Heydon v NRMA Ltd; Bateman v NRMA Ltd; Morgan v NRMA Ltd
Case
•
[2000] NSWCA 374
•21 December 2000
No judgment structure available for this case.
Reported Decision: [2000] 36 ACSR 462
[2001] 19 ACLC 1
[2001] Aust Torts Reports 81-588
New South Wales
Court of Appeal
CITATION: HEYDON v NRMA LTD & ORS; BATEMAN & ORS v NRMA LTD & ORS; MORGAN & ORS v NRMA LTD & ORS [2000] NSWCA 374 revised - 1/02/2001 FILE NUMBER(S): CA 40587/99; 40644/99; 40647/99 HEARING DATE(S): 15-26 May 2000 JUDGMENT DATE:
21 December 2000PARTIES :
JOHN DYSON HEYDON v NRMA LTD & ORS;
GREGORY THOMAS BATEMAN & ORS (T/A ABBOTT TOUT) v NRMA LTD & ORS; JOHN KERIN MORGAN & ORS (T/A ALLEN ALLEN & HEMSLEY) v NRMA LTD & ORSJUDGMENT OF: Malcolm AJA at 1; McPherson AJA at 360; Ormiston AJA at 455
LOWER COURT JURISDICTION : Supreme Court LOWER COURT
FILE NUMBER(S) :Comm D 50257/95 LOWER COURT
JUDICIAL OFFICER :Giles J
COUNSEL: T F Bathurst QC/A J Meagher SC/J T Gleeson (Heydon)
R J Ellicott QC/ G K Burton (Bateman & Ors T/A Abbott Tout)
B C Oslington QC/M R Speakman (Morgan & Ors T/A Allen Allen & Hemsley)
J L Sher QC/ R C McDougall QC/ N J O'Bryan, P T Nugent (NRMA LTD, NRMA INSURANCE LTD, NRMA HOLDINGS LTD)SOLICITORS: Corrs Chambers Westgarth (Heydon)
Ebsworth & Ebsworth (Abbott Tout)
Blake Dawson Waldron (Allen Allen & Hemsley)
Norton White (NRMA Ltd, NRMA Insurance Ltd, NRMA Holdings Ltd)CATCHWORDS: Negligence - professional negligence - barrister - solicitor - solicitor's duty to client based on contract - demutualisation of NRMA - whether involved expropriation or oppression - alteration of articles of association - "benefit of the company as a whole" - whether decision in Gambotto v WCP Ltd (1995) 183 CLR 432 was reasonably foreseeable - whether lawyers' duty of care extended to possible change of law in High Court appeal - standard of care for leader of profession - duty of care in advice as to law when special leave to appeal has been granted - expert evidence in professional negligence cases - whether prospectus misleading or deceptive - "free shares". D DECISION: See Summary pp5-6
- 288 -THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 40587/99; 40644/99; 40647/99
Comm D 50257/95
MALCOLM AJA
McPHERSON AJA
ORMISTON AJA
Thursday 21 December 2000
HEYDON v NRMA LTD & ORS
BATEMAN & ORS v NRMA LTD & ORS
MORGAN & ORS v NRMA LTD & ORSSUMMARY
On 13 May 1999 judgment was given in the Commercial Division of the Supreme Court by Giles J in Action 50257 of 1995 for damages for professional negligence for an amount of $21,193,828 plus interest. The total amount of the judgment as at 4 August 1999, inclusive of interest, was $32,068,910. The appellants were the defendants in the action, namely, Mr J D Heydon QC, then a practising barrister, and two solicitors and the partners of their respective firms. They were Mr J K Morgan of Allen Allen & Hemsley ("AAH") and Mr G A T Bateman of Abbott Tout ("AT"). The respondents, who were the plaintiffs in the action, were NRMA Limited, NRMA Insurance Limited and NRMA Holdings Limited. They have been collectively referred to as "the NRMA" and individually as "Association", "Insurance" and "Holdings" respectively.
The NRMA have cross-appealed against each of the appellants raising issues both in relation to the judgments against them and as between each other. AT, Association, Insurance and Holdings also filed notices of contention.
The appeals raise an important question regarding the application of the decision of the High Court in Gambotto v WCP Limited (1995) 182 CLR 432 to a proposal to "demutualise" Association. This was proposed to be achieved by way of a change of status from a company limited by guarantee to a company limited by guarantee with a share capital, and by converting the rights of members of Association into an entitlement to shares in Holdings, which would in turn hold all the shares in Association. There are other questions which arise, but the question of the application of Gambotto to the transactions involved in this case was the critical question in the appeals. The appeals and cross-appeals also raise questions concerning the duties and standard of care of solicitors and counsel retained to advise in relation to transactions involving considerations of the Corporations Law , the issue of prospectuses, misleading or deceptive conduct under the Trade Practices Act 1974 (Cth) (" TP Act ") and the Fair Trading Act 1987 (NSW) (" FT Act "), breach of contract, professional negligence and damages. It was common ground at the trial that both AAH and AT were retained by contracts which gave rise to contractual duties of reasonable care, skill and diligence in regard to matters within the scope of their respective retainers. It was also common ground that Mr Heydon owed the solicitors and their clients who retained him a common law duty of reasonable care, skill and diligence in regard to matters which he was called upon to advise. The issues which were debated at the trial and on the appeal concerned the content of the relevant duties and the standard of care required in the particular circumstances.
In Gambotto the High Court held that a power to amend the articles of association of a company, so as to confer upon the majority power to expropriate the shares of a minority, may be exercised lawfully only if it is exercisable for a proper purpose and its exercise will not operate oppressively in relation to minority shareholders. Assuming the power to be exercised for a proper purpose, the exercise of the power must be fair in the circumstances. In such a case the onus is on the majority to prove that the amendment was made for a proper purpose and was fair in the circumstances. In general terms, the effect of the decision was that the articles of association of a company could not be altered by special resolution to empower majority shareholders to expropriate the shares of the minority in order to secure a favourable corporate structure.
The trial of the action was heard before Giles J over some seventy-five days between 25 May and 16 October 1998. Further reasons for judgment were given and orders made on 4 August 1999. The transcript of evidence runs to more than 5,000 pages and there are many volumes of documentary evidence. Reasons for judgment which fill some 723 pages plus appendices were delivered on 13 May 1999. On 3 June, 23 and 26 July 1999 the learned trial Judge heard submissions about interest on damages, the formal judgment and costs. Further reasons for judgment were given and orders made on 4 August 1999. The hearing of the appeals and cross-appeals extended over 10 sitting days from 15-19 and 22-26 May 2000. The hearing was facilitated by the availability of the transcript of both the trial and the appeal in electronic form, as well as the co-operation of all counsel involved, albeit at some inconvenience to themselves, which was very much appreciated by the members of the Court.
Liability based on Gambotto
The essence of the NRMA case based on Gambotto was that it should have been advised by Mr Heydon, AAH and AT that Gambotto was on appeal to the High Court and, after special leave to appeal was granted on 10 December 1993, that the appeal had the reasonable prospects of success and there was a real risk that the High Court decision might adversely impact on the proposal. It was contended that this advice should have been given at the latest in March 1994, when the proposal was first put before the Boards or, alternatively, in April 1994 when the Boards first met after the hearing of the appeal in Gambotto . The question was whether there was such a risk and whether there was something that Mr Heydon and the solicitors should have reasonably foreseen in the exercise of reasonable care and skill. Each of Mr Heydon and the solicitors involved were under a duty to exercise the standards of care and skill of persons having special skill in the fields of company and commercial law and, in the case of Mr Heydon, also in the field of trade practices law.The proposal put to the NRMA Boards in March 1994 was to convert Association and Insurance from companies limited by guarantee to companies limited by both guarantee and shares. The shares in Association and Insurance would be issued to Holdings. Members of Association and Insurance would surrender their rights of membership and accept in exchange an allotment of paid up shares in Holdings. No payment would be made for such shares. Those who failed or refused to surrender their membership rights would receive the net proceeds of the sale of the shares to which they would have been entitled, after deduction of expenses. Holdings would be listed as a public company.
The conversion of Association and Insurance to companies limited by guarantee and shares was proposed to be by way of special resolution allowing the articles to incorporate a "changeover" cl 117. This would involve the power of a company to alter its articles by special resolution pursuant to s 176(1) of the Corporations Law . This would be binding on the members by force of s 180(1) of the Law .
Following the decision of the High Court in Gambotto on 8 March 1995 and taking advice from Mr Heydon, Mr S E K Hulme QC and Minter Ellison, solicitors, on 27 May 1995, the NRMA resolved to defer the meetings of members which had been adjourned from the appointed day on 19 October 1994.
The trial Judge found that in breach of his duty to exercise due skill and care, Mr Heydon had failed to warn the NRMA of the risk that if the Gambotto appeal to the High Court succeeded, it would do so on grounds inimical to the validity of resolutions in general meetings having the effect that members of NRMA were deprived of their membership. It was held that Mr Heydon should have obtained transcripts of the special leave application and warned that further consideration should be given to the matter with the benefit of transcript of the argument on the appeal itself. The Court of Appeal has concluded unanimously that Mr Heydon's duty did not extend that far. In any event, none of the appellants was found to have actual knowledge on 10 December 1993, or at any later but possibly material time until well after the end of March 1994, that special leave to appeal had been granted in Gambotto .
Malcolm AJA, McPherson AJA and Ormiston AJA have each concluded that the reasoning of the majority of the High Court in Gambotto was not reasonably foreseeable in or after December 1993. The learned trial Judge concluded that the NRMA proposal involved expropriation of the membership rights of those members of Association who rejected the offer of shares in Holdings in exchange for their membership rights. The Court of Appeal has taken the view that it is not the fact of expropriation which constitutes oppression, but the action of amending the articles to facilitate expropriation. When Gambotto was decided by the Court of Appeal it had been held that, if the expropriation was fair, the fact of the expropriation would not make it invalid. McPherson AJA has pointed out that there were other grounds on which an expropriation might be justified including one expressed by McHugh J in Gambotto at 455 if the expropriation:
"… will enable a company to pursue a beneficial course of action that would otherwise be denied to it … if it will enable the company to pursue some significant goal … that is external to the company."
It was not expected that the High Court would limit the power of altering the articles to facilitate expropriation, particularly the exclusion by the majority in Gambotto of all considerations of benefit to the company that put paid to the NRMA restructuring as it had been planned.
Malcolm AJA has held that the transaction proposed by the NRMA did not involve an expropriation of members' rights or oppression. McPherson AJA has held that there was an expropriation. Ormiston AJA has held that the concept of expropriation in Gambotto involves oppression by way of aggrandisement or securing benefits for the majority at the expense of the minority which did not occur in this case. Malcolm AJA, McPherson AJA and Ormiston AJA have each held that Mr Heydon, Mr Morgan and Mr Bateman were not negligent in the advice which they gave or did not give. In the result the appeals have been allowed.
The "Free Shares"/Disadvantages Liability
The NRMA also claimed damages for negligence against the appellants for their failure to advise on the risks that the description of the shares to be issued to Holdings as "free shares" and the reference to "disadvantages" in the prospectus were each "misleading and deceptive or likely to mislead or deceive" contrary to s 52(1) of the Trade Practices Act 1974 (Cth) "( TP Act "). Mr Heydon was said to have been negligent and AAH and AT were each said to have been in breach of their contractual duty of reasonable care. Claims were also made that each of the appellants contravened s 52 of the TP Act or s 42 of the Fair Trading Act 1987 (NSW) (" FT Act "); or were "involved" in Holdings' contravention of those provisions and liable under s 82 of the TP Act or s 68 of the FT Act ; or liable for contravention of s 985 and s 996 of the Corporations Law . The Court has concluded that the use of the expression "free shares" and "disadvantages" were not misleading or deceptive, there was no negligence and no contravention by the appellants of any of these statutory provisions.Each of the members of the Court has concluded that it should be ordered that:
(1) Each of the appeals be allowed with costs.
(2) The judgment below be set aside, including the contribution orders as between the appellants; and judgment be entered in favour of the appellants dismissing the action with costs.
(3) Each of the cross-appeals be dismissed with costs.
(4) Each of the appeals:
(a) by AT against the dismissal with costs of their notice of motion dated 6 April 1998;
(b) by AAH against the dismissal with costs of their notice of motion dated 28 July 1998; and
(c) by AT against the dismissal with costs of their notices dated 20 May 1999;
be dismissed with costs.
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEALMALCOLM AJA:
Comm D 50257/95
CA40587/99;40644/99;40647/99
McPHERSON AJA
MALCOLM AJA
ORMISTON AJA
Thursday 21 December 2000
HEYDON & ORS v NRMA LTD & ORS
Par No.
INTRODUCTION 1Questions raised by the appeals and Cross-Appeals 2
The Aftermath of Gamgotto 23
The NRMA and “Demutualisation” 5
Proceedings against AAH, At and Mr Heydon 11
Approval of the Demutualisation Concept 15
The Demutualisation Proposal Adopted 16
Federal Court Proceedings 19
gambotto liability 25
THE RESOLUTIONS OR SCHEME ISSUE 25
GAMBOTTO’S CASE 32
MR HEYDON’S BRIEF 34
CONFERENCE WITH MR HEYDON 51
THE REVISED BRIEF TO MR HEYDON 56
OPPRESSION ADVICE DEFERRED 58
MR HEYDON’S OPINION OF 20 DECEMBER 1993 60
MR HEYDON’S BRIEF OF 25 JANUARY 1994 64
CONFERENCE WITH MR HEYDON ON 2 february 1994 67
THE FEBRUARY 1994 BRIEF TO MR HEYDON 69
CONFERENCE WITH MR HEYDON ON 7 MARCH 1994 71
BOARD APPROVAL OF THE PROPOSAL 72
THE PROPOSAL DEFINED 76
BRIEF TO MR HEYDON OF 19 APRIL 1994 77
CONFERENCE WITH MR HEYDON ON 29 APRIL 1994 79
BRIEF TO MR HEYDON OF 15 JULY 1994 80
THE DUE DILIGENCE COMMITTEE 85
MR HEYDON’S OPINION OF 28 JULY 1994 89
BOARD APPROVAL OF THE PROPOSALS 18 AUGUST 1994 91
PUBLICATION OF THE PROSPECTUS 93
OPINION OF THE TRADE PRACTICES COMMISSION 94
FEDERAL COURT PROCEEDINGS 98
MR MORGAN’S MEMORANDUM OF 15 NOVEMBER 1994 99
CHANGE OF SOLICITORS: SUBMISSIONS INVITED ANDRECEIVED 103
MINTER ELLISON INSTRUCTED 112
THE IMPACT OF GAMBOTTO 114
MR HEYDON’S OPINION OF 13 MARCH 1995 120
MR HULME BRIEFED TO ADVISE 124
MR HULME’S OPINIONS OF 3 APRIL 1995 127
CONCLUSION OF THE TRIAL JUDGE 129
JOINT BOARD MEETING ON 3 APRIL 1995 131
JOINT BOARD MEETING ON 27 MAY 1995 134
THE NRMA CASE ON GAMBOTTO 137
SCOPE OF DUTY AND STANDARD OF CARE 143
ADMIsSIBILITY AND RELEVANCE OF EXPERT EVIDENCE 149EVIDence of mr bennett qc 156
conclusions of giles j 161
contentions on behalf of mr heydon 175
no expropriation 177
scope of mr heydon’s duty of care 182
correctness of mr heydon’s opinion as at 20 december
1993 185
limitation of power of the majority: oppression 188
the australian authorities 201
application of the authorities to this case: no
expropriation 216
mr heydon’s opinion reasonable and competent 228
mr heydon not negligent 237
gambotto and the liability of AAH and AT 238
AT not liable for failure to advise re gambotto 249
aah not liable for failure to advise re gambotto 250free shares/disadvantages liability 254
federal court proceedings 293
contentions on cross-appeals 254
the prospectus 255
appeal to the full federal court 295
conclusions of giles j 300
prospectus not misleading or deceptive 302
other claims concerning the prospectus 304
misleading conduct, breach of contract and
negligence 305
negligence claim against mr heydon 308
breach of contract claims against aah and at and
involvement in misleading or deceptive conduct 314
statutory claims under ft act and failure to take
reasonable care 324
statutory claims under corporations law 347
conclusions 358
THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL1 These are appeals and cross-appeals from a judgment of Giles J in which he awarded NRMA Ltd ("Association"), NRMA Insurance Ltd ("Insurance") and NRMA Holdings Ltd ("Holdings") damages of $21,193,828 plus interest against John Dyson Heydon ("Mr Heydon") then a barrister and of Queens Counsel, Allen Allen & Hemsley, solicitors ("AAH") and Abbott Tout, solicitors ("AT"). Each of Mr Heydon, AAH and AT were ordered to contribute equally to the payment of the damages and interest. The total amount of the judgment inclusive of interest as at 4 August 1999 was $32,068,910. Mr Heydon, AAH and AT have each appealed. Association, Insurance and Holdings have cross-appealed against Mr Heydon, AAH and AT. The cross-appeals raise issues both in relation to the judgments against them and as between each other. AT, Association, Insurance and Holdings have also filed Notices of Contention.
Comm D 50257/95
CA 40587/99; 40644/99;40647/99
Thursday 21 December 2000
MALCOLM AJA
McPHERSON AJA
ORMISTON AJA
HEYDON & ORS v NRMA LTD & ORS
JUDGMENT
INTRODUCTION
MALCOLM AJA:
2 The appeals raise an important question regarding the application of the decision of the High Court in Gambotto v WCP Limited (1995) 182 CLR 432 to a proposal to "demutualise" Association. This was proposed to be achieved by way of a change of status from a company limited by guarantee to a company limited by guarantee with a share capital, and by converting the rights of members of Association into an entitlement to shares in Holdings, which would in turn hold all the shares in Association. There are other questions which arise, but the question of the application of Gambotto to the transactions involved in this case was the critical question in the appeals. The appeals and cross-appeals also raise questions concerning the duties and standard of care of solicitors and counsel retained to advise in relation to transactions involving considerations of the Corporations Law, the issue of prospectuses, misleading or deceptive conduct under the Trade Practices Act 1974 (Cth) ("TP Act") and the Fair Trading Act 1987 (NSW) ("FT Act"), breach of contract, professional negligence and damages. It was common ground at the trial that both AAH and AT were retained by contracts which gave rise to contractual duties of reasonable care, skill and diligence in regard to matters within the scope of their respective retainers. It was also common ground that Mr Heydon owed the solicitors and their clients who retained him a common law duty of reasonable care, skill and diligence in regard to matters which he was called upon to advise. The issues which were debated at the trial and on the appeal concerned the content of the relevant duties and the standard of care required in the particular circumstances. 3 In Gambotto the High Court held that a power to amend the articles of association of a company, so as to confer upon the majority power to expropriate the shares of a minority, may be exercised lawfully only if it is exercisable for a proper purpose and its exercise will not operate oppressively in relation to minority shareholders. Assuming the power to be exercised for a proper purpose, the exercise of the power must be fair in the circumstances. In such a case the onus is on the majority to prove that the amendment was made for a proper purpose and was fair in the circumstances. In general terms, the effect of the decision was that the articles of association of a company could not be altered by special resolution to empower majority shareholders to expropriate the shares of the minority in order to secure a favourable corporate structure. 4 The trial of the action was heard before Giles J over some seventy-five days between 25 May and 16 October 1998. Reasons for judgment were delivered on 13 May 1999 and on 3 June, 23 and 26 July 1999 the learned trial Judge heard submissions about interest on damages, the formal judgment and costs. Further reasons for judgment were given and orders made on 4 August 1999. The transcript of evidence runs to more than 5,000 pages and there are many volumes of documentary evidence. Reasons for judgment which fill some 723 pages plus appendices were delivered on 13 May 1999. On 3 June, 23 and 26 July 1999 the learned trial Judge heard submissions about interest on damages, the formal judgment and costs. Further reasons for judgment were given and orders made on 4 August 1999. The hearing of the appeals and cross-appeals extended over 10 sitting days from 15-19 and 22-26 May 2000. The hearing was facilitated by the availability of the transcript of both the trial and the appeal in electronic form, as well as the co-operation of all counsel involved, albeit at some inconvenience to themselves, which was very much appreciated by the members of the Court.
QUESTIONS RAISED BY THE APPEALS AND CROSS-APPEALS
5 Association was originally incorporated as National Roads Association of New South Wales in 1920 as a company limited by guarantee. It was formed to promote the interests of motorists and other road users and to provide services to motorists, including an emergency or breakdown road service and insurance. There were some intermediate changes of name, including a change to the National Roads and Motorists' Association with the adoption of the acronym "NRMA". On 17 November 1992 the name was changed to NRMA Ltd. By 1994 Association had over 1,800,000 members. It wholly owned or was the majority shareholder in eight subsidiary companies and had assets of approximately $457 million under its management. 6 NRMA Insurance Ltd ("Insurance") was incorporated in 1926, also as a company limited by guarantee. Insurance was formed to provide insurance and financial services not restricted to any connection with motoring. Policy holders and recipients of financial services did not have to be members of Insurance. The members of Insurance were Association, any director of Insurance appointed by Association, and, speaking generally, policy holders who were also members of Association. By 1994 Insurance had approximately 1,300,000 members and wholly owned or was the majority shareholder in eight subsidiary companies. It had assets of approximately $4.4 billion under its management. 7 Association, Insurance and their subsidiaries operated as an organisation collectively and generally known to the public as the "NRMA". In his judgment, Giles J so referred to the organisation unless it was necessary to distinguish between the constituents. I shall do the same. The affairs of the NRMA were substantially controlled by Association. The directors of Association appointed the directors of Insurance, and the President of Association was ex officio the chairman of directors of Insurance. The articles of association provided in Article 116 for the management of Association's affairs to be carried on by a Board of Management comprised of the President, the Chief Executive Officer and others elected by the directors being either directors or employees, with a majority of directors. Article 116 also provided that the power of the Board of Management shall be "subject to such direction as to the policy or otherwise as may be made … by the Board of Directors from time to time". The articles of association of Insurance provided for appointment by the directors of Association of the members of the Board of Management as a committee to act "in liaison with" the directors of Insurance, and also provided that the directors of Insurance might delegate their powers to the committee. These bodies with their common membership acted jointly as the Board of Management and Insurance Liaison Committee. Consequently, the affairs of Association and Insurance received substantially common direction, but in circumstances in which Association was able to exercise control. The learned Judge found, and it is not disputed that the NRMA was successful and prosperous. As his Honour said in para 4 of his reasons:
THE NRMA AND "DEMUTUALISATION"
8 From some time in 1992 there was discussion of a proposal that the NRMA be restructured by way of "demutualisation". This involved a change from the operation through companies limited by guarantee for the mutual benefit of members, to operation through a company with shareholders conducted with a view to making profits and distributing them to the shareholders. The proposal as ultimately developed was described in a letter from the President to members, in the prospectus subsequently issued, as a proposal to "unlock the wealth" of the NRMA and "permit members to share in [its] wealth and future financial successes". 9 At the end of 1992 or early in 1993 the NRMA retained Mr Morgan of AAH to advise generally on the proposal. Mr Bateman of AT was retained at the end of October 1993 to advise on structures and certain other aspects of the proposal. Later, AAH obtained advice by way of opinion from Mr Heydon. The advice obtained included advice regarding the proposed new structure and the steps required to be taken to achieve it, as well as advice and assistance in developing a prospectus. These solicitors and Mr Heydon as counsel gave advice and carried out work in connection with the proposal in 1993, 1994 and the early part of 1995. In the result a prospectus was issued on 23 August 1994 and sent to the members of Association and Insurance. It contained notices of meetings of Association and Insurance to be held on 19 October 1994. Mailing of the prospectus commenced on 31 August 1994. On 22 September 1994 two of the directors of Association commenced proceedings for declarations and an injunction claiming that the prospectus was misleading and deceptive. These proceedings were successful and resulted in declarations and an injunction granted by Gummow J in the Federal Court on 13 October 1994: Fraser v NRMA Holdings Ltd (1994) 52 FCR 1. An appeal to the Full Court of the Federal Court was only partially successful, but on 27 January 1995 the prospectus was held to be misleading and deceptive in one of the respects found by Gummow J and in another related respect by the Full Court: NRMA Holdings Ltd v Fraser (1995) 55 FCR 452. In a further judgment on 30 January 1995 the Full Court left open the possibility of the issue of a supplementary prospectus. At that stage the NRMA still wished to proceed and was considering how best to do so. Further work was done on a supplementary prospectus. 10 In May 1995, following the decision of the High Court in Gambotto on 8 March 1995, the proposal which had been developed was abandoned and proceedings were subsequently commenced against AAH, AT and Mr Heydon for damages in actions for breach of contract against the two firms of solicitors and for damages for negligence against Mr Heydon. It was also contended that AAH, AT and Mr Heydon were engaged or involved in the NRMA's misleading conduct in relation to the prospectus issued to NRMA members. The prospectus was withdrawn, with the result that the expenditure alleged to have been wasted on the proposal was sought to be recovered from the appellants, as damages for professional negligence or breach of contract and in consequence of or involvement in misleading or deceptive conduct.
"It built up large reserves. Its success and prosperity did not mean the distribution of its profits. As companies limited by guarantee, Association and Insurance were operated for the mutual benefit of members. Profits could, and did, mean that the annual subscription for the provision of road services by Association was kept down, that other services were provided by Association to members at less than cost, and (for a time) that rebates were given to the holders of policies issued by Insurance. But the members were not shareholders, and as the articles stood could not receive dividends; on a winding-up of Insurance any surplus went to Association, and if Association were then wound up any surplus went not to members but to an institution with similar objects or for charitable purposes."
11 Association, Insurance and Holdings brought proceedings against the partners at the time of AAH as first defendants, the partners at the time of AT as second defendants and Mr Heydon as third defendant. The claims for damages against each of the present appellants focused on the failure to adequately advise the NRMA on the risks to the proposed demutualisation posed by a successful appeal to the High Court in Gambotto and the risk that the description of the shares to be issued in Holdings as "free shares" could be held to be misleading or deceptive. The damages claimed in relation to Gambotto were said to encompass most of the wasted expenditure. The claim relating to the misleading or deceptive conduct by the references to "free shares" in the prospectus was the basis for a claim in damages for the whole of the wasted expenditure. It was contended by the respondents at the trial that had they been told of the risk posed by Gambotto's case, they would have deferred any decision to proceed until after the decision of the High Court. The expenditure from the time of such postulated or hypothetical deferral would not have been incurred. If they had proceeded and been properly advised regarding the free share questions, they would have avoided the successful challenge to the prospectus in the Federal Court, with the consequence that the whole of the expenditure would not have been wasted. The causes of action pleaded in support of the claims for damages were breach of contract; negligence; contravention of s52 of the TP Act or s42 of the FT Act; involvement in Holdings' contravention of the TP Act or the FT Act; contravention of s995 of the Corporations Law and contravention of s996 of the Corporations Law. 12 While there were issues regarding the scope of the retainers of AAH and, in particular, of AT it was common ground at the trial that the retainers of both firms of solicitors gave rise to concurrent duties of care in negligence as well as in contract: Hawkins v Clayton (1988) 164 CLR 539 at 574-575 per Deane J; and Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642. After the conclusion of the trial and while judgment was reserved, the High Court held in Astley v Austrust Ltd [1999] HCA 6; (1999) 73 ALJR 403 that contributory negligence was not a defence to an action for breach of contract, even where there was concurrent liability in contract and tort, although both AAH and AT maintained reliance on contributory negligence, in so far as it was an available defence to the statutory claims. 13 As against Mr Heydon, it was alleged that he breached his duty of care in that he should have advised that there was a real risk that the proposal to effect the demutualisation by special resolutions of the members of Association and Insurance could be rendered unlawful by the decision of the High Court, on a successful appeal in Gambotto. Further, it was alleged that he should have advised against the use of the expression "free shares" in the prospectus, or given consideration to the question whether the expression was or could be misleading or deceptive. The claim against Mr Heydon was in tort so that contributory negligence was available as a defence in his case. 14 As already mentioned, the NRMA also relied on ss52 and 82 of the TP Act. Section 52(1), which is in Part V of the TP Act, provides that a corporation shall not, in trade or commerce, engage in conduct that is "misleading or deceptive or is likely to mislead or deceive". Section 82(1) of the TP Act provides that a person who suffers loss or damage by conduct of another person in contravention of a provision in Part V may recover "the amount of the loss or damage by action against that other person or against any person involved in the contravention". Sections 42 and 68 of the FT Act were in the same terms, except that s42 referred to a "person" rather than a "corporation". At a late stage in the trial the claims under the TP Act against AAH and AT were abandoned and relief confined to the claims for breach of the FT Act. The claims against Mr Heydon under the FT Act were also abandoned. The claims under the FT Act were limited to the "free shares" question. However, claims against AAH, AT and Mr Heydon for damages based on involvement in contravention of s52 of the TP Act and s42 of the FT Act in respect of the misleading and deceptive conduct by NRMA were maintained. Such claims were also maintained under the combination of ss995(2) and 1065(1) of the Corporations Law, which substantially reflect in relevant part the provisions of the TP Act. These claims were ultimately abandoned against Mr Heydon. Finally, there was a claim against AAH, AT and Mr Heydon under s996(1) of the Corporations Law in relation to material statements in the prospectus said to be false or misleading. All of these claims related to the "free shares" issue.
PROCEEDINGS AGAINST AAH, AT AND MR HEYDON
15 The demutualisation concept was formally approved for further development in March 1994 by the boards of Association and Insurance with a view to ultimate listing of NRMA shares on the Stock Exchange. The proposal was publicly announced on 17 March 1994. At that time neither the new structure nor the steps to be taken to achieve it were finally determined. It was then envisaged that a new company with share capital would be incorporated and admitted to membership of Association and Insurance. Resolutions would be passed at general meetings of members of Association and of Insurance, having the effect that the members of Association and Insurance other than the new company would cease to be members. Instead they would either become shareholders in the new company or receive a cash payment, if they did not wish to take up shares, and the new company would be listed on the Stock Exchange. In the result, the new company would be a listed holding company which would also be the only member of Association and Insurance. Services previously enjoyed by virtue of membership, such as road services and other services, would be provided to the shareholders in the new company under contracts with the service provider.
APPROVAL OF THE DEMUTUALISATION CONCEPT
16 Development of the proposal continued after 17 March 1994 although the basic structure did not change. A new company, NRMA Holdings Ltd ("Holdings"), was incorporated and some of the directors of Association became its directors. Holdings became a member of both Association and Insurance. On 18 August 1994 the boards of Association and Insurance formally resolved to proceed with the proposal by putting it to general meetings of their members with their recommendations. 17 It was proposed that general meetings of both Association and Insurance be held on 19 October 1994 to consider special resolutions of the members of both companies. To that end, a booklet, entitled a prospectus, was issued on 23 August 1994. The prospectus was sent to members of Association and Insurance in a clear plastic cover accompanied by a separate two leaf document known as an "onsert". Notices of meetings were contained in the prospectus for general meetings to be held on 19 October 1994. The onsert included proxy voting papers for the general meetings. It was contemplated that special resolutions of not less than 75% of those persons present, in person or by proxy, were required. The prospectus contained an offer of shares in Holdings to those members (and others) who chose to become shareholders. This is what called for the issue of a prospectus. Mailing of the prospectus package began on 31 August 1994. 18 The offer of shares was described in the prospectus as the "Members Free Offer" based on membership. There was also an exceptional group of members of Insurance who were invited to participate in the Members Free Offer. Members could choose to accept what were described as "Free Shares" or a cash alternative. No money was payable for the shares, but acceptance of the proposal would mean that the members of Holdings would cease to be such members and would instead become members of Association if they accepted the offer of shares. Likewise, those who accepted the cash alternative would cease to be members of Association. The shares allocated to members who did not accept the offer or who chose the cash alternative were to be allocated to the NRMA Offer Trust on trust for sale by the Trustees. The proceeds would be paid to such members in proportion to their respective entitlements as set out in the prospectus.
THE DEMUTUALISATION PROPOSAL ADOPTED
19 The approvals of the proposals by the boards of Association and Insurance, and the resolutions by those boards to proceed with it, were not unanimous. On 22 September 1994, two of the directors opposed to the proposal, Mr Richard Talbot and Miss Dawn Fraser, filed an application in the Federal Court of Australia seeking declaratory and injunctive relief in relation to the prospectus and onsert and the holding of the general meetings. Holdings, Association and Insurance were respondents to the application. 20 In Fraser v NRMA Holdings Ltd (1994) 52 FCR 1 Gummow J ordered that there be heard separately from any other questions the applicants' claims for a declaration that the members of Association and Insurance were not fully, fairly and adequately informed of the proposal, the subject of the resolutions to be put before them or of the offers made in the prospectus. There were also claims for a declaration that the prospectus and the information in it were misleading in certain respects, and for an injunction restraining the relevant respondents from proceeding with the meetings, except for the purpose of adjourning them, and from proceeding in any way with the offers or the implementation of the restructuring and offers proposed in the prospectus. Those claims were heard on 5-7 October 1994. Judgment was given on 13 October 1994 holding that the prospectus was misleading in certain respects and that by distributing the prospectus and onsert Holdings had engaged in misleading or deceptive conduct in contravention of s52 of the TP Act. In particular, it was held by Gummow J at 28 to be likely to mislead or deceive to describe repeatedly in the prospectus, particularly in the passages most likely to be studied by the ordinary reader, that which was offered to members in connection with their consent to the restructuring as "free shares". His Honour reached this conclusion because relinquishment of membership involved the relinquishment of significant rights to the control of the affairs of Association and Insurance, and demutualisation removed the possibility of further enjoyment of other benefits of membership. It was also held by Gummow J that by proceeding with the general meetings Association and Insurance would be parties to and knowingly concerned in the contravention of s52. Injunctions were granted restraining a further distribution of the prospectus and onsert and restraining Association and Insurance from proceeding with any business at the general meetings except as as necessary or appropriate to adjourn them. 21 The general meetings convened for 19 October 1994 were opened, but in accordance with the orders of Gummow J, no substantive business was transacted and the meetings were adjourned. In the meantime, Holdings, Association and Insurance sought leave to appeal from the decision of Gummow J to the Full Court of the Federal Court. Full argument on the merits of the appeal was heard on the application for leave on 6 and 7 December 1994. On 27 January 1995 leave to appeal was granted, but the appeal dismissed although one variation was made to the orders of Gummow J: NRMA Holdings Ltd v Fraser (1995) 55 FCR 452. The Full Court (Black CJ, von Doussa and Cooper JJ) did not uphold all of the respects in which the prospectus had been found to be misleading or deceptive by Gummow J, but held the prospectus to be misleading in another respect. The Full Court considered that, as well as the description of the shares in Holdings to be issued to members as "free shares" was misleading or deceptive, the disclosure of the disadvantages of the proposal was also misleading or deceptive. Consequently, the injunctions remained in force and the general meetings could not transact any substantive business. 22 The judgment of Gummow J had left open the possibility of the issue of a supplementary prospectus to rectify the misleading content and the judgment of the Full Court was such as to enhance the possibility of doing that. At that stage the NRMA wished to proceed with the proposal and was considering the issue of a supplementary prospectus. Some work in connection with the preparation of that was done. In the meantime, on 8 March 1995 the High Court delivered judgment in Gambotto.
FEDERAL COURT PROCEEDINGS
23 The NRMA then took further advice on the implications of this decision for the demutualisation by the steps then contemplated, namely, by way of resolutions in general meetings by which the memberships of the members of Association and Insurance would cease and they would become shareholders in Holdings. In May 1995 the NRMA decided not to proceed with the proposal, whether with a supplementary prospectus or at all. It was in these circumstances that the attempt of the NRMA to demutualise failed. At that stage, however, it had incurred substantial expenditure in obtaining advice and assistance from merchant banks, corporate advisers, underwriters, accountants and lawyers. It had also obtained marketing and public relations services from a number of providers. The printing and postage of the prospectus package alone cost millions of dollars. There were many other costs involved including the costs of the Federal Court proceedings and further merchant banking, legal and other advice and assistance which had been obtained after the decision of the Federal Court. The case for the NRMA at the trial before Giles J was that, inclusive of internal costs, it suffered damages by way of "wasted expenditure" of nearly $30 million. 24 In developing the proposal the NRMA had obtained advice from AAH, AT and Mr Heydon. The advice included advice to do with the development of the proposed new structure, the steps required to achieve it and the preparation of the prospectus and the onsert. The NRMA instituted the proceedings the subject of these appeals alleging that their solicitors and counsel were liable in breach of their professional obligations in respect of the advice which they gave or did not give and, consequently, they were engaged in or were involved in the NRMA's misleading conduct and were liable in damages for the wasted expenditure.
THE AFTERMATH OF GAMBOTTO
25 In November-December 1993 there was a difference of opinion between Mr Morgan of AAH and Mr Bateman of AT whether the proposal could be implemented by way of special resolutions at general meetings of Association and Insurance, or a scheme of arrangement approved by the Court would be required. Mr Morgan considered that the former procedure would be appropriate, but Mr Bateman expressed the view that a scheme of arrangement would be necessary. Mr Morgan was of opinion that the changes could be effected by resolution under s167 of the Corporations Law, provided there was no oppression under s260 of the Corporations Law and no unfairness. 26 In a letter to Ms Godwin of the NRMA dated 17 November 1993, Mr Morgan referred to the possibility that:
THE RESOLUTIONS OR SCHEME ISSUE
GAMBOTTO LIABILITY
27 At that stage, within the management of the NRMA there was a suggestion that the entitlement of NRMA members to shares in Holdings would be "in equal shares". The basis later adopted was more sophisticated. In a memorandum dated 19 November 1993, the reasons for the suggested basis of entitlement included:
"… a dissident group of members may perhaps be able to bring on action alleging fraud on the minority or oppression if they could demonstrate that in some way they were adversely affected and that the proposal was not able to be justified or in the best interests of the company as a whole."
28 It was against this background that Mr Morgan and Mr Bateman met with representatives of management and the NRMA's members to examine a structure involving a holding company and subsidiaries. The learned trial Judge found that "in the climate of attention to entitlements and spoiling oppression must have been in the minds of those present". There was consideration of removing the voting rights of members of Association, while leaving them as members. The record of the meeting noted that objections to that course included the possibility of an oppression action under s260 of the Corporations Law. It was in this particular context that the issue of a scheme or meeting specifically arose. Mr Bateman maintained the need for a scheme. Reference was made to Gambotto which had been decided by the Court of Appeal. In WCP Ltd v Gambotto (1993) 30 NSWLR 385, it was recognised that equity imposed a limitation on the wide powers of alteration of the articles of association of a company under s176 of the Corporations Law. 29 On 9 December 1993 Messrs Morgan and Bateman met with Ms Godwin, an in-house lawyer of the NRMA. Mr Morgan was accompanied by Mr Simpson, a solicitor at AAH working on the legal aspects of the project. This meeting discussed the need for a meeting or scheme to carry out the proposed restructure. There was some dispute about what took place at the meeting, but it was found by the learned trial Judge that Mr Bateman repeated his view that a scheme was necessary. Ms Godwin's response was to say "We understand your view, let's just wait to see what Heydon says". In the result the NRMA instructed Mr Morgan to obtain the opinion of Mr Heydon. The brief, prepared by Mr Morgan, was delivered to Mr Heydon on 13 December 1993. The brief specifically asked Mr Heydon to advise on the appropriate procedure, in the sense that the question was whether it was legally possible to achieve the restructure proposed by special resolutions altering the articles of association. Advice was also sought on whether the effect or terms of the transactions would raise issues of oppression. Mr Heydon's advice was sought by 20 December 1993. At the conference Mr Heydon indicated that he could advise on the procedure by 20 December, but that he would not be able to deal with the oppression issue within that time-frame. His preliminary view was that the proposal could be implemented by special resolutions altering the memorandum and articles of Association and Insurance, to convert them from companies limited by guarantee to companies limited by guarantee and shares. As far as oppression was concerned, the matter was left to be dealt with later. There was some dispute about the precise circumstances, but Mr Heydon was asked to advise at that stage on the assumption that the proposal would be fair and not oppressive. By a letter dated 10 December 1993 to Mr Heydon, Mr Morgan confirmed the conference arranged for 14 December 1993 and, in advance of the formal brief, provided some background information and set out the "main questions". 30 The essence of what was then proposed was that Association and Insurance would each convert from being a company limited by guarantee to a company limited by shares and guarantee. All of the shares in each of Association and Insurance would be issued to a new company. Membership of the members of Association and the associated rights of members would cease and be converted into a right to receive a parcel of shares in the new company. Members of Association who did not wish to take the shares would receive a cash payment. Similarly, membership of Insurance would be converted to a right to receive shares in the new company or cash in lieu. In both cases the members of Association and Insurance were being asked to agree to the extinguishment of their rights as members of Association and/or Insurance in exchange for an entitlement to an issue of shares in the new company. 31 The letter to Mr Heydon, dated 10 December 1993, a copy of which was not sent to or seen by Mr Bateman, indicated that one of the most significant matters was the manner in which the entitlement to shares would be distributed between the members of Association and the members of Insurance, and the extent to which benefits could be provided to policy holders of Insurance who were not members of Association. However, the "immediate question" focused on the need to amend the memorandum and articles of Association and Insurance which would "remove the existing members as members of those companies on the basis that those members are given an allocation of shares in the new holding company". The suggestion that this should be done by scheme of arrangement was referred to, but Mr Morgan said AAH believed that a scheme:
"The greatest risk of failure is that a body of opinion develops which opposes the float and the vote is lost. The second greatest risk of failure is that someone decides to bring an action alleging oppression or fraud on the minority which, regardless of the ultimate outcome of the case, would be sufficient to effectively extinguish any chance of success."
32 At that time Gambotto had been decided both at first instance and on appeal to the Court of Appeal. At first instance McLelland J held that an alteration to the articles of a company to enable the majority shareholders, who held approximately 99.7% of the shares in a company to compulsorily acquire from Mr Gambotto and others the approximately 0.3% of the shares not already held by the majority at a fair value was oppressive: Gambotto v WCP Ltd (1992) 8 ACSR 141; 10 ACLC 1046. The company had an issued capital of 16,980,031 shares of 20 cents each, of which 16,929,441 were held by wholly-owned subsidiaries of Industrial Equity Ltd. The remaining 50,590 were held by the minority, including Mr Gambotto and others, who between them held 15,898 shares. The company gave notice of a general meeting to be held for the purpose of considering and, if thought fit, of passing a special resolution for the amendment of the articles of association to insert a new article to any members "entitled for the purposes of the corporations law to 90 per cent or more of the issued shares" to acquire compulsorily, before 30 June 1992, all the then issued shares at a price of $1.80 per share. The notice was accompanied by a valuation of the shares on a nett asset basis of $1.365 per share. There was evidence that if the special resolution was passed, the majority would probably move to acquire the shares of the minority. The resolution was passed on 11 May 1992. Mr Gambotto sought an injunction restraining the implementation on the grounds that it constituted an act of oppression, or a fraud on the minority by the majority. The injunction was granted by McLelland J, who said at ACSR 144; ACLC 1049 that:
"… carries with it significant risks and, in particular, provides a greater opportunity for opponents to the proposal to express their views and to have them heard in the forum of the Court.
We also believe that, on the basis of current authority, if the members duly approve the reconstruction of the companies and the shares in the holding company are duly issued in accordance with that reconstruction proposal, that that is of itself sufficient to bind the members. Of course, members may seek to bring action on the basis that there is a fraud upon the minority or that there is an oppression but we believe that, so long as the allocation of entitlements is fair, the likelihood of the success of such action is extremely low…
The question we therefore ask you to consider is whether a scheme is necessary to achieve the ends sought.
GAMBOTTO'S CASE
For the purposes of considering this narrow question as to whether or not a members' resolution approving the proposal will effectively bind members, you should assume that the allocation adopted will meet the requirements of fairness as between members."
33 The decision of McLelland J was reversed by the Court of Appeal: WCP Ltd v Gambotto (1993) 30 NSWLR 385. The principal judgment in the Court of Appeal was that of Meagher JA (with whom Cripps JA agreed). After referring to a number of well-known authorities Meagher JA said at 389:
"The immediate purpose and effect of the amendment was to permit the shares of the minority shareholders to be expropriated by the majority shareholders. In my opinion such an amendment amounts to unjust oppression of those minority shareholders who object."
34 The brief to Mr Heydon summarised the judgment of Meagher JA which appeared to be supportive of what was proposed. The learned trial Judge noted that Gambotto's case was not referred to in the context of the "main issue", but in the context of oppressive conduct. 35 A draft of the brief to Mr Heydon had been prepared by Mr Simpson of AAH at the request of Mr Morgan. Mr Simpson dealt with Gambotto, both at first instance and on appeal, in the brief. He had formed the view that the judgment of Meagher JA stood for the proposition that, if the compensation was fair and benefits flowed to the company from the expropriation, then it was possible to expropriate proprietary rights of minority shareholders in a company pursuant to majority shareholder resolution, although what was fair compensation depended on the particular proposal. He thought that this was consistent with the other English and Australian cases to which he had recourse. He concluded that a scheme of arrangement was not necessary and that the proposal could be implemented through members' resolutions, if it could be said that no classes of members of Association and Insurance were being treated unfairly or oppressively. The draft brief was approved by Mr Morgan and provided to Ms Godwin and Mr Bateman for their comments. It was amended to take these into account. The brief was delivered to Mr Heydon on the afternoon of 13 December under cover of a letter confirming the conference for the following morning. 36 The contents of the brief were extensively set out in the judgment of Giles J at paras 348-349. It set out the proposed corporate structure and raised a number of issues not now relevant. Section 6 of the brief was headed "Major Issue - Scheme of Arrangement or General Meeting" and contained the following:
"In the present case the evidence demonstrated, and the judge accepted, that there would be enormous taxation advantages for the company if the minority shares were expropriated, and that there would be considerable administrative savings if such an expropriation took place. Nor was it alleged that the compensation provisions were inadequate. Just why the court should interfere and why his Honour in fact did so, I cannot see.
As I have pointed out, his Honour's view is consistent with, and only with, some notion that in an expropriation of shares whether beneficial for the company or not is a malum in se and as such always enjoinable. His Honour could not have held that the resolution in question was 'so extravagant that no reasonable person could believe that it was for the benefit of the company' (to quote the test of Latham CJ in Peters' American Delicacy Co Ltd v Heath (at 482)); indeed, he specifically held to the contrary.
It can hardly be contended that all powers of expropriation are repugnant to the Corporations Law . The legislation in terms permits expropriations in s701 and s702 (take over schemes), s411 (compromises) and s414 (schemes of arrangement). Nor, in my opinion, could it reasonably be contended that these provisions constitute some sort of code governing the expropriation of shares. If the company's articles had contained an art 20A when it was incorporated, it is difficult to see how anyone could object to it. Moreover, articles of association regularly provide for liens leading to forfeiture, and this involves an expropriation of property. Further, the decisions in cases like Allen v Gold Reefs of West Africa, Ltd and Sidebottom v Kershaw, Leese and Co Ltd both involved expropriations which were sanctioned by the courts of England and those cases have been approved by the courts of Australia.
MR HEYDON'S BRIEF
For these reasons I am of the view that the appeal must succeed in so far as it challenges his Honour's view, which I have set out, that the expropriation was invalid."
37 A reference was then made to the tests formulated and applied by courts in determining whether to sanction a scheme in Re Dorman Long & Co Ltd [1934] Ch 635; In re H Stanke & Sons Pty Ltd [1968] SASR 156; and in re Alabama, New Orleans Texas and Pacific Junction Railway Co [1891] 1 Ch 213 at 243 per Bowen LJ. AAH expressed the view in the brief that:
"The major issue that needs to be considered and on which Counsel's advice is sought is whether the resolutions which will need to be passed by Association and Insurance to facilitate the flotation is best achieved by:
(a) a scheme of arrangement under Section 411 of the Corporations Law; or
(b) extraordinary general meetings of the members of Association and Insurance.
Historically, meetings of members of Association have a voter turnout of approximately 5% of members (… the total membership of Association is approximately 1.9 million members) and meetings of Insurance have a voter turnout of approximately 1% of members (the total membership of Insurance is approximately 1.6 million members).
The obvious advantage of a scheme of arrangement for each of Association and Insurance is that the schemes would be binding on the members of each assuming the schemes were approved by the Court. If it was desired to provide benefits to non-member policyholders a scheme would be advantageous but perhaps not absolutely necessary.
A disadvantage of proceeding by the scheme of arrangement route is that in doing so a forum is readily provided for opponents of the proposals to express their opposition and generally put their views on the matter."
38 The brief then went on to deal with oppression as well as the possibility of relief under s260 of the Corporations Law. In particular, the brief contained a reference to the decision of the NSW Court of Appeal in Gambotto. After referring to the facts, the brief contained the following comments:
"In our view, the relevant resolutions may be passed by members of Association and Insurance in general meeting without recourse to a court approved scheme of arrangement. In either case, however, we need to consider the issue of oppression both at general law and under Section 260 of the Corporations Law."
39 One of the aspects of the brief at that time was that consideration was then being given to the offer of shares in Holdings, not only to members of Association but also to certain non-members, including policy holders of Insurance, who did not qualify for membership of Insurance. Obviously with that possibility in mind, having referred to the authorities, the brief then continued:
"In his judgment, Meagher JA points out that the leading case in the doctrine of majority oppression is the decision of the English Court of Appeal in Allen v Gold Reefs of West Africa, Limited [1900] 1 Ch 656. In that case the court held a new article extending a company lien over partly paid shares to fully paid shares was valid. Lindley MR, when dealing with the majority's power to change the articles (at 671) said:
'… it must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded.'
Meagher JA points that initially these words of Lindley MR were taken as setting two requirements, namely:
(i) that the alteration should be made in good faith; and
(ii) that it should intend to benefit the company as a whole.
The test propounded by Lindley MR in Allen v Gold Reefs of West Africa, Ltd was discussed in some detail by Latham CJ and Dixon J in Peters' American Delicacy Company Limited v Heath (1939) 61 CLR 457. Their Honours in that case pointed out, amongst other things that:In Gambotto at 389 Meagher JA said that the evidence demonstrated that there would be taxation advantages for the company if minority shares were appropriated and there would be considerable administrative savings if such an appropriation took place. As referred to above, there was no allegation that the compensation provisions were inadequate. In those circumstances the Court of Appeal could see no reason to interfere.
(i) Lindley MR's test, although constantly invoked, was almost meaningless;
(ii) in many cases, the proposal was so obviously beneficial to the company that the amendment to the articles in question must necessarily be valid;
(iii) in every case the proposed amendment would be ex facie invalid, for example, if it involved expropriating shares without compensation, depriving the minority of voting rights, allowing the majority to acquire the company's property at an undervalue;
(iv) the test of Lindley MR was wider than was necessary for the purposes of that case. There would have been less confusion in later cases if Lindley MR's words were taken as merely laying down a negative test rather than a positive test which must be complied with in all cases; and
(v) where it was arguable whether a test [ sic proposal] was beneficial for the company, the court would not substitute its views for those of the shareholder. In such cases it will simply decline to interfere."40 There was also an issue raised whether or not the members of Association and/or Insurance could complain about any allocation to Association of Insurance's share of the net worth. 41 Under the heading "8. Questions" the following appears:
"Turning to the question of the NRMA, the issue is whether if shares are issued to persons who are not members, such issue having been approved by the requisite majorities of Association and Insurance in general meeting, or if the flotation proceeded by way of scheme of arrangement, the minority could challenge the resolution or the scheme on the basis of the principles outlined above.
It is, at this stage, possible to divide non-member policyholders into various groups as follows:
(a) those policyholders who have been disenfranchised from membership by administrative error (eg omitting from proposal forms accidentally the agreement to be bound by the Memorandum and Articles of Association);
(b) policyholders disenfranchised by operation of law (eg trade practices legislation) or by other means not within the control of the policyholder;
(c) in other cases, policyholders may have unwittingly ordered their affairs so as to deny themselves membership (eg the fact that only the first-named holder of a policy is qualified for membership).
Beyond these groups is a wider group of policyholders who have been offered policies on the basis that no membership is offered. There are also those policyholders who could not in any circumstances be members by reason of merely holding a policy (eg policyholders with NRMA Life Limited).
…
A further issue is whether or not the members of the Association could complain if the windfall was offered to members of Insurance. In our view, such a complaint would have little prospects of success. In the first place, most members of Insurance would be members of Association or, alternatively, employees or members of other organisations approved by the Association. Secondly, it is Insurance which has provided the economic wealth. Association as a member of Insurance, could, in our view, agree to this as being a matter properly in the best interests of Association as the Association requires the approval of the ordinary members of Insurance to unlock the wealth of Insurance for the benefit of the members of the Association."
42 The learned trial Judge made a number of comments about the brief. The first was that the proposal at that stage involved payment of the par value of the shares to be issued by Holdings. Secondly, the brief sought specific advice about whether it was "necessary" to proceed by way of scheme of arrangement, although earlier the issue had been whether what was proposed would be "best achieved" by a scheme or meeting. As his Honour commented, in para 352:
"Counsel is briefed to advise generally in relation to the above matters and specifically on whether Counsel can confirm our view that we believe that it is not necessary for the NRMA Group to proceed by way of scheme of arrangement under Section 411 of the Corporations Law to realise the successful adoption of the relevant resolutions.
We also seek Counsel's advice as to whether, if a person brought an oppression action challenging the proposals, steps would be available to NRMA to conclude the oppression action expeditiously.
Our view is that the relevant resolutions may be passed by the members of Association and Insurance in general meeting and that, despite the difficulty in dealing with persons who are presently non-members, those difficulties may be overcome in a manner which brings some non-members into the membership fold without exposing the Association and Insurance to successful claims under Section 260 under common law."
43 Thirdly, the brief sought procedural advice about whether steps would be available to NRMA to conclude any oppression action expeditiously. It was pointed out that this was a procedural rather than a substantive matter concerned with how quickly the matter could be dealt with, rather than the prospects of success in such proceedings. Giles J commented that it was as if an oppression action was seen as likely, if not inevitable, whether the procedure was by way of resolution or scheme of arrangement. Fourthly, the brief also sought advice generally, but it was not clear what that meant. 44 So far as Gambotto was concerned, his Honour commented that:
"The specific advice sought was by way of confirmation of AAH's view, and AAH's view as expressed put aside as a separate matter the issue of oppression."
45 In para 356 of the judgment, his Honour said:
"…, the reference to Gambotto's case was not in connection with the 'major issue', but in connection with oppressive conduct and whatever may have been asked of Mr Heydon in that respect. It was in the part of the brief to do with oppressive conduct, it followed a summary of what, on the cases, was oppressive or unfairly prejudicial conduct, and it was plainly enough cited as a recent illustration of no unfairness in the majority's exercise of its power to change the articles. The brief did not treat Gambotto's case as going to whether the fact of something like expropriation would make an exercise of the power to amend articles invalid - indeed, oppression was seen as a constraint on both proceeding by scheme of arrangement and proceeding by members' resolution (see 'In either case, however, we need to consider the issue of oppression …' ). This is not surprising, given the views held by Mr Morgan and Mr Simpson: in their view, the issue was whether there was fair compensation and no oppression."
46 Finally, Giles J commented that, given the "obscurity in some respects of the brief, and its late delivery, it could not reasonably have been expected that Mr Heydon could advise early on 14 December 1993, without further information or at all". The consequence was that the conference on 14 December 1993 was only exploratory and a revised brief was provided to Mr Heydon on 15 or 16 December 1993. 47 As at December 1993, the decision of the Court of Appeal in Gambotto on 7 May 1993 had been reported in the NSWLR with an editorial note that "An application for special leave to the High Court has been filed". In fact, the application for special leave had been heard and granted by the High Court on 10 December 1993. As will appear, the extent of the appellants' knowledge of the application for special leave, the grant of such leave and the hearing of the appeal on 21 April 1994 was of some relevance in the action and on appeal. 48 It was submitted on behalf of the NRMA that the transaction then contemplated by the NRMA included the expropriation of the membership rights of the minority, in the event that the special resolutions were passed as contemplated. In my opinion, for the reasons I state later in these reasons at paras 173 and following, it was quite inappropriate to describe the proposed transaction, as it was outlined in the brief to Mr Heydon, as one which involved expropriation by the majority of members of Association and/or Insurance of the interests of the minority. All of the members of each of Association and Insurance had the same rights as against each of the two companies. In respect of the former it was an entitlement to services in consideration of the membership fee. In respect of the latter, it was the taking out of insurance cover by a person not otherwise a member of Association, which entitled that person to become a member of Insurance and thereby a member of Association. There was no identifiable majority which was seeking to get rid of or acquire the interests of an identifiable minority. 49 Section s167(1)(d) of the Corporations Law, as it stood at all material times, specifically contemplated that a company limited by guarantee may convert to a company limited both by shares and guarantee. The company limited by guarantee was typically a form of incorporation used by associations formed for charitable, social or similar purposes. It is of the essence of such a company that, instead of limiting the contribution of members to the amount payable for their shares, the members agree to pay an agreed amount in the event of liquidation. It follows that the members of a company limited by guarantee do not necessarily have any interest in the capital of the company. This was dependent on whether the memorandum or articles did or did not require that any surplus be paid or applied to some other body or purpose. In the case of Insurance there was a provision in cl 4 of the memorandum of association that in the event of Insurance being wound up "every member of the company undertakes to contribute to the assets of the company", during the time he or she is a member or within one year afterwards, a sum not exceeding $1.00 for payment of the debts and liabilities of the company contracted before he or she ceases to be a member. Clause 5 of the memorandum of association of Insurance provided that in the event of a winding up or dissolution, any surplus would be paid to Association. There were alternative provisions if Association had ceased to exist. In the case of Association there was a provision in cl 4 of the memorandum of association that, in the event of a winding up or dissolution, each member agreed to contribute "such amount as may be required not exceeding two dollars and ten cents" for the payment of debts and liabilities. I assume that this had been one guinea in former times. Clause 5 of the memorandum provided that:
"Sixthly, and following from the last observation, what might be thought surprising is that Mr Bateman's grounds for doubting the members' resolution route were not exposed in the brief, and that Gambotto's case was not cited in the brief in that connection. There seemed to have been a shift from concern over crunching out members' rights (I use the vivid phrase even if it was not used at the time) to concern about fairness of entitlements. The latter was a valid concern, but the former remained. As I have indicated, the advice which Mr Morgan was instructed to obtain on 6 December 1993 amounted to advice as to whether the fact of something like expropriation might make the exercise of the power to amend the articles invalid. He did not identifiably ask for that advice, and it is curious that Mr Bateman did not suggest that the brief clearly extend to it."
50 Sections 167(2) and (3) of the Corporations Law at the relevant time set out the procedure for a change of status of a company. It was provided in s167(2) that when a company lodges a written application for the change and lodges the "necessary documents" with the application, the Companies and Securities Commission ("the Commission") shall issue the company with a certificate of registration appropriate to the new status. Upon the issue of such a certificate the company is given the new status specified. Section 167(3) specifically contemplated that the change shall be effected by a special resolution of the company. Section 167(3) relevantly defined "necessary documents" as meaning:
"If upon the winding up or dissolution of the Association there remains after satisfaction of all its debts and liabilities any property whatsoever the same shall not be paid to or distributed among the members of the Association but shall be given or transferred to some other institution or institutions having objects similar to the objects of this Association such institution or institutions to be determined by the members of the Association at or before the time of dissolution, and in default thereof by the Chief Judge in Equity of the Supreme Court of New South Wales or such other Judge of that Court as may have or acquired jurisdiction in the matter, and if and so far as effect cannot be given to the aforesaid provision then to some charitable object."
This provision is analogous to a "cy-pres" scheme provision in the case of a charitable trust.
51 On 14 December 1993 Mr Morgan and Mr Simpson of AAH, Mr Bateman of AT and Ms Godwin of the NRMA attended a conference with Mr Heydon. As the learned trial Judge noted, the decision of the Court of Appeal in Gambotto had been given on 7 May 1993 and was cited in the brief. The report in the NSWLR contained a footnote on the first page that:
"(a) a printed copy of a special resolution of the company:
(i) resolving to change the status of the company and specifying the status sought;
(ii) making such alterations to the memorandum of the company as are necessary to bring the memorandum into conformity with the requirements of this Law relating to the memorandum of a Division 1 company of the status sought;
(iii) if the company has articles otherwise than by virtue of subsection 175(2) - making such alterations and additions (if any) to the articles s are necessary to bring the articles into conformity with the requirements of this Law relating to the articles of a Division 1 company of the status sought;
(iv) otherwise - adopting such articles (if any) as are required by this Law to be registered in respect of a Division 1 company of the status sought or are proposed by the company as the registered articles of the company upon the change in its status; and
(v) changing the name of the company to a name by which it could be registered as a Division 1 company of the status sought;"
CONFERENCE WITH MR HEYDON
It follows that the appropriate procedure expressly contemplated by the Corporations Law itself was to proceed by way of a special resolution to achieve the change of status sought. A special resolution, of course, is one required to be passed by a majority of not less than 75% of the persons present in person or by proxy at a general meeting of the company called for the purpose.
52 The evidence of the participants at the conference differed from one another, but the differences appear to be more of difference in recollection rather than matter of dispute, although Mr Heydon doubted that he expressed a firm view about resolutions as against a scheme, because that was the matter on which his written opinion had been sought. He doubted he was aware of the application for special leave at that time. While he may have become aware, he did not know that the appeal had been heard until after the judgment of the High Court was delivered in March 1995. 53 The learned trial Judge, having reviewed the individual and somewhat conflicting accounts of what was said at the conference on 14 December 1993 found that it was likely that Mr Heydon had expressed a provisional view that it would be appropriate to proceed by way of members' resolution, as he subsequently gave firm advice to that effect. That was the "major issue" in the brief. His Honour did not find that the advice was based on the decision in Gambotto. As his Honour said in para 374:
"An application for special leave to appeal to the High Court has been filed".
In fact, the application for special leave had been heard and granted on 10 December 1993. Mr Morgan's evidence was that Mr Heydon said:
" Gambotto must be right. It must be right that you can go by way of members' meetings rather than by scheme of arrangement."
54 So far as knowledge of the appeal to the High Court in Gambotto is concerned, there was a conflict of evidence. The learned Judge concluded in para 384 that:
" Gambotto's case was not mentioned in the firm advice which was shortly given, and while there was reference to Gambotto's case in the conference and Mr Heydon probably expressed the view that the decision of the Court of Appeal was correct I consider that was, as Mr Heydon recalled, in connection with oppression as the broad separate matter raised in the brief. In these respects I prefer the evidence, essentially, of Mr Heydon to that of Mr Morgan."
"In my opinion the more likely position is that Mr Morgan did refer to Gambotto's case being on appeal, and those at the conference were thereby made aware of the appeal if they were not independently aware of it. That does not necessarily mean knowledge of the grant of special leave to appeal on 10 December 1993, and the reference may have been to an appeal in a loose sense which could have conveyed either an application for special leave to appeal or the grant of special leave to appeal. After all, the law report disclosed the application for special leave to appeal, and at least four of the lawyers present should have read the law report. I accept the substance of the evidence of Mr Bateman on this matter, broadly supported as it is by the evidence of Ms Godwin, without accepting the precise outlining of timing and response."
55 His Honour accepted the substance of the evidence of Mr Bateman regarding what was said at the conference, which was supported by the evidence of Ms Godwin. In particular, Mr Bateman recalled a reference by Mr Morgan to an appeal to the High Court in Gambotto. Mr Morgan said that he had spoken to Mr Arthur Emmett QC, who had appeared for the successful party in the Court of Appeal, who considered that the appeal to the High Court would not be successful. The learned Judge also concluded that whatever was said by Mr Heydon did not on any account extend to advice that no problem of oppression could arise in the demutualisation proposal. The only relevant comment by Mr Heydon, with reference to Gambotto, was that fairness was the key in considering oppression. Mr Heydon said he would try to provide his opinion on or before 20 December 1993. 56 Later on 14 December 1993 Mr Bateman sent to Ms Godwin an extract from Hennessy v National Agricultural and Industrial Development Association (1947) IR 159, which was relevant to the "mass elimination" of the members of Association and Insurance. He thought this should be brought to Mr Heydon's attention via Mr Morgan as relevant to the issue whether to proceed by way of special resolution or scheme of arrangement. Mr Simpson of AAH prepared a revised brief which was sent to Mr Heydon on 15 or 16 December 1993 and incorporated reference to Hennessy. The "major issue" was amended so as to more clearly direct attention to the ability to proceed by way of members' resolutions and put aside any issue of oppression. The question was framed in terms that:
THE REVISED BRIEF TO MR HEYDON
57 The questions at the end of the brief were reframed as follows:
"The major issue … is whether the resolutions which will need to be passed by Association and Insurance to facilitate the proposal must, as a matter of law, be achieved by:
(a) a scheme of arrangement under s411 of the Corporations Law, or whether, in the absence of a legal requirement that the matters proceed by way of scheme of arrangement, the proposal can be realised by:
(b) extraordinary general meetings of the members of Association and Insurance."
58 According to Mr Heydon he spoke to Mr Morgan on 16 or 17 December 1993 and told him that he could deal with the "structural and machinery aspects under the Corporations Law and the issue of which articles must be amended" within the time frame, but not "oppression issues or the other questions" before the Christmas vacation. Mr Heydon said that Mr Morgan's reply was that it was not necessary for him to deal with oppression or the other questions and that: "What I need to know is whether it is legally possible to effect the restructuring by members' resolutions or whether a scheme of arrangement is legally necessary". There was then some discussion of the decision in Hennessy. Mr Morgan made a note of the fact that he had a conversation with Mr Heydon on 16 December 1993 but the note was uninformative as to content. He did not recall the conversation but accepted that it was possible it was to the effect stated by Mr Heydon. The learned Judge accepted Mr Heydon's evidence. 59 According to Mr Morgan, at that time he saw Gambotto as contemplating that an expropriation of members' property could be oppressive because of unfairness on the particular facts. He did not consider that Mr Heydon would be giving an opinion at that stage on whether the particular details of any proposal would be oppressive or unfair to members, because they had not yet been developed. His expectation was that Mr Heydon would advise whether there was any objection as a matter of principle to proceeding by way of members' resolutions.
" 12. Questions
(a) Main Issue
On an urgent basis we seek Counsel's advice as to whether there is a legal requirement to proceed by way of scheme of arrangement under Section 411 of the Corporations Law or whether it is sufficient if the necessary resolutions are passed by members in general meeting?
(b) Other Issues
Also, and by way of summary of the above, we seek Counsel's advice on, and/or confirmation of, the following matters:
(a) where certain provisions of the Articles of Insurance are expressed as giving the council of Association the relevant right or power, that such right or power is a right or power of Association, not of the councillors in their capacity as councillors;
(b) that the existing directors of Insurance (as opposed to all those persons who have never been a director) constitute a separate class;
(c) the prospects of success of an action against Association and/or Insurance based on any of the following reasons:
(i) expansion of the class of members who are eligible to participate in the flotation;
OPPRESSION ADVICE DEFERRED
(ii) the establishment of the record date.
Would your answer to (c)(i) be different if the expansion of members resulted from correcting past administrative errors rather than for substantive reasons?
(d) do the directors of Insurance have power to declare and pay a dividend?
(e) Can some of the net worth of Insurance be allocated to Association? On the assumption that some of Insurance's net worth is allocated to members of Association, what is the prospect of a member of Insurance or Association successfully challenging the allocation?
(f) if a person brought an oppression action challenging the proposals, what steps (if any) would be available to NRMA to conclude the action expeditiously?"
60 Mr Heydon provided a written opinion dated 20 December 1993. He noted the steps set out to achieve the proposed structure and defined his task in terms of the "major issue" on which he was briefed as follows:
MR HEYDON'S OPINION OF 20 DECEMBER 1993
61 Mr Heydon concluded that the proposals could be realised by the latter procedure, setting out and discussing parts of s167 and other provisions of the Corporations Law, in the context of the memoranda and articles of association of Association and Insurance. He identified the necessary changes to the articles of Insurance, and gave his opinion that "all necessary changes could be made by special resolution under ss167, 172 and 176" of the Corporations Law. I have already referred to s167(d). Necessary changes to the memorandum could be effected by special resolution under s172(2). The reference to s176 implies that Mr Heydon regarded that provision as conferring power to make the change from a company limited by guarantee to a company limited by shares. It was submitted on behalf of Mr Heydon on the appeal that s167(3)(c)(iv) was an independent source of power to amend the articles. In my opinion, however, s167 is relevantly concerned with the registration requirements following upon an alteration of the memorandum under s167 and an alteration under s176. Mr Heydon also said that the validity of the alterations was conditional on compliance with other provisions of the Corporations Law, including s260:
"I am asked whether the resolution which will need to be passed by Association and Insurance to effectuate the proposal must, as a matter of law, be achieved by a scheme of arrangement under s 411 of the Corporations Law, or whether, in the absence of a legal requirement that the matters proceed by way of scheme of arrangement, the proposals can be realised by extraordinary general meetings of the members of Association and Insurance."
62 Mr Heydon also referred to the decision in Hennessy, saying that there were dicta "to the effect that a company limited by guarantee could not reduce its membership (and the projected proposals will have that outcome)". After setting out the relevant passages from the judgment in Hennessy, Mr Heydon concluded:
"….which prohibits oppressive or unfairly prejudicial or unfairly discriminatory conduct. (This issue will be dealt with in a separate opinion.)"
He reached the same conclusion with respect to the articles of Association.
63 In paras 401 and 402 of his judgment, the learned trial Judge noted that:
"These observations were made against a framework of legislation containing much less extensive powers to amend the Memorandum of Association than those existing under the Corporations Law. No such limitations are to be found in the language of the Corporations Law. Further, the analogy between a reduction of capital and a reduction of members who have given their guarantees is in my opinion weak; the central point of a company limited by guarantee is that it has no capital, and hence rules against reduction of capital can scarcely apply, particularly in a context where the company is moving to the new status of a company limited by shares and by guarantee. Capital is being introduced, not reduced. In my opinion Hennessy's case is no bar to what is proposed.
It follows that in my opinion the proposals can be realised by appropriate special resolutions passed at extraordinary general meetings of the members of Association and Insurance, and that a scheme of arrangement is not legally necessary."
64 On 25 January 1994 Mr Morgan delivered to Mr Heydon a brief following on from the revised brief of 15 or 16 December 1993. The brief was prepared by Mr Simpson. Mr Morgan and Mr Simpson had taken Mr Heydon's opinion of 20 December 1993 to confirm that the proposal could be implemented by members' resolutions, if fair and not oppressive. There was, however, concern about challenges to particular aspects of the proposal on the ground of oppression, particularly if shares were offered to non-members and part of the network of Insurance was allocated to Association. This brief repeated the description of the NRMA's then structure and membership adding a reference to the provisions of the memoranda of Association and Insurance in relation to the distribution of assets on a winding up. There was an issue relating to a claim which Association may have had to the assets of Insurance and the allocation of those assets to members of both Association and Insurance. It repeated the description of the proposed structure, but with the addition of "InvestCo" as a company in addition to Holdings, the shares in which would be allotted to members on the payment of a subscription price anticipated to be equal to the "buyer value" of the shares. In this case the shares would be worth considerably more than their par value and that the difference would be a windfall for members of Association and Insurance. There was an observation there could be complaint of legal action over the valuation and allocation of the net worth of Insurance to the members of Association founded on fraud on the minority or oppression either under the general law or under s260 of the Corporations Law. There was a question whether members could mount a challenge on the basis of the principles concerning oppression, if shares in Holdings and InvestCo were offered to non-members with the approval of the requisite majorities of Association and Insurance in general meeting, or if part of the net worth of Insurance was allocated to Association. The brief concluded with the specific questions:
"401 The opinion did not provide advice on the "other issues" in the brief, and made no mention of Gambotto's case. Mr Heydon had been told that it was not necessary for him to deal with the other issues in the brief, and the opinion included that the issue of oppression would be dealt with in a separate opinion. As will appear when I come to Gambotto liability, this perceived division between legal necessity and oppression was important in the failure to advert to risk to the proposal from the appeal in Gambotto's case. The decision of the High Court could be seen as concerned with oppression, but with necessary oppression because of the expropriatory nature of the resolutions, and in truth it affected legal necessity.
402 Mr Morgan gave evidence that he took the opinion of 20 December 1993 to confirm his view that a scheme of arrangement was unnecessary in order to implement the proposal."As is apparent from what Giles J said in para 401, his Honour regarded the effect of the proposed restructure as being of an "expropriatory nature".
MR HEYDON'S BRIEF OF 25 JANUARY 1994
65 The brief was delivered under cover of a letter confirming a conference for 27 January 1994. The conference on 27 January 1994 was preliminary in nature and Mr Heydon did not express any opinion at it. A further conference was arranged for 2 February 1994. In a letter dated 31 January 1994 confirming the further conference, a copy of which was sent to Mr Bateman, there was a restatement of the questions for Mr Heydon which raised questions concerning entitlements. As to the latter, the covering letter stated:
"(a) We seek Counsel's advice on the prospects of success of an action commenced by members of Association and/or Insurance based on any of the following reasons:
(i) expansion of the class of members who are eligible to participate in the flotation; and
(ii) the allocation of some of the net worth of Insurance to Association.
(b) If a person brought an oppression action challenging the proposals, what steps (if any) would be available to NRMA to conclude the action expeditiously?"
66 A number of specific questions were asked about these matters including the nature of existing entitlements; the allocation of the interest of Association in Insurance as between the members of Insurance and Association; the possibility of Association and Insurance declaring a dividend to members; whether members who were policyholders have any underlying interest in the assets of Association; and whether the policyholder/member of Insurance had an underlying interest in Insurance, questions concerning the application of provisions of the Income Tax Assessment Act 1936 (Cth) s160ZZS, the interests of members of Association and Insurance. However, questions 3 and 4 were as follows:
"Broadly, the recommendations for entitlements are summarised in the attached document. In essence, the holding company will allocate shares to members of the Association by reference to years of membership and also by reference to whether or not the member holds a policy with Insurance. Membership of Insurance is not proposed to be a criteria of eligibility for the proposed entitlements. The reasons for this proposed approach is that a number of members of Association may well hold policies with Insurance (eg green slips) which would not qualify them for membership of Insurance. The general proposal is for a $500 minimum allocation up to an allocation of $2,000. At this stage, these are indicative numbers and would require adjustment once final figures are known but, hopefully, will generally reflect the position."
67 Mr Morgan, Mr Bateman and Ms Godwin attended at the conference on 2 February 1994. The learned trial Judge concluded in para 443 that:
"3. Are there any steps which Senior Counsel believes should be taken to protect against legal attack on the method of allocation, eg an oppression suit?
4. Does Senior Counsel believe that an allocation of entitlements in HoldCo of the type outlined in the attachment could be successfully made the basis of an oppression suit?"
CONFERENCE WITH MR HEYDON 2 FEBRUARY 1994
Gambotto was referred to in the observations.
68 The learned Judge continued at para 444:
"The conference proceeded in a manner whereby Mr Heydon was not required to answer the particular questions in the letter of 31 January 1994 (or the particular questions in the brief). Mr Heydon's task and advice in relation to entitlements and oppression was general. So far as can be found, the advice was to the effect that giving entitlements to non-members involved risk (and they should have to make an offer to HoldCo); that disparity between members brought risk but rewarding loyalty was relevant to parity; and that an allocation of entitlements of the type outlined in the attachment to the letter (which was itself broadly expressed and with the figures subject to adjustment) was unlikely successfully to be made the basis of an oppression suit. Mr Heydon's advice in this last respect was less than definite, as the imprecise phrase 'looks okay' indicated."
69 At a meeting on 11 February 1994 Mr Bateman and Mr Morgan had a discussion about whether members who did not either accept shares or renounced their entitlement could be made shareholders in the holding company by force of the special resolutions, or would they be sent cash flowing from the trustee taking up their entitlements. This led to a further brief to Mr Heydon. In February 1994 Mr Heydon's advice was sought on the question whether:
THE FEBRUARY 1994 BRIEF TO MR HEYDON
"No one suggested that Gambotto's case was referred to at the conference. In one sense that is curious, since it was cited in the brief and was a recent case to do with oppression, and this conference, unlike the conference on 14 December 1993, was concerned more with oppression in the sense of fairness than with the legality of proceeding by members' resolutions. In another sense it is not curious, since the advice was general and it is probable that, as earlier explained, the fundamental test of fairness was not thought to be in doubt. Again rightly or wrongly, an appeal in Gambotto's case was not seen at this conference as significant, and if, as I have found, an appeal was mentioned on 13 December 1993, the minds of those at the conference did not turn to it."
70 The question was asked because it was recognised that some members would neither accept nor reject the offer. Observations in the brief included the following:
"…..HoldCo can, in effect, force an allotment of shares by providing that all members of Association and Insurance who do not respond to the HoldCo offer shall have HoldCo shares allotted to them."
71 There was a further conference with Mr Heydon on 7 March 1994. Mr Morgan, Mr Simpson and Mr Bateman attended. Giles J concluded, in para 475, of his judgment that:
"We have given consideration as to whether an analogy can be drawn between 'forcing' shares in HoldCo on members and cases where a scheme of arrangement is undertaken whereby shareholders in one company become shareholders in a new company or where shareholders in a company have their shares acquired compulsorily under stipulated procedures.
A recent example of the latter was the decision of the New South Wales Court of Appeal in WCP Ltd v Gambotto (1993) 30 NSWLR 385 which, in essence, emphasised that the terms upon which the shares in that case were being acquired compulsorily must be 'fair'.
The difficulty in drawing any analogy between these cases and our situation it [sic] that, of course, both a scheme of arrangement and the compulsory acquisition provisions are specifically blessed by statute. The analogy is therefore not a strong one.
The reason for raising the issue is that whether or not it is possible to draw together various streams of authority which would enable the conclusion to be reached that the 'package' being offered to members is fair and that there is no valid reason to disallow, in the special circumstances that the NRMA case, a provision which requires non-responding members to be allotted shares [sic]. It is integral to the proposals that each member receives something."
After a summary of arguments, the brief asked Mr Heydon "to advise on the question referred to in paragraph 1 above".
CONFERENCE WITH MR HEYDON ON 7 MARCH 1994
72 In early March 1994 it was decided to put the proposal before the boards of Association and Insurance on the one day, 17 March 1994. The report, which was prepared by a Mr Rees and circulated in draft among other executives of the NRMA was dated 8 March 1994. The report recommended that:
BOARD APPROVAL OF THE PROPOSAL
"From the notes of the conference it may be that the discussion ranged more widely, and included using a scheme of arrangement to bind non-responding members, but the context was quite different from that of changing the status of Association and Insurance by turning members of a company limited by guarantee into shareholders in the holding company. If it was implicit in Mr Heydon's advice that non-responding members could not be obliged to become shareholders in HoldCo pursuant to resolutions of Association or Insurance, but that they could be so obliged pursuant to a scheme of arrangement (although it is not easy to come to this conclusion on the state of the evidence), that was not expropriation of shares but the reverse, and Gambotto's case was not relevant. There was no reason to give advice about Gambotto's case or oppression, and it was not given."
73 The restructuring was to be conducted "in a way that guarantees the unique features and traditions of the NRMA are preserved". The description of the proposal was limited to "key aspects", namely:
"The board of the NRMA Group approve further detailed investigation into the implementation of a restructuring of the NRMA into a company limited by both shares and guarantee and listed on the Australian Stock Exchange."
Although it is not altogether clear, I consider that it is safe to assume that the reference to the "board of the NRMA Group" was a reference to the Board of Management of Association, which was in effective control of the day-to-day affairs of both Association and Insurance. In the case of the latter this was achieved through the Insurance Liaison Committee of the Board of Management of Association. There were in fact a significant number of individual companies controlled by the Association Board and whose accounts were consolidated for the purpose of financial reporting.
74 A copy of the report was circulated to all general managers of the NRMA on 9 March 1994, together with other information concerning the proposals. Shortly afterwards there was an executive conference at which the proposal was presented at management level. In the week prior to and on 17 March 1994 the members of the boards were given "pre-briefings" on the proposal intended to be put before the boards on that day. Recollections of the occasions were varied. However, on 17 March 1994 it was resolved by the Board of Management:
"2.1.2 Establishment of a listed holding company to control the major existing operating companies (Association, Insurance, and Life) as subsidiaries (Appendix 2).
2.1.3 Offer members shares in the new company so that members can become directly entitled to the wealth of the NRMA. Entitlements to shares would be based on a formula reflecting length of membership (see Appendix 3).
2.1.4 A special provision would be enshrined in the Articles to provide for continued advocacy and mutual type service activities.
2.1.5 The key concept of NRMA membership will continue, by allowing people to join a 'club' for the purposes of receiving the member services currently available.
2.1.6 The restructuring proposed would require changes in the Memorandum and Articles of both the Association and the Insurance company. Thus the restructuring would be implemented only upon approval by 75 per cent of the members voting at a general meeting of members to authorise the restructuring."
75 The board of directors of Insurance resolved in like terms, on the same day, save that it resolved for itself to give approval to management to proceed with the further development of the proposal, conveyed to the board of Association that it agreed that approval should be given to the formation of Holdings, and resolved for itself to give approvals in relation to advisers, the due diligence committee and the press statement. The board of directors of Association accepted the recommendation of the Board of Management and the board of Insurance. The resolutions adopted by the boards of directors resulted in the appointment of a Due Diligence Committee "to plan and carry out the due diligence necessary for the proposal. The proposal was formally announced on 17 March 1994.
"That the Board of Management recommends to the Board of NRMA Limited that approval is given for management to proceed with the further development of the proposal for listing of the NRMA Group on the Australian Stock Exchange (subject to members' approval) and that management is authorised to do all things necessary to progress that process.
That the Board of Management recommends to the Board of NRMA Limited that approval be given for the formation of a company to be called 'NRMA Holdings Limited' with the President, Deputy President, Chief Executive Officer, Group Secretary and General Counsel and Greg Bateman of Abbott Tout, Solicitors, being the five (5) subscribers as to $1.00 each. Such approval would be given on the basis that:
(a) subject to members' approval, NRMA Holdings Ltd is to be the vehicle whereby the NRMA Group is listed on the Australian Stock Exchange;
(b) prior to such listing the subscribers undertake to procure that NRMA Holdings Ltd will not trade without the prior approval of the Board of Directors of NRMA Ltd;
(c) each of the subscribers will remain the only shareholders until such listing is to be implemented; and
(d) if such listing has not been implemented within 12 months, those subscribers undertake to transfer the issued share capital of NRMA Holdings Ltd to the Association or as the Board of Directors of NRMA Ltd may direct."76 It was shortly after this that Mr Morgan appears to have developed the proposal whereby Association and Insurance would become subsidiaries of Holdings (also called "HoldCo"), on the basis that the members resolve that:
THE PROPOSAL DEFINED
77 The desirability of the adoption of this or a similar approach was the subject of a brief to Mr Heydon to advise dated 19 April 1994 which contained the following request for advice:
(1) each company change status to companies limited by shares and guarantee;
(2) the members resolve that in consideration of Holdings making the invitation contained in the prospectus the members agree that the articles be amended so that each member ceases to be a member and that a share or shares in Association and Insurance be transferred to Holdings;
(3) in consideration of the issue of that share to Holdings, the value of the share over the subscription monies subscribed by HoldCo be applied to pay up the shares issued by Holdings pursuant to its offer;
(4) in consideration of the foregoing, Association and Insurance would agree to issue a share paid up to $1 for $1 to Holdings.
The resolutions of Association and Insurance would bind all members if passed by the requisite 75% majority. While the essence of the proposal was that members of Association would have the opportunity to take up shares in Holdings and would cease to be members of Association, it is clear that the proposal was yet to be defined with precision.
BRIEF TO MR HEYDON OF 19 APRIL 1994
78 This proposal involved the members giving up their rights of membership, so that as a practical matter, the wealth of the NRMA went to Holdings as the remaining member. The question was whether in consideration of that acquisition, HoldCo could issue fully paid shares to the members. It was stated in the conclusion of the brief:
"We seek Counsel's advice upon one specific issue relevant to the first structure.
That structure provides that the shares to be issued by HoldCo will be paid up from the value of the NRMA Group transferred to HoldCo as a result of HoldCo becoming the only member of Association and Insurance after the existing members have given up their rights of membership. That is, members give up their rights as members in consideration of HoldCo using the consideration that flows from this retirement (the value of the NRMA Group which is owned solely by HoldCo) to pay-up the shares issued by HoldCo to members.
In other words, the paid up capital for the HoldCo shares is not subscribed directly by members or provided by way of dividend.
The question is whether the shares to be issued by HoldCo may be paid up in this way?"
79 A conference with Mr Heydon was arranged for 29 April 1994. At the conference, Mr Heydon confirmed the views expressed by Mr Morgan in the brief. This development was also the genesis of the "free shares" topic which was being discussed when preparation for the prospectus reached an advanced stage in July 1994.
CONFERENCE WITH MR HEYDON ON 29 APRIL 1994
"In the case of the NRMA, the consideration for the relinquishment of membership is the allotment of shares by HoldCo to the (former) members of Association and Insurance the value for which derives from the value of the NRMA Group of which HoldCo is the sole member (prior to the allotment being made).
We do not see a difficulty with this consideration being recognised by the law but we seek Senior Counsel's confirmation."
BRIEF TO MR HEYDON OF 15 JULY 1994
80 On 15 July 1994 Mr Morgan delivered another brief to Mr Heydon, seeking his "written confirmation" on two issues. The covering letter noted that both issues had been discussed in conference previously but stated that "because of their importance we require a written opinion". The brief outlined the proposal and the changeover articles as follows:
81 One of the issues for confirmation was put forward under the heading "The First Question", as follows:
"2.1 Holdings is incorporated and becomes a member of Association and Insurance.
2.2 A trust to be known as the NRMA Offer Trust will be established with Perpetual Trustees Australia Limited as trustee ("the Trustee").
2.3 A prospectus will be issued and will include notices of meeting and an explanatory statement for the meetings of members of each of Association and Insurance.
2.4 The members of each of Association and Insurance in general meeting will be asked to vote on a resolution to change the status of each of the Association and Insurance from companies limited by guarantee to companies limited by shares and guarantee. The Articles of each of Association and Insurance will be amended to include standard provisions concerning the payment of dividends to members and the distribution of assets on a winding up to members.
2.5 The Articles of each of Association and Insurance will include a special article (the "Changeover Article") which, in effect, provides that on a specified date, assuming the vote of members of each of Association and Insurance is in favour of the proposals, all members other than Holdings will cease to be members of Association and Insurance and Holdings will issue shares to those members or, if the members elect not to take shares or do not respond, the member will be provided with an interest in the 'NRMA Offer Trust'."
82 Later, the brief expressed the view of AAH that:
"The structure provides for the shares to be issued by Holdings to be paid up from the value of the NRMA Group transferred to Holdings as a result of Holdings becoming the only member of Association and Insurance after the existing members have given up their rights of membership. That is, members give up their rights as members in consideration of Holdings using the consideration that flows from this retirement (the value of the NRMA Group which is owned solely by Holdings) to pay up the shares issued by Holdings to members.
In other words, the paid up capital for the Holdings shares is not subscribed directly by members or provided by way of dividend.
Senior Counsel is briefed to advise that the shares to be issued by Holdings to members may be fully paid up by reason of the consideration or transfer of value from members to Holdings by the members agreeing to give up their membership."
83 The second issue for confirmation was that under the heading "The Second Question", namely:
"In the case of the NRMA, the consideration for the relinquishment of membership is the allotment of shares by Holdings to the (former) members of Association and Insurance the value for which derives from the value of the NRMA Group of which Holdings is the sole member (prior to the allotment being made). We do not see a difficulty with this consideration being recognised by the law."
84 The first question was the paid-up shares question on which Mr Heydon had previously advised in conference on 29 April 1994. The second question encompassed the question of non-responding members on which Mr Heydon had advised in conference on 7 March 1994, but it was a wider question and extended to the issue whether all members would be bound by the proposals, if the resolutions were passed by the requisite majority, not just non-responding members. Mr Heydon had not previously advised on that wider aspect of the question. As to this, the learned Judge commented in his judgment:
"As you can see from the above it is intended that members of Association and Insurance will be bound by the proposals through the contract constituted by the Articles of each of Association and Insurance (Section 180 of the Corporations Law).
We do not see any difficulty in this, assuming of course that the resolutions are passed by the requisite majority, and seek Senior Counsel's confirmation of this."
85 The board resolutions of 17 March 1994 included a resolution to establish a Due Diligence Committee to plan and carry out the due diligence necessary for the proposal. The Due Diligence Committee comprised the President, Mr Mackay the Chief Executive Officer, Mr Morgan of AAH, Mr Bateman of AT, a partner of Coopers & Lybrand, a partner of Deloitte Touche Tohmatsu, an Executive Director of BT Corporate Finance Ltd, and such other persons as the President or the Chief Executive Officer might approve from time to time. Mr Rees asked the various advisers to prepare a short list of the major issues for consideration in the due diligence process describing them as those matters which were material and had not yet been resolved. Mr Bateman prepared a list, one item on which was -
"763 The NRMA suggested that the second question had the wider scope, and was a further occasion for attention to Gambotto's case . Its case did not, however, include that the Gambotto advice should have been given at this time - the case in this respect was that the advice should have been given earlier, so as to affect the NRMA's conduct on 17 March 1994 or at the very latest at the first board meeting after the hearing of the appeal in Gambotto's case on 21 April 1994, in that the proposal would then have been put on hold. The point of the NRMA's suggestion was not entirely clear, and this occasion for a written opinion should be seen as part of the overall course of events for the light it sheds on the defendants' conduct.
THE DUE DILIGENCE COMMITTEE
764 Why did Mr Morgan brief Mr Heydon for the written opinion? Mr Morgan said that he wanted the questions "finally answered by Mr Heydon, particularly the one regarding the method of members' resolution", but that only takes the question one remove: why did Mr Morgan want the questions finally answered by Mr Heydon, and why particularly the second question? It is necessary, I think, to go back in time, to the setting up of the due diligence committee in late March 1994."
86 Mr Bateman presented the document to a meeting of the due diligence committee on 30 March 1994. Mr Bateman's evidence was that this item reflected his continued concern that the members' resolutions route was appropriate having regard to two matters. The first was that the resolution should be effective to determine memberships. The second was that no oppression would occur. He considered that the due diligence process should include reaching satisfaction that neither constituted a material issue. 87 At the meeting of the Due Diligence Committee on 11 July 1994, prompted by a review of the Interim Due Diligence Report - Legal, Mr Bateman said he raised what the minutes of the meeting recorded as his statement "that the change in membership status of members of the Association should be noted as a material matter". He said that the due diligence process was to remove doubts about the procedure for achieving listing, and:
"3. Procedure to Achieve Listing
Residual doubts about the proposed process have to be removed. Major doubt for areas to be satisfied are:
(a) each of Association and Insurance ceases to have any members by virtue of the passing of a special resolution at the 12 October meeting of members;
(b) no oppression is going to occur;
(c) shares to be issued by HoldCo to former members (of each of Association and Insurance) are credited as fully paid (no expenditure by them)."
88 While Mr Morgan could not recall Mr Bateman saying these things or anything to their effect, the learned Judge said:
"In particular, doubtful areas which had to be covered include how each of Association and Insurance ceases to have any members by virtue of the passing of a special resolution, as opposed to a scheme of arrangement. In other words, can the change of status of a member of Association be achieved by a resolution of members adopting a new set of articles, as distinct from a court approved scheme of arrangement. This is not referred to in the interim report on due diligence on legal matters. It is a material matter that has to be addressed. Another matter is how Holdings is able to pay up its shares when it issues them to those former members of Association and Insurance."
Mr Morgan then said that those were matters upon which he had briefed Mr Heydon and "we will be getting him to sign-off on them".
89 Mr Heydon provided an opinion dated 28 July 1994 and confirmed that the shares to be issued by Holdings to members of Association and Insurance would be issued as fully paid up by reason of consideration in the form of the membership agreeing to give up their membership of those companies. He was also of the opinion that members of Association and Insurance would be bound by the proposals through the contract constituted by the respective articles of each company under s180 of the Corporations Law. In this respect, Mr Heydon said:
MR HEYDON'S OPINION OF 28 JULY 1994
"The list and the minutes of the meeting support Mr Bateman's evidence, and I accept it."
90 According to Mr Morgan, the answer to the second question confirmed Mr Heydon's previous advice that the proposal could be implemented by the adoption, by special resolutions in extraordinary general meetings of the members of Association and Insurance, of amendments to the articles of those companies. He agreed, however, that he understood that Mr Heydon was not expressing an opinion about oppression. According to Mr Simpson, Mr Heydon's answer confirmed his view that a members' resolution could bind non-voting or dissenting members to the proposal and that a scheme of arrangement was unnecessary, so long as it could not be said there was any "unfairness" to members.
"The statutory contract created by s 180(1) to which a member is party is an unusual one in that in certain respects, unlike normal contracts, it can be varied without the consent of the member. Section 180(3) indicates certain respects in which the contract may not be varied. Section 180(3)(a) and (c) do not apply, and part of s 180(3)(b) does not apply, because the companies are not companies in which the liability of members is limited by shares. And the changes do not increase the liability of members to pay money, hence the other part of s 180(3)(b) does not apply. the contract constituted by the Articles can thus be varied by amending the Articles. That requires a special resolution (s 176(1)) and it requires the majority to avoid oppression of the minority. Subject to those requirements, the answer is 'yes'."
BOARD APPROVAL OF THE PROPOSALS 18 AUGUST 1994
91 The board approvals of the proposals on 18 August 1994 included regard to the sign-off letters of AAH and AT. The sign-off letters were part of the due diligence process. In their sign-off letter AAH stated that in giving their opinion AAH had relied on the opinion of AT as to the information to members contained in the prospectus. Also AAH stated that in giving their opinion they had assumed, amongst other things:
92 The AT sign-off letter had a reservation "whether the resolution of members will bind all members", reflecting what may have been continuing doubt on Mr Bateman's part the scheme or meeting question, so that he took care to leave the opinion on that to Mr Heydon and AAH. Giles J commented in para 995 that:
"that the distribution of entitlements to the NRMA Shares constitutes a fair and equitable distribution."
93 NRMA began to post out the package containing the prospectus and the onsert at about the beginning of September 1994. It published the text of the prospectus in newspapers and promoted the proposal through the media which included newspaper advertisements published on 4 and 11 September 1994.
PUBLICATION OF THE PROSPECTUS
"If so, Mr Bateman did not reiterate or refer to any continuing doubt."
94 In a letter dated 14 September 1994 from the Australian Government Solicitor on behalf of the Trade Practices Commission ("TPC") to Holdings, Association and Insurance it was notified that in the opinion of the TPC the advertisements contravened ss52 and 53(g) of the TP Act. There were two matters of concern. The first was that the advertisements suggested that members had to vote in favour of the proposal to get any benefit, whether shares or cash. The second was related to the use of the expression "free shares". Concern was expressed that the advertisement contravened the TP Act:
OPINION OF THE TRADE PRACTICES COMMISSION
95 This was a new perception of the "free shares" problem to be referred to later in these reasons. It had also been asserted that the shares were not "free" because they were in exchange for membership in Association. That was the principal concern of the TPC. The TPC would have left the subsidiary concern untouched, save that there was to be included a statement "You can choose free shares or the cash alternative". 96 Mr Morgan dealt with the "free shares" point in a letter to the TPC dated 14 September 1994 as follows:
"…..by describing the shares as 'free shares'. The shares which members will receive if they do vote in favour of the proposed changes in sufficient numbers will not be free in the sense that they will not have to be paid for by them in money or money's worth. If members choose to accept the shares, they must forego payment to Association of the cash alternative. For this reason the shares cannot truly be described as 'free'."
97 Another matter was raised by Mr Aleco Vrisakis, a solicitor, in a letter to Ms Conway dated 15 September 1994 complaining that the advertisements were designed to convey the message that it was necessary to vote in favour of the proposal in order to get free shares. Mr Vrisakis also said that there had not been sufficient disclosure in the prospectus by way of identification and explanation of the disadvantages to have been considered by the NRMA boards and the reasons for their conclusion that the advantages outweighed the disadvantages. There followed a somewhat acrimonious exchange of correspondence between Ms Conway and Mr Vrisakis between 19 and 22 September 1994.
"It is our view that the shares are free as they will not have to be paid for. In no sense can it be said that the net proceeds of the sale of shares are given up in consideration of the free shares. You must understand the nature of the cash alternative as outlined above."
Mr Morgan said advertisements would be placed to allay the TPC concerns.98 The Federal Court proceedings were commenced on 22 September 1994 and the hearing before Gummow J commenced on 5 October 1994. On 13 October 1994 in Fraser v NRMA Holdings Ltd (1995) 52 FCR 452, Gummow J held that the prospectus contravened s52 of the TP Act and was misleading in five respects, one of which related to the use of the expression "Free Shares". An injunction restrained further distribution of the prospectus and proceeding with any business at the meetings of Association and Insurance other than to adjourn them. The meetings were adjourned on 19 October 1994. As will appear in more detail later in these reasons, in the subsequent appeal to the Full Court, the decision of Gummow J was upheld only in relation to the "Free Shares" issue and on the basis that the treatment of the "disadvantages" question was inadequate: NRMA Holdings Ltd v Fraser (1995) 55 FCR 452. At the trial before Giles J it was submitted on behalf of AAH that the evidence relevant to the alleged misleading content of the prospectus and the onsert which was given in the Federal Court proceedings was much less than the evidence led at the present trial, and that the facts established at the trial relevant to the question of material undisclosed disadvantages in the proposal were much more extensive.
FEDERAL COURT PROCEEDINGS
99 Shortly before the hearing of the motion for leave to appeal from the decision of Gummow J, Mr Morgan prepared a draft memorandum dated 15 November 1994 giving consideration "to the contents of a future NRMA prospectus or, alternatively, the processes involved if a scheme of arrangement was undertaken". It was not immediately provided to the NRMA. It included the paragraph concerning Gambotto on which the NRMA relied at the trial. The memorandum referred to the difficulty in continuing with the current prospectus. If the appeal was successful, material changes in circumstances would have to be included. If the appeal was not successful, the prospectus would have to be changed to rectify deficiencies. It also referred to what would be involved if a scheme of arrangement were undertaken, noting that this would involve the Court as an "independent supervisor", independent experts' reports and an opportunity for all opponents to state their positions. 100 The draft memorandum contained the following by way of background:
MR MORGAN'S MEMORANDUM OF 15 NOVEMBER 1994
101 The draft repeated Mr Morgan's earlier objection to the scheme of arrangement approach. The authority to which Mr Morgan referred was Gambotto. Giles J said in 1112, that:
"Under the original proposal, we had examined the possible use of a scheme of arrangement rather than proceeding by way of prospectus and notice of meeting. The prospectus and notice of meeting procedure was adopted after Senior Counsel confirmed that it would bind members into the proposals. You should note that one of the principal authorities upon which this view was based is subject to a High Court appeal and, although the case has been argued, no final decision has been made. It is not expected that the High Court's views will change the conclusion but it is a matter that needs to be watched."
102 Two of the directors gave evidence suggesting that reference had been made to the decision in Gambotto at the NRMA board. Dr Werner said he had heard of Gambotto in the discussions concerning the decision of Gummow J prior to Christmas 1994. He recalled someone saying that the Federal Court proceedings "might not be the only problem you've got", and in explanation some discussion about Gambotto. Mr Lawson recalled hearing something about Gambotto before the decision of the High Court, to the effect that it had "the possibility of impacting on our demutualisation", but he did not recall when. There was no other evidence of recognition of Gambotto as a possible difficulty. Giles J considered it likely that Dr Werner and Mr Lawson became aware of Gambotto in late February or early March 1995 when advice was provided by the solicitors about it, or even after the decision was pronounced on 8 March 1995.
"The statement that the confirmation was based on Gambotto's case , amongst other authorities, was probably not accurate, but involved recognition that Gambotto's case was a material authority. As I have earlier recorded, according to Mr Morgan he became aware that Gambotto's case was on appeal to the High Court in the course of the proceedings before Gummow J."
The point made by the NRMA was that, if an appeal in Gambotto needed to be watched in November 1994, it had needed to be watched in late 1993 and early 1994, so that a lawyer acting properly should have found out about the special leave application and the appeal and should have given the "the Gambotto" advice. His Honour found, however, that neither Mr Morgan nor anyone else informed the NRMA that that the reserved decision in Gambotto "could be an impediment to the proposal, or at least it was not conveyed that with any force".
103 Following the decision of the Full Court of the Federal Court on 27 January 1995 and the further judgment on 30 January 1995, when a supplementary prospectus was left open, the NRMA considered what action to take. In December 1994 it had decided to consider changing solicitors if the proposal had to be taken back to members. Accordingly, submissions had been invited from Clayton Utz ("CU"), Minter Ellison Morris Fletcher ("ME"), and Norton Smith ("NS"). The invitations requested an evaluation of the prospectus, the approach to any new prospectus and a strategy to assist NRMA "to move ahead". The submissions had been received in mid-January and ME was ultimately retained. CU referred to Gambotto and the appeal, although not by name, when dealing with the potential for further litigation, both in relation to "the legal steps which are proposed to effect the demutualisation" and also the basis for the allocation of shares. They referred to recent cases dealing with "the question of expropriation of shares" and said:
CHANGE OF SOLICITORS: SUBMISSIONS INVITED AND RECEIVED
104 The ME submission also foresaw the need for a new prospectus and suggested a scheme of arrangement, giving reasons for and against. One reason in favour of a scheme was that:
"Having regard to the decisions expressed by the Courts in those cases, we believe that it is possible to provide for cancellation of membership of a company limited by guarantee where, as is proposed in this case, compensation is provided, namely the opportunity to receive shares in the new holding company or the cash alternative. However, the principal case dealing with amendments to Articles of Association has been appealed to the High Court and judgment is still awaited. The cases proceed on the basis that the Court will examine closely whether the compensation to be provided in exchange for extinguishment of existing shareholders' rights is fair. This immediately leads to the second issue, namely the basis of allocation of shares to the respective members."
105 The NS submission was less detailed and seemed to envisaged a new prospectus, but said:
A new proposal for demutualisation was proposed, but one which still involved proceeding by way of resolution adopted by general meetings.
"….lengthy challenges to the implementation of the proposal, on such grounds as that the cancellation of memberships is oppressive or in fraud on the minority (grounds of uncertain scope in light of the Gambotto litigation) would effectively be avoided because the proposal would be sanctioned by orders of the court."
106 Giles J commented on the submissions as follows:
"However we must add the warning that we think that there are further basic underlying problems with the prospectus (or is it meeting) approach. In particular there is the question of the rights of members between themselves even forgetting the association/insurance question. As a clear example, any one who has become a member over the last 9 months will receive no benefit at all. What is the 'right' of people who became members earlier to leave out these later one out [sic]. Bearing in mind that everyone has a different although probably highly undefined interest, how can one member vote away the different rights of another?
Possibly we are more sensitive to this than might be generally the case because of the delay in receiving a judgment from the High Court in the appeal to that Court from the Court of Appeal Judgment in WCP v Gambotto. The recent judgment of McClelland J [sic] in Melcann v Superjohn is also cause for concern."
NS wondered "whether notice of meetings/prospectus route is the best, especially given the opposition."
107 The NRMA received a letter from Mr Morgan dated 27 January 1995 which was written with the knowledge of the invitation to other solicitors and with a view to the continued engagement of AAH. It contemplated a supplementary prospectus or a new prospectus depending on the outcome of the appeal and referred in passing to the alternative route of a scheme of arrangement. Giles J commented in para 1130 that the letter referred:
"Apart from being one source of advice about what to do, the submissions were said to be relevant to these proceedings in that they showed other lawyers watching the appeal in Gambotto's case . The watchers' gazes went beyond simple fairness or unfairness. CU focussed on fairness, but hinted at a more fundamental basis of challenge on the ground that membership could not be cancelled while apparently of the view that such a challenge would not succeed. ME referred to uncertainty over cancellation of memberships in the light of the Gambotto litigation, uncertainty which had to go further than the fairness of entitlements since the price for the shares in Gambotto's case was conceded to be fair. NS questioned how one member can "vote away the different rights of another", referring to sensitivity involving the appeal in Gambotto's case . Although not in terms, all saw the decision in the appeal as something to be known in order properly to advise."
108 Under cover of a letter to Ms Conway dated 31 January 1995, Mr Morgan enclosed a memorandum concerning a scheme of arrangement "to put in place the same result as was envisaged under the prospectus". The memorandum was but an outline and referred to possible difficulties because of different classes of members. As to this his Honour commented in para 1131:
"… rather in passing to the alternative route of a scheme of arrangement even with knowledge of the High Court appeal in Gambotto's case , Mr Morgan can not have seen it as an impediment to the resolutions in general meetings route."
109 In a further letter to Ms Conway dated 1 February 1995, following the decision of the Full Court of the Federal Court, Mr Morgan said that he did not think that a scheme of arrangement "presents any advantages over the proposal that has now been made by the Federal Court". Mr Morgan did not think a scheme of arrangement was necessary and the alternatives he identified were a new prospectus (as distinct from a supplementary prospectus) and delaying the float. 110 The boards of Association and Insurance met jointly on 2 February 1995. A resolution was adopted expressing continued support for demutualisation; authorising management to continue to "do all work necessary" to put a proposal for restructuring to members; and requesting a report and recommendations for the way forward in the light of the decision of the Full Court. Only Mr Talbot and Ms Singleton opposed the motion. Ms Fraser supported the resolution on the basis that she had achieved her objective of "having a 'no' case put to the members". On 6 February 1994 Mr Talbot filed a notice of motion in the Federal Court proceedings seeking leave to amend to restrain continuance with the proposal on various additional grounds and joining some of the NRMA directors and claiming damages against them. 111 At the same time Mr Bateman was asked for his views about the way forward. In a letter to Ms Conway dated 6 February 1995 he recommended the preparation of a supplementary prospectus as soon as possible. He briefly reviewed the possible difficulties and indicated that a revision of the existing prospectus was a second option.
"Maybe reference to Gambotto' case should not have been expected, and in fact no Gambotto concern was expressed."
112 The NRMA selected ME to undertake further work on the restructuring, leaving for later decision whether to continue with AAH and AT. Subsequently, however, the board/management liaison committee resolved to obtain legal advice whether AAH and AT had been negligent. In a report dated 21 February 1995 ME recommended that there be a full and genuine reconsideration of the entire demutualisation process and that the board commission a report by an independent expert on the reasons for and against demutualisation, whether it was desirable in the interests of Association and Insurance and their respective members; and whether the proposals in the prospectus were fair and reasonable as regards Association and Insurance and their respectively members. It was recommended that the report should also consider whether there was any obvious alternative that should be preferred. Finally, it was recommended that management should be authorised to preserve the existing options pending the receipt and consideration of the report. 113 If it were decided to proceed, ME considered that the most viable alternative was to continue with the proposals in the existing prospectus, reviving the adjourned meetings either with a supplementary prospectus or with a new prospectus, preferring that course to undertaking a scheme of arrangement. In other words, the view was taken that given that the prospectus was suitably amended or supplemented, it was appropriate to proceed by way of the adoption of special resolutions at general meetings. The advantages and disadvantages of general meetings as against a scheme were summarised. This prompted a comment by Giles J in para 1138 that:
MINTER ELLISON INSTRUCTED
114 The learned Judge found that, although the ME report on 21 February 1995 did not refer to Gambotto as posing a risk to the proposal, Professor Austin of ME told Mr Mackay in late February or early March 1995 of the outstanding High Court appeal and alerted him to the fact that if the decision went in favour of Gambotto, "it might present a problem". His Honour commented in para 1144 that:
"Perhaps curiously in the light of the earlier submission, in relation to a scheme of arrangement the stated disadvantages did not mention Gambotto's case , save so far as that might have been involved in the observation that if the court were to identify small groups of members as separate classes 'those small groups would have a power of veto over the proposal whatever the wishes of the majority of members as a whole'. But as will appear, outside the report the NRMA was told of concern over the appeal in Gambotto's case. "
THE IMPACT OF GAMBOTTO
The ME report was presented to a joint meeting of the boards of Association and Insurance on 23 February 1995. On 27 February 1995, Grant Samuel & Associates Pty Ltd ("Grant Samuel") were commissioned to provide the independent expert's report, having been selected by a committee formed for the purpose.
115 The judgment in Gambotto of 8 March 1995 was immediately seen as an obstacle to the proposal. At a meeting of the board management liaison committee on 9 March 1995 Professor Austin reported on Gambotto. The record of the meeting noted that:
"The concern can not have been regarded as major, or it would have been found in the ME report of 21 February 1995 and ME would not have considered resolutions in general meetings the most viable alternative. But ME was watching Gambotto's case , and awareness that the resolutions in general meetings route might be open to challenge underlay the first declaration proposed by Mr Talbot."
116 A recommendation from ME to cease all work on either supplementary prospectus or a new prospectus was accepted. The ME report said:
"This has fundamental implications for our demutualisation proposal relating to the claim of oppression and compulsion. Minter Ellison and Arthur Emmett QC have reviewed the judgement and, although final written confirmation is sought from Emmett, Minter Ellison's feeling is that to proceed with our current proposal would be 'risky and foolhardy'."
117 There followed a summary of the joint judgment of Mason CJ, Brennan, Deane and Dawson JJ. The report then said:
"An integral part of the demutualisation proposal contained in the 1994 prospectus was that all members of the Association and Insurance would cease to be members upon implementation of the proposal, on condition that they were offered shares in Holdings or the cash alternative.
The compulsory aspect of the demutualisation proposal was to be achieved by provisions in the new articles of association of the two companies, which were to be adopted by special resolution of the members.
…
As we have indicated previously, there is a legal issue as to whether an amendment to articles of association of a company which compulsorily extinguishes membership against the wishes of a member is necessarily oppressive and therefore invalid.
The decision of the High Court in WCP Limited v Gambotto was delivered on 8 March 1995. In that case the articles of association of WCP were amended to permit the 99.7% shareholder to acquire compulsorily the remaining 0.3% of the company's shares for a price which was acknowledged to be more than fair. Mr Gambotto objected to the compulsory acquisition. The High Court held that the amendment to the articles was invalid."
118 The learned Judge commented in para 1149 that:
"Obviously the demutualisation proposal is factually distinguished from Gambotto's case in several respects. The demutualisation proposal would compulsorily extinguish the rights of all members, including those who vote in favour of the new articles. Moreover, there are important differences between shareholding and membership of a company limited by guarantee. It is not clear, even after the Full Court's judgment in the NRMA case , whether the rights of a member of a company limited by guarantee are properly described as 'proprietary rights'.
Nevertheless, our provisional opinion is that the basic reasoning of the Gambotto case is applicable to the demutualisation proposal. The majority voting in favour of the proposal would be doing so in order to secure for themselves the benefit of a corporate structure that can derive a new commercial advantage. It could not be said that the continued shareholding of the minority is detrimental to the company.
Yesterday afternoon we consulted Mr Arthur Emmett QC who agrees with our provisional view. It will be necessary to obtain written advice from Senior Counsel as soon as practicable.
If our provisional view is correct, the implication seems to be that it will be impossible to proceed with the supplementary prospectus, or with a new prospectus to implement the current demutualisation proposal. The alternatives will be either:
a scheme of arrangement; or
a proposal in which members will have a choice between retaining their existing membership rights or taking shares."
119 Under cover of a letter dated 10 March 1995 Mr Bateman sent Ms Conway a copy of the judgment for her information saying:
"Accordingly [sic] to the initial report, the concern in relation to the proposal was that compulsory extinguishment of membership might be 'necessarily oppressive', a concise way of expressing of [sic] the observations much earlier in these reasons that McLelland J in Gambotto's case seems to have thought that the fact of expropriation was enough to constitute oppression, but in the view of the Court of Appeal if the expropriation was fair the fact of expropriation would not invalidate the exercise of the power to change the articles. The High Court did not decide that an expropriation of shares was necessarily oppressive, but, to repeat what I said also much earlier in these reasons, held that the fact of expropriation would make the exercise of the power invalid, even if the expropriation was fair (which was equated with not oppressive), unless the majority shareholders could prove a proper purpose."
120 In the meantime, Professor Austin sought and obtained an opinion from Mr Heydon dated 13 March 1995. Mr Heydon was asked whether the special resolutions proposed by the NRMA for the adoption of new articles of association to implement the 1994 demutualisation proposal would be valid, if adopted, having regard to the decision of the High Court in Gambotto. Mr Heydon said:
MR HEYDON'S OPINION OF 13 MARCH 1995
"The reasoning of the High Court has implications for any restructuring of NRMA Limited and/or NRMA Insurance Limited. While the Judgment is framed in terms of a majority expropriating the shares of a minority, it can also be viewed, on one interpretation, as also dealing with the expropriation of the rights of a minority regardless of the fact that the majority do not acquire those rights."
121 The learned Judge rightly noted that the opinion was not definitive. His Honour said:
"The two questions which the High Court says any majority must demonstrate to be capable only of an affirmative answer are, first, whether the purpose is to secure the company from significant detriment or harm and, secondly, whether the alteration to the articles is 'fair' ie not oppressive.
As to the first question, the minority in the present circumstances are not analogous to competitors or foreign shareholders preventing the company from obtaining or retaining an advantage. Gambotto's case (in the view of the majority though not that of McHugh J) excludes the capacity of a company to rely on tax advantages by grouping and administrative benefits as a justification for expropriating minorities. Those advantages are real advantages to the company and to the majority, but they do not appear to be different in character, so far as the present problem is concerned, from the benefits summarised on page 6 of the prospectus. The High Court specifically said that the majority cannot expropriate the minority 'in order to secure for themselves the benefit of a corporate structure that can derive some new commercial advantage'. It also forbade expropriation 'where it would advance the interests of the company as a legal or commercial entity or those of the general body of corporators'.
If the first question were not answered affirmatively, the second would not arise. Even if the first question were answered affirmatively, the second would seem to call for a disclosure of 'all relevant information leading up to the alteration' (which incidentally may create a collision with what the Full Federal Court said in Fraser v NRMA Holdings Limited (1995) ATPR 41-374 at 40,144) as well as valuation by an independent expert (which, according to the Full Federal Court in Fraser v NRMA Holdings Limited (1995) ATPR 41-374 at 40,157 'may be impossible'). These are heavy burdens. The High Court left open the question of whether the majority should abstain from voting; an answer that they should would be fatal so far as the present enterprise is concerned.
The answer to the question is accordingly that there seems to be at least a significant likelihood that the special resolutions would not be valid having regard to the decision of the High Court in WCP Limited v Gambotto . They would appear to be capable of validation only if some reason for the demutualisation of which I am unaware is capable of being identified and is capable of being characterised as falling within the permissible purposes stated by the High Court in that case."
122 On 15 March 1995 Mr Heydon advised in conference that he had reviewed the prospectus and had not identified any reason for the demutualisation which would served to distinguish the facts from those in Gambotto. Mr Heydon said:
"It was rather obscure as to fairness or oppression, and while focussing on proper purpose did not clearly address the NRMA's purpose and its propriety. No doubt that was why, from an account in a later letter from ME to Ms Conway, Mr Heydon was then asked to advise whether, having regard to the text of the prospectus, any reason had been identified falling within the permissible purposes stated by the High Court."
123 Mr Heydon's advice was considered by the board management liaison committee on 21 March 1995. Some members expressed reservations about his advice and Mr Easson prepared a paper, the thrust of which was that there could be a demutualisation as proposed consistently with Gambotto.
"In particular, purposes relating to unlocking the wealth of the organisations, stabilising their Boards and corporate governance, and improving the 'financial engineering' of the companies would not fall within the permissible purposes stated by the High Court in that case."
124 ME were asked to obtain further advice and briefed Mr S E K Hulme QC, who was asked the same question as had initially been asked of Mr Heydon. On 23 March 1995 Mr Hulme orally advised that Gambotto would pose a problem if the NRMA were to proceed with the special resolutions proposed. Mr Hulme was then asked by letter dated 26 March 1995 to consider some further questions, probably as a result of Mr Easson's paper. The first question was whether special resolutions along the lines of the 1994 proposal would be valid if adopted for certain purposes identified as reasons for demutualisation in the paper, including some reasons not expressly stated in the prospectus. These were to the effect that the NRMA had to expand its business and improve its competitive position, by increasing its ownership base, extending its market beyond New South Wales and defeating the medium to long term threat of other organisations. It also had to improve its corporate governance to remove exposure to "populism" and ensure the skills required to manage its business. The objective that surplus capital be made available to members, together with the other reasons, called for a change from a mutual structure to the structure of a listed entity. 125 The second question was whether there were sufficient points of distinction between the circumstances of the NRMA and the circumstances in Gambotto so that a new proposal which would by amendment to the articles extinguish the membership of members of Association and Insurance and in exchange for shares or a cash alternative "would avoid the Gambotto principle". 126 The third question was whether a procedure under which membership of Association and Insurance was not extinguished, but the voting rights of members curtailed so that Holdings would be the sole voting member of Association and Insurance, if implemented by amendment to the articles of association of Association and Insurance without a scheme of arrangement, "would attract the principle in Gambotto".
MR HULME BRIEFED TO ADVISE
127 Mr Hulme provided two opinions dated 3 April 1995. The first dealt with the question on which he had orally advised on 23 March 1995. In the first opinion he said that, if what was to happen constituted the expropriation of a minority, then Gambotto was obviously significant because the attainment of the purposes expressed in the prospectus did not justify an amendment introducing a power not previously there to expropriate the minority. In his view, there would be a compulsory loss of a position seen as being, and being, a valuable one, and that would be an expropriation. He concluded:
MR HULME'S OPINIONS OF 3 APRIL 1995
128 Mr Hulme's second opinion addressed the three further questions posed in the letter of 26 March 1995. As to the first question, his opinion was the purposes identified in Mr Easson's paper took the matter no further, and gave him no reason to alter the views previously expressed. As to the second question, Mr Hulme considered the points of distinction between the circumstances of the NRMA and Gambotto identified by Mr Easson, and concluded that the circumstances of the NRMA case were not "sufficiently distinguishable to enable a proposal for amendment of the articles to extinguish the memberships to be drawn in such a manner as to avoid Gambotto". As to the third question, Mr Hulme said that depriving members of the right to vote was expropriation for the purposes of Gambotto, the right to vote being one of the bundle of rights enjoyed by a shareholder, and that there was no difference of principle between taking all the rights and taking some of them and that a right to vote had a value. Mr Hulme concluded his opinion by saying:
"15. Accordingly I am of opinion that what is to be done does constitute expropriation; that the decision in Gambotto is likely to stand in its way; that no court lower in the hierarchy is likely to accept an argument distinguishing this case from Gambotto ; and that the chances of the High Court wishing to do so are low.
16. In that last regard it may be noted that the judgment said little as to expropriation occurring via schemes of arrangement, reconstructions etc. But at T 12 the judgment does say that to allow expropriation wherever commercial advantage could be shown … would 'circumvent the protection which the Corporations Law gives to minorities who resist compromises, amalgamations and reconstructions, schemes of arrangement and takeover offers'. It appears then that what has been said is not intended to stand in the way of expropriation seen as proper by a court-approved scheme of arrangement. That I fancy means that the High Court would be more likely to expand Gambotto than restrict it, leaving those still wishing to proceed to do so via the method which gives the acquired person the protection of the courts."
129 In the light of this material, the learned trial Judge concluded, at para 1165:
CONCLUSION OF THE TRIAL JUDGE
"11. The central fact, as I see it, is that having taken a stand of the kind it did in Gambotto , the High Court is not lightly going to let parties find ways to circumvent it. As one considers the various alternatives to the original proposal, one finds Gambotto lying in wait. Increasingly I feel forced to the view that the courts will force the matter into the form of scheme of arrangement."
130 The advice of ME in a draft report dated 29 March 1995 was that in light of the Gambotto decision and the opinions of counsel, it was no longer possible to proceed by way of supplementary prospectus, even with newly convened meetings. This advice was reinforced by Mr Hulme's written opinions of 3 April 1995.
"This was a powerful body of advice that Gambotto's case precluded implementing the demutualisation through special resolutions at meetings of members. In these proceedings the NRMA submitted that in fact it did not do so, but the NRMA could hardly be expected to have acted contrary to the body of advice it was receiving; and it did not blindly succumb to one opinion, but questioned the advice it was receiving and was given confirmatory advice."
131 There was a joint board meeting on 3 April 1995. Prior to that meeting the NRMA was provided with a copy of an opinion by Mr Garnsey and Mr Camilleri concerning Gambotto obtained by Mr Talbot. Their advice was that the reconstruction in the form proposed or in any form substantially the same could not be carried out in accordance with law in the light of the decisions of the High Court in Gambotto and the Federal Court in the NRMA case. They also concluded that in the light of the decision of the High Court in Gambotto it was difficult, and probably impossible, to carry out any reconstruction of Association and Insurance involving the conversion of those corporations, from companies limited by guarantee to corporations limited by guarantee and a share capital, so as to achieve "demutualisation". This went further than the advice of ME and Mr Hulme. ME considered that Gambotto did not prevent the implementation of the substance of the proposal by way of a scheme of arrangement, or by other possible methods such as pursuant to an Act of Parliament, or a proposal which would not compulsorily extinguish membership. 132 In the meantime, the Grant Samuel report had become available and was in favour of demutualisation. It concluded that demutualisation was in the best interests of Association and Insurance and their respective members, that the proposal set out in the prospectus was fair and reasonable as regards the two companies and their respective members, and that alternative restructuring proposals that would achieve a better outcome had not been identified. 133 The Grant Samuel report was subsequently distributed to all NRMA members with a covering letter drawing attention to Gambotto as possibly affecting implementation of a demutualisation, but said that the question of methods of implementation was one for the future. Members were invited to consider the Grant Samuel report and let the NRMA have their comments. Advertisements were placed, public consultation meetings were held and market research was undertaken.
JOINT BOARD MEETING ON 3 APRIL 1995
134 At a joint meeting of the boards of Association and Insurance on 27 May 1995 reports were received to the effect that the membership was negative and a 75% vote of members in favour of demutualisation was unlikely at that stage. A report from ME concluded:
JOINT BOARD MEETING ON 27 MAY 1995
· proceed with the meetings convened and adjourned in 1994; or
"12. In summary, on the basis of legal advice the position is that it is not feasible to
· issue a supplementary prospectus,135 A further ME report entitled "Options For The Way Forward" was noted and discussed which mentioned four options, namely:
having regard to the impact of the decision in the Gambotto case and all other relevant circumstances.
13. It therefore seems appropriate for the Boards to resolve that the 1994 meetings and prospectus should be abandoned, while leaving open the question whether similar proposals should be put forward by convening new meetings and issuing a new prospectus, or by proceeding in some other way, in the future."
136 The board resolved that in the light of the ME report, the adjourned 19 October 1994 meetings and the prospectus not be proceeded with. It was also resolved, however, to reconfirm the decision of the board to propose a re-structuring of the company as set out in the Grant Samuel report. It was further resolved to request management to develop for the board within three months a concept document to address the concerns coming out of the consultation process, indicating that the majority of the board still favoured the restructuring of the NRMA.
"(a) do nothing;
(b) defer going to members to change structure until after 1995 AGM and elections;
(c) ask management to develop for the Boards' consideration a concept document which addresses the concerns coming out of the consultation and the key outcomes of the Independent Expert's Report;
(d) implement essentially the 1994 proposal to demutualise by 'mandatory' scheme of arrangement."
THE NRMA CASE ON GAMBOTTO
137 The essence of the NRMA case on Gambotto was that it should have been advised by Mr Heydon, AAH and AT that Gambotto was on appeal to the High Court and, after 10 December 1993, that the appeal had reasonable prospects of success and there was a real risk that the High Court's decision might adversely impact upon the proposal.
138 It was contended that had that advice been given, the boards would have voted to stop or slow down the proposal and much, if not all, of the expenditure later incurred would have been avoided. The date by which it was said the advice should have been given and would have been acted on was 17 March 1994, when the proposal was first put before the boards. Alternatively, it was submitted that the advice should have been given by 28 April 1994, the date of the first board meetings after the hearing of the appeal. The duty of care of the appellants was defined by the learned trial Judge as follows:
139 His Honour noted, however, that "the duty of care is not a warranty of perfection": Duchess of Argyll v Beuselinck (1972) 2 LLR 172 at 185. This is another way of saying that there is not a duty to give "correct" advice. It was not suggested that Mr Heydon was entitled to the advocate's immunity considered in Giannarelli v Wraith (1988) 165 CLR 543. His Honour also said that the due care, skill and diligence were to be exercised in doing what the solicitors were retained or Mr Heydon was briefed to do. His Honour went on to say:
"The defendants were bound to exercise due care, skill and diligence, bringing to their task the competence and skill usual amongst solicitors or barristers (as the case may be) practising their profession and taking proper care in what they did ( Voli v Inglewood Shire Council (1963) 110 CLR 74 at 84; Midland Bank Trust Co Limited v Hett Stubbs & Kemp (1979) 1 Ch 384 at 403). Each of AAH, AT and Mr Heydon professed to be, and was, expert in corporations law, and the care, skill and diligence to be exercised was that appropriate to a member of the relevant profession having such specialist expertise ( Duchess of Argyll v Beuselinck (1972) 2 LLR 172 at 185; Rogers v Whitaker (1992) 175 CLR 479 at 483; Yates Property Corporation (in Liquidation) v Boland (1998) 157 ALR 30 at 50-51; Montague Mining Pty Ltd v Gare (Wilcox J, 23 October 1998, unreported)."
140 So far as the retainers were concerned, Giles J said in para 1192:
"Because a solicitor's duty lies in tort as well as contract, it may be that in the particular circumstances it may require that the solicitor go beyond the specifically agreed professional task or function if that is necessary to avoid a real and foreseeable risk of economic loss being sustained by the client ( Hawkins v Clayton at 579; Waimond Pty Ltd v Byrne at 652; Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418)."
141 The question raised by that approach is in each case whether the possible risk was something that should have been reasonably foreseen by competent solicitors possessing the qualifications and experience of Messrs Morgan and Bateman and competent counsel of the qualifications and experience of Mr Heydon. As to the scope of the respective retainers, the learned Judge said in para 1193:
"In the present case I have no doubt that the retainer of AAH and AT extended to advice upon the possible risk to the proposal from the appeal to the High Court in Gambotto's case , if the exercise of due care, skill and diligence so required, and that the briefs to Mr Heydon similarly required him to advert to that risk if the exercise of due care, skill and diligence so required."
142 His Honour also said in para 1195:
"As to AAH and AT, they were called upon to advise the NRMA whether the proposal could and should be implemented by scheme or meeting, and a risk in the resolutions in general meetings route was clearly something to which they should have had regard and of which they should have informed the NRMA. As to Mr Heydon, as a minimum he was asked by the revised brief delivered on 15 or 16 December 1993 to advise 'whether there is a legal requirement to proceed by scheme of arrangement … or whether it is sufficient if the necessary resolutions are passed by members in general meeting'. If a risk to the proposal because the resolutions would be 'necessarily oppressive' (to take up Professor Austin's concise expression) should have been seen, reference to the risk should have been part of the advice. In the circumstances, it would not have been sufficient for AAH, AT, or Mr Heydon simply to advise that the proposal could be implemented by the resolutions in general meetings route, if of that view after weighing arguments for and against, without informing the NRMA of a risk forming one of the arguments against. In the language of the brief to Mr Heydon, resolutions in general meetings would not be sufficient, either as the obverse of a legal requirement to proceed by way of scheme of arrangement or as a course for the NRMA to undertake, if there were a risk."
143 No expert evidence by a solicitor or barrister was called by any party regarding the nature of the advice or the range of possible advice which could have been given by an appropriately qualified solicitor or barrister responding to the retainer or instructions which were given by either party. Although AAH called Mr Bennett for another purpose, in the context of the appeal the appellants sought to rely on his evidence for a wider purpose as establishing what was described before us as "the minimum non-negligent advice". That designation or description was first used by counsel for Mr Heydon at the appeal. The decision not to call evidence was justified by counsel for the NRMA before Giles J on the basis of the comments of Oliver J in Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] 1 Ch 384 at 402 where his Lordship said:
"More widely, the question … whether to proceed by the resolutions in general meetings route or the scheme of arrangement route had significant practical implications, given that opposition to the proposal was expected. AAH and AT were well aware of this, and it was made known to Mr Heydon. This emphasised, if it were not already evident, that the risk of a necessarily invalidating impediment to the resolutions in general meetings route should be brought to account."
SCOPE OF DUTY AND STANDARD OF CARE
As to the last three words in this passage, I assume that the learned Judge intended to convey that the risk should be taken into account.
144 The duty of care of a professional person and the need to warn of risks was most recently considered in the High Court in Rogers v Whitaker (1992) 175 CLR 479. As appears from the joint judgment of Mason CJ, Brennan, Dawson, Toohey and McHugh JJ, in the case of a medical practitioner the law imposes a duty to exercise reasonable care and skill in the provision of professional advice and treatment; see at 483. In that case their Honours also said at 483 that the standard of reasonable care and skill required is that of the ordinary skilled person exercising and professing to have that special skill, which in that case was the skill of an ophthalmic surgeon specialising in corneal and anterior segment surgery. Speaking more generally, their Honours said at 487 that:
"I must say that I doubt the value, or even the admissibility, of this sort of evidence, which seems to be becoming customary in cases of this type. The extent of the legal duty in any given situation must, I think, be a question of law for the court. Clearly, if there is some practice in a particular profession, some accepted standard of conduct which is laid down by a profession institute or sanctioned by common usage, evidence of that can and ought to be received. But evidence which really amounts to no more than an expression of opinion by a particular practitioner of what he thinks he would have done had he been placed, hypothetically and without the benefit of hindsight, in the position of the defendants, is of little assistance to the court; whilst evidence of the witnesses' view of what, as a matter of law, the solicitor's duty was in the particular circumstances of the case is, I should have thought, inadmissible, for that is the very question which it is the court's function to decide."
145 Their Honours also said in Rogers v Whitaker at 490 that:
"In Australia, it has been accepted that the standard of care to be observed by a person with some special skill or competence is that of the ordinary skilled person exercising and professing to have that special skill. But, that standard is not determined solely or even primarily by reference to the practice followed or supported by a responsible body of opinion in the relevant profession or trade. Even in the sphere of diagnosis and treatment, the heartland of the skilled medical practitioner, the Bolam principle has not always been applied. Further, and more importantly, particularly in the field of non-disclosure of risk and the provision of advice and information, the Bolam principle has been discarded and, instead, the courts have adopted the principle that, while evidence of acceptable medical practice is a useful guide for the courts, it is for the courts to adjudicate on what is the appropriate standard of care after giving weight to 'the paramount consideration that a person is entitled to make his own decisions about his life'."
146 In my opinion the approach adopted in Rogers v Whitaker is applicable to the duty of care of legal practitioners and the standard of care. Both barristers and solicitors owe a duty of care to those whom they advise or for whom they act. In the present context, their duty is to exercise reasonable care and skill in the provision of professional advice. The standard of care and skill is that which may be reasonably expected of practitioners. In the case of practitioners professing to have a special skill in a particular area of the law, the standard of care required is that of the ordinary skilled person exercising and professing to have that special skill. Each of Mr Heydon, Mr Morgan and Mr Bateman were persons who were among the leaders of the profession in the fields of company and commercial law and, in the case of Mr Heydon, also in the field of trade practices law. Each was acknowledged as having special skill or competence in the relevant areas. It did not follow from this that they were to be judged by some higher standard in these areas than the ordinary skilled person exercising and professing to have that special skill: see also Duchess of Argyll v Beuselinck (supra) at 183. 147 In this context the content of the duty of care and the liability is the same whether it is founded on contract in the case of a solicitor, or whether it is founded on a duty of care in tort in the case of a barrister. In each case the duty is to apply the relevant degree of skill and exercise reasonable care to carrying out the task. There is no implied undertaking that the advice is correct, but only that the requisite degree of professional skill and care has been exercised in the giving of the advice. Of course, where there is reason for doubt or there are risks which a person possessing the relevant degree of skill and competence should perceive, it follows from the above that there may be a duty to warn of the kind recognised by their Honours in Rogers v Whitaker. Thus, in Hawkins v Clayton (1988) 164 CLR 539 at 583-585, it was held by Deane J that, in the case of a solicitor, the circumstances may give rise to a duty to do more than simply perform the task defined by his instructions, if circumstances arose giving rise to a real and forseeable risk of economic loss by the client, or, in particular circumstances, even a person who was not a client but who may be adversely effected. See also Waimond Pty Ltd & Anor v Byrne (1989) 18 NSWLR 642 in which the judgment of Deane J was followed. In Henderson v Merrett Syndicate Limited [1995] 2 AC 145 the House of Lords declined to follow Hawkins v Clayton insofar as it suggested that in the case of a solicitor liability lay only in contract rather than concurrently in contract and tort. In Astley v Anti trust Ltd [1999] HCA 6; (1999) 73 ALJR 403 the High Court decided to follow the decision in Henderson v Merrett Syndicate Limited in preference to the judgment of Deane J so that in the case of solicitors, the liability remains a concurrent liability in contract and in tort. 148 As already noted, the liability of a barrister to the lay client has always been founded on tort rather than contract. Prior to the decisions in Hawkins v Clayton and Waimond Pty Ltd v Byrne, the duty of a barrister briefed to advise was generally regarded as being to advise on the specific matters or questions raised in the brief from the solicitor. It is a nice question whether there was a duty on the part of counsel to volunteer advice beyond the scope of the brief, although counsel may well and generally would volunteer additional advice which was considered relevant, but not specifically raised in the instructions. In the present case the learned trial Judge referred to Waimond Pty Ltd v Byrne in the context of findings against the appellants of negligently failing to warn of risks with respect to questions which, on the face of it, were not within the scope of the specific questions on which they had been asked to advise.
"The law should recognize that a doctor has a duty to warn a patient of material risk inherent in the proposed treatment; a risk is material if, in the circumstances of the particular case, a reasonable person in the patient's position, if warned of the risk, would be likely to attach significance to it or if the medical practitioner is or should reasonably be aware that the particular patient, if warned of the risk, would be likely to attach significance to it. This duty is subject to the therapeutic privilege."
While no therapeutic privilege is relevant in the present context, the application of these principles to a set of circumstances in which lawyers are called upon to advise whether a transaction can be implemented in particular way clearly gives rise to a duty to warn a client of any material risk in the same sense as that used in the medical context in Rogers v Whitaker .
149 As to the question of the admissibility and relevance of expert evidence regarding the duty of care in the context of proceedings against a lawyer, in Boland v Yates Property Corporation Pty Ltd [1999] HCA 64; (2000) 74 ALJR 209 at [45], Gleeson CJ noted without comment that in proceedings before Branson J in the Federal Court the defendants gave evidence and, in addition, there was further evidence from expert valuers, and from senior counsel experienced in valuation law and practice, noting that:
ADMISSIBILITY AND RELEVANCE OF EXPERT EVIDENCE
150 Further at [47] the Chief Justice noted that:
"Her Honour relied upon that evidence, and upon her own opinions and judgment, in reaching her conclusions."
151 In Boland paras [48] and following the Chief Justice quoted from and examined in some detail the judgment of Branson J below, in which her Honour approached the matter, as indicated in para [49], having regard principally to the expert evidence, by attaching weight also to her own reading of the authorities, to form the view that no negligence had been established against any counsel or solicitor in connection with the presentation of the claim. In the result, the decision of Branson J was upheld. In relation to the particular aspects of the case which I have mentioned, Gaudron and Gummow JJ agreed with Gleeson CJ. Callinan J made a number of observations of some relevance. His Honour said at [307]:
"Branson J referred to evidence given before her by Mr Simos concerning his opinion on the relevant issues. She also referred to evidence given by two legal experts, Mr McClellan QC and Mr Davison SC. Mr McClellan was called by Yates, and Mr Davison was called on behalf of the defendants. Mr McClellan was not asked to, and did not, express an opinion on whether the approach adopted by Messrs Simos and Webster to the subject of special value was one which could reasonably have been taken by competent senior and junior counsel. Mr Davison, a barrister with extensive experience of valuation law and practice, expressed the opinion that the views which had formed the presentation and conduct of the primary litigation by Mr Simos and Mr Webster were views which could reasonably have been held by competent senior counsel at the time of the proceedings and, in addition, were views with which Mr Davison personally agreed."
152 In the light of these authorities, I consider that expert evidence would have been both relevant and admissible in the present case, but it remains for the Court to determine what is the appropriate standard of care and whether, in the instant case, the relevant advice was given consistently with or in breach of that standard. 153 The judgment of Branson J and the consideration of it by Gleeson CJ (with whom Gaudron and Gummow JJ agreed in Boland), to which I have referred, assumes both the admissibility and relevance of the evidence to the determination to be made by the Court. 154 In the present case there was no witness called for the purpose of giving evidence of any relevant professional standard or practice. In para 1197 of his judgment the learned trial Judge said that he expressed "no view on whether expert evidence could or should have been called" and that it fell "to the court itself to provide that content" (citing authorities). 155 As Kirby P (as he then was) said in Waimond v Byrne (1989) 18 NSWLR 642:
"The nature and scope of the duty of lawyers to exercise reasonable care, particularly when litigation is in prospect or being, must be assessed in the knowledge that litigation always involves some uncertainties…"
His Honour also said:
"[309] In determining whether, in giving an opinion or advice on the conduct of the case, lawyers have been negligent it will not necessarily be a proper base for criticism that they had recommended or acquiesced in an approach which might have seemed to some to be novel in law or one upon which minds might differ. So to, as counsel for the respondent submitted, regard has to be had to what the law might reasonably be perceived to be at the time that the conduct in question occurred.
[310] In the last 20 years it is possible to point to many changes in legal thinking in and as a result of decisions of this Court. ( Burnie Port Authority v General Jones Pty Ltd) (1994) 179 CLR 520; Theophanous v Herald & Weekly Times Ltd (1994) 182 CLR 104; Lange v Australian Broadcasting Corporation (1997) 189 CLR 520. See also the discussion by Brennan J of presumptions as to the state of the law from time to time in Giannarelli v Wraith (1988) 165 CLR 543 at 583-586). There are also a number of decisions of this Court on important matters in which different Justices have taken diametrically opposed views ( Wik Peoples v Queensland) (1996) 187 CLR 1; Gould v Brown (1998) 193 CLR 346; Re Wakim; ex parte McNally (1999) 73 ALJR 839). All of this is to highlight the increased difficulty which lawyers face in making decisions as to the way in which to conduct some complex cases and advise their clients."
156 AAH called Mr David Bennett QC, whose expertise in corporations law and experience in practice as a barrister were not questioned, not to give evidence of practice, but to give evidence of what he would have done and advised, if briefed in December 1993. The purpose of the evidence was relevant to causation on the basis that had Mr Heydon given the Gambotto advice which the NRMA said should have been given, the NRMA would have asked for a second opinion. It was postulated that Mr Bennett would have been briefed to advise on the relevance of Gambotto, and that his opinion would have allayed any fears of risk to the proposal, so that the NRMA would not have stopped or slowed down work on the proposal. In the course of cross-examination other parties enlarged the scope of his evidence to give content to the due care, skill and diligence required of the appellants. 157 Mr Bennett's evidence was based on a brief in fact delivered to him in July 1998, incorporating a copy of the revised brief delivered to Mr Heydon on 15 or 16 December 1993. Mr Bennett was asked to assume that Mr Heydon had advised, "without addressing the question of oppression", that the proposal could be implemented by resolutions in general meetings, referred to Gambotto and the pending appeal to the High Court, and asked Mr Bennett to advise:
"In default of any evidence as to professional standards or common practice in a situation such as the present, it falls to the court itself to provide its definition of the scope of the duty of care owed by reference to general principles."
EVIDENCE OF MR BENNETT QC
The same may be said of the position of counsel: Negal v Power (1967) SASR 373 at 376; Fox v Everingham (1983) 76 FLR 170 at 178-179; and Amadio Pty Ltd v Henderson (1998) 81 FLR 149 at 217.
158 Mr Bennett's evidence was that, without perusal of the transcripts of the application for special leave to appeal or the argument on appeal, he would have said that the appeal in Gambotto was likely to fail. If he had perused the transcript of the application for special leave to appeal, he would have said that there was a possibility of the appeal being allowed, although a less than 50 per cent prospect of success. Having perused the transcript of the argument on the appeal, he would have said that there was a reasonable prospect of the appeal succeeding, "possibly slightly in excess of 50 per cent"; and that in both instances he would have said that the possible allowance of the appeal in Gambotto would not affect the proposal. 159 Mr Bennett considered that the proposal and the expropriation in Gambotto were quite different. In the NRMA proposal, all members were treated equally because all lost their memberships and had an entitlement to shares or cash. The members would continue to enjoy the same assets as shareholders. In Gambotto, the interest and wishes of the majority differed from those of the minority, but under the NRMA proposal the interests were all identical. In his evidence at the trial he said that he thought that:
"(a) as at January 1994 'whether the fact that Gambotto has gone on appeal to the High Court has any relevance to the plan to implement the proposal by way of special resolution at members' meetings and if so, what relevance"; and
(b) as at May 1994, after the hearing of the appeal, "if there is anything you wish to add to your opinion or if you wish to change your opinion in any way".
160 In cross-examination, Mr Bennett said that:
"….the parameters of Gambotto at the trial and in the Court of Appeal are sufficiently narrow that it would be unlikely in the extreme that any decision by the High Court, even one allowing the appeal, would be so wide as to apply to this very different sort of proposal".
161 In para 1202 of the judgment, Giles J commented that:
CONCLUSIONS OF GILES J
"…..in order to advise whether the appeal in Gambotto's case was likely to affect the proposal, he would have required to see the transcripts, and that he would have foreseen a successful appeal more readily after the grant of special leave and would have expected the High Court to decide the appeal by reference to principle rather than on the particular facts."
162 Taking account of his finding that Mr Heydon was made aware of the appeal, albeit in the loose sense to which reference has been made in para 54 above, Giles J concluded at para 1204 that Mr Heydon should have been aware of the appeal, consistently with the exercise of due care, skill and diligence. As his Honour put it:
"To this extent the NRMA's case was assisted, while remembering that the course which Mr Bennett would have taken and his expectation were not necessarily the general or required course and expectation of a lawyer acting with due care and skill - for example, they may have exceeded what was involved in the exercise of due care, skill and diligence. With a similar qualification, in saying that, for the reasons outlined, he did not think that the High Court was likely to express a principle so wide as to affect the proposal, Mr Bennett's evidence was adverse to the NRMA's case, but did not directly address that case in that it presupposed awareness of the possibility that Gambotto's case might impact on the proposal. Mr Bennett was asked to advise on that possibility. Even if Mr Bennett thought that Gambotto's case would not impact on the proposal, should a lawyer in the position of the defendants have adverted to the possibility?"
163 Mr Heydon's own experience was that about 50 per cent of appeals to the High Court succeeded and that the decisions were generally at the level of legal principle. The prospect of re-consideration at the level of legal principle was regarded by the learned trial Judge as "what matters". His Honour said that:
" Gambotto's case was a relevant case, at the least as a recent appellate discussion of what could constitute oppression, and had been cited prominently in the brief; it was specifically referred to at the conference as the most recent case in the area. The report at hand disclosed that an application for special leave to appeal had been filed, and even if Mr Heydon thought that the Court of Appeal was correct in what it had said it was incumbent on him, in my view, to take note that an application for special leave to appeal had been filed and follow it up to see whether special leave to appeal had been granted. If a grant of special leave to appeal had been granted, that would indicate that members of the High Court considered that there was a point of principle requiring clarification or correction, and that there was at least a prospect that the appeal would be allowed. So the filing of the application for special leave to appeal could not be ignored."
164 His Honour concluded that as at December 1993 Mr Heydon was an expert in the relevant field of the law and was briefed as such so that the exercise of reasonable care, skill and diligence required "appropriately thoughtful and informed analysis". The effect of the decision of the Court of Appeal was that, if the expropriation was fair, the fact of expropriation would not make the exercise of the power to change the articles invalid. Both McLelland J and the Court of Appeal found unhelpful the test of constraint according to exercise of the power bona fide for the benefit of the company as a whole, and the High Court had said much the same in earlier cases; see for example, Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457. Both McLelland J and the Court of Appeal had held that the outcome did not turn on oppression because of unfairness, because the acquisition of the shares was on fair terms. It was against this background that Giles J took the view, at para 1208, that:
"Had he noted and followed up the application for special leave to appeal, Mr Heydon would have found that special leave to appeal had been granted on 10 December 1993. Even if he did not then obtain the transcript of the application for special leave to appeal, he should have seen the prospect that the appeal would be allowed to which I have referred (which not to say that the appeal was more likely than not to succeed). What did the exercise of due care, skill and diligence, from someone expert in the relevant field of law, require?"
165 In my opinion, it was critical to the finding of negligence by the learned trial Judge that the present case be characterised as one of expropriation of a kind which the High Court struck down in Gambotto. 166 His Honour went on to say in para 1209:
"….if the appeal were upheld it was in prospect that it would be upheld pursuant to a principle fashioned by the High Court, other than a test of the exercise of the power bona fide for the benefit of the company as a whole, by which the fact of expropriation, quite apart from fairness, constrained the exercise of the power."
167 Giles J concluded that in his opinion an analysis of that kind should have led Mr Heydon to see in the grant of special leave to appeal in Gambotto a risk in proceeding by the resolutions in general meetings route. His Honour also said:
"The principle could be as blunt as that upon which McLelland J had apparently acted (and his Honour was a respected and experienced judge in this area), or could leave room for expropriation if a condition or conditions other than fairness were met, but the prospect was of constraint on the exercise of the power to amend the articles greater than as held in the Court of Appeal. At the heart of any such constraint was likely to be (as in fact was evident in the High Court's reasons, although for present purposes that must be put aside) that valuable proprietary rights were at stake, something foreshadowed in the observation of Priestley JA in the Court of Appeal that the divesting of property from an owner without that owner's consent will often attract community opinion that the divestment was oppressive and/or unjust. Whatever was meant by expropriation, and notwithstanding points of distinction such as those seen by Mr Bennett, if under the proposal members arguably lost valuable proprietary rights, a successful appeal in Gambotto's case could mean that the proposal could not be implemented by resolutions in general meetings."
168 In my opinion, not very much can be made of the latter point as the applicant was a litigant in person and there was not the interchange with the bench and counsel which might otherwise have occurred. The learned Judge also implied that the grant of special leave should have signalled the need to peruse the transcript of the argument on the appeal, which gave further grounds for analysis. Giles J referred to the fact that Mason CJ spoke of lack of power to amend articles with the effect of expropriating minority shareholders, not of oppression. So did Brennan J. McHugh J spoke of "prima facie oppression to take someone's shares away" and asked why a statutory power should not be read as subject to the exception, if it was not intended to be exercised to take away such a fundamental right as the right to possess a share. In para 1211 of the judgment, Giles J commented on the relevant passage, saying "the transcript is corrupt but the meaning is clear". Dawson J responded to a submission by counsel "One cannot say just because it is an expropriation it is oppressive" with a direct "Why not?". Giles J said:
"Perusal of the transcript of the special leave application, which I think should have been done, would have heightened concern about a risk, because the court did not call on the applicant."
169 At the same time, his Honour acknowledged in para 1212 that:
"Going back to December 1993, these attitudes in the High Court could and should have been foreseen by a barrister professing the expertise of Mr Heydon.
In my view, the risk of a decision on appeal adverse to an expropriation of shares in the circumstances of Gambotto's case should have been seen."
170 It is implicit in his Honour's reasons that it was the characterisation of the transactions or in the nature of an expropriation which posed the risk to proceeding by way of amendment to the articles by special resolution. In my view, however, if the characterisation was correct, it was not likely that a scheme with the same effect would have any better prospect of success. 171 His Honour said he did not overlook the evidence of Mr Bennett, but he was far from sure that, in the circumstances in which it was given in chief and by cross-examination, it could properly be taken as evidence of what the exercise of due care, skill and diligence required or did not require. He considered that Mr Bennett's evidence was balanced, if not outweighed, by the attention given by CU, ME and NS to the appeal as something to be known about in order properly to advise the NRMA, and by Professor Austin's express view, prior to the decision of the High Court, that a decision in favour of Mr Gambotto might present a problem because the compulsory extinguishment of membership might be necessarily oppressive. This was qualified by a reference to the benefit of the transcript of the argument, but his Honour considered that these attitudes would not have been unexpected "if the process of analysis I have described were undertaken". The fact that Mr Morgan saw the appeal in Gambotto as "something to be watched" in November 1994 tipped the scale further. His Honour's conclusion was that:
"There was a difference between the majority expropriating the shares of the minority and a divesting of all memberships in return for shares or cash, but common to both was that proprietary rights were compulsorily taken away by voting power in general meeting. A risk to compulsory divestment of membership should also have been seen, depending on the principle fashioned by the High Court and its basis, and the prospect to which I have referred included that the appeal in Gambotto's case would affect the implementation of the proposal."
172 It was submitted at the trial and on the appeal, however, that, taking Mr Bennett's evidence as evidence of what advice could have been given without carelessness, even though others might have seen and advised of a risk, it would not have been negligent for the appellants to conclude that Gambotto would not affect the proposal and so not advise of risk in proceeding by the resolutions in general meetings route. The learned trial Judge rejected this submission, repeating his doubt about this use of the evidence of Mr Bennett. At the same time it was recognised that a different opinion was at the least reasonably open. However, the learned trial Judge pointed out that Mr Bennett was asked to advise of the relevance to the implementation of the proposal of the appeal to the High Court in Gambotto, and his evidence presupposed awareness of the possibility that Gambotto might impact on the proposal. This led his Honour to point out that:
"The preponderance of such "expert" evidence as there was in what Mr Bennett, these firms, and Professor Austin thought and did or would have done, in my opinion favours the NRMA's case, and is consistent with the view to which I would have come in the absence of the assistance gained from that evidence."
173 In my opinion, in the present context a critical question was whether the proposed transactions could be characterised as involving an "expropriation", whether of the kind the subject of the decision in Gambotto, or any other kind. In this context, there is a somewhat remarkable statement by the learned trial Judge in para 1217, after he had reached the conclusions to which I have already referred, namely:
"Mr Heydon did not recognise or give thought to the possibility. In my opinion the issue posed was such that, notwithstanding that Mr Bennett saw a reasonably clear answer, there was still a risk which should have been recognised in advice to the NRMA."
174 The learned Judge then went on to express his conclusions in paras 1218 and 1219 as follows:
"Perhaps curiously, in order to repel a causation argument in connection with free shares/disadvantages negligence to which I will come, the NRMA itself submitted that Gambotto's case as decided by the High Court would not have prevented the demutualisation from proceeding. It said that there were two 'simple and obvious' features taking the proposal out of the reach of Gambotto's case . One was that there was no expropriation by a majority because the majority was not expropriating anything. The other was that everyone was treated equally, and all were given the same option. These features have some similarity to those underlying Mr Bennett's reasons for advising that Gambotto's case would not affect the proposal. They are, however, a product of knowledge after the event, and I am not moved by the NRMA's present stance in this respect to depart from what I have said in the preceding paragraphs."
175 It was contended on behalf of Mr Heydon in the appeal that the trial Judge erred in holding that, in responding to the revised brief delivered to him on 15 or 16 December 1993, Mr Heydon was negligent in failing to advert to the grant of special leave to appeal to the High Court in Gambotto and in failing to warn that, if that appeal was upheld, it might be upheld on grounds inimical to the validity of resolutions in general meetings, which had the effect that members of Association were deprived of their memberships. This ground was directed to the conclusion reached by his Honour in para 1218 of the judgment. In Gambotto at 444-445, Mason CJ, Brennan, Deane and Dawson JJ said:
"1218 In my opinion, therefore, in responding to the revised brief delivered on 15 or 16 December 1993 Mr Heydon should have adverted to the grant of special leave to appeal to the High Court in Gambotto's case , and should have warned that if the appeal were upheld it might be upheld on grounds inimical to the validity of resolutions in general meetings having the effect that members of the NRMA were deprived of their memberships. Mr Heydon may have thought, and said, the appeal would not succeed, or that if it succeeded it would not succeed on grounds relevant to the proposal, but he did not advert to Gambotto's case in this respect, to an appeal in Gambotto's case , or to risk. At the least, a warning whereby further consideration should be given to the risk when the appeal had been heard, with the benefit of the transcript of the argument, should have been given., If that had been done, as earlier explained the transcript of the argument would have given further grounds for the analysis I have described.
CONTENTIONS ON BEHALF OF MR HEYDON
1219 I do not think that, as faintly suggested in the conduct of Mr Heydon's case, failure to advert to the risk can adequately be explained by the reservation for a later occasion of advice on the other issues in the brief, or by the course taken at the conference on 2 February 1994 when those other issues had been raised in the brief of 25 January 1994 and the letter of 31 January 1994. Certainly the other issues and parts of the later brief and letter were to do with oppression, but oppression because of unfairness. The potential in the appeal to the High Court in Gambotto's case was in a sense to do with oppression, but not oppression because of unfairness; rather, oppression because of the expropriatory nature of the proposal. For reasons I have explained, oppression of that kind fell within the advice required of Mr Heydon in December 1993, but if it was not then the subject of advice there were occasions in February and March 1994 when, with appreciation that the issue was not oppression because of unfairness but oppression because of the expropriatory nature of the process, Mr Heydon should have returned to it."
176 Their Honours went on at 445 to distinguish between the inclusion of a power of expropriation in a company's constitution upon incorporation, on the one hand, and an amendment of the articles of association so as to confer upon the majority power to expropriate the shares of a minority. As their Honours said at 445:
"In the context of a special resolution altering the articles and giving rise to a conflict of interests and advantages, whether or not it involves an expropriation of shares, we would reject as inappropriate the 'bona fide for the benefit of the company as a whole' test of Lindley MR in Allen v Gold Reefs of West Africa Ltd . The application of the test in such a context has been criticized on grounds which, in our view, are unanswerable. It seems to us that, in such a case not involving an actual or effective expropriation of shares or of valuable proprietary rights attaching to shares, an alteration of the articles by special resolution regularly passed will be valid unless it is ultra vires, beyond any purpose contemplated by the articles or oppressive as that expression is understood in the law relating to corporations. Somewhat different considerations apply, however, in a case such as the present where what is involved is an alteration of the articles to allow an expropriation by the majority of the shares, or of valuable proprietary rights attaching to the shares, of a minority. In such a case, the immediate purpose of the resolution is to confer upon the majority shareholder or shareholders power to acquire compulsorily the property of the minority shareholder or shareholders. Of itself, the conferral of such a power does not lie within the 'contemplated objects of the power' to amend the articles."
177 In my opinion, the present case involved no attempt by a majority to expropriate the shares of a minority. According to the Shorter Oxford Dictionary, the ordinary meaning of "expropriate" is "to deprive of property" and the meaning of "expropriation" is "the action of depriving of property". The latter meaning says nothing in itself about the person acquiring the property or the terms of the acquisition. There is a secondary meaning not found in the Shorter Oxford Dictionary or the Oxford English Dictionary, which is in Garner's Dictionary of Modern English Usage and the American Heritage Dictionary in which the transitive verb "expropriate" is given the meaning "to transfer another's property to oneself". This may well be the sense in which the relevant term was used in Gambotto, although in the opening paragraph of the joint judgment at 437 their Honours described the purpose of the amendment as "to enable the shareholder holding 90 per cent or more of the issued shares to acquire compulsorily shares held by minority shareholders". The term is often used in the sense of compulsory acquisition. In this sense the word may have a connotation of disapproval where the circumstances in which or the terms on which the power is exercised are seen as unfair. A compulsory acquisition is nonetheless an expropriation even where the terms are entirely fair or even generous. The relevant proposal in this case was one to convert Association from a company limited by guarantee into a company limited by shares and guarantee. This required a special resolution to be adopted by not less than 75% of the members of Association voting in person or by proxy, at an extraordinary general meeting called for the purpose. Each of the members of Association had one vote. There is nothing in the evidence which identified any group of members as being in a position to control a majority of votes at a general meeting of members. There were some 1.8 million members. In my view, it cannot be said that, merely because the requisite majority might vote at a general meeting to pass the necessary special resolution, the consequence of the conversion of rights of membership in Association into a right to receive shares in Holdings and become a member of that company, or receive a cash payment in lieu, involved any element of expropriation. The essence of the proposal was the conversion of a right of membership in Association for which a subscription was paid into a right of membership in Holdings by the acceptance of shares to be issued by Holdings, in the event that the proposed change was approved by the requisite majority. 178 The conversion from a company limited by guarantee to a company limited by shares and guarantee is something which was expressly contemplated by the relevant provisions of the Corporations Law and its predecessors. It was not something which was simply contemplated by the articles. The introduction of Holdings as the entity to hold all of the shares in Association and Insurance would give the members of Holdings a financial interest in both companies, through their shares in Holdings. There is nothing to suggest that the proposal was one which was other than one taken for a "proper purpose", as that term was used in Gambotto. There is nothing to suggest that the proposal was inherently unfair, so far as the corporate procedure was concerned. 179 As I have noted, Mason CJ, Brennan, Deane and Dawson JJ said in Gambotto at 446 that the majority shareholders were required to disclose all relevant information leading up to the alteration. In the present case, it was apparent that there was no identified majority of members or a group of members who could be expected to combine together at a general meeting. Assuming that the defects in the prospectus could be rectified, the requirement to disclose all relevant information leading up to the alteration could have been satisfied. It is of the essence of the conversion of a company limited by a guarantee to a company limited by shares and guarantee that it must be open for a qualification of membership by annual subscription to be converted to a membership by virtue of shareholding, provided that the offer or allocation of shares is on a fair and equitable basis. So far as I have been able to ascertain, there was no suggestion that the way in which the number of shares to which a member of Association or, for that matter, a member of Insurance would become entitled, was other than fair. There was no suggestion of oppression. It seems to have been accepted that the formula for the calculation of the number of shares which members would receive, or the cash consideration payable if the offer of shares were rejected, was not susceptible to attack on the grounds of fairness. Their Honours said in Gambotto at 447 that it would be for the majority to prove that an alteration of articles providing for expropriation was valid. In my opinion, that would not apply in the present case because the contemplated transaction could not be characterised as one of expropriation, whether by the majority or otherwise. The transaction was one expressly contemplated by the articles, when read in conjunction with the relevant provisions of the Corporations Law. 180 The effect of Gambotto was that the compulsory acquisition or expropriation by a majority of the shares of a minority, for the purpose of excluding the minority who voted against the proposal from participation in the future conduct of the affairs of the company would be prima facie invalid. This was clearly to be distinguished from a proposal to give all members a greater right of participation by an offer of shares in a company proposed to be listed on the Stock Exchange, converting whatever limited rights they had as members of Association into shares in the holding company of Association, on a basis which would ensure the continuance of their rights to receive services, to which would be added the tangible benefits of the assets controlled by Insurance also being brought within the corporate umbrella of Holdings, by virtue of Insurance being a wholly owned subsidiary. 181 In the various cases which speak about expropriation of shares, the result is that not only does the holder of those shares cease to be a member and shareholder of the subject company, but the only right of that shareholder is to receive a fair price for the shares. The present case is clearly distinguishable because every person forming part of an assumed minority voting against the proposal had the option of becoming a shareholder in Holdings, and so continuing to receive not only the benefits of the services previously received as a member of Association (albeit by payment of an annual fee rather than a membership subscription) but, in addition, the prospect of receiving dividends and the benefit of ownership of a marketable security in the form of shares to be listed on the Stock Exchange in due course. Each member was given the option to accept a cash consideration in lieu of an allocation of shares. It was not suggested that the formula for the allocation of shares or determining the cash consideration in lieu was other than fair. In either case, it would represent a substantial financial gain in the nature of a windfall for those persons who relinquished their membership in Association in exchange either for shares or cash.
NO EXPROPRIATION
"Such a power could not be taken or exercised simply for the purpose of aggrandizing the majority. In our view, such a power can be taken only if (i) it is exercisable for a proper purpose and (ii) its exercise will not operate oppressively in relation to minority shareholders. In other words, an expropriation may be justified where it is reasonably apprehended that the continued shareholding of the minority is detrimental to the company, its undertaking or the conduct of its affairs - resulting in detriment to the interests of the existing shareholders generally - and expropriation is a reasonable means of eliminating or mitigating that detriment."
182 Counsel for Mr Heydon submitted that the key issue in Mr Heydon's appeal was the scope of his duty of care in relation to the brief to advise delivered on 15 or 16 December 1993. The relevant question put to Mr Heydon was:
SCOPE OF MR HEYDON'S DUTY OF CARE
183 Mr Morgan, at whose direction and under whose supervision the brief was prepared, saw Gambotto as contemplating that an expropriation of members' property could be oppressive because of unfairness on the particular facts. He did not then consider that Mr Heydon would be giving an opinion on whether the proposal would be unfair or oppressive to members. That would not be possible because the details of the proposals had not been developed. The question was whether there was any objection as a matter of principle to proceeding by way of members' resolutions. The alternative was to proceed by way of a scheme of arrangement under s411 of the Corporations Law. While reference was made in the brief to Gambotto, the case was not regarded by AAH as instructing solicitors as relevant to the main question, either in the observations in the brief or during a conference on 13 December 1993. There is no suggestion in the brief that a transaction involving something like expropriation was envisaged, which might invalidate the exercise of the power to amend the articles in the manner contemplated. What was involved was an exercise of the statutory power to convert from a company limited by guarantee to a company limited by shares and guarantee. Mr Heydon was not asked to express an opinion on the likelihood of success or otherwise in the appeal to the High Court in Gambotto. That case was then regarded as related to issues of oppression and not of relevance at that stage. 184 Mr Heydon's opinion identified the necessary changes to the articles of Association and Insurance. The provisions of the Corporations Law which permitted the changes to be made by special resolution were identified. The decision in Hennessy was distinguished on the basis that it was decided against a background of more limited legislation. It was made clear that the question of oppression was not then addressed, but would be dealt with in a later opinion. AAH, as instructing solicitors, had agreed to this.
"…whether there is a legal requirement to proceed by way of a scheme or arrangement under s411 of the Corporations Law or whether it is sufficient if the necessary resolutions are passed by members in general meeting?"
185 In my opinion, the answer Mr Heydon gave to the question of him correctly stated the law as it was generally understood to be as at 20 December 1993. The procedure which Mr Heydon considered could be adopted was that expressly contemplated in the Corporations Law itself. Members of Association were being asked to give up their membership of Association which gave them a right to vote at general meetings and the election of members of the board, as well as to receive road and other services from Association in consideration of the payment of a subscription. Clearly, these rights were of some value. They were transferable pursuant to article 5 of the Association's articles by which the board of directors might:
CORRECTNESS OF MR HEYDON'S OPINION AS AT 20 DECEMBER 1993
186 There was no evidence of the existence of any trade in membership. The value of membership was found by all concerned to be extremely difficult to quantify. While the members were being asked to give up their membership rights, they were being invited to do so on the basis that they could convert their membership of Association into an entitlement to an issue of shares in Holdings for which they would not have to pay. It was proposed that Holdings would become a listed public company and that Association and Insurance would become wholly owned subsidiaries of it. There was an expectation in that the very significant assets and profitability of the operations of Association and Insurance would be reflected in the value of the shares of Holdings, which would become a listed public company. At the same time, former members of Association would be entitled to continue to receive the road and other services which they had previously received, on payment of an annual fee. Those persons who did not wish to continue to be members of the NRMA, or who for other reasons did not wish to become shareholders in Holdings, were given the alternative of receiving a cash payment of an amount representing the value of the shares. The proposal did not include anything of the nature of compulsory acquisition by or on behalf of the majority. It was not part of the objective of what was proposed "to get rid of" any minority. The proposal invoked the machinery provided by the Corporations Law itself to facilitate the conversion of a company limited by guarantee to a company limited by shares and guarantee. It was also proposed that the members of Association would be entitled to interest in a new company referred to as "HoldCo" which in the result was Holdings. 187 If the necessary resolutions were passed by a majority of 75% or more, the effect would be that all of the persons who were members of Association would be entitled to accept the offer of shares in Holdings. They would not be excluded from participating in the conduct of the affairs of NRMA in its new structure. On the contrary, as both members and shareholders of Holdings they would have a much more direct and tangible legal and commercial interest in the affairs of the NRMA through the shareholding in Holdings. If, and only if, they did not want the shares, members were entitled to accept the offer of cash in lieu of shares.
"… approve, on such terms as they may determine, the transfer of a member's membership to any person entitled to apply …"
188 For more than a century it has been recognised by the courts that some limits must be placed on the power of shareholders within a company who are able to command a majority vote. In a range of circumstances the courts will intervene to invalidate the resulting resolution to restrain what has been traditionally described as "a fraud on the minority": cf Borland v Earle [1902] AC 83 at 93 per Lord Davey. The importance of the doctrine or concept of fraud on the minority has been greatly reduced by the introduction of the statutory remedy against oppression contained in s260 of the Corporations Law, which has its origin in s210 of the Companies Act 1948 (UK), and which provided a remedy to any member of a company who complained that the affairs of the company were being conducted in a manner oppressive to some part of the members, including himself. If satisfied that the facts would justify a winding up order on the just and equitable ground, the court could make an order accordingly but, if this would unduly prejudice the oppressed members, the court was empowered to make such order as it thought fit to regulate the conduct of the company's affairs in future, including an order that certain members or the company itself purchase the shares of any members, or otherwise bring to an end the oppression complained of. 189 At the material time in the present case, Gower's Principles of Modern Company Law (5th ed) 1992 at 596-598 dealt with the topic of resolutions to expropriate members' shares by saying:
LIMITATION OF POWER OF THE MAJORITY: OPPRESSION
190 In the previous edition, Modern Company Law (4th ed) 1979, Professor Gower said, at 620, under the heading "Expropriation of Other Members' Property":
"Resolutions falling under this head seem to the writer to present a stronger case for requiring members voting for such a resolution to consider whether it is in the best interests of the company. But, once again, it is not clear whether they are required to do so."
191 The first of the relevant authorities referred to in the 5th edition of Gower was Brown v British Abrasive Wheel Co [1919] 1 Ch 290. In that case a public company was in urgent need of further capital which the majority, holding 98 per cent of the shares, were willing to supply if they could buy out the minority. Having failed to persuade the minority to sell, it was proposed to pass a special resolution adding to the articles a clause by which any shareholder was bound to transfer their shares upon a request in writing of the holders of nine-tenths of the issued capital. Such a clause could have been validly inserted in the original articles: Phillips v Manufacturers Securities Ltd (1917) 116 LT 290. In particular, in the case of a company limited by guarantee it was proper to incorporate in the original articles a power entitling the council to require a member to resign: Gaiman v National Association for Mental Health [1917] Ch 317.
"Just as the controllers cannot exercise their voting power so as to deprive the company of its property, so, it is submitted, they are not entitled to use it so as to deprive the other members of their shares in the company. In this case, however, the prohibition is clearly not absolute and will not apply if such expropriation is for fair compensation and required in the interests of the company as a whole."
192 Despite the fact that such a clause could have been validly inserted in the original articles and although the good faith of the majority was not challenged, it was held in Brown by Astbury J that an attempt to add the clause in order to compulsorily acquire the shares of the minority, who had bought shares when there was no such power, could not be for the benefit of the company as a whole, but was solely for the benefit of the majority. An injunction was granted restraining the company from passing the resolution. 193 Considerable doubt was cast on the correctness of the decision in Brown by the judgment of the Court of Appeal in Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154. In that case a director-controlled private company had a minority shareholder who was interested in a competing business. A special resolution was passed empowering the directors to require any shareholder who competed with the company to transfer his shares, at their fair value, to nominees of the directors. The Court of Appeal, reversing the trial judge, held that the alteration was valid. It was held that the company had the statutory power to amend its articles so as to include any provision which could have been validly included in the original articles, provided that the alteration was made bona fide for the benefit of the company as a whole. As it was beneficial to the company to be able to rid its membership of a competitor, the alteration was valid. Brown v British Abrasive Wheel Co was distinguished as turning on the finding by the judge that the alteration was not made "for the benefit of the company as a whole". Both Lord Sterndale MR at 163 and Eve J at 172 made it clear that the decision in Brown was dependent on the particular findings of fact in that case and the notion that "bona fide" and "for the benefit of the company" were two separate things. Gower (4th ed) commented, at 621, that the members of the Court of Appeal "obviously had doubts whether they would have made the same finding". 194 In Dafen Tinplate Co v Llanelly Steel Co [1920] 2 Ch 124 Peterson J held that a new article conferring on the majority an unrestricted and unlimited power to buy out any shareholder they might think proper, went much further than was necessary for the protection of the company from conduct detrimental to its interests. Peterson J said, at 141, that his finding was one of fact and consistent with the decision in Sidebottom in that the alteration would be valid if for the benefit of the company as a whole. In this respect, he considered that the onus of proof was on those who sought to uphold the resolution and that the test was an objective one rather than a subjective one in terms of what the shareholders honestly believed. Peterson J referred to Brown at 139-140 noting the test applied in that case and that it was considered by the Court of Appeal in Sidebottom. No mention was made of the criticism of Brown. Peterson J merely said that Brown was "considered" by the Court of Appeal which reaffirmed the test applied by Lord Lindley MR in Allen v Gold Reefs of West Africa [1900] 1 Ch 656. While the decision in Brown may have been justified on its facts, the reasoning does not provide guidance in relation to principle. In Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457 at 509-510 Dixon J referred to Brown and the comments on that case in Sidebottom by Lord Sterndale MR at 167 and Warrington LJ at 172 saying that both made it clear that Astbury J:195 Each of the decisions so far considered implied that a resolution amending the articles to include an expropriation provision would be valid only if it were passed bona fide in the interests of the company, both in the opinion of the members and of the Court. In a later decision, not concerned with expropriation of shares, the Court of Appeal corrected the erroneous view expressed by Peterson J in Dafen and decided that it was for the members, and not the court to determine what was beneficial to the company and the court would only interfere only if the members had not acted in good faith: Shuttleworth v Cox Bros and Co [1927] 2 KB 9; and see Greenhalgh v Arderne Cinemas [1951] Ch 286. 196 In 1979 the position in the United Kingdom was that s209 of the Companies Act 1948 (re-enacting and extending s155 of the Companies Act 1929) conferred on a majority of nine-tenths of the shareholders rights of compulsory acquisition of the shares of the minority in certain limited circumstances and subject to certain safeguards. 197 In Re Bugle Press [1961] Ch 270, a decision of the Court of Appeal, the holders of 90 per cent of the shares, who wished to buy out the holders of the remaining 10 per cent formed a company and vested their shares in that company which then made a bid for the remaining shares and purported to acquire them under s209. This was held to be impermissible on the basis that to allow existing shareholders to use the section as a device to get rid of a minority whom they did not happen to like would be contrary to fundamental principles of company law; see per Evershed MR at 287 and Harman LJ at 287-288. Gower's 5th ed at 598 n42 comments that if Greenhalgh v Arderne Cinemas, in which Evershed MR also presided, is rightly decided it is not easy to find any such "fundamental principle" 198 It was also suggested in Gower (5th ed) at 598-599 that, particularly in cases of expropriation of a member's shares, "the members in general meeting are subject to a sort of fiduciary duty", namely, that the members must act bona fide in the interests of the company. This was seen as a limitation on other statements in the cases ( such as North-West Transportation v Beatty [1887] 12 App Cas 589; Burland v Earle [1902] AC 83; and Goodfellow v Nelson Line [1912] 2 Ch 234) that the votes of members of the company are proprietary rights, the same as any other rights attaching to shares, which the holder is generally entitled to exercise in his own interests, even if they are opposed to the interests of the company. A shareholder may bind himself or herself by contract to vote or not to vote in a particular way: Greenwell v Porter [1902] 1 Ch 530; and Puddephatt v Leith [1916] 1 Ch 200. It is for reasons like these that the doctrine of fraud on the minority appears to have been developed as a limitation on the abuse of majority power. 199 Buckley on the Companies Acts (14th Ed) 1981 vol 1 at 49 said that:
"… had been wrong in treating bona fides and benefit of the company as separate conceptions, and the justification, if any, for his decision lay in a finding of fact that the majority had acted entirely for their own benefit."
Dixon J also pointed out that Peterson J had decided Dafen on the basis that the test of the validity of the alteration was whether it could "properly be said to be for the benefit of the company": see at 141.
200 The requirement that the power must be exercised bona fide for the benefit of the company as a whole was derived from Allen v Gold Reefs of West Africa, Ltd (supra). In that case the Court of Appeal upheld a special resolution of the company altering its articles so that the company's lien for all debts and liabilities of any member of the company would extend, not only to partly paid shares, as was originally provided, but also to fully paid shares. Lord Lindley MR, at 671-672 held that s50 of the Companies Act 1862 (UK) conferred a broad power to amend the articles, subject to the general principles of law and equity applicable to all powers conferred on majorities and enabling them to bind minorities. Consequently, it was an implied condition of the exercise of the power that it be exercised, not only in the manner required by law but also bona fide for the benefit of the company as a whole, and that it must not be exceeded. Romer LJ at 678 agreed with the Master of the Rolls. Although Vaughan-Williams LJ dissented, his Lordship, at 676, was in essential agreement with the principle that an alteration must be made in good faith and without oppression to a shareholder.
"…..it appears that the limits upon the power of altering the articles conferred by this section [s10 Companies Act 1948 (UK)] are that it must be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities enabling them to bind minorities, that is to say, it must be exercised bona fide for the benefit of the company as a whole; and the phrase [the company as a whole] does not (in cases such as these) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. It may be more accurate to look at the converse and say that a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give the former an advantage of which the latter were deprived. But, apart from this limitation and the further limitation imposed by the opening words of the section, which required the alteration of the articles to be one which could validly have been embodied in the original articles, the right of alteration is unrestricted, and an alteration may be nonetheless for the benefit of the company as a whole, notwithstanding that it is a detriment to one or more members of the company."
The authority cited for the final proposition in that passage is Sidebottom v Kershaw, Leese & Co.
201 In Richard Brady Franks Ltd v Price (1937) 58 CLR 112 it was held by the High Court that where a challenge was made that a power of the directors to pass a resolution of the board had not been exercised bona fide for the benefit of the company as a whole, the onus was on the plaintiff who challenged the action of the directors to establish that they did not act bona fide for the benefit of the company. Latham CJ at 135-136 applied Allen v Gold Reefs of West Africa, Ltd. The same test was applied by Rich J at 138 although he also expressed the view that:
THE AUSTRALIAN AUTHORITIES
202 In Peters' American Delicacy Company Ltd v Heath (supra), which was decided two years later, the High Court upheld special resolutions altering the articles of a company relating to the capitalisation of profits, such that a distribution of shares would take place in accordance with the amount paid up on the shares, in substitution of a previous articles providing for distribution in accordance with the numbers of shares. At the same meeting, resolutions were passed increasing the capital of the company and for the promotion of a new company, to which the existing company would sell a portion of its assets, on the basis that the sale proceeds would be put in a special reserve account and then distributed to shareholders by way of a bonus dividend, to be satisfied by the issue of fully paid shares in a company. First, Latham CJ held that a company cannot deprive itself of the statutory power to alter its articles of association either by agreement or by a provision contained in the articles: Malleson v National Insurance and Guarantee Corporation [1927] 2 KB at 18,23; and Allen v Gold Reefs of West Africa, Ltd (supra). Secondly, it followed, according to the Chief Justice, at 479 that:
"No court 'should consider itself fettered by the form of words, as if it were a phrase in an Act of Parliament which must be accepted and construed as it stands' ( Shuttleworth v Cox Brothers & Co (Maidenhead) [1927] 2 KB at 26)."
Dixon J said at 143:
"Those impeaching the transaction must sustain the burden of proving that the directors acted in their own interests and were not in fact exercising their powers in supposed furtherance of any purpose or advantage of the company. In considering such a question, it is important to ascertain what are the purposes for which powers are given and to remember that the fiduciary duty of the directors is to the company and the shareholders."
203 The fifth proposition was that the power to alter the articles must be exercised bona fide. Latham CJ at 480-481 approved the statement by Lindley MR in Allen's case at 671, and in particular the proposition that the power of alteration must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole and must not be exceeded. Latham CJ at 481 also accepted that it was not for the court to impose upon a company the ideas of the court as to what is for the benefit of the company. That was for the shareholders to determine, subject to the proviso that the decision was not such that no reasonable man could have reached: Shuttleworth v Cox Brothers Co (Maidenhead) Ltd (supra). The Chief Justice also said at 481 that this was not an absolute rule, but it was the prima facie general rule: Carruth v Imperial Chemical Industries Ltd [1937] AC 707. 204 Latham CJ went on to say at 481-482, however, that:
"It is not possible, by articles of association, to make an unalterable article. If it is desired to place the rights of particular shareholders beyond the risk of being affected by an alteration of articles it is possible to include provision in the memorandum of association which will have that effect."
Thirdly, his Honour went on to say that it followed that the contract between the members of the company and between the company and its members constituted by the articles must be regarded as containing among its terms a provision that articles may be altered in the manner provided by the Act, that is, by a special resolution. An alteration in a particular case may constitute a breach of contract with a shareholder, but such a breach of contract does not invalidate the resolution to alter the articles: Allen's case. Fourthly, it followed that where the rights of members of the company depend upon the articles, it was possible to alter the rights of members or some only of the members by altering the articles. The Chief Justice went on to say at 480:
"The fact that an alteration prejudices or diminishes some of the rights of the shareholders is not in itself a ground for attacking the validity of an alteration: see Sidebottom v Kershaw Leese & Co Ltd [supra] (expelling a shareholder); Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [supra] (disqualifying a director); Allen's case [supra] (creating a lien upon shares). Any other view would, in effect, make unalterable and permanent any articles of association which conferred rights upon a class of shareholders, or possibly upon any shareholder, if they or he desired that those rights should continue to exist unchanged. It is plainly not the law that the fact that an alteration of articles alters the rights or prejudices the rights of some shareholders is sufficient to prevent the alteration from being validly made."
205 The Chief Justice also said at 482:
"The benefit of the company as a corporation cannot be adopted as a criterion which is capable of solving all the problems in this branch of the law. An alteration which is made bona fide and for the benefit of the company, if otherwise within the power, will be good, but it is not the case that it is necessary that shareholders should always have only the benefit of the company in view. In cases where the question which arises is simply a question as to the relative rights of different classes of shareholders the problem cannot be solved by regarding merely the benefit of the corporation. I refer to Pender v Lushington [1877] 6 Ch D 70 at 75,76 and Mills v Mills (1938) 60 CLR at 164, a case of the exercise of powers of directors in relation to the 'interests of the company'. See North-West Transportation Co Ltd v Beatty [1887] 12 App Cas 589, where it was held that a shareholder may vote as he pleases even when his interests are different from or opposed to those of the company. Shareholders are not trustees for the company or for one another and the relations between them cannot be identified with the relations between partners ( Phillips v Manufacturer's Securities Ltd (1917) 116 LT 290). But though a shareholder may vote in his own interests the power of shareholders to alter articles is limited by the rule that the power must not be exercised fraudulently or for the purpose of oppressing a minority: See Cook v Deeks [1916] 1 AC 554 at 564; Menier v Hooper's Telegraph Works [1874] 9 Ch App 350; Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [supra] ; Carruth v Imperial Chemical Industries Ltd [1936] Ch 587; [1937] AC 707.
(7) When the validity of a resolution of shareholders is challenged, the onus of showing that the power has not been properly exercised is on the party complaining. The court will not presume fraud or oppression or other abuse of power."
206 Rich J, at 494-495 said that:
"The result of applying these principles is that the special resolution altering the articles cannot be declared to be invalid merely upon the ground that the original articles conferred special rights upon the holders of partly paid shares of which the alteration deprived them, or upon the ground that the voting holders of fully paid shares were interested in making the alteration adversely to the holders of partly paid shares. If, however, the resolution was passed fraudulently or oppressively or was so extravagant that no reasonable person could believe that it was for the benefit of the company, it should be held to be invalid."
207 Dixon J said at 503:
"No rights given by articles of association can prevail against a three-fourths majority and it is well understood that all are subject to it. It is true that the power of alteration must be exercised bona fide with a view to the advancement of the company considered as a whole and not with a view to the advancement of the interests of a majority of voters or of a section of the company only ( Richard Brady Franks Ltd v Price (1937) 58 CLR 112 at 138 ; Mills v Mills (1938) 60 CLR at 169, 170). But in deciding what is for the interest of the company and what is bona fide, the constitution of the company, the condition and effect of the various articles of association and the extent to which rights are conferred upon different classes of shareholders are relevant and important. This seems to be the effect of Allen v Gold Reefs of West Africa, Ltd [1900] 1 Ch 656; British Murac Syndicate Ltd v Alperton Rubber Co Ltd [1915] 2 Ch 186; Sidebottom v Kershaw, Leese & Co Ltd [1920] 1 Ch 154 and Shuttleworth v Cox Brothers & Co (Maidenhead) Ltd [1927] 2 KB 9. Where the very problem which arises contains as inherent in itself all the elements of a conflict of interests between classes of shareholders these authorities do not mean that the power of alteration is paralysed, they mean only that the purpose of bringing forward the resolution must not be simply the enrichment of the majority at the expense of the minority."
208 Dixon J acknowledged later on 504 that reliance upon the general doctrine that powers shall be exercised bona fide and for no "bye or sinister purpose" brought its own difficulties. It was pointed out at 504 that:
"It is the province of the memorandum of association to fix the constitution and nature of the company, and the power of altering the articles is subject to whatever restrictions it may contain. But no article as such could be made unalterable."
His Honour also noted at 503-504 that:
"After the abandonment of the distinction between, on the one hand, matters of administration and management admittedly subject to the power of alteration and, on the other, matters going to the constitution of the company and said therefore to be outside the power, the courts sought for a limitation in the more general doctrine that a power must be exercised bona fide for the end for which the power is designed. Primarily a share in a company is a piece of property conferring rights in relation to distributions of income and of capital. In many respects the proprietary rights are defined by the articles of association, and it is easy to see that a power of alteration might be used for the aggrandisement of a majority at the expense of a minority. For example, if there were no check upon the use of the power, it is conceivable that a three-fourths majority might adopt an article by which the shares which they alone held would participate, to the exclusion of other shares, in the surplus assets in winding up or even in distribution of profits by way of dividend."
209 After referring to a number of the authorities, including Cook v Deeks [1916] 1 AC 554, Dixon J said, at 506-507:
"The power of alteration is not fiduciary. The shareholders are not trustees for one another, and, unlike directors, they occupy no fiduciary position and are under no fiduciary duties. They vote in respect of their shares, which are property, and the right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner's personal advantage."
210 In Sidebottom at 173, Eve J had referred to the question what is meant by mala fides and said:
"A power to alter articles of association is necessarily a power to alter the rights of shareholders inter se , including their mutual rights in respect of profits and surplus assets. It is therefore evident that some difficulty must arise in applying to resolutions for the alteration of articles a statement of principle which assumes the independent existence of rights which should not be impaired or destroyed. Prima facie rights altogether dependent upon articles of association are not enduring and indefeasible but are liable to modification or destruction; that is, if an when it is resolved by a three-fourths majority that the articles should be altered. To attempt to distinguish between alterations which deserve the epithet fraudulent or oppressive or unjust and those deserving no moral censure without explaining the considerations upon which the distinction depends, is to leave the whole question to general notions of fairness and propriety."
"Speaking for myself, I do not think the solution of that question is assisted by the use of such phrases as 'the ordinary principles of justice.' 'just and equitable' or 'oppressive'."
211 His Honour went on to say at 507-508:
As to that Dixon J said in Peters at 507:
"To base the application of the epithets upon the circumstance that the majority obtain a benefit by the change seems to involve some departure from the principle that the vote attached to a share is an incident of property which may be used as the shareholder's interests may dictate."
212 So far as Allen's case is concerned, Dixon J noted at 508 that, for the decision of that case, it was enough to say that an alteration which was made "bona fide for the benefit of the company as a whole" could not be invalid. It was noted that Lindley MR had gone on to say that if these conditions were complied with he could discover no ground for judicially putting any other restrictions on the power. As to this, Dixon J commented at 508 that:
"But, whatever may constitute bad faith, it is evident that, if a resolution is regularly passed with the single aim of advancing the interests of a company considered as a corporate whole, it must fall within the scope of the statutory power to alter the articles and could never be condemned as mala fides. A positive test was therefore available, conformity with which necessarily spelt validity."
213 Dixon J then proceeded to review the decisions in Brown v British Abrasive Wheel Co Ltd; Sidebottom v Kershaw, Leese & Co Ltd; Dafen Tinplate Co Ltd v Llanelly Steel Co (1907) Ltd; and Shuttleworth v Cox Brothers Co (Maidenhead) Ltd. At 511 Dixon J explained the need for putting some restraint on the power to alter the articles of a company as follows:
"Lord Lindley's statement was taken in some subsequent cases as formulating the issue on which validity or invalidity depended absolutely, viz, whether 'the power had been exercised bona fide for the benefit of the company as a whole.' "
214 His Honour went on to say at 511-512:
"If no restraint were laid upon the power of altering articles of association, it would be possible for a shareholder controlling the necessary voting power so to mould the regulations of a company that its operations would be conducted or its property used so that he would profit either in some other capacity than that of member of the company or, if as member, in a special and peculiar way inconsistent with conceptions of honesty so widely held or professed that departure from them is described, without further analysis, as fraud. For example, it would be possible to adopt articles requiring that the company should supply him with goods below cost or pay him ninety-nine per cent of its profits for some real or imaginary services or submit to his own determination the question whether he was liable to account to the company for secret profits as a director."
215 In the present context it is significant that Dixon J concluded at 513 that:
"The chief reason for denying an unlimited effect to widely expressed powers such as that of altering a company's articles is the fear or knowledge that an apparently regular exercise of the power may in truth be but a means of securing some personal or particular gain, whether pecuniary or otherwise, which does not fairly arise out of the subjects dealt with by the power and is outside and even inconsistent with the contemplated objects of the power. It is to exclude the purpose of securing such ulterior special and particular advantages that Lord Lindley used the phrase 'bona fide for the benefit of the company as a whole'. The reference to 'benefit as a whole' is but a very general expression negativing purposes foreign to the company's operations, affairs and organisations. But unfortunately, as appears from the foregoing discussion, the use of the phrase has tended to cause misapprehension. If the challenged alteration relates to an article which does or may affect an individual, as, for instance, a director appointed for life or a shareholder whom it is desired to expropriate, or to an article affecting the mutual rights and liabilities inter se of shareholders or different classes or descriptions of shareholders, the very subject matter involves conflict of interests and advantages. To say that the shareholders forming the majority must consider the advantage of the company as a whole in relation to such a question seems inappropriate, if not meaningless, and at all events starts an impossible inquiry. The 'company as a whole' is a corporate entity consisting of all the shareholders. If the proposal put forward is for a revision of any of the articles regulating the rights inter se of shareholders or classes of shareholders, the primary question must be how conflicting interests are to be adjusted, and the adjustment is left by law to the determination of those whose interests conflict, subject, however, to the condition that the existing provision can be altered only by a three-fourths majority."
216 In this case the immediate question was the conversion of Association from a company limited by guarantee to a company limited by shares and guarantee by which members of Association would cease to be such, but would become, if they so elected, shareholders in Holdings. This was the kind of resolution which Dixon J noted at 513 as one in which in voting for or against the resolution shareholders were not bound to disregard their own interests. 217 In my opinion, the comment in the passage in para 213 above is particularly apposite in the present case. Following their review of the relevant authorities referred to by Dixon J in Peters, Mason CJ, Brennan, Deane and Dawson JJ said in Gambotto at 443-444:
APPLICATION OF THE AUTHORITIES TO THIS CASE: NO EXPROPRIATION
"But, when the very question to be determined is a conflict of interests, unless the subject matter is held outside the power, the purpose of the resolution, as distinguished from the motives of the individuals, often must be to resolve the conflict in favour of one and against the other interest."
218 So far as the latter point is concerned, their Honours referred to Richard Brady Franks Ltd v Price at 135; Mills v Mills at 187-188; Ngurli Ltd v McCann 1953) 90 CLR 425 at 440; Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483 at 493; and Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 287. 219 Their Honours continued at 444:
"In conformity with the views expressed in Peters , the use of the expression 'for the benefit of the company as a whole' is no longer influential in the context of an alteration of the articles designed to effect or authorize the expropriation of a minority's shares. But the expression is still in vogue in the context of the exercise by directors of their powers, particularly the power to issue or allot shares."
220 It is important to bear in mind that while the view was expressed in the joint judgment in Gambotto at 444-445 that the expression "for the benefit of the company as a whole" was "no longer influential" in the context of an alteration to effect or authorise the expropriation of a minority's shares, the test was still relevant in the context of the exercise of the power of the directors to issue or allot shares. In my opinion it would also be relevant in the context of an alteration of the memorandum and articles of association which might have the effect of compulsory acquisition. For example, a proposal to restructure by offering shareholders in company A shares in company B in exchange for their shares in company A, with a cash alternative for those who did not wish to exchange, would not, without more, suggest an expropriation in the sense in which that term has been widely used in the corporate context. 221 It Gambotto at 445 their Honours formulated the test that an expropriation may be justified where it is reasonably apprehended that the continued shareholding of the minority is detrimental to the company, its undertaking or the conduct of its affairs, resulting in detriment to the interests of the existing shareholders generally. It was recognised that expropriation is a reasonable means of eliminating or mitigating that detriment. Consequently, the transaction must be one capable of being characterised as an expropriation. In such a case, as their Honours put it at 446:
"The foregoing analysis of the authorities reveals that the courts have struggled to strike a balance between the interests of the majority and the minority. On the one hand, the courts have recongized that the proprietary rights attaching to shares are subject to modification, even destruction, by a special resolution altering the articles and that the power to vote is exercisable by a shareholder to his or her own advantage. On the other hand, the courts have acknowledged that the power to alter the articles should not be exercised simply for the purpose of securing some personal gain which does not arise out of the contemplated objects of the power. The problem of stating a workable criterion arises, as Dixon J said in Peters at 507, 'in attempting to discover and fasten upon some element the presence of which will always vitiate a resolution for the alteration of articles of association'."
222 In all of this discussion it is as well to bear in mind the comments of Jacobs J in Crumpton v Morrine Hall Pty Ltd (1965) NSWR 240 at 244 that:
"…….an alteration to the company's articles permitting the expropriation of shares will not be valid simply because it was made for a proper purpose; it must also be fair in the circumstances. Fairness in this context has both procedural and substantive elements. The first element, that the process used to expropriate must be fair, requires the majority shareholders to disclose all relevant information leading up to the alteration ( Re John Labatt Ltd (1959) 20 DLR (2d) 159 at 163) and it presumably requires the shares to be valued by an independent expert. Whether it also requires the majority shareholders to refrain from voting on the proposed amendment is a question that is best left open at this stage."
223 It is difficult to find a suggestion in the cases or texts that what cannot be done under the power to amend the articles can be done by a scheme of arrangement. Re International Harvester Co of Australia Pty Ltd (1953) VLR 669 was referred to by counsel for Mr Heydon as authority for the proposition that where the Corporations Law lays down a special procedure for dealing with a particular matter, the court cannot approve of a scheme of arrangement to the same effect. The question was whether a change to the memorandum of Association to allow a proprietary company to take money on deposit could only be implemented under the specific provisions of s6 of the Companies Act 1938 (Vic) or whether it could be achieved under the scheme of arrangement provisions in s153 of the Companies Act. Martin J said at 675:
"It seems to me that the truth is that the Courts in each generation or in each decade have set a line up to which shareholders have been allowed to go in affecting the rights of other shareholders by alteration of Articles of Association, but beyond which they have not been allowed to go. It seems to me that no amount of legal analysis or analytical reason can conceal the fact that the decision has in the past turned, and must turn ultimately, on a value judgment formed in respect of the conduct of the majority - a judgment formed not by any strict process of reasoning or bare principle of law but upon the view taken of the conduct."
224 Section 6 of the Victorian Act was a widely expressed provision relating to alterations to the memorandum. It was held that the alteration to the memorandum set out in the proposed scheme fell within s6 of the Act with the consequence that the application for the sanctioning of the scheme of arrangement was dismissed.
"The authorities make it clear, I think, that s153 is to be construed liberally, and that it is wide enough to include schemes altering the provisions in a memorandum relating to the share capital of a company; and it may be that it extends so far as to cover schemes altering other provisions in a memorandum. But however widely the language of s153 may be construed, it cannot, of course, operate to enable a company to escape from compliance with those provisions of the Act which, either expressly or by implication, lay down a special and exclusive procedure for effecting certain kinds of alterations to the memorandum."
225 In Gambotto at 444-445 Mason CJ, Brennan, Deane and Dawson JJ said that:226 For the reasons which I have indicated, I do not consider that the present case involves "an actual or effective expropriation of shares or of valuable proprietary rights attaching to shares." In reaching that conclusion, I am prepared to accept that membership of Association and enjoyment of the rights associated with such membership can be equated with a shareholding for the purposes of the application of the relevant authorities. 227 In my view, as the law stood, as at 20 December 1993, and at all material times until 8 March 1995, a number of propositions can be stated in the light of the various authorities and the relevant statute law. First, the Corporations Law conferred a power to amend the articles of Association in terms broad enough to encompass the proposal put to Mr Heydon, including the giving up of the status and rights of membership in Association in exchange for a right to receive shares in Holdings, without payment of any further consideration or to receive a cash payment in lieu. All members of Association were offered that right, including those who voted against the proposal. Upon the assumption that the number and value of the shares to be offered, or the amount of the payment to be made to members who did not accept the offer of shares, was fair and not oppressive there was no prima facie abuse of majority power. There was no suggestion to the contrary in the present case. Any member alleging unfairness or oppression would bear the onus of proof. If there were circumstances suggestive of oppression of the minority (an issue which Mr Heydon reserved for later consideration) that could be used as the basis for a challenge to the amendment of the articles or to the approval of a scheme whichever procedure was adopted. The scheme provisions were not a code governing the proposed alterations to the exclusion to the power to amend the articles. Any provision which could have been included in the articles at the outset, could in principle be introduced by later amendment. It followed that there was nothing to suggest that there was any legal requirement to proceed by way of a scheme of arrangement rather than an amendment to the articles.
"… in such a case not involving an actual or effective expropriation of shares or a valuable proprietary rights attaching to shares, an alteration of the articles by special resolution regularly passed will be valid unless it is ultra vires, beyond any purpose contemplated by the articles or oppressive as that expression is understood in the law relating to corporations. Somewhat different considerations apply, however, in a case such as the present where what is involved is an alteration of the articles to allow an expropriation by the majority of the shares, or of valuable proprietary rights attaching to the shares, of a minority. In such a case, the immediate purpose of the resolution is to confer upon the majority shareholder or shareholders power to acquire compulsorily the property of the minority shareholder or shareholders. Of itself, the conferral of such a power does not lie within the 'contemplated objects of the power' to amend the articles."
Peters at 511 was cited as authority for the proposition in the last sentence. It should be noted, however, that Dixon J said in Peters at 511-512 that the relevant consequence followed from applying the test as formulated by Lord Lindley.
228 The learned trial Judge took the view that because the expropriation in Gambotto was on admittedly fair terms, the potentiality in the appeal to the High Court was for a new principle to be fashioned by which an expropriation could survive only if it satisfied some test in addition to fairness: see paras 1208-1210 of the judgment. In my opinion, it was well within the range of opinions which might be reasonably and competently held for senior counsel of the level of expertise of Mr Heydon to conclude that there was no significant risk of the proposals, as they were put before him, being held by the High Court to constitute the equivalent of "an actual or effective expropriation" of the membership or membership rights of the members of Association and, in particular, the membership rights of those persons who were opposed to the demutualisation proposal. It was not suggested that any reasonably competent counsel would have advised that any risk arising from the decision in Gambotto could be lessened or overcome by using a scheme. 229 In my view, the decision of High Court in Gambotto on 8 March 1995 substantially altered the settled law as it was understood to be as at 20 December 1993 in four respects. First, it held that an amendment to the articles of a company to allow the majority to expropriate the minority's shares would be invalid, unless it fell within a very narrow range of permitted purposes and, in particular, a purpose of securing the company from significant detriment or harm. Secondly, the previous law relating to the onus of proof was departed from so that it was now for the majority to prove that its purpose was a "proper purpose" rather than for the minority to prove that the purpose was an improper purpose. Thirdly, there was a sharp distinction to be drawn between a situation where a company included an article permitting expropriation in its articles at the outset, on the one hand, and an amendment to introduce such an article, on the other hand. Fourthly, there was imposed a new and additional requirement of fairness, both substantive and procedural which required, for the first time, full disclosure of all relevant information to shareholders, an independent valuation and raised the possibility of the majority not voting. It was not held that any exercise of the power to amend the articles to effect an expropriation of shares was necessarily oppressive. It was not suggested that it was necessary in every case that the amendment to the articles be adopted by way of a scheme of arrangement approved by the court, instead of seeking an amendment to the articles by resolution in extraordinary general meeting in the manner specifically contemplated by the Corporations Law provisions to which I have referred. 230 Once it is accepted that a reasonably competent senior counsel in the position of Mr Heydon, having concluded that, on the assumption that there was no unfairness or oppression, the proposed alterations could be achieved by resolution in an extraordinary general meeting and given that, in my opinion, the transaction contemplated could not be characterised as one involving expropriation of the membership rights of any minority the question of a duty, if any, to follow up on the special leave application by obtaining a copy of the transcript and later obtaining a copy of the argument on the appeal had no bearing on the matter. In any event, there was no suggestion in the transcript of evidence at the trial that the alleged oppression arose by reason of adopting an amendment to the articles as opposed to proceeding by way of a scheme of arrangement. There was nothing to suggest that the decision of the appeal would deal with issues relating to a corporate restructure of the kind proposed by the NRMA, as distinct from the basis upon which the majority in Gambotto could acquire the shares of the minority. There was no suggestion that the High Court would introduce new constraints on the power to amend the articles in the terms in which it did, as distinct from adapting or reformulating the relevant test to take account of the criticism of the test in Allen's case by Dixon J in Peters. 231 It is against this background that the contentions on behalf of the NRMA that, after his opinion of 20 December 1993, Mr Heydon was negligent in failing to advise in February or March 1994, or possibly as late as April 1994, that there was a risk that Gambotto would be decided in a way which would adversely affect the demutualisation proposal. In my opinion, for the reasons already stated, there was no reason for Mr Heydon to give such advice. The relevant dates were 2 February, 7 March and 29 April. As to the first two of these occasions, the learned trial Judge held that no relevant inquiry was made of Mr Heydon regarding oppression and, in particular, no inquiry regarding the implications of the decision in Gambotto. The learned Judge concluded in para 444 that, at the conference on 2 February 1994, Mr Heydon was called upon to advise on matters referred to in a letter dated 31 January 1994 to Mr Heydon from AAH. Advice was given on the basis that the relevant test for oppression in the context was one of fairness. The advice given was to the effect that an allocation of entitlements of the type outlined in the instructions was unlikely to be made the basis of a success from oppression suit. As Mr Heydon said, it "looks okay". 232 There was no reference to Gambotto at that conference or at the conference on 7 March 1994. There was a discussion on that date about a scheme of arrangement as one of three possible ways of forcing an allotment of shares on a non-responding member. The others were by way of amendment to the articles or the use of a trust. 233 There was also a contention by the respondent that, even as late as 29 April 1994, advice should have been given by Mr Heydon and the solicitors about the potential impact of the decision in Gambotto. There was, in the meantime, more time to consider the implication of what was proposed in terms of oppression, a greater likelihood of discovering the grant of leave in Gambotto, the nature of the arguments on the appeal and the discussion of them in the hearing before the High Court. In the meantime, of course, theBoards of Association and Insurance had approved the proposal on 17 March 1994. As then described in the papers for the Board, "the key aspects" of the proposal were:
MR HEYDON'S OPINION REASONABLE AND COMPETENT
234 It is significant that notwithstanding his earlier conclusions, the learned trial Judge gave further consideration to the period after December 1993 in para 1219 and concluded that, as oppression was a matter on which advice had been sought in December, "there were occasions in February and March 1994 … Mr Heydon should have returned to it". With respect, I do not consider that this conclusion was consistent with the earlier findings. 235 The learned Judge found that the evidence of what occurred at the conference on 7 March 1994 was incomplete and there were divergent recollections. Mr Heydon said that he was not asked for and did not give any opinion concerning oppression on this occasion and did not do so. There was no request in the brief for a written opinion. Mr Morgan's evidence was that there was extensive discussion about s180(3) of the Law, the use of a trustee, changing the articles, and the possibility of proceeding by way of a scheme of arrangement. Mr Simpson's recollection was similar, including the absence of any discussion regarding oppression. He had no recollection of any discussion regarding Gambotto. Mr Bateman's evidence was that there was some discussion of the possibility of making shares available in Holdings to persons who were not members of Association or Insurance, but Mr Heydon advised restricting the issue of such shares to members of Association or Insurance. Mr Heydon agreed that a scheme of arrangement was one way of dealing with the issue of shares. He confined the discussion of s180(3) as well as an allotment of shares to a trustee pending instruction. Mr Bateman did not recall any discussion of oppression or Gambotto.
"2.1.2 Establishment of a listed holding company to control the major existing operating companies (Association, Insurance, and Life) as subsidiaries (Appendix 2).
2.1.3 Offer members shares in the new company so that members can become directly entitled to the wealth of the NRMA. Entitlements to shares would be based on a formula reflecting length of membership (see Appendix 3).
2.1.4 A special provision would be enshrined in the Articles to provide for continued advocacy and mutual type service activities.
2.1.5 The key concept of NRMA membership will continue, by allowing people to join a 'club' for the purposes of receiving the member services currently available.
The accompanying papers did not go into any further detail. This was past the date when the NRMA had committed to the demutualisation proposal and was not an occasion which called for detailed advice about oppression.
2.1.6 The restructuring proposed would require changes in the Memorandum and Articles of both the Association and the Insurance company. Thus the restructuring would be implemented only upon approval by 75 per cent of the members voting at a general meeting of members to authorise the restructuring."
236 In para 475 of his judgment the learned Judge commented that:237 The conclusions expressed in the preceding paragraphs are in themselves sufficient to allow the appeal and set aside the decision of the learned trial Judge. There were a number of other points taken, however, with which I consider I should deal. The content of the duty of care in a particular case is governed by the relationship of proximity giving rise to that duty: Hawkins v Clayton at 579. The assumption of the responsibility and reliance will, in general, determine the content of the duty: Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418. There was no evidence that Mr Heydon assumed a responsibility for making a prediction how the law might change or develop during the prospective life of the proposal. There was no evidence that Mr Heydon's instructing solicitors or the relevant officers of the NRMA relied upon his opinion as involving any prediction. Such evidence as there was suggested to the contrary: see the evidence of Mr Morgan referred to in para 1111 of the judgment and Mr Bateman's at p5198.4 of the transcript. On the basis of the material before him, I do not consider that, at the time he gave his advice, there was any want of due care, skill or diligence on the part of Mr Heydon in failing to foresee as a real or significant risk that the decision in Gambotto would have any adverse consequences for what was proposed by the NRMA as at 20 December 1993. It follows that Mr Heydon's appeal should be allowed.
"If it was implicit in Mr Heydon's advice that non-responding members could not be obliged to become shareholders in HoldCo pursuant to resolutions of Association or Insurance, but that they could be so obliged pursuant to a scheme of arrangement (although it is not easy to come to this conclusion on the state of the evidence), that was not expropriation of shares but the reverse, and Gambotto's case was not relevant. There was no reason to give advice about Gambotto's case or oppression, and it was not given."
There was a conflict of evidence whether something was said about "free-shares" at the conference on 7 March 1994. The only person who recollected such a discussion on 7 March 1994 was Mr Simpson. In the end the extent of Mr Simpson's recollection was that Mr Heydon had said the issue of shares was capable of being described as "free", but no more, and that whether that description was misleading or inaccurate would depend on the context. Mr Heydon denied any such discussion, Mr Simpson admitted his recollection was not firm, and no-one else at the conference remembered it. The learned Judge declined to find that there was anything said of any significance on that subject on that occasion.
MR HEYDON NOT NEGLIGENT
238 The learned Judge said in relation to the Gambotto liability claim against AAH and AT that the reasoning outlined in relation to Mr Heydon applied "in principle" to AAH and AT. His Honour rejected the submission on their behalf that it was not a breach of their duty of care to fail to be aware of the application for special leave to appeal, or of the appeal, or to fail to perceive that the decision of the High Court in Gambotto might present a risk to the proposal. The learned Judge then said at para 1224:
GAMBOTTO AND THE LIABILITY OF AAH AND AT
239 The learned Judge went on to say in para 1226:
"Mr Morgan and Mr Bateman professed and had expertise in corporations law. They could and should have followed up the application for special leave to appeal, and undertaken the analysis I have described - they were not tyros in the field, or general practitioners entitled to rely on others with greater expertise. What I have said in relation to Mr Heydon applies to them also. But there was more.
1225 Mr Bateman had questioned whether a minority [ sic ] of members could deprive the majority [ sic ] of membership, and Gambotto's case had been specifically raised by Mr Morgan as the answer to his concern. Mr Bateman's answer was that Gambotto's case as decided in the Court of Appeal may not provide a sound basis for proceeding by the resolutions in general meetings route, for reasons only partially involving necessarily oppressive expropriation, but one would have expected Mr Morgan and Mr Bateman to ensure that the application for special leave to appeal was followed up and that regard was had to the pending appeal in the advice which would direct the important choice between scheme or meeting."
240 In my opinion, the lengthy sentence comprising para 1226 is the critical passage in the judgment so far as both AAH and AT are concerned. The question is whether it was right to say that the NRMA demutualisation proposal contemplated "something like expropriation [which] would make the exercise of the power to amend the articles of association of Association invalid." As I have already indicated, I do not consider that the transaction could properly be characterised as one involving an "expropriation" of the membership or rights associated with membership of the members of Association in the sense in which the term "expropriation" was used in Gambotto, or in any equivalent or similar sense. 241 In para 1227 the learned Judge said that the solicitors did not adequately address either the grounds for Mr Bateman's concern or the question whether the appeal in Gambotto might affect the basis upon which it was thought appropriate to proceed by way of resolutions in general meetings. 242 His Honour also said in paras 1227-1228 that neither Mr Morgan nor Mr Bateman gave thought to an analysis of the kind which the learned Judge had described in dealing with Mr Heydon's position, "but their positions and expertise were such that they should have". His Honour concluded in para 1228 that, had they done so, it would have been "obvious" to them that Mr Heydon had not given sufficient attention to the risk from the appeal to the High Court in Gambotto to implementation of the proposal by resolutions in general meetings. As his Honour put it in para 1228:
"Strangely, the grounds for Mr Bateman's concern were not translated into the brief to Mr Heydon, and while Gambotto's case in the Court of Appeal was prominent in the observations in the brief it was not put forward as relevant to the essential disagreement between Mr Morgan and Mr Bateman, whether the fact of something like expropriation would make the exercise of the power to amend the articles invalid."
243 It should be noted that the conclusion reached by the learned Judge treated both AAH and AT as if they were in the same position, subject to the same duty and that the scope of the relevant duty was the same. It was submitted at the trial on behalf of AT and on the appeal that the position of AT was different.
"The opinion of 20 December 1993 did not refer to Gambotto's case at all. It was primarily concerned with the source of power in s 167 of the Law and the memoranda and articles of Association and Insurance, and did not consider possible constraint on the exercise of the power because of something like expropriation. For reasons I have given, reservation of oppression for a later opinion should not have been seen as the explanation for the deficiency, but in any event neither AAH nor AT took steps to ensure that, when oppression was dealt with (to the extent to which it was), the present relevance of Gambotto's case , and the possible significance of the appeal to the High Court, were addressed and the subject of advice. So AAH and AT left the NRMA without that advice, and because they did not themselves address risk to the proposal from the appeal to the High Court in Gambotto's case , or ensure that Mr Heydon addressed it, they also did not exercise due care, skill and diligence."
It follows from what I have said in relation to Mr Heydon that, with all due respect to his Honour, I am unable to agree.
244 As has been seen, AAH were retained to act and advise generally in relation to the demutualisation proposal. 245 So far as AT were concerned the primary submission made on their behalf on the appeal was that in contrast to the AAH general retainer on the demutualisation project, AT's retainer was limited to specific issues. At the meetings on 3 and 6 December 1993 Mr Bateman had expressed reservations regarding the proposal to proceed by way of extraordinary general meetings and expressed the view that a scheme of arrangement was necessary. He had been told by Ms Conway and Mr Rees on 6 December 1993 that Mr Morgan would deal with the matter. Mr Bateman maintained his reservations and mentioned them at meetings of the Due Diligence Committee on 30 March 1994 and 1 July 1994. It was Mr Morgan's responsibility to obtain a final opinion from Mr Heydon on the relevant subject. Mr Bateman did not see the opinion of Mr Heydon dated 28 July 1994 until mid-August 1994. It was submitted that in the circumstances Mr Bateman had deferred to and relied on the opinions of those retained and briefed on the matter when his view had not been preferred by the NRMA. His sign-off letter was qualified in para 5.2 to exclude an opinion on the subject "whether the resolution of members will bind all members". 246 The learned trial Judge held that this was no answer to his conclusion that AT, in common with AAH, did not exercise due care skill and diligence. The reasons for this were expressed in para 1231 and 1232 as follows:247 It was significant that his Honour held in the following para 1233 that the retainer of AT extended to:
"Having expressed his reservations, which he attributed to a feeling that the resolutions in general meeting route was not right rather than to risk from Gambotto's case or any other reasoned regard to statute or general law, Mr Bateman's obligation was to see that the NRMA received proper advice. His reservations had been answered by reference to Gambotto's case , and when Gambotto's case was on appeal it followed that the answer might shortly lose its basis. For that reason alone, one would have expected Mr Bateman to speak out more than he had done, but as well the reasons I have given meant that the proper advice included regard to the appeal in Gambotto's case .
1232 As I have said, it would have been obvious to Mr Bateman that Mr Heydon had not given due attention to the risk from the appeal to implementation of the proposal by resolutions in general meeting. His own continued reservations raised on 30 March 1994 and 11 July 1994 show that he did not think the NRMA had been properly advised. He did not himself give attention to the risk, or pursue attention to it by Mr Heydon or Mr Morgan, and the opinion of 28 July 1994 was as silent as the opinion of 20 December 1993 on the matters which had excited Mr Bateman's reservations and on Gambotto's case . Mr Bateman could not adopt a passive role, and in doing so, and failing himself to have regard to the pending appeal in the choice between scheme and meeting, he did not discharge his duty of care."
248 For the reasons which I have already indicated, I do not consider that that was the critical question. The critical question was whether what was proposed was in substance or effect an expropriation which was liable to be struck down if the proposal was the subject of a special resolution at an extraordinary general meeting. In my view, if that were the case, putting the proposal in the form of a scheme of arrangement would be unlikely to be approved by the Court in any event. While Mr Bateman clearly recognised that, the proposed resolutions would have the effect that dissenting members would lose their membership rights in Association, he was also entitled to conclude that they still had the option of accepting the shares in Association and paying the annual fee for services in lieu of being entitled to the services in consideration of the payment of an annual subscription. Both before and after the implementation of the transaction they would retain their right to vote in an election for the Board of Management. In these circumstances, once the advice of Mr Heydon was provided, there was no duty or obligation on AT to pursue the matter further. For these reasons, I do not consider that any breach of the duty of care arising out of contract or in tort was proved as against Mr Bateman, with the consequence that the appeal by AT should be allowed. It was reasonable for Mr Bateman and AT to act upon the opinion of Mr Heydon and to rely upon the unanimous opinion of the Court of Appeal in Gambotto. In my view, any risk posed by the appeal in Gambotto was outside what a competent practitioner at the time would regard as being within the traditional issues associated with expropriation or oppression. It is for this reason that I also consider that AAH was entitled to rely on Mr Heydon's advice in discharging any duty of care which they owed pursuant to their general retainer or in tort concerning the implications of Gambotto and the appeal in that case to the High Court.
"… advice upon whether the proposal could and should be implemented by scheme or meeting, which included regard to and advice on risk in the resolutions in general meetings route."
249 I have referred earlier to the finding that the advice which Mr Morgan was instructed to obtain on 6 December 1993 amounted to advice whether "the fact of something like expropriation" might make the exercise of the power to amend the articles invalid. Mr Morgan did not ask for that advice and his Honour found it curious that Mr Bateman did not suggest that "the brief clearly extend to it". Mr Bateman did not comment on the draft brief he received because of his limited retainer. He had been told by representatives of the NRMA that it was not his concern. Mr Bateman was not sent a copy of the revised brief to Mr Heydon which was prepared following the conference on 14 December 1993. The revised brief followed the provision by Mr Bateman to Ms Godwin of the reference to Hennessy. In my opinion, Mr Bateman had discharged whatever duty he may have had by what he had said and done by and on the afternoon of 14 December 1993. Mr Bateman gave undisputed evidence that he did not see the copy of Mr Heydon's written opinion dated 20 December 1993 until sometime in 1994 before 18 August and did not see Mr Heydon's opinion on the same matter dated 28 July 1994 until he saw it as an annexure to the Legal Due Diligence Report on or after 10 August 1994. When he was told about Mr Heydon's opinion on 31 December 1993 he deferred to the opinion of eminent counsel despite his own doubts. It was not disputed that the NRMA and Mr Morgan expressly accepted the reservation in Mr Bateman's sign-off letter dated 17 August 1994, para 5.2, which excluded AT from offering any view on the question which, in the view of the learned trial Judge made tracking the Gambotto appeal appropriate. It is for these reasons that I would allow the appeal by AT.
AT NOT LIABLE FOR FAILURE TO ADVISE RE GAMBOTTO
250 As to AAH, the submissions on their behalf put in the forefront that, having held that AAH knew or should have known of the pending special leave application or the grant of special leave in Gambotto, his Honour found that the exercise of reasonable care required AAH to give advice on the possible effect of a successful appeal to the High Court in Gambotto on the demutualisation proposal. The finding was that if such advice had been given, the NRMA would have put its demutualisation proposal on hold pending the outcome of the appeal. The advice given by AAH to the NRMA and the observations in the brief to Mr Heydon in December 1993 were consistent with the law as expressed in the unanimous decision of the Court of Appeal in Gambotto. 251 It was submitted on behalf of AAH that if they had given advice on the question whether the High Court was likely to alter the law as stated by the Court of Appeal and, if the advice given had been to the effect that it was unlikely in the extreme that a decision of the High Court upholding the appeal would be so wide as to apply to the NRMA's proposal, such advice would not have been negligent and would have been within a range of opinions given by reasonably competent solicitors in the position of AAH exercising reasonable care. While it is conceivable or possible that advice warning of a greater risk may have been within the range of non-negligent opinions it did not follow that advice warning of a lesser risk was negligent. In my view, it was rightly submitted on behalf of AAH that the learned trial Judge was in error in deciding the reliance issue on the basis that AAH should have warned of a risk which was far greater than the magnitude of risk required to be identified in non-negligent advice. No detailed evidence was called by the NRMA to prove the content of the advice which would have been given by a reasonable practitioner exercising reasonable care at the time and none of the relevant witnesses on behalf of AAH or AT were asked what advice they would have given. Mr Heydon was asked (T5593.23-.55) what advice he would have given. He said it would take him a couple of days to put himself back into the position he was in at the time in order to answer the question. There was no suggestion on behalf of the NRMA that Mr Heydon be given the opportunity to enable the question to be answered. Mr Heydon's advice was that, assuming no intention to achieve an improper purpose, one could deal with minorities so long as they received appropriate compensation for whatever was being done. On this basis, the decision of the Court of Appeal in Gambotto was a decision which strongly supported the validity of the proposal by the NRMA. It was a decision which accorded with generally accepted principles and a view which a competent legal practitioner practising in the relevant field could properly regard as correct. 252 In general, AAH adopted the submissions on behalf of both Mr Heydon and AT. It was also submitted that if a view could be formed without negligence at the outcome of the High Court appeal in Gambotto would not affect the NRMA's proposal, there was no duty to give any advice to the NRMA. 253 The learned Judge held in paras 1215 and 1216, notwithstanding that Mr Bennett saw a reasonably clear answer, there was still a risk which should have been recognised in advice to the NRMA. But that risk was one which, as assessed by Mr Bennett, was one in which, in para 1270, the learned Judge interpreted as advice which would have conveyed to the directors that Gambotto would not affect the proposal. In my view, an opinion consistent with that advice could be formed without negligence, so that the duty of care owed by AAH to the NRMA was not breached by failure to warn of a risk. That is a view which could be formed in the exercise of reasonable professional judgment without negligence. That was the position in this case. In such a case the solicitors are not in breach of their contractual duty of care if the reliance on the opinion of a barrister was proper and reasonable and no occasion arose for the advice to be rejected: Boland v Yates at [142] per Kirby J. Given the advice received from Mr Heydon in his opinions dated 20 December 1993 and 28 July 1994 confirming the appropriateness of proceeding by members' resolutions, I do not consider that AAH were negligent in the manner alleged by the respondents. For these reasons, I would allow the appeal by AAH.
AAH NOT LIABLE FOR FAILURE TO ADVISE RE GAMBOTTO
254 As noted in para 14 above, the contentions pressed by the respondents by way of cross-appeal before us were claims against:
CONTENTIONS ON CROSS-APPEALS
FREE SHARES/DISADVANTAGES LIABILITY
255 The first part of the prospectus package mailed out in August 1994 was the "onsert". The content of the onsert differed depending upon whether the member could vote at all, whether the member could vote as a member only of Association, whether the member could vote as a member of both Association and Insurance, or whether the member could vote only as a member of Insurance and, in the latter case, according to whether one vote or more votes could be exercised. A large majority of members were what was called situation 3 members, voting as a member of Association and also as a member of Insurance. The next largest group comprised situation 2 members, voting as a member only of Association. The remaining members were relatively insignificant. The learned trial Judge took the view that the onsert took on a more significant role in the proceedings at the trial than in the Federal Court proceedings. 256 The first page of the onsert was intended to contain the name and address of the member next to the postage details and came to be called "the carrier". It was beneath a clear plastic cover. The second page contained instructions to the member. The third page contained the proxy voting paper for the general meeting of Association and the Acceptance of Free Shares form. The fourth page contained the proxy voting paper for the general meeting of Insurance. The material features of the onsert were:
(a) AAH and AT for damages for breach of contract for negligence and against Mr Heydon for damages for negligence in relation to the preparation of the prospectus for failing to advise the NRMA on the risk that the use of the expression "Free Shares" and the failure to specify disadvantages may be held to be misleading or deceptive under s52 of the TP Act and s42 of the FT Act ;(b) AAH, AT and Mr Heydon for damages based upon their respective involvement in contravention of ss52 and 82(1) of the TP Act and ss42 and 68 of the FT Act in respect of the misleading conduct found against the NRMA in relation to the prospectus;
(c) AAH and AT under ss995(2) and 1065(1) of the Corporations Law based upon the involvement by those appellants in contravention of the Law , which, in relevant part substantially reflects ss52 and 82(1) of the TP Act and ss42 and 68 of the FT Act .
(d) AAH, AT and Mr Heydon under s996(1) of the Corporations Law in relation to material statements in the prospectus which were said to be false or misleading.
THE PROSPECTUS
257 The onsert for the other situations where the member could vote had the same features. The onsert for the situation where the member could not vote did not have "How to vote!" or the proxy voting papers, or that part of the instructions to do with voting, but did have "How many shares you will be given!" and, with appropriate alterations, the references to "Free Shares" and the Acceptance of Free Shares form. 258 Page 1 of the Prospectus was headed "Your Prospectus" followed by the statement:
(a) the words "How to vote" and "How many shares you will be given!" appeared on the first page in substitution of a previous draft which said "How many FREE shares you will get!";(b) the reference to the onsert including an Acceptance of Free Shares in the bottom left hand corner of the first page;
(c) an asterisk against "Free Shares" in the first line of the instructions on the second page, and the marginal note to which it referred stating that "The Free Shares (or cash alternative) are in exchange for membership under the Articles of each of NRMA Ltd and NRMA Insurance Ltd …"; and
(d) the Acceptance of Free Shares form on the third page in proximity to the proxy voting paper for the general meeting of Association.259 It was then said that the document was divided into nine sections as follows:
"This prospectus provides information on the NRMA which will help you to decide whether you want NRMA shares.
This prospectus explains the proposal and its implications."
260 Alongside a marginal note "IMPORTANT TO NOTE" it was said that:
"1. Information for Members
2. Details in the Members Free Offer and the Sale Offer
3. Guide for Investors
4. The NRMA and its Businesses
5. Financial Information
6. Independent Accountant's Report
7. Actuarial Reports
8. Additional Information
9. Definitions and Technical Terms"
261 This was followed by instructions to be followed if the recipient wished to vote as follows:
"The Members Free Offer will only go ahead if 75% of members who vote (in person or by proxy) at the meetings to be held on Wednesday 19 October 1994 are in favour."
262 The following then appeared alongside a marginal note, "THE BOARD RECOMMENDS":
"If you wish to vote, use the Proxy Voting Paper which came on the outside of this prospectus. Also complete the Acceptance of Free Shares part of the form. Post this form back to us in the postage paid envelope so that we receive it preferably by no later than 12 October 1994. There are legal time limits which are explained at the end of Section 1, but 12 October 1994 will meet all the deadlines."
263 Against a further marginal note, "KEEP YOUR PROSPECTUS", it was pointed out that "members may be able to buy extra NRMA shares during the Sale Offer". These would be the NRMA Shares of members choosing the last alternative, as well as of members from whom a valid "Acceptance of Free Shares" form was not received.
"The Boards of the Association and NRMA Insurance recommend that:
- members of each of the Association and NRMA Insurance vote in favour of the proposal;
- members of the Association choose the Free Shares."
264 The prospectus made frequent use of the expression "Free Shares" which was defined in Section 9 as meaning "the NRMA" shares offered to members under the "Members Free Offer". The term "NRMA shares" was defined to mean "some or all (depending on the context) of the fully paid ordinary shares of $1 par value each in NRMA Holdings offered under this prospectus". The term "Members Free Offer" was defined as "the offer of Free Shares to members as described in Section 2". The prospectus both contained an offer of shares in Holdings as well as notices of the general meetings of Association and Insurance together with information to inform members so that they could vote on the resolution to be put forward at the meetings. 265 It was stated on the inside of the cover of the prospectus that it was issued by both Holdings and Perpetual Trustee Company Ltd ("Perpetual"). This was because there was a second stage offer of shares in Holdings by Perpetual. The first stage offer was by Holdings to former members of Association and Insurance, being "the Members Free Offer". Those shares not taken up under the Members Free Offer would become subject of the NRMA Offer Trust of which Perpetual was trustee. These shares would in turn be offered to institutions, members and policy holders and then to the public under the "Sale Offer". The Sale Offer was an additional stage offer. In the definitions, the offer to members and policy holders as part of the Sale Offer was described as the "Members Extra Shares Offer", distinct from the Members Free Offer and defined as:266 The shares under the Sale Offer were not described as "Free Shares". The prospectus explained that it provided information on the NRMA to help those to whom it was addressed to decide whether they wanted NRMA shares and sought to explain the proposal and its implications. The members were urged to vote and were told that the boards of Association and Insurance recommended that members of each vote in favour of the proposal and that members of Association "choose the Free Shares". It was said that the prospectus should be kept because:
"The invitation made pursuant to this prospectus to members and non-member policyholders to apply to buy NRMA shares as described in Section 2."
267 The prospectus contained a table of contents referring to nine separate sections which followed, but which were preceded by a "President's Letter" on a Holdings Letterhead. Among other things, the letter said:
"[A]s well as the proposal to issue the Free Shares, members may be able to buy extra NRMA shares during the Sale Offer."
268 The letter then concluded by urging members to vote and complete and sign the "In Favour" sections of the Proxy Voting Paper and Acceptance of Free Shares form. 269 Section 1 of the prospectus dealt in more detail with the "Free Shares", recommended a vote in favour of the proposal and made reference to consideration of the advantages and disadvantages of the proposal, including the references to giving up membership. In Section 1 it was stated that:
"In short, the proposal is to unlock the wealth of the organisation by giving members Free Shares. The Proxy Voting Paper that came on the outside of this prospectus will have told you the number of Free Shares you will receive and an estimate of their value. The proposal and its implications for you are detailed in Section 1 of this prospectus. If the proposal is adopted, members' financial ownership of the NRMA will be formalised. The Boards of the Association and NRMA Insurance have each considered the options and have concluded that the share issue is in the best interests of members and policyholders.
The restructure will not affect the way we operate. The NRMA will continue to provide efficient Road Service and competitive insurance. There will be no change in the road patrols. The restructure will however give us greater flexibility in developing businesses for the benefit of all members and policyholders.
The Boards therefore strongly recommend that you vote in favour of the proposal and accept the Free Shares.
……
The decision is yours. On Wednesday 19 October, there will be two general meetings at which you will make the decision. You can vote and accept your Free Shares by post using the Proxy Voting Paper and Acceptance of Free Shares form that came on the outside of this prospectus.
Only if 75% of members who vote are in favour can the shares be issued."
270 In the description of the proposal which followed members were told they had the opportunity to become shareholders of Holdings, described as "a new company which will own the NRMA businesses". It was then said:
"Under the NRMA's current structure the wealth that is the product of this success is locked away, inaccessible to members of each of the Association and NRMA Insurance. The challenge for the NRMA was to find a way of unlocking that wealth while ensuring that it continues to provide excellent service.
The NRMA is proposing to change its legal structure to enable its financial success to be shared with its members. At the same time, the new structure will allow the NRMA to remain a unique institution which continues to provide quality service.
The primary benefit of the proposal is that members of the Association will receive Free Shares allowing them to share in the future financial success of the NRMA."
271 There was then a diagram representing the proposed new structure. Holdings was shown as wholly owning Association and Insurance. It was said that road and other services would continue as they had in the past. It was also said that as "an NRMA shareholder" the member would have valuable shares reflecting the market value of the NRMA's businesses and the rights to receive dividends, elect directors, and vote at annual general meetings. Against a marginal heading "Free Shares in the NRMA" the following was stated:
"If you were a member of the Association on 16 March 1994, you are being offered Free Shares in NRMA Holdings Ltd. You may choose to take the free shares or to take the cash alternative. If you choose to take your free shares, you will become a shareholder of NRMA Holdings Ltd."
272 The cash alternative and the need for a 75% vote in favour were repeated. There was then a description of the basis on which the Free Shares being offered to members of Association had been allocated. All members of Association as at 16 March 1994 were offered shares. An additional allocation was offered if the membership of Association was "linked to an NRMA insurance policy" as at 16 March 1994, and "the longer the membership (using five year intervals) the greater the entitlement" with a maximum of 25 years. The entitlements ranged from 250 Free Shares for a recent member with no policy to 1000 Free Shares for a long standing member with one or more policies. In addition, relatively small numbers of non-members were being offered Free Shares, namely, members admitted on and after 17 March 1994, employees of the NRMA, some spouses and deceased members, and a miscellaneous group of members of Insurance who were not members of Association. 273 There was then information provided against a marginal note "How the Sharemarket Works", together with further details relating to additional costs of being a listed company and the commitment to keeping members' loyalty, maintaining services and the objectives of Association. It was asserted that:
"NRMA shares are now being offered free to all members of the Association as at 16 March 1994. You may choose to take the Free Shares or the cash alternative. If we do not receive a valid Acceptance of Free Shares form from you, you will get the cash alternative. Make your choice by filling out the Acceptance of Free Shares form which came on the outside of the prospectus and return it in the postage paid envelope.
Any NRMA shares which members have not accepted will then be offered for sale. Members and non-member policyholders will be the first to be given the opportunity to buy NRMA shares, except for some NRMA shares set aside to enable a fair price to be established."
274 In particular, it was said that NRMA Holdings' Constitution will require that "these objectives of the Association continue for the benefit of Service Members and all road users". 275 There was then a description of other options with had been considered. This was followed by the heading "The Next Steps" a marginal note referring to members' general meetings which said:
"Only the legal framework of the NRMA will change, not its culture."
276 It was then stated that the boards urged members to vote in favour of the resolutions. 277 This was followed by the legal steps involved in the change as follows:
"On Wednesday 19 October 1994 there will be two general meetings at Sydney Convention and Exhibition Centre, Darling Harbour. Details of the meeting times and the resolutions to be considered are at the end of this Section. One meeting will be for the Association and the other for NRMA Insurance. These meetings will decide the future structure of the NRMA and members can participate either by attending the meetings in person or by filling in the Proxy Voting Paper which came on the outside of the prospectus.
Having carefully considered the implications of the proposal, the Boards believe that this proposal is in the best interests of members and the NRMA."
· changing the legal status of the Association and NRMA Insurance from companies limited by guarantee to companies limited by shares and guarantee; · adopting new Articles for each company, the central element of which means that members (other than NRMA Holdings) agree to give up their membership of the Association and NRMA Insurance on condition that Free Shares are offered by NRMA Holdings. This leaves NRMA Holdings as the only member of the Association, and NRMA Holdings and the Association as the only members of NRMA Insurance, and hence each is under the control of NRMA Holdings. By a resolution of the Boards, NRMA Holdings was admitted as a member of the Association on 4 August 1994 and as a member of NRMA Insurance on 16 August 1994. The special resolutions (if passed) constitute an agreement which binds all members of the Association and of NRMA Insurance, even if the voted against the proposal or did not vote at all; · approving, first, the allocations of entitlements to Free Shares as described earlier (people who are being allocated entitlements to Free Shares are referred to as 'those entitled' in this paragraph), second, the allotment by NRMA Holdings of the Free Shares to those entitled who elect to take up the Free Shares and, third, the allotment to the NRMA Offer Trust of shares not so taken up. The Trust will sell the shares and distribute the net proceeds of sale to both those entitled who choose the cash alternative and those entitled from whom we do not receive a valid Acceptance of Free Shares form; · in the case of the Association, approving changes to the Memorandum and Articles of NRMA Insurance so that the Association ceases to control NRMA Insurance with the result that NRMA Holdings controls NRMA Insurance; and · approving the overall changes in the structure of the NRMA so that each of the Association and NRMA Insurance is owned and controlled by NRMA Holdings."
"Members' approval will mean members of the Association and members of NRMA Insurance will no longer be members of those companies. The Association presently controls NRMA Insurance by appointing its Board. For an NRMA Insurance policyholder to be eligible to have become a member of NRMA Insurance, the policyholder must have been a member of the Association. Members of the Association are, therefore, being offered an automatic entitlement to Free Shares, with an additional allocation if the membership was linked to an NRMA Insurance policy (other than Life or Travel). For these reasons the Boards consider that members of NRMA Insurance have interests similar to those of the members of the Association.
The legal elements of the approval by members of the Association and members of NRMA Insurance are:
278 There was then a description of the beneficial taxation treatment to be extended to the acceptance of Free Shares or the cash alternative and answers to members' questions. 279 For present purposes it is enough to note that the prospectus indicated that there were sixteen directors of Association of whom thirteen were in favour of the proposal and the other three against. There were eleven directors of Insurance, eight of whom were common to the board of Association. Only one director of Insurance was against the proposal, that being one of the three Association directors who were against it. Overall, therefore, there were sixteen directors who were recommending the proposal to members. 280 It was stated in the prospectus that if the proposal was approved by not less than 75 percent of the members of each of Association and Insurance, members who choose the Free Shares would get those shares and a statement would be sent by early December confirming how many NRMA shares they owned. The board recommendation was repeated followed by the formal notices of the meetings to be held on 19 October 1994. The notice of meeting for Association contained a note as follows:281 The notice of meeting for Insurance was similar in form and content including the note. In place of the passages underlined in the case of Association the note in the case of Insurance was:
"The information for Members is important and should be read carefully. The purpose of the resolution is to make legal changes which would result in NRMA Holdings Ltd issuing shares to members of NRMA Ltd (and certain members of NRMA Insurance Ltd). Within three days of the issue of the prospectus NRMA Holdings Ltd will apply for listing on the Stock Exchange. As part of the legal changes all members of NRMA Ltd (other than NRMA Holdings Ltd) will no longer be members of NRMA Ltd and Road Service will be provided under the Service Membership contract on much the same terms as presently apply. This will be on condition that Free Shares in NRMA Holdings Ltd are offered by it. It is the new company which will control the NRMA . Further information on this is set out in the Information for Members. Copies of the proposed Memorandum and Articles of Association of NRMA Holdings Ltd and of NRMA Ltd are available on request from the Secretary at 151 Clarence Street, Sydney." [Underlining added]
282 Section 2 of the prospectus was entitled "Details of the Members Free Offer and the Sale Offer". Section 2 did not make express reference to members giving up membership. The definitions of Free Shares and the Members Free Offer took the reader to a description of the mechanics of the first stage offer but did not direct the reader's attention to the information in Section 1 or to the emphasised parts so far as they might shed light on the references to "Free Shares". 283 There were many references to "Free Shares" and "entitlement to Free Shares" in Section 2 and more instructions about completing the Acceptance of Free Shares form in order to "choose the Free Shares". There were more details about the NRMA Offer Trust and the Sale Offer as well as the Members Extra Shares Offer. So far as "The Members Free Offer" was concerned the prospectus said:
"As part of the legal changes all members of the NRMA Insurance Ltd (Other than NRMA Ltd and NRMA Holdings Ltd) will no longer be members of NRMA Insurance Ltd. This will be on condition that Free Shares in NRMA Holdings are offered by it. It is the new company which will control the NRMA."
284 Reference was then made to the fact that the entitlement to Free Shares was shown on the Acceptance of Free Shares form on the outside of the prospectus. Attention was then drawn to the Members Extra Shares Offer. 285 Section 3 of the prospectus was headed "Guide for Investors". It sought to explain the position of and benefits of being a shareholder and outlined taxation considerations. In particular, para 2 of Section 3 contained the following caution:
"Entitlement to participate in the Members Free Offer is based on membership of the Association. Section 1 also identifies an exceptional group of NRMA Insurance members who participate in the Members Free Offer. In this Section, including the diagram at the beginning of this Section, when we talk of 'members', it includes that group."
286 Section 4 was headed "The NRMA and its Businesses" and described the NRMA's history, present motoring and insurance services as well as its intentions and prospects for growth. This concluded with some details concerning the NRMA's staff and senior management. 287 These sections were followed by application forms for shares in Holdings. These forms were in addition to the Acceptance of Shares form which was part of the onsert and which contained the entitlement of the addressee. The additional form appears to have been intended as an application for shares in the event of a Sale Offer which could be made to both members and non-members. Detailed instructions were given how to complete the form and lodge the applications. 288 Section 5 of the prospectus dealt with "Financial Information". The forecast consolidated after-tax profit of the NRMA Group as defined for 1994/95 was $215 million, significant components of which were an underwriting loss of $129 million and unrealised investment gains of $102 million. 289 Section 6 of the prospectus contained a report from Coopers & Lybrand ("C & L") incorporating "a pro forma balance sheet of Holdings to give effect to the proposed restructuring" on a particular basis. 290 Section 7 of the prospectus was entitled "Actuarial Reports". Section 8 was entitled "Additional Information" and concluded with the signatures to the prospectus of each director of Holdings and (by its common seal) Perpetual. This Section contained the statement:
"You should understand that the prices of shares can fall as well as rise. You are urged to seek professional advice from a stockbroker, financial adviser, accountant or other suitably qualified adviser before making an investment decision."
291 Section 9 contained definitions and technical terms. 292 Inside the back cover of the prospectus was a "Directory", which amongst other things described AAH as "Solicitors to the Offer" and AT as "Solicitors to the NRMA".
"Neither NRMA Ltd nor NRMA Insurance Ltd has authorised or caused the issue of this prospectus but both companies have approved the inclusion in this prospectus of the material in Section 1 and the Proxy Voting Papers which came on the outside of this prospectus."
293 In Fraser v NRMA Holdings Ltd (1995) 52 FCR 452 it was contended that by distribution of the onsert and the prospectus the respondents engaged in conduct that was misleading or deceptive both for the purposes of s52 of the TP Act and s995(2) of the Corporations Law. The latter provision proscribed engaging in conduct that was misleading or deceptive or likely to mislead or deceive in or in connection with the allotment or issue of securities, any prospectus issued in relation to securities, or the doing of acts preparatory to or related to the allotment or issue of securities. In this case, as Gummow J said in Fraser v NRMA Holdings Ltd, supra, at 18, a finding of contravention of s52 of the TP Act would have been accompanied by a finding of a contravention of s995 of the Law. Gummow J concluded that the distribution of the onsert and the prospectus constituted engaging in misleading conduct in a number of respects, but it was only in one of these that his decision was upheld by the Full Court namely, the reference to "Free Shares": NRMA Holdings Ltd v Fraser (1995) 55 FCR 452. Gummow J held at first instance at 28 that the repeated description in the prospectus of the shares being offered as "Free Shares" was misleading, because the relinquishment of membership involved the relinquishment of significant rights to the control of the affairs of Association and Insurance and demutualisation removed the possibility for further enjoyment of other benefits of membership. As his Honour put it at 27-28:
FEDERAL COURT PROCEEDINGS
294 Gummow J concluded that there should be an injunction under s80 of the TP Act restraining the further distribution by the respondents of the onsert and the prospectus. A declaration and orders were made accordingly. The injunction restraining further distribution of the prospectus and onsert was expressed in absolute terms and also restrained Association and Insurance from proceeding with any business at the general meeting of members the subject of the notice, otherwise than the taking of such steps as were necessary or appropriate to adjourn those meetings without the leave of the Court.
"No doubt one adjectival use of 'free' is to describe that which is provided without, or not subject to, a change or payment. Counsel for Holdings submits that that is what is meant in the prospectus with the use of the phrase 'free shares'. He pointed, in particular to the use, on p 21, the first page of section 2, of the heading:
Details of the
Members Free Offer
and the Sale Offer.
But, as I have indicated, the particular phrase is 'free shares' and this is used in the prospectus on many occasions. In particular, as counsel for the applicants pointed out, the first two sections of the prospectus are replete with use of 'free shares' which is not in any apposition to the 'sale offer'.
Rather, the phrase is used to identify and attract the reader by suggesting there are available for acquisition dividend yielding shares at no outgoing to the member. This accords with another adjectival use of 'free', to identify that which is given without consideration and as a gift.
It is true that in several places in Exs A, B and C, including the passage identified by the asterisk on the leaflet headed 'Important Information Inside' and on p 12 of the prospectus, it is said that the 'free shares' are in exchange for membership or that membership is to be given up on condition of the offer of the 'free shares'.
Nevertheless, the effect of the persistent reiteration of the phrase 'free shares' is to engender in the reader the notion that the shares may be acquired without any significant loss or outgoing to the offeree who accepts them.
Counsel for the respondents pointed to the provisions in the memoranda of Insurance and the Association which would deny the members a distribution of assets on a winding-up. That, as I understood the submissions, was used to support the submission that, in truth, there could be no significant consideration moving from the members, so that the shares were 'free'.
I have referred earlier to what might be called the ultimate control of Insurance by the members, notwithstanding the manner in which the board is appointed. The board of the Association is in a different position, it being responsible for its election to the members. Furthermore, Art 26 of the present articles of the Association obliges the board on the written requisition of 200 or more members forthwith to convene a meeting of members to be held as soon as practicable and, in any case, not later than two months after the date of the requisition.
The relinquishment of membership thus, in a legal sense, involves the relinquishment of significant rights to the control of the affairs of the two corporations. Further, 'demutualisation' removes the possibility of further enjoyment of the advantages described earlier in these reasons.
A basic question for members to decide, as pointed out earlier in these reasons, is whether they will be better off remaining as members or becoming shareholders or recipients of the proposed cash distribution in lieu of shares. It is a matter of weighing the respective advantages and disadvantages of each course of action. In that setting, in my view it is likely to mislead or deceive to describe repeatedly in the prospectus, particularly in the passages moot [ sic ; most] likely to be studied by the ordinary reader, that which is offered to members in connection with their consent to the reorganisation as 'free shares'."
295 The NRMA appealed to the Full Court of the Federal Court against the decision of Gummow J. As to the use of the expression "Free Shares", in NRMA Holdings Ltd v Fraser, supra, at 482-484, after referring to the conclusion of Gummow J, the Full Court (Black CJ, Von Dousa and Cooper JJ) said:
APPEAL TO THE FULL FEDERAL COURT
"His Honour noted that the proposal, by requiring the relinquishment of the rights of the members of Association to control Association, and through their power to appoint the Council of Association to control the appointment of the board of Insurance, involved 'the relinquishment of significant rights to the control of the affairs of the two corporations'. Further, his Honour held that 'demutualisation' would remove the possibility of further enjoyment of advantages of subsidised road services and other members' services of Association, and of insurance rebates given to policyholders on certain classes of policy available through Insurance. His Honour held that the relinquishment of these substantial rights was incompatible with the notion that the shares might be acquired without significant loss or outgoing.
In this connection, the respondents contended before this Court that his Honour erred as a matter of fact in his conclusion that the road services were subsidised. We think his Honour's finding in that regard was justified by the financial information on p 52 of the prospectus at pp 53 and 70 recorded that the rebates on insurance which had been provided in the past were not expected to continue past 31 July 1995. His Honour did not overlook those statements. He referred expressly to them when considering a statement in the prospectus that the option of continuing insurance rebates had been examined and rejected for several reasons, one of which was that 'rebates only benefit policyholders - and not the some 30% of members who do not hold insurance policies'. As this reason disclosed, the benefit of rebates had arisen in the past from being a policyholder rather than a member of Insurance, but rebates had been one of the traditional benefits of the mutual character of the organisations which would certainly disappear if the 'demutualisation' proceeded.
The respondents also contended that his Honour's criticism that the shares were not 'free' because valuable rights were being given up was unjustified because, it was submitted, it must have been crystal clear to even the least sophisticated reader of the prospectus that membership of the Association and Insurance was being given up in exchange for shares in Holdings or for the cash alternative. We agree that statements to that effect are made in the margin on the back of the first sheet of the onsert, in the notices of meeting, and on p 12 of the prospectus, but to the reader who was previously unfamiliar with the nature of a mutual organisation and the process of 'demutualisation' those statements, simple as they were, were liable in our view to be overwhelmed in their impact by the far more prominent and persistent reference to 'Free Shares'. This impact was enhanced by the packaging of the prospectus. Before opening the package the addressee would have been likely to be attracted by the messages 'Share the Future', 'How to Vote!', and especially, 'How many shares you will be given!' notwithstanding the additional words 'There is MORE information on the back of this page'. But in any event, these statements that membership will be relinquished do not answer the conclusion reached by the trial judge which was, in effect, that the description of the shares as 'free' was likely to mislead or deceive members into thinking that the rights that were to be given up by them were not rights which could be regarded by members as being of importance to them in making a properly informed judgment on the proposal.
Although it is no doubt true that in some contexts, such as in the expression 'buy one, get one free', the word 'free' may be understood as meaning 'without additional or marginal outlay over what is obviously being paid', this is not invariably so. 'Free' can easily be misleading or deceptive, depending on the context: Federal Trade Commission v Standard Education Society 302 US 112, 116-117 (1937); Book of the Month Club v Federal Trade Commission 202 F 2d 486, 488 (2nd Cir 1953). We agree with the trial judge that in the present context of a document that strongly argued in favour of voting for the proposed changes, the persistent use of the expression 'Free Shares' was in fact likely to engender the notion that the shares might be acquired without significant loss or outgoing and it was in this respect misleading or deceptive, or likely to mislead or deceive, to use that phrase.
641 In that case, of course, there was a conventional majority and a minority whose interests were to be bought out as such, so that a relevant conflict of interests and advantages clearly was raised. But in the present case the proposed scheme was not designed to resolve a conflict of that kind, for there were no such groups and no potential groups, except of an irrelevant kind. The majority would not have been seeking to support or benefit a group of members of a specified class or description, nor did the resolution adversely affect a group of members of a specific class or description. The proposal was general in operation affecting all members in a like manner. The only “conflict” created was that which would have resulted from the fact that some voted in favour and some against, but in my opinion that was not the problem which Dixon, J. perceived or which the joint judgment in Gambotto sought to solve. Indeed, upon reflection, the proposed scheme raised circumstances in which the “company as a whole” test could best be applied, for the issue in question was what was the best way in which each company could continue to run its affairs and whether the proposed scheme was for the benefit of each company as a whole. No member would have come to the meeting, or to the courts, seeking to maintain any special interest or right, different from that of any other member, at least not in the present context or in the way in which the present dispute has evolved. Here the members could have voted having regard only to what they perceived to be the long term interests of each company, unencumbered by any financial interest peculiar to them or any class of them. If there were to be differences, as clearly there would have been, they would have been based on general considerations, not on considerations based on identifiable rights or interests. However rare it may be, the Allen v. Gold Reefs principle here would have posed a relevant test. If the members were to fall into separate classes because of their attitude to the resolution that would have been merely because of differing attitudes as to what was best for each company or as to how they wished each company to be run. That, in my opinion, was not what the judgment in Gambotto was intended to resolve, as the reasoning in the joint judgment made clear. 642 I would concede that sometimes “rights”, “interests” or “advantages” of the relevant kind are more clearly defined and sometimes less so, but at the end of the day it is usually easy to see whether a conflict of interests will result from a resolution, for the relevant principles will apply if one group is favoured by the outcome or another group is discriminated against. In the latter case the relevant inequity can be invoked if the resolution takes away or denies rights to some only of the members, for the balance of the membership, being or including the majority, will by definition benefit. Where the relevant harm or loss of rights will be suffered by all members equally, a relevant inequity will arise, capable of being restrained, if, but only if, benefit flows correspondingly to some only of the other members, ordinarily the majority. 643 The matters just raised both as to the existence or otherwise of conflicting rights and interests and as to whether it is relevant that all members lose and gain in equal measure have been seen by some since Gambotto as not being of any continuing relevance. In particular, I refer to the opinions of Mr S.E.K. Hulme, Q.C. given on 3 April 1995 to NRMA and written in his customary lucid style. He said that “equality of treatment seems … to miss the wood for the trees”, because the proposed scheme did not amount to a “discrimination case”. He was of opinion that it was sufficient under the circumstances of the proposed scheme to show that all shareholders had their membership rights taken away by compulsory acquisition. So he said that the majority of which a member complains is not confined to a majority which acquires the relevant rights “but [is] the majority which altered the rules so as to expose him to the acquisition”. He would therefore conclude that expropriation in itself is sufficient to invoke the stringent principle in Gambotto whatever be the surrounding circumstances, even though all are treated in an identical manner.
644 With respect, that appears to ignore the way in which the joint judgment approached the issue of expropriation in Gambotto which, it must be recalled, arose where clearly a conventional majority sought to gain at the expense of a few shareholders who were to be deprived entirely of their membership, albeit for some consideration. The logic of the joint judgment, as I would understand it, depends upon the basic equitable rule and the assumptions which underlie it. That rule may now be changed, and in particular the onus of proof altered in certain circumstances, but there is nothing in the judgment which would suggest that the starting point, at least, was the partly flawed attempt by the Court of Appeal in Allen v. Gold Reefs to qualify members’ rights to vote as they wish at general meetings. That those rights are partly intended to be preserved can be seen in a number of passages in the judgment. In the first place, the joint judgment acknowledged that, if a power of expropriation is included in the company’s constitution, that is “one thing”, At 445. for their Honours would recognise the right of the majority to exercise that power: see their earlier reference At 442. to the subject and to Phillips v. Manufacturers Securities. Secondly, the judgment recognised At 444., as have courts in the past, that “the proprietary rights attaching to shares are subject to modification, even destruction, by a special resolution altering the articles and that the power to vote is exercisable by a shareholder to his or her own advantage”. They then proceeded to attempt to devise a workable criterion which, in the first place, involved dividing off those cases which did not give rise to a conflict of interests and advantages. Thirdly, not only did they put aside that class of case but they also posed At 444. a separate test in cases “not involving an actual or effective expropriation of shares or a valuable proprietary right attaching to shares”. In that particular sub-class of case there seems to be no onus resting on the majority, as in the case of expropriation, for alterations “regularly passed will be valid” unless the minority can establish want of power, excess of purpose, equitable fraud or oppression. 645 In each case, therefore, except that of expropriation, the right of the majority given under the relevant companies legislation and the constitution of the company may be exercised unless want of power, fraud in the equitable sense or the like can be established. That is the relevant “discrimination” which must always be invoked so as to defeat the members’ rights to vote at general meetings as they choose and it is only now that in the case of expropriation the onus is placed on the majority. It is placed on the majority, however, as I have endeavoured to explain, because their Honours in the joint judgment perceived that to be prima facie inequitable or oppressive, thus requiring justification. They did not, however, hold expropriation to be bad in itself; indeed, they allowed the possibility that it might, in very limited circumstances, be justified. The essence of the rule, therefore, is still the old equitable principle that the exercise of a legal right may be restrained by a court of equity in certain circumstances, those circumstances ordinarily importing excess of power, equitable fraud, oppression or other unjust or reprehensible behaviour. 646 If I be wrong in the conclusions which I have just stated, then that would again point to the inability of any competent legal adviser reasonably to foresee at the relevant time that such a drastic change to the exercise of the powers of members to vote in general meetings would result from any appeal in Gambotto. It is one thing to suggest a special rule or branch of a rule relating to expropriation; it is quite another to suggest that fraud or oppression as the basis for equity’s intervention to restrain the exercise of such voting powers should disappear. It would be another reason for saying that the appellants could not fairly have anticipated and so warned about changes in principle of that kind. However one approaches the matter, the appellants could not reasonably have forecast a change in principle which would have struck down the proposed demutualisation scheme, so long as the burdens to be suffered, and the benefits to be gained, remained equal.
647 Before turning to the final issue whether the learned trial judge erred in his conclusions that the appellants failed to exercise due care in advising the respondents, it is necessary to consider again the extent of that duty. Some preliminary observations have already been made about the nature of the duty to advise imposed on lawyers of the standing of the appellants in this case. In paras.[460]-[461]. Likewise I have already analysed in some detail the extent to which each of the appellants should have been aware when they gave their opinions or advice of the forthcoming appeal in Gambotto and the issues likely to be raised by it. In paras.[558]-[566]. Each of the appellants’ ability reasonably to anticipate the principles the High Court would lay down ultimately in Gambotto, as to the rule in Allen v. Gold Reefs and as to the extent to which it was likely that that court would hold all expropriations of “minority” interests invalid, has likewise already been discussed. My conclusions appear in paras.[601]-[603]. More specifically, the extent to which the appellants might reasonably have foreseen a new test laid down by the High Court as to the validity of amendments to articles of this kind, where all membership rights are extinguished equally and there is no direct or indirect benefit to a class of member who should be characterised as the “majority”, have also been discussed. See paras.[611]-[624]. Finally, an attempt has been made In paras.[625]-[646]. to look at the relationship between any principle fairly to be anticipated and the scheme in fact proposed by the respondents. 648 It will be abundantly clear from what I have there said that I do not consider that any of the appellants failed in their duty to the respondents when advising them in late 1993 and early 1994 as to the manner in which they might carry out the proposed reorganisation of Association and Insurance. It is therefore necessary to add relatively little on this issue. 649 So far as the obligation resting on counsel and firms of solicitors who in each case profess experience in the field, I am content to adopt what has been said in their judgments by Malcolm, A.J.A. and McPherson, A.J.A., subject only to what appears below. It is only the content of the duty which is here in issue. The exercise of due care, skill and diligence does not require, even the case of practitioners of the expertise and experience of the appellants, that they should invariably give the right advice as to every question raised for their opinion, as indeed the learned trial judge recognised in his conclusions in relation to the “free shares” claim. The factor, however, which was fundamental to the trial judge’s findings and which candidly counsel for the respondents fixed upon to justify those findings, was the alleged obligation to advise “upon the possible risk to the proposal from the appeal to the High Court in Gambotto’s case, if the exercise of due care, skill and diligence so required”. As it was argued by counsel for the respondents on this appeal, “if it was open to conclude that the High Court could decide the case in a way which would be … inimical to the procedure being adopted by the NRMA which [the appellants] were recommending, then there is negligence … if they failed to advert to that risk”. That was the essence of their argument. 650 Counsel was prepared to accept that the relevant risk must be a real risk but nevertheless persisted in saying that even a small risk might attract the obligation, if it could have led to disastrous consequences. For this purpose it seems that counsel called in aid the High Court decision in Rogers v. Whitaker (1992) 175 CLR 479.. Let me say at once that one should be cautious about adapting to another sphere of professional negligence the test laid down in that case relating to a doctor’s obligation to warn of risks of a medical procedure. Both the circumstances and the nature of the advice are very different from a case where a commercial organisation, albeit having some of the characteristics of a voluntary association, seeks advice as to the manner in which it wishes to pursue a specified objective. 651 It is not necessary to express a final view as to the precise correlation between the two tests. It is sufficient to say that in the course of giving legal advice as to particular proposals put forward by clients, a barrister or solicitor will have to exercise some judgment as to the manner in which he or she deals with every aspect which could possibly arise for consideration. Those in the position of the respondents, with their own legal staff behind them, would be well aware that most legal advice requires judgment not merely as to the relevant principles, which may or may not have attained a degree of certainty for practical purposes, but also as to the factual basis to which to apply those principles, a task which again requires, frequently, a capacity to interpret a collection of circumstances of varying certainty. If lawyers always stopped to wait and divert themselves and their clients into the whys and wherefores of particular principles of law or of the ways in which particular statutory provisions have been interpreted, and then had to qualify their understanding of the facts by speculating upon a series of inferences which might be drawn by others, then very little advice of any use would be given to clients. One may regret the complexity of the modern law: one may yearn for its apparent former simplicity: but in the end advice must be given based upon a fair appreciation of principle and statute and a reasonable understanding of the facts put in front of the legal adviser. 652 The present diffuse and far too long examination of the principles relevant to this issue alone shows how a lawyer could spend many hours examining the basis for particular principles and the possibilities that they may be varied or overturned on appeal on some occasion in the future. It is beyond reason, however, to expect that counsel or solicitors will go through that exercise in relation to every point raised for opinion. The present case is a good example, for this enormous piece of litigation has concentrated essentially on two issues, one of which is whether the proposed scheme amounted to an expropriation of shares of a kind which the courts would restrain. So far as counsel was concerned, when asked to advise, that issue could have been perceived, only very darkly, as a possible aspect of advice sought on the practical means of achieving a particular result, in relation to which at least a dozen other points had been raised for opinion, all, so it was originally hoped, to be answered in the five days before the Christmas vacation. So far as the appellant solicitors were concerned this aspect of the scheme was merely one of thousands which had to be resolved in advising NRMA, devising the scheme and preparing the necessary documentation which would put it into effect. There is a point beyond which lawyers cannot be expected to go unless they are specifically asked to examine the possibilities of change as such, and the present case falls far short of one where potential risks as to changes of principle should fairly have been seen to be critical to the advice sought. Otherwise, as I have suggested, the wheels of commerce and other daily transactions would grind to a halt by lawyers’ earning fat fees working through all the permutations and combinations of potential risks to their clients in seeking to carry out any proposed transaction or scheme. 653 As I stated at the outset of this judgment, the duty of the lawyer, whether Queen’s Counsel or senior firm of solicitors, is to advise their clients on the basis of principle, in which I would include for present purposes a proper understanding of statute law and its accepted interpretation. Occasionally, principle is uncertain or the meaning of a statutory provision equivocal, so that lawyers must endeavour to give their advice as best they can by seeking to resolve those differences, not merely if they are asked, but if they fairly see it to be necessary to give the required advice. But for that purpose they must, in my opinion, act primarily on accepted principle, not upon speculation as to what might become principle this year, next year or the year after. Sometimes principle does not give a conclusive answer because at the highest level there are statements contained in conflicting dicta and issues deliberately left unresolved for future argument. For example, over the last ten years there has been uncertainty as to the actionability of torts in the different States of the Commonwealth which was resolved only this year in John Pfeiffer Pty. Ltd. v. Rogerson [2000] HCA 36; 74 ALJR 1109.. Even more occasionally appellate courts of last resort make generally known their desire to resolve or even reconsider some question of principle, in a way which is generally known throughout the profession, for example, when the High Court considered the validity of the cross-vesting legislation, ultimately resolved in re Wakim; ex parte McNally (1999) 198 CLR 511.. 654 Of course the respondents have contended that Lord Lindley’s principle as stated in Allen v. Gold Reefs was known to be subject to reconsideration in the Gambotto appeal, but was that truly notorious (at the time) and was the Court going to reconsider more than the principle as it related to the expropriation of shares? I have already pointed out how difficult it was, and would have been, to ascertain precisely what was in issue and how even more difficult it was to forecast any specific conclusion, as to which the appellants should have perceived a real risk of a kind requiring warning to the respondents. It has been noted how little publicity the case received when leave was granted and how it was not even shown that this was well known to those practising company law in Sydney. But a “rule” requiring enquiries as to special leave applications, or the application of the rule in question, could not be confined to a case about which some practitioners may have had knowledge for, if correct, it must apply generally to cases in which the High Court has granted special leave to appeal. Some practitioners may follow the lists of grants of special leave, some may try to find out a little more, and some may even go to the trouble of looking at transcripts, especially as they are now available on the Internet. But even so, as I have observed, the comments of judges in the course of argument are notoriously unreliable pointers to particular outcomes. With the best will in the world, and even the keenest nose for these matters, any forecast can merely be speculative. Can further enquiries as to future decisions be fairly required, other than in the most exceptional of circumstances? The answer must be, No.
D. Conclusions on “ Gambotto” liability
(1) Whether the appellants failed to discharge their duty of care to the respondents
655 There are, no doubt, other circumstances and other cases where warnings as to risk may be appropriate but the present was not one where it could realistically have been required.
656 Just as counsel for the respondents did not rely upon any error as such in the appellants’ advice, so the learned judge held the appellants liable only because they failed, in advising the respondents, to advert to the risk of the High Court’s holding all (or almost all) expropriations to be invalid. For the reasons I have endeavoured to explain that conclusion was, with respect, erroneous. The basis for knowing the risk was tenuous, the likelihood of its coming to pass in a relevant way obscure and its application to the proposed scheme likewise fraught with uncertainty. That conclusion is sufficient to show that the judgment against each of the appellants should be set aside. 657 The connection between the potential outcome in the Gambotto appeal and the issue which had to be answered by the appellants depended in any event on a series of assumptions which the learned judge was prepared to make for this purpose. In considering the liability of Mr Heydon in relation to the specific advice he had to give as to whether the proposal should proceed by way of scheme of arrangement or by way of resolutions amending the articles of association, it was said by the judge At para.[1198]. that the proposal would have been subject to the risk that those resolutions “would be necessarily oppressive”, to the extent that advice as to that risk should have been given. It is unnecessary to repeat what has been said already as to the element of oppression (or, preferably, inequity) which was said to have been the consequence of the passing of the proposed resolutions. Some perhaps may see any form of expropriation, that is any form of taking away or denying of membership rights, as oppressive or inequitable, but that assumes that resolutions having the identical effect on all existing members (of each company) should be so characterised. One may accept that the taking away of rights equally may form part of an oppressive or inequitable scheme if the end result is to give a benefit to the majority or some only of the members, for then they would gain a benefit which might be described as inequitable or oppressive, but, as stated earlier, the benefits were here equally available. It was a matter of simple choice whether or not they would be accepted and, even if not accepted, benefits of effectively equal value would be provided in their place. Moreover, no group of members was advantaged by that offer, on the exercise of their choice. I may be wrong in my understanding of what the High Court intended in Gambotto, but was it sufficiently clear in late 1993 and early 1994 that there was a real likelihood that a rule of such generality would be devised by the High Court? For reasons given above, no such outcome could reasonably have been anticipated. 658 As to Gambotto, much was said by the learned trial judge in his judgment as to the appellants’ knowledge of the Gambotto litigation, especially of Mr Heydon’s awareness of the appeal “even if only in a loose sense”, so that he should have been aware of the appeal “consistently with the exercise of due care, skill and diligence”. See the judgment at para.[1204]. His Honour said that the Court of Appeal decision in Gambotto was relevant as to “what could constitute oppression” and that it had been cited prominently in the brief as being “the most recent case in the area”. But that was to misunderstand the nature of the reference to it. Much of the brief for opinion was taken up with questions of oppression but not of the kind here under discussion. It should be remembered that at that stage the proposal was in the earlier stages of planning and that, although a holding company would be set up in which the members of both Association and Insurance would be allotted shares, there was a good deal of uncertainty as to the manner in which the shares would be allocated. There was also uncertainty as to whether particular existing members, who might not be entitled to any shares or a lesser number of shares, could complain that they were being dealt with unfairly, so as to entitle them to bring an oppression action. So in Part 11 of AAH’s brief to advise delivered to Mr Heydon examples of those who might be oppressed and constitute a relevant minority were given as:
(2) Whether the learned judge was correct in holding the appellants liable
659 Nevertheless, those cases were raised for consideration because of what was seen to be a risk that particular groups of members might be “disenfranchised” or that there might be a “windfall” to members of Insurance if they were given some special priority. But the question was never raised as to whether the relevant equitable rule would apply if all members equally lost their membership rights but equally gained new shareholding rights, as was proposed. It is not surprising therefore that Mr Heydon, with the concurrence of the solicitors, saw the question of oppression and the like as something which ought to be deferred because the particular rights to be offered under the scheme had not then been fully worked out and it would only be when they were that anyone could satisfactorily address that issue. Having regard to how it was raised in the brief, it is not difficult to see why Gambotto would have been seen to be peripheral to the general issue upon which Mr Heydon was asked to advise urgently. 660 The learned judge thought, moreover, that it was “incumbent” on Mr Heydon (and, by implication, the other appellants) to take note of the special leave application and follow it up. If he had, so it was said At para.[1206]., counsel would have discovered the grant of leave and “seen the prospect that the appeal would be allowed”. But, with respect, so what? I have already described the many alternative lines of argument which could have been adopted in the High Court. Even if counsel should have seen that it was more likely than not that the appeal would succeed, it did not follow, even if that was likely to involve some condemnation of “expropriation”, that any new principle would have a bearing on the issues he was considering. The judge said At para.[1204]. that Gambotto (in this Court) was “the most recent case in the area”, but what was the area and what import might it have? His Honour said At para.[1204]. it discussed “what could constitute oppression” but, however useful that might be for resolving the deferred, more specific issues raised in counsel’s brief, it would have been seen to be of marginal relevance in deciding how the NRMA proposal could be put into effect, more especially because all members effectively gained and lost in equal degree, subject only to the then unresolved question as to how the new shares might be allocated generally among the members. Although the “majority” might bask in self-satisfaction that their demutualisation scheme was in place, it was not intended that they should gain anything at the expense of the “minority”, i.e. those who voted against or who refrained from voting. 661 It was said At para.[1208]. by the learned judge that the clear issue before the High Court in Gambotto would be whether expropriation was sufficient to constitute oppression, but “the outcome did not turn on oppression because of unfairness, because the acquisition of the shares was on fair terms”. But that was, with respect, to misunderstand the nature of that dispute. Of course the acquisition in that case was said to be unfair, not, as was accepted by all judges other than McHugh, J., that the price was unreasonably low, but simply because the majority was to obtain the benefit of the anticipated financial and accounting advantages, as well as the shares acquired from the minority who were to be deprived of the benefits of the new corporate structure. If for the moment one could ignore the price offered and the nature of the majority shareholders’ rights to vote, then, perhaps, it is not so difficult to see why the Gambotto transaction might have been characterised as oppressive, as some of the observations of members of the High Court in argument, quoted by the learned judge At para.[1211]., might seem to suggest. But one could not, as the judge maintained, At para.[1219]. separate the issue of oppression from unfairness, for ultimately the High Court picked on the deprivation of proprietary rights and the “aggrandisement” of the majority as being the critical reasons for their conclusion. For this purpose “oppression” means essentially unfairness. To my way of thinking there was no such unfairness in the plans outlined to counsel by the solicitors; indeed, it might seem the very opposite, for much of the advice sought was directed to how unfairness in a number of aspects might be avoided. I have already expressed my conclusion that it is very hard to infer unfairness, oppression, inequity or the like where all shareholders or members are treated in the same way, both in the taking away of existing rights and the giving of new rights in substitution, unless indirectly a majority gains a benefit of a recognised but inequitable kind from the whole transaction. No such view could have been taken of the proposed NRMA plans. 662 It would follow, with respect, that there was a fundamental weakness in the judge’s conclusions as to the need to seek out information about the special leave application and the argument in Gambotto so as to found a warning against the proposed plan that there was some risk to its viability if the High Court were to uphold the appeal. On proper analysis the ultimate decision was irrelevant to the matters upon which both Mr Heydon and the solicitors were asked to advise. At the very least, it could not at that time have been relevant to the kind of plan under consideration, nor could it reasonably have been seen to be relevant. 663 I would nevertheless reiterate that it may be one thing to ask counsel, or other legal advisers, to advise upon the possibility and future consequences of the outcome of specific litigation in the High Court; it is quite another to suggest that whenever some proposition of law is at risk at being overturned or modified in the future by the High Court, counsel should investigate whether any such litigation is in the pipeline, what has been said by judges in the course of argument and what is the possible outcome of that litigation which might bear on some issue then under consideration. Life is too short; there is too much material available of tenuous relevance to every problem to justify enquiries of the kind here suggested. Over the last decade the problems of research had been exacerbated by the use of the CDRom and the Internet and one doubts that they have been significantly alleviated. Thousands of unimportant cases become deposited on hundreds of CDRoms and sites, which are of marginal relevance and even less real use to practitioners. On top of that, counsel and all legal practitioners must keep up to date with some five to six volumes of Commonwealth statutes and three to five volumes of State statutes published each year. There is a limit to what fairly may be expected. For the present it should be drawn well short of any obligation to investigate special leave transcripts and transcripts of arguments which would ordinarily only reveal the Socratic questioning of High Court judges. 664 In the present case the learned judge said that he had eschewed hindsight but he forgot, if I may suggest with respect, that the contents of the two High Court transcripts Referred to at paras.[1210] and [1211] of his judgment. would only become known if counsel (and the other appellants) had had the time and prescience to read them. It would only be by chance that he would come to know of the contents in advance and it surely cannot be the duty of practitioners to read such transcripts on the off-chance that comments arguendo might sufficiently reveal the likely outcome. 665 In my opinion, therefore, the learned judge was in error in concluding At para.[1218]. that Mr Heydon “should have adverted to the grant of special leave … and should have warned that if the appeal were upheld it might be upheld on grounds inimical to the validity of resolutions” depriving NRMA members of their membership rights. Likewise, I consider his Honour to be in error in saying In para.[1219]. that Mr Heydon should have returned to the subject in the course of conferences and the like in February and March 1994 because he should then have gained an “appreciation that the issue was not oppression because of unfairness but oppression because of the expropriatory nature of the process”. In my opinion it ought not to have been seen otherwise than that there was a mere possibility that, as the High Court ultimately held, expropriations should be condemned and restrained inasmuch as they involved the inequitable aggrandisement of the majority, the very archetype of unfairness. The distinction the judge draws is in my view untenable; certainly it could not be seen to have been tenable at the relevant time. I have great sympathy for the learned trial judge who had to struggle with a huge array of factual and legal questions, but who has now been held to have erred on a limited number of critical issues. 666 Essentially the learned judge’s reasons for holding Mr Heydon to be liable were relied upon by him for holding AAH and AT liable. The solicitors’ responsibility may be seen to be more general and continuous up to the time when the scheme was approved in April 1994. There seems, especially on the part of Mr Bateman, to have been a great concern with Gambotto but, as with Mr Morgan, their concerns were not directed to the present issue but to the possibility of unfairness between groups within the two companies. The reasons for rejecting the claim against Mr Heydon and as to why I do not consider any warning as to the outcome of the appeal in Gambotto was required have already been stated.
“(a) A member of Insurance objecting to Association members participating in the net worth of insurance;
(b) A member of Association or Insurance objecting to the broadening of the class of members who participate in the scheme; and
(c) A person objecting to disenfranchisement as a result of the timing of the record date.”
The latter paragraph was not referring to general loss of membership rights but rather to a want of entitlement to shares for those who joined after a specified date, being the date when the scheme was to be announced. As referred to in Part 8 of the Brief. It was at this point in the brief that there had been detailed discussion both of the oppression section, s.260, and of the equitable rule laid down by Lord Lindley, which, it was pointed out, had been criticised both in Peters and in the Court of Appeal in Gambotto .
667 For the reasons appearing above, Insofar as I have failed to deal with certain of the matters raised in argument, I would adopt the reasoning of the other members of the Court, to the extent that it is not inconsistent with this judgment. I consider the learned judge erred in holding each of the appellants liable in negligence and breach of contract to the respondents in relation to their claims based on the possible application of the High Court’s decision in Gambotto. The appeal should therefore be allowed and the judgments based on these claims should be set aside.
668 A series of claims were made at the trial, but which were rejected by the learned trial judge, whereby the respondents alleged that the appellants and each of them were liable to the respondents in varying ways because the respondents were advised to or allowed to describe as “free shares” in the prospectus the shares to be allotted in Holdings to the members of Association and Insurance under the demutualisation scheme. It was said that those words were misleading or deceptive for the purposes of the Trade Practices Act 1974, the Fair Trading Act 1987 and the Corporations Law and that they should have been advised, or at least warned, accordingly. The failure to warn the respondents of the risk that the expression might be considered misleading or deceptive was itself said to be an act of negligence on the part of the three appellants, albeit in somewhat different ways, varying according to the particular role each played in advising the respondents. It was also said that the appellants' own behaviour contravened those statutes in different ways although, for the purposes of the cross-appeal, no claim is made now under the Trade Practices Act. However, the respondents maintain that the learned judge erred in dismissing their claims based on what has generally been described as the "free shares" issue. For present purposes the facts and circumstances leading to these claims are more than adequately set out in the judgment of the learned trial judge and are sufficiently summarised in the judgment of McPherson, A.J.A. 669 In general terms and subject to what appears below, I agree with the reasons of McPherson, A.J.A. for concluding that none of the grounds asserted by the respondents have been made out and that the cross-appeal should be dismissed. I also agree with the reasoning on these issues of Malcolm, A.J.A. to the extent that it is not inconsistent with that of McPherson, A.J.A. and this judgment. In essence, I would agree that it has not been shown that the learned trial judge erred in the manner in which he dealt with the claims based on these issues and the related circumstances. 670 The only matter about which I would disagree with both the learned judge and McPherson, A.J.A. And with Malcolm, A.J.A. is the extent to which I would consider that the Federal Court erred in its findings as to the misleading or deceptive nature of the prospectus when urgent interlocutory relief was sought against the respondents by certain dissident directors of Association, which have been raised in the course of the present trial and on this appeal: see Fraser v. NRMA (1994) 52 FCR 1. (Gummow, J.) and NRMA v. Fraser (1995) 55 FCR 452. (Full Federal Court), as discussed later in this judgment. To some, including the trial judge and McPherson, A.J.A., it might appear that the Federal Court took a narrow or restrictive view of the expression “free shares” as appearing in the prospectus. I do not think it is necessary to reach any conclusion for the purpose of the present appeal as to the correctness of the conclusions reached in that Court. The legislation serves a particular purpose and that purpose may be considered best served by taking a more stringent, rather than a less stringent, approach to conduct of which complaint is made. It is sufficient for my purposes, as will appear below, that the matter was by no means obvious, that the decision may have depended upon the limited amount of evidence before that Court and that opinions may well vary as to the use of common everyday English words. Its subtlety and adaptability is one of the beauties of the English language, but it is not a language ideally suited for precise legal analysis, unless one takes a broad view of words in fact used. As I have said and as later appears, it is not necessary to reach any further conclusions as to those judgments; it is sufficient to say that lawyers could fairly take different views as to the meaning of the words in this context and that there was no obligation in the present circumstances to warn the respondents of the likelihood that a different view might be taken if the matter went to court. It seems for practical purposes that those who dealt with the matter within their organisation were sufficiently aware of the risks.
PART II: THE “FREE SHARES” ISSUE
671 The events giving rise to the “free shares” issue took place some months later. By then the respondents were committed to a scheme to be effectuated by the passing of appropriate resolutions for the amendment of the memorandum and the articles of both Association and Insurance together with, of course, the incorporation of Holdings as the corporation in which the former members would hold shares and which would be the holding company of the former guarantee companies which would become its wholly owned subsidiaries. It is not obvious why a proceeding by way a scheme of arrangement could not then have been substituted, but as time had gone by the essential elements in the scheme were drafted in detail, as was a long and comprehensive prospectus. 672 At the end of the day, one of the principal selling points of the respondents’ proposals was that members would obtain shares on a carefully worked out basis at what seemed likely to be well in excess of their par value and for which they would have to make no outlay in cash. What they were obviously losing were their rights as members of Association and, in the case of about two-thirds of the members, as members of Insurance. As those companies had previously been guarantee companies, the members clearly had no interest by way of shares in those companies so that the rights they were losing were the rights which flowed from their membership in Association or Insurance which naturally depended upon the payment each year of their subscriptions but which brought with them, in terms which must be analysed further, rights to obtain road service and other advisory assistance and rights to vote and otherwise participate in the affairs of each of the companies. In the case of Insurance their existing rights had also depended on the continued payment of premiums each year. 673 There was, as might be expected, and to which reference has been made briefly, a degree of resistance to the scheme overall so that, for example, at least two of the directors of Association were firmly opposed to the proposal from the outset even if they had not voted against it on every occasion it had been discussed. There had been quite vociferous opposition, which promised to continue, from those who disliked the concepts of changing what were effectively voluntary associations into commercial entities. They therefore were prepared to look gift horses in the mouth, as it were, by asserting that what were once mutual bodies would thereafter be run for profit and that that profit in certain ways would derogate from the kind of service and benefits that they received in the past and might have expected in the future. Over the last ten years or so, “demutualisation” seems to have become a vogue form of restructuring certain types of mutual organisations but it has almost invariably been accompanied by dissent. One may have some sympathy with those affected by such plans, especially where they have seen no reason to be dissatisfied with the organisation of which they are members and more especially where the paying of dividends might be seen to be likely to have direct effects on financial entitlements already enjoyed, as in the case of mutual life insurance companies. That is not to say, however, that they should necessarily be allowed to stand in the way if a majority of their fellow members of 75 per cent or more would prefer to adopt a different way of organising their mutual affairs where the law permits that to take place.
A. Whether appellants’ advice as to use of “free shares” in prospectus amounted to negligence
674 In the present case, though the members had rights and obligations as members of guarantee companies to the extent, for example, that they were under a minimal liability if either company were wound up, both Association and Insurance had by dint of their operations amassed considerable sums by way of reserves and the like which were of real value, though difficult to turn to account. The consolidated balance sheet produced for the purpose of the prospectus showed a members’ equity in the group in excess of $2-billion and the assets under the control of the two companies were, in broad terms, as to Association, $457-million worth of assets, and, as to Insurance, $4.401-billion worth of assets. As with almost all companies of this kind dividends could not be declared and upon winding up the assets of each of the companies had to be applied, effectively, to bodies having similar purposes. It was not suggested that the objects of the association were thereby charitable or that they could not be applied thereafter during the company’s lifetime in other ways, so far as by law that could be achieved. Nevertheless, as has already been seen, an ingenious scheme was worked out providing paid-up shares in Holdings to members of both guarantee companies who agreed to take them and paying to those members who did not wish to take up shares a “cash alternative”, which was to be funded by the sale on the open market, pursuant to the terms in the prospectus, of the very shares which had been turned down. In return all would lose their existing membership rights. 675 Thus the boards’ proposal had this attraction to members that either they were to be provided with shares treated as fully paid up to their stated par value of $1.00 each or, for those unwilling to become members, they were to be paid a sum equivalent but not identical to the true value of the shares to which they would have been entitled, seemingly about $2 per share, but depending on the market’s reception of what was called the “sale offer”. In particular the boards were anxious that existing members should be told that they were the object of a “free offer” and that they could obtain “free shares”, in fact defined towards the end of the prospectus as “the NRMA shares offered to members under the Members’ Free Offer”. 676 So it came to pass that the prospectus, together with the brochure sent with it called “the onsert”, Of which there were several forms, according to the recipient’s interest. sent to members of Association and Insurance was replete with references to the “free” shares and the option which members were given to accept either the shares or take the cash alternative. Some of those responsible at NRMA and their legal advisers had been concerned at first about describing these shares as free, not so much because of that description but because in effect the shares might be seen to have been improperly issued at a discount to par value: see s.203 of the Corporations Law as it then was. Nevertheless there was also a residual concern lest the membership rights proposed to be taken away should thereby be considered as having no value. Although the appellant solicitors, especially AAH, were firmly of the view that there was no misleading of members by describing the shares as free, certainly in the context of the elaborate discussion contained in the prospectus, nevertheless advice was sought from Mr Heydon as to the form of the onsert which contained forms for the “acceptance of free shares” and otherwise referred to free shares, but in a brief two sheet document which at the time contained no explanation of the circumstances whereby those shares would be issued to members. Conceivably a member receiving both documents might look only at the onsert and decide to accept the free shares or to send a proxy in favour of the scheme (which was likewise contained in the onsert) without being fully aware of the circumstances under which the shares would be issued and allotted. 677 These in broad terms were the circumstances (elsewhere described in considerable detail) under which counsel’s advice was sought as to that specific document. No advice was sought from him then or later as to the prospectus, although he had been asked to advise the trustee, Perpetual Trustee Company Limited which had also issued the prospectus, but essentially from the viewpoint of the trustee which was to administer the scheme for selling those shares which were not accepted by members. 678 The two firms of solicitors had ongoing responsibilities of varying kinds, with each obliged to “sign off” aspects of the report of the Due Diligence Committee of which Mr Morgan and Mr Bateman were both members. Both firms are criticised by the respondents (in the course of the cross-appeal) for failing to give advice both to the due diligence committee and to the respondents as to the risks entailed in describing the shares as “free shares” in the prospectus and otherwise. Mr Heydon is not criticised for his opinion, for in truth it was critical of the expression when used in one version of the onsert and contained his conclusion that in that document it was “ambiguous or worse”. That document was changed to its final form which was sent with the prospectus, though Mr Heydon had been asked to give a further opinion in respect of the new version about which he was, for obvious reasons, much less critical. The claim made against him, however, in the course of the cross-appeal is that he failed to draw attention to the prospectus which he had earlier seen for the purpose of advising another client, the Perpetual Trustee Company Ltd, and thus was said to be guilty of negligence under the “Waimond” principle described and correctly criticized in the judgment of McPherson, A.J.A. 679 At the time there was no authority, or at least no useful authority, as to what was a proper and thus not a “misleading or deceptive” use of the word “free” in advertising or other commercial contexts. The respondents do not now say that any of the appellants were negligent in forming the opinions they did at the time, although the respondents say the solicitors at least were wrong. The criticism is largely confined Although it also forms an element in the statutory claims. to a claim that they acted negligently in failing to advise the Due Diligence Committee and their clients of the risks of using that word or, in particular, having regard to Mr Heydon’s advice, by not drawing that opinion directly to the attention of the Committee and the clients. It seems that certain members of the clients’ executive staff were aware of his opinion but not any member of the board or the other members of the Due Diligence Committee. 680 The problem however was exacerbated because two of the dissenting directors immediately took the matter to the Federal Court and obtained favourable decisions, including declarations and an injunction restraining the scheme from going ahead, first of all from Gummow, J. on 13 October 1994 and then, with some variations, from the Full Court of the Federal Court in a judgment handed down on 27 January 1995. See Fraser v. NRMA and NRMA v. Fraser. 681 The outcome of that case and the opinions of the four judges involved might at first seem to show that the solicitor appellants were misguided in their advice to the respondents and that, even though the barrister appellant had clearly pointed out difficulties with the onsert, all appellants might have approached the matter on a too simplistic level. Again, however, such a conclusion would be formed with the benefit essentially of hindsight. The matter was by no means as clear as was stated in those forcefully expressed judgments. The absence of authority, in relation to the relevant provisions of the legislation invoked for this purpose, as to what the word “free” meant or could it be taken as connoting in the context of commercial offers, advertisements and the like, might be thought to have made it difficult to say beforehand how it would be interpreted. Indeed, there was no discussion of authority as to the meaning of the word in the judgment of Gummow, J. and in the Full Court there was but brief reference to two American decisions on different legislation, including the Supreme Court decision in Federal Trade Commission v. Standard Education Society 302 US 112 (1937).. From this they concluded: “’free’ can easily be misleading or deceptive, depending on the context …” 55 FCR at 483.. Perhaps broad generalisations such as that were a reasonable basis for the trial judge in the present case to express doubts as to the outcome in the Federal Court, but it is not necessary for me to express any such conclusion. I should point out that the trial judge rightly noted that the evidence before him was far more extensive than that which had been put before the judge in Fraser on an application for urgent interlocutory relief. 682 The Full Court in Fraser observed that in some contexts, such as in the expression “buy one, get one free”, the word “free” might be understood as meaning “without additional or marginal outlay over what is obviously being paid”, and I might add, with respect, that it is part of everyday experience to receive brochures and see advertisements in similar terms, where the purpose is to sell books, computer programs, air tickets or what you will. Even to the relatively unsophisticated an offer of that kind would be understood as an offer to provide some item free of cost if one is prepared to outlay a sum sufficient to buy something else. In the Federal Court Gummow, J. pointed to several meanings, not specifically attributed to dictionaries, but seemingly adapted from meanings 25 and 26 in the Macquarie Dictionary. In the first place he referred to the meaning “that which is provided without, or not subject to, a charge or payment”, which seems to have been the meaning espoused by the respondent companies in that case 52 FCR at 27.. His Honour, however, seemed to prefer At 28. the slightly wider meaning, namely, “that which is given without consideration and as a gift”. He therefore concluded, in the context of the phrase “free shares”, which he saw as significant because of its frequent use in the context of a prospectus, that the “notion” was engendered that the shares “may be acquired without any significant loss or outgoing to the offeree who accepts them”. With great respect, I am not entirely clear how his Honour came to chose that particular collocation of words The words “loss or outgoing” do not necessarily connote that either or both is incurred by way of “consideration”, the absence of which seems an essential element of the second of the two definitions earlier chosen. Probably, however, all that was meant was that the prospectus failed to emphasise that the members were giving up something of value in return., but it was by reference to that meaning that he found the use of the expression misleading or deceptive, largely because the prospectus failed sufficiently clearly or sufficiently often to emphasise the rights and benefits which the offerees were giving up as members of the two existing companies. 683 On appeal the Full Court was prepared to accept the definition of Gummow, J. without any further discussion of its meaning other than that to which I have already adverted. 55 FCR at 483. Perhaps the respondent companies were prepared to accept that definition but argued, as they did unsuccessfully, that there was no significant loss or outgoing which had not been sufficiently identified in the prospectus. 684 I have referred to this discussion, not to show that the learned judges of the Federal Court were wrong, but only to show that they took a particular view of the meaning and connotation of the words in the context of the prospectus. The question raised on the cross-appeal is not so much whether the solicitor appellants should have foreseen the possibility of some such conclusion and reasoning, because they had, as was confirmed by their briefing Mr Heydon as to the onsert, but whether they should have advised that there was a danger that some conclusion opposite to their own would be reached if the matter were taken to court. In particular it was argued that the matter was of some difficulty and that it required an expert in trade practices law, indeed an expert on Part V of the Trade Practices Act and the Fair Trading Act, to confirm their own view before they advised going to press with the onsert using the expression “free shares” in the way that they did. It was said that the same, or almost the same, difficulty should have arisen before advising that the prospectus might be issued. It was thereby suggested that any understanding of the law, including all relevant authority, would make clear the risk which the companies faced and which should have been drawn to the respondents’ attention before the issue of the prospectus. 685 To my way of thinking, however, the latter approach misapprehends what might fairly be expected in these circumstances. There is of course much authority as to the meaning of the expression “misleading or deceptive”, although largely from single instances occurring in particular circumstances over now many years, but it is essentially an expression of simple import. A qualified lawyer of experience should be able to give advice about the operation of s.52 and the related statutory provisions here relied upon, at least where the expression likely to be challenged is relatively simple. I am not suggesting that an understanding of the operation of guarantee companies and the rights and obligations of members thereof could in any way be said to be a matter of general knowledge, even amongst experienced company lawyers. That, however, was not the point made here, for it was contended that it was necessary to have an expert on the meaning of s.52 to advise as to the possible construction of the expression “free shares” in the prospectus, perhaps because they had already sought the advice of the appellant Mr Heydon as to the “onsert”, who was of course an acknowledged expert on the whole of the Trade Practices Act and on the Fair Trading Act. 686 Here it was said that the difficulty was in the connotation properly to be placed on the words “free shares”, but I see no reason why competent lawyers should not advise on their meaning, at least if they understood what the nature of the proposed scheme was. In that latter respect I understood no criticism to be made, at least for this purpose. 687 In essence the word “free”, as here used, is a word of straightforward meaning. It conveys, of course, a secondary meaning of a word with far greater import. Most of its primary meanings connote an absence of restriction, whether of an intellectual, moral, legal, physical or any other practical kind. In the Oxford English Dictionary the present use appears only as the thirty-second meaning of the adjective and its relationship to the other, more significant, meanings is explained by the authors stating that it is “in full, free of cost, charge, or the like”. Consequently the definition then stated is relatively simple: “given or provided without payment, costless, gratuitous”. 688 The relevant standard being, for those purposes, what reasonable practitioners would do in the circumstances of the present case, it is not hard to see why those firms of solicitors might not have concluded that for all practical purposes the shares were free of cost or free of charge inasmuch as no payment was being sought from the members to whom they were offered. Nothing had to be done by the members except choose whether they would take the shares or take the cash alternative. As I read the prospectus and the proposed changes to the memoranda and articles, acceptors of the shares were not even required explicitly to give up their rights as members of either or both of the existing guarantee companies. Allotment of the shares did not even depend on whether the acceptor voted in favour of each necessary resolution. As was stated in the onsert in the box immediately above the place for accepting these shares: “If at least 75 per cent of the votes cast are YES votes, free shares will be issued.” The proposed amended articles of Association likewise made that clear: see article 117. Membership rights in the guarantee companies would be lost regardless of a member’s vote, if the necessary majorities voted in favour. In fact it was only in the note added at Mr Heydon’s suggestion on the opposite page that one sees anything about the existence of consideration, inasmuch as the starred footnote ultimately stated that the free shares “are in exchange for membership under the Articles of each of” Association and Insurance. That conclusion, however, flowed not from any element in the scheme which required any member of Association or Insurance to agree directly to give up their rights, but from an assumption that the proposed special resolutions, when passed, would effect the necessary amendments to those companies’ articles which would “constitute an agreement which binds all members …, even if they voted against the proposal or did not vote at all”. See the description on p.12 of the Prospectus of the “legal steps involved in change”: cf. s.180 of the Corporations Law at the time. 689 These subtleties may, however, explain the approach of the two companies, or at least that of their solicitors. They were each anxious to make clear that the shares were not being issued at a consideration below par value. They sought to maintain that the value, as calculated on a hard-headed economic basis, was in excess of the paid-up value. For good reason they did not pursue nor wish to contemplate any suggestion that what was being given up was of no value, or any suggestion that the loss of rights would be a fait accompli and that the shares would be issued without the giving of consideration on the part of the individual member. They considered the shares to be free simply because members were not being asked to make any payment, but they were also fully alive to the other aspect of the transaction upon which the Federal Court placed such heavy reliance. Their failure consisted, not so much in their lack of understanding of what was being given up, but in failing, as that Court held, to ensure that the prospectus made that clear to the average member of the guarantee companies. The difficulty for the solicitors was that they were fully aware of the nature of the scheme which would bring the existing membership structure of the guarantee companies to an end and the substitution of the rights in the holding company. That had its legal complications, complications it may be thought of a kind which would not ordinarily attract the interest of the average member and so it was described in a largely appropriate but shorthand way on two occasions in the prospectus, with other references appearing in diagrams and charts which hinted at but did not explain the precise changes to be made to the articles. If the solicitors were foolish in advising the company, it was in failing to insist that the words “free shares” not be repeated so many times without appropriate qualification, and in that the Federal Court saw the germ of the problem. To the appellant solicitors, however, that was merely the repetition of a defined term which happened to emphasise what seemed obviously the case, namely that the members did not have to pay for the shares upon allotment. It was the balance, or the lack of balance, between the repetition of the expression and the extent of the relatively brief explanation of the structural changes affecting the members and their rights which the lawyers got wrong, as was later held. But the question here is not whether they were right, nor whether they might genuinely have reached their conclusions, but whether they should have said something different to the clients and whether they should have warned them what they had done might turn out to be inappropriate and capable of being restrained. 690 In this I do not see that the respondents have made out their case on the cross-appeal that the learned judge was wrong in his conclusion on this issue, although I may differ from him on some matters of emphasis. Essentially the decision to be made was one of balance and it turned out that the solicitors’ opinion was held to be wrong. As has been so frequently emphasised, that does not mean that they were negligent. I can see good reasons for the appellant solicitors taking the simplistic approach that they did, albeit in the end the Federal Court held the prospectus to be misleading or deceptive. It was and is not necessary to say that the Federal Court itself came to an erroneous decision on this subject: to that extent I may appear to differ from the learned judge and from Malcolm, A.J.A. and McPherson, A.J.A. 691 It is merely necessary to add that the solicitors could have formed a different opinion genuinely and that the formation of that opinion did not require, as the respondents assert, that any doubts should have been expressed further to the Due Diligence Committee or to the boards or other representatives of the companies. The issues were well enough known but the emphasis turned out to be wrong. I see no negligence in their failure to advise that a different view might be taken. As already stated that is the general concomitant of giving advice on difficult legal matters. If the respondents were looking for fail-safe, no-risk advice, they should have made that clear to their legal advisers.
692 As to the respondents’ claims on the cross-appeal that the appellants should be liable under various provisions of the Trade Practices Act, the Fair Trading Act and the Corporations Law for their acts in relation otherwise to the use of the expression “free shares” in the prospectus, it is sufficient for me to say that I agree with the reasoning and conclusions of McPherson, A.J.A.
B. Other claims relating to use of expression “free shares ”
693 Consequently the cross-appeal should be dismissed. There remain only the various claims for contribution and the series of applications for leave to appeal brought by various parties, especially certain directors, which might have been pursued if the appellants had remained liable under the original judgment or if the cross-appeal had succeeded. As in my opinion the appellants should not be held liable for any aspect of their activities in relation to the respondents’ proposals for demutualisation in the years 1993/1994, there seems no purpose in pursuing them, as would appear from the judgment of McPherson, A.J.A. The contribution orders would therefore fall with the judgment itself and I agree in the orders which he proposes.
PART III: OTHER ISSUES AND CLAIMS
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