GIO Building Society [2001] NSWSC 704

Reported Decision : (2001) 39 ACSR 77 [2001] NSWSC 704

New South Wales Supreme Court

CITATION : GIO Building Society [2001] NSWSC 704 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2406/01 HEARING DATE(S) : 14, 19, 25 & 29 June, 16 & 27 July, 20 August 2001 JUDGMENT DATE : 20 August 2001

PARTIES : Application of GIO Building Society Limited (P) Australian Securities and Investments Commission (amicus curiae) JUDGMENT OF : Austin J

COUNSEL : T Bathurst QC with D Ryan SC (P) K Cuneo (ASIC) SOLICITORS : Minter Ellison (P) Jan Redfern, Solicitor for ASIC CATCHWORDS : CORPORATIONS LAW - scheme of arrangement - building society with shareholder and members by guarantee - court's role at first hearing - principles of valuation of non-shareholder members' interests - allocation of special value LEGISLATION CITED : Corporations Act 2001 (Cth) s 411 FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69 Holt v Cox (1994) 15 ACSR 314 CASES CITED : Melcann Ltd v Super John Pty Ltd (1995) 13 ACLC 92 Pauls Limited v Dwyer, QSC, 13 March 2001 Winpar Holdings v Goldfields Kalgoolie Limited (2000) 34 ACSR 737 DECISION : Orders made for convening meetings to consider proposed scheme

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

AUSTIN J

MONDAY 20 AUGUST 2001

2406/01 GIO BUILDING SOCIETY LIMITED (APPLICATION OF)

JUDGMENT

1 HIS HONOUR: This morning I made orders for the convening of meetings of the two classes of members of GIO Building Society Ltd. This morning's hearing was the last of a series of seven short hearings before me during which I communicated concerns about various drafts of the explanatory statement and independent expert's report for the proposed scheme, and the plaintiff responded to those concerns in various ways. 2 Such a process of iteration is not unprecedented in the Equity Division, in cases where the proposed scheme is out of the ordinary, particularly where what is involved is the extinguishment of memberships in a company by way of demutualisation or some analogous process. In the present case the company is not a mutual society but the proposed scheme involves the extinguishment of memberships by guarantee. 3 An application for the convening of meetings to approve a scheme of arrangement is typically an ex parte application in which the plaintiff seeks the Court's authorisation to begin a process which will involve, at later stages, consideration of a proposed scheme by the members and if they agree to it, an application to the Court for approval of the scheme. At the first hearing, the issue for the Court is whether to make orders that a meeting or meeting of members be convened. In the present case, the issue arises under s 411 (1) of the Corporations Act 2001 (Cth). The proceedings were initiated before the commencement of the Commonwealth Act, which commenced on 15 July 2001, but they are to be treated as proceedings under the new legislation by virtue of s 1383 of the Act. If the members approve the proposed scheme, the application for the Court's approval will be made under s 411 (4) (b) of the Act. 4 Because the first hearing is conducted ex parte, and the Court's function of approving the scheme is reserved by s 411 for the second hearing, after the members have considered it and any objections have emerged, the Court is always careful not to decide issues at the first hearing which may later become matters of contention. Nevertheless, the first hearing is important because the Court reviews the scheme and explanatory statement (and other relevant documents such as the independent expert's report in this case), and invites the plaintiff to attend to any matters which seem to the Court to require attention before the distribution of the documents. This is the process that led to the present case coming before the Court, briefly, on seven occasions. While expressing opinions on the drafts, the Court does not commit itself to any particular view of the scheme. 5 It has been said that 'the court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves the statutory majority at the [members'] meeting the court would be likely to approve it on the hearing of a petition which is unopposed': FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69, 72 per Street CJ; and see the other cases cited in Ford's Principles of Corporations Law (looseleaf), paragraph [24.071]. What applies to the scheme document itself should also apply, in principle, to the draft explanatory statement and independent expert's report. But this principle should not be pushed too far. The fact that the Court has reviewed the draft explanatory statement before making an order for the convening of meetings does not prevent an objector from contesting the adequacy or accuracy of the disclosure made in that document. Equally, the fact that the Court has reviewed an independent expert's report before making the order does not limit the scope of challenges to the adequacy of the report at the second hearing. 6 Among the issues that I raised in the present case were issues about the expert's report by Andersen Corporate Finance Ltd. The scheme proposal is that all non-shareholder memberships will be cancelled in consideration of a payment, in most cases, of $100 per membership. The independent expert addressed the question whether that proposal is in the best interests of the members. That raised questions of valuation. The non-shareholder members have no right to economic benefits except for an entitlement to participate equally with the shareholder member in the distribution of surplus assets on winding up. Additionally, the draft explanatory statement makes it plain that there are benefits to be gained by the shareholder member and the AMP Group (which controls the shareholder member) once the non-shareholder memberships have been extinguished. 7 At the hearing of 29 June 2001 I made the following observations with respect to questions of valuation, referring at that stage to much earlier drafts than the ones before me today: 'It seems to me there are two key issues on the question of valuation. The first relates to the relevance of the entitlement of members equally to participate in the distribution of the surplus assets on the winding up of the plaintiff, under paragraph 79.3 of the constitution of the company. The materials suggest that this entitlement would yield $2,100 per member on winding up, as compared with the proposed consideration of $100. In Holt v Cox (1994) 15 ACSR 314 Santow J usefully summarised the relevant principles of the law of valuation. His judgment was substantially approved by the Court of Appeal at 23 ACSR 590. As the matter emerges, it seems a critical question in assessing the significance of participating in the surplus on the winding up is to make an assessment of the degree of likelihood that winding up may occur in any foreseeable circumstances. In a typical commercial company, if a winding up is unlikely, that fact will normally imply that an appropriate valuation method would be discounted cash flow or some similar method - assuming there is no real market for the securities in question and perhaps even if there is. The assessment of the degree of likelihood of winding up seems to depend on a question of fact which, as far as I can see, is not disclosed in the materials before me.