FEDERAL COURT OF AUSTRALIA Australian Health Management Group Limited, in the matter of Australian Health Management Group Limited (No 1) [2008] FCA 1868 AUSTRALIAN HEALTH MANAGEMENT GROUP LIMITED, IN THE MATTER OF AUSTRALIAN HEALTH MANAGEMENT GROUP LIMITED NSD 1534 OF 2008 EMMETT J 3 OCTOBER 2008 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 1534 OF 2008 IN THE MATTER OF AUSTRALIAN HEALTH MANAGEMENT GROUP LIMITED AUSTRALIAN HEALTH MANAGEMENT GROUP LIMITED Plaintiff JUDGE: EMMETT J DATE OF ORDER: 3 OCTOBER 2008 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 411(1) of the Corporations Act 2001 (Cth), the Plaintiff convene a meeting ("Scheme Meeting") of the Participating Members of the Plaintiff (as defined in the draft explanatory statement contained in Exhibit 1) for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between the Plaintiff and its Participating Members, a copy of which appears at Tab 6 of Exhibit BM1 in the proceeding. 2. The Scheme Meeting be held at the Sydney Masonic Centre, 66 Goulburn Street, Sydney, immediately after the general meeting of the Plaintiff's members to be held at 10.30 am on 8 December 2008. 3. Mr Christopher Doogan, or failing him, Mr Michael McMahon, be appointed chairman of the Scheme Meeting. 4. The chairman of the Scheme Meeting have power to adjourn the Scheme Meeting in his absolute discretion. The draft explanatory statement that is Exhibit 1 ("Explanatory Statement") be approved for distribution to the Participating Members of the Plaintiff substantially in the form of Exhibit 1. 5. The Plaintiff dispatch by pre-paid post to each Participating Member of the Plaintiff who is recorded in the Plaintiff's register of members as at 5.00 pm on 15 September 2008, and in the case of such a member of the Plaintiff whose registered address is outside Australia, by pre-paid air mail, or dispatch by air courier for overseas pre-paid post: (a) a document substantially in the form of the Explanatory Statement; (b) a letter from the Chairman of the Plaintiff, substantially in the form that appears at tab 9 of Exhibit BM1; (c) an allocation form, substantially in one of the forms that appear at tab 9 of Exhibit BM1; (d) a proxy form for the Scheme Meeting, substantially in the form that appears at tab 9 of Exhibit BM1; (e) a reply paid envelope pre-addressed to Link Market Services Ltd for return of the proxy; and (f) a payment authority, substantially in the form that appears at tab 9 of Exhibit BM1. 6. The Plaintiff dispatch the documents referred to in paragraphs (a) to (f) of Order 6 above on or before 4 November 2008 to each Prescribed Member (as that expression is defined in the Explanatory Statement). 7. The time by which Participating Members (or their attorneys) must return their proxy forms, or lodge their electronic proxy forms, for the Scheme Meeting be 10.30 am on 6 December 2008. 8. Voting at the Scheme Meeting be on a poll, except for procedural motions. 9. Other than reg 5.6.13, regs 5.6.12 to 5.6.36A of the Corporations Regulations 2001 (Cth) shall not apply to the Scheme Meeting. 10. Notice of the hearing of any application to approve the scheme of arrangement be published once in The Australian newspaper, by a notice substantially in the form of Annexure A to these orders, such notice to be published no later than 5 December 2008 and the Plaintiff otherwise be exempted from compliance with rule 3.4 of the Federal Court (Corporations) Rules 2000 (Cth). 11. The proceedings be stood over to 10 December 2008 at 9.00 am before Justice Emmett for the hearing of any application to approve the scheme of arrangement. 12. There be liberty to apply on one day's notice. 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 1534 OF 2008 IN THE MATTER OF AUSTRALIAN HEALTH MANAGEMENT GROUP LIMITED AUSTRALIAN HEALTH MANAGEMENT GROUP LIMITED Plaintiff JUDGE: EMMETT J DATE: 3 OCTOBER 2008 PLACE: SYDNEY REASONS FOR JUDGMENT 1 I have before me an application by Australian Health Management Group Limited (the Company) for orders under s 411 of the Corporations Act 2001 (Cth) (the Act) for the convening of a meeting of members of the Company for the purpose of considering and, if thought fit, agreeing to a scheme of arrangement proposed to be made between the Company and its members. The scheme is part of a broader proposal that involves the Company's demutualisation and subsequent merger with Medibank Private Limited (Medibank). It is proposed that a cash consideration will be paid by Medibank, which will be distributed under the proposed scheme to participating members in accordance with allocation rules set out in the proposed scheme. 2 The Company has been providing private health insurance products in Australia for over 35 years. It is currently the eighth largest private health insurer in Australia and has approximately 160,000 members. The Company is presently a public company limited by guarantee. Accordingly, it does not have shared capital or shareholders. The Company is registered under the Private Health Insurance Act 2007 (Cth) (the Private Health Insurance Act) as a not-for-profit private health insurer. 3 Under the Company's constitution, the only persons eligible to be members are principal policy holders (as defined under the Company's Health Benefits Fund Rules) who meet the criteria set from time to time by the Company's board. A principal policy holder is defined as the first named holder of a complying health insurance policy issued by the Company. 4 Under the proposed scheme, the membership of all participating members will be cancelled and the liability of each participating member as a guarantor on the winding up of the Company will also be cancelled. In return, participating members will receive cash payments in accordance with the allocation rules. 5 On 14 July 2008 the Company and Medibank entered into a merger implementation deed. On 15 September 2008 that deed was amended and the parties restated their obligations as amended. I shall refer to that restated and amended deed as the Merger Deed. 6 By the Merger Deed, the Company and Medibank agreed to take all necessary steps to implement the proposed scheme, subject to certain conditions precedent, some of which were capable of waiver. The general demutualisation and merger proposal is to be implemented by a number of steps as follows: 1. It is necessary for a special resolution to be passed by the requisite majority of qualified members to permit the Company to demutualise. That is a requirement of a provision of the Company's constitution, which contemplates a postal vote of qualified members. 2. The requisite majority of members of the Company will approve, at an extraordinary general meeting, special resolutions amending the Company's constitution to enable Medibank or its nominee to become a member of the Company and to change the Company, under Part 2B.7 of the Corporations Act., from a public company limited by guarantee to a proprietary company limited by shares. The special resolutions will also authorise the directors to issue shares to Medibank. 3. Participating members will be asked to approve or agree to a resolution in accordance with s 411 of the Corporations Act in relation to the proposed scheme. 4. The Court will be asked to approve the scheme pursuant to s 411 of the Corporations Act. 5. Medibank or its nominee will become a member of the Company after Court approval has been given but prior to the scheme's becoming effective. 6. At 11.59 pm on the day immediately preceding the date on which the Company's change of type becomes effective, the memberships of all participating members will be cancelled and their liability as guarantors will be cancelled, in consideration for which the scheme consideration, by that stage held in a trust account, will be available for application and distribution to participating members. 7. On the day following the implementation time, as defined, the Company will issue shares to Medibank and will direct the trustee of the trust account to distribute the scheme consideration to participating members in accordance with their entitlements. 8. Finally, the Company's registration under the Private Health Insurance Act will be converted from a not for-profit to a for-profit private health insurer. 7 Under the proposed scheme, a participating member is a person who was a member of the Company on 13 July 2008 or is a prescribed member, as defined, and, in each case remains a member as at 10.30 am on 6 December 2008. 8 On 13 July 2008 the directors of the Company resolved to establish a new criterion for membership, namely, that only persons who were principal policy holders on that day are entitled to become members, subject to the amendment of the constitution's to permit Medibank or its nominee to become a member. The cut off date of 13 July 2008, being the day before the first merger implementation deed was signed, was chosen to ensure that existing members were not disadvantaged through dilution of their entitlements under the allocation rules by non‑members taking out policies after announcement of the proposed demutualisation and merger. 9 The proposed scheme is subject to a number of conditions precedent, which are set out in the Merger Deed. The conditions include approval by the Private Health Insurance Administration Council of the conversion of the Company's registration from a not for-profit to a for-profit private health insurer. It will also be conditional upon the passing of the various resolutions by members or relevant categories of members. 10 The Company's constitution provides for the adoption by the board of postal ballot rules to apply to a postal ballot in relation to a resolution for the approval of demutualisation of the Company. The board have adopted postal ballot rules accordingly. If the demutualisation resolution is not carried, the Company will not proceed with the scheme and the Company would apply to the Court to seek an order cancelling the proposed meetings. It is expected the results of the postal ballot will be announced on 1 and 2 December 2008 on the Company's website and by publication in daily newspapers. 11 The allocation of the consideration of $367 million payable by Medibank is to be determined in accordance with allocation rules devised by the Company's actuary appointed under the Private Health Insurance Act. Entitlements to share in the consideration have been determined having regard to the type of policy held by a member on 13 July 2008, the scale of policy, being a single policy or a non-single policy, and the period of time that a member has held a policy. The scheme provides for a mechanism for review of entitlements if a participating member is not satisfied that he or she has been allocated consideration in accordance with the rules. 12 The obligations of Medibank under the proposals are to be secured by a deed poll to be executed by Medibank in favour of participating members. In any event, the position of participating members will be secured by the payment by Medibank of the cash consideration into a trust account prior to the cancellation of participating members' membership of the Company. 13 The directors of the Company have unanimously recommended that the participating members vote in favour of the scheme in the absence of a superior proposal. In addition, the Company has appointed Lonergan Edwards & Associates Limited (Lonergan Edwards) to assess the scheme and prepare a report, which will be included in the information memorandum to be sent to members. Lonergan Edwards have assessed the value of a 100% controlling interest in the Company at between $322 million and $364 million. Since the total merger consideration of $367 million is significantly higher than the upper-end of that range, Lonergan Edwards have concluded that the consideration is fair and reasonable. 14 In relation to the allocation rules and the scheme generally the Company's directors retained Mr Warrick Gard, the Company's appointed actuary, to prepare a report. Mr Gard reviewed the impact of the demutualisation and merger proposal on members' interests and concluded that: · the reasonable benefit expectations of members are unlikely to be materially adversely impacted by the proposal, · contribution rates are unlikely to be materially adversely impacted, and · the allocation rules represent a fair and reasonable basis upon which the financial benefit arising from the proposal will be distributed among participating members. 15 The directors of the Company also retained Finity Consulting Pty Limited (Finity Consulting), an independent firm of consulting actuaries, to review the appointed actuary's report. Finity Consulting agreed with Mr Gard's conclusions, including that the allocation rules represent a fair and reasonable basis upon which the financial benefit arising from the proposal will be distributed among participating members. 16 In addition, the Company proposes to include in the information memorandum to be sent to scheme participants advice from Ernst & Young ABC Pty Limited (Ernst & Young) addressing the tax implications of the demutualisation proposal and scheme. Ernst & Young in their report refer expressly to a Bill for an Act which has been passed by the Commonwealth Parliament and awaits royal assent. The effect of the proposed legislation is that any capital gain made under the scheme by participating members should not be subject to capital gains tax. In addition, the provisions of the proposed new law should ensure that no benefit received by a scheme participant will be treated as assessable income. 17 The Merger Deed contains exclusivity provisions described generally as "no shop" restrictions and a conditional "no talk" restriction. Under the Merger Deed and the proposed scheme the exclusivity provisions are capable of precise ascertainment and the "no talk" restriction is subject to an overriding obligation not to breach fiduciary duties imposed upon directors. There are also other qualifications on the "no talk" restriction. I do not consider that the restrictions are unreasonable. 18 The most recent accounts of the Company demonstrate that it has net assets in excess of $214 million. Theoretically, the cancellation of members' guarantees could be adverse to unsecured creditors, however the reduction of $160,000 is de minimis in terms of the net assets of the Company. It is therefore not a relevant consideration for the Court. 19 I have evidence before me that the factual information stated in the proposed information memorandum has been verified by appropriately qualified officers of the Company and of Medibank. The authors of the reports have also sworn that the opinions stated in the reports are opinions genuinely held by the authors. The evidence also shows that the authors are qualified to express those opinions. 20 The Australian Securities and Investments Commission (ASIC) has intimated that it does not currently propose to appear to make submissions or intervene to oppose the proposed scheme. That intimation is based on information hitherto provided to ASIC in the form of a draft information memorandum. I am satisfied that the effect of the scheme will be to ensure that there is no risk to the members of the Company that Medibank could acquire the equity of the Company without paying the consideration. 21 In the light of the opinions expressed by Lonergan Edwards, Mr Gard and Finity Consulting, I am satisfied that the scheme is one that the members of the Company properly informed by the information memorandum may approve. The scheme is one which the Court would be likely to approve on the assumption that it is also agreed to the participating members and on the assumption that there is no opposition to the Court's approval. Accordingly I propose to accede to the Company's application to convene a meeting of participating members. 22 There are some drafting details to be attended to in relation to the final form of the information memorandum. Those details have been the subject of exchange with senior counsel for the Company and for Medibank. Subject to those drafting changes' being made, I am satisfied that the proposed information memorandum is satisfactory to insure compliance with the provisions of the Act. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 15 December 2008 Counsel for the Plaintiff: Mr F Gleeson SC and Mr J Williams Solicitor for the Plaintiff: Jones Day Counsel for Medibank Private Limited: Mr MB Oakes SC Date of Hearing: 3 October 2008 Date of Judgment: 3 October 2008