FEDERAL COURT OF AUSTRALIA IOR Friendly Society Ltd ACN 087 648 940 v IOR Group Ltd ACN 124 030 253 [2007] FCA 970 Income Tax Assessment Act 1936 (Cth), Division 9AA IOR FRIENDLY SOCIETY LTD ACN 087 648 940 v IOR Group Ltd ACN 124 030 253 NSD756 OF 2007 EMMETT J 16 MAY 2007 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD756 OF 2007 BETWEEN: IOR FRIENDLY SOCIETY LTD ACN 087 648 940 Plaintiff AND: IOR GROUP LTD ACN 124 030 253 Defendant JUDGE: EMMETT J DATE OF ORDER: 16 MAY 2007 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Leave be granted to file in Court an Amended Originating Process initialled by Emmett J and placed with the papers. 2. Service of the Amended Originating Process be dispensed with. 3. Pursuant to section 411(1) of the Corporations Act 2001 (Cth) (the Act) the Plaintiff (IOR) convene separate meetings for the following classes of members of IOR, namely: (a) the member who is the trustee of the Verification Trust; (b) the member who is the trustee of the Overseas Members Trust; and (c) all members other than those referred to in (a) and (b) (collectively the 'Members'); for the purpose of considering and if thought fit, agreeing (with or without modification) to a scheme of arrangement proposed to be made between IOR and the Members (the Scheme), being the Scheme substantially in the form of the draft explanatory statement contained in the booklet, being Exhibit 1 (the Explanatory Memorandum). 4. The meeting referred to in 1(a) be held on 21 June 2007 at Crowne Plaza Norwest, 1 Columbia Crescent, Baulkham Hills, NSW at 10.00 am. 5. The meeting referred to in 1(b) be held on 21 June 2007 at Crowne Plaza Norwest, 1 Columbia Crescent, Baulkham Hills, NSW at 10.15 am. 6. The meeting referred to in 1(c) be held on 21 June 2007 at Crowne Plaza Norwest, 1 Columbia Crescent, Baulkham Hills, NSW at 10.30 am (collectively the 'Meetings'). 7. Ms Margaret Campbell, or failing her, Mr Graeme Purdie be chairperson of each of the Meetings. 8. The chairperson appointed to the Meetings has the power to adjourn the Meetings in his or her absolute discretion. 9. The Explanatory Memorandum be approved for distribution to the Members. 10. The Explanatory Memorandum to be despatched to each of the Members be in the form or to the effect of Exhibit 1 and may be posted by pre-paid post, and in the case of a member of IOR whose registered address is outside the country, by pre-paid post or despatched by air courier for overseas pre-paid post. 11. Regulations 5.6.12 and 5.6.14 to 5.6.36A of the Corporations Regulations shall not apply to the Meetings of Members. 12. IOR publish a Notice of Hearing of any application to approve the Scheme in the form of Annexure 'A' hereto no later than 22 June 2007 and IOR is relieved from compliance with Rule 3.4 of the Federal Court (Corporations) Rules 2000 to the extent necessary. 13. This proceeding be stood over to 2 July 2007 at 9.30 am before Justice Emmett for the hearing of any application to approve the Scheme. 14. There be liberty to restore on 2 days' notice. 15. These Orders be entered forthwith. 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 NSD756 OF 2007 BETWEEN: IOR FRIENDLY SOCIETY LTD ACN 087 648 940 Plaintiff AND: IOR Group Ltd ACN 124 030 253 Defendant JUDGE: EMMETT J DATE: 16 MAY 2007 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The plaintiff, IOR Friendly Society Limited (the Society), has applied to the Court for orders under the Corporations Act 2001 (Cth) (the Corporations Act) that the Society convene meetings of its members for the purposes of considering and, if thought fit, agreeing to a scheme of arrangement between the Society and its members. The object of the scheme is to demutualise the Society. 2 The Society's activities date back to 1861, when it was established by order of a United Kingdom organisation known as the Independent Order of Rechabites. In 1862 the Society was registered as the "Independent Order of Rechabites Friendly Society Victoria District No 82 Limited", under the then Victorian Friendly Societies Act of Victoria. The Society was originally established for the purpose of providing its members with: · sickness and funeral benefits; and · social activities, temperance education and scholarships through fraternal activities. That was followed by the establishment of other Friendly Societies in New South Wales, Western Australia and South Australia and Queensland, all of which provided benefit funds that undertook fraternal activities. 3 In the 1930s the various Friendly Societies expanded their activities to include medical and dispensary funds as well as offering their members life assurance products. In the 1950s, the medical and dispensary funds were replaced by newly established private health insurance funds. The activities of the Society were further expanded in 1982 by the formation of the Rechabite Community Villages Friendly Society Limited, established for the purposes of conducting retirement villages. 4 In 1999 the Society changed its name to its present name following a national amalgamation involving the transfer of the businesses of the Friendly Societies in other states. In May 2001 the Society established a wholly owned subsidiary known as IOR Community Care Pty Ltd for the purposes of owning and operating retirement villages. The Society and its subsidiaries presently employ 40 full-time and 210 part-time and casual staff under the direction of a managing director. Its main activities involve: · development and operation of retirement village complexes and aged care facilities; · funds management; · management and operation of benefit funds; and · investment in a mutual based pharmacy group. 5 As a result of changes that were introduced on 1 July 1999, the Society is now subject to the Corporations Act as well as the Life Insurance Act 1995 (Cth) (the Life Insurance Act). The Society is also regulated by the Australian Prudential Regulation Authority as a result of becoming a registered life insurance company under the Life Insurance Act with effect from 1 July 1999. The directors have concluded that it is in the best interests of the members of the Society as a whole that the Society demutualise and become a company limited by shares, with greater capacity and flexibility to respond to opportunities and the ability to provide capital growth and dividend income for the benefit of its members. 6 The Society has accumulated retained profits in its management fund of approximately $23.3 million as at 31 December 2006. However, the current structure of the Society does not permit the distribution of any of those retained profits to its members. Under the Society's constitution, individual members may leave the Society as their policies mature without any tangible recognition of their contribution, other than the benefits received from their policies. The proposal is intended to make the accumulated and retained profits accessible to members. 7 The Society is a company limited by shares and guarantee, although no shares have been issued. Generally, under the current constitution, a person becomes a member through ownership of a Benefit Fund Policy, although it is possible to apply for membership without owning a policy. Under the current constitution, members are entitled to receive notice of any general meeting of the Society and to attend and vote at general meetings. They are entitled to receive copies of reports required to be provided to the members by law. On a winding up, in the event of a deficiency, the members are required to contribute a maximum of $2 to the property of the Society for the payment of existing debts and liabilities of the Society, and the costs of winding up. However, members may participate in any surplus in the Society at the time of winding up, subject to the requirements of the Life Insurance Act and the Corporations Act. Members have no other entitlement to receive dividends or to assign membership to another person in order to realise the value of accumulated retained profits. 8 On 30 April 2007, the Society entered into an Implementation Deed with IOR Group Limited (the Holding Company). The Holding Company is a public company limited by shares. It presently has two issued fully paid shares each of which is held by a partner of the Society's solicitors, Minter Ellison. By the Implementation Deed, the Holding Company consented, in writing, to become a member of the Society and subscribed for a single share in the capital of the Society at the price of $1. By the Implementation Deed, the Society agrees that it will issue and allot that share to the Holding Company at the appropriate time in the course of the implementation of the proposed scheme. 9 In addition, the Holding Company consented to becoming a member of the Society, effective from the Implementation Date, which is defined as 1 August 2007, in respect of 55 million shares. The Society agreed that it would, on that date, issue and allot to the Holding Company 55 million shares in its capital. Under clause 5 of the Implementation Deed, the Society agreed to transfer to the Holding Company the undertaking of the Society and its assets and its liabilities, with the exception of its statutory funds under the Life Insurance Act and an identified bank account. The Holding Company agreed to accept the transfer of those assets. The assets are described as the "Management Fund". As from the Implementation Date, the Holding Company will indemnify the Society against all liabilities of the Society in respect of the Management Fund. 10 By clause 6 of the Implementation Deed, the Holding Company agreed to issue and allot shares to persons entitled under the Share Allocation Rules as described in the proposed Explanatory Memorandum. By clause 7, the Society undertook to use its best endeavours to ensure that the scheme is implemented in a timely manner in accordance with the Implementation Deed. 11 On 28 March 2007, a deed of trust was entered into under which the trustee, IOR (FTM) Pty Limited, agreed to deal with shares allotted to it in accordance with the regime there specified. The regime involves steps being taken to identify unverified members. To the extent that shares remain after all steps have been taken and there are still unverified members, the shares are to be sold and the proceeds distributed in the manner provided. A similar regime has been established by trust deed executed on 29 March 2007 by Income Recipient Pty Limited, as trustee in respect of overseas members' shares. An unverified member is a member who is not or has not been identified by the Society as at the cut-off date of 11 April 2007. Overseas members are those who, as at the cut-off date, have a registered address outside Australia. 12 I have raised with senior counsel for the Society the question of the possible application of laws as to remoteness of vesting in relation to the two trusts. It may be that an amendment will be needed to ensure that there is no possible invalidity of the trusts in that regard. It is not something of vital significance at this stage, so long as, before any shares are issued to the trustees, it is clear that there is no possibility of invalidity of the trust by reason of remoteness of vesting. 13 On 30 April 2007, the Holding Company executed a deed poll whereby it covenanted, for the benefit of any member of the Society or eligible employee as defined, to execute all documents and do all the acts and things that are necessary, desirable, incidental to or connected with the full and effective implementation and performance of its obligations in connection with the proposed scheme. 14 Clause 3.2 of the proposed scheme specifies the steps that will be taken to implement it as follows: (a) the Society will issue 55 million shares in its capital to the Holding Company in accordance with the Implementation Deed; (b) the present members of the Society will cease to be members of the Society; (c) the liability of each member of the Society to contribute to its capital on winding up will be extinguished; (d) each member of the Society will be taken to have consented to be a member of the Holding Company; (e) the Society will transfer and procure that the Holding Company will accept the transfer of the Management Fund, and must procure that the bank account that remains with the Society has a credit balance of not less than $2 million; (f) the Society will procure that the Holding Company issue shares to each member or to the trustees of the trusts in accordance with the Implementation Deed and the Share Allocation Rules specified in the Explanatory Memorandum to be sent to members; and (g) the Society will procure that the Holding Company issue and allot to eligible employees the number of shares allocated to them in accordance with the Share Allocation Rules. 15 The Share Allocation Rules are set out in Section 8 of the proposed Explanatory Memorandum. 2,500 shares will be allocated to each member of the Society, other than the trustees of the Trusts. In addition, shares will be allocated to members in respect of policies held as follows: (i) 1000 shares for each benefit fund in which a member holds one or more policies. (ii) A further allocation in respect of each policy held by a member calculated in accordance with a formula specified in the Share Allocation Rules. The formula involves the following elements: · Fund percentage, being a weighting to reflect the extent to which the different benefit funds in which policies have been written have contributed to the value of the Management Fund. · Policy duration, being the number of years equal to the number of years for which the policy has been in force. · Policy value, being an amount calculated by reference to the account balances of the policies at relevant dates. · A scaling factor, to recognise the rate of contribution of polices to the value of the Society, depending upon the policy size. 16 In addition, 1000 shares will be allocated to each Eligible Employee, being an employee as of 21 June 2007, who was employed prior to 1 July 2006, subject to some qualifications. An additional 500 shares will be allocated to each Eligible Employee who commenced service with the Society or its subsidiaries prior to 1 July 2002. Allocations of shares are also to be made to the managing director and to other current directors of the Society. 17 The shares allocated to members, eligible employees and directors will be issued at the implementation date. Provision is made in the trusts for unverified members and for overseas members. 18 It is intended that, in due course, the shares in the Holding Company will be listed for quotation on Australian Securities Exchange Limited (ASX). Many of the members of the Society are elderly and the proposed explanatory memorandum contains information concerning social security consequences of being allotted shares in a public company. The Explanatory Memorandum also contains a summary of the tax implications of the proposal. The proposal has been formulated in order to satisfy certain requirements of the Income Tax Assessment Act 1936 (Cth). Division 9AA of that Act covers demutualisation of life insurance companies and provides for certain methods of demutualisation. 19 The Society has chosen demutualisation method 3, which is colloquially referred to as the "top hat model". That is to say, it involves forming a new holding company to acquire the mutual organisation in exchange for the issue of shares in the new holding company to members of the organisation. That is the model that I have briefly described. 20 Mr Bruce Watson is the Society's appointed actuary. He has provided a report to be included in the Explanatory Memorandum stating his opinion that the Share Allocation Rules provide for a fair allocation of the value of the Society, excluding its statutory funds, to members in respect of their membership rights, while maintaining the security of policy holders' entitlements. 21 In addition, the Society retained Ernst and Young ABC Pty Limited (Ernst & Young), a firm of consulting actuaries, to prepare an independent report in relation to the proposed demutualisation. The report of Ernst & Young is to be included the Explanatory Memorandum. Ernst & Young were engaged to provide an independent assessment and report in respect of four areas of the proposed demutualisation. 22 The first area is the fairness and reasonableness of the share allocation basis in exchange for membership rights that would be foregone should the restructure proceed. Ernst & Young consider the proposal involves a fair and reasonable exchange for membership rights. While there was a range of possible allocation methodologies that could have been adopted, the report indicates a belief that the basis chosen represents a fair and reasonable allocation in respect of membership rights foregone, should the proposal succeed. 23 The second area is the fairness and reasonableness of the proposed share allocation basis in respect of employees and directors relative to the allocation basis for members. Ernst & Young consider that, having regard to the very small allocation overall compared with that given to members, the proposal allocation to employees does not unduly disadvantage members and does not appear unreasonable. 24 The third area is whether the proposal would have an adverse impact on the reasonable benefit expectations of the policy holders under the policies issued by the Society. Ernst & Young believe that the proposal will not have an adverse impact on the reasonable benefit expectations of the policy holders under policies issued by the Society. That assessment is closely linked to the analysis of the security of the policy benefits, which is dealt with in the fourth area. 25 The fourth area is whether the security of policy benefits would be adversely impacted by the proposal, and if so, whether that is material or whether there is nevertheless expected to be adequate security for policy benefits. Ernst & Young consider that, as the operation of the benefit funds will remain unchanged following the restructure, the security of the policy benefits within the benefit funds should not be adversely impacted by the proposal. They also consider the proposed transaction will not weaken the Management Fund to a point that it would impinge upon the security of policy benefits. 26 In addition, the Society has requested KPMG Corporate Finance (Aust) Pty Ltd (KPMG) to provide an independent report for inclusion in the Explanatory Memorandum. KPMG have provided a detailed analysis and report on the financial position of the Society. They have expressed their opinion that the proposal is in the best interests of the members of the Society. They say that the financial position of members as a whole would appear to be enhanced. They also say, that the demutualisation process provides greater advantages to the Society and its members compared with the alternatives, including remaining as a mutual. They conclude that, based on the analysis reviewed by them, the proposed transaction delivers the highest value to members compared with any of the potential alternatives. They also express the view that a share in the holding company would trade, if and when the holding company is listed on ASX, in the range of $1.10 to $1.30 per share. In forming that opinion they considered they advantages of the proposal and the disadvantages and the implications to the members of the Society should the demutualisation not proceed. Each of those factors is summarised in their report. 27 Australian Securities and Investment Commission (the Commission) has been notified of this application and has been provided with a copy of the Explanatory Memorandum. The Commission does not wish to be heard in opposition to the application to convene a meeting of members. 28 I have considered the Explanatory Memorandum and it appears to me to be acceptable. In all of the circumstances, I am satisfied that the proposed scheme is one that the members, acting reasonably and properly informed, would be likely to agree to. I also consider that the scheme is one that the Court would be likely to approve, assuming it is agreed to by the requisite majority of members and is otherwise unopposed. Accordingly, I propose to make orders as asked by the Society. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 16 May 2007 Counsel for the Plaintiff: Mr M Oakes SC Solicitor for the Plaintiff: Minter Ellison The Defendant did not appear. Date of Hearing: 16 May 2007 Date of Judgment: 16 May 2007