Reported Decision : (2000) 34 ACSR 737 (2000) 18 ACLC 665 New South Wales Supreme Court CITATION : Winpar Holdings Limited v Goldfields Kalgoorlie Limited [2000] NSWSC 728 revised - 26/07/2000 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3125/00 HEARING DATE(S) : 14/07/00, 17/07/00 JUDGMENT DATE : 25 July 2000 In the matter of Goldfields Kalgoorlie Limited (ACN 009 712 092) and the Corporations Law PARTIES : Winpar Holdings Limited (ACN 003 035 523) (Plaintiff) Goldfields Kalgoorlie Limited (ACN 009 712 092) (Defendant) JUDGMENT OF : Santow J S Blanks (Sol.) (Plaintiff) COUNSEL : M Oakes, SC (Defendant) K Cuneo (ASIC) (Amicus Curiae) SOLICITORS : Stephen Blanks & Associates (Plaintiff) Allen Allen & Hemsley (Defendant) CATCHWORDS : CORPORATIONS — Selective reduction of capital having same economic effect as takeover to eliminate minority — Is there need for entirely separate meeting of holders of shares to be cancelled — Need for scheme of arrangement and relevance if at all of Gambotto principles — meaning of "fair and reasonable" to shareholders "as a whole" in s256B of Corporations Law — Whether any special value from acquiring 100% should have been allocated exclusively to the minority or other than pro rata — Is there guidance from s667C of the Corporations Law — Valuation of gold mining company — Treatment of hedge book — Economic upside — Adequacy of disclosure — Any "dealing" in shares when shares cancelled — Relevance if any of divergent commercial interest of largest minority shareholder with preponderance of minority votes — Stock market price not determinative of what is fair and reasonable in particular circumstances of trading. Companies (NSW) Code 1981, s123 LEGISLATION CITED : Company Law Review Act 1998 Corporations Law Part 2J.1, s256A, s256B and s256C, s411, s663B, s664C, s665B, s667A, s667C of Ch 6A , s701, s1322, s1324 Trade Practices Act 1974 (Cth) s52 Re Advance Bank Australia Ltd (1996-97) 22 ACSR 513 Re Albert Street Properties Ltd (1997) 23 ACSR 318 Boland v Yates Property Corporation Pty Ltd (2000) 74 ALJR 209 Catto v Ampol Ltd (1989) 7 ACLC 717 Commonwealth v Milledge (1953) 90 CLR 157 Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 CASES CITED : David Grant & Co Pty Ltd v Westpac Banking Corporation (HC) (1995) 13 ACLC 1572, 18 ACSR 225 Gambotto v W C P Limited and Anor [1994-1995] 180 CLR 432 Holt v Cox (1994-1995) 15 ACSR 313 Melcann Ltd v Super John Pty Ltd (1995) 13 ACLC 92 Nicron Resources Ltd v Catto (1992) 8 ACSR 219 Re Shine Fisheries Ltd (1994) 12 ACSR 627 Thornett v Federal Commissioner of Taxation (1938) 59 CLR 787 Re Tiger Investment Company Limited (2000) 33 ACSR 437 DECISION : Injunction denied. REVISED — 26 July, 2000 IN THE SUPREME COURT OF NEW SOUTH WALES IN EQUITY SANTOW J No. 3125/00 In the matter of GOLDFIELDS KALGOORLIE LIMITED (ACN 009 712 092) and the Corporations Law WINPAR HOLDINGS LIMITED (ACN 003 035 523) Plaintiff GOLDFIELDS KALGOORLIE LIMITED (ACN 009 712 092) Defendant JUDGMENT 25 July 2000 INTRODUCTION 1 This is the first challenge to a minority takeover by selective reduction of capital, since court approval ceased two years ago to be a requirement for reductions of capital, selective or otherwise. Court approval for reductions cancelling minority capital used to be a trade off for a much lower acceptance requirement for compulsory acquisition so achieved. But, as emerges, the court, at the behest of an aggrieved shareholder, still retains a supervisory jurisdiction. So the trade off partially remains. 2 The Plaintiff, Winpar Holdings Limited, ("Winpar") challenges the acquisition of its minority shareholding in Goldfields Kalgoorlie Limited ("GKL") pursuant to a selective reduction of capital. It does so on various grounds. They are essentially grounds going to the legal efficacy of the steps taken. Winpar brings its challenge at the conclusion of those corporate steps but before payment has been effected. It does so by way of an injunction pursuant to s1324 of the Corporations Law on the ground that the conduct or proposed conduct of GKL would contravene ss256B and C of the Corporations Law under which the selective reduction of capital is sought to be effected. However, that challenge, with its associated grounds relating to lack of sufficient disclosure of material information, takes place against the background of a radical series of changes in 1998 affecting share capital reductions under the Corporations Law, which have eliminated the need for court approval. But first some history. 3 Small minority shareholdings in public companies have over the years been eliminated in a variety of ways. One of these ways was what was called a selective reduction of capital. It was particularly convenient for bidders or those seeking to eliminate minorities, because there was and remains no requirement for an affirmative vote of a majority of shareholders. Moreover the percentage of votes required was merely 75% of the total votes cast at the meeting. Contrast a conventional takeover leading to compulsory acquisition, where there is the much higher hurdle of acceptance from 90% of the outstanding shares (and 75% in number of shareholders if the bidder starts with 10% or more). These thresholds in s701 of the Corporations Law have since been slightly modified in favour of the acquirer by the so-called CLERP Act amendments introduced in 1999; see Hughes "Compulsory Acquisition of Minority Shareholders' Interests — Still a Tyranny of the Majority" (2000) 18 C & SLJ 197 at 206-7. 4 However, until 1998, reductions of capital, selective or otherwise, required not only the affirmative vote of three-quarters of the total shareholder votes cast at the meeting but also court approval. That latter safeguard was primarily directed at the interest of creditors. But because of the prevalence of selective reductions of capital to effect takeovers, it necessarily had to accommodate shareholder interests as well. In particular there had to be adequate safeguards against unfair expropriation for the minority shareholder. Those safeguards were derived by analogy from takeover law and the law with respect to shareholder scheme of arrangements, where the self-same issues of fairness to minority shareholders arose; see generally Bryson J in Nicron Resources Ltd v Catto (1992) 8 ACSR 219 at 234-5. That result was reinforced by disclosure practice notes issued by ASIC, which recognised the functional equivalence of takeovers for minorities and selective reductions of capital. They now require modification in light of the recent statutory changes of Pt 2J.1. 5 By the reforms effected under the Company Law Review Act 1998 statute finally caught up with the commercial world. It was recognised for the first time that there is a distinct functional difference between a conventional return of capital on an equal basis and a selective reduction of capital. The latter, despite use of the term "reduction", really amounts to takeover by another name; cancelling for cash or shares, all the external shareholdings save that of the intended new corporate holding company. However, if minority shareholdings were to be so cancelled, the new Part 2J.1 required there be not only a special resolution of all shareholders save those who were to receive consideration as part of the reduction but also a special resolution passed at a meeting of shareholders whose shares are to be cancelled; see s256C of the Corporations Law. The new s256B imposed only three conditions for a reduction of capital under Part 2J.1 when eliminating the need for court approval but retaining the capacity for court challenge. The first of these conditions, that creditors not be materially prejudiced, is not in issue here. However, what is in issue is whether the necessary special resolutions have been passed in accordance with the requirements of s256C of the Corporations Law and whether, as required by s256B(1)(a), the reduction "is fair and reasonable to the company's shareholders as a whole". 6 There is a further issue as to whether such a selective capital reduction even if complying with the necessary safeguards, can in law be effected without a scheme of arrangement. Then, even if it can, whether it falls to be appraised for fairness under the non-statutory principles in Gambotto v W C P Limited and Anor [1994-1995] 180 CLR 432 ("the Gambotto principles") and if so, does it fail that test. 7 The present challenge to the selective reduction of capital not only contends that its terms are not fair and reasonable but also that there has been a failure to provide "all information known to the company that is material to the decision on how to vote on the resolution" pursuant to s256C(4). And more generally, whether there has been misleading or deceptive conduct within s995 of the Corporations Law or analogously under s52 of the Trade Practices Act 1974 (Cth). The latter comes into play, where there is no "dealing in securities". Cancellation of a share appears not to constitute a "dealing" in a share but rather its extinction. However, the outcome under either regime is likely to be the same. NARRATIVE OF AGREED FACTS 8 The relevant facts as agreed between the parties are set out below. 9 The Plaintiff, Winpar Holdings Limited, holds 12,373 ordinary shares in the Defendant, Goldfields Kalgoorlie Limited. 10 The Defendant is a publicly listed company. The Defendant's business involves gold mining and acquiring and exploring for gold resources. 11 At present there are 244,382,133 ordinary shares in the Defendant on issue and those shares are held as follows: · Goldfields Group* 87.7% · QBE Group 11.4% · Winpar (the Plaintiff) 0.005% · Other minority shareholders 0.895% (* Goldfields Limited and Renaissance Mining Pty Limited). 12 In this narrative: (a) Goldfields Limited and its subsidiary Renaissance Mining Pty Limited (both part of the Goldfields Group) will be referred to as the "Goldfields Shareholders"; (b) the other shareholders in the Defendant will be referred to as the "Non-Goldfields Shareholders"; (c) all shareholders in the Defendant will be referred to as the "Shareholders". 13 The Defendant held an Extraordinary General Meeting of Shareholders on 28 June 2000 to consider a proposal for a selective reduction of its capital (under s256B of the Corporations Law). The proposal was that all shares held by Non-Goldfields Shareholders be cancelled and that the Non-Goldfields Shareholders be paid consideration of 55 cents per share held. Following implementation of the proposal the Defendant would be a wholly owned subsidiary of Goldfields Limited (also a publicly listed company). 14 A notice of Extraordinary General Meeting of Shareholders to consider the proposed selective capital reduction was distributed. Accompanying the notice were the following documents: · Explanatory Memorandum; · Independent Expert's Report prepared by PricewaterhouseCoopers (PWC) dated 15 May 2000; · Technical Report prepared by Gilfillan Associates Pty Limited dated May 2000; · Independent Tenement Standing Report prepared by Tenement Administration Services dated 10 May 2000; and · Lawyers' Report on material joint venture agreements prepared by Allen Allen & Hemsley dated 10 May 2000. 15 PWC concluded that: (a) the value of each share in the Defendant was within the range of 45.7 cents to 46.9 cents; (b) the proposed selective capital reduction at a price of 55 cents per share was fair and reasonable [see paragraph 14 of the PWC report]. 16 The following persons were, among others, present at the Extraordinary General Meeting of Shareholders held on 28 June 2000: (a) Mr R F E Warburton (Chairman of Directors) (holding proxies for 28,278,296 shares) (b) Dr P W Cassidy (Director) (c) Mr J B Studdy (Director) (d) Mr N F Lenehan (Director) (e) two shareholders (representing 6,356 shares) (being Dr G B Elkington and a Mr Catto) (f) four other persons (holding proxies for 214,363,357 shares) (including a Mr Fielding as corporate representative of the Plaintiff) (g) a representative of QBE. 17 (See Exhibit DX1 at p1 and T2.26-58.) 18 The holders of proxies for the Goldfields Shareholders were present during the entire meeting, the Chairman having asked for objections to that course and receiving none immediately prior to consideration of the minority shareholders special resolution (see Exhibit DX1 at p1). 19 Two resolutions were put at the Extraordinary General Meeting of Shareholders held on 28 June 2000: (a) Non-Goldfields Shareholders were asked to consider, and if thought fit, pass the following resolution as a special resolution: "THAT subject to: (a) the lodgement of this special resolution with the Australian Securities and Investments Commission; and (b) the resolution specified as item 2 in this Notice of Meeting being separately passed as a special resolution by Goldfields Kalgoorlie Limited shareholders not receiving any consideration as part of the Capital Reduction, the issued share capital be reduced, pursuant to section 256B of the Corporations Law, by cancelling all ordinary shares of the Company on issue held by Shareholders other than Goldfields Limited and its subsidiary, and in consideration for the cancellation of such ordinary shares the Company will pay an amount of $0.55 for each such ordinary share to the registered holders of such cancelled shares, with the total amount so paid being debited to the Share Capital Account of the Company. (b) The Goldfields Shareholders were asked to consider, and if thought fit, pass the following resolution as a special resolution: "THAT subject to: (a) the lodgement of this special resolution with the Australian Securities and Investments Commission; and (b) the resolution specified as item 1 in this Notice of Meeting being separately passed as a special resolution by Goldfields Kalgoorlie Limited shareholders other than Goldfields Limited and its subsidiaries, the issued share capital be reduced, pursuant to section 256B of the Corporations Law, by cancelling all ordinary shares of the Company on issue held by Shareholders other than Goldfields Limited and its subsidiaries, and in consideration for the cancellation of such ordinary shares the Company will pay an amount of $0.55 for each such ordinary share to the registered holders of such cancelled shares, with the total amount so paid being debited to the Share Capital Account of the Company. 20 Each of the resolutions set out in paragraph 19 was passed by more than the majority required under the Corporations Law (see Exhibit DX1 at p2). Further, more than half of the proxies by number as opposed to value voted in favour of the resolution set out in paragraph 19(a) (ie the resolution for approval of the proposal by the Non-Goldfields shareholders) (see T1.39-41). LEGAL ISSUES 21 With necessary amendment, it is convenient that I set out the issues as formulated by the Plaintiff. The parties have proceeded on the basis that these sufficiently identify the legal issues. 22 Question 1 — Whether, in the case of a selective reduction of capital involving the cancellation of shares, s256C of the Corporations Law requires the convening of a general meeting of the company and a separate meeting of the shareholders whose shares are to be cancelled, at which only those shareholders whose shares are to be cancelled are present? If so, whether the convening of a single extraordinary general meeting of GKL was a "procedural" irregularity cured by s.1322(2), or an irregularity in respect of which the Court should make an order under s.1324(a), pursuant to the Defendant's cross-claim? 23 Question 2 — Whether this takeover sought to be effected by a selective capital reduction pursuant to Pt 2J.1 of the Corporations Law, but not associated with a full scheme of arrangement, falls foul of the decision in Gambotto? In particular: (a) can such an acquisition, made for cash, be effected without a scheme of arrangement under s411 of the Corporations Law and, if so (b) does such an acquisition not only have to satisfy the requirements of Pt 2J.1, including that it be within s256B(1)(a) "fair and reasonable to the company's shareholders as a whole" but also fair, within the ambit of the Gambotto principles, and if so (c) whether the present procedures and their substantive outcome would not satisfy the Gambotto principles of procedural and substantive fairness? 24 Question 3 — Whether this selective capital reduction has not been shown by GKL to be "fair and reasonable to shareholders as a whole", by reason of (a) the consideration received by the shareholders whose shares are being cancelled being (according to the Plaintiff) less than the value received by the continuing shareholder, or (b) by reason of the 'special benefits" to be received by Goldfields Limited in question 4 below being shared pro rata between GKL and the minority, rather than allocated wholly to the minority? 25 Question 4 — Whether the value of the special benefits to be received by Goldfields Limited (parent of GKL) as a result of the implementation of the selective capital reduction, have been appropriately identified, disclosed and taken into account, being: (a) the elimination of cost duplication arising from the existence of two listed companies; and (b) economic upside potential which may arise from an increase in the gold price in the future and rationalisation of operations through acquisitions which have arisen and are expected to arise from time to time? In particular, does the expert valuation report contained in the explanatory memorandum accompanying the proposal fail to satisfy the statutory requirements for disclosure and the avoidance of misleading or deceptive conduct, by reason of the following: (c) the way the value of the special benefit arising from the elimination of cost duplication has been dealt with; (d) the way the possibility of higher production resulting from a higher gold price has been taken into account; (e) the appropriateness or otherwise of the method of valuation used in respect of the hedge book (to the extent it has the effect of making the valuation insensitive to variations in the gold price) for valuing the potential benefit which may arise from an increase in the gold price in the future? 26 Question 5 — Whether shareholders have been provided with a statement satisfying the statutory requirements for disclosure and the avoidance of misleading or deceptive conduct, in particular in relation to: (a) the value attributed to the possibility of the company's gold mine and milling facility at Paddington continuing in operation beyond 2002; (b) the potential acquisition of an interest in a gold deposit known as White Foil, which was announced after the date of the expert's report but before the date of the shareholders' meeting; (c) the variable factors which influence the valuation; (d) the valuation method used in relation to the company's gold mines at Kundana and Paddington being such as to enable another expert to replicate the procedure? 27 Question 6 — Whether the Court can conclude that the selective capital reduction is "fair and reasonable to shareholders as a whole" where: (a) in a case where a single shareholder (QBE) can determine the outcome of the vote on the selective capital reduction, that shareholder's decision is formed as a result of, or influenced by, a general corporate strategy to reduce its exposure to the Australian market; (b) the consideration for the reduction is at a substantial discount to the long term average weighted stock market price for the shares being cancelled? RESOLUTION OF LEGAL ISSUES Question 1 28 Whether, in the case of a selective reduction of capital involving the cancellation of shares, s256C of the Corporations Law requires the convening of a general meeting of the company and a separate meeting of the shareholders whose shares are to be cancelled, at which only those shareholders whose shares are to be cancelled are present? If so, whether the convening of a single extraordinary general meeting of GKL was a "procedural" irregularity cured by s.1322(2), or an irregularity in respect of which the Court should make an order under s.1324(a), pursuant to the Defendant's cross-claim? 29 Section 256C(2) is in the following terms: "(2) If the reduction is a selective reduction, it must be approved by either: (a) a special resolution passed at a general meeting of the company, with no votes being cast in favour of the resolution by any person who is to receive consideration as part of the reduction or whose liability to pay amounts unpaid on shares is to be reduced or by their associates; or (b) a resolution agreed to, at a general meeting, by all ordinary shareholders. If the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled." 30 Winpar's contention is that the meeting for the second resolution referred to above, namely the "special resolution passed at a meeting of the shareholders whose shares are to be cancelled" fails to satisfy that statutory requirement. This is said to be because s256C(2), by its terms or necessary implication, precludes the presence at that meeting of any persons other than such shareholders. As elaborated in the agreed narrative of facts, at the meeting at which the cancellation resolution was passed, were present not only shareholders whose shares were to be cancelled but also other persons. These included the holders of proxies for the Goldfield's Shareholders as well as various directors of GKL. The Chairman asked for objections to the holders of proxies for the Goldfield's Shareholders being present during the entire meeting. He received none, not even from the three shareholders associated with the present Plaintiff, namely Dr Elkington, Mr Catto and Mr Fielding. There is no evidence that the shareholders whose shares were to be cancelled were in any way intimidated or otherwise influenced in exercising their votes in the way they did by that extra presence or the identity of the chairman, who was from Goldfields. 31 Mr Michael Greig, the partner of Allen Allen & Hemsley who gave advice to GKL, sets out in an affidavit of 13 July 2000 the reasons why he formed the view that it was not necessary for GKL "to convene a meeting of Minority Shareholders which was entirely separate from any other business required to be approved by its shareholders". 32 Mr Greig notes that persons present included lawyers, journalists and the Goldfield's voting representative. He points to the artificiality that would otherwise be entailed in closing the meeting which approves by special resolution the reduction of capital in order to have an entirely separate meeting of the Minority Shareholders at which any outsiders were excluded. He was concerned at causing confusion by sending minority shareholders what would have been two notices for two entirely separate meetings. 33 Finally, he points to the bare statutory words "passed at a meeting of the shareholders whose shares are to be cancelled". These he said showed a lack of any legislative intention for two entirely separate meetings for resolutions in practice likely to be interdependent and essentially identical. 34 To all of this the Plaintiff contends that having a separate meeting of those whose shares are to be cancelled excluding any outsiders is no mere formality. It "can be seen as part of the trade-off for capital reductions being taken outside of the net of Court appraisal, and is not a mere technicality". In particular, the absence of GKL or its parent was a necessary protection to ensure that an entity with a materially different interest in the transaction should not be in a position to influence the outcome of the vote. 35 ASIC, which appeared as an amicus, saw no basis for objection in the events that occurred. ASIC cites the Explanatory Memorandum of the Company Law Review Bill 1997 which states that s256C(2) was included as a "procedure to protect minority shareholders against their shares being cancelled under the guise of a capital reduction. In addition to the other shareholder approval requirements, a reduction of capital that involves the cancellation of shares will require approval by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled." (at para 12.18) 36 Thus ASIC characterised the protection as one which prevents the will of the minority being overborne by the majority on a resolution to cancel the minority shares. 37 Clearly there is no suggestion that the outsiders present at the meeting influenced the vote. It was put by bare assertion that the GKL Chairman who chaired the meeting would have influenced shareholders as compared say to QBE providing the chairman. But given that QBE was part of the minority shareholders' group which was voting for the resolution, it is hard to see how that would have helped. 38 The supposed significance of the GKL Chairman needs to be put in proper perspective. The GKL Chairman held a directed proxy from QBE entitling him to be present at the meeting in circumstances where all but 7,489 of the total votes of 28,278,296 cast were directed votes. There is no evidence that QBE would have accepted nomination as chairman or have been a more impartial one. Finally, Article 57 of GKL's Constitution provides that the Chairman is to preside at general meetings of GKL. It is not unreasonable to construe the Constitution as giving a broad meaning to general meetings to include any meeting separately of GKL shareholders. 39 I would agree with the submissions of ASIC to the effect that the protection of minority shareholders which s256C(2) is designed to ensure is not enhanced by, or dependent upon, the resolution approving the reduction being passed at an entirely separate meeting of shareholders whose shares are to be cancelled and held without the presence of any other persons. This is so long as those other extraneous persons do not themselves vote (save as proxy holders) or attempt improperly to influence the outcome of the meeting. The real protection is achieved by ensuring a separate relevant resolution is considered and voted upon by minority shareholders, following receipt of the notice and information statement required by s256C(4). The presence of "non-voting" others is really an irrelevancy in the present circumstances. 40 That leads me to the question whether s256C(2) in its reference to the expression "a meeting of the shareholders whose shares are to be cancelled" nonetheless requires as a matter of literal construction or necessary intendment, two separate meetings, with the second having present only those members whose shares are to be cancelled. In my view that construction is not the correct one and finds no basis in any purposive construction or supposed lacuna nor is it compelled by the language used. Thus there is ample scope for the Court to intervene under s256B(1)(a) where appropriate proceedings are brought, should the presence of others render the reduction one which ceased to be "fair and reasonable to the company's shareholders as a whole". Likewise if the shareholders whose shares were being cancelled did not genuinely approve the resolution because the outcome was manipulated by the presence of outsiders. Neither of those grounds came near to being made out here. It is common place to have separate meetings of classes of shareholders without it ever being suggested that the presence of non-voting others rendered the meeting not as a meeting of that class. It could be otherwise if they, not being entitled to do, purported to vote, though that is a question for another day. 41 However, because the statutory wording leaves the matter not entirely free from doubt, I would for abundant caution, be prepared to make orders under s1322(4) of the Corporations Law, being satisfied that the conditions for doing so are made out. This is not an instance where the legislation is so emphatic in its mandatory requirements that such a remedial order could not be made; compare s459G of the Corporations Law and the analysis in David Grant & Co Pty Ltd v Westpac Banking Corporation (HC) (1995) 13 ACLC 1572, 18 ACSR 225. Question 2 42 Whether this takeover sought to be effected by a selective capital reduction pursuant to Pt 2J.1 of the Corporations Law, but not associated with a full scheme of arrangement, falls foul of the decision in Gambotto? In particular: (a) can such an acquisition, made for cash, be effected without a scheme of arrangement under s411 of the Corporations Law and, if so (b) does such an acquisition not only have to satisfy the requirements of Pt 2J.1, including that it be within s256B(1)(a) "fair and reasonable to the company's shareholders as a whole" but also fair, within the ambit of the Gambotto principles, and if so (c) whether the present procedures and their substantive outcome would not satisfy the Gambotto principles of procedural and substantive fairness? 43 In Re Tiger Investment Company Limited (2000) 33 ACSR 437 at 445, I raised without having to answer this question: "Would a cash takeover masquerading as a selective reduction of capital, but not associated with a scheme, fall foul of the decision in Gambotto v WCP Ltd (1995) 180 CLR 432?" The argument would be that such a selective reduction of capital amounts to expropriation without a Court fairness appraisal. In Gambotto (supra) at 446 the High Court impliedly excludes schemes or other statutory regimes for compulsory acquisition, which have the safeguards of a fairness appraisal. However, these are questions for another day." 44 The present case does squarely pose that issue. Indeed the current statutory language effectively removes any masquerade. Thus the legislative changes brought about in 1998 which produced Pt 2J.1 now expressly recognise and provide in detail for that species of takeover which is effected by a selective reduction of capital, whether directed at a minority or a majority. The technique has long been used without such explicit recognition. The intended ultimate holding company retains a handful of shares after all other shares are cancelled, so inheriting the earth as the sole remaining shareholder in the intended target. 45 Where such a selective reduction is effected by giving those whose shares are to be cancelled, not cash emanating from the reducing company but shares in another company (typically the new holding company), it is well accepted that such a process requires a scheme of arrangement. This is in order to compel the assent of all shareholders to their receiving shares. No one can be so compelled in the absence of express assent which may be deemed to have been given if the articles clearly enough anticipate that possibility or if there be a binding scheme of arrangement; see the discussion in Re Advance Bank Australia Ltd (1996-97) 22 ACSR 513 at 529 and the authorities I there cite. 46 Here however, the acquisition involves no such compulsion on a shareholder to take shares. Rather the shareholder is compensated for the cancellation of shares by cash emanating from the company whose capital is reduced utilising an available specific statutory regime — selective reduction of capital — for the purpose.. That cannot also require a scheme of arrangement to be effective when there is no compulsion to take new shares in substitution. Indeed that answers the first sub-question posed; no scheme is necessary. 47 That leads to the second sub-question, namely whether such an acquisition not only has to satisfy the requirements of Pt 2J.1 (in particular that it be "fair and reasonable to the company shareholders as a whole") but must also satisfy the fairness requirements under the Gambotto principles. 48 In Gambotto at 446 the High Court stated that: "It [expropriation by special resolution] would open the way to circumventing the protection which the Corporations Law gives to minorities who resist compromises, amalgamations and reconstructions, schemes of arrangement and takeover offers." 49 While selective reductions of capital are omitted, the clear premise is that where the Corporations Law by statute provides a protective mechanism from minority shareholders, associated with a particular mode of acquisition, there is no "circumventing" of that protection if the particular mechanism is utilised. 50 Indeed the procedural and substantive elements of fairness as set out by the High Court in Gambotto (at 446) as to process would otherwise be substantially duplicated by statute, though there are some differences. Thus at general law as by statute the majority shareholder must disclose all relevant information. While statute governing selective reductions does not require the shares to be valued by an independent expert ASIC does. The majority shareholder by statute is required to refrain from voting, a matter the High Court left open as to whether it was an essential element of procedural fairness. 51 That the terms of the expropriation be fair is clearly reflected in s256B(1)(a) in requiring that the reduction must be "fair and reasonable to the company's shareholders as a whole". Nonetheless as emerges in answering question 3 below, how fairness is determined is more prescriptive under the statute, though that difference should not be overstated. 52 Though Court appraisal as such is no longer initially required, s1324 in providing for injunctive relief expressly contemplates in s1324(1B)(a) that a selective reduction of capital may be challenged in court on grounds including its fairness and reasonableness. That brings the Court directly into consideration of any fairness grounds of challenge. Moreover s1324(1B)(a) reverses the onus such that "the court must assume that the conduct constitutes, or would constitute, a contravention of that paragraph, section or provision unless the company or person proves otherwise." The cited provisions include paragraph 256B(1)(a) or (b) thus emphasising the centrality of fairness and reasonableness. 53 I should add that sub-s256C(4) contains an express regime of disclosure, further emphasising that the legislature has created its own comprehensive, protective code. Gambotto principles of general law are left with no further work to do. I agree with ASIC's submission that properly informed minority shareholder approval can be taken to express a view about the substantive fairness of the terms offered to the minority. That is a view to which courts ordinarily give considerable weight, as with schemes of arrangement, on the basis that shareholders, properly informed, are the best judge of what is in their interests. However, the Court must still, in the case of a challenge, reach its own view. 54 These conclusions are reinforced by the explanatory memorandum to the Company Law Review Act 1998. It observed at 12.25: "Accordingly, the principles set out in Gambotto v WCP Ltd … do not apply to the expropriation of rights under this mechanism." Here the mechanism is that for a selective reduction of capital in Pt 2J.1 and referred to in s1324(1B). 55 The conclusion that Gambotto principles do not apply here is also consistent with earlier authority pre-dating the 1998 amendments. Bryson J recognised in Nicron Resources Ltd v Catto (supra) at 234-5 that there were a number of alternative statutory procedures for effecting a takeover, none having any a priori paramountcy. Selective reductions have long been accepted by the High Court; Thornett v Federal Commissioner of Taxation (1938) 59 CLR 787. Finally, in Re Albert Street Properties Ltd (1997) 23 ACSR 318 at 322 Hanson J stated: "… Gambotto , although dealing with an analogous area (as McLelland CJ in Eq said in Melcann at 93) did not concern a selective reduction of capital. In any event their Honours in Gambotto , in the context with which they were concerned, referred to the matter of fairness both as to procedure and price and for a power to be properly exercised, which are matters of a nature which are taken into account in a selective reduction of capital. It is true however that Gambotto may be seen as heralding a more stringent approach to the expropriation of minority shareholdings and that mere benefit for the majority or the company as a commercial entity may be insufficient: see Ford's "Principles of Corporations Law", looseleaf, Butterworths, 1995, Vol 2, para 24.310. However, Gambotto did not state disapproval of the selective reduction cases and there is the overriding importance of the requirement (directed by the High Court) of consistency in decision making which means that I should follow Nicron (and the other cases) unless I am persuaded that the decision is clearly wrong." 56 Thus the overall answer to this question is that the Gambotto principles have no direct application in the present context. Fairness and reasonableness are to be determined by reference to the statute. The general law may, but only to the extent consistent with the statute, provide some interpretive guidance. Question 3 57 Whether this selective capital reduction has not been shown by GKL to be "fair and reasonable to shareholders as a whole", by reason of (a) the consideration received by the shareholders whose shares are being cancelled being (according to the Plaintiff) less than the value received by the continuing shareholder, or (b) by reason of the 'special benefits" to be received by Goldfields Limited in question 4 below being shared pro rata between GKL and the minority, rather than allocated wholly to the minority? 58 What lies behind this question is whether the cash equivalent of certain special benefits received by Goldfields Limited as a result of the implementation of the selective capital reduction should have been wholly allocated to the minority and not merely pro rata between majority and cancelled minority. 59 It is convenient to consider this argument by reference to the special benefit of a saving in head office costs. The disclosure issue relating to that matter is considered separately under question 4. That saving in head office cost was treated as a special benefit allocated pro rata by the independent expert PriceWaterhouseCoopers in its report ("PWC report") valuing the shares. That allocation pro rata can be seen in the PWC report at page 23 of the Explanatory Memorandum. Head office costs are there shown as negative A$4.1 million. The independent expert, Mr Edwards, gave evidence that the value of the benefit obtained overall by Goldfield Limited from cost savings resulting from the capital reduction was about $4 million; T, 9.1—.15. 60 If one were to translate this to a per share value but attribute the per share value exclusively to the minority, that would represent a figure of $0.133. In that context it should be remembered that the reduction consideration in fact contains a premium of 8 cents per share over the PWC report value at the higher end of its range; that range was 45.7 cents to 46.9 cents. If one attributed the whole of the $0.133 to the minority shareholding that translates roughly at the higher end case to an increase of 13.3 cents per share less some 1.7 cents per share already attributed to the minority. The result of that is said by the Plaintiff to be unfair, in producing (upper range) 59.5 cents per share compared to the 55 cents in fact paid; see T, 9.10. 61 The Plaintiff then relies upon the decision of McLelland CJ in Eq in Melcann Ltd v Super John Pty Ltd (1995) 13 ACLC 92. In that case, the relevant valuation and the price consequently paid for the minority failed altogether to take into account the value to the acquiring company of "the synergies involved in its ability after cancellation of the minority shareholders to merge substantial elements of the company's activities with those of ACH itself." (at 93) 62 However it is important that I state the actual conclusion McLelland CJ in Eq reached at 94: "For the purpose of attributing a value to the minority shareholdings in the company, cancellation of those shareholdings would be functionally equivalent to expropriation thereof by ACH. In either event, ACH would obtain the special benefits indicated above, and in such circumstances, I see no reason why this should not be taken into account for the purpose of determining the fair value of the shares which are to be cancelled for the very purpose of conferring such benefits on ACH. Since it has not been taken into account, I am not satisfied that the proposed reduction of capital would be fair to the minority shareholders." 63 What the Defendant correctly points out is that McLelland CJ in Eq was dealing with a case where none of the per share equivalent of the special benefit had been attributed to the minority shareholding in the price it received in return for cancellation of the relevant shares. That is to say, the new holding company got the whole of that benefit but made no allowance at all for it. In determining the fair value of the shares the expert had unfairly failed to take into account the special benefits to the acquiring company. What McLelland CJ in Eq did not decide is whether the whole of such special benefits should be attributable to the minority or merely the pro rata portion represented by their shareholding as a proportion of the total issued share capital, or indeed, whether that depends on other relevant circumstances embraced by what is fair or unfair. The pro rata alternative would share the benefit pro rata between the acquiring company and the minority shareholders who were eliminated by the selective reduction. The Defendant contends that the pro rata allocation here allowed was, in the overall context, "fair and reasonable to the company's shareholders as a whole". ASIC adopt the submission that a pro rata allocation is not intrinsically unfair or unreasonable. That conclusion is based on the construction of that requirement in the context of Pt 2J.1. It is said also to find support in the parallel provision covering, inter alia, conventional takeovers under Ch 6, which is to be found in s667C of Ch 6A. That provision clearly negates any requirement for other than pro rata attribution of the value of any premium in determining fair value to be paid on compulsory acquisition. However for reasons which I elaborate below I do not consider that s667C has an invariable effect upon the construction of s256B. I do agree that a pro rata allocation of any special value will ordinarily be fair and reasonable, in the absence of special circumstances. I note in passing that s667C was added 1 year later than the 1998 amendments which brought in s256B. So it would be surprising if the effect of s667C was so far-reaching as to entirely pre-empt what was a fair and reasonable value. Rather pro rata allocation reflects the nature of a reduction of capital. The aliquot interest each shareholder has in the underlying assets of the company is released to the shareholder by the reduction. It would be expected such release would usually be on a pro rata basis, even if share cancellation follows. 64 Thus Chapter 6A of the Law makes provision for compulsory acquisition and buy-out of securities by (a) a bidder following a conventional takeover bid; (b) the two kinds of "90% holder" set out in s664A; and (c) by a 100% holder of full beneficial interest in all securities in a class (s665A in relation to the buying out of holders of convertible securities). 65 The whole subject matter of Ch 6A is thus compulsory acquisitions and buy-outs in their most common form. But importantly, only for minority interests of this 10% or less variety (or convertible securities). Whereas, selective reductions of capital could be of a minority or majority. Part 6A.4 of the Law requires an expert report to accompany notices given: (a) under s663B of the Law (notices given by a bidder with a relevant interest in at least 90% of securities in a bid class to holders of securities convertible into bid class securities); (b) under s664C of the Law (notices given by a 90% holder to compulsorily acquire the remainder of securities in a class); and (c) under s665B of the Law (notices given by a 100% holder of a class of securities to holders of securities convertible into that class). 66 Section 667A(1)(b) requires an expert's report accompanying notices given under s663B, s664C and s665B to "state whether in the expert's opinion the terms proposed in the notice give a fair value for the securities concerned ….". 67 Importantly in the present context, s667C sets out how "fair value" in s667A should be determined, in the following terms: "SECT 667C Valuation of securities 667C (1) to determine what is fair value for securities for the purposes of this Chapter: (a) first, assess the value of the company as a whole; and (b) then allocate that value among the classes of issued securities in the company (taking into account the relative financial risk, and voting and distribution rights, of the classes); and (c) then allocate the value of each class pro rata among the securities in that class (without allowing a premium or applying a discount for particular securities in that class). (2) Without limiting subsection (1), in determining what is fair value for securities for the purposes of this Chapter, the consideration (if any) paid for securities in that class within the previous 6 months must be taken into account." 68 ASIC submitted that the reference to "premium" in s667C(1)(c) includes a reference to the "special benefits" identified by McLelland CJ in Eq in Melcann (supra). It is true this premium, or reciprocal discount, may reflect particular special benefits for the acquirer in getting 100% ownership. But I consider that the references to premium (and discount) is primarily directed to the situation where a key holding within the acquired minority (say QBE in this present context) might command a "premium" price to acquire; that is, absent the statutory definition in s667C of "fair value" which precludes such circumstances in favour of a pro rata allocation of the total value including any such special benefits (s258B would likewise preclude this). In that sense, pro rata allocation of value reflected in price paid is certainly the invariable norm within classes where 10% or less is being acquired - or convertible securities. But by parity of reasoning, the acquirer's 90% or more is not allowed to command any (notional) premium as against the minorities' 10% or less, in calculating what is paid for the minority under s667C. 69 I therefor consider that s667C in its particular context is a clear legislative indication in its context that the collective value of the company as a whole, including any special value derived from 100% ownership, is to be allocated without attributing a premium or discount to particular securities firstly within a class, including for example a key holding from within this minority holding compulsorily acquired and secondly as between majority and minority. Thus that value should be allocated pro rata, though clearly the acquirer may choose to be more generous. Thus while an expert is ordinarily required to take into account the special value 100% ownership may have to a majority holder in working out the total value of the company, fairness requires that special value to be allocated pro rata. But can that reasoning be extrapolated to selective reductions of capital, where the test is what is fair and reasonable? 70 Kirby P in Catto v Ampol Ltd (1989) 7 ACLC 717 at 720 in the Court of Appeal was considering a reduction of capital under the old s123 of the Companies (NSW) Code 1981. He favoured a harmonious interpretation of the previous versions of the two statutory regimes: "In construing [section 123 of the Companies Code] I regard it as legitimate and appropriate for a court to keep in mind the provisions of the Acquisition of Share Code. The two Codes should be read together. They are addressed, substantially, to the same actors. Often they operate upon the same events. Their operation is of great importance to the corporations of this country which are, in turn, of vital significance for our economic well-being. So far as the language and apparent purposes of the Codes permit, a court should endeavour to provide an interpretation of them which affords a harmonious, practical and mutually supportive operation to each." Prima facie, that should apply to those regimes' present statutory form, unless their language directs otherwise; for example if it would be unreasonable to allocate any special value pro rata or if what is being acquired is to be valued differently because it is a majority interest that is acquired. 71 The harmonious and mutually supportive operation for Ch 6A and Ch 2J is ordinarily achieved in transactions within Ch 2J by the allocation of special benefits as reflected in any premium pro rata between the shareholders as a whole. However, that is not to say that some other allocation may not in unusual circumstances be required as "fair and reasonable to the company's shareholders as a whole". This is in order to achieve the stated purpose of Pt 2J.1 in s256A(b) namely "seeking to ensure fairness between the company's shareholders" and taking into account what is both fair and reasonable for shareholders "as a whole". An example would be where the special value derives not only from 100% ownership, but also extraordinary efforts on the part of the 100% parent, such as to exploit a particular resource. There is also the converse case where 100% ownership is of such unique value to the 100% parent, that it may be arguable that more should be attributed to the minority than the pro rata amount. Even so, one would not expect 100% to go to the minority. Here there is an extra loading in favour of the minority in the 8 cents above value. 72 Indeed the words "as a whole" in s256B reinforce that interpretation. Those words require fairness and reasonableness as between majority and minority, not some one-sided allocation. 73 Hugh Digby in "The Implications of Gambotto for non-takeover Aspects of Compulsory Acquisitions: a Comment" Ramsay I M (ed) Centre for Corporate Law and Securities Regulation, Faculty of Law, the University of Melbourne, 1996 argues: "It is not clear from McLelland CJ's judgment whether the benefit accruing to the majority is to be spread evenly across all of the shares in the company, or simply to the shares held by the minority. The latter result would be perverse because the minorities' shares would continue to become more valuable as they were progressively eliminated. Indeed it would remove any commercial justification for the proposal in the first place! Even if the benefits are spread across the whole of the issued share capital, the decision still runs counter to principles previously laid down in Catto v Ampol Ltd ." 74 However, I believe it is a fair reading of McLelland CJ in Eq's judgment that he quite deliberately left open the question of what is a proper allocation of the benefit. The decision in Melcann is simply authority in the present context that special benefits to the acquiring company must be taken into account in a manner that is "fair and reasonable to the company's shareholders as a whole". It would prima facie be unfair to deny minority shareholders any attribution of that value to their shares. This is more especially under the new regime for capital reduction, where no longer is it primarily a matter of whether the proposal has been "fairly" presented to members for their commercial judgment, though this Court retains a residual discretion Now the Court must be positively satisfied, in the event of challenge, that "the reduction" — not the consideration — is "fair and reasonable to the company's shareholders as a whole", with the onus on the company doing the reduction, though members' commercial judgment on that is certainly not irrelevant. See generally the discussion in Renard & Santamaria "Takeovers and Reconstructions in Australia" (Butterworths) at [1325] and the Explanatory Memorandum para 12.24 in identifying relevant factors in determining what is fair and reasonable. 75 That conclusion in Melcann is consistent with the decision of the High Court in Boland v Yates Property Corporation Pty Ltd (2000) 74 ALJR 209 and in particular the analysis of Gleeson CJ. It is true that that case was in relation to a materially different set of circumstances. It concerned the notion of special value from the point of view of the party whose property, in that case land, was expropriated, rather than the special value to the acquirer. It occurred in the context of expropriation where it would be consonant with the authorities for the compensation to be on the generous side for the compelled vendor who thus has to give up any special value. (Here the 8 cents premium is said to reflect that generosity). Finally it occurs in a context where there is no provision corresponding to s667C of the Corporations Law with its strong gravitational pull upon the parallel provisions for selective reduction of capital in Pt 2J.1. 76 What was ultimately at issue in Yates was as the High Court said anticipated by Dixon CJ and Kitto J in the Commonwealth v Milledge (1953) 90 CLR 157 at 164. They affirmed that "compensation must include not only the amount which any prudent purchaser would find it worth his while to give for the land, but also any additional amount which a prudent purchaser in the position of the owner, that is to say with a business such as the owner has already established on the land, would find it worth his while to pay sooner than fail to obtain the land …." 77 Here, if it be the case that the special benefits are of such unique value that they should lead to the minority shareholders receiving more than a pro rata proportion, it may be that it would be fair and reasonable for a greater than pro rata proportion of that special value to be attributed to the shares of the minority. However, there is nothing in the facts before me which indicates that any special value is other than the normal advantages of having a wholly-owned subsidiary as against partial ownership. These advantages include the ability to group tax losses for tax purposes (but there are none here) and the rationalisation savings from combining head offices which clearly do exist. 78 Adopting the words of Master Adams in Re Shine Fisheries Ltd (1994) 12 ACSR 627 at 634, there is nothing in the pro rata allocation and the associated 8 cents premium that in the present circumstances would lead me to conclude that the minority have been treated in other than a "fair and equitable" manner; see generally Holt v Cox (1994-1995) 15 ACSR 313 at 323-338 where the notion of a "fair price" is discussed by reference to Australian and Canadian authorities. Question 4 79 Whether the value of the special benefits to be received by Goldfields Limited (parent of GKL) as a result of the implementation of the selective capital reduction, have been appropriately identified, disclosed and taken into account, being: (a) the elimination of cost duplication arising from the existence of two listed companies; and (b) economic upside potential which may arise from an increase in the gold price in the future and rationalisation of operations through acquisitions which have arisen and are expected to arise from time to time? In particular, does the expert valuation report contained in the explanatory memorandum accompanying the proposal fail to satisfy the statutory requirements for disclosure and the avoidance of misleading or deceptive conduct, by reason of the following: (c) the way the value of the special benefit arising from the elimination of cost duplication has been dealt with; (d) the way the possibility of higher production resulting from a higher gold price has been taken into account; (e) the appropriateness or otherwise of the method of valuation used in respect of the hedge book (to the extent it has the effect of making the valuation insensitive to variations in the gold price) for valuing the potential benefit which may arise from an increase in the gold price in the future? 80 Here the issue is whether the so-called special benefits including any economic upside potential have been appropriately taken into account by the valuer and second whether the expert's report adequately discloses various matters pertaining to the contended special benefits. 81 My answer to the previous question means that there is no failure to disclose any supposed inequity from such benefits being allocated pro rata, as there is no intrinsic inequity in that allocation. What however of any claimed special benefits from economic upside potential from a possible increase in gold price in the future and the rationalisation of operations through acquisitions which have arisen or are expected to arise? I am satisfied that, on the evidence before me, this appears to have been adequately dealt with in two ways. First, there is the premium of 8 cents per share. Second, there is the way the hedge book has been treated. It assumes Australian dollar gold prices in the range A$461 to A$500 per ounce. The latter reflects the highest price achieved in the last four years as an upper value; see Mr Edward's evidence in cross-examination T, 11.30—.44. I elaborate on that later. 82 As to whether the value of the special benefits from elimination of cost duplication has been appropriately taken into account, I am satisfied that it has; see earlier answer to question 3. 83 As to disclosure, here the Defendant's complaint is that the Explanatory Memorandum does not specifically state that absent allowance for synergistic benefits, the capitalised figure for head office expenses would be ($8.2m) instead of the ($4.1m) which appears in the table on page 23 of the PWC report. (The figures in brackets represent a negative figure.) 84 However, I consider that there has been no attempt to obfuscate the position. The PWC report provides sufficient information on what is after all a matter of relative detail for anyone sufficiently interested to calculate the $4.1 million saving. That emerges from the disclosure of the following matters (references to these paras being from the PWC report): (a) The current level of head office ("HO") expenses is $2 million per year — para 104. (b) The applicable tax rate is 30% — para 104. (c) The level of HO expenses will be reduced by expenses that are incurred as a result of listed status of the company and will not be incurred following the selective capital reduction ("SCR") — para 104. (d) Estimated ongoing after tax HO costs following the SCR will be $0.7 million — para 105. (e) The capitalised negative value of these costs is $4.1 million — para 106. The steps which need to be taken which are not mentioned in the PWC report are: (a) The before tax post SCR ongoing HO expense is $1 million per year ($700,000 grossed up by the 30% tax rate). (b) The estimated post SCR level of HO expenses is half the current level. (c) The amount of HO expenses saved is $1 million per year. (d) This has a capitalised value of $4.1 million. I agree with the Defendant that it is not necessary to have descended to the level of detail where the capitalised saving is actually stated. Here the information is given from whence it can be worked out by anyone sufficiently interested and the allocation has been fair and reasonable. In those circumstances actually stating the end calculation is not of material importance; compare Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 468. 85 To explain further why I am satisfied as the treatment of other claimed special benefits supposed to result from the economic upside potential, I need to turn to the PWC report in more detail. 86 The PWC report takes into account "economic upside" in several ways. First, there is as I have mentioned the high end gold price of $500 per ounce being the highest price achieved for gold in the last four years. At page 22, para 10 of the PWC report the hedge book is valued at a base case of $(15.4)m and at a high case of $(40.6)m with the high case reflecting the A$500 per ounce upper value. That in turn is reflected in the high end value per share. 87 At page 35, paras 98-102 PWC in their report described the way in which the hedge book has been constructed. At 98 it is said that "GKL performed a mark to market value of the gold hedging book at 31 March 2000 using a spot price of A$461 per ounce. The valuation showed that it would have cost $22 million to close out all hedge positions based on the prevailing spot price of A$461 at that date. (The amount of $22 million compares to a projected cost of $18 million disclosed in March 2000 announcements by GKL based on the valuations provided by counterparties, who, in some cases, use differing Australian dollar gold prices.)" 88 In the same context, PWC explain that "the valuations of Kundana and Paddington have also been prepared on the assumption of spot gold prices of A$422 and A$500 per ounce". The mark to market valuation of the gold hedging book at 31 March 2000 was based on these assumed gold prices. 89 The approach taken by the independent expert is consistent with the views of W Lonergan (also of PWC) in "The Valuation of Business, Shares and Other Equity", 3rd ed 1998 at 392 in the chapter "Valuation of Gold Companies": "The proper valuation of a gold project should be based on the net present value of future cash flows. These cash flows should be separated into a those being generated from the use of derivative financial instruments, which should be valued at their current market value (ie marked to market) and b those being generated from the basic mining operation unaffected by the use of derivative financial instruments ie core mining operations valued at their net present value." Here gold projects of GKL do use the hedge book so giving rise to cash flows generated from the use of derivative financial instruments. 90 Nor is there any indication that the range of values used is other than fair and reasonable in terms of the high end value. Moreover, the PWC approach as outlined at page 35 of the Explanatory Memorandum in valuing the hedge book on a "mark to market" basis was not the subject of cross-examination in which it was put to Mr Edwards that this valuation approach was incorrect under current methodology. Nor was there any expert valuation evidence from the Plaintiff that another methodology would be more appropriate or that "mark to market" methodology is not that currently used or appropriate. The alternative method of assessment, not pressed by the Plaintiff with any expert evidence by way of substantiation, is what is called "mark to forecast". This, like "marked to market", also assumes delivery into existing positions, but involves a subjective assessment of where the market will be on the relevant delivery dates rather than a range of values based on experienced gold prices as utilised here. Indeed a higher gold price figure would further depress the value of the hedge book rather than increase it, contrary to the underlying premise of the Plaintiff's attack. 91 Summing up, I consider that the evidentiary onus has passed to the Plaintiff to establish the method, or methodology of valuation is not fair and reasonable, and the Plaintiff has failed to do so. 92 Turning to the other ways in which the economic upside has been taken into account, it will be clear from page 22, para 10 of the PWC report that the Kundana and Paddington reserves, including the value of the option over Paddington, have been calculated with a high end value based on the assumption of A$500 per ounce. That clearly takes into account economic upside from any likely increase in value of gold. 93 The PWC report at paras 83-94 deals in detail with the discounted cash flow valuation of Paddington. At para 91 the impact of a higher gold price on the value of Paddington of A$500 per ounce produces a derived value of $20.4 million for the Paddington operation. The prospect of additional throughput is dealt with at paras 93 and 94. The premium of 8 cents per share over and above the valuation so derived from the high end value in any event builds in scope for a deal of economic upside not otherwise taken into account. 94 It should also be noted that the possibility of higher production resulting from a higher gold price has been taken into account as the PWC report assumes production at full capacity; see para 66 at page 30 in relation to Paddington capacity and para 62 at page 30 in relation to Kundana capacity, and see generally pages 180-181 of the Explanatory Memorandum. 95 It follows that in answering question 4, I do not consider that there has been any substantiated non-disclosure or misleading or deceptive conduct as regards the various matters including of economic upside identified by the Plaintiff. Question 5 96 Whether shareholders have been provided with a statement satisfying the statutory requirements for disclosure and the avoidance of misleading or deceptive conduct, in particular in relation to: (a) the value attributed to the possibility of the company's gold mine and milling facility at Paddington continuing in operation beyond 2002; (b) the potential acquisition of an interest in a gold deposit known as White Foil, which was announced after the date of the expert's report but before the date of the shareholders' meeting; (c) the variable factors which influence the valuation; (d) the valuation method used in relation to the company's gold mines at Kundana and Paddington being such as to enable another expert to replicate the procedure? 97 In relation to the value attributed to the possibility of the company's gold mine and milling facility at Paddington continuing in operation beyond 2002. The Plaintiff contends that because very recently additional gold has been acquired through an acquisition called White Foil under a public tender arrangement, there must be scope for additional throughput in the Paddington mill. This is said to add value to what is called the "Paddington option". However, to contend that this additional value has not been already taken into account disregards what is said in paras 93 and 94 of the PWC report. There the prospect of extending the Paddington mills tolling operation is described as having a material "option" value which therefore accommodates possible future acquisitions. That option value is recognised at $10 million. Mr Edwards, in cross-examination (T, 15.44—.46) confirmed that the subjective assessment of the value of the Paddington option he had made of $10 million was generous. He explains why in the later questions and answers. 98 In relation to the significance of the White Foil acquisition otherwise, Mr Edwards makes clear that the acquisition was by virtue of a public tender process. One may reasonably assume that a fair market price was paid, with the only result for valuation purposes that the value of White Foil assets acquired thereafter substitutes for cash; see T, 15.25—.38. 99 It follows that I do not consider that there is any failure to comply with statutory requirements for disclosure or the avoidance of misleading or deceptive conduct or other inappropriate treatment in regard to either of the facility of Paddington or the White Foil acquisition. I would conclude similarly as to variable factors which might influence the valuation and as to the valuation methods used in relation to the company's gold mines at Kundana and Paddington. Again, the evidentiary evidence has shifted to the Plaintiff, in light of the evidence given by the Defendant. That evidentiary onus has not been satisfied. 100 Indeed to put materiality of the White Foil transaction in context, each $1 million of value of GKL is worth approximately $0.004 per share. So if White Foil were worth, say, $11 million (ie an extra $2 million) this would mean that each share was worth merely an extra $0.008. There is already a premium built into the price amply able to accommodate that. Question 6 101 Whether the Court can conclude that the selective capital reduction is "fair and reasonable to shareholders as a whole" where: (a) in a case where a single shareholder (QBE) can determine the outcome of the vote on the selective capital reduction, that shareholder's decision is formed as a result of, or influenced by, a general corporate strategy to reduce its exposure to the Australian market; (b) the consideration for the reduction is at a substantial discount to the long term average weighted stock market price for the shares being cancelled? 102 I am satisfied that the Court can conclude that the selective capital reduction was fair and reasonable, notwithstanding that QBE as a single shareholder could determine the outcome of the vote. While that shareholders' decision was influenced as a result of a general corporate strategy to reduce its exposure to the Australian market, it does not follow that the overall vote is vitiated. To take the analogy of a scheme of arrangement, it could not be said that the interest of QBE was so divergent from that of the other members who voted that it would have been treated as a separate class under a scheme of arrangement. Closer scrutiny gives no cause for concern here. In any event, QBE indicated that it has obtained its own valuations. It would be unreasonable to suppose that QBE would not have considered its commercial corporate interest including matters of value; see generally the evidence given by a representative of QBE, Mr Ten-Hove commencing at T, 20 and in particular at 21.35-.50 and 22.20-.22 where Mr Ten-Hove makes clear that "obviously we have done our own valuations". 103 In any event, only 224,546 proxy votes were cast against the proposal. Out of the minority, non-QBE shareholders comprised 2,233,807 shares representing 7.3% of the shares to be cancelled. Whereas, QBE's holding of 27,801,342 shares represented 92.7% of the shares to be cancelled. Winpar Holdings 12,373 shares represented 0.5% of the non-QBE shares to be cancelled. That indicates that there were a very substantial number of other shareholders whose shares were cancelled who were satisfied either not to vote at all or to vote for the resolution. That certainly does not point to major opposition. 104 The other contention is that the consideration for the reduction being at a substantial discount to the long-term average weighted Stock Market price for the shares being cancelled should, for that reason, lead to a conclusion that the selective reduction was not fair and reasonable. However, the PWC report at paras 113-115 concluded that having regard to the level of trading in the shares, share trading was not a reliable indicator. While the Stock Market price is often an important indicator of value, it is not determinative in every case as to what is or is not a fair and reasonable price. It may be sometimes too high and sometimes too low; see generally Holt v Cox (supra). Here there is nothing to indicate that PWC were mistaken in rejecting the stock market price as the determinant of what was fair and reasonable. OVERALL CONCLUSION 105 I am satisfied that none of the Plaintiff's contentions succeed and that no injunction should be granted. The matter has proceeded on the basis of the Defendant's undertaking. That may now be treated as at an end so that the minority may be paid without further unwarranted delay. 106 Costs ordinarily should follow the event though I am prepared to hear submissions on costs if the parties so desire. ********** Last Modified: 09/26/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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