Elkington v Pauls Ltd

[2004] HCATrans 230

[2004] HCATrans 230

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B2 of 2003

B e t w e e n -

MILLY ELKINGTON

Applicant

and

PAULS LIMITED

First Respondent

JENNIFER MARY DWYER

Second Respondent

ANDREW DOUGLAS CAMERON

Third Respondent

PETA GILLIAN CATTO

Fourth Respondent

AKW INVESTMENTS PTY LTD

Fifth Respondent

ALISTAIR HAZARD

Sixth Respondent

RICHARD KIRKBY

Seventh Respondent

HAZEL LILIAN NEILD

Eighth Respondent

DAVID TWEED

Ninth Respondent

WILLIAM R. CAMERON

Tenth Respondent

ROBERT JOHN C. CATTO

Eleventh Respondent

ROBERT JOHN CHARLES CATTO (A/C RAGLAN SUPER FUND)

Twelfth Respondent

PAMELA WENDY ETHERIDGE

Thirteenth Respondent

LUCAS INVESTMENTS PTY LTD

Fourteenth Respondent

SUPER JOHN PTY LTD

Fifteenth Respondent

GORDON BRADLEY ELKINGTON

Sixteenth Respondent

BATOKA PTY LTD

Seventeenth Respondent

THE AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Eighteenth Respondent

Office of the Registry
  Brisbane  No B3 of 2003

B e t w e e n -

GORDON BRADLEY ELKINGTON

Applicant

and

PAULS LIMITED

First Respondent

JENNIFER MARY DWYER

Second Respondent

MILLY ELKINGTON

Third Respondent

ANDREW DOUGLAS CAMERON

Fourth Respondent

PETA GILLIAN CATTO

Fifth Respondent

AKW INVESTMENTS PTY LTD

Sixth Respondent

ALISTAIR HAZARD

Seventh Respondent

RICHARD KIRKBY

Eighth Respondent

HAZEL LILIAN NEILD

Ninth Respondent

DAVID TWEED

Tenth Respondent

WILLIAM R. CAMERON

Eleventh Respondent

ROBERT JOHN C. CATTO

Twelfth Respondent

ROBERT JOHN CHARLES CATTO (A/C RAGLAN SUPER FUND)

Thirteenth Respondent

PAMELA WENDY ETHERIDGE

Fourteenth Respondent

LUCAS INVESTMENTS PTY LTD

Fifteenth Respondent

SUPER JOHN PTY LTD

Sixteenth Respondent

BATOKA PTY LTD

Seventeenth Respondent

THE AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Eighteenth Respondent

Office of the Registry
  Brisbane  No B86 of 2003

B e t w e e n -

WINPAR HOLDINGS LIMITED

Applicant

and

ENERGEX LIMITED

First Respondent

GORDON BRADLEY ELKINGTON

Second Respondent

ARTHURS TRADING CO PTY LTD

Third Respondent

ANTHONY HUNTA AND DENISE LYNDA BIDDULPH

Fourth Respondents

JOHN FREDERICK BLIGH

Fifth Respondent

ANDREW DOUGLAS CAMERON

Sixth Respondent

KATHERINE VICTORIA MAY CAMERON

Seventh Respondent

ROBERT FRANKLIN CAMERON

Eighth Respondent

ROBERT FRANKLIN CAMERON

Ninth Respondent

MR ROBERT FRANKLIN CAMERON SUPERANNUATION FUND

Tenth Respondent

ESTATE OF THE LATE STUART FRANCIS GRIFFITHS CAMERON

Eleventh Respondent

WILLIAM ROBERT CAMERON

Twelfth Respondent

ANDREW EASTON

Thirteenth Respondent

NICHOLAS PAUL HASLUCK

Fourteenth Respondent

CONSTANCE WINIFRED HUMPHRIES

Fifteenth Respondent

ESTATE OF THE LATE MARION AGNES HYLES

Sixteenth Respondent

ELLEN LAING

Seventeenth Respondent

JOHN WESTON SEAFORTH MACKENZIE

Eighteenth Respondent

ELIZABETH NESTA MARKS

Nineteenth Respondent

PINK PUMPKIN PTY LTD

Twentieth Respondent

TOMYFUTURE HEALTH PTY LTD

Twenty-first Respondent

COREY VINCENT

Twenty-second Respondent

ESTATE OF WILLIAM VINCENT WALTON DECEASED

Twenty-third Respondent

ROSEMARY HAMILTON WEST

Twenty-fourth Respondent

JOHN WHITE AND NICOLE WHITE

Twenty-fifth Respondents

JOHN ANDREW WHITE

Twenty-sixth Respondent

Office of the Registry
  Brisbane  No B87 of 2003

B e t w e e n -

GORDON BRADLEY ELKINGTON

Applicant

and

ENERGEX LIMITED

First Respondent

ARTHURS TRADING CO PTY LTD

Second Respondent

ANTHONY HUNTA AND DENISE LYNDA BIDDULPH

Third Respondents

JOHN FREDERICK BLIGH

Fourth Respondent

ANDREW DOUGLAS CAMERON

Fifth Respondent

KATHERINE VICTORIA MAY CAMERON

Sixth Respondent

ROBERT FRANKLIN CAMERON

Seventh Respondent

ROBERT FRANKLIN CAMERON

Eighth Respondent

MR ROBERT FRANKLIN CAMERON SUPERANNUATION FUND

Ninth Respondent

ESTATE OF THE LATE STUART FRANCIS GRIFFITHS CAMERON

Tenth Respondent

WILLIAM ROBERT CAMERON

Eleventh Respondent

ANDREW EASTON

Twelfth Respondent

NICHOLAS PAUL HASLUCK

Thirteenth Respondent

CONSTANCE WINIFRED HUMPHRIES

Fourteenth Respondent

ESTATE OF THE LATE MARION AGNES HYLES

Fifteenth Respondent

ELLEN LAING

Sixteenth Respondent

JOHN WESTON SEAFORTH MACKENZIE

Seventeenth Respondent

ELIZABETH NESTA MARKS

Eighteenth Respondent

PINK PUMPKIN PTY LTD

Nineteenth Respondent

TOMYFUTURE HEALTH PTY LTD

Twentieth Respondent

COREY VINCENT

Twenty-first Respondent

ESTATE OF WILLIAM VINCENT WALTON DECEASED

Twenty-second Respondent

ROSEMARY HAMILTON WEST

Twenty-third Respondent

JOHN WHITE AND NICOLE WHITE

Twenty-fourth Respondents

JOHN ANDREW WHITE

Twenty-fifth Respondent

WINPAR HOLDINGS LIMITED

Twenty-sixth Respondent

Applications for special leave to appeal

GLEESON CJ
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT BRISBANE ON WEDNESDAY, 23 JUNE 2004, AT 9.50 AM

Copyright in the High Court of Australia

__________________

MR G.B. ELKINGTON appeared in person.

MR C.J. BIRCH, SC:   If your Honours please, I appear for the applicant, Milly Elkington, in application B2 of 2003 and for the applicant, Winpar Holdings Limited, in application B86 of 2003.  (instructed by Stephen Blanks & Associates)

MR G.J GIBSON, QC:   If it please your Honours, I appear for the first respondent with my learned friend, MR K.N. WILSON, SC, in applications B2 and B3 of 2003, that is, Pauls Ltd.   (instructed by Biggs & Biggs)

MR P.A. KEANE, QC:   If it please the Court, I appear with my learned friend, MR J.D. McKENNA, SC, for the first respondent, Energex Limited in No B87 of 2003 and B86 of 2003.   (instructed by Clayton Utz)

GLEESON CJ:   Is it convenient to counsel if we hear all arguments from counsel in respect of both sets of proceedings before we give our decision?

MR KEANE:   Yes, if it please the Court.

GLEESON CJ:   It is probably convenient to hear you in the order of Mr Birch, and then you are supporting Mr Birch, I think, are you not, Dr Elkington?

MR ELKINGTON:   Yes, I am independent but I support him.

GLEESON CJ:   All right, we will hear you second and then we will hear Mr Gibson and then we will hear Mr Keane.  Yes, Mr Birch, just remind us of the relationship between these proceedings.

MR BIRCH:   Yes, the position is that they concerned separate applications, in each case for an approval by the court of a proposal for the compulsory acquisition of a minority interest in companies.  In the Winpar Holdings v Energex Case, the subject shares were in a company called Allgas and Winpar Holdings held a parcel of preference shares in that company, Allgas.  In fact, in chronological terms, the first case to come before the Queensland Supreme Court and Queensland Court of Appeal was the matter involving Pauls Limited.  In that case, Pauls Limited sought to acquire the outstanding preference shares in a company called Pauls Victoria which had been previously called Associated Dairies.

GLEESON CJ:   The court in the Allgas Case followed the decision in the Pauls’ Case, is that right?

MR BIRCH:   They did.  There was an opinion expressed by Justice Jerrard in each case which differed with some of the reasoning of the majority.

GLEESON CJ:   Yes, we understand that.  Now, in both cases, that is, in both Allgas and in Pauls, were there two substantial issues with which we are now concerned, first, what I will call the constitutional issue, the acquisition of property other than on just terms, and secondly, the valuation issue?

MR BIRCH:   Indeed.

CALLINAN J:   Was there a third issue about the power of the Commonwealth to enact legislation providing for acquisition not on just terms because it was done under a referred power?  Was that also an issue?

MR BIRCH:   That is, and that is an issue in both cases.

GLEESON CJ:   You would not get to that issue if you had decided the first of the constitutional issues against you.

MR BIRCH:   Let me put it this way, perhaps ‑ ‑ ‑

GLEESON CJ:   If you decided that this was not an acquisition of property other than on just terms, you would not get to that last issue, would you?

MR BIRCH:   If you decided it was not an acquisition for 51(xxxi) purposes, we would still have an issue about the proper construction of section 667C, but we would not have the benefit of being able to appeal to the constitutional argument in support of our construction argument.  It is important to understand that we do not argue as our first position that 667C is invalid, rather, we argue that it is capable of a number of possible interpretations, one that would give just terms – the one we prefer – and we say the other interpretations, those adopted in the court below, do not. 

Now, if it is a law with respect to the acquisition of property, then that is a compelling reason to give it the construction which we urge.  If I do not persuade your Honours that it could be a law in regard to the acquisition of property, I am left to argue the statutory construction issue unaided by any constitutional ‑ ‑ ‑

GLEESON CJ:   Well, we can leave the matter to counsel to decide whether they want to deal with the cases, that is, the Pauls’ Case and the Allgas Case, separately or together.

MR BIRCH:   Yes.  Your Honours, I was proposing to present, in effect, a combined argument on each and that is because on the crucial issues the argument that I have to put is essentially the same.

GLEESON CJ:   The only thing I did not quite understand is whether there is any relevant difference between the valuation issue in the Pauls’ Case and the Allgas Case.

MR BIRCH:   The facts are different and there is something called special special value in the Allgas Case which I can explain to your Honour shortly, and that is a different factual matter, but the matters of key principle are identical and I can deal with them compendiously in my submissions.

GLEESON CJ:   Very well.

MR BIRCH:   Your Honours, in both cases the structure of our argument is simply this.  The court had to determine whether the value that had been offered for the outstanding preference shares was fair value and 667C of the Corporations Act provided the methodology by which that fair value was to be ascertained.  That methodology is plainly one which is not an exhaustive enumeration of the factors that were to be taken into account. 

It involved several key steps, the first of which is to ascertain the fair value of the company overall.  It is at that point the first issue arises, that is, whether in determining the value of the company overall there should be taken into account that component of value the company will have once a unity of ownership is achieved that derives from the administrative savings, the synergies and the like that will be enjoyed when there is 100 per cent ownership.  That has been referred to in the judgment as the special value issue, should special value in that sense be counted when one determines the value of the company overall?

The second issue is required by the methodology in 667C.  Once you have determined the value of the company overall, it must be allocated amongst the classes of shareholders.  We accept that “classes” here means the conventional division under the memorandum and articles of types of share.  In both of these cases there were two classes.  There were ordinary shareholders and there were preference shareholders.  The question then is, how does one allocate the value of the company overall between those two classes? 

What was done was, firstly, of course, in the courts below there was a finding that the special value should not have been included at all.  Then there was a determination that even if that be wrong and one was to have included the special value, it should simply have been distributed pro rata over all the shares in the company, a very large number of ordinary shares and a very small number of preference shares in each case.  The result of that was to produce a relatively de minimis increase in the value of the preference shares. 

If that is done because the offer that was made in each case was pitched with a certain amount of leeway in it, it is said against us, once you distribute the special value pro rata the offer that was made was still adequate and, therefore, it is put by the respondents, the case is moot.  In putting it that way, of course, they assume an important issue in their favour.  They assume the allocation ought to be made on a pro rata basis.  Our second argument is to say that that is quite wrong, that what one should do is to be guided by the principles that the market would apply in determining how to allocate between classes, and the evidence plainly showed that the market would have allocated a far more generous share of special value to the class of preference shareholders and, therefore, the offers, we say, were not fair. 

Now, that is the construction argument on 667C.  The constitutional argument we come to at this stage.  We say, firstly, the ‑ ‑ ‑

CALLINAN J:   Excuse me a moment.  Why would the market allocate more special value to the preference class?

MR BIRCH:   Let me perhaps look at special value itself.  If an owner of a preponderant number of shares in the company is wishing to obtain the benefits of a unity of ownership, it will have to offer to shareholders more than simply their normal market value.  If someone wants to take over a company, they are not going to induce a high percentage of shareholders to part with their shares if they simply offer them whatever they are selling for on‑market at the time because a large number of shareholders will probably be holding their shares as a long‑term investment and it is matter of indifference to them whether they convert that to cash.

CALLINAN J:   I do not follow why it is different for the preference shareholders.

MR BIRCH:   What one can observe, firstly, is that when the market has had to make this allocation itself, the market has made an allocation which is substantially more generous.  I can take your Honour in a moment to the facts.  But another perhaps hypothetical way of approaching it is this.  If you envisage the company’s value determined overall and capable of being realised by the whole of the shareholders and those shareholders then have to determine between themselves how they will share or allocate that sum – so one imagines you have determined a company to be worth a $1 billion to the party who will ultimately acquire 100 per cent ownership.  You ask yourself, “How would the classes of shareholders themselves engage in that allocation process?”  The only reasoned way, we suggest, that one can do it is to ask, “Well, what would they do?  How would they bargain between themselves to share that benefit?”

Now, if you have the preference shareholders and the ordinary shareholders with assumed equal bargaining power and full knowledge of the circumstances relating to the transaction, then at least notionally one would expect them to achieve an equal division of the benefit.  Neither side can enjoy the benefit unless they come to a completed bargain.  Neither side would be prepared to see the other take a larger share.  Therefore, one would assume, at least in that hypothetical example, that they would share equally. 

When one looks to the Allgas Case, several companies had sought to acquire the whole of the preference shares.  The last offer was made only about two years before the company ceased to be traded on the stock exchange, two years before the notice was issued.  Throughout that period there had been offers made for the Allgas preference shares in a range of about $7.50 to $12.50.  The offer that was made the subject of this litigation is just a little over $2.00. 

Now, that shows, we contend, that where there is a process of free bargaining and the market is allowed to operate, there is an allocation made between the classes that reflects the judgment made about people’s comparative bargaining positions and the benefits that they envisage will be derived from some and what it will require to induce others to part with their investment.  There is simply no reason, we say, to abandon that market model, reject the evidence and the underlying assumption that what you do in allocation is look to see how people would spread it if they were engaged in such a bargaining process. 

What was done in the court below was to deal with the allocation issue by essentially saying, we will simply – it is arbitrary and it is not, we contend, something that was adequately reasoned for.  There was simply an allocation pro rata per share, not even per dollar value but per share.  I have summarised rather elaborately for your Honour the argument that we put on the allocation issue ‑ ‑ ‑

CALLINAN J:   No, it was helpful, thank you, Mr Birch.

MR BIRCH:   So there are two steps in the process, firstly, to persuade the court that the special value component should be included and then to persuade the court to the allocation issue.  I then come to the constitutional issue.  Could I then perhaps go back and deal with special value itself and why the court below erred in rejecting it as an essential component of value in both instances.  The facts which are not in contention show that there would have been in the Pauls’ Case some $20,000 reflecting the capitalised sum of saving and that would have reflected value to the company in the ‑ ‑ ‑

CALLINAN J:   $20 million or $20,000?

MR BIRCH:   $20,000.  It is a small sum in the Pauls’ Case.  In the Allgas  Case the sum that would be saved through administrative savings and synergies from unity of ownership was $3 million, but that there was a still further sum that was discussed by the experts.  That was because once Allgas was owned entirely by Energex there was going to be a change in the tax position of the holder of the Allgas shares, because of its status as a Queensland Government company and the tax that was previously paid to the Commonwealth would be paid to the State. 

Now, that is a special issue.  Can I just leave that to one side for the moment and come back to the $20,000 and the $3 million savings and synergies value.  The experts called on all sides – and, indeed, the court does not seem to have departed from this or rejected it – accepted that a way of valuing the company overall was to apply the maintainable earnings system of calculating value and looking to what the capital sum would be that would reflect the maintainable earnings of the companies. 

In determining the maintainable earnings one, of course, has to look to the cost structure of the companies because that affects the company’s profitability.  So if there is going to be a reduction in the cost structure of the company once a unity of ownership is achieved, that is going to have an obvious effect upon maintainable earnings and, hence, upon the value of the company.  We say in the first instance that is plainly and simply a component of value.  There is simply no reason to exclude that component of value in determining what the company’s value is overall.

There are two principal reasons that appear to have been relied upon below in rejecting that contention.  One is that this special value component was nevertheless one that might be characterisable as greenmail and that the legislation was passed with an intention of outlawing or prohibiting greenmailing and, therefore, one should construe it in a fashion which can accept this special value.  There are a number of difficulties with that proposition.  There is a reference in the explanatory memorandum – your Honours, we have included that in a bundle of documents.  I can read perhaps the provision.  This is the strongest passage that we have identified in any of the extrinsic materials.  In the explanatory memorandum it is said that one of the purposes of the bill was to:

discourage minority shareholders from demanding a price for their securities that is above a fair value (often referred to as ‘greenmailing’).

Now, there is certain circularity in this because we are contending that fair value involves sharing with those whose shares are expropriated a portion of the special value.  If they be fair value, of course, it will not be greenmailing, even as the explanatory memorandum describes it.  The explanatory memorandum contains no detailed definition.  There is no offence of greenmailing under the Act.  There is no clear consensus, even in the decided cases, about what the concept of greenmailing is or applies to.  It simply cannot perform the work that has been set aside for it in this particular argument.

CALLINAN J:   You do not say that the ordinary shareholders should not get special value, do you?

MR BIRCH:   No.  We say the special value should be shared.

CALLINAN J:   Well, if the ordinary shareholders are prepared to accept the takeover offer, why is not the price which they are prepared to accept the best evidence of value, including any special value?

MR BIRCH:   Well, in fact, that is a good point, but it demonstrates our argument because the provisions of 6A.2 do not apply to a conventional takeover.  This is a compulsory acquisition power which can be applied without the normal takeover provisions.  So if a company has crept up to the 90 per cent mark – it has to give a notice under the Act when it has achieved

an 85 per cent shareholding, but it does not have to make a formal takeover offer.  It can creep up to 90 per cent simply by ‑ ‑ ‑

CALLINAN J:   By a certain number of acquisitions a year, is it not, percentage a year?

MR BIRCH:   Well, no, it can simply do it by purchasing occasional parcels on‑market.

CALLINAN J:   In any event, that is all evidence of the market, is it not, what the ordinary shareholders have accepted over time and from time to time?

MR BIRCH:   Let me go to a takeover situation.  If a company was to make a takeover offer, if it simply offers whatever the market price is at the moment, if one holds shares in Telstra or BHP or whatever, a certain number of those shareholders presumably have simply bought them for the benefit of the dividends and the long-term investment value.  If they are offered today, whatever the market price of those shares is, they will presumably consign that offer to the waste bin because it was of no use to them.  If they were to get that money, they would then have to go out and find another replacement investment, and if they have incurred capital gains tax, brokerage or other transaction costs, they will have a reduced capital sum.

CALLINAN J:   But often the market price will reflect a takeover premium anyway.

MR BIRCH:   Well, this is an argument which I think Dr Elkington has put forward in his written outline.  There is a distinct difference in the structure of the Corporations Act where one has a formal takeover offer made on the one hand which provides a more generous method of arriving at the amount that will be paid to a minority shareholder and this new provision which has only been inserted in the legislation in the last three or four years which permits a compulsory acquisition without the context of a formal takeover offer being made.

GLEESON CJ:   Yes, thank you, Mr Birch.  Yes, Dr Elkington.

MR ELKINGTON:   I do not want to – I will be very brief.

GLEESON CJ:   You do not have to be very brief.  You have 20 minutes.

MR ELKINGTON:   Thank you.  When a company such as either Pauls or Associated Dairies or Energex for reasons best known to themselves at some time in the past issues a separate class of shares, they do that to meet some purpose of the company.  From that point on the company has two classes of shares and it no longer lies in the power of the ordinary shareholders, by takeover or by whatever means, to pass the ownership of the company as a whole to an intending acquirer. 

From the day that the preference shares are issued and there are two classes there are tensions between the two classes, and you see that in all sorts of context, in schemes of arrangement and in capital reductions and in takeover offers.  Of course, each class of shareholders is looking to, I suppose, get the best they can out of the rights and simply the fact of their being part owners of the company. 

When, of course, there is a takeover made, it is well known that the ordinary shares rise in price and that increase is supposed to be a reflection of what is sometimes referred to as the control premium.  There are different sorts of controls.  A person who wants to take over a company can get quite a large measure of control by acquiring 51 per cent of the ordinary shares and that gives them the right to put directors on the board and generally run it; if they had three‑quarters of the ordinary shares, they can change the company’s articles; if they want a much better control of it, of course, they need all of the ordinary shares.  The historical context of these provisions is that where 90 per cent of the ordinary shareholders accept a takeover offer the remaining 10 per cent of the shares are not supposed to be out of step and, of course, they can be compulsorily acquired.

The evidence in both of these cases show that much of the same sort of thing applies to preference shares in a takeover context.  It is not surprising that preference shares also rise when a person intends to take over a company.  There were many examples in the evidence of other companies where the preference shareholders have got quite a significant premium over the value of their shares because, in effect, the class of preference shares represents the key to giving access to all sorts of benefits:  the company’s cash flow and any synergy benefits that arise from owning all of the shares in the company. 

In a takeover context, the preference shares or a small class of shares can be quite an important class.  What has happened in these two cases essentially is that the shares in the preference class have been valued in the way that minority parcels of shares are valued on the market when no takeover offer is in contemplation.  So it is not surprising that each class should get some share of what you might call a control premium.  I mean, different sorts of control come from controlling each of the two classes of shares. 

Running through these cases is the idea that if preference shareholders expect anything more in a takeover situation than they would

get on the market just when the shares are listed that somehow or other they are asking for more than fair value.  That really begs the question because the fair value contemplated by section 667C is a statutory fair value.  The section clearly envisages that all of the classes should be looked at from a common perspective, whatever that perspective may be.  It seems to me that the only reasonable perspective that you can look at these two classes from is in the way that the market would treat them when an outside person is intending to acquire the shares by means of a conventional takeover. 

The fact that somehow or other these classes have been treated as not very important because they are small and because they are small some of their value appears to have evaporated, but it has not really evaporated.  I mean, those aspects of control of the company that come from a person owning all of the shares in the company – I mean, that is the value of the company as a whole, you get control of all of the shares. 

What ordinary shareholders might accept – your Honour raised this question of what ordinary shareholders might accept – that really is no indication at all of what preference shareholders might accept.  The fact that these classes are small – once upon a time, these classes were quite large.  I mean, they contributed to these companies being set up decades ago and over time, of course, they have become smaller with the issue of more ordinary shares, but until recently they were shares that were listed on the stock exchange, they were important enough to have a listing.  It seems to me that if section 667C is construed in any other way than the way that the market would deal with it, that that is likely to lessen general confidence in the securities market. 

You cannot get by means of the division in section 667C the same value as you would get in a takeover context.  Section 667C is really about allocation.  The way it has been treated in both of these cases essentially is that it is about the valuation of small parcels of preferences shares just as they trade on the market when nobody is there wanting to acquire the company as a whole.  But both classes of shares go up in a takeover context.  They go up by different ratios, depending how the market perceives all these things to which Dr Birch has referred.  Is there anything that you would like to ask?

GLEESON CJ:   No, we understand, thank you very much.  Yes, Mr Gibson.

MR GIBSON:   Thank you, your Honours.  Your Honours, section 664 requires that fair value be paid for the shares the subject of the compulsory acquisition notice.  Section 667C provides the manner of determining or quantifying the fair value for those ‑ ‑ ‑

GLEESON CJ:   Just give me a moment, Mr Gibson, will you?  I cannot put my finger on a convenient place for the legislation.  Where do I find it in the application book most conveniently?

MR GIBSON:   It is in the applicant’s book tab 2, if your Honours please.

GLEESON CJ:   Yes, I have it, thank you.

MR GIBSON:   Now, section 667C provides the methodology for the determination of the fair value.

CALLINAN J:   Or for the allocation of the fair value.

MR GIBSON:   And for the allocation of the fair value, your Honour, yes.  It seems to be that which has been the primary subject of the oral submissions.

CALLINAN J:   It seems to me 667C is really only concerned with allocations.  You assess the fair value of the company as a whole and then allocate the value.

MR GIBSON:   Well, the submissions made against us though are that the valuer in this case and then ultimately the court exercising its power under 664F – because once an objection is lodged to a compulsory acquisition notice the matter then goes to the court for determination under section 664F and particularly under subsection (3).

GLEESON CJ:   The court considers whether the terms set out in the compulsory acquisition notice give a fair value.

MR GIBSON:   Yes.

GLEESON CJ:   To determine what is fair value you apply section 667C.  That is the relationship between 664F and 667C.  That is the purpose of what you are doing in 667C.

MR GIBSON:   Exactly.  Now, in this case then it is submitted against us that the assessment of the value of the company, that is, the first step in 667C(1)(a), failed to accord fair value because it failed to include the administrative cost savings as a component of the value of the company.  Then the complaint is made that there was not an appropriate allocation of that component of the value of the company to the minority shareholders of the preference shares.  In our submission, what was done by the valuer was entirely uncontroversial.  He assessed the value of the company by reference to its capitalised figure for its maintainable earnings.  The applicants did not take issue with the correctness of that approach ‑ ‑ ‑

GLEESON CJ:   Presumably, if the expression “the value of the company as a whole” requires reflection of cost savings that can result from the acquisition of the company by another company, it has as many values as there are possible acquirers because the amount of the cost savings would vary with the identity of the acquirer presumably.

MR GIBSON:   Indeed.  With respect, your Honour, that point exposes a weakness – and we would submit a fatal weakness – in principle in the approach taken against us.  That is that on the approach contended for by the applicants the fair value of the company would not be a figure objectively ascertainable as a matter of principle; it would be necessary to have regard to the particular circumstances pertaining to any particular acquirer or potential ‑ ‑ ‑

GLEESON CJ:   Well, presumably if you had a company that carried on the business of a small bank, the amount of synergies, to use an expression that is sometimes used, involved in acquisition of that company might vary according to whether it is taken over by the National Australia Bank or by the St George Bank.

MR GIBSON:   Yes.

CALLINAN J:   And whenever a government authority acquires property, there is always a prohibition upon looking at the consequences to the government of the acquisition arising out of the government’s particular use.

MR GIBSON:   Yes, quite right.

CALLINAN J:   If you compare that to the situation that the Chief Justice and you have just been discussing, this is very similar.

MR GIBSON:   Yes.  So, in our submission, the applicants’ case fails at that threshold point.

GLEESON CJ:   What about the allocation point, which is paragraph (b)?

MR GIBSON:   We will deal with the allocation.  The valuer approached the allocation in a way described in the reasons of Justice Davies in the Pauls’ application book, page 21 at paragraph [12] of the reasons.  What the valuer did was to fix the value of the preference shares again by adopting a capitalisation of maintainable earnings approach in respect of those shares, bearing in mind that the preference shares’ entitlement to share in the profits or distributions of the company was confined to an entitlement to a fixed return of 7 per cent.  So the valuer adopted a figure representing the capitalised sum for the future earnings based on the 7 per cent and deducted that figure from the valuation for the whole of the company ‑ ‑ ‑

GLEESON CJ:   The argument against you, as I understand it, is or at least includes the proposition that if there were an internal negotiation going on between the ordinary shareholders and the preference shareholders about what they would respectively and in combination accept for the purpose of selling the whole of the shares in the company to an outsider, there was some special bargaining position that the preference shares had.  What would be the source of the preference shareholders’ special bargaining position as against the ordinary shareholders’ bargaining position?

MR GIBSON:   We would submit – and I trust this answers your Honour’s question – that the only identifiable source of such a preferred position would be the opportunity to greenmail which is the subject of these provisions.

GLEESON CJ:   Why have they got a better opportunity to greenmail than the ordinary shareholders or some of ‑ ‑ ‑

CALLINAN J:   Or any block of the ordinary shareholders?

MR GIBSON:   I take your Honour’s point.  My observation is made with respect to the particular facts of this case and in a case that did not involve these particular facts your Honour’s proposition might be correct, but it would not be limited to those.

GLEESON CJ:   There must be an explanation for this.  I would just like to understand what it is in practice.  If you were going to do a bit of greenmailing, what would attract you to the preference shares rather than to the ordinary shares except that they might be cheaper?

MR GIBSON:   I am not suggesting that preference shares would present as a more attractive vehicle for greenmailing than would the holding of any shares.

CALLINAN J:   I do not understand why that is so.  If a group of 10 per cent come together, I do not see why they would be in any different position from the preference shareholders.

MR GIBSON:   I am acknowledging that, your Honour, yes.  So the position is not unique to a preference shareholder.  The position posited by our learned friends applies to any minority shareholder in a position to exert influence in terms of the price which can be extracted from a party wishing to acquire the whole of the shareholding in the company.  It is simply a case of, if I can use the colloquial, the last man standing endeavouring to effect the premium to buy out his interest. 

Now, in our submission, such considerations as that upon which the applicants base their entitlement for fair value are extraneous to the methodologies provided by section 667C.  As Justice Davies, in our submission, correctly said, when one is looking at just terms, accepting that that term is not itself defined, in circumstances in which the assertion is to the effect that there has been a failure to meet just terms because of the inadequacy of the consideration offered, then just terms and fair value are synonymous.  This legislation provides a proper principled based methodology for the assessment of fair value, and that was what was applied in this particular case. 

In this case the value of the company was assessed, I think, at a range of $90 million‑odd to $112 million and the figure for the administrative cost saving was $20,000, and it is that upon which the applicants assert that they were not paid fair value because that $20,000, or some part of it, was not paid to them as opposed to paid to the ordinary shareholders who were the only shareholders in a position to participate in a distribution of capital or of profits.  The preference shareholders’ rights were limited to $2.00 in the event of a winding up, for example.

CALLINAN J:   Other than the value in an arm’s length transaction, there is probably no perfect method of valuation anyway, and different approaches are often available and acceptable.

MR GIBSON:   Well, for example, your Honour, in this case the valuer selected a range of $2.30 to $2.57 for the preference shares.  If one were to take the $20,000 that is the subject of this argument and allocate 50 per cent of it to the preference shares, even though there were only 37,000 of them compared to 24 million ordinary shares, it would still yield a figure that was within the range.  In other words, $2.30 lifted by I think the figure on that illustration is 26 cents.  So this application which is put forward as raising serious matters of principle, in fact, breaks down at a factual level, in our submission.

Your Honours, with respect, that in itself is sufficient to dispose of the application that is made against us, but out of an abundance of caution could I mention one point that is raised against us in the Pauls’ Case but is not raised in the Energex Case.  It can be shortly disposed of.  It is a submission that is made to the effect that the valuer in this case was not independent and that his valuation, therefore, did not satisfy the requirements of ‑ ‑ ‑

CALLINAN J:   Is that because he got a success fee?

MR GIBSON:   Well, it was termed a success fee in the applicants’ submissions.  Success fee has a colloquial meaning and we would have thought that it would mean that payment of his fee would have been contingent upon the successful acquisition of all the shares.  That is simply not the case at all.

CALLINAN J:   What were the facts?

MR GIBSON:   The facts were that he was – I will deal with this in order.  ASIC was asked to provide the acquirer, Pauls, the names of three independent valuers.  Mr Selak was one of those three.  Pauls had not resolved at that stage to purchase all the shares but they approached Mr Selak and asked him for a valuation.  He provided a valuation which was $2.30 to $2.57.  Pauls, having considered that considered it to be acceptable, then resolved that they would proceed with an acquisition under the Act and engaged Mr Selak to provide a report as required by the Act.  That he did.  Had Pauls not resolved to proceed further, he would have received no fee for payment of a report.

CALLINAN J:   He was just paid for the report, was he?  Is that what happened, that he was just paid for the report or ‑ ‑ ‑

MR GIBSON:   He was paid his valuation fee.  Because that was a figure that was acceptable to Pauls and they proceeded further, he was then engaged to provide a report, which was quite brief, and he was paid a fee for that report.  Both the valuation and the report were provided with the compulsory acquisitions ‑ ‑ ‑

CALLINAN J:   But there was no fee that was contingent upon the success of the acquisition?

MR GIBSON:   No, none whatsoever.  So, in our submission, there is no special leave point in that.  It is purely a question of fact.  It was resolved at first instance and on appeal that there was no substance in the issue.  One might point out, in any event, one wonders where it goes because, as we saw a little earlier, section 664F provides to the effect that upon receipt of an objection by the recipient of such a notice the matter is then in the hands of the court to determine what is fair value.  No doubt the valuer’s report will be part of the evidence, as it was in this case, but it goes no further than that.

The final matter that I should briefly advert to is simply this, that even if the applicants were to succeed in persuading your Honours that there was a point worthy of special leave on the allocation issue that we have discussed and if the – I am sorry, if the applicants’ position were to

unfold in such a way that they advanced the submission that this legislation or Part 6A is invalid because it fails to provide for the acquisition of property on just terms, in our submission, that point also goes nowhere because of the safety net provision of section 1350 of the Act which specifically contemplates such a possibility and provides to the effect that if payment of the assessed value does not yield a fair value then the owner or owners of the shares the subject of the acquisition may sue the acquirer for the amount representing the difference between that paid and fair value.

GLEESON CJ:   Just to understand the relationship between what might be called the valuation issue and the constitutional issue.  The legislation in terms in section 664F and 667C entitles the person whose property is being acquired to fair value.  Now, if the person gets fair value in what I might call a constitutional as distinct from a statutory sense, then that would seem to dispose of an argument that this is an acquisition of property other than on just terms.

MR GIBSON:   Yes.

GLEESON CJ:   If there is some discrepancy or discordancy between the statutory concept of fair value and the constitutional concept of just terms, then the adjustment is made by this additional statutory provision to which you refer.  Is that what it comes to?

MR GIBSON:   Yes.

GLEESON CJ:   So that in that respect the constitutional point is dependent upon the valuation point?

MR GIBSON:   Yes.

GLEESON CJ:   And it only arises if the valuation point in the application of the statute does not produce just terms?

MR GIBSON:   Yes, absolutely.  Your Honours, unless there are any further matters, those are my submissions.

GLEESON CJ:   Thank you, Mr Gibson.  Yes, Mr Keane.

MR KEANE:   Your Honours, in relation to the point your Honour the Chief Justice was just making, we should observe that the applicants at trial and in the Court of Appeal, certainly in our matter and I apprehend in my learned friend’s matter as well, made no attempt to demonstrate that the section 667C formula produces a different result.  When we say that, we are speaking about the evidence that was adduced and the claims that were made.

There was, for example, no claim to establish an amount of money payable under section 1350 of the Act and to demonstrate that as a matter of valuation it was a figure that was disparate from the figure produced by the 667C valuation; rather, as appears from the record, the present applicants contented themselves with seeking to demonstrate that the 667C valuation did not produce a fair result.

CALLINAN J:   Mr Keane, what do you say about the referred power point?

MR KEANE:   Your Honour, we submit, with respect, that the view taken in the Court of Appeal by Justice Davies in Pauls was correct but ‑ ‑ ‑

CALLINAN J:   I know.  I mean, we do not get to it unless – but I am just interested in very briefly what you say.

MR KEANE:   Well, your Honour, we submit that it was correct.  We submit that what was referred was the matter of the Bill.  The Bill contained these provisions.  It was a matter within State power to legislate and to refer the matter of the Bill to the Commonwealth Parliament, and that is what they did, so that Commonwealth limitations on power do not apply.

CALLINAN J:   So even if it were on unjust terms – and you, of course, submit that it is not, but even if it were, you say the Commonwealth can enact it on a reference?

MR KEANE:   We do, but, your Honour ‑ ‑ ‑

CALLINAN J:   Is there any case that says that?

MR KEANE:   No, your Honour.  The reason we are reluctant to engage your Honour in that is that it might be thought that here is a bright shiny object that might attract the Court.

CALLINAN J:   No, Mr Keane.  They have to get there through the facts ‑ ‑ ‑

MR KEANE:   Your Honour, that is why we say that while that is an interesting an novel question, we submit that it is correctly decided, but we submit that one can assume that just terms are required.  Our learned friend’s argument really depends upon two propositions.  The first is one which they do not really seek to advance in terms of principle, that is, that just terms must necessarily require the Commonwealth Parliament to ensure that a party in a position to exercise an opportunity to exploit the anxiety of an anxious purchaser must have the benefit of that opportunity otherwise there cannot be just terms.  That is the proposition in principle which is fundamental to their case but which never actually gets articulated in clear terms. 

The second is that as a matter of fact they should be able to demonstrate that in this case the formula does not produce just terms.  The other problem they have in terms of applying their principle is that in our case, and I think in our learned friend’s as well, there was never an attempt to demonstrate that the purchaser was an anxious purchaser.  To the extent that they sought to rely upon evidence of prices paid on‑market two years before in the middle of the takeover, we make the submission that we make at pages 103 and 104 of the record. 

At 103, in paragraphs (b), (c) and (d), we set out the chronology of the takeover and the prices paid under it.  In (c) we refer to the attitude of the senior management of Energex, that is to say the purchaser, after the takeover had been completed.  In (d) we refer to his Honour the learned trial judge’s findings of fact where he rejected as a matter of fact the evidence of market prices as reflecting value several years later.  At page 104 paragraph (g) we make the point that insofar as our learned friends want to point to prices paid in the takeover period, as the passage from the applicant’s expert, Mr Lonergan, set out in (g) shows, that someone who hangs on can miss the boat because the anxious purchaser has sailed.  That is simply what has happened here.

CALLINAN J:   Well, you would take your chances if you hold out, really.

MR KEANE:   And, your Honour, that is precisely what is said by the expert for the other side at paragraph (g) at page 104 and, with respect, it is plainly correct.  That is all that has happened.

CALLINAN J:   Takeover climates are usually a feverish one and therefore a lot of volatility and it is often volatile for only a very short period.

MR KEANE:   Quite, your Honour.  If you do not take the chance, you miss out.  But you cannot then say that those prices reflect market value later on when, as I say, the anxious purchaser has sailed.

Your Honours, as to special value – this is in terms of the exercise under 667C(1)(a), that is, the valuation of the company, as to special value, that is to say the synergies, in this case they just do not matter, as we explain at page 105 paragraph (iii), because the trial judge in our case said, “Even if I accept that special value should be taken into account, it still produces a situation where the price that is offered is more than the price that is so arrived at.”

CALLINAN J:   There was a survey taken some years ago which demonstrated that in almost every case those who accepted the takeover offer – and I know this was not a takeover in the formal sense – were much better off than the shareholders who remained shareholders or were shareholders of the predatory company.

MR KEANE:   Your Honour, I am not aware of the survey, but it certainly bears out what Mr Lonergan said in the passage we referred your Honours to.  As to the special special value, that is to say a value that is said to be part of the value of Allgas because of the circumstances of the beneficial shareholder of the acquirer, we deal with that argument at page 105, paragraph (iv).  We make the point that Allgas, the company, would have to pay the same amount of money irrespective of whether it is ultimately wholly owned by the State of Queensland or not.  It pays tax and the identity of the tax collector does not matter in terms of its value.

CALLINAN J:   Well, that is a special arrangement, is it not, between the Commonwealth and the State?

MR KEANE:   It is.  That is right, your Honour, but so far as the value of the company is concerned, it still has the same outgoing.

CALLINAN J:   It still has that overhead.

MR KEANE:   So that, your Honours, in our submission, one simply does not get to the question whether by reason of the referral of power just terms were not required.  So far as the operation of the section itself is concerned, we should also remind your Honours or make the point that this present reliance on the special special value was something that was not even agitated with the Court of Appeal.  Your Honours will see that the Court of Appeal did not deal with that issue because they were not invited to, we submit for the very good reason that it is simply unarguably wrong.  Unless your Honours have something to raise with us, those are our submissions. 

GLEESON CJ:   Thank you Mr Keane.  Yes, Dr Birch.

MR BIRCH:   Could I commence with a point that was raised by your Honour the Chief Justice to Mr Gibson; that was whether the quantum of the special value depended upon the nature of the acquirer.  There would be some elements of special value that might be largely indifferent to the acquirer, but certainly there would be other elements of special value that may depend upon the acquirer or the identity of the acquirer, but that is not a reason for ignoring them in value.  In any valuation exercise the use to which property will be put is various and valuers speak of the highest and best use as ‑ ‑ ‑

GLEESON CJ:   It is fair value in the context of valuing a particular offer by a particular offeror in section 664F and 667C.

MR BIRCH:   Indeed, your Honour.  If one applies that test, then, of course, the identity of the acquirer is known and the synergies are easily quantifiable.  There is a passage – unfortunately I do not have it to hand – in one of the decisions of Justice Santow that were referred to where his Honour said something to the effect that one of the things which is known about the future of this company is that if this goes ahead that it is going to become 100 per cent owned by whoever it was that was seeking to acquire it. 

So it is not as if this is a speculative issue.  The fact that these synergies may depend upon an acquirer having a particular structure itself is not a reason for ignoring them.  The other point, of course, is that if one leaves them out of the valuation exercise in 667, you deliver a windfall to the acquirer.  The acquirer gets 100 per cent of that value.  The parties whose shares have been acquired get no share of it.  Where is the fairness in that, we say.  So there is no warrant in the wording of 667C to discount synergies simply because they might depend upon the identity of the acquirer.

Could I turn then quickly to another point that was raised.  I think your Honour Justice Callinan said, where does the source of the classes’ bargaining power come from, or could not a parcel of ordinary shareholders equally hold out?  We say that that is an important point in this respect.  When one looks at what happens in a market situation, the market distinguishes between the interests of preference shareholders and the interests of ordinary shareholders.  The offers made do not normally distinguish between ordinary shareholders.  In other words, the market does put a particular market value upon the preference shareholder class.  That reflects, we say, the way the market has worked the allocation.  What my learned friend said was – and indeed that might be a high sum during a takeover, but if you delay you may miss the boat and no longer have an anxious vendor.

GLEESON CJ:   Suppose you had a company in which the majority of the ordinary shares and all the preference shares were held by the members of a particular family who were acting in concert and suppose a parcel of the ordinary shares were held by some outsiders.  How does 667C operate in relation to allocation in that respect?

MR BIRCH:   One would still have to consider the way in which the notional holders of preference shares and ordinary shares would negotiate between themselves the distribution of that allocation.  The section

expressly provides that once one gets down to a class – this is in 667C(1)(c):

then allocate the value of each class pro rata among the securities ‑ ‑ ‑

GLEESON CJ:   Well, hang on.  In the example I have just given you most of the ordinary shares and all the preference shares are held by the family members and the people who are holding out, if you like, the potential greenmailers, hold ordinary shares.  How does this section operate in relation to the question of allocation then?

MR BIRCH:   Just the way that I opened in my first submission to your Honour.  You would image that the ordinary and preference shareholders with equal bargaining power would distribute the special value equally between them and then 667C(1)(c) would require that share that has been attributed to the ordinary shareholders to be distributed pro rata amongst all of the ordinary shareholders.  We do not, of course, suggest that once you have identified the amount to allocate to a class you do not ‑ ‑ ‑

GLEESON CJ:   That does not seem to reflect the special market bargaining position of the minority ordinary shareholders because of what you call the allocation pro rata.

MR BIRCH:   Your Honour, we do not take issue in this case with whether 667C(1)(c) defies the necessity for just terms because we say we already have a case on the allocation point in 667C(1)(b).  What your Honour is really putting to me is perhaps the premium that could be commanded by a group within a class also ought not to be able to be expropriated, and that is simply not a case I have to or seek to make today.

GLEESON CJ:   Thank you, Dr Birch.  Yes, Dr Elkington.

MR ELKINGTON:   I did not quite understand that example that you gave to ‑ ‑ ‑

GLEESON CJ:   The example was an example in which all the members of a family are acting in concert.  The family members own most but not all of the ordinary shares and they own all the preference shares.

MR ELKINGTON:   Yes.

GLEESON CJ:   So the people who are holding out, if you like, are ordinary shareholders – a minority of ordinary shareholders.  How does section 667C work in that case?

MR ELKINGTON:   That is partly dealt with in Teh v Ramsay where Justice Barrett makes it clear that section 667C is not a section about share valuation.  That was a case in which there were only ordinary shares and Justice Barrett makes it clear that the minority shareholders in a company where there is only one class of shares are not supposed to be punished for holding out, they are supposed to get their share of the control premium, which, of course, in a company with only one class is spread rateably over that class.  That also deals with the issue raised about people who hold out and do not accept a takeover offer must accept less if they miss the boat, but that really is to punish them. 

I mean, the section is not a section which is intended to punish people that hold out.  They are still supposed to get their share of whatever part of the control premium attaches to that class.  Of course, in the case of Allgas, in the takeover context, very high multiples of – I mean, somewhere between – and I think Energex itself offered $8.00 on one occasion and $10.00 on another occasion.  That certainly gives some indication.  I mean, they are not offering that amount of money just out of goodwill or anything.  There must be something in it.  That is an indication of what those shares are worth.  To value them now on the basis of a market value certainly is inconsistent with what Justice Barrett says in Teh v Ramsay.

The whole section is not about share valuation; it is about allocation.  One of the submissions that was just made was that the section sets up a principled basis of assessing the value of these classes.  I am not very clear even now, this matter having being before several courts, what this principle is upon which the value of the company as a whole is to be allocated.  I mean, all of the cases have simply valued the preference shares.  It seems to me that to value the preference shares and then just subtract that from the value of the company as a whole – that is not an allocation.  An allocation suggests that you weigh things up having regard to whatever factors may be relevant.  That is an allocation.  The valuation of the company as a whole in all these cases has all been done just for form’s sake.  There has never really been any attempt to allocate that value.

Lastly, the question about Mr Selak’s report.  Mr Selak was independent in the sense that he was nominated by ASIC as an independent person, but the sense in which he was not independent was that Pauls knew what he thought the fair value would be before they sought his report.  Now, the section does not say that they are to seek a valuation from ASIC’s nominee.  The framework of the legislation is that the person seeking to acquire the shares sets a price and an independent person gives his opinion as to whether the price is fair or not. 

Now, in this case they knew what he was going to say before they asked for his report.  I think if the section is followed according to its terms,

anybody setting a price would tend to set a generous price because otherwise they would run the risk that the expert would say that the price was not fair.  The risk is all taken away in this case.  That is not the framework of the legislation.  If this is the way the legislation is to operate, this will be done in every case and minority shareholders will never know what the acquirer thinks they should pay; it will be really what the expert says. 

The section does not say that the shareholders have to go at a price determined by an independent expert.  It says they have to go at a price which they set and the expert has to pronounce upon the price that they set.  So to say that all that is involved in this section is that the shareholders get fair value, that is not the end of it.  I mean, that does not provide procedural fairness to the minority shareholders.  So that is all I have to say, your Honour.

GLEESON CJ:   Thank you.

These four applications for special leave to appeal arise out of two decisions of the Court of Appeal of the Supreme Court of Queensland.  They have been argued and will be decided together.

The primary issues in these cases involved questions of what the heading to the relevant legislative provision describes as valuation of securities.  Having regard to the findings of fact made in the Supreme Court of Queensland on the valuation issues and to the relationship between the valuation issues and the constitutional issues we consider that there are insufficient prospects of success of appeals to warrant grants of special leave to appeal and the applications are dismissed with costs.

We will adjourn for a short time to reconstitute.

AT 10.59 AM THE MATTERS WERE CONCLUDED