FEDERAL COURT OF AUSTRALIA Regional Publishers Pty Limited v Elkington [2006] FCA 1017 CORPORATIONS –compulsory acquisition of shares – shareholder objection to acquisition – application for Court approval of compulsory acquisition - whether applicant has satisfied provisions of Part 6A.2 of the Corporations Act 2001 (Cth) – whether the nomination of a company is the nomination of an individual – whether fair value given for preference shares Acts Interpretation Act 1901 (Cth) ss 22, 23 Corporations Act 2001 (Cth) ss 9, 664A, 664AA, 664C, 664E, 664F, 667A, 667AA, 667C, 761, 764, 764A, 766A, 766B, 991A, 1322 Spencer v The Commonwealth (1907) 5 CLR 418- referred to Teh v Ramsay Centauri Pty Ltd [2002] NSWSC 456- referred to Winpar Holdings Ltd v Austrim Nylex Ltd [2005] VSCA 211- referred to REGIONAL PUBLISHERS PTY LIMITED ABN 20 000 014 700 v GORDON BRADLEY ELKINGTON AND ANOR NSD 982 OF 2006 EMMETT J 11 AUGUST 2006 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 982 OF 2006 BETWEEN: REGIONAL PUBLISHERS PTY LIMITED ABN 20 000 014 700 Plaintiff AND: GORDON BRADLEY ELKINGTON First Defendant GEPPS PTY LTD Second Defendant JUDGE: EMMETT J DATE OF ORDER: 11 AUGUST 2006 WHERE MADE: SYDNEY THE COURT: 1. Approves the acquisition by the plaintiff of all the cumulative preference shares in the capital of Harris and Company Pty Limited ACN 009 475 736 on the terms set out in the compulsory acquisition notice dated 20 March 2006. 2. Orders the plaintiff pay the costs of the first and second defendants. 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 NSD 982 OF 2006 BETWEEN: REGIONAL PUBLISHERS PTY LIMITED ABN 20 000 014 700 Plaintiff AND: GORDON BRADLEY ELKINGTON First Defendant GEPPS PTY LTD Second Defendant JUDGE: EMMETT J DATE: 11 AUGUST 2006 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The first and second defendants, Gordon Bradley Elkington ('Dr Elkington') and Gepps Pty Limited ('Gepps'), hold preference shares in Harris & Co Pty Ltd ('the Company'). The Plaintiff, Regional Publishers Pty Limited ('Regional'), desires to acquire those preference shares compulsorily, pursuant to the provisions of Part 6A.2 of Chapter 6A of the Corporations Act 2001 (Cth) ('the Act'). Regional is able to do so, so long as it satisfies the prerequisites of Part 6A.2 and, in the events that have happened, it establishes that the terms on which it proposes to acquire the preference shares give a fair value for them. Dr Elkington and Gepps say that Regional has not satisfied the prerequisites of Part 6A.2 and that, in any event, the terms upon which Regional proposes to acquire their preference shares does not give them a fair value for the preference shares. COMPULSORY ACQUISITIONS UNDER THE ACT 2 Division 1 of Part 6A.2 of the Act deals with the compulsory acquisition of securities by a 90% holder, as that term is defined in the Act. Section 664A(2), which is in Division 1, provides that a person is a 90% holder in relation to a class of shares of a company if: · the person's voting power in the Company is at least 90 per cent, and · the person holds full beneficial interests in at least 90% by value of all shares of the Company. Section 664A(3) provides that a 90% holder in relation to a class of shares of a company may compulsorily acquire all of the shares in that class in which the person does not have full beneficial interests if, relevantly, the Court approves the acquisition under s 664F. Section 664F is activated where people who hold shares object to the proposed acquisition. However, the procedure contemplated by Division 1 must be followed before any application is made to the Court for approval under s 664F. 3 Under s 664AA, the 90% holder in relation to a class of shares may compulsorily acquire shares in that class only if the holder lodges a compulsory acquisition notice for the acquisition with the Australian Securities and Investments Commission ('the Commission'), within the period of six months after the 90% holder becomes a 90% holder. Under s 664C(1) the 90% holder must prepare a notice that sets out a cash sum for which the 90% holder proposes to acquire the shares and provides certain other information specified in that provision. Under s 664C(2), the 90% holder must then: · lodge the notice with the Commission; · give each person who is a holder of shares in the class the notice, a copy of an expert's report under s 667A and an objection form; and · give the Company copies of those documents. 4 Part 6A.4 of the Act is concerned with expert's reports and valuations. Under s 667A(1), an expert's report under s 664C must: · be prepared by a person nominated by the Commission under s 667AA, · state whether, in the expert's opinion, the terms proposed in the notice give a fair value for the shares concerned, and · set out the reasons for forming that opinion. Under s 667A(2), the expert's report must also state whether, in the expert's opinion, the person has full beneficial ownership in at least 90% by value of all the shares of the Company and must set out the reasons for forming that opinion. 5 Under s 667AA, a person who proposes to obtain an expert's report for the purposes of s 664C must request the Commission to nominate a person to prepare the expert's report. The Commission must nominate an appropriate person to prepare the report. In determining whether a person is an appropriate person to prepare an expert's report, the Commission must consider the nature of the company to be valued. 6 Under s 667C(1), to determine what is fair value for shares for the purposes of Chapter 6A, the following steps must be taken: · first, assess the value of the relevant company as a whole, · then allocate that value among the classes of issued shares in the company, taking into account the relative financial risk, and voting and distribution rights, of the classes, and · then allocate the value of each class pro rata among the shares in that class, without allowing a premium or applying a discount for particular shares in that class. Under s 667C(2), in determining what is fair value for shares, for the purposes of Chapter 6A, the consideration, if any, paid for shares in that class within the previous six months must also be taken into account. 7 Section 664E(1) provides that a person who holds shares covered by a compulsory acquisition notice may object to the acquisition of the shares by signing an objection form and returning it to the 90% holder. The 90% holder must lodge with the Commission a copy of any objection forms returned under that provision. If people who hold at least 10 per cent of the shares covered by the compulsory acquisition notice object to the acquisition within a specified period, the 90% holder must give everyone to whom the compulsory acquisition notice was sent, relevantly, a notice that the 90% holder has applied to the Court for approval of the acquisition under s 664F. 8 Under s 664F(1), if people who hold at least 10 per cent of the shares covered by a compulsory acquisition notice object to the acquisition within a specified period, the 90% holder may apply to the Court for approval of the acquisition of the shares covered by the notice. Under s 664F(3), if the 90% holder establishes that the terms set out in the compulsory acquisition notice give a fair value for the shares, the Court must approve the acquisition of the shares on those terms. Otherwise the Court must confirm that the acquisition will not take place. Section 664F(4) provides that the 90% holder must bear the costs that a person incurs on legal proceedings in relation to such an application, unless the Court is satisfied that the person acted improperly, vexatiously or otherwise unreasonably. PROPOSED ACQUISITION OF PREFERENCE SHARES BY REGIONAL 9 Regional became a 90% holder in relation to fully paid ordinary shares and preference shares of the Company on 29 September 2005. By letter of 18 October 2005, Regional's solicitors, Deacons, requested the Commission to nominate a person for the purpose of preparing an expert's report under s 667AA of the Act. By letter of 2 November 2005, the Commission nominated three companies pursuant to the request made by Deacons. One of the companies named in the letter was described as follows: 'Licence holder: Ernst & Young Advisory Services Ltd'. The letter of 2 November 2005 stated that one of the three companies named could be chosen to prepare the necessary report. The letter also referred to the provisions of the Act whereby an appeal lay to the Administrative Appeals Tribunal from the Commission's decision nominating those three companies. 10 For the purpose of nominating independent experts under s 667AA, the Commission maintains two registers of experts. One is a register of experts who are able to prepare reports for large companies, being companies with a consolidated gross operating revenue of more then $10 million or consolidated gross assets of more than $5 million. The second is a register of experts who are able to prepare reports for companies that meet neither of those criteria. The Commission appoints to the registers only experts with a licence under s 913B of the Act that authorises a person who carries on a financial services business to provide financial services ('Australian financial services licence'). 11 As at 2 November 2005, the registers maintained by the Commission included the name 'Ernst & Young Advisory Services Ltd'. There is no company with that name. However, there is a company with the name 'Ernst & Young Transaction Advisory Services Ltd' ('Ernst & Young'). Ernst & Young is the holder of Australian financial services licence No. 240585. The Commission intended to appoint Ernst & Young to the registers maintained by it. And it is clear that the registers contained an error in relation to the name of Ernst & Young. That error resulted in the Commission, in its letter of 2 November 2005, nominating 'Ernst & Young Advisory Services Ltd' rather than Ernst & Young. 12 Ernst & Young wrote to Regional on 9 January 2006, setting out the proposed terms of its engagement by Regional to prepare an independent expert's report in relation to the proposed compulsory acquisition of preference shares in the Company. On 28 February 2006, Regional acknowledged that that letter and its attachments formed a binding agreement between Ernst & Young and Regional. 13 Pursuant to that engagement, Ernst & Young provided to Regional a report prepared by it, dated 20 March 2006 ('the E&Y Report'). In the E&Y Report, Ernst & Young expressed the following opinions: · The consideration to be paid by Regional under the proposed offer to holders of preference shares in the Company, of $2.50 per share, is greater than Ernst & Young's assessed fair market value of the preference shares. · Regional has full beneficial ownership in at least 90 per cent by value of all the shares of the Company. The E&Y Report was signed by Mr Stuart G. Bright and Mr John E. Gibson, each of whom is a director of Ernst & Young and a representative of Ernst & Young for the purposes of Part 7.6 of the Act. Ernst & Young's reasons for their opinions were set out in a detailed attachment to the E&Y Report. 14 On 20 March 2006, Regional lodged with the Commission a compulsory acquisition notice in respect of preference shares in the Company and dispatched to each holder of preference shares a compulsory acquisition notice, a copy of the E&Y Report and an objection form. It also gave the Company copies of those documents. The compulsory acquisition notice provided, relevantly, as follows: '[Regional] hereby gives notice that it proposes to compulsorily acquire preference shares that you hold for the cash amount of $2.50 for each preference share. … During the last twelve months [Regional] has purchased securities of the same class for $2.00 per preference shares and $2.50 per preference share.' 15 Thereafter, people who hold at least 10 per cent of the preference shares objected within the relevant period to the acquisition of their shares by Regional. Accordingly, on 19 May 2006, Regional applied to the Court pursuant to s 664F of the Act for approval of the acquisition of the preference shares covered by the compulsory acquisition notice. Dr Elkington and Gepps have appeared in the proceeding and have been joined as defendants. Another holder of preference shares has made a written submission through Regional, but has not appeared. THE ISSUES 16 The question that arises under s 664F is whether Regional has established that the terms set out in the compulsory acquisition notice, of payment of $2.50 in cash per preference share, gives a fair value for the preference shares. However, several specific issues have been raised by Dr Elkington and Gepps. The first issues concern the nomination of Ernst & Young by the Commission. First, they say that Ernst & Young was not nominated and that a non-existent company was nominated. Secondly, they say that Part 6A.4 only permits the nomination of an individual as an appropriate person to prepare a report and does not permit the nomination of a company. 17 In addition, the defendants have raised an issue concerning the content of the E&Y Report. They say that the E&Y Report does not satisfy the requirements of s 667C in determining what is fair value for the preference shares. However, each eschews a contention that any failure to comply strictly with s 667C invalidated the process that led to Regional's application to the Court. Rather, they say that the evidence before the Court, insofar as it is limited to the E&Y Report, falls short of establishing that the terms set out in the compulsory acquisition notice gives a fair value for the preference shares. Specifically, they point to what they say is a special value arising from the benefits that accrue to the Company by becoming a wholly owned subsidiary of Regional: they complain about the allocation of the value of those benefits between the ordinary shares and the preference shares of the Company. 18 It is convenient to deal first with the Commission's nomination of Ernst & Young and then with the valuation questions. NOMINATION OF ERNST & YOUNG Misnomer 19 There can be no doubt that the Commission intended to appoint Ernst & Young to the registers maintained by it for the purposes of s 667A. There is no company with the name Ernst & Young Advisory Services Ltd. Notwithstanding the reference to a company with that name in the Commission nomination of 2 November 2005, I consider that the letter should be construed as referring to Ernst & Young. In any event, the misnomer is no more than a procedural irregularity and a nomination by the Commission pursuant to s 667AA(2) is a proceeding under the Act. Regional calls in aid s 1322 of the Act, which deals with relief from the consequence of irregularities. Under s 1322(1), a proceeding under the Act is not invalidated because of any procedural irregularity unless the Court is of the opinion that the irregularity has caused or may cause substantial injustice that cannot be remedied by an appropriate order of the Court. Clearly the misnomer has caused no injustice. The nomination of 2 November 2005 was not invalid by reason of the misnomer of Ernst & Young. A Company is a Person 20 Section 667AA(2) provides that a person who proposes to obtain an expert's report for the purposes of s 664C must request the Commission to nominate a person to prepare the expert's report. Clearly, the word 'person' first appearing includes a corporation. That is to say, s 664A clearly contemplates that a corporation may be a 90% holder in relation to a class of shares. It would be curious, therefore, if the word 'person' when used in the same sentence had a different meaning, such that it is limited to a natural person. 21 Section 22(1)(a) of the Acts Interpretation Act 1901 (Cth) provides that the word 'person', when used in a statute, includes a corporation unless the contrary intention appears. Further, s 23(a) of that Act provides that words importing gender include every other gender. The question is whether a contrary intention appears from the context in which the word 'person' is used in s 667AA. 22 The expert's report called for by s 667A must state whether, in the expert's opinion, terms proposed give a fair value and whether the person giving the compulsory acquisition notice has full beneficial ownership in at least 90 per cent by value of all the shares. I do not consider that the requirement that the report state an opinion requires that the expert be a natural person. 23 Certainly, a corporation can act only through its agents, including its directors and employees. It has long been accepted that a corporation, through its relevant agents, can acquire a state of mind, such as an intention; a corporation can, through its relevant agents, acquire knowledge. There is no reason, in principle, why a corporation cannot, through appropriate agents, form an opinion. 24 There is no indication in the scheme of Part 6A.4 that a natural person must take responsibility for the opinion expressed in an expert's report and must be able to support it on oath, as suggested by Dr Elkington. There is no requirement in the Act that an expert's report be verified on oath or by any other means. The person nominated, of course, must accept responsibility for the opinion. Doubtless, when considering a nomination, the Commission would have regard to the capacity of the person to be nominated to provide a reliable opinion. Even if a nomination by the Commission is subject to review by the Administrative Appeals Tribunal, that gives no hint that a nominated person must be a natural person and cannot be a corporation. 25 The word 'person' is used throughout the Act to refer both to corporations and to natural persons. I do not consider that there is anything in the context in which s 667AA is found to suggest an intention contrary to the primary effect of s 22(1)(a) of the Acts Interpretation Act. 26 That conclusion is supported by the scheme of the Act generally and Chapter 7 in particular. Chapter 7 is concerned with financial services and markets. Part 7.6 deals with the licensing of providers of financial services. Under s 911A, a person who carries on a financial services business must hold an Australian financial services licence covering the provision of the financial services. It could not be suggested that a company is not a person for the purposes of s 911A. 27 Under s 766A, a person provides a financial service for the purposes of Chapter 7 if, amongst other things, the person provides financial product advice. Under s 766B, financial product advice means, for the purposes of Chapter 7, a recommendation or a statement of opinion or a report of either of those things that is intended to influence a person or persons in making a decision in relation to a particular financial product. Under s 764A(1)(a), a security is a financial product and, by the operation of ss 761A and 9, a share in a company is a security. 28 It follows that a person who provides an expert's report under s 667A must be the holder of an Australian financial services licence. Clearly, the Act contemplates that any holder of an Australian financial services licence could be nominated by the Commission to prepare an expert's report for the purposes of s 664C of the Act. While that is not decisive as to whether such an expert can be a company, it is persuasive of that conclusion. I consider that the nomination of Ernst & Young in the Commission's letter of 2 November 2005 was valid and effective. FAIR VALUE UNDER SECTION 667C 29 Section 667C of the Act provides how fair value for shares is to be determined for the purposes of Chapter 6A. There are three steps, the first of which, in the present context, is to assess the value of the Company as a whole. The second step only arises where there is more than one class of issued securities in a company, as is the present case. Thus, the issued capital of the Company consists of ordinary shares and preference shares. The value of the Company as a whole, determined in the first step, is then to be allocated between the ordinary shares and the preference shares in the Company. The value of each class of those classes is then to be allocated, pro rata, among the shares in that class. 30 The requirement of the third step, that the value of each class be allocated pro rata among the shares in that class, is a purely arithmetical process. However, the first and second steps call for judgment on the part of whoever is determining fair value. The first judgment is as to the value of the relevant company as a whole. The second judgment is as to the manner of allocating that value among the classes of issued shares. 31 To arrive at the value of property on a particular date, it is necessary to make a judgment as to the price at which the property would be sold on that date by voluntary bargaining between a seller and a buyer willing to trade, but neither of whom is so anxious to do so that the buyer or seller would overlook any ordinary business consideration. The judgment must be made on the assumption that both buyer and seller are perfectly acquainted with the property and cognisant of all circumstances that might affect its value, either advantageously or prejudicially. Having placed itself in the position of such parties at the relevant date, the question for the decision maker to determine is the point at which the buyer and seller would meet: that is to say, the aim is to determine the sum that the buyer would be willing to pay and the price that the seller would be prepared to take (see Spencer v The Commonwealth (1907) 5 CLR 418 at 441). So much is undoubted. 32 However, the first question that arises in the present context is to determine just what is to be valued. Section 667C refers to 'the company as a whole'. That phrase signifies the overall enterprise or undertaking of the relevant company, in the sense of the whole of its assets and its liabilities as a going concern or as a cohesive collection of resources organised so as to produce a return through outlay. Attention is directed at the sum of the component parts, viewed as a productive organisational whole and not at any particular asset or advantage (see Teh v Ramsay Centauri Pty Ltd [2002] NSWSC 456 at [13]). 33 In particular, the phrase does not direct attention to the value of particular share capital of the relevant company. On the other hand, dealings in the share capital of a company may give considerable assistance in the task of determining the value of that company as a whole. 34 The date as at which the value is to be determined is the date at which the 90% holder gives the relevant compulsory acquisition notice. It is at that point that the 90% holder initiates the process for compulsory acquisition. The holders of the shares that are to be subject to acquisition are drawn into a relationship with the 90% holder, whether they like it or not, by the operation of the Act (see Teh v Ramsay Centauri at [28]). THE E&Y REPORT 35 The E&Y Report did not directly address the question of the value of the Company as a whole, in the terms just outlined. The E&Y Report referred expressly to the provisions of s 667C(1) and referred to Practice Note 43, issued by the Commission, which provides guidance on possible valuation methodologies for an expert to consider. However, notwithstanding the express reference to s 667C(1), the E&Y Report adopted the approach of valuing the ordinary shares and the preference shares in the Company and then aggregating those values to arrive at the value of the Company as a whole. While, ultimately, the result of such an exercise may be helpful, that does not appear to me to be the approach called for by the terms of s 667C. Ernst & Young's Reasoning 36 The Company operates in the newspaper printing and publishing industry in Australia. The E&Y Report began with an overview of that industry followed by a profile of the Company. The core operating activity of the Company is publishing 'The Advocate', a regional daily newspaper based in Burnie, Tasmania. The Company also operates a printing business which prints The Advocate as well as undertaking general printing for third parties. The Company also has a 40 per cent interest in The Examiner Newspaper Pty Ltd, which publishes 'The Examiner', a newspaper based in Launceston, Tasmania. 37 Ernst & Young's first step was to determine the value of the ordinary shares in the Company, using, as the primary methodology, prices paid for ordinary shares. Prior to September 2005, Regional had acquired 85.3 per cent of the ordinary shares in the Company, at a price of $32 per share. In September and November 2005, Regional acquired the 14.7 per cent of the ordinary shares in the capital of the Company that it did not own, at a price of $36.38 per share. Ernst & Young concluded that the ordinary shares should therefore be valued at $36.38 per share. On that basis, Ernst & Young concluded that the fair value of 'the ordinary equity' in the Company was $55,821,000, as at 20 March 2006. 38 The second step taken in the E&Y Report was to consider the reasonableness of the value of $58,821,000 for the ordinary equity by reference to the earnings before interest, tax, depreciation and amortisation ('EBITDA') of the Company. Ernst & Young had regard to the multiple of the Company's EBITDA that was implied by the value of $55,821,000 and the reasonableness of that value in the context of EBITDA multiples observed by Ernst & Young in respect of comparable listed entities and transactions. 39 In particular, Ernst & Young had regard to multiples observed in the Australian newspaper industry, including newspaper publishing companies and commercial printing companies, as follows: · Historical EBITDA trading multiples of similar companies operating in the Australian newspaper industry, having an average of 11.5. · Forecast EBITDA trading multiples of similar companies operating in the Australian newspaper industry, having an average of 11.1. · Historical EBITDA trading multiples of companies operating in the printing industry in Australia, having an average of 7.3. · Forecast EBITDA trading multiples of companies operating in the printing industry in Australia, having an average of 6.1. 40 Each of those multiples included a premium of 20 per cent for control. In addition, Ernst & Young considered the EBITDA multiples implied by other transactions in the newspaper industry. Finally, Ernst & Young had regard to the fact that the selected comparable companies are all much larger and diversified than the Company, which operates only in the small market of regional Tasmania, with limited readership. Such factors increase the exposure of smaller companies to the effects of recessions and other 'negative earnings shocks', as Ernst & Young put it. 41 In the course of determining the implied EBITDA multiples, Ernst & Young derived an 'enterprise value' for the Company. That entailed adding, to the value of the issued capital of the Company, the amount of the net debt of the Company, of $8,914,000, plus 40 per cent of the net debt of The Examiner Newspaper Pty Limited, of $3,700,000. Ernst & Young concluded elsewhere in the E&Y Report, as indicated below, that the preference shares had a fair value of $54,000. Accordingly, the fair value of the total share capital of the Company was determined as $55,875,000, being $55,821,000 plus $54,000. The conclusion was an 'enterprise value' for the Company of $68,489,000. 42 The Company's EBITDA for 2005 was $9,375,000 and the Company's forecast EBITDA for 2006 was $11,245,000. On the basis of an enterprise value of $68,489,000, the multiple for 2005 would be 7.3 and the multiple for 2006 would be 6.1. Those multiples for the years 2005 and 2006 were comparable with Ernst & Young's observations of other participants in the industry. The E&Y Report concluded, therefore, that the multiples of 7.3 and 6.1 were not unreasonable for a company engaged in the industry in which the Company is engaged. 43 Ernst & Young's third step was to determine the total value of the 50,000 issued preference shares in the Company by capitalising future maintainable dividends, including an allowance for franking credits. Ernst & Young considered that that was the appropriate methodology, having regard to the rights attached to those shares. That conclusion was based on an examination of the Company's capital structure and the rights and conditions attaching to the preference shares. 44 Clause 95 of the Company's Constitution sets out the terms and conditions upon which the directors were authorised to issue preference shares. Relevantly, terms and conditions of the preference shares include the following: · The shares carry the right to a fixed cumulative preferential dividend of 6 per cent per annum, or such other increased dividend as shall be determined by special resolution, on the capital paid up on the shares, such dividend to be payable on the last days of March and September in each year. · The shares rank, both as regards dividend and return of capital, in priority to all other shares in the Company, but confer no further rights to participate in profits or assets. · The capital paid up on the preference shares is not liable to cancellation or reduction. · Preference shareholders have the same rights as ordinary shareholders as regards receiving notices, reports and balance sheets and attending general meetings. However, preference shareholders have no right to vote at general meetings except in respect of specified matters that directly affect the preference shareholders. In such exempted matters, the preference shareholders were to have the same voting rights as ordinary shareholders. · There can be no creation or issue of further preference shares, beyond the first 130,000, no repayment of preference capital and no alteration of the rights of preference shareholders, unless agreed to by a resolution of the holders of at least three-fourths of the issued preference shares at a special meeting called for that purpose. 45 Ernst & Young considered that, in the light of clause 45, the key characteristics of the preference shares are as follows: · They have a face value of $1 and are fully paid. · They attract a fixed preferential dividend of 6 per cent per annum, paid semi-annually in March and September of each year. · They are non-redeemable, in that a preference shareholder can realise the capital investment only by selling the preference shares or in a winding up. In the latter case, the preference shareholder would receive a maximum of $1 per share. 46 Ernst & Young considered that the preference shares could be characterised as being akin to a perpetual debt instrument, with no obligation to the Company to repay the capital subscribed, except on a winding up. Accordingly, the value of the preference shares was not directly dependent upon the value of the Company's assets unless it were to experience financial difficulties such that it was unable to make the preference share dividend payments or repay the capital upon a winding up. There was no evidence that any such circumstances existed. 47 Against that background, Ernst & Young adopted the methodology of capitalising future maintainable dividends, including an allowance for franking credits. Ernst & Young concluded, after conducting that exercise, that, depending upon the appropriate pre tax dividend yield adopted, the fair market value of each preference share was between $1.01 and $1.14. That gave a total fair market value of the issued preference shares of between $50,420 and $57,143, with a mid point of $54,000. 48 Ernst & Young then took into account the recent share trading history of the preference shares. Regional had purchased preference shares at $2 per share up to May 2004 and at $2.50 per share thereafter, giving an average price of $2.14 per share. Those prices are not higher than the price proposed under the compulsory acquisition notices. 49 The final step taken by Ernst & Young in the E&Y Report was to aggregate the value that had been determined for the 'ordinary equity' in the Company and the value that had been determined for the preference shares. Ernst & Young concluded that the value of the Company as a whole was between $55,871,000 and $55,878,000, giving a mid point of $55,874,000. 50 Because of an argument that a special value should be attributed to financial benefits that would be derived by Regional's increasing its interest to 100 percent of the preference shares, Ernst & Young considered such potential 'special value'. Ernst & Young concluded that, in two areas, there were possible benefits for the Company. 51 First, Ernst & Young observed that, in the event that the remainder of the preference shares are required by Regional, the Company would no longer be required to produce separate statutory accounts or be the subject of a separate audit opinion. Ernst & Young assumed that the value of that benefit could be quantified at approximately $100,000 per annum. 52 Secondly, Ernst & Young postulated other minor benefits to Regional in not having minority shareholders in the Company. Ernst & Young suggested that such benefits could include reduced administration costs and the avoidance of legal costs that might be required from time to time in relation to the outstanding holders of preference shares. While Ernst & Young considered that it was difficult to quantify such benefits, the assumption was made, for the purposes of the analysis, that such benefits could be in the order of $100,000. 53 Based on assumed savings of $200,000 per annum and the implied multiples referred to above, Ernst & Young concluded that such a special value could be considered to be in the order of $1,400,000. If the benefits of 100 per cent ownership by Regional are to be taken into account in determining the value of the Company as a whole, that would involve adding the sum of $1.4 million to the value otherwise determined. 54 Against the possibility that special value was relevant, Ernst & Young allocated the postulated special value of $1.4 million pro rata, based on the respective values of the ordinary shares and the preference shares, as determined above. On that basis, a special value of 3 cents would be allocated to each preference share. The result was a notional fair value per preference share, if special value is included, of between $1.03 and $1.17, giving a mid point of $1.10. Thus, Ernst & Young concluded that, even if special value is to be taken into account, the fair value for each preference share was still well below the price of $2.50 to be paid by Regional under the compulsory acquisition notices. Difficulties with the E&Y Report 55 In a sense, Ernst & Young approached the question from the wrong direction. That is to say, a valuation was carried out in relation to the two classes of shares and the two valuations were aggregated to arrive at the value of the Company as a whole. Ernst & Young did not directly consider the second step required by s 667C, although, by working backwards, the allocation of the value of the Company as a whole between the two classes of shares is simply a matter of examining the two valuations that were aggregated to produce the value of the Company as a whole. 56 The exercise conducted by Ernst & Young, in order to test the reasonableness of the value of 'the ordinary equity', is really the exercise that should have been conducted as the primary first step. Thus, according to the Commission's Practice Note 43, an appropriate methodology for valuing a company as a whole is to apply earnings multiples appropriate to the businesses or industries in which that company is engaged, to the estimated future maintainable earnings or cash flows of that company. That figure would then be added to the estimated realisable value of any surplus assets. In effect, Ernst & Young determined a value of the Company as a whole as a check of its valuation of 'the ordinary equity' in the Company. That value was the enterprise value of $68,489,000. 57 I do not consider that an addition for the special value identified in the E&Y Report is appropriate, having regard to the language of s 667C. As I have said, the first step requires the determination of the value, as at the date of the compulsory acquisition notice, of the Company as a whole, in the sense indicated above. It is impermissible, in determining fair value, to make any allowance for synergies to be achieved by the acquisition. It is equally impermissible in determining fair value to take into account special benefits deriving from full ownership (see Winpar Holdings Ltd v Austrim Nylex Ltd [2005] VSCA 211 at [35]). 58 I have taken some trouble to deal with Ernst & Young's opinion in some detail since, for the reasons I have indicated, I consider that it adopts an inappropriate approach. However, neither defendant suggested that such an inappropriate approach invalidated the process. That is to say, they accepted that it is a matter for the Court, on the basis of the evidence before it, which was limited to the Expert's Report, to determine whether Regional has established that $2.50 per preference share gives shareholders a fair value for the preference shares. FAIR VALUE FOR THE PREFERENCE SHARES 59 The defendants advanced arguments concerning the basis upon which the so-called special value should be allocated between ordinary shares and preference shares. The contention appears to be that Regional is a buyer of preference shares, and the present holders, apart from Regional, are sellers of preference shares. They suggested that it is necessary to allocate the special value of $1.4 million identified by Ernst & Young between Regional, on the one hand, and preference share holders, who include Regional, on the other hand. Something in the order of half and half was suggested as appropriate. The contention appears to be that that exercise should be undertaken as part of the allocation of the value of the Company as a whole between the two classes of shares. 60 However, the argument ignores the express terms of s 667C. The allocation between the two classes of shares is to be effected, taking into account the relative financial risk and voting and distribution rights of the classes. The Act does not require any other factor to be taken into account. Indeed, the presumed object of Part 6A(2), is to eliminate special value of the kind in question from the exercise that is to be undertaken in accordance with s 667C. Even if special value is to be taken into account, it is taken into account in the assessment of the value of the Company as a whole. There is no warrant in the Act for allocating special value of the kind in question between classes of shares on a basis different from the basis upon which the value of the Company as a whole is to be allocated. 61 The starting point is to determine the value of the Company as a whole. I consider that, on the material presently before me, the value of the Company as a whole can be postulated from the E&Y Report by applying appropriate multiples to the Company's EBITDA for 2005 and the Company's forecast EBITDA for 2006. According to the E&Y Report, multiples in the range 6.1 to 7.3 are reasonable. The application of those multiples to the EBITDA for 2005 and 2006 results in a value of the Company as a whole, in the relevant sense, in the vicinity of $68,489,000. That is the figure determined by Ernst & Young as the enterprise value. 62 The defendants point out that the E&Y Report makes no attempt to determine maintainable EBITDA of the Company for the future. Rather, Ernst & Young simply looked at the Company's EBITDA for 2005 and the Company's forecast EBITDA for 2006, which exceeded actual EBITDA for 2005. Nevertheless, it is clear enough that the basis on which Ernst & Young proceeded is that the actual EBITDA and the forecast EBITDA give a reasonable indication of maintainable EBITDA. No evidence was adduced by the defendants to suggest that maintainable EBITDA of the Company was significantly greater than that forecast for 2006. 63 The defendants also contended that it is not open to Regional to choose its own multiple, which should be determined by an expert. However, it is clear, from the exercise carried out by Ernst & Young in the E&Y Report, that Ernst & Young, who clearly are experts, formed the view that multiples between 7.3 and 6.1 were reasonable for the Company. Again, no evidence was adduced by the defendants to suggest any other EBITDA multiple. 64 The real issue in the proceeding is the way in which the second step should be undertaken. That step requires the value of the Company as a whole to be allocated between the ordinary shares and the preference shares, being the only two classes of shares in the Company. Certainly, no formula is suggested by s 667C(1)(b). Gepps complained that Mr Bright, who was an author of the E&Y Report and who gave evidence and was cross-examined, did not explain the rationale for allocating the value between the two classes of shares on the basis of the market value of the shares. Dr Elkington, in written submissions made after the hearing, contended that the value of the Company as a whole should be allocated 'in the way that the market would allocate it'. 65 The only evidence as to that question was that of Ernst & Young, in the E&Y Report, to the effect that the appropriate manner of allocation is by reference to the market value of the two classes of shares. Ernst & Young suggest that the appropriate basis for allocation is valuation determined in the manner explained in the E&Y Report. The defendants adduced no alternative evidence as to the manner of valuing the two classes of shares. On the evidence before the Court, there is no reason to depart from the basis adopted by Ernst & Young in the E&Y Report. 66 Section 667C requires that, in making the allocation, it is necessary to take into account the relative financial risk and the voting and distribution rights of the ordinary shares and the preference shares. In addition, it is necessary to take into account the price paid for the preference shares within the previous six months. 67 The ordinary shares bear a greater risk than the preference shares. That is to say, the preference shares confer the right to a return of paid up capital and a fixed dividend in priority to any distribution to the ordinary shares. However, to the extent that there is any excess profits or capital, that belongs entirely to the ordinary shareholders. The preference shareholders have a right to receive a dividend of 6 per cent per annum and no more, whereas the ordinary shareholders are entitled to distribution of all profits that are distributed. On a winding up, any surplus beyond the paid up capital of the preference shares and any outstanding fixed dividend on the preference shares goes entirely to the holders of the ordinary shares. The preference shareholders are not entitled to vote except in relation to matters that specifically concern their rights. 68 The right to receive accounts and to attend meetings and the right to vote in relation to matters that affect preference share rights directly are merely incidents of the right to receive the fixed dividend and to a right to return of the paid up capital on the winding up, in priority to any distribution or return to the holders of ordinary shares. While, under the constitution of the Company the preference capital cannot be repaid without the agreement of the holders of at least three-fourths of the preference shares, that right is expressly abrogated, in effect, by the operation of Part 6A.2 of the Act. That is to say, but for Part 6A.2, the holders of the preference shares would be entitled to continue to hold their shares in perpetuity, subject to the winding up of the Company and subject to agreement by the holders of three-fourths of the preference shares. 69 In the circumstances, I consider that it is appropriate to allocate the total value of the Company as a whole between the preference shares and the ordinary shares on the basis of their respective values, as determined by Ernst & Young. If the value of the Company as a whole is not to take account of the special value, the enterprise value of $68,489,000 would be the value of the Company as a whole, although it might be greater if the Company's maintainable EBITDA were greater than was impliedly assumed by Ernst & Young. Assuming, contrary to the view expressed above, that the special value should be brought into the calculation of the value of the Company as a whole, the sum of $1,400,000 would be added to the amount of $68,489,000, to give a value of the Company as a whole in the vicinity of $70 million. 70 Ernst & Young concluded that the respective market values of the ordinary share capital and the preference share capital were $55,821,000 and $54,000. On that basis, the allocation of $70 million would be $69,932,349 to the ordinary share capital and $67,651 to the preference share capital. If the latter figure is allocated among the 50,000 preference shares pro rata, a fair value for each preference share would be $1.35. CONCLUSION 71 While $1.35 is greater than the figure determined by Ernst & Young, it is significantly below the price proposed in the compulsory acquisition notice, of $2.50 for each preference share. The maintainable EBITDA would have to be significantly above the figures for 2005 and 2006 in order to result in an allocation of the value of the Company as a whole to the preference shares that would result in a figure that was close to $2.50. 72 It follows that the terms of the compulsory acquisition notice give a fair value for the preference shares. It is appropriate, therefore, to make the order asked by Regional, approving the acquisition of the preference shares under the compulsory acquisition notices. Regional should pay the costs of Dr Elkington and Gepps, as provided by s 664F(4). I certify that the preceding seventy-two (72) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 11 August 2006 Counsel for the Plaintiff: Mr M. Oakes SC Solicitors for the Plaintiff: Deacons The First Defendant appeared in person Counsel for the Second Defendant: Mr A.J. O'Brien Solicitors for the Second Defendant: Mr Tony Vella Date of Hearing: 27 July 2006 Date of Final Submissions: 3 August 2006 Date of Judgment: 11 August 2006