Austrim Nylex Limited v Kroll (No. 2)

Do Not Send for Reporting
IN THE SUPREME COURT OF VICTORIA		Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL LIST

No. 4908 of 2001

AUSTRIM NYLEX LIMITED (ACN 009 375 553)	Plaintiff
v
IRENE JULIANA KROLL and OTHERS	Defendants

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JUDGE:	Warren J
WHERE HELD:	Melbourne
DATE OF HEARING:	28, 29 and 30 November; 3 and 4 December 2001
DATE OF JUDGMENT:	24 May 2002
CASE MAY BE CITED AS:	Austrim Nylex Limited v Kroll & Ors (No. 2)
MEDIUM NEUTRAL CITATION:	[2002] VSC 193

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CORPORATIONS – compulsory acquisition – minority interests.

VALUATION – methodology – inclusion of additional factors – special benefits – premium for forcible taking – "fair value" –time of distribution – method of distribution.

NOTICE – compulsory acquisition - adequacy of notice to minority shareholders – disclosure – material information.

WORDS AND PHRASES – "fair value" – "materiality" – "just terms" – "relevant interest".

THE CONSTITUTION (Cth) – s.51(xxxi), s.51(xxxvii).

CORPORATIONS ACT2001 (Cth) – ss.608, 609, 664, 664A, 664B, 664C, 664D, 664E, 664F, 664G, 666A, 666B, 667A, 667C, 667D, 1322, 1325D, 1350, 1382, 1383, 1384, 1350.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr J. Santamaria Q.C. with Mr J. Moore	Clayton Utz
For the 7^th and 8^th Defendants	Mr S. Blanks (as solicitor on 28 and part 29 November 2001) Mr Cotman S.C. (part 29, 30 November; 3 and 4 December 2001)	Stephen Blanks and Associates
For the 9^th Defendant	Dr G. Elkington	In person

TABLE OF CONTENTS

Introduction........................................................................................................................................ 2

Background Facts............................................................................................................................... 2

Part 6A.2 Division 1 of the Corporations Act............................................................................... 3

The Evidence....................................................................................................................................... 4

The Issues............................................................................................................................................ 4

Fair Value............................................................................................................................................. 5

1. The Concept of Fair Value............................................................................................................ 5

(a) General Principles................................................................................................................... 5
(b) Section 667C(1)(a).................................................................................................................... 6
(c) 100 per cent Ownership.......................................................................................................... 7
(d) Legislative History.................................................................................................................. 8

2. Time of Determination of Fair Value......................................................................................... 8

3. Distributions................................................................................................................................... 9

Conclusions as to Fair Value............................................................................................................ 9

The Constitutional Issues............................................................................................................... 10

The Expert Evidence........................................................................................................................ 17

(1) The Evidence of Kershaw......................................................................................................... 17

(2) The Evidence of Lom – the Independent Expert.................................................................. 17

(3) The Evidence of Lonergan – the LEA Report........................................................................ 19

(4) The Further Report of Lom....................................................................................................... 22

(5) The Evidence of Selak............................................................................................................... 23

Findings on the Evidence............................................................................................................... 23

(1) Method of Valuation................................................................................................................. 23

(2) Costs Savings.............................................................................................................................. 26

(3) The Advantage or Benefit of 100 per cent Ownership........................................................ 27

(4) Voting Rights.............................................................................................................................. 29

(5) Other Matters.............................................................................................................................. 30

Procedural Matters........................................................................................................................... 32

Conclusion......................................................................................................................................... 34

HER HONOUR:

Introduction

The plaintiff made an offer to compulsorily acquire the remaining minority units in a company in which the plaintiff held over 90 per cent of the issued shares in the company. The plaintiff issued these proceedings relying upon the compulsory acquisition provisions of the Corporations Act 2001 being ss.664(3) and 664F(1) seeking court approval of the proposed compulsory acquisition of the remaining minority units in the company.

The defendants, as the minority shareholders, opposed the application essentially on the basis that the offer made by the plaintiff for the minority shareholding did not give fair value. The defendants contended, also, that the statutory provisions relied upon by the plaintiff were unconstitutional and, therefore, invalid. The defendants were Irene Julianna Kroll, Jonathan Vincent Bickerstaff Bligh, Douglas Robert Graham Neild, AKW Investments Pty Ltd, Cameron Investments Pty Ltd, Robert Cameron (Superannuation Fund), Gordon Bradley Elkington, Milly Elkington, Winpar Holdings Limited, Mary Graham Neild and Mary G. Neild and Robert J. Catto in their capacity as executors of the estate of J.I.S. Catto. Only the seventh, eighth and ninth defendants appeared, namely, Gordon Elkington, Milly Elkington and Winpar Holdings. The parties called expert evidence and tendered documentary evidence. The Attorney‑General of the Commonwealth of Australia did not intervene but I was provided with written submissions on the constitutional issues. The submissions drawn on behalf of the Attorney‑General supported the plaintiff's position.

I turn to the background facts.

Background Facts

The plaintiff, Austrim Nylex Limited, owns 99.98 per cent of the issued shares in the subject company, National Consolidated Limited ("NCL") and 100 per cent of the NCL voting shares. The desire of Austrim Nylex is to compulsorily acquire all of the remaining shares in NCL.

On 28 April 2000 Austrim Nylex engaged DMR Corporate Pty Ltd ("DMR") being an expert nominated and approved by the Australian Securities and Investments Commission ("ASIC") to prepare a report in accordance with s.667A of the Corporations Law as to the fair value of the remaining preference shares. The principal author of the DMR report was Paul Lom. In the DMR report dated 22 December 2000, ("the initial report") DMR considered the maximum value of each of the remaining preference shares was $1.71. Ultimately, Austrim Nylex offered the remaining minority shareholders the amount of $2.00 for each remaining preference share. On 15 January 2001 in accordance with the requirements of s.664C(2)(b) of the Corporations Law, Austrim Nylex forwarded to each of the affected minority shareholders a notice of compulsory acquisition, the initial report of DMR and an objection form. Eight minority shareholders accepted the offer. The plaintiff received 12 objections to the notice of compulsory acquisition from the defendants to the present proceeding. Briefly stated the objections by the remaining minority shareholders were that the price offered was not fair and that the initial report of DMR failed to take into account benefits that Austrim Nylex would derive if it acquired a 100 per cent interest in NCL.

Part 6A.2 Division 1 of the Corporations Act

In a recent, virtually identical case, Capricorn Diamonds Investments Pty Ltd v Catto & Ors[1] I set out in some detail the history and background to Part 6A.2 of Division 1 of the Corporations Act.[2] In particular, I observed:[3]

" … the legislature was seeking to balance the interests of the two groups of parties that is, the interests of facilitating changes in corporate ownership with the need to protect the rights of the minority shareholders. Part of the process was the discouragement of minority shareholders from demanding a price for their securities that is above a fair value, the practice of greenmailing. The explanatory memorandum shows that part of the objective of the legislative scheme was to remove that potential that is, to remove the matters that would otherwise operate to force a price above fair value were there to be the ordinary commercial bargaining context in which consent of both parties is required before a transaction can be concluded. Furthermore, in the explanatory memorandum the provisions of s.667C are explicitly addressed and it is stated that it is proposed that experts would not account for premiums. It is to be noted that the expression "premiums" is cast in the plural. The memorandum refers to premiums on account of the special value of outstanding securities to the acquirer, that is, the extent to which the acquirer may be prepared to pay a sum above fair value in order to secure its objective. This is the classic situation of the anxious buyer rather than non‑anxious buyer of the Spencer formulation." (Footnotes omitted)

I adopt the same approach in Part 6A.2 and its history as I did in Capricorn Diamonds.

[1][2002] VSC 105.

[2]Paras 9 – 29.

[3]At para 28.

The Plaintiff ("Austrim") seeks an order pursuant to s.664F of the Corporations Law approving the acquisition of securities in National Consolidated Limited ("NCL") covered by compulsory acquisition notices dated 15 January 2001 issued by the Plaintiff. The securities covered by the notices are those shares in a class of securities (preference shares) in NCL that the Plaintiff does not already own. Besides a subset of 43,693 preference shares, the Plaintiff owns all the shares in NCL namely, approximately 202,700,000 ordinary shares, and 6,307 preference shares.

Austrim's offer was $2.00 for each preference share covered by its compulsory acquisition notices. The Independent Expert valued the preference shares in the range of $1.26 to $1.71. The offer amount was 29 cents above the maximum valued placed on each preference share by the Independent Expert, DMR Corporate Pty Ltd.

The Evidence

Austrim Nylex relied upon the evidence of Phillip Kershaw and Graeme Douglas Norman, and the expert evidence of Paul Lom and John Selak. The defendants relied upon affidavits of Stephanie Carmichael, Robert Catto and Elkington and the expert evidence of Wayne Lonergan of Lonergan Edwards and Associates.

The Issues

There are three main issues in this proceeding. First, do the terms proposed by Austrim in its compulsory acquisition notice give a fair value for the shares covered by the notice? If I find that the terms proposed by Austrim Nylex give a fair value for the shares, I must approve the compulsory acquisition: s.664F(3) of the Corporations Act. Secondly, is Part 6A.2 of the Corporations Act constitutionally valid? Thirdly, has there been compliance with the requirements of s 664C(2) in relation to disclosure by Austrim Nylex in its compulsory acquisition notice? If not, should the Court exercise its power under s.1322 or 1325D to relieve Austrim Nylex from the consequences of any proved non-disclosure?

The issues in this proceeding are the same as those considered in Capricorn Diamonds. I turn to consider the issues of fair value and, subsequently, the matter of constitutional validity or invalidity as the case may be.

Fair Value

In Capricorn Diamonds I considered the determination of fair value by dissecting the subject into three sections being the concept of fair value, the time of determination of fair value and the distribution of fair value. It is useful to apply the same approach here.

1. The Concept of Fair Value
(a) General Principles

Here, as in Capricorn Diamonds, the defendants relied upon the judgment of Santow J at first instance in Winpar v Goldfields Kalboorlie[4]. In Capricorn Diamonds, after consideration of Winpar v Goldfields Kalgoorlie (at first instance and on appeal)[5] I determined that the authority had little or no relevance to s.667C because the authorities were concerned with a capital reduction and s.256C of the Corporations Law.[6]
[4](2000) 34 ACSR 737.
[5](2001) NSWCA 427 (12 December 2001).
[6]See Capricorn Diamonds at para 54.

In any event, in Capricorn Diamonds I identified eight principles extracted from the authorities for the purpose of identifying "fair value":[7]

"First, fair value of an asset is its fair equivalent in money ascertained by a supposed sale by voluntary bargaining between vendor and purchaser, each of whom is both willing and able, but not anxious, to trade and with a full knowledge of all the circumstances which might affect value: Holt v Cox; Gregory v FCT; McCathie v FCT. Secondly, the fact that the units must be disposed of at a fair value should not be a factor leading to a discount or lower valuation than would otherwise obtain: Holt v Cox. Conversely, it should not be a factor leading to a premium or higher valuation. Thirdly, a fair value does not require that any amount should be included in respect of ransom value or a power of veto: Edwards v Minister of Transport. Fourthly, the value of special benefits to the acquirer is not properly to be included in the calculation of the value of the company as a whole: Pauls Limited. Fifthly, generally, apart from s.667C, fairness requires that the value of any special benefits should be allocated pro rata amongst securities in the same class: Winpar. Sixthly, if the value of special benefits is to be included under s.667C, their value should be allocated pro rata under s.667C: Winpar; Pauls Limited.
The seventh principle to be extracted from the authorities is that when deciding whether the consideration is fair the proper approach is to consider whether it is fair to all shareholders, rather than whether it is fair to a particular shareholder or class of shareholders in the peculiar circumstances of the case: Elkington v Vockbay Pty Ltd. Consequently, a shareholder's individual taxation position and like matters said to give rise to a premium for forcible taking are not relevant to the value of the company as a whole. Nor are the acquirer's individual circumstances relevant. Further, the market price cannot be a safe indicator of fair value as the market may not provide a fair indication of the value of shares in circumstances of limited trading: Catto v Ampol. In addition, the market may not be a fair indicator of value because of the effect of a takeover offer on the market: Kingston v Keprose Pty Ltd [No 2].
Finally, the eighth principle to be extracted from the cases is that fair value may require a more liberal estimate of value within a range of possible values where there is a compulsory acquisition of property (Commissioner of Succession Duties (SA) v Executor Trustee & Agency Co of SA Ltd (Re D Clifford). Nevertheless, it does not permit or require a premium for forcible taking: Holt v Cox."
(Footnotes omitted)

[7]See Capricorn Diamonds paras 59 – 61.

I apply the same eight principles in this case.

(b) Section 667C(1)(a)

Section 667C(1)(a) requires an assessment of the value of the company as a whole to be made and that as a result no allocation may be made that is not included in the value of the company as a whole. In Capricorn Diamonds[8] I held with respect to the value of the company as a whole:

" … No additional share of the value to be allocated may be allocated to units held by minority holders disproportionately to the share to be allocated to units held by the majority holders. Section 667C(1)(c) by its express terms does not allow any premium or discount for particular securities in a class of securities and expressly provides that the allocation must be pro rata amongst all the holders of securities of the class concerned."

[8]At para 62.

I further held in Capricorn Diamonds:

"In addition, it is to be observed that the prohibition in s.667C(1)(c) on allowing any premium for particular securities in a class does not mean that fair value compensation is not full compensation for that which has been lost. Rather, in my view, the prohibition serves to prevent the compensation becoming artificially inflated to take into account the ransom value that minority security holders might otherwise be able to extract for their securities by reason of their minority status."

I took the view in Capricorn Diamonds that s.667C(1) requires pro rata allocation of the value of the company as a whole such that shares in the same class are treated in the same way whether held by the 90 per cent holder or the minority holders.[9]
[9]See Capricorn Diamonds at para 61; also, Pauls Limited v Dwyer, para [29].

I adopt the same approach here.

(c) 100 per cent Ownership

I further held in Capricorn Diamonds that an expert reporting in accordance with s.667C is not required to take into account any special value that 100 per cent ownership may achieve as the associated factors as they do not reside in and are not embodied in the company as a whole; they do not form part of the asset or the enterprise to be valued for the purposes of the section; special benefits are more properly construed as external to the asset for they do not exist at the time when the valuation occurs and will only ever exist after the transaction has taken place.[10] I further observed that a requirement to attribute value to a special benefit sometimes called a "Melcann" special benefit would be contrary to the intention underlying s.667C(1)(a) that an assessment must be made of the value of the company as a whole at the outset.
[10]Capricorn Diamonds at para 74.

Again, I adopt the same approach in the present case.

(d) Legislative History

In Capricorn Diamonds I considered that the intention of Parliament with respect to s.667C was to preclude synergies or special benefits from the determination of fair value. I observed:[11]

" … The inclusion of s.667C is a legislative indication that premiums attaching to minority holdings should not affect an assessment of the fair value of a minority's securities … Experts determining fair value should not account for premia arising from the special benefits of the outstanding securities to the acquirer or discounts on account of the lack of a market for particular securities."[12]

[11]Capricorn Diamonds at para 73.

[12]See also the Explanatory Memorandum [7.45]; also, the Legal Committee Report paras [2.82 – 2.89].

I considered in Capricorn Diamonds, also, the role of s.667D and held that the section addresses the matter of greenmailers:

"Section 667D addresses the position where an acquirer seeks to give some benefit outside the offer for compulsory acquisition that yields a differential advantage between those who fall within the class of minority security holders. The section is not concerned with the elements that an offer to acquire can or must incorporate."[13]

[13]See Capricorn Diamonds para 87.

I will follow that approach here.

2. Time of Determination of Fair Value

In Capricorn Diamonds I held that the time of the notice is the time at which the issue of fair value is to be tested for the purposes of the statute.[14] I observed:

" … Because the enquiry as to fair value is directed to the terms set out in the compulsory acquisition notice both in the case of the expert's report and in the case of the Court's determination, the time of the notice is the time at which the issue of 'fair value' is to be tested. It is the preparation of the notice that initiates the procedure for compulsory acquisition under s.664A(3) and it is the securities to be acquired outstanding at that time that comprise 'the securities covered by the compulsory acquisition notice'."

[14]See Capricorn Diamonds para 90.

I adopt the same approach to time in this case.

3. Distributions

In relation to the subject of distributions I expressed the view in Capricorn Diamonds[15] that there is no indication in ss.664A – 664G or ss.667A or 667C that excludes the right to distributions and other rights that attach to them. I expressed the view that the benefit of distributions that are undeclared at the time of the notice accrue to the acquirer for the purposes of s.664A.
[15]At para 92.

On the basis of these matters as to the concept of time and distribution of fair value I reached my conclusion as to fair value in Capricorn Diamonds and held:

"It is based upon willing and informed but not anxious parties; there is no allowance for special or ransom value but any such value may be distributed pro rata; the value must be fair to all shareholders; and, there is no premium for forcible taking. Furthermore, the time of the notice of compulsory acquisition is the time when fair value is to be assessed. Finally, the benefit of distributions undeclared at the time of the notice of compulsory acquisition accrued to the acquirer … ".[16]

[16]See Capricorn Diamonds para 102.

The defendants in this case agitated the same arguments as those urged by the defendants in Capricorn Diamonds. I rejected those arguments. I adopt and apply the same approach in the present case. In my view it is on all fours with the circumstances in Capricorn Diamonds.

Conclusions as to Fair Value

In summary, therefore, as a consequence of Capricorn Diamonds the following approach should be adopted in any expert assessment of the subject offer in the present case:

(1)The vendor and buyer ought be assumed to be willing to trade and to possess knowledge of the circumstances affecting value.
(2)No special allowance, discount, premium or valuation should be made other than would ordinarily arise in the course of a valuation.
(3)There should be a pro rata allocation of the assessment of value of the company as a whole.
(4)The issue of fair value should be assessed at the time of the notice of compulsory acquisition.
(5)The benefit of distributions undeclared at the time of the notice of compulsory acquisition accrue to the acquirer.[17]
[17]See, also, Capricorn Diamonds at para 102.

The Constitutional Issues

The defendants argued that Part 6A.2 of the Corporations Law is not a law in force in Victoria as it was not part of the Corporations Law at the time of the enactment of the Corporations (Victoria) Act 1990 (Victoria). They argued that so far as the Corporations (Victoria) Act purported to incorporate, adopt or otherwise introduce into the law of Victoria legislation of the Commonwealth enacted after the date of that Act it is void as an impermissible delegation of legislative power by the State of Victoria to the Commonwealth of Australia by virtue of the operation of s.51(xxxvii) of The Constitution.

Generally, a trial judge will approach constitutional issues with some hesitation and be reluctant to contemplate constitutional issues beyond that which is necessary for the decision in the case: see Re Patterson; ex parte Taylor;[18] also, Re Goodyear Australia Limited; Kelly-Springfield Australia Pty Ltd v Green.[19] Broadly speaking, Santow J in Kelly-Springfield was dismissive of the constitutional arguments canvassed by the defendants in that case which by and large are similar to the constitutional issues argued by the defendants in the present case.[20] With respect, I adopt the same approach in that regard as the learned judge.
[18](2001) 75 ALJR 1439 at [251] to [252].
[19](2002) NSWSC 53 para 102.
[20]See Kelly-Springfield at paras 2 – 7.

Here the defendants conceded that the Corporations Act (Commonwealth) was enacted on 15 July 2001. They acknowledged that the present proceeding attracted the operation of s.1384 of the Corporations Act. However, the defendants challenged the validity of s.1384 for the purposes of the present proceeding. This argument appeared to be rejected by Santow J in Kelly‑Springfield[21] and the Queensland Court of Appeal in Pauls Limited v Elkington.[22] Insofar as the Commonwealth Attorney‑General made submissions on the constitutional issues in the present case it relied upon submissions made in Kelly-Springfield. It also adopted the submissions made by the Commonwealth in Capricorn Diamonds.
[21]At para 7.
[22](2001) QCA 414 (2 October 2001).

Section 1384 of the Corporations Act provides:

"1384 Treatment of court proceedings under or related to the old corporations legislation – federal corporations proceedings
(1)This section applies to a proceeding in relation to which the following paragraphs are satisfied:
(a)the proceeding was started in a court before the commencement; and
(b)the proceeding was a federal corporations proceeding that related to a matter to which a provision of the old corporations legislation of a State or Territory in this jurisdiction applied; and
(c)the proceeding had not been concluded or terminated before the commencement.

(2) In this section:
(a)the proceeding to which this section applies is called the continued proceeding; and
(b)the provision of the old corporations legislation referred to in paragraph (1)(b) is called the relevant old provision.

(3) Subject to subsection (4):
(a)the continued proceeding continues after the commencement in the same court as if it were, and always had been, a proceeding in relation to a matter to which the provision of the new corporations legislation that corresponds to the relevant old provision applies; and
(b)to the extent that the proceeding, before the commencement, related to pre-commencement rights or liabilities, the proceeding, as continued, relates, and as so continuing is taken always to have related, to the substituted rights and liabilities in relation to those pre‑commencement rights or liabilities."

Hence, s.1384 of the Corporations Act applies to a proceeding called "the continued proceeding". If the proceeding was commenced in a court before 15 July 2001, the proceeding was a Federal corporations proceeding that related to a matter to which a provision of the old corporations legislation "in this jurisdiction" applied and the proceeding had not been concluded or terminated before 15 July 2001. The present proceeding was commenced by but not concluded or terminated before 15 July 2001 it having been commenced on 5 April 2001 and an amended originating process having been filed on 21 May 2001. As a consequence, s.1384(1)(a) and (c) is satisfied. The proceeding in one that "relates to a matter to which 'Part 6A.2 of the former Corporations Law of Victoria applies". As a result of the reliance by the defendants on ss.51(xxxi) and (xxxvii) of The Constitution the present proceeding involved a matter "arising under the Constitution or involving its interpretation for the purposes of s.76(i) of The Constitution". Hence immediately before the commencement of the Corporations Act the proceeding involved the exercise of Federal jurisdiction. As a consequence, the proceeding falls within the definition of "Federal corporations proceeding" pursuant to s.1382(1)(b)(c) and satisfies s.1384(1)(b) of the Corporations Act. It is clear, therefore, that the present proceeding is a "continued proceeding" for the purposes of s.1384 of the Corporations Act.

The Commonwealth Attorney‑General in Kelly-Springfield and as adopted by the plaintiff here submitted that s.1384(3)(a) of the Corporations Act provides that "the continued proceeding continues after the commencement in the same court as if it were, and always had been, a proceeding in relation to a matter to which the provision of the new corporations legislation that corresponds to the relevant old provision applies". It was submitted, further, that s.1384(3) changed the substantive law to be applied by a court in determining a proceeding in Federal jurisdiction. Reliance was placed upon Bachrach (HA) Pty Ltd v Queensland.[23]Whereas under the old law the substantive law was the Corporations Law (Victoria) now the substantive law is the Corporations Act (Commonwealth).
[23](1998) 195 CLR 547.

For the Commonwealth in Kelly-Springfield and adopted by the plaintiff it was submitted that s.1384 of the Corporations Act was not invalid on four grounds. First, s.1384 did not provide an obstacle to a party bringing an action including a fresh challenge. In any event, s.51(xxxi) of The Constitution does not apply to any acquisition of property arising from s.1384 (this matter will be considered in further detail below as already considered in Capricorn Diamonds). Secondly, any chose in action constituted by a cause of action of challenging Part 6A.2 of the former Corporations Law of Victoria is without value because it has been determined by the High Court[24] and, furthermore, if the defendants' shares are acquired they will be so acquired under Part 6A.2 of the Corporations Act (Cth) and not the former Corporations Law of Victoria.[25] Thirdly, in any event, s.1384 provides just terms in that by converting a cause of action under the old Corporations Law into an otherwise identical cause of action under the new law the status quo has been conferred on the defendants. Fourthly, even if s.1384 of the Corporations Act amounted to an acquisition of property contrary to s.51(xxxi) its validity would be assured by s.1350 of the Corporations Act.
[24]Te Teori Tau v The Commonwealth (1960) 119 CLR 564; also Durham Holdings Pty Ltd v New South Wales (2001) 75 ALJR 501.
[25]See s.1400 of the Corporations Act.

I accept the submissions of the Commonwealth Attorney‑General with respect to s.1384 of the Corporations Act. The submissions made by the Commonwealth were compelling and self-evident. Furthermore, the submissions made by the defendant were not pursued with much vigour. Indeed, the focus of the defendants' case was reliance upon the expert evidence of their expert, Lonergan. Furthermore, for the reasons I elaborate upon below, the whole matter of s.1350 of the Corporations Act was considered in Capricorn Diamonds and I adopt the same view in the present matter. I observe that the defendants conceded that if their challenge under s.1384 of the Corporations Act failed they would not press their other constitutional challenges with respect to just terms and s.1350. Nevertheless, should it be necessary I turn to consider those matters.

The defendants contended that s.51(xxxi) of The Constitution provides a guarantee of just terms so as to ensure full compensation for loss. They argued that s.667C requires the taking into account of factors to produce a fair price and thereby just terms. They argue that there was no statutory exclusion of factors such as special benefits to the purchaser. The defendants argued, also, that insofar as s.667C of the Corporations Act insists upon a valuation procedure excluding factors such as special benefits it is unfair and thereby invalid.

In Capricorn Diamonds, again, the same argument was made by the defendants with respect to the constitutional matters. There I dismissed the submission of the minority shareholders on the basis of the legislative command enshrined in s.667C. The submissions made on behalf of the Commonwealth Attorney‑General in Capricorn Diamonds were accepted. I held:[26]

"It is primarily for Parliament to determine that which is the appropriate compensation for a compulsory acquisition. Unlike, for example, legislation concerned with compulsory acquisition of property, here the law allows limited compensation and makes no provision for special compensation over and above value such as solatium. The High Court has stated that the role of the courts is to determine whether that compensation might reasonably be regarded as just: "[i]f that compensation satisfies the requirement of 'just terms', the Court will not declare the terms unjust and the law in excess of power for the reason that the Court entertains an opinion that other terms would have been fairer or more appropriate". Again, as the High Court has made clear, whether compensation is just is determined by reference to whether the compensation is fair as between the owner of the property and the person acquiring the property. From a fundamental perspective there is no statutory solatium provision expressly or impliedly contained in Part 6A.2.
Necessarily, if the minority security holders could require a premium for their securities, Parliament's express intention to provide for the compulsory acquisition of property on just terms would be frustrated. In particular, the inclusion of a premium in the determination of "fair value" would suggest a capacity in the minority security holders effectively to veto the compulsory acquisition process by seeking prohibitive prices (based solely on the security holders' minority status) for the acquisition of their securities. In my view, it would run counter to the clearly expressed words of the section and the legislative intent as clarified by the explanatory memorandum to the legislation." (Footnotes omitted) [27]

[26]At paras 113 – 114.

[27]See, also, Pauls Limited v Dwyer & Ors (2001) 19 ACLC 959; Austrim Nylex Limited v Kroll (2001) VSC 168 at [17].

Further, there is authority[28] to the effect that there are certain acquisitions in the absence of express legislation to which s.51(xxxi) does not apply. I concluded in Capricorn Diamonds that Part 6A.2 is not a law properly characterised as a law with respect to the acquisition of property for the purposes of s.51(xxxi). I held[29] that properly construed Part 6A.2 is not a law with respect to s.51(xxxi) and the requirement to provide "just terms" does not apply. I held that the constitutional requirement of "just terms" is not triggered and that the invalidity argument of the defendants in Capricorn Diamonds failed. I reject the submissions of the defendants in this matter based on the same analysis as applied in Capricorn Diamonds.
[28]Attorney-General (Cth) v Schmidt (No. 1) (1961) 105 CLR 361, 371 – 372; also, Nintendo Co Limited v Centronics Systems Pty Ltd (1994) 181 CLR 134.
[29]At para 120.

There was an additional constitutional argument in the present case that s.667C is constitutionally invalid unless preserved by s.1350 of the Corporations Act. The section provides for compensation by the acquirer and the institution of proceedings by the person whose property is acquired where the acquisition would otherwise be constitutionally invalid. Here the defendants contended that in any event s.1350 did not provide a solution.

I considered the same argument in Capricorn Diamonds[30] and held that the argument of the defendants challenging the constitutional validity of s.667C of the Corporations Act failed and I rejected the correlative argument to the effect that s.1350 of the Corporations Act did not apply. In particular, I held:[31]
[30]At paras 121 – 127.
[31]Capricorn Diamonds at paras 124 – 126.

"In my view, s.1350 plainly gives effect to the requirements of s.51(xxxi) of the Constitution. In this respect I am assisted by the statements of Williams JA in Pauls Limited v Elkington:
'The provision [ie, s.1350], in my view, has the effect that if in law the acquisition must be on 'just terms' because of the provision of the Constitution, that is how the compensation payable must be assessed. In other words the legislation is not rendered invalid by operation of s.51(xxxi) of the Constitution, but rather if the provision of the Constitution applies appropriate compensation must be paid.'

Section 1350 should be interpreted as consistent with rather than contrary to constitutional requirements see eg Residual Assco Group Ltd v Spalvins. Furthermore, the Full Court of the Federal Court held in Minister for Primary Industries and Energy v Davey that a similarly-worded provision was consistent with s.51(xxxi). Yet again, in The Commonwealth v Western Australia, Kirby and Callinan JJ confirmed that a right to seek reasonable compensation in a court provides 'just terms'.
The fact that s.1350 (unlike the provision in Davey) requires the compensation to be provided by the acquirer, and not the Commonwealth, is entirely consistent with s.51(xxxi). Under Part 6A.2, securities will often be acquired by private persons and the obligation to provide compensation will fall therefore on those private persons. In the context of this matter, s.1350 imposes an obligation to provide compensation on an acquirer that has already paid "fair value" for the securities, as assessed under Part 6A.2. Even if there is any difference between "fair value" and "just terms", the possibility that an acquirer could afford to pay "fair value" but could not pay "just terms" is unlikely. There is no question it seems, therefore, of the right to compensation conferred by s.1350 being empty or without substance. Section 1350 does provide for "just terms" and that, in turn, means that Part 6A.2 of the Corporations Act is not invalid by reason of s.51(xxxi) of the Constitution." (Footnotes omitted)

I adopt the same view in the present matter. It follows that the defendants' argument with respect to both the constitutional issue and the argument concerning s.1350 fails.

The Expert Evidence

Separate from my findings on fair value and the constitutional issues I turn to consider the expert evidence in this case.

The Plaintiff relied upon three reports. First, the Independent Expert's report dated 22 December 2000 prepared by DMR Corporate . Second, the DMR supplementary report dated 4 October 2001 prepared by the Independent Expert. Third, the Ernst & Young Report dated 19 October 2001.

The defendants relied upon the report of Lonergan Edwards & Associates ("LEA") dated 28 September 2001. The defendants also led the lay evidence of Catto and Elkington as to the impact of the acquisition and the prices paid for preference shares in other companies obtained through a commercially negotiated bargain. I regard this latter evidence as having little or no relevance to the assessment of fair value for the purposes of s.667C. So far as the overall evidence was concerned, it was the expert evidence as to valuation that was significant.

(1) The Evidence of Kershaw

The plaintiff led evidence from Phillip Kershaw as director and company secretary of Austrim Nylex. He described the principal business of NCL as being the manufacture of nuts, screws, bolts and the like, plastic and rubber components and ferrous castings. Kershaw gave evidence as to the shareholding of Austrim Nylex in NCL, its voting power and the nomination by ASIC of DMR to prepare the independent expert's report for the purposes of the compulsory acquisition.

Kershaw gave evidence, also, as to the other formal steps relating to preparation and service of the notice of compulsory acquisition, the acceptance by some minority shareholders and the receipt of the 12 subject objections comprising a total of 21,143 shares. The plaintiff relied, also, upon the formal affidavit of the company secretary of NCL, Graeme Douglas Norman.

(2) The Evidence of Lom – the Independent Expert

The report of the independent expert, namely, DMR, was prepared principally by Paul Lom. The report was tendered in evidence, further, Lom attended the hearing of the proceeding for the purposes of cross‑examination.

The DMR report was prepared by both Lom and also Derek Ryan. Ryan was not called to give evidence. Lom is qualified as a chartered accountant and a registered company auditor being formerly a partner of KPMG and Touche Ross but for a number of years specialising in audit matters. He also has extensive experience in acquisitions, valuations and privatisations both in Australia and overseas. Ryan apparently had over 30 years experience in accounting including the preparation of valuations, takeovers and capital reconstructions. The qualifications and expertise of Lom and, for that matter, Ryan, were not challenged by the defendants.

In summary, the evidence of Lom considered the history of NCL, its share capital and its operating performance. He also considered the net assets, share price history and cash flows. In addition, Lom considered an earnings based valuation ("EBV") and for comparative purposes valuation applying earnings before interest and tax ("EBIT") or earnings before interest, tax depreciation and amortisation ("EBITDA"). Ultimately, Lom concluded that after considering these valuation methods the maintainable EBIT ought be in the range of $50,000,000 to $60,000,000. Following these valuation methods through Lom concluded that a preliminary low valuation was in the sum of $300,000,000 and a high sum of $390,000,000. He made adjustments for surplus assets and interest bearing liabilities and eventually concluded that based on the capitalised maintainable earnings before interest and tax methodology the value of NCL was in the range of $227,000,000 to $317,000,000 equating to a value per ordinary share in the range of $1.12 to $1.56. Applying earnings based valuations, therefore, Lom concluded that on a capitalisation of earnings methodology the value of NCL is in the range of $200,000,000 to $270,000,000 deriving a value in the range of $0.99 to $1.33.

With respect to the valuation of NCL preference shares Lom took account of a number of factors. They included that the preference shares are not convertible into ordinary shares, cannot be redeemed, return a fixed rate of five per cent, carry voting rights in defined circumstances only and that the shares are cumulative. Lom observed, also, that there is no obligation NCL to frank dividends paid to holders of preference shares and that the shares are unlisted and therefore an "illiquid investment". With these and other factors in mind Lom concluded that the NCL preference shares should be valued by capitalising the future maintainable dividend attaching to the preference shares. He gave consideration, further, to market history and concluded that the value of NCL preference shares is in the range of $1.26 to $1.61.

Lom considered, in addition, the fact that the preference shares are in effect a perpetual debt of NCL because they are not redeemable. He considered the preference shares could be valued, therefore, by reference to other long term debt instruments. After considering suitable alternatives such as ten year Commonwealth bonds and their relevant yield Lom concluded that the NCL preference shares would not exceed a value beyond $1.71 per share. Weighing the market evidence and the value as a debt instrument Lom concluded that the fair value of the preference shares is in the range of $1.26 to $1.71. Ultimately, Lom concluded that as the cash consideration offer was the sum of $2.00 thereby exceeding the maximum value of $1.71 thereby the terms proposed in the compulsory acquisition notice gave a fair value for the securities. He observed, also, that in accordance with the requirements of s.667C(2) of the Act he had given consideration to the preference shares in the preceding six months period and noted that the last recorded sale was on 13 January 1998 when 50 shares were sold at a price of $1.42 per share.

Following consideration of the report of the independent expert, namely, that of DMR prepared by Lom, the defendants responded and relied upon the expert evidence of Wayne Lonergan of LEA. Thereafter there were further reports by both Lom and another expert, Selak. It is appropriate, in the sequence of events, to consider next the report of Lonergan.

(3) The Evidence of Lonergan – the LEA Report

Lonergan was called by the defendants as their expert. He has given evidence on a number of occasions in valuation cases including, relevantly, in Capricorn Diamonds and Kelly-Springfield. His evidence was rejected both on the application of legal principles and methodology in Capricorn Diamonds. On the other hand, his evidence was to some extent accepted by Santow J in Kelly-Springfield with respect to special benefits described by the learned judge as "reflexive value".

In summary, Lonergan did not approach value on a pro rata basis. He applied a special benefit and incorporated such benefits in the assessment of fair value. On the basis of the approach as to legal principles I have set out thus far I reject the evidence of Lonergan. Even so, it is useful to set out the summary of Lonergan as to his attitude towards the report of the independent expert and his assessment of fair value:

"DMR concluded that, in its opinion, the price offered by Austrim of $2.00 per preference share represents 'fair value'. However in our opinion, DMR's assessment of the 'fair value' of the National Consolidated preference shares is far too low because:
(a)DMR has valued the preference shares on the basis that they are a pure income producing debt instrument only
(b)DMR ignores the fact that Austrim can be expected to generate substantial benefits from acquiring all the remaining preference shares (eg. cost savings and interest rate benefits from being able to continue to charge National Consolidated's asserts for group borrowing)
(c)DMR ignores the fact that Austrim should be prepared to pay a proportion of the value of special benefits to minority shareholders in order to obtain the substantial benefits which Austrim will not obtain unless they acquire the remaining preference shares in National Consolidated
(d)DMR attributes no premium value to take into account the fact that minority shareholders are being forced to sell their shares and will be financially disadvantaged by doing so
(e)DMR attributes no value to the voting rights attributable to the preference shares.

Our assessment of 'fair value'
In our opinion, the 'fair value' of the preference shares comprises the following elements:
(a)the value of the preference share as a secure income producing security; plus
(b)a share of the 'special benefit' that will be able to be accessed as a result of the acquisition of the remaining preference shares; plus
(c)a premium for forcible taking to compensate preference shareholders for the disadvantages they will suffer as a result of the compulsory acquisition of their shares.

In other words, an offer consideration would, in our view, be demonstrably unfair if it leaves the preference shareholders with less income and less security of income than they would have had but for the acquisition. It would also, in our view, be demonstrably 'unfair' if the preference shareholders did not share in the special benefits created by their acquisition plus a premium for forcible taking to compensate them for the other financial and other disadvantages that they will suffer.
Special benefits
In our opinion, the total value of special benefits is approximately $3.88 million to $7.48 million, representing $0.28 million (being the value of cost savings) plus $3.6 million to $7.2 million in estimated interest rate benefits.
The assessment of the 'fair' share of the value of the special benefits attributable to the preference shareholders is, to a degree, subjective, however in our opinion, it should be noted that:
(a)the special benefit would not exist in the absence of the acquisition
(b)the preference shareholders will not otherwise share in the special value benefit themselves as they do not participate in the profits and assets of the company (other than to the extent of their fixed dividend entitlements)
(c)however, the consent of the preference shareholders is required so that the ordinary shareholders can get access to the special value benefits created in perpetuity
(d)the ordinary shareholders can only receive the special value benefits (in perpetuity) through acquiring all the preference shareholders' shares, which they are unlikely to do unless they share the special benefits with the preference shareholders. This is because, inter alia, the preference shareholders would be exposed to financial risks as a result of this access being granted. It would be economically irrational for preference shareholders to expose themselves to this risk without compensation.

It appears therefore that neither the ordinary nor preference shareholders can share in the special benefits without the consent of the other and it is only as a result of the acquisition that this special benefit can be obtained by Austrim in perpetuity. Given that both ordinary and preference shareholders therefore have to agree (in the absence of compulsion), in our opinion, it is therefore reasonable to apportion the special value benefits equally between the share classes."

Furthermore, Lonergan imposed his own interpretation on the requirements of the Corporations Act in particular s.667C to provide the foundation of an allowance for that which he termed "income value" being a secure perpetual income stream for the minority shareholders. He imposed his own interpretation of the statute to justify the allocation of a special benefits value and, also, a premium for forcible taking. For the reasons set out already, in particular those recited in Capricorn Diamonds, I reject the construction imposed by Lonergan under the statute. Nevertheless, there were other aspects of the evidence of Lonergan to be considered.

(4) The Further Report of Lom

Lom prepared a report in response to the opinion of Lonergan. In essence, the difference between Lonergan and Lom was that Lonergan allocated a special value of $8.88 and a premium for forcible taking of $0.25 together with a value as an income producing security of $1.61 thereby deriving a total value of $10.74 compared with the value of Lom of $1.71. The main obvious point of difference between Lonergan and Lom was the allocation of special value. A further critical difference between the two experts was that Lonergan allocated special value not a pro rata basis but entirely to the minority. In Capricorn Diamonds I held that distributions should be on a pro rata basis. Lom in his subsequent report observed that an allocation of the special value attributed by Lonergan on a pro rata basis would alter the Lonergan valuation and lead to an allocation of special value of $0.02 thereby deriving a revised valuation of $1.88. On that basis, therefore, even if a share of special value and a premium for special taking was taken into account the valuation of Lonergan did not exceed the bid price of $2.00 that is the subject of the notice of compulsory acquisition.

(5) The Evidence of Selak

The plaintiff called as an expert John Selak, chartered accountant of Ernst & Young. Selak had formal qualifications in accounting and extensive experience in valuation.

Selak identified that the essential difference between the plaintiff's assessment and that of Lonergan was the allocation of special value by Lonergan. Similar to Lom, Selak observed that if special value or benefit was distributed on a pro rata basis then the quantum of such benefit would be in the order of a low value of $0.02 or a high value of $0.04. On that basis, therefore, Selak concluded that even if an allocation was made in the valuation for special benefits the fair value would be in the order of $1.98 that is less than the $2.00 per share offer of Austrim.

Findings on the Evidence

The Independent Expert in the December 2000 Report was of the opinion that the terms of the Plaintiff's compulsory acquisition notice gave a fair value because the $2.00 cash sum in the notice was higher than the range of values which the Independent Expert assessed as fair value.

(1) Method of Valuation

The Independent Expert valued NCL as a whole by capitalising earnings, both price earnings, and earnings before interest and tax. As I observed in Capricorn Diamonds, this is a traditional method of valuing a company. The Independent Expert concluded that the value of NCL was in the range of $200,000,000 to $270,000,000.

The Independent Expert concluded, further, that the appropriate method of valuing preference shares with no fixed maturity date was to capitalise future maintainable earnings. Based on market dividend yield, the Independent Expert concluded that the value of NCL preference shares was in the range of $1.26 to $1.61. Based on an analogy between the NCL preference shares and other long term debt instruments, the Independent Expert concluded that the value of NCL preference shares fell in the range of $1.26 to $1.71. It was concluded, therefore that the value of NCL preference shares did not exceed $1.71. As the cash consideration offered of $2.00 exceeded the maximum value of each preference share, the Independent Expert concluded that the terms of the compulsory acquisition notice give a fair value for the securities concerned.

A troubling aspect of the evidence of Lonergan was the extremely varying fair values contemplated by him ranging between $40.48 and $76.66, $46.08 and $87.46 and $6.12 and $18.98. After considering these potential values, Lonergan concluded:

" … it is our opinion that the 'fair value' of the preference shares comprises:
(a)their value as a secure income producing security;
(b)a fifty per cent share of the special benefits from acquiring the remaining preference shares together with
(c)a premium for forcible taking (including loss of voting rights)."

Ultimately Lonergan selected $11.00 as a single point estimate of 'fair value' being within a selected lower range of $6.12 and $18.98.

In his October 2001 Report, Lom rejected a number of aspects of the report of Lonergan. In particular, Lom expressed the view that:

"No premium should be incorporated in 'fair value' to reflect the fact that minority shareholders are being forced to sell their shares as this is not part of the value of the company as a whole:
* * * * * * * * * * * * * * * * * * *
it is inappropriate to assume that preference shares last 'forever'. The company in which a preference share is held might collapse, leaving the preference shareholder with nothing. NCL nearly did, and might still, itself collapse;
even if special benefits are to be taken into account, they must be allocated equally amongst all shares in the company – that is, pro-rata. It cannot be correct to simply divide the special value equally between preference shares and ordinary shares;
when the total value of special benefits alleged by LEA are allocated pro rata, they increase the value of the preference shares by between 2 cents and 4 cents. This compares with LEA's suggested 50/50 split, which increases the value of the each preference share by between $38.80 to $74.80;
some of the suggested cost savings that LEA alleges Austrim will achieve if it becomes a 100 per cent owner could be achieved without Austrim becoming a 100 per cent owner;
LEA relies on some information which did not exist at the date of the compulsory acquisition notice."

Selak also rejected the contentions advanced by Lonergan.

The approach adopted by Lonergan not to allocate special benefits on a pro-rata basis leads to anomalous results. In particular, on his approach, if there was one preference shareholder holding one preference share, and that person refused to sell, Austrim Nylex would have to pay between $194,000 (five per cent of the total value of special benefits) and $1.94,000,000 (50 per cent) for that share. For the reasons stated in Capricorn Diamonds there is no warrant for allowing a premium for forcible taking. However, there is an additional factor here. In my view the Austrim Nylex consideration of $2.00 would leave the preference shareholders with the ability to generate higher income than they do at present. In any event, focusing only on the wide range of values given by Lonergan, I consider his approach is unreliable and ought be rejected. In my view the evidence of Lom and Selak is to be preferred. The approaches of Lonergan represented a vast range of valuations from of $6.12 at the lower end to $87.46 at the upper end. It was difficult to comprehend the basis for the extreme range. It was difficult to comprehend why he selected a figure that fell within the lowest range $6.12 to $18.98 that is $11.00 as opposed to the highest range being $46.08 to $87.46. The approach of Lonergan lacked logic and not accord with usual methodology in valuation assessments when compared with the assessments Lom and Selak.

In addition to his valuation, Lonergan applied that which he termed cross-checks for reasonableness. He applied as a cross-check the price at which other preference shares have been traded over the last decade. He relied upon a price of $7.50 paid for the preference shares in another company, Ampol. However, he admitted in cross-examination that the $7.50 paid for those Ampol preference share was a "greenmail" value. Lonergan acknowledged that on another occasion he had defined that value as "substantially above fair value". Thus Lonergan was selective in his consideration of allegedly comparative preference share values. In cross‑examination Lonergan conceded that his method was intended to represent, so far as is possible, the conduct of parties reaching an agreement in the context of normal commercial bargaining and that in such bargains "greenmail value" was extracted. As I observed in Capricorn Diamonds, the eradication of greenmailing is a fundamental imperative of the present legislative regime. In this respect, I do not accept the evidence of Lonergan.

(2) Costs Savings

Lonergan considered that costs savings derived from the acquisition ought be factored into the valuation. Even if the Independent Expert and the Court are required to take into account "special benefits" in the determination of "fair value", in the present case (save in one small respect) there is no evidence of any benefits special to Austrim Nylex that will accrue by reason of its owning 100 per cent of the preference shares in NCL in the nature of costs savings.

Kershaw said that the suggested cost savings were largely trivial except in one respect. His evidence was to the following effect:

(a)there would be no cost reductions in relation to the maintenance of the share registry;
(b)the savings in relation to "secretarial aspects" may be $2 given how few trades there were in the preference shares;
(c)savings in respect of the auditing of the separate accounts may be in the vicinity of $20 000, but that would be available only if ASIC accepted a cross-deed covenant and there was a cost (albeit one off) in relation to procuring that;

(d)the preparation of compliance certificates by external lawyers would involve a trivial cost; and
(e)there were no tax benefits accruing to Austrim Nylex by reason of the acquisition of the NCL preference shares.

On the evidence the only cost saving related to audit fees. Kershaw said that the cost saving might be in the order of $20,000 per annum. No attempt was made by the defendants to quantify that cost. In my view, Kershaw was in the best position to consider potential costs savings. I accept his evidence that there would be none save perhaps for audit fees that were comparatively small and not satisfactorily established on the evidence.

(3) The Advantage or Benefit of 100 per cent Ownership

Lonergan identified one other potential benefit to Austrim Nylex. He said that if Austrim Nylex acquired 100 per cent of all the shares in NCL then Austrim Nylex could offer all the assets of NCL to its bankers as security for its own borrowings and that, in doing so, it could reduce the cost of borrowings. For this purpose Lonergan assumed both a "low benefit", namely, an interest rate improvement of 0.5 per cent, and a "high benefit", namely, an interest rate improvement of one per cent. He said that this benefit would be available only if Austrim Nylex achieved 100 per cent of NCL. However, Austrim Nylex already has the ability to cause NCL to charge its assets in favour of Austrim Nylex borrowings. Hence the benefit exists and does not depend upon Austrim Nylex achieving 100 per cent of NCL. It follows, therefore, that in so far as Lonergan considered this to be "special benefit" to that must be taken into account his analysis was erroneous.

Furthermore, Austrim Nylex does not require 100 per cent control of NCL in order to be able to cause NCL to charge its assets in favour of Austrim Nylex Group borrowings. Even without 100 per cent control, NCL's assets could lawfully be charged by obtaining the approval of shareholders pursuant to the provisions of Part 2E.1 of the Corporations Law or by converting NCL to a private company. However, given my primary conclusion with respect to this factor it is unnecessary to embark on further consideration of Lonergan's analysis.

Kershaw gave evidence including the annual reports for NCL and Austrim Nylex for the year 2000 and certain guarantees of indebtedness of Austrim Nylex by NCL. The evidence disclosed that NCL had been indebted to the NAB for $80,000,000 when Austrim Nylex took over NCL. The NAB terminated its facility. Austrim Nylex established facilities that it drew down and from which it was able to make advances to NCL to permit it to repay the NAB. As part of the consideration, NCL guaranteed the liabilities of Austrim Nylex. Thus there remained outstanding indebtedness by NCL to Austrim Nylex of approximately $203,000,000. Kershaw gave evidence that that indebtedness was informally documented and repayable on demand.

Lonergan acknowledged that approximate indebtedness and that Austrim Nylex could require repayment of that amount on reasonable notice.

Lonergan acknowledged also that if Austrim Nylex took security from NCL, it could assign that security to its own lenders. In simple terms the financial strategy is one available to Austrim Nylex at present and is not a benefit available to Austrim Nylex only if Austrim Nylex acquires 100 per cent of NCL. Thus, insofar as Lonergan factored in a special benefit for 100 per cent ownership in this respect it was misconceived. Even if it were such a special benefit, Lonergan has assumed that the whole of Austrim Nylex's the unsecured debt of $335.7,000,000 of Austrim Nylex could be secured over the assets of NCL.

The assumption was erroneous as borne out by the evidence of Selak. He gave evidence relating to the availability of the assets of NCL as security. He relied upon the book value of the assets of NCL. They were $497,000,000. Selak said that the book value of the assets of NCL would need to be discounted to their security value before any advantage available to Austrim Nylex could be determined. Selak gave unchallenged evidence that the security value of those assets was approximately $213,000,000. Allowing for the fact that Austrim Nylex could demand security in respect of $203,000,000 already NCL could only offer as security the difference between $213,000,000 and $203,000,000, that is, $10,000,000 over and above that to which Austrim Nylex was already entitled. Selak gave other evidence that NCL had a contingent liability to Austrim Nylex in respect of mandatory converting units and that such liability would be taken into account by any party proposing to take security over the assets of NCL. Selak concluded and I accept that NCL had no further ability to provide security for the borrowings of Austrim Nylex over and above that to which Austrim Nylex was already entitled given the discounts to security value from book value and given that a banker would take into account the existing liability in relation to the units.

(4) Voting Rights

Lonergan also contended that there were several items that needed to be taken into account to determine the compensation for forcible taking. The first item concerned the voting rights of the minority to which he assigned a value of $0.07. However, the assessment was misconceived as a dissatisfied shareholder is entitled to invoke the jurisdiction of the court to restrain the way in which a company is conducted. Such standing does not depend upon votes being attached to a shareholding.

Lonergan also said that the preference shareholders should be compensated for the fact that they were being compelled to give up a valuable security particularly as shareholders lost tax and investment benefits.

Selak said that, whether or not the preference shareholders were required to pay tax on the proceeds of the $2.00 per share, they would be better off than they were at present if they invested in government bonds. He provided an analysis of risk adjusted returns. In cross‑examination Lonergan agreed that the preference shareholders would be better off if they invested in government bonds. Further, Lonergan asserted that interest rates might drop to one per cent but he conceded that he could not identify a time when the interest rate on government bonds dropped below three per cent. I do not accept the evidence of Lonergan.

It follows from my analysis of the expert evidence that I reject the evidence of Lonergan as to method of valuation, special benefits (based on costs savings and the achievement of 100 per cent ownership) and any premium or benefit (based on voting rights) and loss of form of investment). Thus, even if the construction I placed on the relevant statutory provisions was in appropriate, I do not accept the evidence of Lonergan in any event. In my view the overall evidence of Lom and Selak is to be preferred to the evidence of Lonergan.

(5) Other Matters

In cross-examination by the ninth defendant, Dr Elkington, it was suggested that the Independent Expert had failed to take into account that the preference shareholders could prevent a cancellation of their shares in reduction of capital. However, the criticism was misconceived because in fact the matter was taken into account. The Independent Expert said that the preference shares should be valued as if they were a "perpetual debt". Furthermore, the Independent Expert expressly referred to the right to vote on a reduction of the capital of the company in the appendix to the first report.

In closing address the defendants sought to re-open their case to introduce evidence in purported support of a new point not previously foreshadowed. They contended that Austrim Nylex is not the holder of "full beneficial interests" in 90 per cent of the shares of NCL pursuant to s.664A(1) because of certain securities given by Austrim Nylex relating to its shares in NCL. The submission was misconceived. A party does not lose full beneficial interests in a share by creating a security interest in that share. A security interest does not deprive the chargee of equitable ownership. So much is clear from consideration of the authorities and the texts on the topic.

In discussing the distinction between mortgages and charges, see Tyler Young & Croft Fisher & Lightwood's Law of Mortgage (Australian edition) 1995 states at para [1.5]

"A mortgage is a form of security almost invariably created by contract, conferring an interest in property defeasible – that is, annullable – upon performing the condition of paying a given sum of money, with or without interest, or performing some other condition. The classic description of a mortgage was given by Lindley MR in Santley v Wilde [1899] 2 Ch 474, as follows: 'A mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given'."

The authors then refer to the judgment of Gillard J. in Waldron v Bird [1974] VR 497 at 501.

At [1.6] Tyler Young and Croft state:

"A charge is the appropriation of real or personal property for the discharge of a debt or other obligation, without giving the creditor either a general or special property in, or possession of, the subject of the security, for example, an order upon a third party to apply money in that person's hands to the discharge of a debt, or a charge on realty for the payment of a specified amount." (emphasis added).

Even in the case of a legal mortgage, the mortgagee does not hold the property beneficially. See Finch, "Security Over Shares" (1995) 13 Company and Securities Law Journal 292 at 296. Further, Jacobs' Law of Trusts in Australia (R P Meagher, W M C Gummow, 6^th ed, at p 29) states:

"The charge creates an equitable interest in the property in the person in whose favour it is charged so that it does to that extent resemble a trust. Such a person however, has only a security interest in the property and has not the equitable ownership in the same way as a beneficiary under a trust." (emphasis added)

I would have considerable hesitation in allowing a party to re‑open its case to put an entirely new point in the overall circumstances of this case including the fact that the parties agreed to pre‑trial directions. However, the point is misconceived in any event. In addition, I observe that it is equitable ownership to which s664A(1) of the Corporations Act is directed. This is confirmed both by other sections of the Act.[32]
[32]See for example, Part 60.2, ss.672A and 672B and the definition of "relevant interest" in ss.608 and 609.

Finally, I observe that there seems to be no logical reason to suppose that the legislature intended to exclude from the compulsory acquisition procedure a holder of 90 per cent of the relevant shares who has charged some or all of those shares. Further, for the reasons stated already the task of the Court is directed to circumstances that existed at the time the notice of compulsory acquisition was given. At that time, the charges that the defendants seek rely on did not exist. Consequently, there is no evidence that at that time Austrim Nylex was other than a 90 per cent holder of full beneficial interests in NCL shares.

Procedural Matters

The defendants in the present proceeding made very similar submissions to those made by the defendants in Capricorn Diamonds with respect to disclosure. The defendants challenged whether the compulsory acquisition notice served by Austrim Nylex disclosed all information that was material within the meaning of s.664C of the Corporations Act. There were other matters relating to technical compliance with the requirements of Part 6A of the Act.

As in Capricorn Diamonds, here the defendants criticise the procedures adopted by Austrim Nylex in respect to the notice process. In Capricorn Diamonds I held:[33]

"Commentators have observed that s.664C is framed so that failure to meet its requirements (including disclosure of material information) deprives a majority of the right of compulsory acquisition. Commentators have contemplated that curative relief under s.1322 of the Corporations Act is precluded. Nevertheless, the same commentators have observed that the procedural requirements of s.664C(2) – (5) (as to service and timing) are cast in different terms and that in all likelihood s.1322 would be available to cure procedural defects. Obviously, s.1322 is available if needed. The section is cast in terms not confined to any particular part, provision or division of the Corporations Act. In other words, the section is available wherever and whenever an irregularity may arise. In particular, s.1322(4) is cast in terms that although it is a section that ordinarily and conveniently is described in terms of dealing with irregularities it extends to the case in which but for the remedial order a step taken under the legislation may be seen to be invalid.
In any event, I consider the correct approach with respect to s.1322 is that adopted by Douglas J in Pauls case. There the learned judge observed that objections of a procedural nature could be excused by the provisions of s.1322, if necessary. A similar approach was adopted although in a different statutory context by the New South Wales Court of Appeal in Kelly‑Springfield." (Footnotes deleted)

[33]Paras 242 – 243.

I also considered in Capricorn Diamonds the authorities as to matters that might reasonably affect or tend to affect the decision of the ordinary investor whether or not to accept the offer. I described the types of matters that are material for the purposes of the decision to be made by the investor[34] as including:

(a)Any information that is necessary to enable an offeree to make an informed assessment of the offer;[35]
(b)information that would have had actual significance to the deliberations of a reasonable offeree even if its disclosure would not have been likely to alter an investor's decision;[36]
(c)information that might reasonably affect or tend to affect the decision of the ordinary investor, including sufficient information to enable an offeree to judge how valuable the acquisition will be to the bidder permitting an informed assessment of whether the bidder may be prepared to pay a higher price.[37]

[34]Capricorn Diamonds at para 245.

[35]Australian Consolidated Investments Limited v Rossington Holdings Pty Ltd (No. 2) (1992) 10 ACLC 600, 601.

[36]TSC Industries Inc v Northway Inc (1979) 426 US 438; 48 Led 2D 757; 96 Sct 2126; also Savage Resources Limited v Pasminco Investments Pty Ltd (1998) 159 ALR 304.

[37]Pancontinental Mining Limited v Goldfields Ltd (1995) 16 ACSR 463, 467.

Here the defendants, as occurred in Capricorn Diamonds, adverted to the scheme of arrangement context to support the assertion that there was insufficient disclosure by Austrim Nylex. In Capricorn Diamonds[38] I considered the relevant authorities with respect to schemes and takeovers but ultimately concluded[39] that the cases concerned with schemes and takeovers were not concerned with the materiality of information in the context of a compulsory acquisition under Part 6A.2 of the Corporations Act.
[38]At 246 – 247.
[39]At para 248.

Ultimately, there was no evidence or insufficient evidence of the matters complained about by the defendants with respect to material disclosure. Importantly, there was no evidence that any of the matters relied on by the defendants were material to a minority shareholder's decision to object. Furthermore, it behoved the defendants to demonstrate knowledge by Austrim Nylex of the information concerned, that it was material to deciding whether to object to the acquisition and that the information was not disclosed in the independent expert's report. To state the obvious (and as observed in Capricorn Diamonds[40] materiality is determined by reference to the facts as known to Austrim Nylex at the time of preparing the notice and by reference to the significance of the information concerned to deciding whether to object to the acquisition as set out in s.664C(1)(e) of the Corporations Act.
[40]At para 258.

In any event, if there had been failure by Austrim Nylex to provide material information known to it I consider any such failure in the present circumstances would constitute a procedural irregularity and that Austrim Nylex ought be relieved from any consequences. If any invalidity of the notice were to have resulted I would validate the notice pursuant to s.1322(4). I adopted the same attitude in Capricorn Diamonds.[41]
[41]At para 259.

With respect to alleged procedural difficulties I also held in Capricorn Diamonds[42] that s.1325D of the Corporations Act enables the Court to declare that any act, document or matter is not invalid because of a contravention of Chapters 6, 6A, 6B or 6C of the Corporations Act if satisfied that the contravention ought be excused. In my view in the present case if any act, document or matter was invalid because of a contravention of the relevant provision I would be persuaded to grant declaratory relief under s.1325 to overcome that which I regard as inconsequential contravention in any event. Furthermore and quite significantly, no substantial injustice appears to have been caused to any party because the requisite objections were made and the matter has proceeded to the Court. Hence, if required, s.1325DC provides a complete answer to the criticisms made by the defendants under s.1322 of the Corporations Act.
[42]At para 260.

Conclusion

It follows from these reasons that I am satisfied that the compulsory acquisition notice gives fair value for the NCL shares the subject of the notice. In accordance with the statutory directive in ss.664(3) and 664F(1) of the Corporations Act, therefore, I must approve the compulsory acquisition and I will make orders accordingly.

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[2002] VSC 193

24 May 2002