effect, that the description of the shares as "free" was likely to mislead or deceive members into thinking that the rights that were to be given up by them were not rights which could be regarded by members as being of importance to them in making a properly informed judgment on the proposal. Although it is no doubt true that in some contexts, such as in the expression "buy one, get one free", the word "free" may be understood as meaning "without additional or marginal outlay over what is obviously being paid", this is not invariably so. "Free" can easily be misleading or deceptive, depending on the context: Federal Trade Commission v Standard Education Society 302 US 112, 116-117 (1937); Book of the Month Club v Federal Trade Commission 202 F 2d 486, 488 (2nd. Cir. 1953). We agree with the. trial judge that in the present context of a document that strongly argued in favour of voting for the proposed changes, the persistent use of the expression "Free Shares" was in fact likely to engender the notion that the shares might be acquired without significant loss or outgoing and it was in this respect misleading or deceptive, or likely to mislead or deceive, to use that phrase. This conclusion involved a finding that the rights to be given up were rights which would be material to members of the Association and Insurance in making a properly informed judgment on the proposal. The respondents argued that this has not been established by the evidence. In particular it was argued that membership of Insurance had no value; it was transitory, lasting only as long as the annual policies held by the member, there was no right of renewal; in the case of policies held by two of more people it was a matter of chance which policy holder-was- entered-as-a-member; no-consideration was paid for membership; membership was not transferable; and, most importantly, the true beneficiary of the wealth of Insurance was the Association. It was submitted that such powers of control of Insurance as existed in members of Insurance had no practical significance in the circumstances. In particular, the members had no power to confer on themselves any direct financial benefit by way of dividends or capital rights in the event of a winding up. There is force in these contentions in relation to membership of Insurance. But membership of the Association carried with it rights to participate in the control of Association, and through the appointment of the Council of Association, in the affairs of Insurance. The evidence did not attempt to place any monetary value on these rights, and. it may be impossible to do so. But it does not follow that the rights would not be material. to members of Association.in making a properly informed decision: cf Jn re NFU Development Trust [1972] 1 WLR 1548 at 1554. The rights of control if exercised by a sufficient body of members could be used to require that the benefits which have been enjoyed in the past by members arising from the mutual character of the NRMA organisation be continued in the future. The materiality and importance of the rights of control therefore depended in tum on the materiality and importance to members of the continuation of these benefits. It was in this context that the trial judge said that a basic question for members to decide was whether they would be better off remaining as members or becoming shareholders or recipients of the proposed cash distribution in lieu of shares, a question that involved weighing the respective advantages and disadvantages of each course of action. His Honour accepted the submission of the applicants that there were material omissions from the treatment in the prospectus~of the retention of the status-quo. Whilst the prospectus stated that five other options had been examined and rejected, the reasons given for doing so made no attempt to quantify, even in broad terms, why the boards did consider members 'would be better off under the proposed restructure beyond the statement that the wealth of the organisation would no longer remain locked up and inaccessible to members. His Honour considered that. the discussion. of the. other. options and the information given on pp. 14 to 16 of the prospectus under the heading "Members Questions", developed the theme anticipated in the President's letter that the "NRMA Culture of Service" would not change and the restructure would not effect the way the NRMA organisation operated. His Honour noted however the following "Members Question" and answer: "Will the cost of my Service Membership go up? The change in legal structure of the NRMA will not mean that the cost of Service Membership will go up. Any increases in Service Membership will only be dictated by the need to properly price this product, which is the same basis of setting the cost of Road Service Membership as has been applied in the past." and later observed: "On the one hand, there is, as it has been put, the suggestion of 'business as usual'. On the other, the suggestion is that there may be increases in service membership dictated by the need to properly price those services, coupled with the suggestion that this has been the case before demutualization." His Honour concluded: "Members might reasonably expect there to be put before them a full and fair disclosure of intentions as to future conduct of the undertaking to be acquired by Holdings after 'demutualization'. An important consideration is whether Holdings suggests that it will or will not conduct its business and undertaking so as not to affect in any substantial way the extent or costs of services presently provided to members, or whether Holdings chooses to make no statement on this subject. To deal with the topic in the manner described above is to leave it in half light. I accept the applicants' submission that to treat 'the subject in this way is to engage in conduct which is liable to mislead or deceive members." His Honour has in effect found that the prospectus made an inadequate disclosure so as to leave the topic of the future conduct of the undertaking in "half light" because the prospectus failed to make it clear whether Holdings will or will not conduct the undertaking as before and failed to state whether a deliberate choice had been made to make no statement on the subject. We do not agree that a contravention of s.52 in this respect has been established. The President's letter and the "Members Questions" in our opinion do make statements on this topic and plainly assert that "the restructure will not affect the way we operate". Further, the answer to the Members Question on this topic stated that the cost of Service Membership will not go up in consequence of the restructure. Under the proposed restructure the annual membership fee paid to the Association would be replaced by an annual service contract with Holdings under which similar "member services" would be provided. The references to the cost of Service Membership clearly enough meant the cost of the proposed service contracts. We do not consider there is any inconsistency which renders the prospectus likely to mislead or deceive between these statements and the further statement in the answer to the Members Question that any increase in Service Membership will only be dictated by the need to properly price the product, as it is stated that that is the basis which has been applied in the past. Elsewhere in the prospectus that policy is referred to. In: the inside cover it is said that NRMA is committed to promoting motorists' interests, providing efficient road service, other member services and insurance at competitive prices: "This commitment will not change if members vote in favour of issuing shares". On page 10 it is said that this commitment will continue. On page 40 it is said the commitment is spelled out in the Sib as | NRMA's Mission Statement: "to provide road service and a range of quality services for members at the lowest possible cost consistent with sound. financial management." In our opinion the treatment of the topic of the future conduct of the undertaking has not been shown to be inadequate for failing to make a clear statement of Holdings' intentions. However we do consider that the treatment of the topic was inadequate, and involved a contravention of s.52, for reasons to which we now tum. Before this Court counsel for the applicants submitted that there was a likelihood of change in the future conduct of the undertaking of the NRMA organisation for reasons of the following kinds which the prospectus failed to bring sufficiently to the members' notice: (i) whilst the present Boards intended "business as usual" the proposed restructure involved a change in status and membership; (ii) shareholders in.a listed company would have different rights and expectations as shareholders, particularly in relation to profit; (iii) the duties and obligations of directors of corporations limited by shares are, so it was submitted in relation to shareholders (who in time could become increasingly large and institutional) to look to profit and value of shares and to pay dividends out of profits available for that purpose, in contrast with the duties of directors of a mutual association; (iv) Holdings after reconstruction would have the capacity to change the operation by selling its assets or undertaking; (v) and in the long term the restructure opened prospects for a takeover, or for effective control of Holdings to pass to a small minority of large shareholders with strategic holdings. To these matters could be added the: consideration that, with time, the composition of the Boards would in any event change and future boards would not be bound by statements of intention by the present board made in the prospectus. Counsel for the respondents contended that there are good commercial reasons why it is unlikely that Holdings would in the future abandon the "culture" which has been instrumental to the success of the NRMA organisation in the past, and that the prospect of control of Holdings being seized by a minority of large shareholders or otherwise taken over or disposed of is fanciful for several reasons. Whether these contentions adequately answer the applicants' submission is largely a matter of opinion about which the members must make a judgment when deciding upon the proposal and weighing the respective advantages of continued membership of mutual associations against a shareholding in Holdings or the cash alternative. Unless the. information available to the members brings to their attention matters of the kind identified by the applicants' submissions (along with any other disadvantages perceived by those members of the boards whose decisions recommend the proposal), and the reasons why it is asserted that the disadvantages are outweighed by the advantages, the members are not fully and fairly informed why they will be "better off" by voting to receive shares or the cash alternative in exchange for their membership of the Association and Insurance. The prospectus as a whole, but particularly in the President's letter and the Information to Members, strongly encourages a favourable response to the proposed restructure and conveys the recommendation of the majority of each board that under it the members will be "better off'. We agree with the trial judge that the prospectus does not attempt to explain or quantify why this will be the case beyond the statement that the wealth of the NRMA organisation will be unlocked by giving each member the share entitlement identified on that member's onsert. On page 6 of the prospectus, when repeating the recommendation of the Boards which was stated on page 1, it is said "The NRMA Boards have carefully considered the advantages and disadvantages of the proposal and have concluded that this proposal is in the best interests of members and the NRMA". Here is a statement that there are disadvantages to be considered, yet nowhere.in the prospectus are the disadvantages identified, explained or compared with the perceived advantages. On page 11 the prospectus says the NRMA has considered the advantages and disadvantages of a range of other options and concluded that the share issue and listing on the Stock Exchange is in the best interests of members of the NRMA. Five other options are discussed. This discussion fails to identify what the disadvantages of the recommended proposal might be. The first of the other options discussed was "Doing nothing". The prospectus reads: "1. Doing nothing: The NRMA could continue to operate under its present structure, but the Boards believe that, by becoming shareholders, members will be better off. No organisation can rest on its laurels and assume that the way things have always been done will work in the future. The NRMA has made many changes to its operations in the past and has always looked for better ways to do business. That has made it a market leader. This is another change which the Boards believe will significantly benefit members and make the NRMA stronger in the future. To do nothing means the wealth of the organisation remains locked up and-inaccessible to members." This discussion fails to state, at least in any meaningful way, the disadvantages about the proposed restructure which the Boards had recommended, and fails to refer to the matters identified in the applicants' 'submissions. At page 15, where: the prospectus for-the -first time discloses that three of the 16 directors of the Association and one of the 11 directors of Insurance are against the proposal, there is no statement of the; dissenting directors' reasons which could serve to redress the failure of the prospectus otherwise to inform the members about the disadvantages of the proposal. The prospectus asserts that under the proposed restructure members will be "better off" and strongly recommends a "yes" vote. In these circumstances the failure to identify and inform members about disadvantages of which the directors making the recommendation were aware was to leave the members in a half light which had the potential to lead them to think that the unidentified disadvantages, whatever they might be, must be ones. that. they. would not treat.as significant in relation to the rights being given up and the new rights to be acquired in a public listed company. This is more particularly so when it is remembered that, contrary to the notion engendered by the persistent use of the phrase "Free Shares", the shares might be acquired without: significant loss or outgoing, the rights that would be surrendered were significant ones which were material to the members of Association in making a properly informed judgment. By Notice of Contention the applicants sought to uphold the orders of the trial judge on grounds which the trial judge had either ruled fell outside the separate issues being tried, or held to be not made out. After hearing argument we: refused leave to the applicants to raise by way of Notice of Contention the ruling of the trial judge that the issues raised by paragraphs 10, 11 and 12 of the amended Statement of Claim fell outside ahs the separate issues then before the Court for urgent trial. Of the other grounds raised by the Notice of Contention all but one was abandoned during argument. The ground which remained was that it should have been held that there was "a shortcoming in the prospectus in the treatment of social services consequences of the proposal to members and policyholders". Counsel contended that the following statement at page 16 of the prospectus ignored the full effect of a report commissioned by the respondents from the Australian Council of Social Services ("ACOSS") which investigated the likely impact of the proposal on members of Association and Insurance who were beneficiaries of social services payments: "This issue is complex, as there are many different categories of Social Security beneficiaries. Based on an extensive examination, it was found that only a relatively small number of pensioners would face unintended consequences. These people are already close to cut-off points and many already receive very small benefits, due to the size of their income and assets. A smaller number may be more seriously affected. To ensure the best possible outcome for this small group (representing less than 1% of the NRMA membership), the NRMA has funded a free independent phone service, to be conducted by the Council on the Ageing. If you think you might be amongst this small group, and need help to arrange your affairs, you can call 008 65 6363 and have the options explained to you. This service will be available from 5 September, between the hours of 9am and 3pm." Gummow J held that there was no shortcoming in this statement of the position. The substance of the statement was taken from an article on the proposed NRMA share issue published in the ACOSS monthly news "Impact" for July 1994. The article, it seems, was written by an officer of ACOSS who conducted the investigation. It was a fair summary of the more lengthy ACOSS report entitled "Information Package". We are not persuaded that the statement in the prospectus fails to state the relevant effect of the ACOSS report, or that the statement is in any respect likely to mislead or deceive. On the "contrary, the statement correctly draws attention 'to the fact'that-a small-group of members might suffer "unintended consequences" (plainly meaning adverse consequences), and informed anyone who thought that they might be amongst this group how additional information could be obtained. In summary, whilst we do not uphold all of the findings of the trial judge, we are of the opinion that a contravention of s.52 was established. The trial of the separate issues before Gummow J came on at very short notice and as a matter of urgency as the proposed meetings of members of the Association and Insurance were about to occur. A finding that a contravention of s.52 had occurred justified declaratory and injunctive relief of the kind ordered to hold the position pending the trial of all issues between the parties. His Honour noted that the nature of the contraventions found to have occurred were such that it was not practical to quarantine any particular function of the prospectus. At that point in the trial and in the proposed time schedule for the general meetings of members it was not appropriate to order the disclosure of further information before those meetings occurred. The orders made by his Honour were framed with those considerations in mind. His Honour's judgment on the separate issues, and the orders which were entered, left open the question whether the conduct found to have been misleading or deceptive or likely to mislead or deceive could be rectified by circulation of supplementary information, and if so, what consequential steps would be necessary to ensure that proxies given by members before they received the supplementary information were not acted upon. It may be that in the light of the views expressed at the trial and on appeal the respondents would wish to amend or supplement the prospectus, _ That essentially is a matter for the respondents. We would endorse the observation of Gummow J that it might not be practicable and might be unwise for the Court to undertake the supervision, ) with the suggestion of its imprimatur, of the dissemination of "corrective" material. On the conclusions which we have reached, we consider leave to appeal should be granted, but the orders made by his Honour should not be disturbed. The parties requested that they be allowed the opportunity to address the Court on the terms of the orders to be made disposing of this application in light of the reasons of the Court. Accordingly we now publish our reasons, and the matter will be relisted for this purpose. I certify that this and the Go preceding pages are a true copy of the Reasons for Judgment of the Court Associate: CHimrtlny LA, Cray Dated: 27] Jommony (996 Counsel for the Applicants : 'D.M.J. Bennett QC AR. Emmett QC M.L Bozic Solicitor for the Applicants (for NRMA Holdings Ltd) : Allen & Hemsley (for NRMA Ltd & NRMA Insurance): Abbott Tout Counsel for the Respondents : J.J. Gamsey QC B.J. Camilleri Solicitor for the Respondents : . Gadens Ridgeway S. Rares SC appeared with T. Davie as amicus curiae by leave granted. Dates of hearing : 6 & 7 December 1994 Place of Hearing : Sydney Date of Judgment : 27 January 1995