ConocoPhillips WA - 248 Pty Ltd v Batoka Pty Ltd - [2005] WASC 184

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: CONOCOPHILLIPS WA - 248 PTY LTD -v- BATOKA PTY LTD [2005] WASC 184

CORAM: TEMPLEMAN J

HEARD: 12 MAY & 21, 22 & 23 JUNE 2005

DELIVERED : 23 AUGUST 2005

FILE NO/S: COR 322 of 2003

BETWEEN: CONOCOPHILLIPS WA - 248 PTY LTD
Plaintiff
AND
BATOKA PTY LTD
Defendant

Catchwords:

Corporations - Compulsory acquisition of shares - Application for approval of terms of acquisition notice - Objections that valuer's report not independent, did not disclose reasons for valuation, was not independently verified and was not based on markets which would produce a higher price for the acquiring company to pay

Legislation:

Corporations Act 2001 (Cth), s 12(2)(c), s 664F, s 667B, s 1322(4)

Result:

Acquisition notice approved

Category: B

Representation:

Counsel:

Plaintiff: Mr C L Zelestis QC, Mr P D Evans &
Ms A Gotjamanos

Defendant: Mr C P Shanahan SC

Solicitors:

Plaintiff: Freehills
Defendant: Stephen Blanks & Associates

Case(s) referred to in judgment(s):

Bromley Investments Pty Ltd v Elkington (2003) 47 ACSR 272
Capricorn Diamond Investments Pty Ltd v Catto (2002) 5 VR 61
IPT Systems Ltd v MTIC Corporate Pty Ltd (2000) 158 FLR 349
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Phosphate Co‑operative Company of Australia Ltd v Shears (1988) 14 ACLR 323

Case(s) also cited:

Aghajanian v Stanley Thompson Valuers Pty Ltd [1999] NSWSC 1154
Austrim Nylex Ltd v Kroll (No 2) (2002) 42 ACSR 18
Bwlfa and Merthyr Dare Steam Collieries Ltd v Pontypridd Waterworks Co [1903] AC 426
Cannane v Official Trustee (1996) 65 FCR 453
Denton v West [1921] 1 Ch 533
Dolby Australia Pty Ltd v Catto (2004) 52 ACSR 204
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 211 ALR 79
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281
National Provincial Bank Ltd v Bradberry [1943] Ch 35
Pauls Limited v Dwyer [2004] 2 Qd R 176
Spencer v The Commonwealth (1907) 5 CLR 418
Teh v Ramsay Centauri Pty Ltd (2002) 42 ACSR 354

TEMPLEMAN J: The plaintiff, ConocoPhillips WA – 248 Pty Ltd, as the owner of more than 90 per cent of the shares in Petroz NL, applies under s 664F(1) of the Corporations Act 2001 (Cth) ("the Act") for the approval of the compulsory acquisition of the remaining shares in Petroz.
The plaintiff achieved a 92.72 per cent shareholding in Petroz on 11 February 2003. The plaintiff then became entitled to acquire the remaining shares in Petroz, compulsorily, pursuant to s 664A(3) of the Act, provided it lodged a compulsory acquisition notice within six months of that date: s 664AA(b).
The procedure for compulsory acquisition is prescribed by s 664C of the Act. Relevantly for present purposes, the acquirer is required to prepare a notice in the prescribed form setting out the cash sum for which it proposes to acquire the shares and to specify an objection period of at least one month.
The notice is to be lodged with the Australian Securities and Investments Commission ("ASIC"), and on the day of lodgement, the notice is to be given to each of the minority shareholders, together with a copy of an expert's report. The report is to be prepared by an expert nominated by ASIC pursuant to s 667AA of the Act. The expert is not to be an associate of the acquirer, within the meaning of s 12 of the Act. By s 667A(1)(b), the report is to state whether, in the expert's opinion, the terms proposed in the acquisition notice give a fair value for the relevant securities.
On 30 April 2003, the plaintiff (through its solicitors) requested ASIC to nominate an appropriate person or persons to prepare a report for the purposes of s 664C. ASIC replied on 12 May, nominating three experts. These included Grant Samuel & Associates Pty Ltd ("Grant Samuel"), which had valued Petroz shares previously, in 2002.
After obtaining quotations, the plaintiff appointed Grant Samuel on 27 June. It is not necessary to refer to the terms of engagement other than to note the inclusion of the following provision, under the heading "Technical Specialist":
"Grant Samuel will engage PetroVal Australasia Pty Ltd ('PetroVal') to provide advice as a technical specialist to Grant Samuel. In particular, PetroVal will provide advice as to likely production rates, capital costs and operating costs for Petroz' producing and planned producing assets. In addition, PetroVal will provide advice as to the market values of any exploration interests."
On 29 July, the plaintiff informed Grant Samuel that it intended to offer 78 cents per share for the remaining Petroz shares. On 4 August, Grant Samuel sent the plaintiff a draft report in which it opined that the appropriate valuation range for the Petroz shares was between 63 and 89 cents per share.
After receiving the draft report, the directors of the plaintiff resolved to increase the price to be offered to 89 cents per share. The plaintiff informed Grant Samuel accordingly.
On 5 August, Grant Samuel provided the plaintiff with its final report. On 7 August, the plaintiff lodged its compulsory acquisition notice and the Grant Samuel report with ASIC, together with other required documents.
These materials were duly sent to Petroz and to the holders of the Petroz shares not then owned by the plaintiff.
In due course, a number of shareholders returned objection forms. The objectors included Batoka Pty Ltd, the defendant.
On 10 October 2003, the plaintiff brought this application.
Section 664F(3) of the Act provides:
"If the 90 per cent holder establishes that the terms set out in the compulsory acquisition notice give a fair value for the securities, the Court must approve the acquisition of the securities on those terms. Otherwise it must confirm that the acquisition will not take place."
Although this provision imposes on the plaintiff the onus of proving that the price at which it seeks to acquire the outstanding Petroz shares represents a fair value, the defendant has opposed the application on a number of specific grounds to which I shall refer below. In essence, the defendant contends that the proposed acquisition price does not reflect the true value of the Petroz shares. The defendant contends further that Grant Samuel was not independent of the plaintiff and that the statutory procedure for compulsory acquisition was not followed.
The determination of fair value involves the assessment of the value of the company as a whole: s 667C(1)(a). In this case, the value of only one of the assets of Petroz is in contention: an 8.25 per cent interest in an oil and gas production project in the Bayu‑Undan field in the central Timor Sea. By way of background, I summarise the relevant features of the project and its status as at the valuation date.

The Bayu‑Undan Project

I take the following summary from an aide‑memoire annexed to the affidavit dated 10 May 2005 and Jarl Bjarte Ellingsen, the Vice President – Finance, of the plaintiff's Australasian business unit. This evidence was not challenged and I accept it.
The Bayu‑Undan Project is based in an offshore gas and liquid hydrocarbon field located some 500 kilometres north‑west of Darwin and somewhat closer to the Democratic Republic of Timor‑Leste (formerly East Timor). The area is designated as a Joint Petroleum Developments Area ("JPDA") by Australia and Timor‑Leste and is subject to Sovereign claims by both nations. However, as a result of a treaty signed on behalf of Australia and Timor‑Leste on 20 May 2002 and ratified subsequently, the Timor Sea Designated Authority was established so as to provide for the co‑operative development of petroleum resources in the JPDA.
The project comprises gas recycle and gas export components. Gas recycling involves the production and export of condensate (a form of light crude oil) and liquefied petroleum gas ("LPG") by tanker from the JPDA, and the re‑injection of gas into the Bayu‑Undan reservoir.
The facilities required for this component include a well‑head platform, drilling, production and processing platforms, a compression, utilities and living quarters platform and a floating, storage and offloading vessel.
The gas export component involves the construction of a 500 kilometre pipeline from the Bayu‑Undan field to a plant for the production of liquefied natural gas ("LNG") to be constructed at Darwin. Facilities are also to be constructed for storing LNG and loading it into tankers for shipping to Japan. The LNG is to be sold to Tokyo Electric and Tokyo Gas over a 17‑year period commencing in 2006, pursuant to a binding Heads of Agreement. This is to be replaced by a more comprehensive agreement.
As at June 2003, the gas recycle project was well advanced. The production wells had been drilled, together with four wells for gas re‑injection and one for water disposal. The offshore facilities had been constructed and commissioning was in progress. The June 2003 monthly report for the gas recycle component disclosed that some $US1.3 billion had been spent, out of an approved budget of $US1.7 billion. Production was due to commence in February 2004. The gas export component was less advanced, having regard to the proposed commencement of production in 2006. However, as at June 2003, contracts had been signed for the construction of the pipeline and the LNG plant at Darwin. Construction of that plant commenced on 24 June 2003.
The joint venture parties involved in the exploitation of the Bayu‑Undan field included ConocoPhillips (03‑12) Pty Ltd, Petroz (Timor Sea) Pty Ltd, having together an interest of some 60 per cent, and three other companies. A ConocoPhillips company was the operator.

Findings of facts relating to the preparation of the Grant Samuel Report

My findings are based on the evidence of three witnesses and a number of contemporaneous documents. The witnesses are:
•Mr Ellingsen, to whom I have referred above.
•Reginald Stephen Cooper, a director of Grant Samuel who was primarily responsible for the preparation of its report.
•Ian William Northcott, a director of PetroVal who was primarily responsible on behalf of that company for the work carried out pursuant to an agreement with Grant Samuel to which I shall refer below.
The contemporaneous documents included print‑outs of e‑mails generated by the witnesses or by persons working under their respective supervision. The e‑mails form part of the agreed trial bundle. I am satisfied that they are genuine in the sense that they are a faithful record of the writers' thoughts and deeds. Further, I am satisfied that Mr Ellingsen, Mr Northcott and Mr Cooper were honest and truthful witnesses. I attribute such few conflicts in their evidence as there were, to imperfect recollection. I have resolved those conflicts by reference to the contemporaneous documents.
As I have noted above, Grant Samuel appointed PetroVal to provide technical advice about Petroz' oil and gas assets. PetroVal's letter of appointment dated 23 June 2003 was under the hand of Mr Cooper on behalf of Grant Samuel. In the letter, Mr Cooper said:
"The value of the oil and gas assets will be assessed having regard to a discounted cashflow analysis for each asset."
PetroVal was required to:
"Review estimates of reserves, capital costs, production rates and operating costs and advice Grant Samuel as to whether these assumptions are reasonable for valuation purposes."
The scope of the review included:
"Review of cashflow models and advice as to whether the future production plans are reasonable [sic] based on current reserve estimates, having regard to existing production capacities and future capital plans. In particular, Grant Samuel expects that PetroVal will advise us whether the projected production volumes, operating costs and capital costs are reasonable."
Mr Cooper noted that Grant Samuel was required to provide a final report by 31 July 2003. He informed Mr Northcott that Grant Samuel would require a preliminary draft of the PetroVal report by 23 July and a final draft by 29 July.
A discounted cashflow analysis of the kind to which Mr Cooper referred in his letter, provides a standard basis for valuing an income‑producing asset. The analysis involves an estimate of future cashflows which are discounted appropriately, having regard to the fact that the income will be earned over a long period. The object of the analysis is to determine the present capital value of the future income stream.
It is usual for the calculations used in performing a discounted cashflow analysis to be carried out by computer. The algorithms (or equations) which form the basis of the calculation may well be complex. A set of such equations is commonly described as a "model" of the subject of the analysis. Where, as here, a discounted cashflow analysis is to be carried out in relation to a producing oil and gas well, the model will be required to bring into account such matters as the expected production rates and the income generated by the sales of the product. It will also be necessary to have regard to the operating and capital costs of the project. Thus, the present day value of the projected cashflow will depend on future oil and gas prices, inflation rates, exchange rates and taxation matters.
Clearly, the accuracy of an economic model of this kind depends on the accuracy of the assumptions or predictions made in relation to these variables. However, the underlying algorithms, being mathematically based, are independent of such considerations.
Mr Northcott, who for present purposes is the alter‑ego of PetroVal, was well qualified to undertake this assignment. At the time, he had spent some 13 years as an independent consultant to the upstream oil and gas industry. His curriculum vitae refers to his having worked for over 100 clients "within the disciplines of petroleum engineering, development geology, petro physics, reserves assessment, reservoir engineering, production engineering and economic valuations". For 10 years, Mr Northcott was retained by the South Australian Department of Mines and Energy.
Although PetroVal's letter of appointment was dated 23 June, Mr Northcott had been approached by Mr Cooper on 16 June. However, the client's name was not then disclosed to him.
By 19 June, Mr Northcott had agreed to accept instructions. Following a telephone discussion with Rachel Marcionni of the plaintiff, he sent a list of the kind of information he would need, in anticipation of a visit to the plaintiff's offices in Perth.
On 23 June, Ms Marcionni sent an e-mail to Mr Cooper and Mr Northcott in which she asked for some information about the time of the visit, the number of persons who would be involved and a list of the persons who Mr Northcott would need to see, in order to carry out his review.
By then, a decision had been taken by the plaintiff not to disclose its economic models, including that of the Bayu‑Undan Project.
Ms Marcionni set out the plaintiff's position in an e‑mail of 23 June to Mr Cooper and Mr Northcott. She said:
"In terms of the financial models, we will not be providing you with electronic versions of the models themselves, however, we will provide the input data electronically and will provide you with all of the assumptions that goes [sic] into the model. The person who is responsible for preparing the model (Joe Kotarski) will be able to run through all of the inputs and assumptions with you at the time of your visit."
The fact that the plaintiff's model would not be made fully available was a matter of concern to Mr Cooper. This concern is reflected in an e‑mail sent by Ms Marcionni on 24 June to Mr Ellingsen and to Mr Nazroo who was the plaintiff's Commercial Vice‑President. Ms Marcionni said:
"(Grant Samuel) believe that this is fundamental to the whole [independent expert review] process and that they will not be able to complete their [review] without electronic versions of the financial model. We need to resolve this with them as soon as possible. They do not believe that they have completed proper due diligence without reviewing how these models work."
Mr Nazroo proposed a solution to the problem. In an e-mail in which he replied to Ms Marcionni, he referred to the confidential nature of the plaintiff's models and the fact that they contained "a lot of proprietary information". However, Mr Nazroo said:
"They can have whatever relevant information they need to complete their evaluation and if they must see the model then we can provide access to it here. [Mr Kotarski] can work alongside them to ensure they understand how we are doing the calculations."
Mr Northcott and a colleague travelled to Perth on 29 June. They were accompanied on the first day of their visit by Hannah Crawford, an employee of Grant Samuel, who was under Mr Cooper's supervision. Mr Northcott's party attended the plaintiff's offices between 30 June and 2 July for the purpose of gathering information to enable the report to be prepared. In the course of that exercise, several presentations were made to Mr Northcott. However, he did not take up the plaintiff's offer to work on or with the plaintiff's model at its premises. At some point during the visit, Mr Northcott decided (apparently with the agreement of Grant Samuel) that it would be necessary to have an economic model available to them in their respective offices: and that Mr Northcott would himself produce such a model.
Mr Northcott subsequently produced an economic model of the Bayu‑Undan Project. It was based on an Excel spreadsheet. I will refer to it as "the PetroVal model".
It was put to Mr Northcott repeatedly in cross‑examination that he had copied or replicated the plaintiff's model in some way. Mr Northcott denied this. He said, and I accept, that he created his model "from scratch … from a blank sheet of paper initially" (TS252). Mr Northcott said he could not have copied or replicated the plaintiff's model because it was never disclosed to him.
On 3 July (shortly after his return from Perth to Adelaide), Mr Northcott sent the first draft of the PetroVal model to Ms Crawford at Grant Samuel. The model was an attachment to an e-mail in which Mr Northcott referred to it as being incomplete because he needed to print all the spreadsheets and to check the algorithms. He sent it, he said, so that Ms Crawford "could review the logic and structure and advise of any improvements or mandatory requirements I may have overlooked". Mr Northcott did not send the model to Mr Kotarski.
At that stage, as Mr Northcott said in his e-mail to Ms Crawford, he had run his model only on a set of data provided by the plaintiff "as a benchmark case for debugging".
The data on which the benchmark case was based had been used in the production of a document described as an Authority for Expenditure ("AFE"). That was an authority for the ConocoPhillips company, as project operator, to spend money on the project. As Mr Ellingsen said in his evidence, and as I accept, AFEs are subjected to considerable and close scrutiny by the joint venturers.
Mr Northcott assumed that because the plaintiff had substantial resources with which to develop its model, and because the operation of the model would have been checked rigorously over many years, it was likely to be mathematically sound. That is not to say that the plaintiff's model would necessarily work in precisely the same way as the PetroVal model.
Mr Northcott had not previously prepared a model such as the PetroVal model for the purpose of providing data to be included in a public document. Further, the PetroVal model was the most complex of its kind with which Mr Northcott had been concerned. He therefore thought it prudent to have the model checked for mathematical accuracy, not only by Ms Crawford but by the plaintiff. For that reason, on 10 July, Mr Northcott e-mailed his model to Mr Kotarski. He said:
"I would appreciate your assistance to debug and verify that it provides correct answers."

Mr Kotarski responded by e-mail on the following day. He said he had not had time to perform a thorough assessment of Mr Northcott's inputs, but he commented on the calculations he had seen in the model. In relation to those matters, Mr Kotarski pointed out two errors: the omission of offshore operating costs and Timor‑Leste value‑added tax.
Mr Kotarski gave further advice to Mr Northcott on 12 July. He suggested the revision of certain production numbers and the inclusion of depreciation in drilling and "non‑capital" costs. Subject to those matters, Mr Kotarski said, "I think your model will match up with our development plan economics reasonably".
On 14 July, Mr Kotarski reported to Ms Marcionni that:
"… the Bayu model is done. I worked with [Mr Northcott] Saturday am and I don't see a reason for any more work on that model."
Mr Northcott said in his evidence that Mr Kotarski had been an integral and important part of the process of the creation of the PetroVal model. However, I accept Mr Northcott's evidence that Mr Kotarski's role was only to check the programming. I find that Mr Northcott himself produced the PetroVal model, albeit with that assistance.
I have referred above to PetroVal's letter of instruction from Grant Samuel. As is clear from that letter, PetroVal's role did not include the valuation of the Bayu‑Undan Project. Although the PetroVal model did produce net present values for the purposes of the benchmark case, it was necessary to do so in order to make a proper comparison with the data provided by the plaintiff. The benchmark case therefore involved inputting oil prices, discount rates and other economic parameters which were included in the plaintiff's model but which were not disclosed to PetroVal or Grant Samuel, except in relation to the benchmark case. Subject to that, the plaintiff's predictions of these economic parameters was of no concern to Mr Northcott. I am satisfied that they were never disclosed to him.
Once the PetroVal model had been completed, it was used by Grant Samuel (in conjunction with PetroVal) to calculate net present values for the Bayu‑Undan Project for a number of production scenarios. The net present values were then adjusted by Mr Cooper as part of the process of valuation of the Petroz assets.
While the Grant Samuel report was in draft form, it was necessary for the accuracy of the factual content to be checked and verified by the plaintiff. It was Mr Cooper's evidence that this practice is contemplated by ASIC Practice Note 42 relating to the content of expert reports. For reasons to which I shall refer below, I accept that to be so.
Sections 1 to 5 of the draft Grant Samuel report were sent to the plaintiff on 15 July 2003. However, Grant Samuel did not disclose its valuation methodology (other than the fact that it was based on a discounted cashflow analysis) nor its tentative conclusions as to the value of Petroz.
Grant Samuel sent an updated draft of the factual sections of the report to the plaintiff on 25 July.
By that stage, somewhat to Mr Cooper's surprise, the plaintiff had not nominated the price at which it intended to acquire the balance of the Petroz shares. Mr Cooper very properly took the view that Grant Samuel should not disclose its valuation until the plaintiff had nominated the acquisition price. This was in accordance with the ASIC guidelines which were to the effect that the independent expert should not be involved in setting the acquisition price. For that reason, Mr Cooper directed Ms Crawford to inform the plaintiff that Grant Samuel could not and would not provide a draft of the valuation section of its report until the plaintiff had nominated the proposed compulsory acquisition price.
In response to that communication, Stephen R Brand, a director of the plaintiff, wrote to Grant Samuel on 25 July. He said the plaintiff was "considering" whether to acquire the outstanding Petroz shares. He said:
"We confirm that the price under consideration by [the plaintiff] to compulsorily acquire the remaining Petroz shares is the cash amount of A$0.78 per share."
Mr Cooper did not regard that statement as sufficient. He took the view – again very properly – that the independence of Grant Samuel might be compromised if it acted on Mr Brand's letter. That view was communicated to the plaintiff.
In response to Grant Samuel's concerns, Mr Brand sent a further letter, on 29 July. He confirmed that the plaintiff intended to acquire the remaining Petroz shares compulsorily. He said:
"We confirm that the price at which [the plaintiff] intends to compulsorily acquire the remaining Petroz shares is the cash amount of A$0.78 per share."
In response to Mr Brand's second letter, Grant Samuel provided the plaintiff with a draft of its complete report. The draft, which is dated 30 July, set out a valuation range of 61‑86 cents per share. The report stated that the intended offer price of 78 cents per share represented a fair value.
The range was increased from 63 to 89 cents per share in the final draft of the report dated 4 August. The reason for the increase was a decline in the exchange rate between Australia and the United States and because Grant Samuel was informed by Petroz that an intra group debt of US$9 million owed by Petroz to the plaintiff should be taken into account in calculating Petroz' net debt as at 30 June.
Although the plaintiff had expressed its intention of acquiring the outstanding Petroz shares at a price of 78 cents per share, it increased the proposed price to 89 cents. The decision to do so was made following a discussion between Mr Brand and Mr Ellingsen. It was Mr Brand's view that there were less likely to be objections to the compulsory acquisition process if the plaintiff offered a price at the top of the valuation range. Mr Ellingsen did not agree, but Mr Brand's view prevailed.
As I have noted above, the plaintiff's notice, nominating a price of 89 cents per share, together with the Grant Samuel report, were despatched to the relevant Petroz shares shareholders on 8 August, these documents having first been lodged with ASIC and delivered to Petroz.
Against that background, I turn to the contentions advanced by the defendant as the basis for objecting to the compulsory acquisition of its Petroz shares at 89 cents per share.

The defendant's contentions

The defendant's original contentions have been amended several times. I refer to the Second Further Amended Notice of Contentions, incorporating amendments made during the hearing of this application.

Contention 1

"The Plaintiff does not sufficiently establish that the payment of $0.89 per Petroz NL share gives a fair value for such shares because sections 667A(1)(a), 667B(1) and 667B(2) of the Corporations Act 2001 (Cth) when read together require that an expert appointed for the purposes of Part 6A.2 of the Act be independent and the expert's report of Grant Samuel & Associates Pty Limited (GSA) dated 5 August 2003 does not satisfy this requirement of independence (independence understood as being of a similar standard to that set out in ASIC Practice Note 42) by reason of:
(a)GSA was not independent from the time it was first approached by the applicant until its report was published;
(b)GSA was commissioned to prepare a report before the proposal to be reported on was finalised;
(c)GSA began to write the report before the proposal was finalised; and
(d)GSA disclosed to the Plaintiff the appraisal method to be employed and conclusion as to value before the proposal was finalised.
(e)GSA was not independent because the financial modelling employed by it in its report of 5 August 2003 ('the model') was a model constructed by GSA's technical specialist, PetroVal, but that model had been checked, reviewed and approved by the Plaintiff, the 90% holder."

There is no doubt that an expert who prepares a report for the purpose of compulsory acquisition of shares under Ch 6A of the Act must be independent of the acquiring party. In my view, the requirement that the expert be nominated by ASIC is not directed towards securing independence. Rather, I think, nomination by ASIC is intended to ensure that the nominee is appropriately qualified. In my view, s 667B(1) is designed to ensure the independence of the expert. It provides that:
"The expert who provides the report must not be an associate of:
(a)the person giving the notice; or
(b)the company that issued the securities."
Put another way, an expert is independent who is not an associate of the person referred to in (a) above or the company referred to in (b).
The basis for contention 1(a) is that Grant Samuel compromised its independence by providing information, including sections of its draft report, to the plaintiff. I see nothing objectionable in this. As I have noted above, Mr Cooper was careful not to give the plaintiff any intimation of Grant Samuel's views about the value of the Petroz shares until the plaintiff had nominated an acquisition price. Those sections of the draft report which were provided to the plaintiff before it nominated a price, contained only factual information. It was clearly important that this material should be verified; and appropriate that the plaintiff should do so. As I have noted above, such a procedure is contemplated by ASIC Practice Note 42 of 8 December 1993.
Practice Note 42 was issued in response to public concern about the independence and quality of experts' reports reflected in a number of decisions. These included Phosphate Co‑operative Company of Australia Ltd v Shears (1988) 14 ACLR 323. In that case, Brooking J (at page 339) held that an expert should not discuss the valuation method to be used in preparing the report. Such conduct might undermine the independence of the expert. However, Brooking J recognised the need for the expert to provide the client with a draft of that part of the expert report which contained the factual basis for the proposal. His Honour said:
"It is one thing to submit to a client … a draft of that part of a report which reviews the facts. This may well be perfectly proper and perfectly safe and, indeed, desirable, but to submit a draft of argumentative matter or of reasoning is, I think, asking for trouble."
On the facts as I have found them to be, Grant Samuel went no further than the provision of factual material to the plaintiff, until the plaintiff had nominated the proposed acquisition price of 78 cents. I am satisfied, therefore, that Grant Samuel's independence was not compromised.
Objections 1(b) and 1(c) are to the same effect. In my view, provided the expert's independence is maintained, there can be no objection to the commencement of a report before the acquisition price is nominated. The statutory scheme for compulsory acquisition requires only that the independent report accompany the compulsory acquisition notice. The scheme says nothing about the way in which the report is to be prepared. That being so, provided there is no association between the expert and the offeror, I see no objection to the expert embarking on the process of valuation before the client has nominated the acquisition price.
Objection 1(d) arises from the fact that the plaintiff increased its proposed acquisition price from 78 cents to 87 cents after being informed of Grant Samuel's valuation range. But in my view, having regard to the circumstances in which the plaintiff decided to offer 89 cents, it cannot be said that Grant Samuel's independence was thereby compromised.
I see nothing in the legislative scheme relating to compulsory acquisition which would have prohibited the plaintiff's conduct in the present case. Nor do I think that conduct contrary to the spirit of the legislation. It did, after all, result in a more generous proposal.
I am therefore of the view that contentions 1(a) to (d) do not disclose a valid objection. In any event, those contentions are, in essence, particulars of the more general contention that because Grant Samuel was not independent, the proposed payment of 89 cents per share did not represent a fair value. My conclusion that Grant Samuel was independent is therefore a complete answer to those objections in any event.
Contention 1(e) raises the same issue as Contention 2, to which I now turn.

Contention 2

"In breach of s 667B of the Corporations Act, GSA was an associate of the Plaintiff by reason of them acting in concert in connection with the preparation of the expert's report, the construction of the model, and the making of the proposal on which GSA reported on the grounds set out in paragraph 1 above.
PARTICULARS
A.In relation to paragraph 1(e) Mr Northcott, on behalf of PetroVal, had contact with Mr Kotarski, an employee of the Plaintiff, between June and August 2003 inclusive seeking and receiving Mr Kotarski's assistance in the construction of the model by checking, reviewing and ultimately approving the model before it was supplied by PetroVal to GSA for, and employed in, generating the value of Petroz NL set out in the GSA report of 5 August 2003.
B.As a result of Mr Kotarski acting in concert with Mr Northcott by checking, reviewing and approving the model before it was provided by PetroVal to GSA PetroVal and the Plaintiff became 'associates' within the meaning of section 12 of the Corporations Act, and
C.GSA also became an 'associate' of the Plaintiff within the meaning of section 12 of the Corporations Act when it utilized the model checked, reviewed and approved by the Plaintiff for the purpose of valuing Petroz NL because PetroVal was acting as GSA's agent with the knowledge of the Plaintiff."

The basis for contentions 1(e) and 2 is that Mr Kotarski assisted PetroVal by checking, reviewing and approving the model prepared by Mr Northcott. Given my acceptance of Mr Northcott's evidence that the model was his work, albeit produced with some assistance from Mr Kotarski of the kind to which I have referred above, I do not accept that the model was ever "approved" by Mr Kotarski. That is consistent with Mr Northcott's evidence, which I accept, that the relationship between Mr Kotarski and him was never one of teacher and pupil.
The relevant "association" provision of the Corporations Act is s 12(2)(c). For the purposes of ch 6A, it provides that:
" … a person (the second person) is an associate of the primary person if, and only if, …
(c)the second person is a person with whom the primary person is acting, or proposing to act, in concert in relation to the designated body's affairs."
The term "designated body" is defined in s 12(5) to mean a body or a managed investment scheme. The term "body" is defined in s 9 to mean a body corporate or an unincorporated body.
By s 667B(1) the expert who provides the independent expert's report must not be an associate of "the person giving the notice". That is the plaintiff in the present case: and the plaintiff is a body within the definition of that term. In my view, the plaintiff is, for the purposes of s 12(2)(c) the designated body. The relevant "affair" of that body was the compulsory acquisition of the Petroz shares.
Section 12(2)(c) appears to contemplate that the primary and second persons there referred to, are different from the designated body. In the present case, if there was to be an association between Grant Samuel and the plaintiff, the persons must have been Mr Kotarski and Mr Northcott: the latter being regarded as the alter ego of Grant Samuel for these purposes. On that basis, the question arises whether the assistance given by Mr Kotarski to Mr Northcott could have been such that they were acting in concert in relation to the plaintiff's affairs.
The meaning of the expression "acting in concert" was considered by Owen J in IPT Systems Ltd v MTIC Corporate Pty Ltd (2000) 158 FLR 349. At [27], his Honour held that:
" … there must be some pejorative element. It will most often (although not always) be found in a common purpose to circumvent the letter, or perhaps even the spirit, of some other statutory obligation or requirement."
The statutory obligation or requirement in the present case is that Grant Samuel should be independent of the plaintiff. That would clearly have been the case if, as originally intended, Mr Northcott (acting on behalf of Grant Samuel, through PetroVal) conducted an independent review of the plaintiff's economic model of the Bayu‑Undan Project. However, the position was the reverse: Mr Kotarski, on behalf of the plaintiff, reviewed the PetroVal model. In these circumstances, there was, in my view, a conflict of interest. Viewed objectively, the possibility existed that Mr Kotarski might have identified an error in the PetroVal model which had the effect of depressing the value of the Bayu‑Undan Project and was therefore favourable to the plaintiff. Alternatively, there is a possibility that Mr Kotarski had the opportunity of introducing an error of that kind, under the guise of "debugging" the PetroVal model.
Mr Kotarski did not give evidence: and, of course, Mr Northcott had no direct knowledge of what Mr Kotarski did or found in the PetroVal model. However, for reasons to which I shall refer below, any question of impropriety can be excluded in the present case. I do not think it can be said, therefore, that Mr Kotarski and Mr Northcott acted in concert in any way to defeat the statutory obligation to maintain Grant Samuel's independence. I am satisfied that Mr Northcott's exchanges with Mr Kotarski were directed at ensuring the factual accuracy of the PetroVal model: in other words, that the model incorporated an appropriate factual matrix and mathematically correct algorithms.
My reason for excluding the possibility that Mr Kotarski improperly influenced the content of the PetroVal model arises from the fact that the model was checked, and its accuracy verified, by a completely independent expert instructed by the plaintiff. This course was taken because at some stage in the proceedings Mr Northcott became unwell to the extent that it was uncertain whether he would be able to give evidence. Fortunately, he recovered. However, in order to allow for the possibility that he might not recover, the independent expert was appointed to review his work. Leading counsel for the plaintiff took me briefly through the report of the independent expert, contained in his affidavit. His conclusion was that although there were some small errors in the PetroVal model, they had the effect of increasing the value of the Bayu‑Undan Project, not reducing it.
Senior counsel for the defendant did not object to my being informed about these matters from the bar table. Further, in his cross‑examination of Mr Northcott, he did not suggest that there was any error in the PetroVal model.
As I have said previously in these reasons, I was impressed by Mr Northcott who was, I find, well aware of his professional obligations. I think, with respect, that it was unwise to have had the PetroVal model checked by Mr Kotarski. I think the perception that Grant Samuel's independence was thereby compromised is understandable in all the circumstances. However, I am quite satisfied that Mr Northcott did not act in any way improperly.
Had I been of the view that Mr Kotarski had acted improperly, but without Mr Northcott's knowledge, I do not think it could have been said that they were acting in concert.
If I am wrong in my view that there was no relevant association in the circumstances of this case, I would have invited the plaintiff to apply for an order under s 1322(4) of the Act for a declaration that the compulsory acquisition proceedings were not invalid by reason of a contravention of the association provisions. I would have taken that course because, in the circumstances as I have found them to be, if there was any association, it had no adverse effect on the conclusions reached in the Grant Samuel report.

I am therefore of the view that there is no substance to contentions 1(e) and 2.

Contention 2A

"That the report of GSA dated 5 August 2003 is not a report for the purposes of section 667A of the Corporations Act by virtue of the fact that GSA had supplied a copy of its report to the Plaintiff before the Plaintiff fixed the price in the Notice of Compulsory Acquisition dated 7 August 2003."

I have set out above my findings of fact about the circumstances in which the plaintiff fixed the price of 89 cents per share for the purposes of the compulsory acquisition. For the reasons given in relation to contention 1, I see nothing objectionable in that procedure.

Contention 3

"In breach of s 667A(1)(c) of the Corporations Act, GSA's report does not set out the reasons for forming the opinions stated in its report, in particular, its reasons for adopting a value for Petroz NL's share in the Bayu‑Undan Project of US$200 million to US$230 million."

Section 667A(1)(c) of the Act requires the expert who expresses an opinion whether a compulsory acquisition notice gives a fair value for the relevant security, to set out the reasons for forming that opinion. In considering whether that requirement has been satisfied, I adopt the approach of Williams JA (with whom Jerrard JA and Holmes J agreed) in Bromley Investments Pty Ltd v Elkington (2003) 47 ACSR 272, at [18]:
"The essential task of the Judge is to determine whether the price offered is fair and that decision must largely be based on the report of the expert furnished pursuant to s 667AA. Of course, if at the end of the hearing the Judge was of the view that there were such deficiencies in the report that made it impossible to determine whether or not the price offered was fair, approval would be refused. But that does not mean that the report must be beyond criticism before the Judge could act on it and conclude that the price offered was fair."
Senior counsel for the defendant submitted that for the purpose of considering this ground it was necessary to "focus … on the expert's report, rather than the explanations given for the expert's report …". That, I think, is the correct approach. It is necessary to consider the report as would a minority shareholder, to determine whether the report sets out adequately the reasons for reaching the conclusion.
However, senior counsel for the defendant relied on Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705, in which Heydon JA referred to the duties and responsibilities of expert witnesses generally. In so doing, his Honour referred to the prime duty of experts in giving expert evidence:
"To furnish the trier of fact with criteria which enable it to evaluate the validity of the expert's conclusions". (At [59]).
A little later in his discussion, Heydon JA referred to an extra‑judicial observation made by Sir Owen Dixon that:
"Courts cannot be expected to act upon opinions the basis of which is unexplained." (At [60]).
Ultimately, the question for the Court under s 664F(3) is whether the plaintiff has established "that the terms set out in the compulsory acquisition notice give a fair value" for the Petroz shares. In determining that question, it is clearly appropriate for the Court to have regard not only to the expert's report but to the evidence of the author of the report given in explanation of it. In the light of that evidence, and applying the principles discussed by Heydon JA in the Makita case, it will be possible to determine whether the value is fair, keeping in mind always that the Court is not itself required to carry out a valuation.
Viewed objectively, it might emerge that the reasons given by the expert in the report were inadequate. For example, a vital step in the reasoning might have been omitted from the report so as to make it incomprehensible to the reader. Alternatively, it might be that the reasons as expressed in the report were erroneous. It is, of course, necessary to draw a distinction between the inadequate expression of reasons for reaching a sound conclusion and incorrect reasoning leading to a flawed conclusion. In the first example the compulsory acquirer might make out its case: in the second, it could not.
In other words, although there is a statutory obligation to set out in the report the expert's reasons for the opinion expressed, a failure to do so is not necessarily fatal to the success of an application under s 664F.
Although, as I have noted above, senior counsel for the defendant submitted that this objection should be determined by reference to the report itself, that is not how he sought to demonstrate inadequacy of reasoning. Rather, he sought to cast doubt on the adequacy of the reasons by reference to Mr Cooper's evidence that although he had considered certain matters in forming his opinion as to fair value, he had not referred to these matters adequately (or in some cases at all) in the Grant Samuel report.
The first of these matters was the sale of four parcels of Petroz shares in the period September 2002 to March 2003. In par 4.6 of the Grant Samuel report, Mr Cooper said that because Petroz had been delisted in November 2001, there was no "liquid market" for its shares. However, Mr Cooper referred to a number of private transactions which had resulted in the plaintiff increasing its interest in Petroz to above 90 per cent. There followed a table in which the four transactions were summarised, each at a price of $US0.3799.
In his evidence‑in‑chief, Mr Cooper referred to the fact that:
" … the best evidence as to value is typically the price of [sic at] which real‑world buyers of interests in that asset have paid … ". (TS316)
Mr Cooper went on to say that he had regard to transaction evidence as well as the discounted cash flow approach in reaching his conclusion.
In par 6.1 of the Grant Samuel report, Mr Cooper wrote that the discounting of projected cash flows was "the primary methodology" used to value Petroz' interests in the relevant assets, including the Bayu‑Undan Project. A little later, Mr Cooper wrote that Grant Samuel's value had:
"… also had regard to valuation evidence derived from transactions involving interests in Bayu‑Undan."
The only transaction evidence referred to in the report is that mentioned above: the four transactions at $US0.3799 per share. However, in his evidence in cross‑examination, Mr Cooper said that these were not the transactions to which he referred in par 6.4 of the Grant Samuel report. He said the transactions referred to in par 6.1 were not mentioned in the report: and that they were omitted because the plaintiff was "highly sensitive" to the disclosure of that information.
Mr Cooper was asked whether he had investigated the four transactions to which he did refer, having regard to the fact that they all took place at the same price, at a time when the spot oil prices were accelerating rapidly. It was pointed out to Mr Cooper that three of the purchases were made by Agip Oil & Gas Ltd. Mr Cooper said he did not regard the transactions as suspicious, although – not having investigated them – he did not understand the basis of the transactions (TS338).
Importantly, however, Mr Cooper did not regard these transactions as comparable sales because they reflected a value of Petroz which was much lower than his ultimate valuation range.
Although senior counsel for the defendant was critical of Mr Cooper for failing to investigate the four transactions, that is not, in my view, a matter which goes to the adequacy of the reasons. I take that view because it was not suggested to Mr Cooper that if there had been an investigation, the result would have been any different.
In my view, the worst that could be said of the statement that Grant Samuel had had regard to valuation evidence derived from transactions involving interest in Bayu‑Undan, was that it was slightly misleading. That is because the reader might have supposed (wrongly, in fact) that the transactions referred to were the four at $US0.3799 per share.
The next matter relied on by the defendant is the fact that the Grant Samuel report did not make reference to all of the Bayu‑Undan LNG sales profiles modelled by Mr Northcott.
The PetroVal report prepared by Mr Northcott formed Appendix 3 to the Grant Samuel report. In the PetroVal report (page 6) Mr Northcott wrote that for the purposes of an economic analysis of the Bayu‑Undan Project, four cases had been compiled. One of those cases (case 2) modelled the accepted budgets, a revised drilling cost and the terms of the LNG gas supply contract, based on proved reserves. Case 1 assumed a liquid recovery lower than case 2. Case 3 assumed increased gas sales based not only on the proved reserves but also the probable reserves. That case assumed also that the performance of the reservoir would be consistent with simulation forecasts. Case 4 assumed increased production in the early stages of the project due to greater demand. It assumed also that the LNG plant would be capable of producing at its designed maximum operating capacity of 3.23 million tones per annum: and that the increased production could be sold, there being an improved efficiency of liquid recovery.
In fact, Mr Northcott had modelled a fifth case. It was based on the highest estimate of reserves provided by the plaintiff. It assumed that the Bayu‑Undan field would produce gas in addition to that to be sold under the contract. In other words, that gas reflected in the increased reserves would be sold on similar terms, by way of an extension to the contract, some 20 to 25 years hence.
Because the projected income would be received so far in the future (assuming, of course, that the reserves actually existed), the contribution to the net present value of the project was minimal. As Mr Northcott said in his cross‑examination, and as I accept, it was appropriate to put a lower weighting on the model based on the high estimate of reserves "because it has a very low probably of occurrence" (TS302).
Although Mr Northcott accepted that, initially, he thought that the unreported fifth case provided an important element in his modelling, it was Mr Cooper's view that it was unnecessary to refer to that case in the report because of the insignificant effect on the value of the Bayu‑Undan Project. This was not only because the projected income was so far into the future: it was also because any additional production would have attracted a higher tax rate (TS326).
In my view, the omission of any reference to case 5 from the Grant Samuel report is not a matter for legitimate criticism. I consider that Mr Cooper's decision not to refer to case 5 was within his discretion, which he exercised properly, having regard to the factors to which I have referred above.
In the Grant Samuel report itself, Mr Cooper summarised the four cases referred to above (referred to in the report as scenario 1, 2, 3 and 4) and then described each of them in more detail.
Although each scenario is given equal prominence in the report, Mr Cooper said in his evidence that:
"We wholly discounted scenario 1 and had at most only marginal regard for scenario 2" (TS377).
However, the report makes no reference to that fact.
Senior counsel for the defendant submitted, in effect, that it was inconsistent to include a reference to scenario 1 in the Grant Samuel report but not to the additional case identified by Mr Northcott, when both were discounted. Counsel suggested to Mr Cooper in cross‑examination that it would have been better to have dealt with the additional case. In answer, Mr Cooper said he was not sure it would have been better "it just would have been different" (TS379).
I agree. Again, I think this was a matter for Mr Cooper's judgment. It is to be noted that Mr Cooper set out in the Grant Samuel reports all of the matters taken into account in reaching his conclusion as to the fair value. In the report, Mr Cooper did not attribute any specific weighting to the individual factors. I do not think it was necessary for him to do so: these were all matters for his judgment as an expert valuer.
Furthermore, it was not suggested to Mr Cooper that it was inappropriate to discount scenario 1 and to have marginal regard to scenario 2. In other words, it was not suggested that his approach resulted in a flawed valuation.
The defendant next submits that inadequate reasons were given in the report to explain how Grant Samuel arrived at the valuation range of $US200.0 to 230.0 million for Petroz' interest in the Bayu‑Undan Project.
In order to consider this submission, it is necessary to summarise that part of the Grant Samuel report which followed on from the description of the four scenarios to which I have referred above.
First, there was set out a table which was said to be:
"The results of the NPV analysis for the Bayu‑Undan field, based on a range of different oil prices and discount rates …".
For each of the four scenarios, net present value was calculated at discount rates of 8.0, 8.5 and 9.0 per cent assuming an oil price of $US20 and $US21 in 2006. This produced a range of net present values from $US162 to $US255 million.
The report went on to say that future oil prices were currently the subject of much uncertainty. Various factors contributing to that uncertainty were referred to, as was the fact that brokers and market analysts were "generally inconclusive with respect to future oil price expectations".
The report went on to say that Grant Samuel had "considered the impact of using futures contract prices to calculate the NPV's for the Bayu‑Undan field". A further table followed. The report said:
"The following table summarises NPV outcomes for the Bayu‑Undan field assuming that futures contract prices prevail until 2010 and escalation with inflation for the remainder of the economic life of the field."
Again, the table set out a range of net present values for the Bayu‑Undan field based on each of scenarios 1 to 4 at the same three discount rates. This produced a range of values between $US186 to $US267 million.
Immediately under the table it was said:
"The analysis indicates that oil price assumptions based on futures contract prices increased the NPV's by approximately $US10 million."
In my view, it is clear that this statement reflects a comparison between the two tables. When the values relating to the respective scenarios are compared, it does appear that, based on futures contract prices, there is an increase in the net present value of the Petroz's interest in the Bayu‑Undan Project of approximately $US10 million.
The report goes on to refer to the possibility that potential purchasers would use higher discount rates than the 8.0‑9.0 per cent incorporated in the NPV calculations. A higher discount rate would reflect a greater appreciation of risk. The report then set out seven specific risks identified by Grant Samuel and two "broader risks" associated with the project; and in particular, the fact that there is no production history.
The reader is therefore informed that the range of values is between $US162 for scenario 1 at a nine per cent discount rate based on a predicted future oil price, and $US267 million for scenario 4 based on an eight per cent discount rate and an oil price based on futures contract prices. Grant Samuel's valuation of between $US200.0 to $US230.0 was said to reflect the NPV scenario analysis and sensitivity analysis taking into account the specific and general risks referred to subsequently.
It is true that the precise way in which these factors are taken into account is not disclosed in the report. However, in my view, it is not necessary that is be done. The weight to be given to the various factors is a matter for the professional judgment of the valuer. The reader of the report will know that the valuer has been nominated by ASIC and can therefore be regarded as competent. The risks are stated, as is Grant Samuel's perception of the magnitude of each of the specific risks.
In these circumstances, I consider that the Grant Samuel report does set out adequately the reasons on which its opinion is based. I conclude that there is no substance to contention 3.

Contention 4

"GSA's report should not be accepted as evidence of fair value because GSA uses financial modelling and development forecasts and assumptions, including field development production scenarios and cost assumptions, provided by the Plaintiff and GSA did not independently verify such financial modelling, forecasts and assumptions."

This contention is based largely on inferences drawn by the defendant from the exchanges of e-mails to which I have referred above. The defendant relies also on the fact that neither Mr Kotarski nor any other of the plaintiff's technical experts with whom Mr Northcott and Mr Cooper dealt, were called to give evidence. Thus, it is submitted, a Jones v Dunkel point arises: it should be assumed that any evidence that might have been given by Mr Kotarski et al would have been unfavourable to the plaintiff's case.
While these suspicions may have been reasonable, I am satisfied that they are without foundation. That is because I have accepted the evidence of Mr Northcott and Mr Cooper that they carried out their respective tasks independently of the plaintiff (I exclude the co‑operation between Grant Samuel, Mr Northcott and the plaintiff for the purposes of verifying factual material contained in the Grant Samuel report). Further, as I have noted above, no adverse inference should be drawn from Mr Kotarski's absence, having regard to the fact that the PetroVal model has since been reviewed independently and found to be accurate.
Contention 4 is therefore without foundation.

Contention 5

"GSA based its valuation on its own estimates of oil prices instead of using objective market futures prices which were materially higher than the forecasts used by GSA."

As I have noted above, in dealing with contention 3, Grant Samuel's valuation range for the Petroz's interests in the Bayu‑Undan Project was based on a consideration of oil prices which included futures contract prices.
However, it was the defendant's contention that Grant Samuel ought to have based its valuation exclusively on futures prices because they indicated that the future trend of oil prices was likely to be significantly higher than those assumed by Grant Samuel. This contention is based on the evidence of Russell David Langusch, the principal and director of Langusch & Associates, an independent energy research consultant. Mr Langusch has had 17 years' experience in financial analysis and corporate advisory work in the resources sector, specialising in the oil and gas industry, electricity – gas utilities and the coal mining sector. Mr Langusch was retained by the defendant to prepare an expert report in relation to these proceedings.
Leading counsel for the plaintiff submitted that the report was inadmissible, being based on hindsight: both as to the opinion expressed by Mr Langusch and because it relied on post mid‑2003 oil prices. I can see the argument that the report was therefore irrelevant. However, Mr Langusch's evidence was relevant, insofar as it related to an approach to valuation. I have decided therefore to admit the report into evidence, but to place no weight on those parts which involve hindsight.
Mr Cooper did not accept Mr Langusch's view as to the utility of using futures prices to predict spot prices. He produced a graph showing spot prices over the period June 1995 to June 2003 for West Texas Intermediate crude oil ("WTI"). WTI is regarded as the benchmark price for crude oil, free on board at Cushing, Oklahoma, in the United States.
On the graph, Mr Cooper superimposed the futures prices on about 25 different dates. If the futures prices were accurate predictions of spot prices, then the graphs would coincide. In fact, there was very little coincidence. And where the futures graph intersected the spot price graph, the movement of the spot price in the intervening period bore little resemblance to the intervening futures prices. The futures graphs tended to curve gently in an upwards or downwards direction whereas the spot prices reflected a number of significant peaks and troughs.

Mr Langusch was cross‑examined about the significance of the graphs. He pointed out that the futures market trades five‑days per week. That being so, Mr Langusch said, it would really be necessary to depict every day's futures trading on the graph to obtain a proper comparison between futures prices and spot prices. However, Mr Langusch said he was not suggesting that the graph produced by Mr Cooper was unrepresentative. The following exchange then took place:
"Q - … generally speaking the futures market tends to predict, at best, a direction or trend, doesn't it, rather than the actual volatile movements, day by day or month, in the spot price?
A -No, I don't think anything can predict that.
Q -Well, you are agreeing then that the futures doesn't predict it if nothing can predict it.
A -I believe it's good as any predicting." (TS428)
In the end, I do not think there is a great deal of difference between Mr Langusch and Mr Cooper. In par 3.1.5 of the Grant Samuel report, Mr Cooper discussed actual and likely movements of world oil prices. He included a graph showing historical and futures prices for WTI. The Grant Samuel report contained the statement that:
"The Light Sweet Crude Oil futures contracts traded on the New York Mercantile Exchange provide some evidence as to the expected future WTI spot price. Historically, the futures prices has shown less volatility than the oil price and appears to be indicative of the trend for long‑term prices."
Mr Cooper based his spot price predictions on forecasts provided by four major brokers: Merrill Lynch, ABN Amro, Deutsche Bank, and Citigroup SSB. Although all four brokers forecast the 2003 and 2004 spot prices, only three forecast the spot prices for 2005; and only one forecast the spot price for 2006 and beyond.
As Mr Cooper said in his evidence, and as I accept, when the Grant Samuel report was written there was substantial uncertainty in the market generally about the future oil price. That is why, Mr Cooper said, he also had regard to oil futures prices: and why his analysis of the value of the Bayu‑Undan Project was based on both spot and futures prices. However, as Mr Cooper observed, futures prices are not intended to be predictors of future spot prices.
For these reasons, I am satisfied that there is no substance to contention 5.

Contention 6

"The choice of scenarios 2 and 3 for low and high case valuations by GSA is not appropriate having regard to the purpose of the valuation, and scenarios should have been chosen which more properly reflect the range of considerations that would be taken into account by a hypothetical fully informed willing buyer and seller."

Senior counsel for the defendant abandoned this contention in his closing address. He did so, having heard Mr Cooper's evidence that he placed marginal weight on scenario 2.

Contention 7

"Fair value should be determined having regard to oil price changes occurring since the date of the GSA report."

Senior counsel for the defendant accepted – correctly in my view – that there was no place for hindsight in the assessment of the Grant Samuel report. However, counsel submitted, it was open to the Court to look at post‑valuation events to the extent that they might cast light on the appropriateness of the valuation.
Viewed objectively, I accept that there may be cases in which that proposition would hold good. However, no evidence has been adduced in the present case which would make it applicable.
There was certainly evidence from Mr Langusch that oil prices had increased to a far greater extent than Grant Samuel's predictions. However, such evidence is hindsight which must be disregarded.
There is, therefore, no substance to contention 7.

Contention 8

"The payment of $0.89 per Petroz NL share does not give a fair value for such shares because:
(a)the value of Petroz NL's share in the Bayu‑Undan Project is more than the US$200 to US$230 million ascribed to it by GSA in its expert report;
(b)since August 2000 and November 2000, when GSA valued Petroz NL shares in the ranges $0.51 to $0.69 and $0.58 to $0.74 respectively, the extent of mitigation of risks surrounding the gas recycling project, gas pipeline and LNG plant comprising the Bayu‑Undan Project is such that the present valuation range of $0.63 to $0.89 is inadequate."

As to (a) above: it is not for the Court to determine the value of Petroz's share in the Bayu‑Undan Project. The Court is required to determine whether 89 cents per share represents a fair value. Contention 8(a) does not, therefore, arise for consideration.
Although contention (b) is cast somewhat differently, it nevertheless invites the Court to conduct a valuation and is therefore inappropriate. It is clear that as the Bayu‑Undan Project has progressed, the risks associated with it have diminished. As I have noted above, in dealing with contention 3, Mr Cooper identified and assessed the risks, both general and specific, as he perceived them to be when carrying out his valuation. It is not for me to make an independent assessment of those risks.
Contention 8 does not, therefore, fall to be considered.

Contention 9

"The payment of $0.89 per Petroz NL share does not give a fair value for such shares because of the delay occasioned by the Plaintiff in vacating the trial dates of 26, 27 and 28 October 2004 and the Plaintiff thereby obtaining the benefit of not paying such amount until after the date of the delayed hearing, and the Defendant suffering a corresponding detriment."

It is, of course, regrettable that the resolution of these proceedings has been delayed for so long. It is not, however, the plaintiff's fault that the October 2004 hearing dates were vacated.
The statutory scheme for compulsory acquisition contemplates that there may be objectors: and that an application will be made to the Court pursuant to s 664F of the Act. That will inevitably involve some delay, so that the minority shareholders who have not objected will not be paid for their shares pending the resolution of the objection.
I can see no warrant for implying into the statutory scheme any basis for disapproval of a compulsory acquisition other than a failure by the acquirer to prove that the proposed price gives a fair value. I am therefore satisfied that there is no substance to contention 9.

Conclusion

The statutory scheme for compulsory acquisition does not require court approval unless there is an objection. And in the present case, objection has been taken only on the basis of the contentions to which I have referred above.
However, in considering the matter generally, I have had regard to the principles set out by Warren J (as her Honour then was) in Capricorn Diamond Investments Pty Ltd v Catto (2002) 5 VR 61 at [59] – [61]. So far as relevant to the present case, they are, first, that:
"… fair value of an asset is its fair equivalent in money ascertained by a support sale by a voluntary bargaining between vendor and purchaser, each of whom is both willing and able, but not anxious, to travel with a full knowledge of all the circumstances which might affect value …"
As to that, Grant Samuel approached the valuation with a view to obtaining:
"a value similar to that likely to be achieved if the business was sold through an open competitive sale process." (Report, par 2.2)
In his evidence, Mr Cooper said his overall approach:
"… was to attempt to estimate the price that a real‑world buyer of that asset would've paid. So its an estimate of what might happen in the real world rather than a theoretical assessment of value." (TS316)
While not cast in conventional terms, I do not think this approach is likely to produce a result less favourable to the defendant than that based on the classic formula.
Secondly, Warren J held that:
"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."
I see nothing in the Grant Samuel report which is contrary to that proposition.
Warren J included in the second principle an observation to the effect that the circumstances of compulsory requisition should not lead to a premium or higher valuation. Similarly, her Honour's third principle was that:
"… a fair value did not require that any amount should be included in respect of ransom value or a power of veto …"
The Grant Samuel report contained the opinion that:
" … the 'value of the company as a whole' assumes that 100% of the company is available to be acquired and includes a premium for control. A premium for control reflects that the owner of 100% of a company has direct access to cashflow and taxable income, controls the composition of the Board of Directors, controls the appointment of senior management and controls all investment, financing and strategic decision‑making. For these reasons, the value of 100% of a company is greater than the value of small parcels of shares ('portfolio interests') in the company."
If this approach to valuation does include a power of veto, then it is an error which favours the defendant.
The fourth, fifth and sixth of the principles set out by Warren J are all concerned with the treatment of special benefits to the acquirer. This is discussed in par 2.2 of the Grant Samuel report. However, in par 6.9, it is said that, although in some cases, there might be benefits "from obtaining 100% ownership of the target company":
"Grant Samuel is not aware of any special benefits that are specific to [the plaintiff] and not available to other potential purchasers."
The seventh principle refers to the need to ensure that the consideration for a compulsory acquisition is fair to all shareholders rather than to a particular shareholder, or class of shareholders. That is not an issue in the present case.
Finally, Warren J held that:
"Fair value may require a more liberal estimate of value within a range of possible values when there is a compulsory acquisition … nevertheless it does not permit or require a premium for forcible taking …"
Mr Cooper's approach was, I think, consistent with this principle. In his evidence‑in‑chief, he said:
"Fundamentally … we were concerned, given the nature of this report and given the nature of our role in this report … to just make sure that minorities manifestly get paid a fair price to ensure that our judgments, if they went one way or the other, were in favour of high values, rather than low values …" (TS327)
I accept that evidence.
As was said in Bromley Investments Pty Ltd v Elkington (supra), the decision whether a proposed acquisition price gives fair value for the Petroz shares "must largely be based on the report of the expert".
I am satisfied that the Grant Samuel report was prepared on a valuation basis no less favourable to the defendant than the law requires; that it was prepared independently by Mr Cooper, with the assistance of Mr Northcott, both of whom were well qualified for the task and aware of their professional obligation. Although I have been critical of Mr Northcott in relation to a potential conflict of interest arising from the assistance he derived from Mr Kotarski, I am satisfied that the integrity of the report was not, in fact, compromised.
Except in relation to the valuation of the Bayu‑Undan project, there is no suggestion that Grant Samuel failed to take account of any relevant material, or took account of anything irrelevant. And as to that project, I am not persuaded that any objection has substance.
I am therefore satisfied that the Grant Samuel report reflects the exercise of proper professional judgment directed to the valuation of the minority‑held Petroz shares, and that the plaintiff's acquisition notice of 7 August 2003, nominating a price greater than the Grant Samuel valuation range, gave fair value for those shares.
I therefore approve the acquisition of those shares on the terms of the notice.

Appendix

This application was heard on affidavit evidence with cross‑examination of deponents where required. However, the parties prepared a very substantial trial bundle contained in some 22 lever arch files. The plaintiff sought to tender the whole of the trial bundle as an exhibit.
The plaintiff's application arose out of its concern to discharge its onus of proving that the notice of acquisition gave fair value for the Petroz shares. However, the plaintiff was put to proof only because of the defendant's objection: and in the objection proceedings, the only matters in issue were those raised by the defendant's various notices of contention. This was confirmed by the defendant's counsel: (TS153).
In these circumstances, I declined to take the entire bundle as an exhibit. Instead, I received into evidence the various affidavits and the documents drawn from the trial bundle which were either referred to by counsel in their respective addresses or put to witnesses in cross‑examination.
Some documents were given an exhibit number during the hearing: others were not, on the basis that I would produce a list of exhibits when preparing my judgment.
After the hearing, the parties identified certain documents they wanted to be included in the exhibit list. These were all documents in the category referred to above. They are included in the following list.
The annual reports for Petroz for the years ended 31 December 2003 and 2004 respectively were received provisionally as exhibits 4 and 5. This tender was opposed by the plaintiff on the ground of relevance. As these reports came into existence after the valuation date, and as no argument was advanced by the defendant in support of contention 7, I uphold the objection.

Exhibits numbered during the hearing

Affidavit of J B Ellingsen; date 10/10/2003
Affidavit of J B Ellingsen; date 14/12/2004
Affidavit of J B Ellingsen; date 15/05/2005
(Petroz Annual Report 2003 (document 994); date 31/12/2003 – ruled inadmissible)
(Petroz Annual Report 2004 (document 1006); date 31/12/2004 – ruled inadmissible)
Affidavit I W Northcott; date 26/10/2004
Affidavit I W Northcott; date 9/12/2004
Affidavit of R S Cooper; date 20/10/2004
Affidavit of R S Cooper; date 11/03/2005
Graph: futures price versus spot price; undated
Affidavit J M Hadley; date 17/10/2003
Affidavit A J M Hellings; date 17/10/2003
Affidavit A J Booth; date 14/11/2003
Affidavit R D Langusch; date 17/02/2005
Letter of instruction; date 05/02/2004
Affidavit R D Langusch; date 11/05/2005

Exhibits numbered post hearing

Report re Bayu‑Undan pipeline: AFE‑4201; date 21/02/2003 - Confidential
Bayu-Undan development plan – amendment; date 21/05/2003 - Confidential
Bayu-Undan gas recycle project – June 2003 monthly report; date June 2003 - Confidential
Report on the reserves of the Bayu‑Undan field; date 30/06/1997 - Confidential
Share sale agreement AGIP Oil & Gas Ltd, Phillips Australia WA – 248 Company Pty Ltd; date 31/07/2002 – Confidential
Bayu‑Undan Darwin LNG plant – AFE-4211; date 21/02/2003 – Confidential
Spreadsheet showing Bayu‑Undan information prepared for Grant Samuel valuation of Petroz; date 27/06/2003
Spreadsheet showing Bayu‑Undan information prepared for Grant Samuel valuation of Petroz; date 3/07/2003
E‑mail Marcionni to Crawford (document 1956); date 26/06/2003
E‑mail Crawford to Northcott (document 2033); date 27/06/2003
E‑mail Marcionni to Ellingsen (document 1510); date 11/06/2003
E‑mail Northcott to Marcionni (document 1725); date 19/06/2003
E‑mail Kotarski to Marcionni (document 2612 ‑ 2617); date 14/07/2003
E‑mail Boterhoven to Marcionni (document 2560); date 10/07/2003
E‑mail Marcionni to Walsh (document 2768 – 2774); date 18/07/2003
E‑mail Marcionni to Kotarski (document 3235); date 01/08/2003
Report re Bayu‑Undan reservoir and simulation studies; date September 2001 – Confidential
E‑mail Marcionni to Northcott (document 3003); date 25/07/2003
E‑mail Northcott to Crawford (document 1942); date 25/06/2003
E‑mail Northcott to Crawford (document 2474-5); date 03/07/2003
E‑mail Northcott to Crawford (document 4417); date 08/07/2003
E‑mail Marcionni to Cooper (document 1755); date 23/06/2003
E‑mail Kotarski to Northcott (document 2576-7); date 11/07/2003
E‑mail Kotarski to Northcott (document 2611); date 12/07/2003
E‑mail Northcott to Crawford (document 2778); date 21/07/2003
Report: Merrill Lynch (document 2628-2640); date 14/07/2003
Report: ABN Amro (document 2477-2483); date 04/07/2003
Report: Deutsche Bank (document 1474-1501); date 04/06/2003
Report: Citigroup Smith Barney (document 1512-1523); date 11/06/2003
ABARE Report (document 2113-2245); date June 2003
E‑mail Nazroo to Marcionni (document 4107); date 24/06/2003
E‑mail Cooper to Marcionni (document 1939); date 25/06/2003
E‑mail Marcionni to Kotarski (document 1944); date 26/06/2003
E‑mail Marcionni to Crawford (document 2726-2730); date 16/07/2003
Article: "Backward to the Future …" (document 3640-3643); date 01/12/2004
ASIC Practice Note 42; date 08/12/93
[Note: I have included this document as an exhibit because it was the subject of evidence and I have referred to it in considering my decision.]