FEDERAL COURT OF AUSTRALIA GPG (Australia Trading) Pty Ltd v GIO Australia Holdings Ltd [2001] FCA 1761 TRADE PRACTICES - CORPORATIONS – s 12DA Australian Securities and Investments Commission Act 1989 – s 995 Corporations Law – s 52 Trade Practices Act 1974 – misleading and deceptive conduct by company listed on the Australian Stock Exchange - non-disclosure – where company made announcements to market omitting disclosure of certain known issues relevant to share price of company – information reported to the board by actuaries not disclosed to market – causation – where investor listed investment company TRADE PRACTICES – CORPORATIONS – meaning of unconscionability under s 12CA Australian Securities and Investments Commission Act 1989 and s 51AA Trade Practices Act 1974 – where company resiled from publicly announced position to enter into scheme to purchase shares WORDS AND PHRASES – "misleading or deceptive", "unconscionable conduct" Trade Practices Act 1974 (Cth) ss 51AA, 51AB, 52 Corporations Law ss 995(2), 1001A Australian Securities & Investments Commission Act 1989 (Cth) ss 12CA, 12CB, 12DA Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 applied Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) 81 FCR 475 applied Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 cited Commonwealth v Verwayen (1990) 170 CLR 394 cited Blomley v Ryan (1956) 99 CLR 362 cited Commonwealth Bank of Australia v Amadio (1983) 151 CLR 447 cited Murphy v Overton Investments Pty Ltd (2001) 182 ALR 138 cited Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd (2000) 96 FCR 491 not followed in part Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd (2000) ATPR 41-778 cited CG Berbatis Holdings Pty Ltd v Australian Competition & Consumer Commission (2001) ATPR 41-826 referred to Cortis Exhaust Systems Pty Ltd v Kitten Software Pty Ltd [2001] FCA 1189 cited Pritchard v Racecage Pty Ltd (1997) 142 ALR 527 cited Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 cited Australian Competition & Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 cited Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia [2001] FCA 1056 cited Bridgewater v Leahy (1998) 194 CLR 457 cited Louth v Diprose (1992) 175 CLR 621 cited Henville v Walker (2001) 75 ALJR 1410, 182 ALR 37 applied Giumelli v Giumelli (1999) 196 CLR 101 cited GPG (AUSTRALIA TRADING) PTY LIMITED ACN 054 400 761 v GIO AUSTRALIA HOLDINGS LIMITED ACN 054 573 401 and AMP LIMITED ACN 079 354 519 N 213 OF 2000 GYLES J SYDNEY 11 DECEMBER 2001 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 213 OF 2000 BETWEEN: GPG (AUSTRALIA TRADING) PTY LIMITED ACN 054 400 761 APPLICANT AND: GIO AUSTRALIA HOLDINGS LIMITED ACN 054 573 401 FIRST RESPONDENT AMP LIMITED ACN 079 354 519 SECOND RESPONDENT JUDGE: GYLES J DATE OF ORDER: 11 DECEMBER 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The proceeding be stood over to enable the parties to bring in short minutes to give effect to these reasons. 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 N 213 OF 2000 BETWEEN: GPG (AUSTRALIA TRADING) PTY LIMITED ACN 054 400 761 APPLICANT AND: GIO AUSTRALIA HOLDINGS LIMITED ACN 054 573 401 FIRST RESPONDENT AMP LIMITED ACN 079 354 519 SECOND RESPONDENT JUDGE: GYLES J DATE: 11 DECEMBER 2001 PLACE: SYDNEY INDEX Paragraphs INTRODUCTION 1 – 5 FACTS IN THE PUBLIC DOMAIN 6 – 31 GPG DECISION-MAKING 32 – 35 WHAT DID GIO AND AMP KNOW CONCERNING REINSURANCE LOSSES AT THE TIME OF THE 24 SEPTEMBER 1999 ANNOUNCEMENTS? 36 – 69 WHY WAS THERE NO REFERENCE TO THE KNOWN POTENTIAL INCREASE IN PROVISIONS FOR PAST REINSURANCE CLAIMS IN THE GIO SCHEME ANNOUNCEMENT? 70 – 71 WHAT MORE DID GIO AND AMP LEARN ABOUT POTENTIAL REINSURANCE LOSSES BETWEEN 24 SEPTEMBER 1999 AND 2 NOVEMBER 1999? 72 – 86 CIRCUMSTANCES OF AMP WITHDRAWAL 87 – 99 WAS GIO'S 24 SEPTEMBER 1999 ANNOUNCEMENT MISLEADING OR DECEPTIVE? 100 – 103 DID THE 24 SEPTEMBER 1999 ANNOUNCEMENT BY GIO CAUSE LOSS OR DAMAGE TO GPG? 104 – 109 OTHER BASES FOR DISCLOSURE BY GIO? 110 WAS AMP'S ANNOUNCEMENT OF 24 SEPTEMBER 1999 AND SUBSEQUENT NON-DISCLOSURE MISLEADING OR DECEPTIVE? 111 – 112 WAS THE CONDUCT BY AMP FROM 29 OCTOBER 1999 UNCONSCIONABLE CONDUCT ACCORDING TO THE UNWRITTEN LAW? 113 – 126 CONCLUSION 127 – 128 REASONS FOR JUDGMENT introduction 1 GPG (Australia Trading) Pty Limited ("GPG Aust"), the applicant, is a subsidiary of Guinness Peat Group plc, a public company incorporated in the United Kingdom and listed on the London, Australian and New Zealand Stock Exchanges. I will refer to the applicant and associated companies as "GPG" unless it is necessary to distinguish them. GPG is what has been described as an entrepreneurial investor. It seeks to identify and acquire undervalued investments and then to pursue an active strategy enabling realisation of the true value. 2 Between 30 September 1999 and 2 November 1999 GPG progressively acquired 16,282,529 shares in the capital of the first respondent, GIO Australia Holdings Limited ("GIO") for a consideration (including costs) of $48,656,391.94. GPG alleges that these purchases were induced by announcements by GIO and the second respondent, AMP Limited ("AMP") to the Australian Stock Exchange ("the ASX") on 24 September 1999 and by the failure to make any different disclosure until announcements were made by GIO and AMP on 2, 3 and 4 November 1999 which caused a significant fall in the market value of the shares acquired. 3 GPG sues GIO in respect of the losses made by it for misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) ("the TPA"), s 42 of the Fair Trading Act (NSW) ("the FTA"), s 995(2) of the Corporations Law and s 12DA of the Australian Securities & Investments Commission Act 1989 (Cth) ("the ASIC Act") arising out of what are alleged to be express and implied representations in an announcement made by GIO on 24 September 1999 and for failure to disclose certain matters between 24 September and 2 November 1999 in contravention of the same sections and in contravention of s 1001A(2) of the Corporations Law. GPG makes similar claims against AMP (although not based upon s 1001A of the Corporations Law) arising out of an announcement by AMP on 24 September 1999 and for failure to disclose matters between 24 September and 4 November 1999, together with a claim for unconscionable conduct in equity and in contravention of s 51AA of the TPA and s 12CA of the ASIC Act because AMP resiled from its announcement of 24 September 1999. 4 The principal bundle of documents which has been tendered covers the period from September 1996 to March 2000 and consists of seven volumes, with three more volumes containing consecutive drafts of two important documents. A number of other documents have been separately tendered. The witnesses called for GPG (in the order in which they were called) were: (a) Maurice William Loomes ("Loomes"), an investment analyst who was a director of GPG at the relevant time and a member of the Sydney investment committee of GPG ("the Committee"), and who made the recommendation to buy the GIO shares; (b) Graeme James Cureton ("Cureton"), an investment manager who had prime responsibility for executing the buying and selling of shares and securities and was a member of the Committee which authorised the investment in GIO. He was a director of GPG at the time; (c) Sir Ronald Alfred Brierley ("Brierley"), the Chairman of directors of GPG and a member of the Committee which authorised the investment in GIO; and (d) Dr Gary Hilton Weiss ("Weiss"), an executive director of GPG who was a member of the Committee which authorised the investment in GIO. This comprised all of the relevant decision-making group at GPG. 5 The witnesses called by GIO were the Chief Executive and director, Peter Corrigan ("Corrigan"), the non-executive Chairman, Paul Keith Mazoudier ("Mazoudier") and non-executive directors John Patrick Ducker ("Ducker"), Bruce Malcolm Robertson ("Robertson") and Peter John Lamble ("Lamble"). This comprised all of the directors who participated in the decisions relating to the announcements by GIO which are in issue. The chief financial officer, Geoffrey Arthur Thompson ("Geoffrey Thompson") was also called. Much of the matrix of facts is undisputed. There are, however, a number of issues of fact and law as to which I have had the benefit of comprehensive written and oral submissions. I will not attempt to deal with all the matters in dispute. I will trace the salient facts which were in the public domain, then proceed to look at the decision-making by GPG, then return to deal with relevant matters which were not in the public domain before considering the causes of action. facts in the public domain 6 GIO was the successor to the Government Insurance Office of New South Wales, which, to use current parlance, had been privatised and floated in 1992. Part of its business was writing reinsurance business, that is, accepting premiums in return for taking a share of risks undertaken by other insurers. This involved potential liability in relation to various kinds of catastrophes around the world. Due to the period for which claims that might arise can take to be notified and quantified it is necessary for the reinsurer to make provision for settlement of those claims. The calculation of the appropriate provision is a complex and specialised task in which the advice of actuaries is necessary. Regulators also take an interest in the topic. It is important to appreciate that this provision is made for events which have occurred (whether or not claims have yet been notified). New events (whether catastrophes or not) are not covered by such provisions. 7 In 1998 AMP made a takeover bid for all of the shares in GIO at an ultimate price of $5.35 per share. AMP had been a mutual life insurance company for many years and was the largest such business in Australia. It also had a general insurance division. The demutualisation of AMP had been completed fairly recently at the time of the bid for GIO. The Board of GIO opposed the offer and the Part B Statement included an independent expert's valuation of GIO shares, with a mid-point acquisition value of $6.19 which supported the Board's recommendation that the bid be rejected. 8 In an announcement to the market dated 10 December 1998 GIO estimated that the reinsurance and corporate finance businesses would contribute $69 million to the company's operating profit, before abnormal items and tax, for the 1998/1999 financial year. Furthermore, in late 1998, GIO's directors declared a distribution to shareholders of 50c cash per share, consisting of a special payment of 38c per share, being a return of excess capital and a fully-franked 1998/1999 interim dividend of 12c per share. The notification to the ASX included the following: "The GIO Board's decision to declare a special payment of 38 cents per share follows a detailed review of GIO's capital position and its short to medium term capital requirements. This lengthy review was referred to in the Part B Statement and has just been completed. The value that a number of leading stockbroking analysts have recently placed on a GIO share, if AMP went away, is greater than the value that many shareholders will receive after capital gains tax if they accept AMP's bid. GIO's businesses are performing strongly and our prospects have never looked brighter." 9 By January 1999 AMP had acquired 57% of the shareholding in GIO and declared the offer unconditional. It appointed four persons to be directors of GIO, being Kerry Roberts ("Roberts") and John Utz ("Utz"), who were both non-executive directors of AMP, and George Trumbull ("Trumbull") and Paul Batchelor ("Batchelor"), who were the two senior executive officers of AMP and who were also authorised representatives of AMP in its capacity as majority shareholder of GIO. 10 In January 1999 Corrigan, formerly employed as the Chief Executive of the AMP general insurance business, was appointed Chief Executive Officer of GIO. At the same time Mazoudier had joined the Board of GIO and was elected Chairman. Mazoudier was not then a director or officer of AMP, although his curriculum vitae shows that he was involved as a solicitor in the demutualisation of AMP. He is now a director of AMP. Some of the previous GIO Board resigned at the same time. In the joint announcement by AMP and GIO of these changes, the former managing director of GIO was quoted as saying: "GIO continues to perform well and is on track to meeting its Part B Statement forecast profit before tax and abnormals for the full year of $250 million. I am glad that GIO is in such good shape." 11 On 3 February 1999 the appointment of Lamble and Corrigan to the Board of GIO was announced. On the following day the appointment of Geoffrey Thompson as Chief Financial Officer was announced, he having previously been Group Manager of Risk Management Services for AMP. 12 On 5 March 1999 GIO announced its results for the half-year to 31 December 1998 and reported a lower operating profit which was attributed primarily to a $32.5 million loss incurred by GIO's reinsurance and corporate finance businesses. On that date, AMP issued a report which said, inter alia: "AMP expected that the GIO reinsurance business would suffer losses after the events of last year (such as Hurricane Georges), as it repeatedly said during the course of the bid. Nevertheless, AMP is confident that GIO now has appropriate mechanisms in place to manage the volatility of reinsurance earnings to provide a more stable platform going forward." 13 On 5 May 1999 GIO issued a release in the following terms: "Peter Corrigan, CEO of GIO Australia Holdings Limited, has advised that, given the Sydney hailstorm and other world catastrophes over the past 12 months, GIO's reinsurance division is unlikely to return to profit by 30 June 1999. GIO's regular review processes are continuing and should be completed in June." 14 On 12 May 1999 GIO made an announcement as follows: "GIO announced today that it is facing much larger losses in its Reinsurance division than previously expected. Peter Corrigan, CEO of GIO, advised today that, following both an internal actuarial review of the Reinsurance business and an independent review conducted over the past two months by a team from Ernst & Young, New York, a significant further deterioration in the Reinsurance result has emerged. It is expected that a pre tax loss of at least $300 million will be incurred for the full year to 30 June 1999 for GIO Reinsurance. For GIO Australia Holdings Limited, this will mean, subject to movements in investment markets between now and year end, an overall loss for the year of at least $100 million before tax and abnormal items. Abnormal items in excess of the $42m reported for the first half, are expected for the full year. Mr Corrigan said the Ernst & Young review identified a number of portfolios and lines of business where provisioning for claims in past years was considered inadequate. The bulk of the loss relates to increasing provisions for these older years. In addition GIO has seen some further development arising out of more recent events. The loss for Hurricane Georges is now expected to add $10m to the loss reported at half year and for Hurricane Mitch $30m. GIO Re is also expecting claims in the region of $30m from the recent Sydney hailstorms and $20m from the Oklahoma tornadoes. Mr Corrigan added, "I am confident that the current management team at GIO Reinsurance has the right approach to this business. Whilst the Ernst & Young review will recommend some changes and improvements, it basically supports the new direction that our team is implementing and we believe the Reinsurance business is now well positioned to move forward."" 15 On the same date, AMP made an announcement as follows: "AMP today said that GIO's announcement about its losses associated with its reinsurance business was disappointing. AMP said the announcement would not have a material impact on AMP's results. AMP was not surprised by the announcement. AMP said repeatedly during the course of the 1998 bid for GIO that it expected that the GIO reinsurance business would suffer losses after the significant events of last year. What has come to light today is that the reinsurance position is significantly worse than outlined in GIO's Part B statement during the bid process. Most of the loss was associated with provisioning for claims in past years. As such much of the loss predates AMP's acquisition of GIO and does not impact AMP's earnings. At this point in time, AMP remains comfortable with the carrying value of GIO but will review the position at the half year. Despite the size of the loss, AMP was encouraged that GIO had decided to deal with the reinsurance situation immediately rather than to smooth out the losses over a number of years." 16 On 23 June 1999 GIO made an announcement including the following: "… Furthermore GIO's board has given approval in principle for a subordinated debt raising which is likely to be in the region of $250-$300 million, providing the group with further capital strength in a very cost effective manner. Details of this raising will be confirmed following GIO's 30 June 1999 year-end, with due consideration to the overall capital position of the group, regulatory matters and GIO's strategic objectives. This was also considered by Standard & Poor's in reaching their conclusions." 17 On 22 July 1999 Ducker and Robertson were appointed as directors of GIO. 18 On 16 August 1999 GIO made a report to the ASX which included the following: "GIO REPORTS MAJOR LOSS AND PLANS TO EXIT REINSURANCE BUSINESS · GIO Australia Holdings Limited announces operating loss of $743m after abnormals and tax for the full year to 30 June 1999 · The results reflect a severe deterioration in the Reinsurance business which reports unprecedented losses of $759m · The GIO Board has decided to exit the Reinsurance business · The core businesses of GIO remain strong and have performed soundly GIO Australia Holdings Limited today announced that it expects to incur an operating loss of $743m after abnormals and tax for the full year to 30 June 1999. This compares to a $27m loss for the same period last year. The results reflect a severe deterioration in the Reinsurance business, where major losses have developed during the second half of the year. On 12 May 1999, the company announced that its Reinsurance loss would be at least $300m. Since that time a further deterioration in claims experience has led to additional reserves of $202m and a shortfall of investment income of $32m and today the Board approved a prudential margin of $225m. … REINSURANCE RESULTS The unprecedented losses in the Reinsurance business of $759m before tax stem mainly from events occurring during the 1998-99 calendar years. In addition the adoption of a "best estimate" claims reserving approach has resulted in higher claim estimates for business written mainly in the 1998 financial year. The 1998-99 years included a number of significant events that have impacted the reinsurance industry as a whole. These included: · Hurricanes Georges and Mitch; · A series of space launch failures; · The Sydney hailstorm. A number of recent developments have resulted in the significant deterioration from the position as at 12 May, 1999. These include: · Increases in expected losses attributable to catastrophes that occurred prior to May 1999; · Heightened attritional claims development in Marine and Property classes again resulting in increases to claims reserves; · Accelerated claims payout impacting investment income on technical reserves. Following the extensive reviews of the portfolio as the Company announced on 12 May 1999, claims reserves have been significantly strengthened to a point where they are now $2.2bn ($1.8bn at 30 June 1998). Included it [sic] these reserves is a prudential margin of $225m. This provides further confidence that the reserves are adequate in response to uncertainties inherent in the reserving process. GIO RE'S FUTURE The losses experienced in 1998 and 1999 have more than offset the cumulative profits from inception of GIO Re in 1986. This situation reflects a business where the management processes and disciplines were historically poor. Prior to recent changes GIO Re's exposures were out of line with reasonable risk tolerances. Over the last 12 months managements' response to the significant issues underlying this poor performance has included the following: · A revamp of the reinsurance program protecting the business for 1999 involving lower retention of risk and higher spending on reinsurance. Notably, the Hurricanes Georges net loss of $170m would be expected to be circa $45m if it occurred today; · Improved underwriting controls and assessment of risks; · General reunderwriting of the portfolio resulting in gross written premiums being reduced from $970m in 1998 to $488m in 1999; · Strengthening of claims management and processing across all classes. These matters are now largely in hand but they were not able to arrest the claims development experienced on business written by the company in earlier years. In recent months, GIO initiated a review of GIO Re to determine its strategic fit within the GIO Group. The findings of this review, which have now been considered and adopted by the Board, are that there is no compelling strategic, relevance of GIO Re to the Group. Consequently, to ensure a proper focus of resources on business activities that are seen as core to rebuilding shareholder value, the Board has decided to exit the Reinsurance business. A sale of the business will be pursued. However, should a sale prove unworkable, GIO will conduct an orderly run-off of the business. This is a strategic decision recognising that a return to profitability is possible in the future, despite the current trading conditions in the reinsurance industry. The majority of the company's reinsurance business is transacted at inception dates of 1 January or 1 July. A small amount is entered into at other dates. Management has therefore decided to suspend underwriting new business until the outcome of the exit process is known. … CAPITAL MANAGEMENT Shareholders' equity was $453m at 30 June 1999, representing a 69% decrease over the 1998 shareholders' equity of $1,459m. The company previously announced a proposed injection of funds via a subordinated debt raising in the region of $250-300m. The Board is currently re-examining funding options, in light of the reduced level of capital arising from the Reinsurance losses. This is now unlikely to include subordinated debt. GIO will consult with its majority shareholder, AMP regarding their potential support for any proposed funding. We expect to make a further announcement shortly regarding GIO's proposed capital strategy. GIO's General Insurance and Financial Services businesses remain adequately capitalised." 19 On the same day, AMP released a statement including the following: "AMP today said that the extent of losses in relation to GIO's Reinsurance business was far worse than expected and significantly out of line with information provided in the Part B Statement, issued to shareholders by GIO directors in December 1998. … AMP CEO, Mr George Trumbull said: "It is no surprise to AMP that GIO's Reinsurance business is encountering problems. What is a surprise is the extent of the problem, given the very public pronouncements made by the GIO directors and their advisers during the bid process. AMP is obviously evaluating its legal options at this time." As a long-term investor in GIO, AMP supports GIO's plan to recapitalise the company. The extent of AMP's participation in such recapitalisation is yet to be determined. AMP agrees with GIO's decision to exit the Reinsurance business and continues to have confidence in current management and in the value of GIO's remaining core businesses." 20 On 20 August 1999 GIO made an announcement to the Stock Exchange as follows: "GIO Reinsurance announces impact of Turkish earthquake GIO Reinsurance anticipates exposure to the Turkish earthquake. At this stage there is a lack of information coming out of the country. The direct exposure, net of reinsurance is expected to be $5m. However, this depends on the total scale and associated cost of the catastrophe. GIO Reinsurance may have additional exposures arising from the London Market but it is too early to estimate GIO's exposure. It is unlikely that it will be significant." 21 On 24 August 1999 GIO released to the market a document called "Appendix 4B – Preliminary Final Report" which revealed an operating loss, after tax, of $742.6 million, together with the financial report, directors' report and audit report for the year ended 30 June 1999 and a report to be given to analysts. These revealed losses in the reinsurance business of $759.2 million before tax. Among the significant accounting policies which were summarised as part of the notes to, and forming part of, financial statement was the following: "Outstanding claims The liability for outstanding claims at balance date comprises claims which have been reported but not yet paid, claims incurred but not yet reported, and the anticipated direct and indirect costs of settling these claims. The liability includes an allowance for inflation and superimposed inflation and is measured as the present value of the expected future ultimate cost of settling claims. The present value is calculated by discounting the liability using risk adjusted market rates of return on investments. Outstanding claims are determined on a best estimate basis in accordance with actuarial standards. Advice is taken from independent actuaries in respect of corporate insurance and the long-tail business of general insurance. A prudential margin is added to the claims liability in respect of inwards reinsurance and the long tail business of general and corporate insurance to increase the probability that the liability is adequately provided for. Change in accounting method – inwards reinsurance Due to adverse claims development in the second half of the financial year, a mathematical model utilised in previous reporting periods to determine outstanding claims for inwards reinsurance business is no longer considered appropriate for use at 30 June 1999. This model has been replaced by the more commonly used best estimate liability basis applied in accordance with actuarial standards for the determination of outstanding claims at 30 June 1999. The best estimate basis uses standard actuarial techniques to analyse premium and claims data and project ultimate claims. Had the previously utilised mathematical model been used for 30 June 1999, it is likely that adjustments to increase outstanding claims above those calculated by the model would have been recognised. Based on previous practice it is therefore possible that the result would not have been materially different from that calculated under the new method. The level of prudential margin has been set having regard to the volatility and predictability of the portfolio of claims. The liability for outstanding claims including prudential margin are disclosed in note 15." In note 15 it was disclosed that in the inward reinsurance included a prudential margin of $225 million, compared with $157.6 million in 1998. 22 On 14 September 1999 AMP made an announcement to the market in the following terms: "AMP today confirmed that it remains comfortable with its 57% ownership of GIO. Naturally, however, AMP will continue to assess all options in line with prudent business practice. AMP is prepared to consider any proposals in relation to GIO's capital raising requirements, which were foreshadowed at the time of GIO's full year profit announcement. However, at this stage, whilst there have been discussions, no formal proposals have been received nor put before the AMP Board. The current focus is on successfully implementing a commercial alliance between AMP and GIO for the benefit of shareholders of both companies." 23 On 24 September 1999 simultaneous announcements were released by GIO and AMP, which lie at the heart of the case and which, therefore, need to be set out in full: "GIO AUSTRALIA HOLDINGS LTD SYDNEY: FRIDAY 24 SEPTEMBER 1999 FOR IMMEDIATE RELEASE GIO PROPOSES THAT AMP ACQUIRE 100% OF GIO EXIT MECHANISM FOR MINORITY SHAREHOLDERS AT $3.05 PLUS CONTINGENT INSTRUMENT PROVIDING FOR POTENTIAL FURTHER PAYMENTS DEPENDANT ON THE RESULTS OF GIO REINSURANCE The independent directors of GIO Australia Holdings Limited ("GIO") announce that GIO proposes to put before its shareholders for consideration a scheme of arrangement under Part 5.1 of the Corporations Law which, if implemented, would result in AMP Group ("AMP") acquiring the 43% of GIO it does not already own ("Scheme"). The Chairman of GIO, Mr Paul Mazoudier, stated: "The independent directors unanimously recommend to shareholders not associated with AMP that they vote in favour of the Scheme, as it represents an opportunity for them to exit their investment in GIO for a consideration which, subject to the opinion of an independent expert, the directors view as fair and reasonable." Mr Mazoudier added that, having regard to the circumstances described below, the independent directors of GIO consider the Scheme to be in the best interests of GIO shareholders not associated with AMP: · The independent directors of GIO have explored a number of capital funding options for GIO in recent months. None of the options were considered to deliver an outcome as beneficial to the minority shareholders as the Scheme. · The directors are also aware of the pending litigation against GIO, and the potential for that litigation to diminish goodwill in the company and jeopardise its businesses, to the detriment of shareholder value. · Following implementation of the Scheme, AMP will recapitalise GIO to ensure regulatory capital requirements are satisfied. · GIO Reinsurance has recently reported significant losses which have precipitated the need for GIO to secure substantial additional capital, as identified in the company's announcement of 16 August 1999. Because of the risk exposures under current reinsurance contracts and the inherent volatility in the management of long-tail claims settlements, the independent directors of GIO have had difficulty in properly estimating the current value of GIO Reinsurance. Therefore, they have negotiated a structure which ensures that minority shareholders receive further consideration that is dependant on the results of GIO Reinsurance in the next 3 financial years. "AMP has undertaken to GIO to support the proposal", Mr Mazoudier said. Under the Scheme all GIO shares not held by AMP will be transferred to AMP, each in consideration for listed debt instruments of AMP ("AMP Notes") so as to receive a face value equivalent to $3.05 per share. In addition, AMP will issue each GIO shareholder (other than AMP) with an unlisted contingent instrument of AMP ("Contingent Instrument") potentially entitling the holder to 2 cash instalments: (a) an amount payable by AMP in September 2000 of 22c per share less any losses in GIO Reinsurance (excluding return on shareholders funds) per GIO share for the 12 month period to 30 June 2000; and (b) an amount payable by AMP in September 2002 reflecting per GIO share accumulated business profits (if any) of GIO Reinsurance during the period 1 July 2000 through 30 June 2002 (or earlier sale of whole or part of GIO Reinsurance), after taking into account a risk return on AMP's investment in that business during that period. Further details on the AMP Notes and the Contingent Instrument are contained in Annexure 1 to this announcement. A meeting of GIO shareholders not associated with AMP ("Scheme Meeting") will be convened for mid-December 1999 to vote on the Scheme, and be held immediately before GIO's Annual General Meeting which is to be postponed to that time. Further details on the process of implementing the Scheme are contained in Annexure 2 to this announcement. The independent directors of GIO propose shortly to engage an independent expert to provide an opinion on the Scheme in accordance with the Corporations Law, in particular on the value of the consideration offered by AMP under the Scheme. The report of the expert will be included in the shareholder materials forwarded with the notice convening the Scheme Meeting. Mr Mazoudier concluded: "My fellow independent directors, and I, believe that this proposal is in the best interests of minority shareholders, customers and staff and that GIO's future is best secured as part of the AMP group." Inquiries should be directed to: Susan Nixon Director of Marketing and Communications GIO Australia Holdings Limited Phone: 9255 8078 Fax: 9251-2084 Email: snixon@gio.com.au "C O'Hehir" Chris O'Hehir Group Secretary and General Counsel GIO Australia Holdings Limited Annexure 1 The AMP Notes The AMP Notes will have the following key features: · interest rate will be no less than 1.3% above the 90 day Bank Bill Rate, and in the first year will be no less than 7%; · perpetual debt security; · to be quoted on the Australian Stock Exchange; · junior subordinated debt securities, ranking only above ordinary and preferred AMP equity; and · redeemable at AMP's option after 5 years. The Contingent Instrument · First Instalment: It is not currently possible for GIO to calculate or even estimate the results of GIO Reinsurance since 1 July 1999, nor for the period from 1 July 1999 through 30 June 2000. However, GIO is aware of a number of catastrophes which may expose GIO Reinsurance to losses, including Hurricane Floyd, Hurricane Gert and earthquakes in Turkey, Taiwan and Greece. GIO proposes to provide GIO shareholders before the Scheme Meeting with an estimate of the GIO Reinsurance losses to the end of October 1999 to assist shareholders in assessing the proposal. However, it will not be possible for the company to estimate the ultimate results to 30 June 2000, as this will be for the auditor to determine in accordance with normal practice. · Second instalment: The amount payable under the second instalment in September 2002 (or upon earlier sale of GIO Reinsurance) will be determined by an independent expert. In summary, the second instalment will reflect minority shareholders' interest in any accumulated business profits of GIO Reinsurance for the 2 years to 30 June 2002 after adjusting for an appropriate risk return of 13% payable to AMP on the minimum capital it must contribute to GIO Reinsurance to meet regulatory requirements. Annexure 2 Key steps in implementation of Scheme The key elements of the Scheme will be: · GIO and AMP will settle all formal terms of the Scheme and its implementation in a Merger Implementation Agreement which, subject to continuing negotiation between AMP and GIO, is expected to have the following key terms: · the conditions to implementation of the Scheme will include: - all regulatory consents; - no judicial, regulatory or governmental intervention preventing implementation of the Scheme; and - no "prescribed occurrences" on behalf of GIO (such as insolvency, the issue of options or notes, or other matters outside the ordinary course of trading); · AMP will recapitalise GIO after the Scheme to ensure regulatory capital requirements are satisfied; · The Merger Implementation Agreement (and the obligations of the parties to progress the Scheme) may be terminated if: - there is a material breach of the agreement; - a condition precedent is not satisfied by 31 December 1999 (or such later date agreed between the parties) and the parties cannot resolve its waiver or elimination; or - GIO shareholders do not approve the Scheme by requisite majorities at the Scheme Meeting; · Additionally, AMP may terminate the agreement if there occurs before the Scheme Meeting a material adverse change in GIO's business except a change: - of which AMP was informed before execution of the agreement; or - which involves a diminution in GIO's net assets of less than 15%, except a diminution reflected in the reduction of the 22c payable in the first instalment under the Contingent Instrument (up to the limit of the 22c amount); or - which was effected by GIO management with AMP's agreement; · AMP will have the right to conduct due diligence on GIO's businesses up until the date of the Scheme Meeting; and · GIO and AMP represent the veracity of the information they each provide for the Scheme documentation to be sent to GIO shareholders, and indemnify each other against a breach of those warranties; · GIO will apply to the Supreme Court of New South Wales in late October for the Scheme Meeting (together with the GIO Annual General Meeting) to be convened for mid-December 1999; · For the Scheme to be implemented, at least: · 75% by number of GIO shares (other than those owned by AMP) voted in person or by proxy at the Scheme Meeting; and · 50% by number of GIO shareholders not associated with AMP present and voting in person or by proxy at the Scheme Meeting, must vote in favour of the Scheme; · Assuming the voting thresholds are obtained, GIO will then approach the Supreme Court of New South Wales for approval of the Scheme, a day or so after the Scheme Meeting; and · If the Supreme Court of New South Wales approves the Scheme, it will become effective immediately upon a copy of the Court's order being lodged with the Australian Securities and Investments Commission, which will occur immediately after the Court hearing, after which AMP will promptly deliver the consideration (ie the AMP Note and Contingent Instrument) to GIO shareholders and the share transfers to AMP will occur." (emphasis added) _____________________ "Australian Stock Exchange Announcement 24 September 1999 AMP Agrees to GIO Independent Directors' Proposal for AMP to Acquire 100% Ownership of GIO AMP Limited today announced it has agreed to a proposal by GIO's independent directors to participate in a scheme of arrangement, whereby AMP would buy out GIO's remaining shareholders with AMP Income Securities, to be listed on the Australian Stock Exchange, and recapitalise GIO after obtaining 100% ownership. AMP's CEO, Mr Paul Batchelor, indicated that AMP's Board had been assessing the GIO situation since the announcement of reinsurance losses earlier this year. "A solution needed to be found for GIO's financial problems to protect AMP's investment in GIO. Full ownership allows us to enhance the synergies we were discussing in relation to the Alliance and implement these synergies more quickly and more efficiently. The creation of economies of scale in various areas will deliver cost savings and revenue benefits. That means added value for our shareholders," he said. Under the Scheme, all GIO shares not held by AMP will be transferred to AMP. The consideration will be AMP Income Securities equivalent to $3.05 per share and an unlisted instrument of AMP, which offers GIO shareholders additional amounts dependent on any upside from GIO's reinsurance results. Income Securities are a relatively new type of security that has gained considerable popularity amongst Australian investors since its first appearance earlier this year. The market-tradeable security will combine an attractive yield with the high credit standing of its issuer, AMP. GIO is a strong strategic fit for AMP, bringing into the combined entity strong brand values, a direct channel capability and additional businesses which strengthen AMP's current range of services. The immediate creation of economies of scale in the areas of general insurance, financial services and asset management should allow AMP to reap rewards from a full acquisition. Mr Batchelor said, "Furthermore, the injection of capital ensures the future prospects of GIO's core businesses, which ideally complement AMP's existing activities. This combination creates operational benefits and increases cross-selling abilities, which will result in increased customer opportunities and greater value for our shareholders. "For both AMP and GIO's customers, this means more choice and for our shareholders it means added value through both cost savings and revenue benefits. We believe that GIO will be an important part of AMP going forward, providing opportunities for GIO employees now and in the future." Mr Batchelor concluded. ENDS Issued by: James Willoughby Group Corporate Affairs Executive AMP Limited Telephone: (02) 9257-5712" 24 On 30 September 1999 GIO made an announcement as follows: "GIO TO RUN-OFF ITS REINSURANCE BUSINESS On 16 August 1999, GIO announced that it had completed a review of its reinsurance business, which concluded that there was no compelling strategic relevance of GIO Re to the GIO Group. A decision was made to exit the reinsurance business and suspend underwriting. GIO also announced that a sale of the business would be pursued and, should a sale prove unworkable, GIO would conduct an orderly run-off of the business. Although interest has been expressed for parts of the reinsurance business, no satisfactory option for sale of the business as a whole has been found. The sale of certain elements will continue to be pursued. However they do not constitute a material part of the overall operation. As a result, GIO's reinsurance business will be placed into an orderly run-off. This will involve the settlement of valid claims liabilities over a number of years as well as management of any unexpired risks. GIO Re is being restructured to meet the operational requirements of a run-off and other opportunities to enhance shareholder value will be actively pursued." 25 On 25 October 1999 GIO released a notice of annual general meeting, to be held on 16 December 1999: "… at 11am or so soon thereafter as the Court ordered Meeting in relation to the proposed Scheme of Arrangement under section 411 of the Corporations Law between the Company and its members concludes" 26 On 1 November 1999 GIO's application to convene the scheme meeting came on before Santow J in the Supreme Court of New South Wales and was adjourned. 27 On 2 November 1999 GIO made an announcement in the following terms: "The financial position of GIO Reinsurance has continued to deteriorate since 30 June 1999, to such an extent that Directors believe it is highly unlikely that any payment will be made under the first 22 cent instalment of the Reinsurance Note contemplated in the Scheme of Arrangement. The main element of the deterioration is in relation to continued adverse development of claims experience in relation to events that occurred prior to 30 June 1999. During the first quarter of the current period, the company continued to receive claim notifications and variations on past events at a much higher level than anticipated. Whilst it may be that some part of these increased levels is a response to the company's decision to move into 'run-off', the Directors cannot disregard the trends and based on reviews conducted across a range of portfolios believe that loss reserves will need to increase by an amount, in the order of $180 million, during the current period. Another element of likely impact relates to events which have occurred since 30 June 1999. GIO Re has exposure to a number of these events and will incur further losses as a result. An assessment of these losses will be reflected in the 31 December 1999 Financial Statements." 28 On 3 November 1999 the ASX announced that the securities of GIO would be placed in pre-open pending the release of an announcement by the company. This amounted to a temporary trading halt and was requested by GIO. On the same date, AMP made the following announcement: "AMP Considering Implications of GIO Announcement AMP is currently considering the implications of the further deterioration in the financial position of GIO's Reinsurance Division and the resulting $180 million additional loss, announced by GIO on 2 November 1999. AMP has entered into discussions with GIO regarding the impact of the announcement on the Scheme of Arrangement, proposed to AMP by GIO's independent directors on 24 September 1999. An announcement will be made at the conclusion of these discussions." 29 On 4 November 1999 GIO released the following announcement: "After GIO's announcement on Tuesday disclosing a further $180m deterioration in the financial position of GIO Re, AMP gave written notice yesterday that it was not prepared to execute a Merger Implementation Agreement on the terms previously announced on 24th September 1999. At the same time AMP proposed modifications to the proposed Scheme. The independent directors of GIO have considered and agreed to take the revised proposal to shareholders. The modified Scheme proposal will proceed on the basis that GIO minority shareholders would receive the following consideration per GIO share: AMP Income Securities with a face value of $2.75 (previously $3.05); and A Reinsurance Note which potentially entitles the holder to two cash instalments: an amount payable by AMP in September 2000 up to 52c per share (previously 22c) less any losses in GIO Reinsurance (excluding return on shareholder funds) per GIO share for the 12 month period to 30 June 2000 (the $180m losses announced on Tuesday will be included in the determination of any amount paid under this instalment); and an amount payable in September 2002 reflecting per GIO share accumulated business profits (if any) for the period 1st July 2000 to 30th June 2002 after recovering any losses in excess of $328m (previously $139m) in the period to 30th June 2000 after taking into account a risk return on AMP's investment in that business during that period. AMP has retained the right to withdraw its consent to participation in the Scheme if: net Reinsurance losses from any one event occurring since 30th June 1999 exceed $50m; or aggregate net Reinsurance losses since 30th June 1999 (on any events) exceed $378m. This right may be exercised up until the date of the Scheme meeting. AMP and GIO have signed a Merger Implementation Agreement reflecting these revised terms; a copy of which has been lodged with the ASX. The proposal will be put before shareholders as a Scheme of Arrangement meeting. This meeting was scheduled for December 16 (the same date as the AGM). Any changes to this date will be advised." 30 On the same date, AMP released the following announcement: "In response to GIO Australia Holdings Limited's ("GIO") announcement on Tuesday 2nd November disclosing a further $180 million deterioration in the financial position of its Reinsurance Division, AMP proposed to GIO independent directors a restructure of the planned Scheme of Arrangement ("Scheme"). The GIO independent directors have considered and agreed to take to shareholders AMP's revisions to the Scheme, which are: · AMP Income Securities issued to 610 minorities in exchange for their holding will now have a face value of $2.75 per GIO share (previously $3.05). · A reinsurance note, which potentially entitles shareholders to two cash instalments and is intended to deliver any residual value in GIO's reinsurance business to its shareholders. The instalments are: · An amount payable by AMP in September 2000 up to 52c per share (previously 22c) less any losses in 010 [sic] Reinsurance (excluding return on shareholder funds) per GIO share for the 12-month period to 30 June 2000 (the $180m losses announced on Tuesday will be included in the determination of any amount paid under this instalment and on present indications, 30c of the 52c is unlikely to be paid due to these losses). · An amount payable in September 2002 reflecting per GIO share accumulated business profits (if any) for the period 1 July 2000 to 30 June 2002 after recovering any losses in excess of $328m (previously $139m) in the period to 30 June 2000 after taking into account a risk return on AMP's investment in that business during that period. In all other respects the financial terms would remain the same. Commenting on the revised terms, AMP's CEO, Mr Paul Batchelor, indicated that the loss announced on Tuesday constituted a material adverse change, which would have allowed AMP to terminate the proposal. "We continue to believe that it is still in the best interests of all relevant GIO stakeholders that GIO minority shareholders are provided with an exit mechanism. However, these further losses meant that AMP had to lower the fixed part of the total payment proposed to protect the interests of our shareholders," Mr Batchelor said. AMP has retained the right to withdraw its consent to participation in the Scheme if: · Net Reinsurance losses from any one event occurring since 30 June 1999 exceed $50m; or · Aggregate net Reinsurance losses since 30 June 1999 (on any events) exceed $378m. This right may be exercised up until the date of the Scheme meeting. Mr Batchelor said: "AMP remains convinced of the advantage of full ownership because of GIO's strong strategic fit with AMP and the considerable synergy benefits, which could be extracted quickly and efficiently.' "The announced losses highlight GIO's need for additional capital to preserve the strength of its excellent core businesses and its internal funding capacity is close to exhaustion," Mr Batchelor added. "It is clear that GIO's ongoing efforts to rationalise its operations are identifying the implications of past problems in greater detail. Although these losses cannot be justified to GIO shareholders, including AMP, a better appraisal of the remaining exposure will help GIO to withdraw from the reinsurance business more quickly and contain risks in the future," he said." (emphasis added) 31 On 16 December 1999 the shareholders (other than AMP) approved the revised scheme of arrangement, which became effective on 20 December 1999. gpg decision-making 32 In 1999 the Sydney office of GPG had responsibility for making investment and divestment decisions in its own right. Those decisions were made by the Committee, which consisted of Brierley, Weiss, Loomes and Cureton. The Committee operated informally, relying upon reports in relation to a particular company or opportunity by a member of the group or one of the analysts employed by GPG, followed by discussion at meetings of the Committee which took place on an ad hoc basis. Although members of the Committee did not have clearly defined areas of responsibility, each member tended to have an in-depth knowledge of particular industries or industry sectors. Loomes' area of interest was the banking and insurance industries. He had initiated investments by GPG in various insurance companies, and had been a director of a life insurer and an insurance broker and underwriter. He had had a professional interest in GIO since 1996, including the purchase and sale of shares by GPG on his recommendation, and he continued to monitor the company for potential reinvestment. He did this by reading public announcements and brokers' reports and by undertaking financial analyses. Loomes saw and studied the announcements by GIO and AMP on 24 September 1999 and prepared an investment report, dated 27 September 1999, recommending that GPG invest in GIO. In the course of preparation of the report, he reviewed all public announcements made by GIO to the ASX during the past year. That report needs to be considered as a whole and in context, but is too long to be reproduced in full. Some of the more important parts of it were as follows: "The company has been trying to sell its reinsurance division via Credit Suisse First Boston but without success (not surprising). The group is now faced with running off the tail, hopefully from a strongly reserved position. This reality has brought to a head the need to address the capital shortage in GIO – various reports have put the new capital necessary at $350-400 million. … Ahead of the announcement, GIO was selling at about $2.60 per share. The consideration offered per share comprises – · One $3.05 perpetual debt note, carrying interest at 90 day bank bill plus 1.3%, and redeemable at AMP's option after five years, to be listed · An unlisted "contingent instrument" entitling holders to two cash instalments · $0.22 less share of GIO Re losses over 1999/2000 · A residual payment reflecting GIO Re's profits over years ended June 2001 and 2002 less interest on capital subscribed by AMP to GIO Re to meet regulatory requirements." The take-over is to be effected by a scheme of arrangement requiring approval by 75% of shares (excluding those held by AMP) and 50% of shareholders. A meeting is scheduled for mid December. There is a "drop-dead date" of 31 December 1999, and AMP has provided itself with plenty of escape clauses. In the wake of the announcement, GIO shares are selling for about $2.90 ps, a discount that possibly reflects a number of considerations – (1) AMP may have a great deal of trouble getting the scheme across the line in the face of outraged shareholders. (2) Valuation of the debt note may be at some discount from face value – but I do not agree with such a proposition given the success of the National Bank's recent issue of a similar instrument at 90 days bank bill plus 1.25% pa. See attached newspaper article. (3) The contingent instrument payments are probably totally discounted as GIO Re suffers further disasters and as profit outcomes will be in the hands of AMP itself. I find it hard to believe that there is not a lot of money to be made out of GIO now that AMP has committed itself to this "mop-up" course of action. The consideration being offered is dubious in nature and uncertain; it is grossly inadequate relative to the value to AMP of 100% ownership of GIO; the entire situation surely provides opportunities for an entrepreneurial investor. To offer investors in equities consideration consisting of debt notes and contingent payments deferred for some years is to invite trouble. No wonder the rush for the exits at $2.90. You would have thought AMP would have put in place a cash alternative underwritten by some enterprising broker – maybe the notes aren't worth $3.05 after all!!! … All of this assumes nil contingent payments, and the outcome on this front is dependent on the performance of GIO Reinsurance. It is not possible to forecast the profitability of this business, but the following points can be made – (1) Liabilities at 30 June 1999 were extensively reviewed and an increase to $225 million in prudential margins was put in place [net of tax, prudential margins are worth $0.25 per GIO share]. (2) GIO Reinsurance has stopped writing business, but (3) There is exposure to unearned premiums, and there have been plenty of natural disasters in the present six months – earthquakes in Turkey, Greece, Taiwan; windstorms etc in Hong Kong, US east coast, Bermuda (4) Ahead of the proposed GIO meeting, shareholders will be updated on the position of GIO Re. If we were to purchase say 5% of GIO (cost $91 million at $2.90 ps), GPG would have lots of options and could possibly be king-maker in the AMP proposal these would include – · Do nothing (or indeed publicly endorse the scheme), accept the offer, sell the notes at face value, book $4.7 million profit (15% pa return) and ride the contingent instrument at nil cost (maybe buy more contingent instruments on a secondary market). Seek a seat on GIO Re board to represent contingent instrument holders. · Agitate for higher consideration or reconstructed consideration – remember AMP is making $1134 million on this deal and a clean offer of say $3.50 per GIO share would not make a big hole in this. The contingent instruments are only extending the aggravation. · Negotiate a role in running off the reinsurance tail on a confrontationist, litigious plane, maximising value for operator and shareholders. The downside is that the scheme is voted down or otherwise fails; we are left with $91 million of GIO with a fundamental valuation of $71 million and facing a need to put up another $20 million into GIO in an equity raising. We would have a $111 million problem but then AMP has already has a $1900 million problem and will then have a $2128 million problem. It is very difficult to believe a solution will not be found, especially given the attractive post merger value of GIO to AMP." (emphasis added) 33 That report was discussed at a meeting of the Committee on 30 September 1999 and the recommendation by Loomes was accepted. This was acted upon immediately and on that day shares worth more than $1.4 million were purchased by GPG. It will be necessary to return to aspects of the decision-making process which arise out of the oral evidence in due course. Purchases continued virtually on a daily basis, during which time Loomes continued to review announcements by GIO and researched AMP's business to understand its reasons for wishing to acquire the balance of the GIO shareholding. 34 On 22 October 1999 Loomes prepared a second investment report. Again, this report needs to be considered in full and in context. His thesis was that the proposed scheme of arrangement was a good deal for AMP, both as to price and as to business strategy. He attempted to fix the value which AMP would attribute to GIO. He comments that an ungenerous observer could argue that GIO's accounts were biased to the advantage of a predatorial major shareholder and asked the question: "What exactly does the creation of $225 million of prudential reserves achieve except to weaken the GIO equity position?". The most relevant portion of the report, for present purposes, is as follows: "THE DOWNSIDE I find it extremely difficult to believe that AMP can afford to walk away from this attempt to move to 100% of GIO. In the unlikely event that this was to happen, one would need to contemplate why as well as the longer term outcome. The only foreseeable reason for AMP to withdraw would be a further deterioration in the Reinsurance business between now and December. Given the recent harsh review of liabilities, such an outcome would probably be driven by adverse claims events in the December 1999 quarter. It is against this that we are betting, and probably on reasonable grounds as the northern hemisphere wind storm season draws to a close. In this scenario, GIO would need $400 million of fresh capital plus more to cover the new setback. The share price would probably settle around $2.00 and we would await the revised AMP offer. The other (more probable) downside is that AMP refuses to budge on the offer terms. There are then two possible outcomes – shareholders reject this offer or shareholders accept. In the latter case, GPG would have a sizable investment in AMP income securities (which would be listed, highly marketable and probably worth more than face value) plus the contingent payment assets. The former case would see GIO selling for probably $2.50-$3.00 ps as the market awaits the next AMP move." (emphasis added) He recommended continuation of buying. He also attached, as an appendix, what he described as "an excellent review of GIO from Falkiners Stockbroking Ltd". This report included as a key point: "GIO is now more prudently reserved than at any time since the company was floated, with over $340 million in prudential margins." The report also includes the following statements: "The 1999 loss of $743 million does not reflect the underlying profitability of GIO The loss incorporates a number of very conservative adjustments that have been made by the company and represents the cost of the following items: · The prudential margins have been increased by $98 million to $342 million. Prudential margins are additional reserves which are added to the best estimate of claims costs. · The actuarial basis adopted by determining outstanding claims reserves has been strengthened by approximately $60 million. … The reinsurance risk profile has been significantly reduced The decision to suspend reinsurance underwriting together with the changes previously adopted to the reinsurance business plan mean that the potential for major deterioration in claims costs through catastrophes is now very limited. GIO's profit is very sensitive to changes in the estimate of future claims payments Currently GIO Reinsurance has outstanding claims reserves of $2.2 billion. Thus, a 10% increase in the estimate reduces pre-tax profit by $220 million. Assuming the current reserves are conservative, future claims adjustments could well be on the positive side. Moreover, GIO now has established a prudential margin of $342 million or 54 cents per share." 35 Buying by GPG continued until the last purchase was made on 2 November 1999. The prices paid for shares ranged from $2.92 to $2.98 over the period of the purchases. what did gio and amp know concerning reinsurance losses at the time of the 24 september 1999 announcements? 36 On 20 August 1999 the first meeting of what was called the "Due Diligence Committee" of GIO ("the DDC"), concerned with the GIO capital-raising flagged in the announcement of 16 August, was held. It considered a planning memorandum prepared by Allen Allen & Hemsley, dated 19 August 1999 which, amongst other things, had recommended the establishment of such a committee. It was essentially concerned with the prospectus preparation and verification in relation to a proposed rights issue to be made by GIO, supported by AMP. 37 On Monday, 23 August 1999 a meeting of the GIO Board Finance and Investment Committee ("the BFIC") was held, at which there was a presentation of a paper prepared by Warburg Dillon Read on funding, and it was resolved to support in principle the recommendations set out in that paper. The recommendations of that paper were as follows: "RECOMMENDED FUNDING STRATEGY · Pursue sale of Finance Company as a priority. · Pursue a rights issue for an amount of $300 million sub-underwritten by AMP to 100% on terms set out in Appendix B. However if AMP indicates it is not prepared to sub-underwrite or that it requires underwriting or other terms not acceptable to GIO management, then pursue an institutional sub-underwriting subject to AMP agreeing to take up its rights. · At the same time canvass interest from the AMP in pursuing a Scheme of Arrangement at a premium to the current market price of $2.55. NEXT STEPS · In the week commencing 23 August 1999: - Confirm the likely acquisition price and buyers for the Finance Company and agree timetable and process; - Settle Investment Case for a rights issue with management; - If there is no expectation of an agreement with AMP in the short term regarding an underwritten rights issue, pursue market sounding with Institutions regarding a non-AMP underwritten rights issue on the terms set out in Appendix B; and - Finalise views on indicative value based on management forecasts and recommend a minimum price at which a Scheme of Agreement could be pursued for consideration by Directors. FINAL RECOMMENDATION · In week commencing Monday 30 August 1999 - Agree funding plan with Directors; - Obtain regulatory endorsement for proposed funding plan; and - If appropriate sign underwriting agreements and announce funding plan to the market." 38 At a meeting of the GIO Board which followed immediately after that of the BFIC, a presentation by the Chairman of the BFIC was noted by the GIO Board and, after discussion, it was noted that the majority consensus was that capital raising should probably be between $400 million and $450 million so as to provide a buffer for further contingencies. At that meeting the procedures for adoption of the 1999 financial statements were approved. Under the heading of "Other Business" the Chairman proposed to raise a matter that involved a possible transaction with AMP. Batchelor, Roberts, Trumbull and Utz declared an interest. Batchelor, Trumbull and Utz left the meeting but the Board resolved to approve Roberts participating as he was Chairman of the BFIC. There was discussion of the possibility of the Board recommending a scheme of arrangement in connection with the proposed capital raising. A commercial alliance with AMP was also being investigated. Mr Menzies of Allen Allen & Hemsley made a presentation of the options available. The consensus was that the possibility of a scheme should be investigated and should be progressed by discussion between Corrigan and his counterpart at AMP. 39 On 24 August 1999 Geoffrey Thompson sent to Trevor Thompson, an actuary employed by AMP, a memorandum which commenced: "In relation to AMP's potential sub-underwriting of a GIO Rights Issue we wish to provide you with further information to aid your understanding of the matters underlying the reported Reinsurance losses. A separate paper is attached to Appendix A which discusses the full year loss and major factors contributing to it." The memorandum then reconciled the 1998 Part B forecast with the 12 May 1999 announcement and the 1998-1999 full year loss announced in August 1999. Appendix A was dated 13 August 1999, entitled "Reinsurance Result, year to 30 June 1999" and was prepared by Greg Schneider ("Schneider"), General Manager, Technical Services, and Gae Robinson ("Robinson"), an actuary in the Portfolio Management section of GIO. This was the final paper from the in-house GIO actuaries as to the 1998/1999 year loss, containing some further adjustments from a previous paper and dealing with prudential margins. It recommended a prudential margin of $225 million and referred to the Ernst & Young (New York) team "assisting in phase two of the strategic review of reinsurance" commenting on that level of prudential margin. The paper also refers to an earlier paper of August 1999 by Schneider concerning prudential margin considerations. 40 The second DDC meeting took place on 27 August 1999. The second draft prospectus was tabled and discussed and, amongst other things, it was decided that independent actuarial review was needed in relation to that part which concerned the reinsurance business. 41 On 1 September 1999 Geoffrey Thompson supplied to Trevor Thompson the response prepared by GIO on 19 July 1999 to an Ernst & Young (New York) report sent to Corrigan on 10 May 1999 under cover of the following memorandum: "In relation to AMP's potential sub-underwriting of a GIO Rights Issue or other discussions in relation to GIO's capital needs attached is further information to aid your understanding of the Reinsurance business. Please note that this information and any other information provided to you previously is to be treated in accordance with your confidentiality undertaking, dated 6 August 1999. Also, in the event that discussions between GIO and AMP on capital matters are concluded we reserve the right to require all documents to be returned to me or destroyed." The confidentiality agreement of 6 August 1999 does not appear to be in evidence. 42 On 3 September 1999 Geoffrey Thompson wrote to Trevor Thompson as follows: "In relation to AMP's potential sub-underwriting of a GIO Rights Issue or other discussions in relation to GIO's capital needs I have been providing you with information to aid your understanding of the GIO Reinsurance business and other relevant business matters. As previously agreed, such information provided to you is to be treated in accordance with your confidentiality undertaking, dated 6 August 1999. Also, in the event that discussions between GIO and AMP on capital matters are concluded we reserve the right to require all documents to be returned to me or destroyed. I understand that you wish to provide this information to other officers of AMP or advisers in relation to their involvement in these capital matters. I consent to the provision of information to other AMP officers and your advisers for the purposes of this exercise, subject to the above terms previously agreed." The schedule attached to this document shows that, in addition to the documents to which I have already referred, AMP had been provided with a July 1999 GIO Board presentation "Strategic Review of GIO Reinsurance (Phase 1)" and a GIO Board Audit Committee "Financial Review, GIO Reinsurance" dated 7 June 1999. All of the GIO documents received by AMP were supplied by it to Tillinghast Actuaries, who were advising AMP. 43 On 3 September 1999 the first draft of what was called a "merger implementation agreement" was created relating to a scheme of arrangement. 44 On 6 September 1999 a meeting of the BFIC was held. The draft minutes record an item as follows: "5.4 Capital Management Update Verbal presentations from Messrs Thompson and Brunsdon were noted by the Committee. The Committee also received advice on various legal issues relating to capital management from Mr Menzies. Mr Mazoudier drew to the Committee's attention the possibility that the capital management proposals may develop in a way that requires, on short notice, an announcement to ASX or, possibly, a temporary trading halt. He suggested the formation of an ad hoc committee of directors, comprising Messrs Mazoudier, Corrigan, Lamble and Roberts, to deal with the issue if it arises. All of the directors present agreed with this proposal. The Chief Executive Officer was asked to contact the other directors immediately after the meeting to seek their agreement. The Committee noted Mr Thompson's advice that the Company's estimated capital requirement of between $400 and $500 million was still valid based on recent analysis." The minutes which were later approved contained the following: "5.4 Capital Management Update Verbal presentations from Messrs Thompson and Brunsdon were noted by the Committee. The Committee also received advice on various issues relating to capital management from Mr Menzies. The Committee noted Mr Thompson's advice that the Company's estimated capital requirement of between $400 and $500 million was still valid based on recent analysis." There was no satisfactory explanation in the evidence for the difference between the draft and final version, but it appears to have been the result of a need for confidentiality. 45 The third meeting of the DDC was held later on 6 September 1999. One item on the agenda was as follows: "7. Actuarial Review The Committee was advised by Geoff Thompson that an external actuarial review of reinsurance results would not be feasible in the timeframe allowed for the prospectus preparation. The Committee was advised that Geoff Thompson and Peter Corrigan would look into this issue and report back to the Committee. Geoff Thompson and Peter Corrigan would also assist in redrafting sections of the prospectus in relation to reinsurance. The Committee also noted that outwards reinsurance contracts would be the subject of a legal review to ensure that the cover was not affected by the decision to run-off the business. (emphasis added) 46 On 7 September 1999 Mr Phil Simmons from AMP wrote to Geoffrey Thompson a "Highly Confidential" memorandum as follows: "As per our conversation, I attach a note from Verne Baker at Tillinghast regarding further information on Reinsurance, and topics they would like to discuss with Greg. Can you advise whether this information will be available shortly, and when Tillinghast might have access to Greg?" The document enclosed was called a "preliminary list of information" and sought a great of detail concerning the reinsurance business of GIO, including a discussion with Schneider on a number of important issues, which are listed in that document. 47 On 9 September 1999 Geoffrey Thompson sent an email to Trevor Thompson headed "Private and Confidential" as follows: "Please find attached a capital management update – reflecting further analysis, including incorporation of our latest business forecasts. It addresses part of your information request under item 1.2 of the list provided to me by Phil Simmons. I would like to discuss this with you before you circulate it further. (See attached file: PC Capital memo Update 9 Sept.doc) Please note that this information is to be treated in accordance with your confidentiality undertaking, dated 6 August 1999. Also, in the event that discussions between GIO and AMP on capital matters are concluded we reserve the right to require all documents to be returned to me or destroyed." Enclosed was a copy of a memorandum from Geoffrey Thompson to Corrigan of 9 September 1999, providing details of changes in agreed capital requirements and the regulatory position since 13 August 1999 BFIC paper "Capital Update to the Board Finance and Investment Committee" was presented. The following is included in this memorandum: "The allocation of funds from the capital raising proposed is intended to address: · Capitalisation of GIO at $380m which meets the regulatory requirements after taking into account $27m in excluded assets. There is no buffer for further deterioration and it will be important to assess the updated net outstanding claims position for experience since 30 June to determine whether this allocation continues to be adequate. Greg Schneider is preparing this analysis. …" (emphasis added) 48 On the same date, Schneider wrote to Mr Verne Baker of Tillinghast ("Baker") as follows: "I write to confirm our meeting at 2:00pm today, and to confirm the purpose and scope of the matters to be discussed at that meeting. Tillinghast has been retained by AMP Limited (AMP) to advise it on actuarial issues in connection with the possible sub-underwriting for a capital raising by GIO Australia Holdings Limited (the Issue). I am prepared to discuss issues relating to GIO Re's 30 June 1999 result and current issues facing GIO Re within my area of expertise on the basis that: a) information disclosed by me is kept confidential by Tillinghast, until such time as that information comes into the public domain as a result of disclosure by a person lawfully entitled to make that disclosure. b) Tillinghast applies that information only for the purpose of advising AMP on the Issue, and for no other purpose; and c) a record of the meeting is prepared by Tillinghast, its contents are agreed with me, and the revised record is provided to AMP and treated in the same way as other documents released by GIO to AMP under existing confidentiality arrangements entered into in connection with the Issue. GIO is conducting its own due diligence exercise in connection with the Issue. Accordingly, I have invited a representative of Allens (who are acting on the Issue) to attend, so that the interview is captured as part of the broader prospectus due diligence exercise." 49 By 10 September 1999 a draft underwriting agreement in connection with the rights issue had been sent to AMP for consideration. Discussions were also proceeding in relation to the scheme of arrangement and a commercial alliance. 50 The fourth meeting of the DDC took place on 10 September 1999. Under the heading of "Status of External Actuarial Review" the following appeared: "… The Committee requested that at a meeting next week, a representative of Ernst & Young, New York who was responsible for the preparation of the May report on the reinsurance business be available to answer questions via video conference. Geoff Thompson noted that Greg Schneider was preparing a further report on claims valuation at 30 June 1999, which will give the Committee further information on claims development since that date." (emphasis added) 51 On 10 September 1999 Geoffrey Thompson provided Phil Mackie ("Mackie") of AMP with copies of a report by Ernst & Young (New York) of May 1999 and that was then given to Baker of Tillinghast. On that day, Ernst & Young (New York) sent a letter to AMP, reciting a request from GIO that it have permission to provide AMP access to the Ernst & Young (New York) December 1998 casualty loss reserve report. It was contemplated that it would be given to members of senior management, Merrill Lynch International (Australia) Ltd, Tillinghast and Mallesons Stephen Jaques, on terms set out in the letter. 52 On 13 September 1999 Baker and Andrew Cohen of Tillinghast wrote to Robinson, referring to a meeting on Friday afternoon (presumably 10 September 1999) and listing other information required. This information was at a detailed level. 53 On 15 September 1999 a report entitled "Single Event Exposures – GIO Reinsurance as at 30 June 1999" was completed by Schneider and a document entitled "Financial Update GIO Reinsurance as at 31 August 1999", prepared by Schneider and Robinson, was also completed. As the name implies, the first document deals with exposure to single events, including an assessment in relation to the then current Hurricane Floyd. The practical question addressed was whether to purchase further reinsurance cover. The second document has been the focus of much attention in the case. Because of its importance, this document needs to be considered in whole and in context. For present purposes, it is sufficient to set out the summary: "The table below summarises what we have labelled the "Level 1 Likelihood" expected profit/loss items for the six months to December 1999; these represent the items with a greater likelihood of occurring (they are however by no means certain). In many cases we will need to wait until December to properly assess the effects. The amount of the Aviation item is particularly uncertain, as mentioned in Section 8. Level 1 Likelihood A$m Catastrophes (Ex Floyd/Gert) (0-30) Attritional Claims (10-20) Space 5-(5) Aviation (20-50) Premium 5-(5) Investment Income (includes paid claims effect and prudential margin interests) (10-15) Sub Total (excluding Aviation) (30-125) Other potential issues are summarised below; these are less certain again. Level 2 Likelihood A$m Floyd ( ? ) Gert ( ? ) MIPI (0-5) Management Expenses (0-15) Reinsurance Expenses (15-20) Sub Total (excluding Floyd and Gert) (15-40) There is a significant amount of uncertainty surrounding the likely loss for Hurricane Floyd and Gert. The ground-up analysis being undertaken as part of the detailed run-off plan may or may not reveal an expense shortfall against the current expense reserves. The decision to purchase catastrophe reinsurance for the current season has not yet been made. It is assumed here that the whole account transaction will be implemented without a bottom line effect. Change to prudential Margin ? If the overall loss turns out to be small then a small reduction in the prudential margin would be reasonable. It is important not to over-react to two months' experience. If Floyd is material a large reduction in the prudential margin could be made only for business reasons, as it would be difficult to justify on purely theoretical grounds. To the extent that some of the recent reported claim costs relate to an acceleration in reporting due to GIO's recent announcements, we will have overstated the negative impact on the bottom line." 54 By 16 September 1999 Mazoudier was of the view that the rights issue was dead, because the GIO Board was not going to sign a prospectus as it could not portray a case for investment and AMP would not underwrite 100% of the issue. A possible alternative was for a placement of shares with shareholder approval. 55 A GIO Board meeting was convened at short notice for the morning of 17 September 1999. No Board papers were issued. The meeting was a special meeting and there was only one agenda item: a proposed scheme of arrangement. I will return to the detail of that meeting in due course. It was resolved to put a scheme of arrangement on the terms agreed between Mazoudier and Batchelor to shareholders for approval and Corrigan and Lamble were authorised to finalise the terms of the structure of the scheme and the terms of the related merger implementation agreement, subject to final Board approval. 56 On Sunday, 19 September 1999, Geoffrey Thompson, Schneider, Trevor Thompson and Bruce McLennan (from Merrill Lynch) met with Baker from Tillinghast being present on a conference call from the United States. McLennan was advising AMP in relation to the rights issue. The purpose of the meeting was to work through and explain the material in the Schneider and Robinson Financial Update of 15 September 1999 to assist AMP's understanding of it. All parties expressed their views about that material. Geoffrey Thompson was the only participant called to give evidence. Geoffrey Thompson says that he also attended other meetings at or around that time with Trevor Thompson, McLennan and Baker to explain matters raised in the various reports that had been provided to AMP. On that day AMP noted receiving a copy of each of the "Single Event Exposures and Financial Update" documents of 15 September 1999, although there is a handwritten "draft" on the front of each of such documents that were tendered. 57 On 20 September 1999 Geoffrey Thompson forwarded an operating report for the two months to 31 August 1999 to members of the Board of GIO. His memorandum included the following: "Included with the report are two papers that have been prepared by GIO Re's Actuary, Greg Schneider: · Financial Update – provides a high level summary of the experience of GIO Re to date and potential outcomes for the six month period ending 31 December 1999; · Single Event Exposures – provides an analysis of GIO Re's exposure to potential events. With regard to the Financial Update paper please note the high degree of subjectivity associated with an evaluation so early in the new financial year. In particular, the "best estimate" approach adopted for the 30 June valuation is still untested in terms of how it works out over time and it is also unclear to what extent our announced exit from Reinsurance is impacting claims activity. In the Single Event paper reference is made to Hurricane Floyd, based on information that was available last Tuesday. Given a week has now passed this assessment of Floyd should be seen as illustrative. We will provide a further update at the meeting, however it is important to note that it is impossible to quantify potential losses with any degree of reliability at this early stage of the event." 58 On 21 September 1999 Baker of Tillinghast wrote to Mackie and Trevor Thompson of AMP as follows: "Dear Phil/Trevor · Information requested (as attached) was promised Thursday 16 September. · We phoned to follow-up Friday morning Sydney time. · Ernst & Young reports not as yet been sent to the Hartford office. · Just to confirm John Ryan and Verne Baker will be meeting with you at 4pm." The information requested was that in the letter of 13 September 1999 to Robinson at GIO Reinsurance. A handwritten note of Mackie which relates to the first two points was "GIO now working on this – some due today and tomorrow". 59 At a meeting of the GIO Board on 22 September 1999 the Chairman reported that the scheme proposal which the Board thought had been agreed had been revoked by AMP but there was a new proposal. The Board, absent the AMP Board members, approved the new proposal and authorised the Chairman to take it back to AMP. The minutes of that meeting record, under the heading "August Operating Report" the following: "(a) The Board noted Mr Thompson's presentation of the August Operating Report, including the accompanying papers concerning GIO Reinsurance. (c) Mr Thompson drew to the Committee's attention the fact that the Reinsurance papers were intended to be an information update rather than a forecast or recommendation. He confirmed that no reliance was being placed on the papers or the information contained in them by management. Mr Thompson proposed, and the Board agreed, that after further analysis, any recommendations from management should be referred back to the Board through the Audit and Compliance Committee in accordance with the procedures that had previously been followed." At that meeting Geoffrey Thompson said words to the following effect which are not recorded in the minutes: "There have been developments with the claims prior to 30 June 1999 and it appears that there are also going to be further losses arising from new events. The losses are very uncertain at the moment but they may be in the order of $40 million to $150 million. There will definitely be further loss the question is of the magnitude. If the overall loss turns out to be at the lower end of the range then this could reasonably be offset against the prudential margin." 60 According to Mazoudier, the proposal that the scheme would include a first payment at risk depending upon reinsurance performance to 30 June 2000 was proposed by Batchelor on 22 September 1999 prior to the GIO Board meeting, although the amount, at that stage, was 15c (approximately $100 million) and it was the GIO Board which proposed raising the amount to 22c. A draft GIO announcement bearing the date 22 September 1999, however, described the contingent instrument as follows: "… (b) an unlisted debt instrument of AMP ("Contingent Instrument") potentially entitling the holder to cash payments up to a maximum of 22c consisting of 2 instalments: (i) an amount capped at 15c cash payable by AMP in early April 2000 reduced on a pro rata basis across all GIO shares to reflect audited losses in GIO's reinsurance division between the period 1 July 1999 and 31 December 1999 (at the date of this announcement, the independent directors of GIO are not aware of any accrued losses since 1 July 1999); and (ii) an amount payable by AMP in early 2003 reflecting the increment in value (if any) of GIO's reinsurance business during the period 1 January 2000 through 31 December 2002 (or earlier sale of the reinsurance business), after taking into account a return on AMP's investment in that business during that period and assuming for the purposes of calculation no present value in that business; …" and then, later: "The Contingent Instrument In addition to the characteristics outlined above, the Contingent Instrument will have the following features: · the Contingent Instrument will not be listed but will be transferable in accordance [with] the Corporations Law; · the 22c cap on the cash payments by AMP under the Contingent Instrument is cumulative, so that if only 4c is paid on the (maximum) 15c first instalment (because during the period 1 July 1999 through 1 December 1999 audited losses in GIO's reinsurance division reduce that element), the amount payable on the second instalment (assuming value exists in GIO reinsurance after 3 years) will be capped at 18c; and · the second instalment – which is intended to reflect the increase in value (if any) of GIO's reinsurance business between 1 January 2000 and 31 December 2002 (or earlier sale of the reinsurance business) – will: · be determined using detailed actuarial formulae to be agreed between AMP and GIO; but · reflect only the increment in value of GIO's reinsurance division over a compound return on AMP's investment in that business during the period up to 31 December 2002 equivalent to 13% above AMP's existing internal rate of return on assets; and · assume for the purposes of calculation that GIO's reinsurance business has no present value." 61 On 23 September 1999 Tillinghast provided an executive summary of their comments on GIO Reinsurance to Trevor Thompson. On the same day, Geoffrey Thompson apparently provided Trevor Thompson with an estimate for known catastrophes. 62 On 23 September 1999 the AMP Board Finance and Investment Committee considered the scheme proposal and amongst the documents before it was a report on GIO Reinsurance dated 23 September 1999. Under the heading "Results Since Balance Date" the following appeared: · GIO's actuary has prepared a financial update report (in draft) for the two months to 31 August 1999. The report indicates existing claims have developed reasonably in accordance with expectations, given the general level of uncertainty in reinsurance, except · Aviation reserves may need to be strengthened by $20-50 million (this is very uncertain). · On shore energy reserves may need to be strengthened by $10-20 million. · The report also indicates significant potential catastrophe claims have emerged since June including · Turkish earthquake (potential loss $10-30 million very preliminary estimate). · Hurricane Floyd (potential loss $10-20 million very preliminary estimate). · Other potential costs may include further provisions to cover management expenses in a rundown scenario (up to $15 million) and further catastrophe reinsurance cover ($15-20 million) which is under consideration. · The report is highly qualified and considered by GIO management to be preliminary. Depending on the results of further analysis to be undertaken, it is likely that a reduction in prudential margin and/or net bottom line loss would be required to be taken at 31 December 1999." Under the heading "Major Risks" the following appeared: "… · A significant risk area for GIO is the catastrophe book. To reduce exposure, outward reinsurance has been purchased at a cost of $45 million which has reduced net premiums to only $5 million presently. · Despite the additional reinsurance, GIO is still significantly exposed to catastrophes (particularly hurricanes) during the final quarter of 1999. This is demonstrated by the potential losses from the Turkish earthquake ($10-30 million) and Hurricane Floyd ($10-20 million). · The business is also subject to a potential acceleration in claims experience as it is now in rundown. Further detailed analysis is being undertaken by GIO management and its actuarial advisers, Ernst & Young. The result of this analysis is likely to lead to an increase in reserving required, particularly in aviation and attrition accounts. · The prudential margin available as a buffer against additional reserving and potential catastrophes stands at $225 million. Clearly any blowout in claims beyond this level of prudential margin in the future can only be funded from shareholders' capital." The AMP Board delegated to a subcommittee the consideration and approval of the transaction. That approval was given on Friday, 24 September 1999 at 7.45am. 63 Light is thrown upon these events by a communication from Trevor Thompson to Batchelor dated 27 October 1999 which included the following concerning reinsurance losses: "These estimates compare with $100m estimate (range of $65m to $135m) provided to the AMP Ltd Board in September. The GIO Scheme negotiated to allow for offset of $140m in claims." The latter point is a reference to the fact that 22c per share was approximately $140 million. 64 Some further light is thrown upon the knowledge of AMP by what was said by Batchelor during a conference call with financial analysts from stockbroking firms and financial institutions on the morning of 24 September 1999 after the announcements. During his introduction Batchelor said: "GIO are confident that their shareholder will see this as an attractive opportunity and it gives them an appropriate exit at a good premium to the current trading. It was trading at 250 before a small rumour hit the market several days ago and just prior to our announcement today it was in the 260s. A good premium. The 305 price is a fair price in that regard. The 22 cents upside in respect of an additional payment under debenture security if in the 12 months to June 30 next year there are no further losses in the reinsurance business, we think it is a fair recognition of the potential of that business in that we do expect some further losses to flow through. We have factored that into our calculations. You can assume that we expect losses in the vicinity of that 22 cents per share to arise in that 12 month period and if we pay some money there, it's money we didn't expect to have anyhow. That means that the business is in a somewhat better state that we expected. So in that respect we think that's a good structure." (emphasis added) 65 That statement was picked up in another session with analysts later that day, with both Corrigan and Geoffrey Thompson present and in relation to which Trevor Thompson said: "Clearly the structure of this mechanism is designed to provide an upside for the GIO minority shareholders if the claims experienced [sic] is lighter than expected and obviously vice versa some benefits for us in the price if it's not." 66 From these facts and circumstances, which are virtually undisputed, it can be concluded that the GIO Board was told by the Chief Financial Officer that there would definitely be further reinsurance loss, the question was as to the magnitude, that the range was in the order of $40 million to $150 million, but that if the overall loss turned out to be at lower end of the range then this could be reasonably offset against the prudential margin. The Schneider/Robinson report, which was before the Board, had a range of potential losses from $45 million to $165 million. At the same time, the AMP Board was given a range of potential losses from $65 million to $135 million, with a mid point of $100 million. This was consistent with the AMP proposal for 15c at risk in relation to the first payment which would equal approximately $100 million and with the agreement to raise that amount to 22c, which would cover the top of the range then indicated to it. The closeness of these various ranges is, of course, not due to coincidence. Each party was working from the same base of information, which was, essentially (on this issue), the reports of 15 September 1999 by Schneider and Robinson and Schneider respectively, supplemented by further data provided by Schneider and Robinson, all subject to discussion with both Geoffrey Thompson from GIO and Trevor Thompson from AMP, and with the experts from Tillinghast. It needs to be borne in mind that Geoffrey Thompson had worked for AMP for about eighteen months before becoming the Chief Financial Officer at GIO and that Corrigan, to whom he reported, had been managing director of AMP General Insurance Ltd prior to appointment as Chief Executive Officer of GIO. 67 I am satisfied that at least a broad consensus was reached between those present at the discussions on 19 September 1999 as to the likely necessity for further provision for past events with a mid point in the vicinity of $100 million. In my view, Geoffrey Thompson minimised the significance of that and other meetings with AMP personnel prior to 24 September 1999 in his evidence. Indeed, I formed the clear impression during his evidence that he was unduly defensive concerning the Schneider and Schneider/Robinson reports. The same can be said about the evidence of Corrigan. I am satisfied that those reports had a significant impact upon those within GIO who saw them or were told about them. They were the first indication of the need for yet further provisions. This must have been, to say the least, highly embarrassing after the radical revisions to the projections in May and August 1999. In particular, it must have been troubling to have serious doubts emerge about the extent of provisions for past events so soon after what had been portrayed as late as August as a thorough internal and external review and which was the basis for approval of the annual accounts. I was unimpressed by the attempts by Corrigan and Geoffrey Thompson to underplay the significance of the September reports from Schneider and Schneider and Robinson. I do not overlook that a reading of the reports indicates the provisional nature of the conclusions in them. Various passages were stressed by counsel for GIO and AMP to underline that circumstance. I do not doubt that each was considered by Corrigan and Geoffrey Thompson to be "preliminary" and were described as such to both the relevant AMP personnel and the Board of GIO. The conclusions were not, however, a figment of Schneider's and Robinson's imagination. They were based on actual experience since 30 June 1999. They were plainly regarded by Geoffrey Thompson and Trevor Thompson, the relevant people within the respective organisations, as indicating the likelihood that losses of some magnitude would be incurred in the ensuing period. They each regarded the reports and the supplementary information provided by Schneider and Robinson as sufficient to pass on to their respective Boards of directors. Counsel for GPG was also correct in submitting that the nature of provisioning for reinsurance claims is an inexact process which is continually under revision and that all of the reports by actuaries on this topic that are in evidence, including those which were undoubtedly relied upon, are heavily qualified. I do not accept that Geoffrey Thompson, Corrigan, or any of the directors of GIO believed that no reliance could or should be placed upon these reports. That would have been quite contrary to the express statement that Geoffrey Thompson made to the Board on 22 September 1999. In my view, the reports were regarded by all, including the directors of GIO, as a clear warning that extra provisions were likely to be necessary both in relation to past events and catastrophes in the current year, although the quantum was uncertain. At the very least, it was a flashing red light as to a looming danger. 68 An attempt was made by some of the GIO witnesses to minimise the significance of these reports by treating them as simply "work in progress", in the normal way, with a view to quarterly or half yearly adjustment of provisions such as would occur under normal circumstances, and subject to all of the procedures appropriate before accounting adjustments are made. This may have been one aspect of Schneider's work. However, the analysis which these reports reflect had much more immediate significance. These reports were contemplated as forming the basis of statements in a prospectus for a public rights issue in circumstances where there would not be time for an external review of them. This is expressly referred to in the memorandum from Geoffrey Thompson to Corrigan of 9 September 1999 and by Geoffrey Thompson at the DDC meeting of 10 September 1999. The fact that the DDC contemplated disclosure on this basis is also instructive as to the issues to be discussed later as to disclosure in relation to the scheme announcement. It needs to be borne in mind that neither Schneider nor Robinson were called by GIO, notwithstanding that, in addition to their reports, they participated in relevant discussions with other executives of GIO, with officers of AMP and with representatives of Tillinghast. Their absence has not been explained. No evidence was called from any witness by AMP either from its own ranks, from Tillinghast or Ernst & Young (New York). 69 There is one aspect of the due diligence process of both GIO and AMP which is to be noticed. It has been seen that from 6 August 1999 a flow of information was provided by GIO to AMP in relation to potential underwriting of the proposed rights issue under cover of a confidentiality agreement. This is referred to in the various documents evidencing the provision of information. That is quite understandable. An underwriter needs information in order to decide whether to underwrite and, if so, on what terms. However, it is clear that the information was used by AMP in the negotiations it had with GIO in relation to the scheme of arrangement. This does not seem to have been the subject of any formality and, indeed, the change of purpose does not seem to have been adverted to. The end result is that AMP, which was considering a transaction which would involve the purchase of shares, was given access to information not generally available. It is certainly not obvious that the position of such a purchaser can be equated with that of a potential underwriter of a rights issue. why was there no reference to the known potential increase in provisions for past reinsurance claims in the gio scheme announcement? 70 I refer here to the actual reasons of the relevant persons connected with GIO as to why no reference was made to potential increased provisions for past claims in the scheme announcement, rather than to the legal questions involved. The GIO directors who were at the meeting on 22 September 1999 all, in various words, said that they regarded the Schneider and Schneider and Robinson reports as too preliminary and too qualified to justify disclosure to the market and that those reports had not been checked or approved according to the appropriate internal procedure then in force at GIO. There was considerable emphasis placed upon this internal procedure in the evidence and submissions because of the disagreement of some directors with the process involved in the market announcement of reinsurance losses in May 1999. In general, I accept the evidence of the directors, although, in my view, there was some retrospective exaggeration, whether conscious or unconscious, by all of them both as to the defects of the reports and as to the almost sacrosanct nature of the internal procedures. 71 However, this evidence is directed to what was regarded as appropriate disclosure in the ordinary course of events, particularly in relation to actual accounting adjustments. Furthermore, none of the directors appears to have considered the significance of what they had been told by Geoffrey Thompson at the meeting of 22 September 1999 as to the certainty of further losses. In particular, none of the directors appears to have given any consideration as to whether the circumstance that the scheme announcement was to be made took the matter out of the ordinary and required some appropriate disclosure, no matter how qualified. No director gave any evidence as to attention being paid to the particular form of the announcement or whether the particular form of the announcement required some relevant disclosure. Indeed, it appears that only Mazoudier and Corrigan actually approved the terms of the announcement. It was not drafted by any witness who was called to give evidence. Neither Mazoudier nor Corrigan explained why the terms of the announcement, particularly the material which explains the first instalment of the contingent instrument and expressly referred to possible future catastrophes, did not spark an obligation to disclose something concerning the other relevant factor, namely, the risk of inadequacy of the provisions for past reinsurance events. So far as I can tell from the evidence, no external legal advice was sought as to the form of the 24 September 1999 announcement. what more did gio and amp learn about potential reinsurance losses between 24 september 1999 and 2 november 1999? 72 At a meeting of the DDC on 12 October 1999, the minutes record the following: "Reinsurance results announcement The Committee discussed various issues in relation to a possible announcement to the market of the latest performance figures for the reinsurance business subsequent to the release of the Information Memorandum. The Committee resolved that all available information regarding the financial position of the reinsurance business will be included in the Information Memorandum and the only further announcements to the market will be in order to comply with the enhanced disclosure regime under the ASX Listing Rules. The Information Memorandum together with an accompanying market announcement will contain a warning to shareholders that possibly little or no part of the first instalment of 22 cents due under the contingent instrument will be payable to them but that the final position will not be known in this regard until September 2000. It will be noted in both the Information Memorandum and announcement that shareholders should not rely on payment of this contingent instrument in order to make their decision on whether or not to accept the Scheme proposal. GIO will perform an internal valuation of the Reinsurance business and PwC will be asked to review the valuation but this review will be restricted to agreed upon procedures. PwC are unable to provide an indication of the exact scope of their work at this stage as it will depend upon the final nature of the valuation provided by GIO management." 73 On 14 October 1999 Geoffrey Thompson participated in a briefing by Orin Linden and Nicholas Pastor of Ernst & Young (New York) on the progress of their work in reviewing GIO Reinsurance. Linden said words to the effect: "We have done enough to get an idea of what is happening. There is most likely a deficiency of $130 million but we haven't finished the analysis yet." He says that he understood that they were to provide a completed report and he wanted to receive that report and reconcile it with the work of both Schneider and PriceWaterhouse Coopers. Geoffrey Thompson advised Corrigan of the briefing. 74 The draft information memorandum as at 14 October 1999 included the following: "The losses are likely to arise from a deterioration in the claims experience associated with events prior to 30 June 1999 of between $[ ] million and $[ ] million, primarily in the area of [ ]. In addition, GIO Reinsurance has exposure to a number of catastrophes which are likely to incur losses for GIO. While the cost to GIO from such events cannot currently be estimated with certainty, initial management estimates suggest that the losses from catastrophes could be in the order of $[ ] million to $[ ] million." and later: "GIO Reinsurance has also deteriorated since 30 June 1999 with a number of new catastrophes occurring and further deterioration in the existing claims at 30 June 1999 being recorded in the period. The business is now in run off and management are committed to placing appropriate controls in place to limit further losses from this business." 75 At the next meeting of the DDC on 20 October 1999 the minutes record the following: "Information Memorandum The Committee discussed the draft Information Memorandum dated 14 October 1999. It was agreed that Section 2 would be redrafted along the lines proposed in the draft tabled by James Roth. The Committee discussed the requirements to include actual numerical data in relation to the reinsurance results. The Committee noted that management are currently working toward providing a financial valuation of the reinsurance business but are unsure as to whether this will be available prior to the date of the Information Memorandum. The Committee resolved that in the event this information is available, it should be disclosed in the Information Memorandum, but in any event, it should be stressed that (on the basis of information available to GIO) it is highly unlikely that any part of the 22 cent first instalment payable under the Reinsurance Note will be paid. The Committee requested that language be inserted into the Information Memorandum to reinforce the fact that the company is exposed to unlimited liability to the extent that claims costs exceed the level of the relevant retrocession protection. The Committee resolved that the description of material changes in financial position since 30 June 1999 disclosed in the present Information Memorandum be expanded." 76 On 22 October 1999, at about 8.30am, Geoffrey Thompson received a message from Nicholas Pastor who, after referring to various headings in the draft Ernst & Young (New York) report which required adjustment, said: "In total, this amounts to roughly $35-40 million in additional deterioration on top of our prior deficiency of $135 million. We will work on tieing [sic] up these loose ends in the next couple days and will finish putting together a draft report." 77 On the same day, Geoffrey Thompson provided the Board of GIO with a memorandum concerning the September operating report, which included the following: "Included with the report is a financial update on Reinsurance. The position outlined in this update has been reflected in the draft Scheme of Arrangement documentation provided with these board papers. At the meeting I will outline the proposed approach for review of this material by PricewaterhouseCoopers and the Board Audit and Compliance Committee." Schneider was also said to be available, if required. The financial update referred to was a document prepared by Schneider and Robinson of 22 October 1999, being an update as at 30 September 1999. The introduction was as follows: "The results of the reinsurance division for the quarter ended 30 September 1999 have been prepared on the basis of a limited scope actuarial review. The review involved an update to the work previously completed as at 30 June 1999, and built on the August update provided at the last Board meeting with some added information to 30 September 1999. The September update was carried out to allow consideration of the most up-to-date information available. A full actuarial valuation will be undertaken for December year end. This will involve extending the current scope to include estimates for post-June catastrophe events, a policy by policy aviation approach and updated MIPI assumptions. These components will not be available until the year end." This report illustrated a deterioration of $95 million since the August update. The conclusion was that the new mid point was a loss of $180 million, with claims from post-June catastrophes not analysed but expected to increase the loss. This report also refers to Ernst & Young (New York) having completed an independent review of the claims provisions as at 30 June 1999, with the benefit of information to 31 August and 30 September 1999: the difference showed a net deterioration of $137 million. It was noted that Ernst & Young (New York) had not finalised their report at that stage but referred to their initial indication that the total provision would increase by a further $34 million to $40 million, which did not include post-June catastrophe events. Ernst & Young (New York) had been asked to provide a full report by early the following week. I cannot see that this report is any different in character from the 15 September 1999 report, being the August update. It is subject to all the same qualifications. It simply has the benefit of another month's experience. 78 The version of the draft information memorandum current on 21 October 1999 referred to further reinsurance losses in excess of $140 million in the six months to 31 December 1999. It said: "As a result, it is unlikely that you will receive the first instalment under the Reinsurance Note. GIO cannot predict the likelihood of you receiving a payment under the second instalment." The draft information memorandum as it stood at 22 October 1999 referred to increasing reserves on account of the development of existing claims by $155 million, plus catastrophes since 30 June 1999 in relation to which there is not sufficient information to permit a reliable assessment of exposure. It was said to be highly likely that the losses will exceed $155 million for the period to 31 December 1999. Amendments made on 25 October 1999 to the draft referred to losses attributable to events which occurred prior to 30 June 1999 as being "in excess of $150 million" plus exposure to catastrophes in relation to which there was not sufficient information to permit a reliable assessment of potential losses and also said that, overall, it was highly likely that the losses will exceed $139 million for the full year to 30 June 1999. It was said that if the loss for the full year to 30 June 1999 exceeds $139 million no payment would be received under the first instalment from the Reinsurance Note and losses above $139 million would affect the amount of the second instalment. 79 On 25 October 1999 Trowbridge Consulting gave a draft report to SG Hambros Australia Limited (which was acting as an independent expert) regarding the proposed scheme of arrangement. Included in that draft was the following: "1.2 Comment on the effect of events post 30 June 1999 and notified to us on the adequacy of GIO Re's outstanding claim reserves at 30 June 1999. With the benefit of hindsight to the date of this report it is our opinion that an upwards adjustment to the held reserves of approximately $100 million (a reasonable range being $50 million to $150 million) is warranted. This related to claims occurring prior to 30 June 1999 and is a response to continued deterioration in some key portfolios such as aviation. 1.3 Comment on the potential underwriting performance for premium earned subsequent to 30 June 1999, including events occurring post 30 June 1999 and business to which GIO is committed, but where the insured event has not yet occurred. It is our opinion that the premium earned after 30 June 1999 (ie new exposure) is more likely to produce a loss than a profit. Our opinion is based on the experience of GIO's portfolio over the last three years, the number of "small catastrophes" occurring in recent months and the softness of the reinsurance market generally. We would caution that the outcome is highly uncertain, as the experience is still very immature, and many events have not yet occurred. Drawing together the conclusions from 1.1, 1.2 and 1.3, we conclude that there is markedly more downside potential than upside for the Reinsurance business, bearing in mind that the nature of the uncertainty is such that nobody can reliably predict the outcome." 80 At 9.18am on 25 October 1999 Nicholas Pastor from Ernst & Young, (New York), sent an email to Geoffrey Thompson enclosing the draft "Executive Summary" of their report. He said that the final number "is approximately a $160 million deficiency, with a range of plus $75 million to minus $400 million". This was received prior to the GIO Board meeting on 25 October 1999. The GIO Board meeting was held at 10am and Geoffrey Thompson was in attendance. 81 At 4pm on 25 October Geoffrey Thompson and Schneider met with Jim Ives ("Ives") of AMP, two representatives of Ernst & Young (Sydney) who were advising AMP, and a representative of Allen Allen & Hemsley. Minutes prepared by Allen Allen & Hemsley called this a due diligence meeting, but it was not a due diligence meeting of GIO. Ives began the meeting by outlining his key objective, which was to hear an overview of the current position of GIO Reinsurance. The September 1999 GIO monthly operating report was distributed to those present. According to Geoffrey Thompson they had, in fact, been provided earlier, together with the GIO Board meeting papers, which included the 22 October Schneider and Robinson report. The minutes prepared include the following: "Geoff Thompson reiterated the main messages he wished to convey in the meeting which were: 1. There is fairly significant deterioration in GIO Re. There are also areas which need more work and time to mature (ie, catastrophes), MIPI and Aviation before a clear picture of the results can be obtained. 2. Run-off is a new experience for GIO Re and it is difficult to know how the market has reacted. It could be that there has been an acceleration of claims as a result of GIO Re going into run-off but Geoff Thompson did not feel that this has been the major cause of the further deterioration in GIO Re. 3. Prudential Margins. Geoff Thompson does not suggest any change to the prudential margin at this stage, however will review this in December and then again in June 2000." Schneider provided a more detailed overview of GIO Reinsurance's current situation and the last matter noted in the minutes is: "Geoff Thompson suggested that the Report be read in conjunction with the more detailed analysis in the August Monthly Operating Report. He reiterated the point that the claims experience would still be relatively uncertain in the next 6 months, (particularly in relation to recent underwriting years) with the real picture only emerging in several years.". 82 A copy of the executive summary of the report of Ernst & Young (New York) was provided by GIO to AMP on 27 October 1999. On that day the AMP Board met at 9am. The minutes record that Batchelor reported to the Board: "Information provided to AMP by GIO reveals a deterioration in the reinsurance book requiring additional provisioning of at least $150 million (in excess of the $139 million allowed for in the 22 cents scheme payment)." At that meeting it was agreed that the merger implementation agreement be signed. The minutes record that Batchelor confirmed that, upon completion of AMP's due diligence on GIO's litigation, he would issue a note to the AMP Board, confirming the legal position of AMP as to GIO at that date and any other issues and actions resulting from the due diligence. 83 On or about 27 October 1999 Geoffrey Thompson received the complete draft report of Ernst & Young (New York), dated that day, which indicated a range of losses from minus $402 million to plus $76 million, with the analysis indicating a net deficiency of $162 million. On that day Geoffrey Thompson attended a meeting with Schneider, Trevor Thompson, Bruce McLennan (of Merrill Lynch), James Roth (of Warburg Dillon Read) and Geoffrey Scott at the AMP building at Circular Quay, at which the latest information was apparently conveyed, including the Ernst & Young (New York) report. Geoffrey Thompson did not mention this meeting in his evidence in chief, and no evidence was called from the other participants. 84 On 29 October 1999 Geoffrey Thompson forwarded to the GIO Board Audit and Compliance Committee a memorandum which attached an extract from the latest draft of the information memorandum relevant to the business results to date and the draft report from Ernst & Young (New York). The management report providing a financial update on GIO Reinsurance was to be faxed or emailed separately. He said that Schneider and Orin Linden (the Ernst & Young (New York) partner) would attend the meeting to answer questions on their reports, with Orin Linden in attendance by telephone. The foreshadowed internal report was a financial update as at 30 September 1999 by Schneider and Robinson, dated 30 October 1999. Although in greater detail than their report of 22 October 1999, the same mid-point of $180 million was reached (ignoring current year catastrophes). 30 October 1999 was a Saturday. 85 Trowbridge Consulting's final draft report of 1 November 1999 included the following: "1.2 Comment on the effect of information received by GIO Re post 30 June 1999 that has been disclosed by GIO Re to us on the adequacy of GIO Re's outstanding claim reserves at 30 June 1999. With the benefit of hindsight to the date of this report it is our opinion that an upwards adjustment to the held reserves of approximately $150 million (a reasonable range being $75 million to $250 million) is warranted. This relates to claims occurring prior to 30 June 1999 and is a response to continued deterioration in claims beyond the levels predicted in some key portfolios such as aviation and marine. 1.3 Comment on the potential underwriting performance for premium earned subsequent to 30 June 1999, including events occurring post 30 June 1999 and business to which GIO is committed, but where the insured event has not yet occurred. It is our opinion that the premium earned after 30 June 1999 is more likely to produce a loss than a profit. Our opinion is based on the experience of GIO's portfolio over the last three years, the number of "small catastrophes" occurring in recent months and the information available on trends in premium rate levels for GIO and the reinsurance market generally. We would caution that the outcome is highly uncertain, as the experience is still very immature, and policy periods that are unexpired cover events that have not yet occurred. Drawing together the conclusions from 1.1, 1.2 and 1.3, we believe that there is markedly more downside potential than upside for the Reinsurance business, bearing in mind that the nature of the uncertainty is such that nobody can reliably predict the outcome. Given the nature of the downside risks, the eventual outcome of the run-off could result in a very material loss. By the same token there could eventually turn out to be a profit, although in our view both the likelihood of a profit and the potential size of any profit are lower than for a loss." 86 On 1 November 1999 Tillinghast prepared a review of the latest Ernst &Young (New York) report and the GIO Reinsurance financial update to AMP. circumstances of amp withdrawal 87 The AMP due diligence planning work team had a meeting on Tuesday, 19 October 1999, for which Ives, who was the due diligence project manager, prepared a memorandum. The first two paragraphs of that memorandum were as follows: "Objective To provide assurance to Trevor Thompson, AMP Corporate Treasurer who is accountable for the Scheme of Arrangement Transaction, that all GIO material issues are properly considered prior to completion of the scheme and to enable a decision to be made on whether or not to invoke the material adverse clause of the Merger Implementation Agreement (MIA). Materiality Level The MIA draft 6, page 11, clause 5.2(b) sets the materiality level for an adverse change at 15% or more reduction in the value of GIO net assets at 30 June 1999. This equates to approximately $65 million." 88 On 20 October 1999 Mallesons Stephen Jaques sent AMP's comments on the then draft of the merger implementation agreement to Allen Allen & Hemsley, including the following: "As discussed with Brent, clause 5.2(a) as currently drafted is not acceptable. AMP's preference would be to actually spell out the currently known material adverse matters such as GIO Reinsurance etc rather than a vague carve out of matters of which AMP was informed prior to execution of the MIA." On the same day, Ewan Crouch from Allens had sent an email to the Mallesons personnel: "Further to my note, clause 5.2(a) represents GIO's understanding as to what was agreed. We have no instructions to give AMPII any further "walk away" right." Mazoudier said he was not aware of this issue and did not give instructions as to it. There is no evidence that Corrigan gave such instructions. 89 As appears above, the AMP Board approved execution of the merger implementation agreement at its meeting of 27 October 1999, subject to due diligence concerning certain litigation. The GIO Board had approved execution of the document at the meeting on 25 October 1999. The relevant termination clause at that time read as follows (with changes from the previous draft marked up): "5.2 Termination Events before First Court DateConvened Meeting This Agreement may be terminated at any time prior to the Court Convened Meeting by AMPII if there occurs or is publicly announced a material adverse change in respect of the business, assets or profitability of GIO other than a change: (a) of which AMP or AMPII (or any related body corporate) was informed in writing or had knowledge of (to the extent of such information or knowledge) prior to execution of this Agreement; or (b) which involves or is reasonably likely in the future to lead to a diminution in the net assets of GIO (as disclosed in the last audited accounts of GIO to 30 June 1999) of less than 15%, except a diminution which will be reflected in the reduction of the (maximum 22c) first instalment of the Contingent InstrumentReinsurance Note (but only up to the 22c limit); or (c) which arises from management decisions taken by GIO to which AMP has agreed." It is clear enough that the amendment to (a) is favourable to AMP compared with the previous form, which accorded with the public announcement on 24 September 1999. No explanation has been offered for that change, which took place on 22 October 1999. The clause had originally referred to termination events before the first Court date. The change had been made to the body of the clause earlier in negotiations and the change to the heading was done on 22 October 1999. 90 The draft of the merger implementation agreement which is dated 28 October 1999 included cl 5.2 as per the 22 October 1999 draft. In the draft merger implementation agreement which is dated 31 October 1999 a note was added at the front "Important – This document is still subject to negotiation between GIO and AMP in relation to clause 5.2". In the draft current at that time, cl 5.2 was as follows (with the changes marked up): "5.2 Termination Events before Court Convened Meeting This Agreement may be terminated at any time prior to the Court Convened Meeting by AMPII if there occurs or is publicly announcedAMPII is not satisfied in its absolute discretion with the results of its due diligence investigations conducted pursuant to clause 17 of this agreement, other than a material adverse change in respect of the business, assets or profitability of GIO other than a change: (a) of which AMP or AMPII (or any related body corporate) was informed in writing or had knowledge of (to the extent of such information or knowledge) prior to execution of this Agreement; or (b) which involves or is reasonably likely in the future to lead to a diminution in the net assets of GIO (as disclosed in the last audited accounts of GIO to 30 June 1999) of less than 15%, except a diminution which will be reflected in the reduction of the (maximum 22c) first instalment of the Reinsurance Note (but only up to the 22c limit); or (c) which arises from management decisions taken by GIO to which AMP has agreed." 91 There has been no real explanation for this vital change. An email at 4.51pm on Friday, 29 October 1999, from Mr Bancroft of Mallesons Stephen Jaques (acting for AMP) to Mr Ewan Crouch of Allen Allen & Hemsley (acting for GIO), which was copied to Prue Milne at AMP and said to be of high importance, was as follows: "Further to Andrew's email to you this morning and our subsequent telephone discussion, this is to confirm AMP's instructions that AMPII is to have a right of termination if it is not satisfied with its due diligence investigations. I suggest this be dealt with by the deletion of all of clause 5.2 after "if" on the second line and replacing the deletion with – 'AMPII is not satisfied in its absolute discretion with the results of its due diligence investigations conducted pursuant to clause 17 of this agreement.' On the basis that you receive instructions to agree to this change, could you please let me have your comments on the drafting." 92 In the course of cross-examination, Corrigan gave evidence that he had been involved in a telephone discussion with Mr Gary Traill ("Traill"), who was described as the legal counsel for AMP. In cross-examination, Corrigan's first account of that conversation was as follows: "What was your discussion? --- The discussion was around the fact that AMP was not prepared to sign the merger implementation agreement and that the negotiations between the lawyers had basically come to a point where there was resolution required on particular issues and that he was ringing me to indicate that unless those issues were resolved between GIO and AMP, he would not be recommending the signing of the merger implementation agreement. And you sorted out these terms with Mr Trail? --- We agreed to – at least, I believe we agreed to overcome the issues that he had." 93 When the matter was returned to later, Corrigan's recollection as to the topic of the discussion with Traill was the right to terminate the arrangement up until the date of the meeting. Corrigan put the conversation with Traill at about 1pm on Friday, 29 October 1999. He said: "… the gist of the conversation was that the lawyers were butting heads on an issue and there was one in particular that he wasn't going to agree to and wanted to speak to me about and that was the issue of the right for termination up until the date of the meeting. I spoke with Paul Mazoudier later that day and we agreed again, for the sake of having the scheme proceed we should agree with that request. So, I would suggest at this stage being the 15th of the 22nd it was still a case of the lawyers arguing the toss" 94 Corrigan agreed that the 31 October 1999 draft did not reflect the deal that had been done with AMP on 24 September 1999 and said that he did not, at any time between 24 September and 31 October 1999, agree with anybody at AMP upon a term of that effect on behalf of GIO. Mazoudier had no recollection of being asked to give any instructions on 29 October 1999 as to the matter raised by AMP. 95 The GIO Board Audit and Compliance Committee had met earlier at 9am that morning and, having considered the reports from Schneider and Linden, with comments from personnel from Pricewaterhouse Coopers, resolved to recommend to the GIO Board an increase in claims reserves as at 30 June 1999 in the order of $180 million. Batchelor was present at that meeting. The GIO Board itself met on that morning at 11.30am. The recommendation of the GIO Board Audit and Compliance Committee was accepted and it was resolved that an announcement should be made. Batchelor was again present. 96 As Batchelor left the GIO Board meeting he told Mazoudier that AMP would not proceed on the terms that then existed. Batchelor, on behalf of AMP, wrote a letter on 2 November 1999 to Mazoudier, as Chairman of GIO, which Mazoudier said he received the following morning. The letter was as follows: "Scheme of Arrangement Proposal I refer to the proposal received from the independent directors of GIO for AMPII to acquire the shares in GIO held by the minority shareholders for a consideration comprising a listed perpetual debt instrument with a face value of $3.05 per GIO share and an unlisted debt instrument (reinsurance note) intended to deliver to GIO shareholders any residual value in GIO's reinsurance business. The transaction was to be implemented by means of a court approved scheme of arrangement. GIO has announced to ASX today further significant losses in reinsurance amounting to approximately $180 million. The arrangements for implementation of the scheme were subject to there being no material adverse change affecting GIO prior to implementation of the scheme. AMP has formed the view that this most recently announced loss amounts to a material adverse change which would have enabled AMP to terminate the proposal. However, AMP believes that it is still in the best interests of all relevant GIO stakeholders for GIO minority shareholders to be provided with an exit mechanism but this must be pitched at a lower level given these further losses. Accordingly, AMP proposes (subject to the approval process outlined below) that the scheme be implemented, however, that the AMP income security be issued with a face value of $2.75 per GIO share and that the reinsurance note be amended to reflect a maximum payment of 52c for the financial year to 30 June 2000 in lieu of the current proposal which caps that payment at 22c. In all other respects the financial terms would remain the same. The proposal is also put on the basis that AMP's due diligence termination right is to remain but is only able to be triggered if the impact of the event exceeds 52c per GIO share. We understand that you will be putting this proposal to your Board tomorrow at 9.00am. As indicated above, I must obtain the AMP Board's approval to this amended proposal. Accordingly, I will expect you to call me tomorrow morning after the GIO Board meeting. I believe it is important that both GIO and AMP inform the market of any amendment to our proposal before the commencement of trading tomorrow." 97 On Tuesday, 2 November 1999, at 11.56am, Mallesons Stephen Jaques communicated with Allen Allen & Hemsley, conveying AMP's instructions in relation to the merger implementation agreement. As far as cl 5.2 was concerned, they were: "We confirm our instructions that this clause should read: 'This agreement may be terminated at any time prior to the Court convened meeting by AMPII if AMPII is not satisfied in its absolute discretion with the results of its due diligence investigations conducted pursuant to clause 17 of this agreement." That is, there should be an unqualified right to walk, with no carve outs for reinsurance, agreement management decisions or anything else." Mazoudier does not recall that matter having been referred to him. 98 A Board meeting of GIO was held at 9am on Wednesday, 3 November 1999, at which the letter from AMP was discussed. The meeting was adjourned at 11am to enable negotiations to take place with AMP and its advisers and reconvened at 4.40pm, when the revised proposal was approved. It is clear enough from the cross-examination of the directors of GIO that whatever may have been the legal position between AMP and GIO, the directors saw little practical alternative but to agree to the revised terms. They saw no other means of raising the necessary capital and did not have the time to litigate. 99 It is clear enough from this chronology of events that between 27 October and 29 October 1999 the decision was made by AMP that it would reserve to itself the right to withdraw from the scheme, notwithstanding that events would not have entitled them to do so pursuant to the clause relating to withdrawal which had been made public on 24 September 1999, or even pursuant to the revised version of the merger implementation agreement which the Boards of GIO and AMP had independently resolved to execute on 25 and 27 October 1999 respectively. In the events which happened, the announced intention to make further provision for losses which was published by GIO on 2 November 1999 would not have entitled AMP to withdraw under either version of cl 5.2. Although a right to withdraw was asserted in the AMP announcement of 4 November, AMP has not sought to justify its action. It simply, as it was put by counsel for GPG, "walked away" from the position that had been announced to the public on 24 September 1999. was gio's 24 september 1999 announcement misleading or deceptive? 100 There is no relevant difference between the various statutory provisions sued upon. It seems to be agreed that s 12DA of the ASIC Act is the pertinent provision. There is little dispute as to the principles to be applied. Leaving aside for the time being any positive duty of disclosure, the question is whether the omission of any reference to what GIO then knew as to the likelihood of further losses in respect of past reinsurance claims and the consequent necessity to increase provisions made misleading or deceptive that which was said by GIO in accordance with the principles outlined in Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 463-468. 101 Considering: (1) the terms of the announcement; (2) what shareholders and the market had been told about provisioning in relation to past reinsurance claims in and since the Part B statement, particularly what had been said in August; and (3) what GIO knew at the time; in my opinion, the 24 September 1999 announcement made by GIO to the ASX was misleading and deceptive. The reasonable reader would assume that there was no relevant change for the worse in what was to be expected in relation to reinsurance claims from events known to GIO compared with the announcements in August 1999. Put another way, the reasonable reader would assume that no further doubt had been cast upon the adequacy of the current provisions on that account. The GIO announcement dealt expressly with the topic of reinsurance. This was inevitable, as both the consideration to be paid by AMP and the ability of AMP to withdraw were affected by it and because of the attention given to that topic during that year, particularly as recently as August 1999. Furthermore, the announcement expressly dealt with one source of further reinsurance losses, namely, catastrophes in the current year, but omitted any reference to the other source of such losses: the increase in the amount necessary to meet claims from previous events. This carries the clear implication that further losses on that account were not then anticipated. 102 The only question is whether GIO had sufficient knowledge of the problem to require a public statement, or warning, of some kind in the context of this announcement. The answer must be yes. The directors of both GIO and AMP had been advised of likely losses with a midpoint in the vicinity of $100 million. The directors of GIO had been told that there certainly would be losses. On 24 September 1999 the Managing Director of AMP told a selected group that losses were expected which, inferentially, were likely to be at least $139 million, and this was confirmed to a similar group by the Chief Financial Officer of AMP on the same day, in the presence of senior executives of GIO. The Schneider/Robinson report of September 1999 had been the subject of close scrutiny by GIO and AMP personnel and advisers. It was based upon actual experience since 30 June 1999. It was expected to form the basis of statements to be made in a prospectus for a rights issue without independent external examination. All of the drafts of the information memorandum recognised that it would be necessary to say something on the topic without having any basis apart from the September Schneider/Robinson report until late in October 1999. The suggestion that losses of the order of $100 million could be absorbed by the existing prudential margin of $225 million is unconvincing. The advice from Ernst & Young (New York) which GIO had received in relation to the August 1999 increase in provisions was that a prudential margin of $225 million was below normal and there is evidence that problems with Australian Prudential Regulatory Authority would have been anticipated if the prudential margin was reduced. The directors of GIO must have assumed that it was likely that any further significant losses would require additional provisions and so go directly to revenue account as a loss. It is no answer to say that the question would be dealt with in the information memorandum to be issued in due course. The shares in GIO were listed on the ASX and traded daily and the announcement immediately and significantly affected the market price of the shares, as would have been anticipated. 103 For present purposes it can be assumed (without deciding) that the information was not certain enough to require a decision to immediately increase the provisions and not certain enough to warrant disclosure to the market absent any other announcement. Those assumptions, however, do not address the relevant issue, namely, the terms of the announcement which was made to the market. I incorporate here, but do not repeat, my conclusions as to the decision-making processes of GIO as to that issue. The form of the announcement and the circumstances in which it was made required that reference should have been made to the substance of the Schneider/Robinson report as relayed to the directors of GIO by Geoffrey Thompson, appropriately qualified to reflect the nature of the information. It is not for GPG or the Court to draft such a reference, but no difficulty in doing so was exposed by the evidence (or the submissions) on behalf of GIO. The absence of such a reference rendered the statement misleading and deceptive. I have not overlooked either the fact that premature release of information may cause damage to shareholders or the fact that casting any doubt upon the adequacy of the increased provision so recently announced would be viewed seriously by the market. Having chosen to speak, GIO came under an obligation not to mislead in so doing. did the 24 september 1999 Announcement by gio cause loss or damage to gpg? 104 The question which arises in these circumstances is whether the omission of any reference to the relevant information was a cause of GPG buying, and continuing to buy, GIO shares until 2 November 1999. The misleading conduct need not be the sole or dominant cause of the decision to invest, provided that it played a part in and contributed to the decision (Henville v Walker (2001) 75 ALJR 1410, 182 ALR 37 at [14], [61], [78], [106] to [108] and [163]). This requires consideration of the evidence of the GPG decision-makers. The evidence of Loomes is of central importance. Insurance companies were within his particular area of interest and expertise as an analyst. He had followed the affairs of GIO closely over the years and had recommended earlier investment and divestment in GIO shares by GPG. He recommended this investment in the first place and recommended the continuation of buying later in October 1999. Without this, the shares would not have been bought. I accept his evidence that disclosure of the substance of the Schneider/Robinson report of September 1999 would have caused him not to recommend the investment. He impressed as honest and capable in giving his evidence. 105 His two contemporaneous reports are of considerable importance. In my opinion, they each support his evidence. The topic of reinsurance performance is accorded significance in them and it is clear that an assumption underlying the reports (and the broker's report attached to the second of them) is that the current (and recently increased) provision was adequate to cover past events. The risk which was taken into account was that of current year catastrophes, not a significant increase in claims for past events. Furthermore, this aspect of both the reports and the evidence of Loomes accords with commonsense and commercial reality. In the absence of some warning in the announcement, the recent drastic increase in the provision must have been regarded as adequate by those reading it. 106 Some aspects arising out of the cross-examination of Loomes should be mentioned. It was elicited that, in fact, Loomes thought that the increase in provision by GIO may have been too drastic and so contained an inbuilt margin, a view which was apparently shared by some in the market to the knowledge of the GIO directors. This does not detract from the significance of a lack of warning as to the risk of the inadequacy of that provision. Counsel for GIO has relied upon the fact that Loomes heavily discounted the possibility of receiving the additional consideration under the scheme in his assessment of the investment. This argument assumes that further reinsurance losses from past events was relevant only to that additional consideration. That is far too limited a perspective about such a warning in view of what could only be described as dramatic write downs on that account which had already occurred in 1999. Further problems emerging so soon after the August 1999 announcements would have been an indication of potentially serious trouble for the future of the business. 107 It was also argued that Loomes did not give evidence which precisely accorded with the representations as pleaded. This is too narrow and literal a view of the case. It is also a false issue. Whether the conduct is misleading or deceptive is not judged by the reaction of any particular observer. The issue presently in question is causation. This, as I have said, substantially turns upon the effect that disclosure of the truth would have had upon Loomes. 108 Acceptance of the evidence of Loomes effectively decides the issue of causation in favour of GPG. In the absence of his recommendation, there would have been no investment. However, no different result would ensue if the evidence of Brierley, Weiss and Cureton is taken into consideration. Naturally, each was influenced by varying considerations in varying degrees. Each was considering a recommendation from one of their number in his field of expertise, rather than making an initial decision. I have no doubt that each of Brierley and Weiss was heavily influenced by Loomes' recommendation whilst neither rubber-stamped it. I judge that, on this particular issue, Cureton would have been inclined to defer to the others. In any event, I accept the evidence that each member of the Committee believed that the provision for past reinsurance events was adequate (and perhaps more than adequate) and that he would have been deterred from the investment if the truth had been appropriately disclosed. After all, this is a hypothetical question upon which the evidence of witnesses is admissible but not decisive. I have no doubt that a shrewd investor who understood what had occurred in relation to GIO in 1999 concerning reinsurance losses would have been inclined to steer clear of new investment in GIO shares if there were any warning of further losses on account of reinsurance of past events even if the warning was heavily qualified. Such a warning would cast doubt upon the integrity of the annual accounts and a shadow over the future of the business. Further losses could imperil the whole scheme of arrangement rather than simply the consideration to be received under it. The risks associated with the investment would clearly be perceived to have increased. GPG was, after all, considering a discretionary new investment. It was under no pressure to make this investment as compared with other opportunities. 109 The misleading conduct continued to affect GPG until it became aware of the announcements of 2, 3 and 4 November 1999. GPG ultimately participated in the scheme. It sold the AMP notes it received as a consequence on 10 March 2000, crystallising a loss of $8,366,653, not taking into account the contingent instrument which is retained by it. other bases for disclosure by gio? 110 GPG allege that, apart from the announcement of 24 September 1999, there was a duty upon GIO to disclose the substance of the Schneider/Robinson report and the substance of the various other reports received after 24 September 1999 dealing with reinsurance losses in connection with previous events by reason of the rules of the ASX, thus bolstering the case for misleading or deceptive conduct and constituting a breach of s 1001A of the Corporations Law. I need not deal with these issues in view of my conclusion as to the misleading nature of the 24 September 1999 statement and the continuing effect of it. That case must be stronger than the case of non-disclosure. The non-disclosure case, even if established, would not lead to any different result. was amp's announcement of 24 september 1999 and subsequent non-disclosure misleading or deceptive? 111 GPG alleges that AMP should have disclosed what it knew about the probability of GIO making further losses. I do not agree. AMP was involved on the other side of a potential transaction and owed no duty to make any statement to the market as to what it knew about the affairs of GIO. No authority in point was cited by GPG. 112 GPG also alleges that the 24 September 1999 announcement by AMP was misleading or deceptive in that it made a number of representations as to what it would do in the future relating to the scheme but that AMP did not lead evidence to establish that the disclosed intention was held at that time on reasonable grounds as required by s 12BB of the ASIC Act (cf s 51A TPA). It is alleged that the representations were falsified by AMP resiling from the arrangement on 4 November 1999. Counsel for AMP relied upon the minutes of the Board of AMP of 23 September 1999, which delegated authorisation of the transaction and the subsequent authorisation by those with delegated authority as establishing a proper basis for concluding that AMP held the intentions which were expressed in the statement. With some hesitation, I accept this submission. A corporate body acts by its board of directors and a board of directors acts by resolution. The resolution and what followed from it is the relevant decision. There is nothing about the resolution, or in the surrounding circumstances, to lead to the view that the Board or the delegates of the Board did not mean what was said at the time. The mere fact that some weeks later it took a different position does not suggest any more than that AMP changed its position. My examination of the evidence indicates that AMP indeed had intended to abide by the announcement until about 29 October 1999, when there was a sudden change of mind. This may be described as unconscientious or unconscionable, some might say reprehensible, but was not misleading or deceptive conduct contrary to the statute (see Mobil Oil Australia Ltd v Lyndel Nominees Pty Ltd (1998) 81 FCR 475 at 521-523). was the conduct by amp from 29 october 1999 unconscionable conduct according to the unwritten law? 113 GPG alleges that refusing to execute the merger implementation agreement and refusing to enter into a scheme on the basis outlined in the 24 September 1999 announcements by GIO and AMP was unconscionable conduct by AMP within the meaning of the unwritten law in connection with securities, contrary to s 12CA of the ASIC Act. This issue is founded upon the conclusion that AMP's conduct between 29 October 1999 and 3 November 1999 was unconscionable in the sense in which that term is used in equity, particularly in relation to equitable estoppel. I agree that such a foundation exists in fact. The announcement by AMP on 24 September 1999 related to and incorporated by reference the GIO announcement of the same day. The AMP announcement was unqualified as to its commitment to the scheme. The GIO announcement included a precise definition of the events which would entitle AMP to withdraw. This state of affairs was quite inconsistent with an unqualified right in AMP to withdraw. The reference to negotiation in the GIO announcement, upon which emphasis was placed by counsel for AMP, does not indicate any general right to withdraw, it refers to the formalities of settling an agreement to give effect to the deal which had been done and announced. In any event, the negotiations as to the form of the agreement were completed and each Board authorised execution of the same settled form of agreement prior to 29 October 1999, when the demand for a radical change to the escape clause was made by AMP and agreed to by GIO. In my opinion, that demand by AMP and the subsequent refusal by AMP to enter into the scheme on the announced basis was plainly unconscientious or unconscionable in the sense explained in authorities such as Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 (per Mason CJ and Wilson J at 404, per Brennan J at 423) and Commonwealth v Verwayen (1990) 170 CLR 394 ("Verwayen") (per Deane J at 441, 444). 114 It is submitted for AMP that this is not the kind of unconscionability which is referred to in s 12CA of the ASIC Act. It is submitted that that section and similar sections in other legislation (for example, s 51AA of the TPA) refer to that kind of unconscionable conduct which would lead equity to set aside a transaction where one party has exploited the special disadvantage of the other, illustrated by cases such as Blomley v Ryan (1956) 99 CLR 362 and Commonwealth Bank of Australia v Amadio (1983) 151 CLR 447 ("Amadio"). Counsel for GPG submits that this contention takes too narrow a view of s 12CA, which should not be read down. 115 This argument reflects some much debated but unresolved questions. In Murphy v Overton Investments Pty Ltd (2001) 182 ALR 138 (at 181, par [158]) I collected a number of relevant references. The most comprehensive discussion of these questions in the cases is to be found in the judgment of French J in Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd (2000) 96 FCR 491, 169 ALR 324 (at [22] to [28]) ("Berbatis 1"), which counsel for GPG submits is correct and should be followed. If it were followed, I agree that GPG would succeed in this case (see particularly Berbatis 1 at pars [16] to [18] where his Honour appears to regard unconscionable conduct which underpins equitable estoppel as encompassed by s 51AA of the TPA). There are two aspects of this to be considered. The first is that equitable estoppel does not relate to the setting aside of transactions. The second is that equitable estoppel does not depend upon one party being at a special disadvantage as against the other. The issue for decision by French J was a preliminary point by way of constitutional challenge to the validity of s 51AA of the TPA and the portions of the judgment relied upon by GPG were an explanation of that section in order to consider validity and, so far as relevant here, were obiter dicta. 116 The case itself was later decided by French J (Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd (2000) ATPR 41-778 ("Berbatis 2")) but it did not involve the precise question in issue here. The special disadvantage of a party to a transaction or dealing was relied upon in order to avoid the transaction. The decision in Berbatis 2 was overruled on appeal (CG Berbatis Holdings Pty Ltd v Australian Competition & Consumer Commission (2001) ATPR 41-826 ("Berbatis 3")). The Full Court in Berbatis 3 took a narrower view of what constituted special disadvantage than French J had taken in Berbatis 2. That issue has no particular significance here. However, the Full Court in Berbatis 3 said (at [83]): "Since the bargain that was struck between the Roberts and the Owners in December 1996 was not unconscionable, it follows, a fortiori, that nothing that was done in May by the Owners could be characterised as unconscionable. Equity is concerned with a remedy where a transaction has been entered into against good conscience or which is unconscientious. No transaction was entered into in May. There could be no conduct that could be characterised as unconscionable under the unwritten law." (emphasis added) It is not clear whether this was intended to be a comprehensive statement as to the scope of s 51AA of the TPA. Even if so, it was not the result of argument, as the parties apparently agreed upon the law applicable to the case itself in the following terms (at [70]): "There was no dispute between the parties as to the relevant legal principles that should be applied in the case. Both parties accepted that, in the circumstances of the present case, it was necessary to demonstrate that the Roberts were under a "special" disadvantage in their dealings with the Owners in connection with proposals for renewal or extension of their lease. The dispute between the parties on appeal was whether the circumstances of the Roberts were such that a conclusion should be drawn that they were at a special disadvantage within the meaning of the relevant equitable principles." 117 In Cortis Exhaust Systems Pty Ltd v Kitten Software Pty Ltd [2001] FCA 1189 Tamberlin J (one of the members of the Court in Berbatis 3) said (at [21]): "In order to make out a case of unconscionable conduct, it is necessary to show that one party has unconscientiously taken advantage of a special disadvantage in the other party's position in relation to the transaction or dealing in question: see Blomley v Ryan (1956) 99 CLR 362 at 415; Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 at 489; Louth v Diprose (1992) 175 CLR 621 at 630 ff; C G Berbatis Holdings Pty Ltd v ACCC [2001] FCA 757 at [70]." (emphasis added) Again, however, the claim was made in order to set aside a deed of assignment. 118 This summary by Tamberlin J accords with the explanatory memorandum as to the amendment to the TPA which introduced s 51AA where it was said (inter alia): "A new Pt IVA is to be inserted into the Act, dealing with unconscionable conduct. The existing s 52A is to be moved to Pt IVA, and a new provision will be created dealing with unconscionable conduct in circumstances not already dealt with by s 52A. The new provision will not extend the existing equitable principles of unconscionability, but will make available remedies under the Trade Practices Act and make possible the involvement of the Trade Practices Commission. … The provision embodies the equitable concept of unconscionable conduct as recognised by the High Court in Blomley v Ryan (1956) 99 CLR 362 and Commercial Bank of Australia v Amadio (1983) 151 CLR 447; 46 ALR 402. … The advantages of providing a statutory prohibition for conduct which is already dealt with by equity lie in the availability of remedies under the Principal Act, the potential involvement of the Commission including the possibility of representative actions, and the educative and deterrent effect of a legislative prohibition in the Principal Act. … Because of the position of the High Court of Australia as the ultimate appellate court for all States and Territories, the "unwritten law" of the States and Territories is the same. If a court in a State or Territory were thought to deviate from the principles recognised by the High Court, another court exercising its jurisdiction in relation to s 51AA would not be bound to follow that deviation, unless it was satisfied that to do so was consistent (or at least not inconsistent) with the law as recognised by the High Court from time to time." These passages (apart from the first) were referred to by the Full Court in Berbatis 3 at [6]. 119 I have been able to locate only two cases in which an attempt has been made to apply s 51AA of the TPA (or cognate sections) outside the field of setting aside a transaction and each is interlocutory. The first is Pritchard v Racecage Pty Ltd (1997) 142 ALR 527, in which a strike-out application was unsuccessful, but in which Branson J, who gave the leading judgment, appeared to indicate a preference for the narrower view of the section (see her Honour's judgment at 545). The second case is Olex Focas Pty Ltd v Skodaexport Co Ltd [1998] 3 VR 380 where Batt J granted an interlocutory injunction (at 402-404). No authoritative guidance is obtained from either case. 120 An aspect of the legislation relevant to the construction of s 12CA of the ASIC Act is the presence of s 12CB which I need not reproduce. Unconscionability is not limited by reference to the unwritten law in that section. If unconscionability in s 12CB is not limited to the meaning of the term within the unwritten law, but is at large, some support is provided to the argument that unconscionable conduct in s 12CA of the ASIC Act is a limited concept, with an extension effected by s 12CB, albeit in a narrower range of consumer transactions than encompassed by s 12CA. There is a debate in the authorities as to the similar question which arises as to the proper construction of s 51AB and s 51AC of the TPA. The preponderance of opinion seems to be that unconscionable conduct in these sections is not restricted to the meaning within the unwritten law (see Australian Competition & Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 at pars [30] to [37]). The history of the TPA provisions, recently traced by Lindgren J in Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia [2001] FCA 1056 (at pars [256] to [262]), supports that conclusion. 121 In Amadio, Mason J (as he then was) said (at 461): "Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage, eg, a catching bargain with an expectant heir or an unfair contract made by taking advantage of a person who is seriously affected by intoxicating drink. Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position. There is no reason for thinking that the two remedies are mutually exclusive in the sense that only one of them is available in a particular situation to the exclusion of the other. Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will be granted when such advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest." (emphasis added) 122 In Bridgewater v Leahy (1998) 194 CLR 457 ("Bridgewater") Gaudron, Gummow and Kirby JJ (at pars [73] to [76]) described the equitable doctrine concerned with unconscionable dealings or conduct as a species of the genus of equitable intervention to refuse enforcement of or set aside transactions which, if allowed to stand, would offend equity and good conscience and made particular reference to Amadio. At par [115] their Honours referred to a position of disadvantage rendering one party subject to exploitation by another such that the benefit of an improvident disposition by the disadvantaged party may not in good conscience be retained, citing Louth v Diprose (1992) 175 CLR 621. 123 In my opinion, it is that equitable doctrine which is picked up by the reference to the unwritten law in s 12CA of the ASIC Act, rather than other situations in which unconscientious conduct is relevant to the grant of equitable relief, such as equitable estoppel. (For a similar view see RP Buckley, "Sections 51AA and 51AC of the Trade Practices Act: the Need for Reform" 8 TPLJ 5, but for a tentative suggestion to the contrary see PD Finn, "Equitable Doctrine and Discretion in Remedies", in Cornish et al (eds), Restitution: Past, Present and Future, 251 (1998) Hart Publishing). It is not pleaded or suggested that this doctrine has application here. As counsel for AMP reminded me on more than one occasion, this is not a case between GIO and AMP either in contract or based upon equitable estoppel. Even if it were, it would be a suit to enforce, rather than set aside, a transaction. For the sake of completeness, I should add that no argument was or could have been developed that there was a cause of action in equity which would lead to the orders sought, apart from the statutory provisions. 124 The doctrine of unconscionable conduct to which I refer is what may be described as an equitable cause of action and so fits comfortably with the rationale that the remedies of the statute are added to those of the unwritten law. There will be many circumstances where a transaction cannot be set aside – the intervention of third party rights or disposition of the property acquired being examples. In those circumstances, the addition of remedies under s GM of the ASIC Act or ss 82 and 87 of the TPA is of utility. The remedy provided by s GD of the ASIC Act and s 80 of the TPA may, in any event, be useful. On the other hand, unconscionable or unconscientious conduct is only one element of equitable estoppel. The doctrine of equitable estoppel is distinct from unconscionable conduct, even if the views of Mason CJ and Deane J in Verwayen (at 411 and 440 respectively) as to a single overarching or general doctrine of estoppel by conduct were to be accepted (see Giumelli v Giumelli (1999) 196 CLR 101 per Gleeson CJ, McHugh, Gummow and Callinan JJ at pars [6] and [7]) and even if equitable estoppel is regarded as a cause of action. 125 The argument to the contrary of my conclusion must involve the proposition that there is an overarching or general doctrine of unconscionability recognised by equity which encompasses all circumstances in which behaviour which can be described as unconscionable plays a part in the entitlement to relief. No authority has been cited to support that proposition, apart from the obiter dicta of French J in Berbatis 1. In my respectful opinion, it is contrary to established authority. The passage from Mason J in Amadio which is set out above and the passages from Bridgewater to which I have referred above are sufficient to make that point. 126 It is no longer necessary to find ambiguity before resorting to guidance from the explanatory memorandum in relation to the amendment of the TPA which inserted s 51AA and to the legislative history of that section and ss 51AB and 51AC of the TPA (s 15AB Acts Interpretation Act 1901 (Cth)), although the use which may be made of that material is limited to that specified in s 15AB(1) of the Acts Interpretation Act, bearing in mind the matters in s 15AB(3). Resort to this extrinsic material confirms my view that the ordinary meaning of conduct which is "unconscionable within the meaning of the unwritten law" is that which constitutes the doctrine of unconscionable conduct which I have identified. If I am wrong in this, and French J was correct in his view that the words in question could refer to a variety of equitable doctrines then, in my opinion, the provision is ambiguous or obscure and the meaning which I have attributed to it can properly be determined as the meaning of the provision when the extrinsic material is taken into account. In coming to this view, I have had regard to s 15AB(3) of the Acts Interpretation Act. It is implicit in this reasoning that the construction of s 12CA of the ASIC Act will be governed by the same considerations that determine the construction of s 51AA of the TPA. conclusion 127 The proceeding against AMP must be dismissed with costs. GPG Australia will have judgment against GIO in the sum of $8,366,653 plus costs, but on terms that it transfers, holds or otherwise deals with the beneficial interest in the contingent instrument as directed by GIO. GPG Australia submits that it is entitled to interest from 4 November 1999, by which time the loss was suffered and the causes of action accrued or, alternatively, from 10 March 2000 when the AMP notes received under the scheme were sold. In my opinion, the latter date is appropriate in this case. GPG is a trader in shares and the loss was crystallised at that point. It was submitted for GPG that, in accordance with authorities to which I was referred, interest should be calculated in accordance with the New South Wales Supreme Court Rules for the applicable period. There is not sufficient divergence between those rates and the post judgment rate pursuant to O 35 r 8 of the Federal Court Rules to warrant departing from the latter. It was submitted for GIO that this rate is higher than the appropriate commercial rate which should be the proper measure. In my opinion, the post judgment rate is the appropriate measure. Interest will therefore run at 10.5% per annum until date of judgment. 128 The matter will stand over for formal orders to be made giving effect to these reasons. The parties can draw my attention to any necessary issue which has not been dealt with in these reasons. I certify that the preceding one hundred and twenty eight (128) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles. Associate: Dated: 11 December 2001 Counsel for the Applicant: AC Archibald QC with RJ Wright SC and T Catanzariti Solicitor for the Applicant: Coudert Brothers Counsel for the First Respondent: NC Hutley SC with Dr AS Bell Solicitor for the First Respondent: Mallesons Stephen Jaques Counsel for the Second Respondent NC Hutley SC with TD Castle Solicitor for the Second Respondent Mallesons Stephen Jaques Date of Hearing: 3-5 October, 8-12 October, 15-18 October, 22 October, 24-26 October, 29 October 2001 Date of Judgment: 11 December 2001