NRMA Ltd v Morgan
[1999] NSWSC 407
•13 May 1999
Reported Decision: (1999) 31 ACSR 435
(1999) Aust Torts Reports 81-505
(1999) 17 ACLC 1029
New South Wales
Supreme Court
CITATION: NRMA LTD & ORS v MORGAN & ORS [1999] NSWSC 407 CURRENT JURISDICTION: Commercial Divison FILE NUMBER(S): 50257/95 HEARING DATE(S): 25, 26, 27, 29 May; 1, 2, 3, 4, 5, 9, 15, 16, 17, 18, 19, 22, 23, 24, 25, 26, 29 June; 1, 3, 6, 7, 8, 9, 10, 13, 14, 15, 16, 17, 20, 21, 22, 23, 24, 27, 28, 29, 30, 31 July; 3, 4, 5, 6, 7, 10, 11, 12, 13, 14, 24, 25, 26, 27, 28 August; 1, 2, 3, 4, 7, 8, 9, 10, 14 September; 6, 7, 8, 9, 13, 14, 15, 16 October 1998 JUDGMENT DATE:
13 May 1999PARTIES :
NRMA LTD & ORS
MORGAN & ORSJUDGMENT OF: Giles J
COUNSEL : Plaintiffs - J L Sher QC & N J O'Bryan
First Defendant - B C Oslington QC & M R Speakman
Second Defendant - R V Gyles QC, G K Burton & R C Beasley
Third Defendant - A J Meagher SC & P R WhitfordSOLICITORS: Plaintiffs - Norton Smith
First Defendant - Blake Dawson Waldron
Second Defendant - Ebsworth & Ebsworth
Third Defendant - Corrs Chambers WestgarthCATCHWORDS: NEGLIGENCE - solicitors and barrister - extent of duties of care - standards of care that of experts in the relevant field - whether breach of duties of care; FAIR TRADING ACT 1987 - misleading conduct - solicitors and barrister - negligence in advising - whether misleading conduct or involvement in client's misleading conduct; CORPORATIONS LAW - issue of prospectus - causing or approving issue - solicitors and barrister - negligence in advising - misleading prospectus - whether causing or approving issue; DAMAGES - wasted expenditure - expenditure to demutualise company - injunction to restrain - if solicitors and barrister negligent - expenditure wasted - whether recoverable without regard to whether demutualisation would have failed anyway - McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 and Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64 considered. DECISION: Reasons published; stood over for calculation of interest and submissions on costs.
IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMERCIAL DIVISION50257 of 1995
GILES J
Thursday 13 May 1999
NRMA LTD & ORS -v- MORGAN & ORS
JUDGMENT
I INTRODUCTION
1 National Roads Association of New South Wales (“Association”) was incorporated 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. With some intermediate changes of name involving expansion to National Roads and Motorists’ Association and use of the acronym NRMA, on 17 November 1992 its 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 it had assets of approximately $457 million under its management.
2 NRMA Insurance Ltd (“Insurance”) was incorporated in 1926, also as a company limited by guarantee. It was formed to provide insurance and financial services, without restriction to a motoring connection. 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 (in general terms) those policy holders who were also members of Association. By 1994 Insurance had approximately 1,300,000 members, it wholly owned or was the majority shareholder in eight subsidiary companies, and it had assets of approximately $4,401,000,000 under its management.
3 Association, Insurance, and their subsidiaries operated as an organisation generally known to the public as the NRMA, and where there is no point in distinguishing between the constituents of the organisation I will so refer to it. Association was the dominant constituent of the organisation. 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 for the management of its 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. The articles of Insurance provided for appointment by the directors of Association of members of the Board of Management as a committee to act “in liaison with” the directors of Insurance, and that the directors of Insurance might delegate their powers to the committee. These bodies were put in place, it seems with common membership, and acted jointly as the Board of Management and Insurance Liaison Committee. So the affairs of Association and Insurance received significantly common direction, but in practice with Association able to exercise overall control.
4 As is evident, the NRMA was successful and prosperous. 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 service 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.
5 For this reason, amongst others, the senior management and a majority of directors of the NRMA did not regard its structure as satisfactory, the other reasons including what was regarded as an unsatisfactory basis for corporate governance and a perceived need to be able to raise capital in order to compete effectively and expand in the NRMA’s commercial activities. So it was proposed that the NRMA be restructured by what was called “demutualisation”, that is, a change from operation through companies limited by guarantee conducted 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 was described in a letter from the President to members, in the prospectus of which much will be said later in these reasons, as a proposal to “unlock the wealth” of the NRMA and “permit members to share in [its] wealth and future financial successes”. The slogan “Share the Future” was adopted in connection with the proposal.
6 Consideration of restructuring began in 1992. The proposal was approved by the boards of Association and Insurance for further development with a view to ultimate listing of the NRMA on the Stock Exchange, and was announced, on 17 March 1994. Neither the new structure nor the steps to achieve it were finally determined at that time, although it was envisaged that a new company with share capital would be incorporated, that the new company would be admitted to membership of Association and Insurance, that resolutions would be passed at general meetings of members of Association and Insurance having the effect that the members of Association and Insurance other than the new company would cease to be members and would instead either become shareholders in the new company or receive a cash payment, and that the new company would then be listed on the Stock Exchange. In the result, the new company would be a listed holding company, the only member of Association and Insurance, and services previously enjoyed by virtue of membership (road service and otherwise) would be provided to the now shareholders in the new company under contracts with the service provider.
7 Development of the proposal continued after 17 March 1994. The new structure and the steps to achieve it were finally determined, still of the same nature. The new company NRMA Holdings Ltd (“Holdings”) was incorporated (some of the directors of Association became its directors), and Holdings became a member of 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.
8 The crucial step in the proposal was the passing of the resolutions at the general meetings. Special resolutions of 75 per cent of those present, in person or by proxy, were required. It was necessary that notices of the general meetings be sent to members and that they be appropriately informed as to the proposal so that they could vote on the resolutions, and as well the offer of shares in Holdings to those members (and others) who chose to become shareholders called for the issue of a prospectus. Both tasks were addressed through a booklet, entitled a prospectus although more than that, 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. The notices of meeting in the prospectus were for general meetings to be held on 19 October 1994, and the onsert included proxy voting papers for the general meetings. Mailing of the prospectus package began on 31 August 1994.
9 The approvals of the proposal 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.
10 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, for a declaration that the prospectus and the information in it were misleading in certain respects, and for injunctions 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. The hearing of those claims took place on 5, 6 and 7 October 1994, and Gummow J gave judgment on 13 October 1994 (Fraser v NRMA Holdings Ltd (1994) 52 FCR 1).
11 I will shortly return to the application and his Honour’s reasons, and for the present it is sufficient that Gummow J held that the prospectus was misleading in what it said or did not say in certain respects, that by distributing the prospectus and onsert Holdings had engaged in misleading conduct in contravention of s 52 of the Trade Practices Act 1974 (“the TP Act”), and that by proceeding with the general meetings Association and Insurance would be parties to and knowingly concerned in that contravention. Injunctions were granted restraining further distribution of the prospectus and onsert and restraining Association and Insurance from proceeding with any business at the general meetings except as necessary or appropriate to adjourn them.
12 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 they were adjourned.
13 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. The Full Court (Black CJ, von Doussa and Cooper JJ) gave judgment on 27 January 1995 (NRMA Holdings Ltd v Fraser (1995) 55 FCR 452).
14 Leave to appeal was granted, but the appeal was dismissed with a variation in the orders of Gummow J. Again I will shortly return to the appeal and their Honours’ reasons, and for the present it is sufficient that the Full Court did not uphold all the respects in which the prospectus had been found by Gummow J to be misleading, and held that it was misleading in a different respect. The respects in which the prospectus was found wanting were in connection with the description of the shares in Holdings to be issued to members as free shares and the disclosure of the disadvantages of the proposal. The position was unchanged: the general meetings could not transact any substantive business.
15 The judgment of Gummow J had left as a possibility the issuing of a supplementary prospectus to rectify matters held to bring about the misleading conduct, and the judgment of the Full Court left an enhanced possibility. The NRMA still wanted to proceed with the proposal, and was considering how best to do so: its consideration included by issuing a supplementary prospectus, and some work towards a supplementary prospectus was done.
16 Then on 8 March 1995 the High Court gave judgment in Gambotto v WCP Ltd (1995) 182 CLR 432 (“Gambotto’s case”). It will be necessary to return to the course of Gambotto’s case and the reasons of the High Court, but the broad effect of the reasons was that the articles of a company could not be changed by special resolution to empower the majority shareholders to expropriate the minority shareholders merely in order to secure a favourable corporate structure.
17 The NRMA took advice on the implications of this decision for the demutualisation by the steps then involved in the proposal, relevantly resolutions in general meetings affecting the continuation of the memberships of the members of Association and Insurance. After detailed consideration of the matter, in May 1995 the NRMA decided not to proceed with the proposal, whether with a supplementary prospectus or at all.
18 So the attempt at demutualisation failed. But the NRMA had spent a lot of money. In developing the proposal it had obtained advice and assistance from merchant banks, corporate advisers, underwriters, accountants, and lawyers. It had obtained marketing and public relations services from a number of providers of such services. The printing and postage of the prospectus package alone cost millions of dollars, and there was a host of other costs, large and small, associated with the formulation and implementation of the proposal. Then the NRMA had incurred the costs of the Federal Court proceedings, and after those proceedings had obtained further merchant banking, legal, and other advice and assistance. Putting forward also a large sum for its internal costs, the NRMA asserted a total expenditure of nearly $30 million. It said that, with the decision not to proceed with the proposal, the expenditure was all wasted.
19 The lawyers from whom the NRMA had obtained advice were the firms of solicitors Allen Allen & Hemsley (“AAH”) and Abbott Tout (“AT”) and, through those firms, the barrister Mr Dyson Heydon QC. The advice included advice to do with the new structure and the steps to achieve it and to do with the content of the prospectus and the onsert. In these proceedings the NRMA alleged that the lawyers were at fault in advice they gave and did not give in those areas, and consequently engaged in or were involved in the NRMA’s misleading conduct, and that they were responsible in law for the waste of the expenditure. It claimed the amount of the wasted expenditure from them.II FOUNDATION MATERIAL20 Central to these proceedings is an appreciation of the prospectus and the onsert, of the reasons of Gummow J and the Full Court, and of Gambotto’s case and its progress through the courts. I will address those matters now, as a foundation for what follows.
The prospectus and the onsert
21 The onsert was the first part of the prospectus package seen by the member, and a description of the onsert should precede the description of the prospectus. There were a number of different versions of the onsert, according to 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 Association and also as a member of Insurance, or whether the member could vote as a member only of Insurance, and in the case of voting as a member of Insurance according to whether one or more vote could be exercised. By far the 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 was situation 2 members, voting as a member only of Association. The other groups were relatively insignificant.
22 The onsert took a more significant role in these proceedings than in the proceedings in the Federal Court, and seeing the majority version in its complete form will be of assistance. As may be expected, the onsert went through many drafts before reaching its final form. A copy of the onsert for situation 3 members is appendix 1 to these reasons.23 The first page, the front of the first leaf, 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 the topmost page in the prospectus package, visible within the clear plastic cover. The second page, the back of the first leaf, contained instructions to the member. The third page, the front of the second leaf, contained both the proxy voting paper for the general meeting of Association and the Acceptance of Free Shares form. The fourth page, the back of the second leaf, contained the proxy voting paper for the general meeting of Insurance. The features of the onsert particularly material to these proceedings were -
(a) the words “How to vote!” and “How many shares you will be given!” in proximity across the first page; for a time in the drafting history of the carrier the latter words had been, “How many FREE shares you will get!”, and the circumstances in which those words were used and were changed will be described in these reasons;
(b) the reference to the onsert including an Acceptance of Free Shares in the bottom left hand corner of the first page; this was a relative constant in the drafts;
(c) the 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 …”; as will be described, the asterisk and marginal note were introduced in conjunction with the change in words in (a); 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.24 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, and did not have that part of the instructions to do with voting, but did have “How many shares you will be given!” and, with appropriate changes, the references to Free Shares with the asterisk and marginal note and the Acceptance of Free Shares form.
25 The prospectus was a document of 100 pages, attractively presented and enhanced by photographs of NRMA personnel and operations. After some preliminary material, it was divided into nine Sections. It made frequent use of the phrase “Free Shares”, a phrase defined in its Section 9 devoted to “Definitions and Technical Terms” as meaning “the NRMA shares offered to members under the Members Free Offer”. This definition in turn took up the definitions of “NRMA shares” as meaning “some or all (depending on the context) of the fully paid ordinary shares of $1.00 par value each in NRMA Holdings offered under this prospectus” and of “Members Free Offer” as meaning “the offer of Free Shares to members as described in Section 2”.
26 In the following description of the prospectus, it must be remembered that it was intended that it do at least two jobs. It was not just a prospectus providing information material to an offer of shares in Holdings. It also contained notices of the general meetings of Association and Insurance and information to inform members as to the proposal so that they could vote on the resolutions to be put forward at the meetings. The description concentrates upon features of the prospectus material to these proceedings.
27 It was stated on the inside of the cover of the prospectus that it was issued by Holdings and Perpetual Trustee Company Ltd (“Perpetual”). Perpetual was included because, under the proposal as finally determined, there was a second stage offer of shares in Holdings by Perpetual. The first stage offer of shares in Holdings was by Holdings to former members of Association and Insurance, being the Members Free Offer. Those shares not taken up pursuant to the offer under the Members Free Offer would go into the NRMA Offer Trust, of which Perpetual was trustee, and would be offered to institutions, to members and policy holders, and then to the public, under the “Sale Offer”: the Sale Offer was the second stage offer. In the definitions, the offer to members and policy holders part of the Sale Offer was described as the “Members Extra Shares Offer”, distinct from the Members Free Offer and defined as “the invitation made pursuant to this prospectus to members and non-member policyholders to apply to buy NRMA shares as described in Section 2”. The shares under the Sale Offer were not described as Free Shares.
28 Page 1 of the prospectus was introductory. It was said that the prospectus provided information on the NRMA “which will help you decide whether you want NRMA shares”, and that it “explains the proposal and its implications”. Members were urged to vote, and it was said 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 “[A]s well as the proposal to issue the Free Shares, members may be able to buy extra NRMA shares during the Sale Offer”.
29 Page 2 of the prospectus was a contents page, providing an index to the nine Sections which followed. Before those Sections, however, on pages 3 and 4 there was a “President’s Letter” on a Holdings letterhead reading -
“Dear Member,
As a member of the NRMA you are facing one of the most important decisions in the proud history of the organisation.
The NRMA, like many other mutual organisations, has reached a crossroads. It is time to decide:
whether we continue to operate within our current structure - which has been successful but which does not permit the members to share in the wealth and financial successes of the organisation; or
whether we adopt a new structure which will build on the current successes and permit members to share in the wealth and future financial successes of the organisation.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
In my 14 years as a member of the Board of the Association, I have seen the organisation grow and prosper. This proposed change in structure will place us in an even stronger position to maintain our high standard of service and our competitiveness.
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. Therefore don’t leave it to others to vote. Your vote and the vote of your fellow members will determine the NRMA’s future, so don’t delay:
consider the proposal using the details in this prospectus;
complete and sign both the ‘In Favour’ sections of the Proxy Voting Paper and Acceptance of Free Shares form that came on the outside of this prospectus and encourage your family and friends to do likewise, so the proposal will receive the requisite 75% vote;
mail the Proxy Voting Paper and the Acceptance of Free Shares form to us so that we receive it preferably by no later than 12 October 1994.Act now and Share the Future with a great organisation - your NRMA.
Yours sincerely
[signature]
DON MACKAY
President”30 Section 1 of the prospectus was entitled “Information for Members”, and occupied pp 5 to 20. The features of the prospectus in this Section particularly material to these proceedings (apart from the references to Free Shares) were the recommendations to vote in favour of the proposal, the references to consideration of advantages and disadvantages and the extent of discussion of advantages and disadvantages, and the express references to members giving up membership. The last-mentioned references are emphasised in their reproduction in these reasons, for ease of later identification.
31 The introduction within Section 1 read -
“ INTRODUCTION
This Section is provided by the Boards of NRMA Ltd (‘the Association’) and NRMA Insurance Ltd (‘NRMA Insurance’).
THE NRMA TODAY From its origins as a club with some 50 members formed in 1920, the NRMA has grown to become one of the world’s leading motoring organis-ations with over 1.8 million members and assets under management of more than $6 billion at 31 March 1994. The tremendous loyalty of the NRMA’s members and policyholders has come from the excellence of the services provided by the NRMA over many years.
BENEFITS OF CHANGE 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.
THE BOARDS RECOMMEND The NRMA Boards have carefully considered the advantages and disadvantages of the proposal and have concluded that this proposal is in the best interests of members and the NRMA.
Vote ‘Yes’ The Boards therefore recommend that: members of each of the Association and NRMA Insurance vote in favour of the proposal;
Accept the Free Shares members of the Association choose the Free Shares.”32 There was then a description of the proposal. It began with the statement that members had the opportunity to become shareholders of Holdings, described as “a new company which will own the NRMA businesses”. It was then said -
“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.”
33 After a diagram representing the proposed new structure, in which Holdings was shown as wholly owning Association and Insurance, it was said that road service and other services would continue as they had in the past, and 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 the marginal heading “Free Shares in the NRMA” appeared -
“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.”34 Further descriptions of the cash alternative, and reiteration of the need for a 75 per cent vote in favour, followed, and 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 was “linked to an NRMA Insurance policy” at 16 March 1994, and “the longer the membership (using five year intervals) the greater the entitlement” with a 25 year maximum. 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: 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.
35 Some paragraphs then purported to answer the marginal note “How the Sharemarket Works”, and then there appeared -
“ COSTS AS A The major additional cost of being a listed company
LISTED will be the cost of maintaining a share register.
COMPANY This is a necessary cost of enabling shareholders to receive dividends and to buy and to sell NRMA shares.THE NRMA The NRMA’s first priority is to keep our members’
COMMITMENT loyalty which has been built up over many years and has contributed so much to our success.Successful organisations know that meeting customers’ needs in the key to long term success. The NRMA has been following this formula for decades.
The NRMA’s commitment to promoting motorists’ interests, providing efficient road service, other member services and insurance at reasonable prices will continue. The devotion to members’ needs has seen the NRMA win the Australian Quality Award and other independent recognitions of service excellence.
Only the legal framework of the NRMA will change, not its culture.
The objectives of the Association presently include and will continue to include:
NRMA Holdings’ constitution will require that these objectives of the Association continue for the benefit of Service Members and all road users.”
to promote the interests of motorists and other road users throughout Australia in good roads, safety and consumer protection;
to provide motorists and others with a range of services, including provision of emergency or breakdown road service and other services to vehicles.36 A heading “Other Options” followed, under which was -
37 This was followed by the heading “The Next Steps” , under which was -
“ WHAT OTHER The NRMA has considered the advantages and
OPTIONS disadvantages of a range of options and
WERE concluded that the share issue and listing on the
CONSIDERED? Stock Exchange is in the best interests of members and the NRMA.Other options which have been examined include:
1. Doing nothing : The NRMA could continue to operate under its present structure, but the Boards believe that, by becoming shareholders, members will be better off.
No organisation can rest on its laurels and assume that the way things have always been done will work in the future. The NRMA has made many changes to its operations in the past and has always looked for better ways to do business. That has made it a market leader.
This is another change which the Boards believe will significantly benefit members and make the NRMA stronger in the future. To do nothing means the wealth of the organisation remains locked up and inaccessible to members.
2. Reducing premiums and membership fees: Charging artificially low prices for our services means that current members subsidise the new customers who would undoubtedly rush to take advantage of artificially low prices. Reducing charges for NRMA services and products below their true cost will weaken the financial strength of the NRMA and increases pressure for large price rises in the future.
3. Continue insurance rebates: Many of the same problems mentioned above are also relevant to continuing insurance rebates. In addition, rebates only benefit policyholders - and not the some 30% of members who do not hold insurance policies. By giving members Free Shares, all members can benefit directly from the success of the NRMA.
4. Making a one-off major payment to Association or NRMA Insurance members: Such a major payment would deplete the NRMA’s reserves, greatly reducing the NRMA’s financial strength. Such a payment could also be liable to significant tax when received by members.
5. Sell off NRMA Insurance: Selling off NRMA Insurance would effectively split the NRMA apart. The NRMA’s strength lies in the value of road service and insurance, with each benefiting the other. If they were to be separated, each would be weakened. The value of the combination is greater than its parts. Separating the two would mean splitting the staff of the NRMA, thereby destroying the very culture which has made the NRMA a success.”
“MEMBERS’ On Wednesday 19 October 1994 there will be
GENERAL two general meetings at Sydney Convention and
MEETINGS 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.
The Boards urge members to vote IN FAVOUR of the resolutions. If voting by post, members should return the Proxy Voting Paper which came on the outside of the prospectus, preferably by 12 October. There are legal time limits which are explained at the end of this Section but 12 October will meet all the deadlines.
All members whether voting in favour of or against the resolutions should also fill out the Acceptance of Free Shares section of the form.
LEGAL STEPS Members’ approval will mean members of the
INVOLVED IN Association and members of NRMA Insurance
CHANGE 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:
You will find the Notices of Meeting for the Association and NRMA Insurance at the end of this Section.” [Emphasis added]
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 they 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.38 After a description of the beneficial taxation treatment to be extended to acceptance of Free Shares or the cash alternative, the Section continued -
39 The next two pages, still within Section 1, contained the notices of meeting. The notice of meeting for Association read -
“ MEMBERS’ QUESTIONS
What happens if members reject the proposal?
If either of the members of the Association or the members of NRMA Insurance do not pass the special resolutions to approve the proposed restructuring, the NRMA structure will remain the same as it is today. The Free Shares will not be issued.
What happens if I don’t vote?
The special resolutions (if passed) constitute an agreement which binds all members of the Association and of NRMA Insurance, even if you voted against the proposal or did not vote at all. Members should make sure they vote. Only if 75% of those members who vote are in favour can the Free Shares be issued. Therefore members should not presume that other people’s votes will achieve the desired result. If a member deliberately abstains from voting, they [sic] should still fill in the Acceptance of Free Shares form that came on the outside of the prospectus.
What happens if I don’t choose Free Shares or the cash alternative?
By law you cannot be given the Free Shares unless you validly choose them on the form supplied. If you don’t choose to take the Free Shares, you will get the cash alternative.
Will the NRMA change its culture?
No. The NRMA’s commitment to Road Service and competitive insurance is a tremendously successful formula and will remain . What changes is the structure of the organisation so that members get Free Shares. Our emphasis on service quality, coupled with being able to adapt to new and better ways of doing business, will not change, as these are the keys to the NRMA’s success.
With shareholders, will the NRMA pursue profit at the expense of service?
The NRMA’s reputation for superior customer service is one of the main contributions to the organisation’s success over the past 74 years.
It is fundamental to the success of a business to get and keep customers. Profit alone is not the mission of any well-run company, it is the result of serving customers better than your competitors.
The culture of the NRMA has always demanded, and will continue to demand, that we serve our customers better than our competitors. It is because we have been ‘customer-focused’ for so long that we have generated the profits that underpin the NRMA’s financial strength. Put another way, service has always been at the core of the NRMA’s winning formula.
The correct question, then, is not ‘Will profits be pursued at the expense of service?’, but ‘What new ways will the NRMA find to improve its service so that customers will continue to choose us and profits can be maintained?’
The NRMA’s culture encourages innovations in customer service and rewards individual service initiatives. This reflects the NRMA’s strong belief that profits and superior service, rather than being incompatible objectives, go hand in hand.
NRMA Holdings will have three types of protection against takeover. The first operates for five years and the other two will last beyond that.
The first is a special protection against takeover which will last until 1 January 2000. The Articles of NRMA Holdings prohibit any person (or company) from owning 5% or more of the shares in NRMA.
This 5% limit will also apply to groups of people or companies (known as associates) acting together to control a block of NRMA shares which together is 5% or more. For some time now it has been a breach of company law if a person (and that person’s associates) fail to notify a listed company when that 5% threshold is crossed. If NRMA Holdings were to receive such a notification (as required by the Corporations Law) that a person had gone over the 5% limit, then the Articles of NRMA Holdings provide that all voting and dividend rights of all the shares concerned (not just the surplus above 5%) are automatically suspended. Further, the directors of NRMA Holdings can then require that NRMA shares be sold to bring the number the person has below the 5% limit.
More details on those special protective provisions in the Articles of NRMA Holdings are set out in Section 8 of the prospectus.
A second protection against takeover is provided by the Insurance Acquisitions and Takeovers Act 1991 (Commonwealth). This legislation provides that no person or associated persons may acquire, without the prior approval of the Treasurer, shares in any insurance company which is authorised to carry on business in Australia, if those shares when aggregated with other shares applied for or held by that person or associated parties would amount to 15% or more of the shares. There are penalties for failure to comply and the Treasurer may order the disposal of shares acquired or issued in such contravention of the legislation. NRMA Holdings will be the holding company of NRMA Insurance and NRMA Life Ltd and the provisions of this legislation therefore apply to any acquisition of shares in NRMA Holdings.
The third form of protection lies with the shareholders themselves. Even if approval could be obtained from the Treasurer, a person or company attempting a takeover would face the very great problem of persuading loyal shareholders to give up their ownership of the NRMA.
Are all the directors in favour of the proposal?
There are 16 directors of the Association. Of these 13 are in favour of the proposal. The other 3 are against the proposal.
There are 11 directors of NRMA Insurance, 8 of whom are common to the Board of the Association. Only 1 director of NRMA Insurance is against the proposal, that director being 1 of the 3 Association directors who are against it.
Overall, therefore, there are 16 directors who are recommending the proposal to members.
Will the cost of my Service Membership go up?
The change in legal structure of the NRMA will not mean that the cost of Service Membership will go up. Any increases in Service Membership will only be dictated by the need to properly price this product, which is the same basis of setting the cost of Road Service membership as has been applied in the past.
What happens to membership cards?
Your current card will continue to entitle you to all services. We will send you a Service Membership card when it is time for you to pay your next annual subscription. This card will be much the same as your current card and will show the number of years you have been a member.
Gold Card members will continue to receive their special benefits.
How will the Free Shares affect my Social Security benefits?
For most people who receive Social Security benefits the proposal will be financially beneficial, although their payments and benefits may change slightly. Some, however, will be adversely affected.
When this issue was first raised, we commissioned an independent investigation of the position of people who receive Social Security benefits in the light of the proposal. A range of pensioner and other representative groups from the community sector were consulted in order to establish their views.
This issue is complex, as there are many different categories of Social Security beneficiaries.
Based on an extensive examination, it was found that only a relatively small number of pensioners would face unintended consequences. These people are already close to cut-off points and many already receive very small benefits, due to the size of their income and assets. A smaller number may be more seriously affected.
To ensure the best possible outcome for this small group (representing less than 1% of the NRMA membership), the NRMA has funded a free independent phone service, to be conducted by the Council on the Aging. If you think you might be amongst this small group, and need help to arrange your affairs, you can call 008 65 63 and have the options explained to you. This service will be available from 5 September, between the hours of 9am to 3pm.
When will members receive their Free Shares?
If the proposal is approved by members of the Association and of NRMA Insurance, members who choose the Free Shares will get those shares and a statement will be sent by early December confirming how many NRMA shares you own.
RECOMMENDATIONS
THE BOARDS The NRMA Boards have carefully considered the
RECOMMEND advantages and disadvantages of the proposal
Vote ‘Yes’ and have concluded that this proposal is in the
Accept the best interests of members and the NRMA. The
Free Shares Boards therefore 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.Your vote is important.
75% of those members of each company who vote (either in person or by proxy) must vote ‘yes’ for the proposal to go ahead.”
40 The notice of meeting for Insurance was similar in form and content, including as to the Note. The Note contained the sentences, in place of the emphasised sentences in the note in the notice of meeting for Association, “As part of the legal changes all members of 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.”
“NOTICE is hereby given that a general meeting of members of NRMA Ltd will be held at Sydney Convention and Exhibition Centre, Darling Harbour, at 10am Wednesday 19 October 1994.
Business - Change of status
To consider and, if thought fit, to pass the following resolution as a special resolution:
‘That the restructuring of the NRMA, as described in the Information for Members accompanying the Notice of this general meeting, be approved and that for that purpose:
(a) the status of NRMA Ltd be converted from a company limited by guarantee to a company limited both by shares and by guarantee;
(b) the Memorandum of Association of NRMA Ltd be amended by:
(i) adding at the end of Clause 4 the words “in addition to the amount (if any) unpaid on any shares held by such member; and
‘5. The nominal capital of the Association is $10,000,000,000
(ii) replacing Clause 5 with:
divided into 10,000,000,000 shares of $1.00 each’;
(c) the regulations contained in the document submitted to this meeting, and for the purpose of identification signed by the Chairman, be approved and adopted as the new Articles of Association of NRMA Ltd to replace all the existing Articles;
with each of (a), (b) and (c) above taking effect on the day the Australian Securities Commission issues to NRMA Ltd a certificate of registration as to its new status, but all on the condition that the members of NRMA Insurance Ltd prior to that time, have also approved the restructuring of the NRMA.’
Note: 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.” [Emphasis added]
41 Section 2 of the prospectus was entitled “Details of the Members Free Offer and the Sale Offer”. It occupied pp 22 to 34, and provided information of the kind indicated. A feature material to these proceedings was that Section 2 did not make express reference to members giving up membership - there was no equivalent to the parts of Section 1 emphasised in these reasons. So the definitions of Free Shares and thence 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 and to the emphasised parts so far as they might shed light on the references to Free Shares.
42 Section 2 included many references to Free Shares and entitlement to Free Shares, more instructions about completing the Acceptance of Free Shares form in order to “choose the Free Shares”, and a recommendation by the directors of Holdings that members of Association and Insurance vote in favour of the proposal and members of Association choose the Free Shares. (The recommendations in Section 1 had been by the boards of Association and Insurance.) Most of the pages were concerned with the NRMA Offer Trust and the Sale Offer and its constituents, including the Members Extra Shares Offer. For present purposes it is sufficient to refer in more detail to two aspects of Section 2.
43 First, against the marginal note “The Members Free Offer” appeared:
· Free Shares; or
“Description
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.Your entitlement to Free Shares is shown on the Acceptance of Free Shares form which came on the outside of this prospectus.
Members can use their personalised Acceptance of Free Shares form to choose either:
· the cash alternative.
The directors of NRMA Holdings recommend that:
When you choose to take Free Shares or the cash alternative, you will get one or the other. You cannot take some of each.
· members of each of the Association and NRMA Insurance vote in favour of the proposal;
This was followed by the instructions about completing the Acceptance of Free Shares form.
· members of the Association choose the Free Shares.”44 Secondly, after a reference to the NRMA Offer Trust there appeared against the marginal note “What if I Want to Buy More Shares” -
There was an evident distinction between the Free Shares available under the Members Free Offer, for which the member did not have to pay, and the shares available under the Members Extra Shares Offer, for which the member did have to pay.
“After choosing to take Free Shares some members may want to buy extra NRMA shares. This may be possible, but of course you would have to pay for any extra NRMA shares you want which are in addition to your Free Shares. The Members Extra Shares Offer enables you to do this.
If you only want Free Shares or the cash alternative, you do not have to pay for any NRMA shares at all. No member has to buy any extra NRMA shares.”
45 Section 3 of the prospectus was entitled “Guide for Investors”. It occupied pp 36 to 38, and purported to explain the position of, and benefits falling to, a shareholder as an investor, and to outline taxation considerations for shareholders. There is no need to go further into this Section.
46 Section 4 of prospectus was entitled “The NRMA and its Business”. It occupied pp 39 to 50, and was a generally laudatory description of the NRMA’s history, present motoring and insurance services, and intentions and prospects for growth.
47 There followed in the prospectus pp A1 to A8 and application forms for shares in Holdings, all to do with applying for shares in the event of a Sale Offer. The application forms were described in the proceedings as generic application forms, in that they were appropriate for use by members or non-members, and the instructions in the pages were not specific to members: they included a request for membership number or policy number if the applicant was a member or a non-member policy holder of the NRMA, but said that “priority can only be assured by use of the personalised application for shares form” and referred to Section 2 of the prospectus. The personalised application was the Acceptance of Shares form part of the onsert. The application forms and instructions provided for application monies to accompany the application forms. On p A8 some information about applications for shares was placed under the heading “Further Information for Members”, but it was still not specific to members. It underlined, however, that members were amongst those who could buy shares in Holdings under the Sale Offer.
48 Section 5 of the prospectus was entitled “Financial Information”. It occupied pp 51 to 60. It is unnecessary to go into the detail of the financial information. That part of the financial information material to these proceedings was the profit and loss summary of historical performance for the four years to 1992/93, estimated actual results for 1993/94, and forecast results for 1994/95. The narrative stated that the forecasts for 1994/95 were based on budgets prepared by management and adopted by the directors of Holdings, and that they were subject to uncertainties and variation and there could be no guarantee or assurance they would be achieved; they had, however, been independently reviewed by Coopers & Lybrand (Securities) Ltd (“C&L”). Certain assumptions on which the forecasts were based were set out, and it was said that the forecast investment return was “sensitive to changes in the assumed return on fixed interest and equities investments except to the extent that fixed interest investments are held to meet insurance liabilities”.
49 Specifically, the forecast consolidated after-tax profit for 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. The defendants’ cases included, in the manner I will later describe, that there were later adverse movements in these components, and so in the forecast profit, material to the NRMA’s financial position and requiring the provision of supplementary information to members.
50 Section 6 of the prospectus was entitled “Independent Accountant’s Report”. It occupied pp 61 to 80, and was a report from C&L addressed to Holdings and Perpetual expressed to “provide financial information relevant to a decision to choose to take shares in NRMA Holdings or the cash alternative, and to provide potential investors with financial information relevant to their decision on whether to invest in NRMA Holdings.” Annexures to the report presented a consolidated balance sheet of the NRMA Group as at 31 March 1994 and what were described as “restated” consolidated profit and loss accounts for the four years and nine months ended 31 March 1994. Copious notes were appended to these financial statements, and it was said in the report that “a pro forma balance sheet of Holdings to give effect to the proposed restructuring” had been prepared on a particular basis. Amongst other things, the report then described C&L’s review of the directors’ forecast financial information, making it clear that the review was less than an audit examination and that actual results might vary materially from the forecasts, and concluded -
“ Forecast Financial Information
Based on our review of the directors’ Forecast:
nothing has come to our attention which causes us to believe that the directors’ assumptions do not provide a reasonable basis for the Forecast; and
in our opinion the Forecast is properly compiled on the basis of the underlying assumptions and on a basis consistent with the accounting policies of the NRMA.Subsequent events
Since 31 March 1994 and up to the date of this report, significant movements have occurred in the market values of investments held by the NRMA. Furthermore, losses have been realised through the sale of a large portion of the fixed interest security portfolio in order to more closely align the maturity profile with that of the insurance provisions. The outcome of these movements, including the effect on the claims provisions, is reflected in the estimated result for the year to 30 June 1994 set out in Section 5 of this prospectus. Movements in value since 30 June 1994 to the date of this report have not been significant in terms of their effect on the results.
Other than the matters dealt with in this report, to the best of our knowledge and belief there have been no material transactions or events outside the ordinary course of business of the NRMA Group which require comment on, or adjustment to, the information contained in this report, or which would cause such information to be misleading.”51 Section 7 of the prospectus was entitled “Actuarial Reports”. It occupied pp 81 to 84, and it is unnecessary in these reasons to go into its detail.
52 Section 8 of the prospectus was entitled “Additional Information”. It occupied pp 85 to 96, and comprised a miscellany of information not calling for particular mention in these reasons. The Section concluded with the signatures to the prospectus of each director of Holdings and (by its common seal) Perpetual. At one point in this Section was the statement, “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.”
53 Section 9 of the prospectus contained definitions and technical terms, to some of which reference has earlier been made.
54 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”.
The Judgments in the Federal Court proceedings
55 Gummow J said (at 17) -
“The complaint of the applicants is, broadly, that the prospectus, the notices of general meeting and the forms of proxy do not put members in possession of information appropriate to enable them to make an informed and critical assessment of the proposal, and to make an informed decision as to their response. They say that if proper regard is had to what is said and left unsaid this shows contravention of s 52 of the Act. The fundamental allegation is that by distribution to members of these documents there has been an engagement, in trade or commerce, in conduct that is misleading or deceptive or likely to mislead or deceive.”
The Act to which his Honour referred was the TP Act. Section 52 of the TP Act provided that a corporation should not, in trade or commerce, engage in conduct that was misleading or deceptive or likely to mislead or deceive. By s 80 of the TP Act, an injunction could be granted to restrain the engaging in such conduct. The Australian Securities Commission (“ASC”) appeared in the Federal Court proceedings as amicus curiae, and drew attention to s 995(2) of the Corporations Law (“the Law”) which 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. His Honour observed (at 18) that it appeared that a finding of contravention of s 52 of the TP Act would have been accompanied by a finding of contravention of s 995 of the Law.56 In detailed reasons, his Honour considered what was said and not said in the prospectus which in his opinion made distribution of the prospectus and onsert engaging in misleading conduct. In summary, his Honour found the misleading conduct because -
(a) the statement in the prospectus that Association controlled Insurance by appointing its board (see the first paragraph against the marginal heading “Legal Steps Involved in the Change” in one of the extracts from the prospectus earlier set out) was in its context at best a half truth and, as such, apt to mislead or deceive (at 24);
(b) the statement in the prospectus that the two bodies of members were considered to have similar interests (see the same paragraph as identified in (a)), without going on to make clear whether the respective boards considered that the similarity of interest extended to the purposes and effects of the proposed restructuring outlined in the prospectus, was likely to mislead (at 26);
(c) the absence of disclosure, in connection with the basis on which the Free Shares being offered members of Association had been allocated (see the summary of that part of the description of the proposal earlier in these reasons), such as to enable members to make a properly informed judgment concerning the criteria for entitlement to Holdings’ shares in relation to the relative values of the assets and undertakings of Association and Insurance, gave rise to a contravention of s 52 (at 27);
(d) it was misleading repeatedly to describe 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”, 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 of further enjoyment of other benefits of membership (at 28); and
(e) the treatment in the prospectus of whether the NRMA would change its culture and how the restructuring would affect the way it operated was not a full and fair disclosure of intentions as to future conduct of the undertaking to be acquired by Holdings after demutualisation, and left in half-light whether Holdings suggested that it would or would not conduct its business and undertaking so as not to affect in any substantial way the extent or cost of services presently provided to members, or whether Holdings chose to make no statement on the subject
(at 31-2).57 Only misleading conduct in the respect in (d) was upheld by the Full Court, and his Honour said in that respect (at 27-8) -
58 Gummow J concluded (at 32) -
“No doubt one adjectival use of ‘free’ is to describe that which is provided without, or not subject to, a charge 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’.
“The applicants have made out their case for declaratory relief as to contravention of s 52 of the Act. The declaration should be to the effect that by distributing to members of the second and third respondents, the Association and Insurance, documents, copies of which are Exhibits A, B and C, the first respondent, Holdings, in trade or commerce, has engaged in conduct that is misleading or deceptive, or likely to mislead or deceive. The nature of the contraventions is such that it is not practical to quarantine any particular portion of the prospectus. Nor, as the facts have unfolded and now stand, would there be efficacy in ordering, before the times appointed for the general meetings, the disclosure of information or the publication of corrective advertisements, by order under s 87 of the Act. I note that the particular power in that regard conferred by s 80A is exercisable only on the application of a Minister or the Trade Practices Commission.
Even without the present exigencies of time, it might not be practicable and might be unwise for the Court to undertake the supervision, with the suggestion of its imprimatur, of the dissemination of ‘corrective’ material.
What is appropriate is injunctive relief under s 80. There should be an injunction against the further distribution by the respondents of copies of Exhibits A, B and C to members of the Association and Insurance.
The Court having been satisfied that Holdings has engaged in conduct that constitutes contravention of s 52, it may grant an injunction in such terms as it determines to be appropriate (s 80(1)). The contraventions by Holdings are directed to encouraging a particular course of conduct by members of the Association and Insurance in relation to the general meetings called by the Association and Insurance for 19 October 1994. For the Association and Insurance to proceed with those meetings, as proposed, would be to become parties to and knowingly concerned in those contraventions. The injunctive relief should include a restraint upon the Association and Insurance from proceeding with any business at the general meetings of members, identified in the notices of general meeting in Ex C, other than by the taking of such steps as are necessary or appropriate to adjourn those meetings. These restraints upon the Association and Insurance should have the proviso ‘without the leave of the Court’: see ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 at 266-267.”
Exhibits A, B and C were respectively the first leaf of the onsert, the second leaf of the onsert, and the prospectus. A declaration and orders were made accordingly. The injunction restraining further distribution of the prospectus and onsert, as distinct from the injunction restraining proceeding with the meetings, was not expressed to be subject to the leave of the Court.59 As I have said, the Full Court did not uphold all the respects in which engaging in misleading conduct had been found by Gummow J, and it held that there was misleading conduct in a different respect. It upheld Gummow J only in relation to the use of the phrase “Free Shares”, and it held that the failure to identify and inform members about disadvantages of which the directors making the recommendation that members vote in favour of the proposal were aware was “to leave the members in a half-light which had the potential to lead them to think that the unidentified disadvantages, whatever they might be, must be ones that they would not treat as significant in relation to the rights being given up and the new rights to be acquired in a public listed company”. The two respects on which the decision of the Full Court was founded were, in the view of the Court, linked in the manner appearing at the ends of the two passages from the judgment which follow. I will refer to them as the free shares question and the disadvantages question.
60 As to the free shares question, the Full Court said (at 482-4) -
“The trial judge found in the applicants’ favour on the ‘Free Shares’ complaint essentially because he considered that the persistent repetition of the phrase in the context engendered or was likely to engender the notion that the shares might be acquired without significant loss or outgoing and to suggest that such rights of membership as were given up to participate in the affairs of Association and Insurance were of no value and were not material to a decision to vote for or against the proposal. We turn now to consider that issue.
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 to which he referred. The respondents also pointed out that 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.
This conclusion involved a finding that the rights to be given up were rights which would be material to members of the Association and Insurance in making a properly informed judgment on the proposal. The respondents argued that this has not been established by the evidence. In particular it was argued that membership of Insurance had no value; it was transitory, lasting only as long as the annual policies held by the member, there was no right of renewal; in the case of policies held by two or more people it was a matter of chance which policyholder was entered as a member; no consideration was paid for membership; membership was not transferable; and, most importantly, the true beneficiary of the wealth of Insurance was the Association. It was submitted that such powers of control of Insurance as existed in members of Insurance had no practical significance in the circumstances. In particular, the members had no power to confer on themselves any direct financial benefit by way of dividends or capital rights in the event of a winding up. There is force in these contentions in relation to membership of Insurance. But membership of the Association carried with it rights to participate in the control of Association, and through the appointment of the Council of Association, in the affairs of Insurance. The evidence did not attempt to place any monetary value on these rights, and it may be impossible to do so. But it does not follow that the rights would not be material to members of Association in making a properly informed decision: cf Re NFU Development Trust Ltd (1972) 1 WLR 1548 at 1554; (1973) 1 All ER 135 at 139. The rights of control if exercised by a sufficient body of members could be used to require that the benefits which have been enjoyed in the past by members arising from the mutual character of the NRMA organisation be continued in the future. The materiality and importance of the rights of control therefore depended in turn on the materiality and importance to members of the continuation of these benefits. It was in this context that the trial judge said that a basic question for members to decide was whether they would be better off remaining as members or becoming shareholders or recipients of the proposed cash distribution in lieu of shares, a question that involved weighing the respective advantages and disadvantages of each course of action.”
61 As to the disadvantages question, the Full Court said (at 485-7) -
“In our opinion the treatment of the topic of the future conduct of the undertaking has not been shown to be inadequate for failing to make a clear statement of Holdings’ intentions. However we do consider that the treatment of the topic was inadequate, and involved a contravention of s 52, for reasons to which we now turn.
Before this Court counsel for the applicants submitted that there was a likelihood of change in the future conduct of the undertaking of the NRMA organisation for reasons of the following kinds which the prospectus failed to bring sufficiently to the members’ notice: (i) whilst the present Boards intended ‘business as usual’ the proposed restructure involved a change in status and membership; (ii) shareholders in a listed company would have different rights and expectations as shareholders, particularly in relation to profit; (iii) the duties and obligations of directors or corporations limited by shares are, so it was submitted in relation to shareholders (who in time could become increasingly large and institutional) to look to profit and value of shares and to pay dividends out of profits available for that purpose, in contrast with the duties of directors of a mutual association; (iv) Holdings after reconstruction would have the capacity to change the operation by selling its assets or undertaking; (v) and in the long term the restructure opened prospects for a takeover, or for effective control of Holdings to pass to a small minority of large shareholders with strategic holdings. To these matters could be added the consideration that, with time, the composition of the Boards would in any event change and future boards would not be bound by statements of intentions by the present board made in the prospectus.
Counsel for the respondents contended that there are good commercial reasons why it is unlikely that Holdings would in the future abandon the ‘culture’ which has been instrumental to the success of the NRMA organisation in the past, and that the prospect of control of Holdings being seized by a minority of large shareholders or otherwise taken over or disposed of is fanciful for several reasons. Whether these contentions adequately answer the applicants’ submission is largely a matter of opinion about which the members must make a judgment when deciding upon the proposal and weighing the respective advantages of continued membership of mutual associations against a shareholding in Holdings or the cash alternative. Unless the information available to the members brings to their attention matters of the kind identified by the applicants’ submissions (along with any other disadvantages perceived by those members of the Boards whose decisions recommend the proposal), and the reasons why it is asserted that the disadvantages are outweighed by the advantages, the members are not fully and fairly informed why they will be ‘better off’ by voting to receive shares or the cash alternative in exchange for their membership of the Association and Insurance.
The prospectus as a whole, but particularly in the President’s letter and the Information to Members, strongly encourages a favourable response to the proposed restructure and conveys the recommendation of the majority of each board that under it the members will be ‘better off’. We agree with the trial judge that the prospectus does not explain or quantify why this will be the case beyond the statement that the wealth of the NRMA organisation will be unlocked by giving each member the share entitlement identified on that member’s onsert.
On p 6 of the prospectus, when repeating the recommendation of the Boards which was stated on p 1, it is said ‘The NRMA Boards have carefully considered the advantages and disadvantages of the proposal and have concluded that this proposal is in the best interests of members and the NRMA’. Here is a statement that there are disadvantages to be considered, yet nowhere in the prospectus are the disadvantages identified, explained or compared with the perceived advantages. On p 11 the prospectus says the NRMA has considered the advantages and disadvantages of a range of other options and concluded that the share issue and listing on the Stock Exchange is in the best interests of members of the NRMA. Five other options are discussed. This discussion fails to identify what the disadvantages of the recommended proposal might be.
The first of the other options discussed was ‘Doing nothing’. The prospectus reads:
‘1. Doing nothing: The NRMA could continue to operate under its present structure, but the Boards believe that, by becoming shareholders, members will be better off.
No organisation can rest on its laurels and assume that the way things have always been done will work in the future. The NRMA has made many changes to its operations in the past and has always looked for better ways to do business. That has made it a market leader.
This is another change which the Boards believe will significantly benefit members and make the NRMA stronger in the future. To do nothing means the wealth of the organisation remains locked up and inaccessible to members.’
This discussion fails to state, at least in any meaningful way, the disadvantages about the proposed restructure which the Boards had recommended, and fails to refer to the matters identified in the applicants’ submissions. At p 15, where the prospectus for the first time discloses that three of the 16 directors of the Association and one of the 11 directors of Insurance are against the proposal, there is no statement of the dissenting directors’ reasons which could serve to redress the failure of the prospectus otherwise to inform the members about the disadvantages of the proposal.
The prospectus asserts that under the proposed restructure members will be ‘better off’ and strongly recommends a ‘yes’ vote. In these circumstances the failure to identify and inform members about disadvantages of which the directors making the recommendation were aware was to leave the members in a half light which had the potential to lead them to think that the unidentified disadvantages, whatever they might be, must be ones that they would not treat as significant in relation to the rights being given up and the new rights to be acquired in a public listed company. This is more particularly so when it is remembered that, contrary to the notion engendered by the persistent use of the phrase ‘Free Shares’, the shares might be acquired without significant loss or outgoings, the rights that would be surrendered were significant ones which were material to the members of Association in making a properly informed judgment.”62 The NRMA’s case that the lawyers were at fault, and engaged in or were involved in the NRMA’s misleading conduct, was in the area of the content of the prospectus and the onsert tied back to the respects in which the Full Court found misleading conduct. The NRMA did not contend for any other respect in which the prospectus was misleading, or rely on the respects found by Gummow J but not upheld by the Full Court, and its case in this area was conducted on the basis that the reasons of the Full Court expounded the deficiencies in the prospectus to be laid at the lawyers’ doors. Some analysis of the deficiencies as found is appropriate even at this point in these reasons.
63 For the free shares question, it can be seen that the reasoning of the Full Court was that the persistent use of the phrase “Free Shares” conveyed that the shares might be acquired without significant loss or outgoing, and that this was likely to mislead or deceive because there might be significant loss or outgoing if the rights lost when membership was given up “could be regarded by members as being of importance to them in making a properly informed judgment on the proposal” or could be “material to the members of Association in making a properly informed decision”.
64 When I come to the facts in the present case, there will be much to do with describing the shares to be issued by Holdings as free shares provided members are informed that the shares are in return for their giving up membership, and in describing the prospectus I have emphasised the express references to members giving up membership. It was not an answer to the reasoning of the Full Court, or that of Gummow J, that there were statements in the onsert and the prospectus to the effect that membership was given up in exchange for the shares. Gummow J acknowledged those statements, but the deficiency remained that the persistent use of the phrase “Free Shares” conveyed that what was given up was not significant - it was really a failure in informing members what giving up membership involved, to be taken into account when weighing the advantages and disadvantages of demutualisation. The Full Court also acknowledged those statements, although their Honours observed that they “were liable to be overwhelmed in their impact by the far more prominent and persistent reference to ‘Free Shares’”, but the deficiency remained that the description of the shares as free conveyed that the rights to be given up might not be material to making a properly informed judgment on the proposal.
65 The reasoning of the Full Court directed attention to the nature and significance of the lost rights, and to why they would be material to the members’ decision on the proposal. The Full Court said that there was force in the contention that the rights of membership in Insurance were not material, but that the rights of membership in Association might be material not because of a monetary value (which it may be impossible to establish) but because the combined exercise of the rights by a sufficient body of members could be used to preserve the existing benefits arising from the mutual character of the NRMA. The link with the disadvantages question was, then, that materiality and importance of the rights of control depended in turn on the materiality and importance of the existing benefits, and so on an understanding of the respective advantages and disadvantages of continuing as before or embracing demutualisation.
66 These things may be said of this analysis. First, and repeating what I have already said, at the heart of the misleading conduct in this respect was not that the prospectus and onsert failed adequately to inform members that membership would be given up in exchange for shares. Secondly, if that which brought the misleading conduct was that members might be misled into thinking that the membership rights were not rights which they could regard as important in making a properly informed judgment on the proposal, or could regard as material to a properly informed decision, at the heart of the misleading conduct in this respect must have been failure adequately to inform members of the possible importance or materiality of the membership rights. Thirdly, it must be asked what the members should have been told about the possible importance or materiality.
67 It is here that I respectfully have some difficulty with the reasons of the Full Court. The materiality and importance was not a monetary value of the membership rights, because it was accepted that it may be impossible to place a monetary value on them. What, then, should members have been told?
68 From the concluding sentences in the passage from the judgment of the Full Court first set out, the materiality and importance may have been that the rights gave control to members if, thinking the existing structure and whatever benefits it brought material and important, they wished to continue that structure and those benefits. Why was it misleading not to inform members of their right of control? The general meeting of Association was an exercise of the control, and members can not have been ignorant of it.
69 Alternatively, from the same concluding sentences the materiality and importance may have been that insufficient information was given for members to determine the materiality and importance of the continuation of the benefits, that is, insufficient information as to the respective advantages and disadvantages of the existing structure and a demutualised NRMA, so that they could value (although not in monetary terms) the membership rights. This view is supported by the concluding sentences of the passage from the judgment of the Full Court secondly set out (although the last sentence elevates the rights to be surrendered to significant and material rights, no longer rights of possible materiality and importance). If this be the correct view of their Honour’s reasons, the free shares question merges in, and becomes a consequence of, the disadvantages question. In short, it was held that it was misleading to describe the shares to be issued by Holdings as free shares because there might have been disadvantages in the proposal not sufficiently identified and elaborated in the prospectus.
70 For the disadvantages question, it can be seen that the reasoning of the Full Court was that, although the prospectus conveyed the recommendations that members would be better off under the proposed restructure, it stated that there were disadvantages but did not identify and inform members about (“explain or compare with the perceived advantages”) the disadvantages, and that this involved contravention of s 52 of the TP Act because the members might think that the unidentified disadvantages “must be ones that they would not treat as significant in relation to the rights being given up and the new rights to be acquired in a publicly listed company”.
71 This reasoning directed attention to the unidentified disadvantages, and the judgment can be read in two ways. From the concluding paragraph in the passage from the judgment secondly set out, the disadvantages were the disadvantages of which the directors making the recommendation were aware - those which were said to exist but were not identified. If so, the disadvantages non-disclosure of which underpinned the misleading conduct were not, or not necessarily, those in the summary of the applicants’ submission plus the consideration added by the Court (see the second paragraph of the passage). The Court considered that there must have been disadvantages, because the prospectus said so, but itself did not identify or make findings as to disadvantages which should have been identified, explained, and compared with advantages but were not so dealt with.
72 Alternatively, from earlier paragraphs in the passage the disadvantages were those in the summary of the applicants’ submission plus the consideration added by the Court, and as well any other disadvantages of which the directors were aware. But even then the Court made no findings as to the existence of the disadvantages, saying only that the members should have brought to their attention matters of that kind and proceeding on the basis that there must have been disadvantages.
73 Again, I respectfully have some difficulty with the reasons of the Full Court. Disadvantages were identified and explained in the prospectus, sometimes indirectly (for example, describing the preservation of the NRMA’s consumer and service activities involved recognising, and countering, a disadvantage) but also directly (especially under Members’ Questions). If the judgment be read in the first way set out above, it involved an assumption, rather than a finding, that there were disadvantages of the kind in the summary of the applicants’ submission plus the consideration added by the Court, and by reference to the “Doing nothing” option the conclusion that there was no meaningful statement of the disadvantages. So in the end the vice in relation to disadvantages on which the Full Court acted was not that particular disadvantages existed but were not identified, explained, and compared with perceived advantages, but that possible disadvantages might have been significant in relation to the exchange of rights, but members might have been led to think that they could not be significant: see the last paragraph in the passage secondly set out.
74 That the Full Court did not go beyond possible disadvantages is supported by regard to the disadvantages to which it referred. Their Honours seem to have taken the class as the likelihood of change in the future conduct of the undertaking of the NRMA: see the opening words of the passage secondly set out. Six disadvantages were then postulated, (i) to (v) from the applicants’ submissions and a further consideration added by the Court. The part of the prospectus addressed for the statement of disadvantages was that part under the heading “Other Options”. There were grounds for concluding that the disadvantages to which it referred were not disadvantages requiring identification, or were disadvantages sufficiently identified and explained in the prospectus. The grounds were as follows, but were not considered by the Court: so the disadvantages were left as possible disadvantages.
75 As to (i), that the proposed restructure involved a change in status and membership, the change was referred to more than once, particularly in the notices of meeting - it was, after all, what the general meetings were about.
76 As to (ii), that shareholders in a listed company would have different rights and expectations as shareholders, particularly in relation to profit, the substance of the disadvantage was recognised, and countered, in the fifth Members’ Question asking whether, with shareholders, the NRMA would pursue profit at the expense of service.
77 As to (iii), to the effect that the directors of a company with shareholders would look to profits and payment of dividends when directors of a mutual organisation would not, the substance of the disadvantage was recognised, and countered, in the fourth Members’ Question asking whether the NRMA would change its culture and in the fifth Members’ Question. The Full Court observed, in relation to abandonment of the culture, that the commercial reasons why the culture of the NRMA would continue was a matter of opinion for the judgment of the members, but the possible disadvantage was there for the members to consider.
78 As to (iv), that Holdings would have the capacity to change the operation by selling its assets or undertaking, so also would Association and Insurance - that the restructuring would bring a change other than via a change in profit-seeking was not evident.
79 As to (v), that in the long term there might be a takeover or minority control via strategic holdings, the substance of the disadvantage was recognised, and partially countered, in the sixth Members’ Question asking whether the NRMA could be taken over if it issued shares. The likely effectiveness of the protection against takeover - also in part protection against minority control - was a matter for members; the possible disadvantage was there for the members to consider.
80 As to the consideration added by the Court, that with time the composition of the boards would change and future boards would not be bound by statements of intention by the present boards, it would be the same for Association and Insurance too; the stress on continuation of the NRMA’s culture flagged for members the possibility of a change in direction if future management so chose, but there could be the change anyway.
81 Regard to the disadvantages to which the Full Court referred does not establish that there was meaningful disclosure of disadvantages, but it underlines that information as to the proposal was held to be misleading not because there were, but because there might have been, disadvantages in the proposal not sufficiently identified and elaborated in the prospectus. The disadvantages question merged with the free shares question. And so my respectful difficulties with the reasons of the Full Court increase. How can it be said that a prospectus is misleading because it has the potential to lead members to think that unidentified disadvantages must be ones they would not treat as significant, unless the existence and significance of the postulated disadvantages is established? Assumption of the disadvantages is not enough, and assessment of their significance is required.
82 To return to the course of the Federal Court proceedings, at the conclusion of its reasons the Full Court observed that it might be that the respondents would wish to amend or supplement the prospectus, and that it “would endorse the observation of Gummow J that it might not be practicable and might be unwise for the Court to undertake the supervision, with the suggestion of its imprimatur, of the dissemination of ‘corrective’ material”. As earlier noted, the order of Gummow J restraining distribution of the prospectus and the onsert was not expressed to be subject to the leave of the Court. On 30 January 1995 the Full Court heard argument on the terms of the orders it should make, the submissions and the result appearing from the following passage from the reasons then given (NRMA Holdings Ltd v Fraser (1995) 55 FCR 489 at 489-90) -
Hence the variation to the orders of Gummow J, whereby the restraint on distributing the prospectus and the onsert was subject to the leave of the Court.
“Mr Garnsey QC for the respondents to the appeal, submitted that for a number of reasons none of the orders should be disturbed and in particular that no order should be made that could result in any further distribution of the prospectus, whether accompanied by a supplementary prospectus, other explanatory or correcting matter, or otherwise. His primary contention was that no correction could possibly overcome the deficiencies in the prospectus.
Mr Bennett QC for the appellants, on the other hand, submitted that the deficiencies, as identified in our reasons for judgment, could be overcome by an appropriate document and he sought an order that would allow the original prospectus to be distributed if the ASC so required consequent upon a supplementary prospectus being lodged with it.
Although we have concluded that the distribution of Exs A, B and C did involve conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) we have reached that conclusion on a more limited basis than the trial judge. We are not persuaded that it would be impossible to correct the contravening effect of those documents, although this is not, of course, to be taken as a positive finding that correction is possible. If it were sought to correct the prospectus and the other documents and the matter came before the Court the question would have to be decided in the light of the evidence then before the Court, including the precise terms of the correcting material and all other relevant circumstances. Those circumstances might include the effect of past advertising and any proposed future advertising. We did not think it appropriate in these circumstances to deny to the appellants the opportunity of seeking to persuade the Court, should they wish to avail themselves of it, that it should grant leave to distribute Exs A, B and C or any of them, in conjunction with correcting material.
Mr Bennett submitted that there should be provisos to orders (1), (2) and (3) which would have the practical effect of allowing the appellants to proceed with the business of the general meeting once a supplementary prospectus had been lodged with the ASC subject only to the requirements of the ASC, and without further order of the Court. In our opinion, whilst this course might have attractions in other circumstances, we do not consider that it should be taken when there are other unresolved challenges to the validity of the decisions made by the boards of the second and third named appellants pending in relation to the proposal.
Mr Bennett submitted that we should only concern ourselves with the discrete Trade Practices Act issue but we consider that the resolution of the issues outstanding between the parties in this Court may affect the discretion to grant or not to grant leave to send out further material, if such leave were sought, or to proceed with the meetings. The Court should also take into account the desirability that all issues be resolved as expeditiously as possible, and in one forum.”
Gambotto’s case
83 WCP Ltd had passed a special resolution for the amendment of its articles, adding article 20A the effect of which was to enable a shareholder entitled to hold 90 per cent or more of the issued shares to acquire compulsorily shares held by minority shareholders for a stated price per share. At least in the two lower courts, it was accepted that the stated price was independently arrived at and fair, and there would have been considerable taxation and administrative benefits for the company if it had become a wholly owned subsidiary of the holding company of the majority shareholders. The majority shareholders did not vote upon the special resolution, which was passed upon the votes of minority shareholders other than Mr Gambotto and Ms Sandri. Mr Gambotto and Ms Sandri contended that the amendment was invalid, arguing that it was oppressive to them in that it permitted their shares to be expropriated by the majority shareholders.84 The invalidity was upheld at first instance (Gambotto v WCP Ltd (1992) 8 ACSR 141). McLelland J said (at 143) that the exercise of the power to alter articles was constrained by principles of equity, but that the commonly stated test of bona fide for the benefit of the company as a whole was ambiguous and often unhelpful, and that it “has not been found possible to define in any precise way the grounds upon which an ostensible exercise of the power should be considered invalid”. He accepted that it would be advantageous to WCP Ltd if it were to become a wholly owned subsidiary of the holding company of the majority shareholders, and said that he would consider “the question of principle on the notional footing that the purpose of the amendment was to achieve the advantages to WCP indicated above”. His Honour then said (at 144) -
“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 …. There are three reported English decisions in which the validity of an alteration of articles of association of a company to effect or permit expropriation of shares of a minority has been considered. [His Honour then referred to the decisions.] In each case the criterion sought to be applied was ‘bona fide for the benefit of the company as a whole’. For the reasons already indicated, that is an inadequate criterion in a case of this kind, and its inadequacy is I think illustrated by a consideration of the judgments given in those three cases.
It is to be observed that if a majority holding or controlling 75% or more of the issued capital of a company could validly expropriate the shares of a minority by an alteration to the articles for reasons of the kind advanced in this case, it would be unnecessary to have such provisions for compulsory acquisition of shares of dissenting minorities as are to be found in ss 414 and 701 of the Corporations Law.
For the above reasons, the amendment to the articles of WCP purportedly made at the meeting of 11 May 1992 was in my opinion invalid and ineffective.”85 On appeal to the Court of Appeal it was held that the amendment was not oppressive and was effective (WCP Ltd v Gambotto (1993) 30 NSWLR 385). The appeal was heard on 4 March 1993 and the decision was given on 7 May 1993.
86 The principal judgment was that of Meagher JA, with whom Cripps JA agreed. His Honour observed that the words “bona fide and for the benefit of the company as a whole” had “beguiled and confused the courts” ever since they were first used in 1900, and his reasons for upholding the appeal were (at 389) -
“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 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 s 701 to s 702 (take over schemes), s 411 (compromises) and s 414 (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.
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.”87 Priestley JA agreed in the result. His Honour’s reasons were (at 386-7) -
88 The NRMA’s allegations of fault on the part of the lawyers in the area of the new structure and the steps to achieve it make appropriate some observations about Gambotto’s case to this point.
“Shares are a form of property, and, often, expropriation of property, that is, the divesting of property from an owner without that owner’s consent, will attract community opinion that the divestment was oppressive and/or unjust. The present case does not strike me as one to which that opinion applies.
For one thing, that opinion is frequently not applicable where the divesting is accompanied by just compensation (as is undisputedly the case here). For another, a person acquiring the shares in question in the present case either knew, or should have known that the company (in the original sense) consisted of members who each agreed, by the fact of membership, to be bound by duly passed resolutions of members of the company at general meeting. Any divestment pursuant to, or dependent on, such a resolution, is, in a real sense, not a divestment against the shareholder’s will; although the shareholder might vote against a particular resolution, and so not consent to its consequences at that point, the shareholder has nevertheless voluntarily become a member of a group of shareholders, binding themselves together by rules by which they agree to be bound by duly passed resolutions even if individual shareholders disagree with them. There are of course abuses of these rules from time to time by members with sufficient voting power; these abuses may be checked by the courts, if the statutory provisions are insufficient. I can see no sign of any such abuse in the present case. The property in the shares now in question does not seem to have, or to call for, the kind of inalienability against their holders’ will which the respondents’ claim involves.”
89 It was concerned with shares in a company limited by shares, and with compulsory acquisition (“expropriation”) of shares by a change in articles. The power to change the articles was not in doubt, and the question was whether the exercise of the power was constrained. 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.
90 McLelland J did not provide an alternative test, going directly to the conclusion that there was oppression: it seems that the fact of expropriation was enough to constitute oppression. The Court of Appeal did not provide an alternative test, but considered that the fact of expropriation was not enough to constitute oppression. Because the stated price was fair and the expropriation was for the benefit of the company as a whole, greater exploration of what might constitute oppression (or an abuse of the power, as Priestley JA described it) in an expropriation of shares was unnecessary.
91 Gambotto’s case stood for the proposition that the exercise of the power to change the articles of a company to provide for the majority shareholders to compulsorily acquire the shares of the minority was not oppressive because there was an expropriation of shares, at least provided that the acquisition was on fair terms. If the expropriation was fair, the fact of expropriation would not make the exercise of the power invalid.
92 On 10 December 1993 the High Court granted special leave to appeal from the decision of the Court of Appeal, and the appeal was heard on 21 April 1994. The dates are important in these proceedings, because they were during the development of the proposal.
93 In the decision delivered on 8 March 1995 the High Court upheld the appeal. The principal judgment was the joint judgment of Mason CJ and Brennan, Deane and Dawson JJ, and McHugh J delivered a separate judgment.
94 In the joint judgment the matter of principle was described (at 439) -
“The fundamental issue in this case is whether, and if so in what circumstances, the taking of a power by majority shareholders by amendment to the articles to acquire compulsorily the shares of the minority shareholders will be held invalid on the basis that it is oppressive.”
After discussion of the authorities, it was said (at 444-448) -95 McHugh J stated the question in the appeal (at 449) as whether the resolution adding the article “was invalid because its passing was oppressive of minority shareholders”. After discussion of the test of benefit of the company as a whole, including observations to the effect that it is not always a satisfactory test for determining whether a proposed alteration of the articles of the company is valid, his Honour said (at 453) -
“ Striking a balance
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 recognized 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 , ‘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’.
The test for determining whether an expropriation is valid
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 criticised 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.
The exercise of a power conferred by a company’s constitution enabling the majority shareholders to expropriate the minority’s shareholding for the purpose of aggrandizing the majority is valid if and only to the extent that the relevant provisions of the company’s constitution so provide. The inclusion of such a power in a company’s constitution at its incorporation is one thing. But it is another thing when a company’s constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority. 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.
Accordingly, if it appears that the substantial purpose of the alteration is to secure the company from significant detriment or harm, the alteration would be valid if it is not oppressive to the minority shareholders. So, expropriation would be justified in the case of a shareholder who is competing with the company as was the case in Sidebottom v Kershaw, Leese & Co , so long as the terms of expropriation are not oppressive. Again, expropriation of a minority shareholder could be justified if it were necessary in order to ensure that the company could continue to comply with a regulatory regime governing the principal business which it carried on. To take a hypothetical example: if the conduct of a television station were the undertaking of a company and a renewal of a television licence under a statute depended upon the licensee’s entire share capital being held by Australian residents, the expropriation of foreign shareholders who are unwilling to sell their shares to Australian residents might be justified assuming it is fair in all the circumstances. But that is not to say that the majority can expropriate the minority merely in order to secure for themselves the benefit of a corporate structure that can derive some new commercial advantage by virtue of the expropriation.
Notwithstanding that a shareholder’s membership of a company is subject to alterations of the articles which may affect the rights attaching to the shareholder’s shares and the value of those shares, we do not consider that, in the case of an alteration to the articles authorizing the expropriation of shares, it is a sufficient justification of an expropriation that the expropriation, being fair, will advance the interests of the company as a legal and commercial entity or those of the majority, albeit the great majority, of corporators. This approach does not attach sufficient weight to the proprietary nature of a share and, to the extent that English authority might appear to support such an approach, we do not agree with it. It is only right that exceptional circumstances should be required to justify an amendment to the articles authorizing the compulsory expropriation by the majority of the minority’s interests in a company. To allow expropriation where it would advance the interests of the company as a legal and commercial entity or those of the general body of corporators would, in our view, be tantamount to permitting expropriation by the majority for the purpose of some personal gain and thus be made for an improper purpose. It would open the way to circumventing the protection which the Corporations Law give to minorities who resist compromises, amalgamations and reconstructions, schemes of arrangement and takeover offers.
As noted in the preceding paragraphs, 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, require the majority shareholders to disclose all relevant information leading up to the alteration 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.
The second element, that the expropriation itself must be fair, is largely concerned with the price offered for the shares. Thus, an expropriation at less than market value is prima facie unfair, and it would be unusual for a court to be satisfied that a price substantially above market value was not a fair value. That said, it is important to emphasize that a shareholder’s interest cannot be valued solely by the current market value of the shares. Whether the price offered is fair depends on a variety of factors, including assets, market value, dividends, and the nature of the corporation and its likely future.
Onus
The respondents’ submissions, which are based heavily on Peters , are premised on the proposition that an alteration allowing an expropriation is prima facie valid. It is conceded that the suggested presumption of validity will be rebutted if the minority shareholder proves either that the alteration was made for an improper purpose or that it is oppressive to that particular shareholder. Nonetheless, the respondents’ approach, which forces the minority shareholder to shoulder a heavy onus of proof, tilts the balance too far in favour of commercial expediency and fails to attach sufficient weight to the proprietary nature of a share. A share is liable to modification or destruction in appropriate circumstances, but is more than a ‘capitalized dividend stream’: it is a form of investment that confers proprietary rights on the investor. Accordingly, in the case of expropriation, we consider that the onus lies on those supporting expropriation to show that the power is validly exercised.
It is for the majority to prove that the alteration is valid because it was made for a proper purpose and is fair in all the circumstances. This approach ensures that the application of the relevant principle does not unduly favour the majority and it largely alleviates the sting of practical difficulties, such as poor access to information, that would otherwise confront minority shareholders.
The validity of art 20A
As the appellants did not contend that the expropriation was not fair in the sense explained above, the validity of art 20A hinges on whether the respondents have proved that the amendment was not made for a proper purpose [sic: was made for a proper purpose?] The immediate purpose of the amendment was to allow the expropriation by the majority shareholder of the shares held by the minority, including the shares held by the appellants. There is no suggestion that the appellants’ continued presence as members puts WCP’s business activities at risk or that the appellants have in some way acted to WCP’s detriment. Nor is there any suggestion that WCP sought 100 per cent ownership in order to comply with a regulatory regime. All that is suggested is that taxation advantages and administrative benefits would flow to WCP if minority shareholdings were expropriated and WCP were to become a wholly-owned subsidiary of LEL. In our view, however, that cannot by itself constitute a proper purpose for a resolution altering the articles to allow for the expropriation of a minority shareholder’s shares. In that regard, it is not irrelevant to note that it is difficult to conceive of circumstances in which financial and administrative benefits would not be a consequence of the expropriation of minority shareholdings by a majority shareholder.
Accordingly, we would hold art 20A invalid and ineffective on the basis that it was not made for a proper purpose.”
96 After further consideration of the statutory power to alter articles and some authorities, his Honour said (at 455-7) -
“In my opinion, a company may alter its articles of association for the purpose of enabling a shareholder to acquire the shares of existing shareholders only when the acquisition is necessary to protect or promote the interests of the company and when the alteration will not be oppressive to those shareholders. In the absence of statutory authorization, a general contractual power to alter the articles of a company would not authorize an amendment empowering the compulsory acquisition of a member’s shares. ‘[C]lear judicial authority, clear legislation or clear principle and necessity would seem to be required’ before a general power to alter the articles of a company could be construed as authorizing such a far reaching alteration. The power to alter the articles of association of a company, however, does not depend upon contract. It is, and long has been, authorized by statute. But, wide though that power is, its application is, as I have indicated, subject to restrictions. One of them is that it does not extend to an alteration whose purpose is to expropriate the shares of an existing shareholder unless the expropriation is necessary for the protection or promotion of the company’s interests.”
97 After expanding on fair dealing and fair price, his Honour concluded (at 459-60) -
“Although, for the reasons that I have given, the generality of the power does not authorize an alteration providing for the expropriation of a member’s shares by majority vote, no reason exists for holding that the power does not extend to those alterations that are necessary to protect or promote the company’s interests. Thus, alteration for the purpose of expropriating a member’s shares may be permissible if it is necessary to protect the company against direct competition from a member or from a company of which the member is a director. Similarly, alteration for the purpose of expropriation may be permissible if the character or status of a member will cause harm to the company or prevent it from pursuing a legitimate commercial interest.
No distinction should be drawn between an expropriation that will enable a company to pursue a beneficial course of action that would otherwise be denied to it and an expropriation that avoids a detriment to the existing interests of the company. I see no difference between an expropriation that will enable a company to renew an existing licence to do something and an expropriation that will allow the company to acquire that kind of licence. Nor in a case like the present, can I see a valid distinction in principle between an expropriation that would allow a company to escape the incidence of a particular tax and an expropriation that would allow the company to reduce its potential tax liability. In both cases, the proper conclusion is that the expropriation is commercially necessary to protect the assets of the company. That does not mean that an expropriation will be valid whenever the expropriation will financially benefit the company. Independently of any question of oppression, the alteration of articles for the purpose expropriating a member’s shares will be valid only if it will enable the company to pursue some significant goal, or to protect itself from some action, that is external to the company. Administrative convenience or cost, for example, could never by itself justify an alteration for the purpose of expropriation.
Oppression
Moreover, the fact that an expropriation is necessary for the protection or promotion of the company does not prevent it from being oppressive to the shareholders whose shares will be acquired. When the articles of association contain no power to expropriate the shares of a member of the company, any resolution granting such a power is prima facie oppressive to those shareholders who do not wish to sell their shares. In the absence of an article authorizing the expropriation of member’s shares, members have a legitimate expectation that, unless some exceptional circumstance should arise they will be able to retain their shares until they wish to sell or until the company is wound up. Once the articles are altered to give the power of expropriation to the directors or the majority shareholders, a shareholder whose shares are liable to be expropriated is placed in the position where he or she can be forced to accept cash or debt in exchange for the shares while the majority retain their shareholding. Any benefits that will flow to the company from the acquisition will flow only to the remaining shareholders. Furthermore, those given the power to acquire are usually not bound to exercise their power. Often, the expropriators can time the acquisition to suit their own convenience and purposes. In periods such as that which followed the stock market ‘crash’ of October 1987, the price of shares may be artificially depressed giving the expropriators the chance to acquire the shares at a price below their ‘fundamental value’. Usually, the expropriator is a person who controls the company and who often has access to information that is denied to other shareholders and to the stock market.
Under these circumstances, to require shareholders to sell their shares against their will is an infringement of their rights as autonomous beings to make their own decision and to carry out their own actions. In a society being free and equal agents any interference with the autonomy of any individual needs to be justified if it is not to be regarded as oppressive. Because those proposing an alteration for the purpose of expropriation must justify their action, the onus must be on them to establish that there has been no oppression.
To prevent an alteration for the purpose of an expropriation being oppressive the expropriators will need to act fairly. In a leading American case, Weinberger v UOP Inc , the Supreme Court of Delaware, in dealing with a statute that enabled a corporation that was a majority shareholder in another corporation to buy out the minority shareholders and merge the two corporations, pointed out that the ‘concept of fairness has two basic aspects: fair dealing and fair price’.”
98 It will be necessary to return to the effect of the decision of the High Court, but this much can presently be said. The power to change the articles seems still to have been accepted, and the question was still whether the exercise of the power was constrained (although McHugh J seems rather to have read down the power). A new test was established for a change in articles to provide for expropriation of shares, with two limbs: that the expropriation be for a proper purpose, and that the expropriation not be oppressive to the minority. The first limb underlined that inquiry in terms of oppression, which was equated with fairness, was not sufficient, and that there was an additional requirement of proper purpose, and proper purpose was not satisfied by benefit to the company as a whole but called for something more by way of securing the company from significant detriment or harm. The fact of expropriation would make the exercise of power invalid, even if the expropriation was fair, unless the majority shareholders could prove the proper purpose.
“ The present caseIn the present case, the principal goal sought to be achieved by the alteration was in my view a legitimate business objective and one that would justify the expropriation of each appellant’s shares provided that it was otherwise fair to that person. The alteration of the articles and the expropriation of the minority shares would enable the company to save over $4 million in taxes.
In my opinion, however, the company has failed to prove that the expropriation was not oppressive. It is true that upon the evidence before the Court and having regard to the concessions of the appellants the price of $1.365 per share may well have been a fair price for the shares, but the onus is on the company to prove that the price was fair, that the appellants have been dealt with fairly and that a full disclosure of all matters in relation to the alteration and expropriation has been made. The evidence falls far short of proving that the company and the majority shareholders have dealt with each appellant fairly. Almost no attempt was made to make the full disclosure that is required in this class of case.
It follows that the resolution adopting art 20A was invalid. The appeal should be allowed.”
99 The plaintiffs in the proceedings were Association, Insurance, and Holdings. The first defendants were the partners at the time of AAH. The second defendants were the partners at the time of AT. The third defendant was Mr Heydon. The allegations of fault on the part of the defendants centred upon the free shares question, the disadvantages question, and the impact of Gambotto’scase on the proposal. In brief, it was alleged that the defendants were at fault in failing adequately to advise the NRMA in relation to risk to the proposal in connection with Gambotto’s case, in relation to the free shares question, or in relation to the disadvantages question, and that if the NRMA had been adequately advised it would not have suffered loss of the wasted expenditure - as to risk in connection with Gambotto’s case most of the wasted expenditure, and as to the free shares question and the disadvantages question the whole of the wasted expenditure. On the NRMA’s case, had it been told of risk to the proposal in connection with Gambotto’s case, it would have deferred the proposal until the decision of the High Court and following that decision would not have proceeded with it at all in the form then determined, so the expenditure from the time of deferral would not have been incurred; if it had proceeded with the proposal, then had it been adequately advised in relation to the free shares question and the disadvantages question it would have done so in a way not open to the successful challenge in the Federal Court, and the whole of the expenditure would not have been wasted. There was, of course, much more to the NRMA’s case than in this brief summary, and the detail will come as these reasons unfold.
III THE NRMA’S CLAIMS100 The claims against the defendants, as ultimately set out in points of claim filed on 25 May 1988, were framed on a number of different causes of action. They may be identified as claims for (a) breach of contract; (b) negligence; (c) contravention of s 52 of the TP Act or s 42 of the Fair Trading Act 1987 (NSW) (“the FT Act”); (d) involvement in Holdings’ contravention of the TP Act or the FT Act; (e) contravention of s 995(2) of the Law; and (f) contravention of s 996(1) of the Law.
Breach of contract
101 AAH and AT were retained by the NRMA, and it was common ground that under the contracts thereby formed they owed to the NRMA duties to exercise reasonable care, skill and diligence (“duties of care”) in the matters for which they were retained. In the manner the proceedings were conducted, the parties said that it did not matter whether the solicitors were retained by Association, by Insurance, or by both, or whether the retainer extended to a retainer by Holdings when Holdings was incorporated.102 Such letters as there were dealing with the retainers addressed fees, resources, and such like, and did not add to, cut down, or give content to the duties of care, and there was a degree of contention over the scope of the matters for which the solicitors were retained. In the result, in the respective submissions there was little issue over the existence of duties of care sufficient for the failures to exercise reasonable care, skill and diligence on which the NRMA relied. It is enough to record that the NRMA alleged in the points of claim, but AAH and AT did not accept in their defences, that the matters for which each of AAH and AT was retained were such that the duties of care included the exercise of reasonable care, skill and diligence in proffering timely and accurate advice to the NRMA generally in connection with all legal issues arising out of the proposal; in preparing, advising upon and settling the prospectus; in ensuring that the prospectus did not contain any misleading, incorrect or incomplete information, statement or representation; in ensuring that the prospectus disclosed all information which was necessary to make the prospectus true and not misleading; in ensuring that the prospectus contained information that was fair and balanced; in ensuring that the proposal was lawful and capable of implementation; and in proffering timely and accurate advice to the NRMA of any risk that the proposal could be rendered unlawful.
103 The points of claim could probably be read as including a claim for breach of contract (as distinct from negligence) against Mr Heydon. Such a claim was espoused even to and in submissions, but at a late stage was expressly abandoned.
104 It was alleged that AAH and AT breached the contracts in that they failed to exercise the reasonable care, skill and diligence, with lengthy particulars of the failures. In the hearing of the proceedings the prolixity of the particulars was not taken up, and more concise and confined submissions of failures to exercise the reasonable care, skill and diligence were made. The thrust of the failures alleged in submissions, to which I will come in due course, was that AAH and AT should have advised that there was a real risk that the proposal as then determined could be rendered unlawful by the decision of the High Court on a successful appeal in Gambotto’s case, and should have advised against describing the shares as free shares at all, or at least of the risk of using that description as it was used. As the NRMA’s case was put in submissions, inadequate advice in relation to the disadvantages question took a subsidiary role, being that the prospectus’ failure to explain the disadvantages “compounded the misleading representation that the members were giving up nothing of value in exchange for free shares”.
105 It was then alleged that in consequence of the breaches of contract the NRMA suffered loss in the amount of the wasted expenditure. In the points of claim the loss on this cause of action, and all others, was claimed globally, as the entire wasted expenditure. In its opening the NRMA made clear that the loss claimed for failure to advise of risk to the proposal in connection with Gambotto’s case was only the expenditure after the date on which the advice should have been given and would have been acted on, putting forward alternative dates in March and April 1994. In the course of submissions it said that it was arguable that the prior expenditure “was lost as a result of the Gambotto negligence”, but confirmed that it was content to start from the intermediate date. As to the loss claimed for failure to advise in relation to the free shares question and the disadvantages question, in submissions there was late modification by the NRMA to a claim that part of the wasted expenditure would be recoverable as such if it succeeded in establishing the defendants’ liability and other of the wasted expenditure would be recoverable on a different basis. Until that time the NRMA’s case on all causes of action going to free shares/disadvantages liability was that it either succeeded or failed in relation to the entire wasted expenditure, and I will further explain the shift from a global claim of loss in due course.
Negligence
106 It was also common ground that the retainers of AAH and AT gave rise to duties of care under common law principles relating to negligence apart from under the contracts thereby formed (see for example Hawkins v Clayton (1964) 164 CLR 539 at 574-5 per Deane J; Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642), the duties of care having the same content as the duties of care under the contracts. In the points of claim the NRMA alleged breach of the duties of care and loss in the same respects as for the claims for breach of contract. No one submitted that the liability of AAH or AT, or the quantification of damages, differed according to whether the NRMA succeeded on a cause of action in contract or in tort, and it was accepted that if the NRMA succeeded on what might be called contractual negligence it would also succeed on what might be called tortious negligence.107 At the time of the hearing it was also accepted that questions of contributory negligence and contribution (see later in these reasons) were in the circumstances of this case not affected by liability being in contract rather than in tort, and with one qualification in the manner the proceedings were conducted it was unnecessary to distinguish between the claims for breach of contract and for negligence. The qualification was that, although perhaps not recognised by it, the NRMA’s reliance on the reasoning of the High Court in McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 for recovery of the wasted expenditure as damages for free shares/disadvantages liability may have required, or been assisted by, liability for breach of contract.
108 More point to distinguishing between the claims for breach of contract and the claims for negligence came with the decision of the High Court, after the hearing and while judgment was reserved, in Astley v Austrust Ltd (1999) HCA 6. To the potential disadvantage of the defendants, it was held that contributory negligence did not provide a defence to a claim for breach of contract even where the claim was also brought in tort. Since the duties of care had the same content, this meant that contributory negligence was of no value to AAH and AT as a defence to the claim for negligence (although both maintained that Astley v Austrust Ltd did not affect contributory negligence so far as it was an available defence to the statutory claims).
109 Mr Heydon was asked by AAH and AT, in briefs and letters, to advise the NRMA in relation to matters to do with the formulation and implementation of the proposal. The NRMA alleged in the points of claim, but Mr Heydon did not accept in his defence, that the circumstances in which he was asked to, and did, advise, and the matters in relation to which he was asked to advise, were such that he owed to it a duty of care under common law principles relating to negligence, being a duty of care to exercise reasonable care, skill and diligence -
“(a) to give timely and accurate advice to the Plaintiffs in connection with all legal issues arising out of the Proposal in respect of which Heydon had been briefed;
(b) to advise upon the lawfulness of the prospectus, (including but not limited to the use therein of the expressions ‘free shares’ and ‘free offer’) and the impact upon the Proposal of an adverse decision in Gambotto ;
(c) to advise that the prospectus was misleading or deceptive and thereby in breach of the Trade Practices Act (1974) (Cth) and the Corporations Law ;
(d) to advise that the ‘onsert’ was misleading or deceptive and thereby in breach of the Trade Practices Act (1974) (Cth) and the Corporations Law ;
(e) to advise whether the prospectus disclosed all information which was necessary to make it true and not misleading;
(f) to advise whether the accompanying documents (including the onsert) which had been briefed to him disclosed all information which was necessary to make them true and not misleading;
(g) to advise whether the Proposal was lawful and capable of implementation;
(h) to proffer timely and accurate advice to the Plaintiffs of any risk that any aspect of the Proposal (including any of the documents referred to above) might be or be rendered unlawful.”110 The full width of the alleged duty of care was not maintained in submissions, in that negligence in failure to advise in relation to the disadvantages question was not maintained against Mr Heydon, and the failures to exercise reasonable care, skill and diligence on which the NRMA relied to some extent confined the contest over the extent of Mr Heydon’s duty of care. A significant contest remained.
111 It was alleged that Mr Heydon breached the duty of care in that he failed to exercise the reasonable care, skill and diligence, again with lengthy particulars of the failures. As in the case of the claims against AAH and AT, in the hearing of the proceedings the prolixity of the particulars was not taken up, and more concise and confined submissions of failure to exercise the reasonable care, skill and diligence were made. The thrust of the failures alleged in submissions, to which again I will come in due course, was that Mr Heydon should have advised that there was a real risk that the proposal as then determined could be rendered unlawful by the decision of the High Court on a successful appeal in Gambotto’s case, and should have advised against describing the shares as free shares at all, or at least that the lawfulness of the description should be considered. As I have said, negligence in failure to advise in relation to the disadvantages question was not maintained against Mr Heydon, but it was submitted that lack of balance in the prospectus was “all the more reason for him to give cautious and careful advice about the use of the expression ‘free’.”
112 It was then alleged that in consequence of the breaches of the duties of care the NRMA suffered loss in the amount of the wasted expenditure. What I have earlier said applies. Since the claim against him was in tort alone, contributory negligence remained a defence available to Mr Heydon.
Contravention of the TP Act and the FT Act
113 The statutory bases for the causes of action were ss 52 and 82 of the TP Act and the corresponding provisions of the FT Act.114 Section 52 of the TP Act, the provision on which the applicants in the Federal Court proceedings relied in 1994 to the detriment of the NRMA, provided so far as relevant -
“52 (1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”
Section 52 was in Part V of the TP Act. Section 82 of the TP Act provided so far as relevant -115 Section s 42 and 68 of the FT Act were in the same terms, save that s 42 referred to a “person” rather than a “corporation”.
“82 (1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.”
116 The NRMA alleged in the points of claim that by breaching their duties of care, further or alternatively by failing to correct “the prospectus, the accompanying documents and the promotional materials” so as to ensure that there were no misleading or deceptive representations contained within them, AAH and AT in trade or commerce engaged in misleading conduct in contravention of s 52 of the TP Act and s 42 of the FT Act. It alleged that by breaching his duty of care Mr Heydon in trade or commerce engaged in misleading conduct in contravention of s 42 of the FT Act. It then alleged that the NRMA suffered loss or damage by that contravening conduct, recoverable under s 82 of the TP Act and s 68 of the FT Act, in the amount of the wasted expenditure.
117 The “accompanying documents” were the onsert. The “promotional materials” were the materials such as media statements, letters or articles in the NRMA magazine The Open Road, letters to members, and scripts for responses on a telephone hotline, produced during 1994 and relevantly referring to free shares. The promotional materials had been taken up in the allegation of duties of care, although it has not been necessary to refer to that aspect of the allegation, and will be referred in some detail in these reasons, but their significance in the proceedings was only as part of the conduct of the parties illuminating the allegations of default in relation to the prospectus and onsert. The decisions of Gummow J and the Full Court were not founded on misleading or deceptive representations in the promotional materials. The NRMA’s case in these proceedings as opened and conducted relevantly involved loss because the decision of the Full Court prevented the proposal from going to the general meetings, and any breach of duty or conduct in contravention of s 52 of the TP Act or s 42 of the FT Act affecting the promotional materials was not causative of the loss alleged. What the NRMA relied on was the deficiencies in the prospectus found by the Full Court, not (save as part of the illustrative conduct) any deficiencies in the promotional materials.
118 Neither AAH nor AT was a corporation. In its opening, and even in submissions, the NRMA said that s 52 of the TP Act nonetheless extended to them by the operation of s 6 of the TP Act. It did not seem to matter, because if AAH or AT contravened s 42 of the FT Act nothing more would flow to the NRMA if they also contravened s 52 of the TP Act, and reliance on the TP Act brought complications which need not be described. Therefore, but also at a late stage in submissions, the NRMA expressly abandoned its claims against AAH and AT for contravention of the TP Act, and confined its claims to claims for contravention of the FT Act. Again at a late stage in submissions, the NRMA expressly abandoned its claim against Mr Heydon for contravention of the FT Act.
119 The claims against AAH and AT for contravention of the FT Act, as they became, was concerned only with the free shares question and the disadvantages question: the case of failure adequately to advise in relation to risk to the proposal in connection with Gambotto’s case was no part of the claims. What I have said about a global claim of loss applies.
Involvement in contravention of the TP Act and the FT Act
120 The statutory basis for the cause of action were the provisions already described plus s 75B of the TP Act and the corresponding provision of the FT Act.121 As has been seen, s 82 of the TP Act and s 68 of the FT Act extended to recovery against any person “involved in the contravention”. Section 75B of the TP Act provided so far as relevant -
122 Section 61 of the FT Act was in materially the same terms as s 75B of the TP Act.
“75B (1) A reference in this Part to a person involved in a contravention of
provision of Part IV or V shall be read as a reference to a person
who -
(a) has aided, abetted, counselled or procured the contravention;
(b) has induced, whether by threats or promises or otherwise, the contravention;
(c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d) has conspired with others to effect the contravention.”123 The NRMA alleged in the points of claim that Association and Insurance had suffered loss or damage by conduct of Holdings, namely the distribution of the prospectus and the onsert; that the conduct was in contravention of s 52 of the TP Act (Gummow J and the Full Court had so held) and also constituted contravention of s 42 of the FT Act; and that all of AAH, AT and Mr Heydon were persons involved in the contraventions because they aided, abetted, counselled and procured the contraventions, induced the contraventions by their own conduct, and were directly and indirectly knowingly concerned in or parties to the contraventions. The conduct of AAH, AT and Mr Heydon alleged as their involvement was their breaches of their duties of care, and in the case of AAH and AT failing to correct the prospectus, the accompanying documents and the promotional materials so as to ensure that there were no misleading or deceptive representations contained within them. The loss or damage alleged was again the amount of the wasted expenditure.
124 The abandonment of the claims against AAH and AT for contravention of the TP Act was matched by abandonment of the claims for involvement in contravention of the TP Act against all of AAH, AT and Mr Heydon. The claim against Mr Heydon for involvement in contravention of the FT Act was maintained. So in the end the claims were against all defendants for involvement in Holdings’ contravention of s 42 of the FT Act. It was not in dispute that if Holdings had contravened s 52 of the TP Act it had also contravened s 42 of the FT Act.
125 Again, the claims for involvement in contravention of the FT Act, as they became, was concerned only with the free shares question and the disadvantages question: the case of failure adequately to advise in relation to risk to the proposal in connection with Gambotto’s case was no part of the claims. What I have said about a global claim of loss applies.
Contravention of s 995(2) of the Law
126 Section 995(2) of the Law, contained in Pt 7.11, provided -
“995(2) A person shall not, in or in connection with:
(a) any dealing in securities; or
(b) without limiting the generality of paragraph (a):engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”
(i) the allotment or issue of securities;
(ii) any prospectus issued, or notice published, in relation to securities;
(iii) the making of takeover offers or a takeover announcement, or the making of an evaluation of, or of a recommendation in relation to, takeover offers or offers constituted by a takeover announcement; or
(iv) the carrying on of any negotiations, the making of any arrangements or the doing of any other act preparatory to or in any other way related to any matter referred to in subparagraph (i), (ii) or (iii);
Section 1005(1) of the Law, also contained in Pt 7.11, provided -127 The NRMA alleged in the points of claim that AAH, AT, and Mr Heydon engaged in misleading conduct in contravention of s 995(2) in or in connection with the making of arrangements and the doing of other acts preparatory to and in other ways related to the allotment or issue of securities in the capital of Holdings and the prospectus issued and the other documents published in relation to the securities of Holdings. The particulars of the allegation took up the matters alleged to give rise to the duties of care and breaches of the duties of care. It was then alleged that the NRMA suffered loss or damage by that contravening conduct, recoverable under s 1005(1), in the amount of the wasted expenditure.
“1005(1) Subject to the following sections of this Division, a person who suffers loss or damage by conduct of another person that was engaged in contravention of a provision of this Part or Part 7.12 may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention.”
128 At one of the late stages in submissions the NRMA abandoned this claim against Mr Heydon. Perhaps because, in the claims against AAH and AT, it was not necessary that the misleading conduct be in trade or commerce, the claims were maintained against AAH and AT. It was not suggested that anything else flowed to the NRMA from these claims which would not flow from the claims for contravention of the FT Act.
129 Again, the claims for contravention of s 995(2) of the Law were concerned only with the free shares question and the disadvantages question: the case of failure adequately to advise in relation to risk to the proposal in connection with Gambotto’s case was no part of the claims. What I have said about a global claim of loss applies.
Contravention of s 996(1) of the Law
130 Section 996(1) of the Law, also contained in Pt 7.11, provided -
“996(1) A person must not authorise or cause the issue of a prospectus in relation to securities of a corporation if:
(a) the prospectus has been, or is required to be,
lodged under Part 7.12; and
(b) either:
(i) a material statement in the prospectus is
false or misleading; or
(ii) there is a material omission from
the prospectus.”
Section 1005(1) extended also to loss or damage by conduct engaged in in contravention of s 996(1).131 The NRMA alleged in the points of claim that AAH, AT, and Mr Heydon contravened s 996(1) by authorising or causing the issue of a prospectus which was or was required to be lodged under Pt 7.12 of the Law, which contained material statements which were false or misleading, and which omitted material information. It was not in dispute that the prospectus was in relation to the securities of a corporation and was, and was required to be, lodged under Pt 7.12 of the Law. The allegation was not fully particularised, but in substance was that the authorising or causing was by their involvement in the preparation and distribution of the prospectus, and that the false or misleading statements and omissions in the prospectus were the matters with which the free shares question and the disadvantages question were concerned. In submissions the case for authorising or causing was not greatly elucidated, involving only broad reference to the respective involvements in the preparation and distribution of the prospectus. It was then alleged that the NRMA suffered loss or damage by the contravening conduct, recoverable under s 1005(1), in the amount of the wasted expenditure.
132 Again, the claims for contravention of s 996(1) of the Law were concerned only with the free shares question and the disadvantages question: the case of failure adequately to advise in relation to risk to the proposal in connection with Gambotto’s case was no part of the claims. What I have said about a global claim of loss applies.
133 So the claims against the defendants came down to claims for -
The claims in (i) were for all Gambotto liability and free shares disadvantages liability. The claims in (ii) to (v) were for free shares disadvantages liability alone.
(i) contractual and tortious negligence, against AAH and AT, and tortious negligence, against Mr Heydon;
(ii) contravention of the FT Act, against AAH and AT;
(iii) involvement in Holdings’ contravention of the FT Act, against AAH, AT and Mr Heydon;
(iv) contravention of s 995(2) of the Law, against AAH and AT; and
(v) contravention of s 996(1) of the Law, against AAH, AT and Mr Heydon.
Allen Allen & Hemsley
135 AAH accepted in its defence, ultimately that filed on 15 June 1998, that it was retained by the NRMA, amongst other things, to advise on the possible alternative structures for what became the proposal, to advise on the compliance of the structure and its implementation with the Law and “the general law”, and to comment on various drafts of the prospectus and accompanying documents and some promotional materials.136 It accepted that it was retained “to advise in respect of the final form of the Prospectus as to whether any matter had come to their attention which caused them to believe” that the prospectus contained any material statement (excluding the financial material) that was false or misleading, that there was any material omission from the prospectus, and that the issue of the prospectus might involve the NRMA in misleading conduct. The words “had come to their attention which caused them to believe” should be noted. AAH denied “the absence of any advice that the Prospectus was or might be misleading, deceptive or in any other respect unlawful”.
137 In relation to Gambotto’s case, AAH admitted that it did not give what the NRMA had defined in the points of claim as “the Gambotto advice” which should have been given, namely, “that the prudent course after 10 December 1993, alternatively after 21 April 1994, was for the Plaintiffs not to proceed with the Proposal, alternatively to proceed with the Proposal only to the extent necessary to ensure that the Proposal was kept in a state in which it could be revived, altered or abandoned conveniently and economically once the decision of the High Court in Gambotto was delivered”. (This Gambotto advice was rather different from the Gambotto advice taken up in the NRMA’s evidence, but it was not in dispute that AAH did not give the latter Gambotto advice either.)
138 AAH admitted that it knew that the NRMA was relying on it to advise of any risk of which it (AAH) was aware based on the information provided to it and, subject to the qualifications contained in AAH’s letter of 18 August 1994 (being the so-called sign-off letter in relation to the proposal), of any risk that rendered the proposal unlawful, but denied that the NRMA had suffered any loss or damage by reason of any act or omission of AAH. Indeed, in some parts of the defence AAH denied that the NRMA had suffered any loss at all.
139 Specifically as to ss 995(2) and 996(1) of the Law, AAH said that the NRMA could not rely on those provisions because the NRMA had itself contravened them, and because as a matter of construction the provisions were not available to a corporation issuing or involved in the issue of the prospectus or a corporation related to such a corporation. This was not taken up in submissions.
140 AAH specifically raised two issues of causation. The first was that any loss suffered by the NRMA was not caused by any act or omission on the part of AAH, but was caused by the supervening decision of the High Court in Gambotto’s case “which declared the law in a way which made it impossible to implement, or which led to the Plaintiff’s abandoning the implementation of, the Proposal by way of resolutions at members’ meetings”. The second had a number of elements rather confusingly thrown together, and was to the effect that any loss or damage suffered by the NRMA was not caused by any act or omission on the part of AAH because the proposal would have been rejected by the members for reasons to do with the financial forecasts in the prospectus and the financial position of Insurance. It was said that the prospectus contained financial forecasts which would have precluded the NRMA from continuing with the proposal, or alternatively would in any event have required a supplementary prospectus to have been issued, with particulars that by November 1994 the profit performance of the NRMA was such that it was likely that the profit for 1994-95 would be materially different from that forecast in the prospectus. It was also said that the financial position of Insurance was such that, had it been known to members at the general meetings “as it would have been as a result of the public announcement of the year’s results”, the proposal would have been rejected by members, or if the proposal had been initially approved was such that it would have led to the ultimate overturning of any decisions of the members made on the basis of the incorrect financial information.
141 Involved in these issues, at least as they were later explained, was that putting the proposal to the general meetings would have been delayed by the decision of Gummow J even if the defendants had not been at fault in relation to the free shares question or the disadvantages question, because his Honour’s orders were founded in part on other deficiencies in the prospectus not now alleged against the defendants, and that during the delay the inhibiting financial position would have become known and would have brought defeat to the proposal; further, during the delay the decision of the High Court would have been given with the same result. More as to these issues should await the attention to the submissions on causation later in these reasons. There was no doubt during the hearing that AAH (and the other defendants) sought to defeat the NRMA on causation grounds which included the issues of causation specifically raised.
142 AAH relied on some exculpatory provisions of the Law. They were complex and difficult to summarise. AT and Mr Heydon also relied on some exculpatory provisions of the Law, with overlapping between the provisions relied on, and it is convenient to set out now the full spectrum of the provisions.
143 First, AAH relied on part of the combined operation of ss 1006 and 1009 of the Law in answer to the claims for contravention of ss 995(2) and 996(1). By s 1006(1), s 1006 applied -
“… for the purposes of an action under section 1005 in respect of conduct being the issue of a prospectus in relation to securities of a corporation:
(a) in which there is a material statement that is false or misleading; or
(b) from which there is a material omission”.
Then by s 1006(2) the reference in s 1005(1) to any person involved in the contravention included a reference to all or any of -Then by s 1009(2), (3) and (4) -
“(e) if the prospectus includes a statement that purports to be, or to be based on, a statement made by an expert and the expert gave consent under section 1032 to the issue of the prospectus - that expert;
…
(g) a person named, with the consent of the person, in the prospectus as an auditor, banker or solicitor or the corporation or for or in relation to the issue or proposed issue of securities;
(h) a person named, with the consent of the person, in the prospectus as having performed or performing any function in a professional, advisory or other capacity not mentioned in paragraph (e), (f) or (g) for the corporation or for or in relation to the issue or proposed issue of securities”.
“(2) A person referred to section 1006(2)(e)(g) or (h) is liable in an action under section 1005 only in respect of:
(3) A person referred to in paragraph 1006(2)(e) is not liable in an action under section 1005 in respect of a false or misleading statement in, or an omission from, the prospectus if it is proved:
(a) a false or misleading statement in the prospectus purporting to be made by the person as a person referred to in that paragraph, or to be based on a statement made by the person as a person referred to in that paragraph; or
(ba) in the case of a person referred to in paragraph 1006(2)(e) - an omission of any material matter from a statement in the prospectus purporting to be made by the person as a person referred to in paragraph 1006(2)(e), or to be based on a statement made by the person as such a person; or
(b) in the case of a person referred to in paragraph 1006(2)(g) or (h) - an omission from the prospectus of any material matter for which the person is responsible in the person’s capacity or purported capacity as a person referred to in paragraph 1006(2)(g) or (h).
…(4) A person referred to in paragraph 1006(2)(g) or (h) is not liable in an action under section 1005 in respect of a false or misleading statement in, or an omission from, the prospectus if it is proved:
(c) that the person was competent to make the statement and, after making such inquiries (if any) as were reasonable, had reasonable grounds to believe, and did until the time of the allotment or issue of the securities believe that:
(i) if the action is in respect of a false or misleading statement - the statement was true and not misleading; or
(ii) if the action is in respect of an omission from a statement - there were no material omissions from the statement.
…
(b) in the case of a statement - that the person was competent to make the statement and, after making such inquiries (if any) as were reasonable, had reasonable grounds to believe, and did until the time of the allotment or issue of the securities believed, that the statement was true and not misleading; or
(c) in the case of an omission - that the person, after making such inquiries (if any) as were reasonable, had reasonable grounds to believe, and did until the time of the allotment or issue of the securities believe, that there were no omissions from the prospectus of material matters for which the person was responsible in the person’s capacity as a person referred to in paragraph 1006(2)(g) or (h), and that the person was competent to act in that capacity”.
Very broadly, an adviser could gain protection under these provisions if his involvement was limited or he had acted reasonably. The reliance of AAH, as pleaded in its defence, was confined to the exculpation under s 1009(4), and in submissions it did not take it up at all.144 Secondly, AAH relied on s 1011(1) of the Law in answer to the claims for contravention of ss 995(2) and 996(1): it provided -
“1011(1) The corporation, a person referred to in paragraph 1006(2)(d) or (f) or a person who authorised or caused the issue of the prospectus is not liable in an action under section 1005 if it is proved that the false or misleading statement or the omission:
(a) was due to a reasonable mistake;
(b) was due to reasonable reliance on information supplied by
another person; or
(c) was due to the act or default of another person, to an
accident or to some other cause beyond the defendant’s
control;
and, in a case to which paragraph (c) of this subsection applies, that the defendant took reasonable precautions and exercised due diligence to ensure that all statements to be included in the prospectus were true and not misleading and that there were no material omissions from the prospectus.”
Again very broadly, a person could escape liability if he had acted reasonably. This was taken up in submissions.145 Thirdly, AAH relied on s 1318(1) of the Law together with s 1318(4) describing its application, in answer to all the claims against it. They provided -
“1318(1) If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default of breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.”
“(4) This section applies to a person who is:
(a) an officer of a corporation;
(b) an auditor of a corporation, whether or not the person is
an officer of the corporation;
(c) an expert in relation to a matter:(d) a receiver, receiver and manager, liquidator or other person appointed or directed by the court to carry out any duty under this Law in relation to a corporation.”
(i) relating to a corporation; and
(ii) in relation to which the civil proceedings has been
taken or the claim will or might arise; or
Again very broadly, an expert could escape liability if he had acted honestly and should be excused. This was also taken up by AAH in submissions, although only in relation to the claims for contravention of ss 995(2) and 996(1) of the Law.146 AAH then said that the NRMA had failed to mitigate its loss, because it could have rectified any misleading or deceptive statements in the prospectus by issuing a supplementary prospectus and did not do so, alternatively because after the decision of the High Court in Gambotto’s case it was still open to the NRMA to implement the proposal by way of a court-approved scheme of arrangement but the NRMA did not do so.
147 Finally, AAH alleged that the NRMA contributed to its loss by its own negligence and that, if AAH was liable, the amount for which it was held liable should be reduced by such amount as was thought just and equitable in accordance with s 10 of the Law Reform (Miscellaneous Provisions) Act 1965. Detailed particulars of the contributory negligence were given, rivalling in prolixity the NRMA’s particulars of breach, the thrust of which was that the NRMA was at fault in persisting with the description “Free Shares” knowing of the risk in doing so and that the NRMA was at fault in either inadequately identifying the disadvantages in the proposal or going ahead with the proposal knowing that the prospectus did not adequately address them. As I have indicated, following the decision in Astley v Austrust Ltd contributory negligence was not available to AAH as a defence to the claim for breach of contract, and so of no practical value as a defence to the claim for negligence. At least in submissions, the parties were at issue over whether contributory negligence was a defence to the statutory claims, and Astley v Austrust Ltd was said by the NRMA to support its position and by the defendants to support their positions.
Abbott Tout
148 The position of AT was in many respects, but not all, the same as or similar to that of AAH.149 AT accepted in its defence, ultimately that filed on 16 June 1998, that it was retained to assist in relation to the proposal, but said that its retainer was restricted to a list of particular matters This particularity - and the list was long - was apparently with a view to excluding any duty of care in relation to the free shares question, the disadvantages question, or the impact of Gambotto’s case on the proposal, as the defence did not concede such a duty of care, and in the course of the evidence there was occasional reference to such a stance. As I have indicated, in the result there was little issue over the existence of a duty of care sufficient for the failures to exercise reasonable care, skill and diligence on which the NRMA relied. That the retainer included providing a “sign-off letter in relation to Section 1 of the prospectus” was admitted.
150 AT did not specifically deny the allegation of breach of the duty of care, but the proceedings were conducted on the basis that breach was in issue. It admitted that it did not give the Gambotto advice, while saying that it was not retained to advise in relation to Gambotto’s case and that in any event the Gambotto advice would not have been appropriate.
151 Specifically as to ss 995(2) and 996(1) of the Law, AT also said that the NRMA was not entitled to rely on those provisions because the NRMA had itself contravened them, or in the alternative that the NRMA was “not within the category of persons to whom Sections 995, 996 and 1005 (in relation to a contravention of Sections 995 or 996) of the Corporations Law are available to be relied upon or used for relief”. This was not taken up in submissions.
152 As to causation, AT raised the issues which AAH had raised concerning the supervening decision in Gambotto’s case, the financial forecasts in the prospectus, and the financial position of Insurance. There were some differences in expression from the defence of AAH, but not such as to warrant further attention at this point. AT also relied upon exculpatory provisions of the Law, in its case the full range of provisions earlier set out (except s 1011(1)(a)). As to s 1318(1) its reliance also extended to all claims against it, and AT did take this up in submissions.
153 AT said that the NRMA had failed to mitigate its loss, because it failed to seek special leave to appeal to the High Court from the decision of the Full Court, failed to issue a supplementary prospectus, and failed to implement the proposal by way of a scheme of arrangement. In submissions, failure to seek special leave to appeal to the High Court was expressly abandoned.
154 Finally, AT also alleged contributory negligence on the part of the NRMA, with detailed particulars with a similar thrust to that earlier described but more directly asserting that the NRMA chose to rely on the advice of its directors, management, legal staff, consultants, and “other external lawyers” rather than the advice of AT.
Mr Heydon
155 Mr Heydon’s defence was ultimately that filed on 15 June 1998. He admitted that he owed to the NRMA a duty of care “in connection with the expression of his opinion on the matters in respect of which it was sought, but only to the extent that his advice was sought by any particular company on any particular occasion”. He denied any wider duty of care. He said that he was not asked to express an opinion material to the free shares question, the disadvantages question, or the impact of Gambotto’s case on the proposal, save to the extent of certain limited advice in relation to the onsert at the beginning of August 1994 as to which he said there was no breach of the duty of care. He denied that he was asked to advise or express an opinion on whether the prospectus was or might be misleading, deceptive, or in any other respect unlawful, and denied that there was any occasion for him to advise as to the materiality of Gambotto’s case to the proposal. His position included, therefore, that he did not owe to the NRMA a duty of care within which fell the failures to advise alleged by the NRMA.156 Specifically as to ss 995(2) and 996(1) of the Law, Mr Heydon said that as a matter of construction the NRMA was not within the category of persons who could rely on those provisions because each of Association, Insurance and Holdings was either responsible for conduct engaged in in contravention of the provisions or was involved in the contraventions. As I have said, the allegation of contravention of s 995(2) of the Law was abandoned as against Mr Heydon, but he did not take this response up in submissions in relation to s 996(1).
157 Mr Heydon’s defence did not expressly raise the issues going to causation or mitigation (the supervening decision in Gambotto’s case, failure to seek special leave to appeal to the High Court, failure to issue a supplementary prospectus, failure to proceed by way of a scheme of arrangement) which had been raised by AAH and AT. Mr Heydon did not rely on the exculpatory provisions of the Law, save that he relied on s 1318(1) in relation to all the claims against him. Mr Heydon alleged contributory negligence on the part of the NRMA, again with extensive particulars the thrust of which was similar to the thrust of those in the defence of AT.
158 The additional matter in Mr Heydon’s defence was that the claims under the TP Act and the FT Act were said to be statute barred because they accrued more than three years before action was commenced against him (see TP Act s 82(2), FT Act s 68(2)). With the abandonment of the claims under the TP Act, only the FT Act was relevant. It was acknowledged in submissions that the matter was likely to be academic. If Mr Heydon was liable for negligence, there was no limitation defence. If he was not liable for negligence, at least at one point the NRMA agreed that it was unlikely that he would be found liable for involvement in Holdings’ contravention of s 42 of the FT Act, although that does not automatically follow.
159 Each of AAH, AT, and Mr Heydon cross-claimed against the others of them for indemnity or contribution. The cross-claim of AAH repeated the NRMA’s allegations against AT and Mr Heydon, alleged that AT and Mr Heydon “caused or contributed to” the NRMA’s loss or damage, and said that AT and Mr Heydon were “liable to pay contribution” to AAH. The nature and source of the liability were not stated. The cross-claim of AT alleged that if AT was liable to the NRMA then AAH and Mr Heydon were also liable to the NRMA, and said that AT was “entitled to contribution” from AAH and Mr Heydon. The entitlement was said to be as an action for contribution under s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (“the LR Act”) “or in equity”. The cross-claim of Mr Heydon was similar to that of AT, save that it claimed a declaration “as to the apportionment of liability, either pursuant to section 5 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) or in equity” and judgment to give effect to the apportionment of liability, and a specific order as to costs incurred by Mr Heydon.
V OTHER CLAIMS IN THE PROCEEDINGS160 Each of AAH, AT, and Mr Heydon also cross-claimed against the NRMA. Subject to a qualification, to which I will come, the cross-claims took the same form. They were expressed to be for contribution under s 5 of the LR Act “or otherwise”, which had the virtue of comprehensiveness but called for explanation.
161 Section 5 of the LR Act provides, so far as relevant -
“5(1) Where damage is suffered by any person as a result of a tort (whether a crime or not) -
…
(2) In any proceedings for contribution under this section the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage; and the court shall have power to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity.”
(c) any tort-feasor liable in respect of that damage may recover contribution from any other tort-feasor who is, or would if sued have been, liable in respect of the same damage, whether as a joint tort-feasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by him in respect of the liability in respect of which the contribution is sought.
162 The “or otherwise” in the cross-claims against the NRMA was explained as involving the principle of contribution for which Albion Insurance Company Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 is commonly cited (“the Albion principle”), that persons who are under co-ordinate liabilities to make good the one loss must share the burden pro rata (see in particular per Kitto J at 349-50).
163 When the cross-claims were brought, by amendment early in the hearing, the NRMA suggested that they raised claims unknown to the law, and were the product of misplaced ingenuity and without substance. The amendment was nonetheless consented to, on the basis that the merits of the cross-claims would be addressed together with all other issues in the proceedings (and according to the NRMA would be found to be nil). The description of the cross-claims against the NRMA should include their “or otherwise” basis, although it must be accepted that in those and other respects the cross-claims may be novel and a proper description is therefore not short.
164 I will first describe the cross-claims by reference to the cross-claim by AAH, and then describe the qualification arising in the cross-claim by AT.
165 The first way in which the cross-claim was put was to the following effect. If the distribution of the prospectus and accompanying documents was misleading conduct, as found in the Federal Court, then each of Association, Insurance, and Holdings had engaged in misleading conduct in contravention of s 52 of the TP Act and s 995(2) of the Law, and each of Association, Insurance, and Holdings had authorised or caused the issue of an erroneous prospectus in contravention of s 996(1) of the Law. Where Association engaged in the misleading conduct, or authorised or caused the issue of the prospectus, then Insurance and Holdings were both involved in the contraventions (I use the word “involved” to encompass aiding, abetting, counselling, procuring, inducing, and being knowingly concerned in or a party to the contraventions). Where Insurance engaged in the misleading conduct, or authorised or caused the issue of the prospectus, then Association and Holdings were both involved in the contraventions. Where Holdings engaged in the misleading conduct, or authorised or caused the issue of the prospectus, then Association and Insurance were both involved in the contraventions. Therefore -
(a) if AAH was a tortfeasor liable to Association or Insurance, Holdings was a tortfeasor liable to Association or Insurance and there could be contribution from Holdings to AAH under s 5 of the LR Act; if AAH was a tortfeasor liable to Insurance or Holdings, Association was a tortfeasor liable to Insurance or Holdings and there could be contribution from Association to AAH under s 5 of the LR Act; and if AAH was a tortfeasor liable to Association or Holdings, Insurance was a tortfeasor liable to Association or Holdings and there could be contribution from Insurance to AAH under s 5 of the LR Act; and
(b) Holdings was under a co-ordinate liability with AAH in respect of any liability of AAH to Association or Insurance; Association was under a co-ordinate liability with AAH in respect of any liability of AAH to Insurance or Holdings; Insurance was under a co-ordinate liability with AAH in respect of any liability of AAH to Association and Holdings; and if AAH was liable to Association, Insurance, or Holdings it was entitled to contribution whereby the burdens were shared pro rata under the Albion principle.166 The second way in which the cross-claim was put was to the following effect. Association and Insurance were promoters of Holdings. Where by the issue of the prospectus Association, Insurance, and Holdings engaged in misleading conduct in contravention of s 995(2) of the Law, or authorised or caused the issue of an erroneous prospectus in contravention of s 996(1) of the Law, then, because they were promoters, by force of s 1006 of the Law Association was involved in the contraventions by Insurance and Holdings and Insurance was involved in the contraventions by Association and Holdings. Therefore -
(a) if AAH was a tortfeasor liable to Insurance or Holdings, Association was a tortfeasor liable to Insurance or Holdings and there could be contribution from Association to AAH under s 5 of the LR Act; if AAH was a tortfeasor liable to Association or Holdings, Insurance was a tortfeasor liable to Association or Holdings and there could be contribution from Insurance to AAH under s 5 of the LR Act; and
(b) Association was under a co-ordinate liability with AAH in respect of any liability of AAH to Insurance or Holdings; Insurance was under a co-ordinate liability with AAH in respect of any liability of AAH to Association or Holdings; and if AAH was liable to Association, Insurance, and Holdings it was entitled to contribution whereby the burdens were shared pro rata under the Albion principle.167 The third way in which the cross-claim was put was to the following effect. Association and Insurance were promoters of the proposal. They prepared drafts of the prospectus and considered whether it was misleading. To their knowledge, Holdings relied on them in that respect. Association and Insurance therefore owed duties of care to Holdings in relation to the preparation and content of the prospectus. They breached those duties of care (presumably in that the distribution of the prospectus was found to be misleading conduct), whereby Holdings suffered loss. Therefore -
(a) if AAH was a tortfeasor liable to Holdings, Association and Insurance were tortfeasors liable to Holdings and there could be contribution from Association and Insurance to AAH under s 5 of the LR Act; and
(b) Association and Insurance were under co-ordinate liabilities with AAH in respect of any liability of AAH to Holdings, and if AAH was liable to Holdings it was entitled to contribution whereby the burden was shared pro rata under the Albion principle.168 The fourth way in which the cross-claim was put was to the following effect. Association and Insurance were funding the proposal. Holdings was issuing the prospectus and offering shares thereunder. Holdings therefore owed duties of care to Association and Insurance in relation to the preparation and content of the prospectus. It breached the duties of care (again presumably in that distribution of the prospectus was found to be misleading conduct), whereby Association and Insurance suffered loss. Therefore -
(a) if AAH was a tortfeasor liable to Association or Insurance, Holdings was a tortfeasor liable to Association and Insurance and there could be contribution from Holdings to AAH under s 5 of the LR Act; and
(b) Holdings was under a co-ordinate liability with AAH in respect of any liability of AAH to Association and Insurance, and if AAH was liable to Association and Insurance it was entitled to contribution whereby the burden was shared pro rata under the Albion principle.169 The qualification earlier mentioned was that the cross-claim by AT was put in three further ways.
170 First, it was alleged that there were implied terms of the contract arising pursuant to AT’s retainer that Association, Insurance and Holdings “would provide complete and proper instructions to enable AT properly and fully to advise on and assist in preparing” the prospectus and other documents, to the extent to which AT did so, and “would properly use advice, drafts and other material in respect of” the prospectus and other documents provided by AT to any of them. It was alleged that the implied terms were breached, taking up the matters particularised for the contributory negligence put forward in AT’s defence, and it was said that AT thereby suffered loss being “such losses, damages, costs and expenses as AT has incurred in respect of these proceedings and is alleged or found liable (if any) to pay in these proceedings”.
171 Secondly, it was alleged that Association, Insurance, and Holdings owed a duty of care to AT “by implied term in the relevant retainer and, further and in the alternative under the general law” to exercise reasonable care in a number of respects, that they failed to do so (again taking up the particulars of contributory negligence), and that AT thereby suffered the same loss as just described. The exercise of reasonable care was said to have been required -
“(a) in providing complete and proper instructions to enable AT properly and fully to advise on and assist in preparing the Prospectus, the Accompanying Documents and the Promotional Materials (to the extent it is found that such documents were advised on and their preparation assisted by AT);
(b) in using advice, drafts and other materials in respect of the Prospectus, the Accompanying Documents and the Materials provided by AT to any of Association, Insurance and Holdings;
(c) in preparing, considering and commenting upon drafts of the Prospectus, the Accompanying Documents and the Promotional Materials;
(d) to ensure that the Prospectus, the Accompanying Documents and the Promotional Materials did not contain any misleading, incorrect or incomplete information, statement or representation;
(e) to ensure that the Prospectus, the Accompanying Documents and the Promotional Materials disclosed all information which was necessary to make each of them true and not misleading; and
(f) to ensure that the Prospectus, the Accompanying Documents and the Promotional Materials contained information that was fair and balanced.”172 Thirdly, it was alleged that Association, Insurance, and Holdings in trade or commerce “represented, gave the impression, or created in AT a reasonable expectation” as to a number of matters, that the representation, impression or reasonable expectation was incorrect (again the particulars of contributory negligence were taken up), that by reason of that incorrectness Association, Insurance, and Holdings had contravened s 52 of the TP Act, and that AT had thereby suffered the same loss as earlier described. The matters were connected with the areas for exercise of reasonable care just set out, and were said to be -
“(a) they and each of them had provided complete and proper instructions to enable AT properly and fully to advise on and assist in preparing the Prospectus, the Accompanying Documents and the Promotional Materials (to the extent it is found that such documents were advised on and their preparation assisted by AT) or had taken reasonable care so to do;
(b) they and each of them had completely and properly used advice, drafts and other material in respect of Documents and the Promotional Materials provided by AT to any of Association, Insurance and Holdings or had taken reasonable care so to do;
(c) they and each of them had taken reasonable care in preparing, considering and commenting upon drafts of the Prospectus, the Accompanying Documents and the Promotional Materials;
(d) the Prospectus, the Accompanying Documents and the Promotional Materials did not contain any misleading, incorrect or incomplete information, statement or representation or that they had taken reasonable care so to ensure;
(e) the Prospectus, the Accompanying Documents and the Promotional Materials disclosed all information which was necessary to make each of them true and not misleading or that they had taken reasonable care so to ensure; and
(f) the Prospectus, the Accompanying Documents and the Promotional Materials contained information that was fair and balanced or that they had taken reasonable care so to ensure.”173 In submissions the cross-claims against the NRMA were touched on, but only briefly, and as to some of the ways they were not taken up at all. Now is not the time to explore them further. The allegations of contributory negligence and the cross-claims are two reasons why a deal of attention was given in the hearing to the origins and development of the proposal, and to the parts played not only by the defendants but also by directors and officers of the NRMA.
VI FACTSPreface
174 It should be appreciated that the facts which follow are of necessity selective from all that occurred in relation to the proposal. A vast amount of work went into the proposal, much of it of no relevance or of only peripheral relevance to these proceedings, and it should not be thought that what I will describe adequately reflects all that was done.175 Events material to advice in relation to the free shares question, the disadvantages question, and risk to the proposal in connection with Gambotto’s case, and otherwise to the defences and cross-claims, were interwoven, with each other and with all else that occurred, and must be seen in the context of the overall development and implementation of the proposal. Some aspects of the defences called for a description of the development of the proposal from early times. Further, the submissions involved close attention to what was said in many documents, and so I have set out many extracts in order that the events and the submissions may better be understood; as well, exposing sometimes extensive extracts assists in understanding how the defendants, the directors and officers of the NRMA, and others acted and thought at the time. It is important to avoid the improper influence of hindsight in deciding these proceedings, and to endeavour to get back to the position some years ago.
176 The facts which follow are therefore lengthy and detailed, although I repeat necessarily selective. To the reader dismayed by the length and detail, be content: you have been spared the sixty-eight lever-arch files of documents, the nine lever-arch files of witness statements, a few more files of miscellaneous exhibits, and about five thousand pages of transcript of oral evidence.
177 Recollections of witnesses were variable, but often poor or only in general terms. That is not surprising, nor is it surprising that on some matters recollections differed. I have no doubt that most of those who gave evidence were doing their best to recall and recount, honestly and as carefully as they could, their thoughts and deeds in the period 1992-95, which is not to deny the effect of plain bad memory and the more subtle effect of associations, outside influences, and self-interest on the most honest and careful witness. The capacity of the human mind to delude itself is great. Poor and only general recollections, and differing recollections, make it all the more important when making findings as to what occurred to endeavour to get back to the position some years ago, the better to make inferences when proper to do so and to resolve differences in recollection.
178 Not all the facts described, and in particular not all the resolutions of differences in recollection, are of moment in my decision of these proceedings, but I have taken the view that my findings should be reasonably comprehensive for the benefit of any appellate court which may be invited to see the claims otherwise than as I see them. Further, to assist in understanding I have at times provided some narrative or explanation as I set out what occurred.
The origins of the proposal
179 The President of Association and chairman of Insurance from 1991 was Mr Donald Mackay. The senior management of the NRMA comprised a chief executive officer and a number of general managers. The chief executive officer held that position in both Association and Insurance. The general managers included a general manager of Association and a general manager of Insurance, together with general managers in various areas such as financial services, finance and administration, and community and customer relations. In the period to September 1992 the chief executive officer was Mr John Lamble. Mr Ray Willing was the general manager of Insurance.180 In late 1991 Insurance embarked on a review of its corporate structure, it seems because it was thought that it might be inappropriate for such a major financial entity to be controlled by Association. Its board established a committee of Mr Mackay, Mr Lamble, and Mr Willing to make a preliminary investigation. A number of merchant banks were approached, and Macquarie Corporate Finance Ltd (“Macquarie”) was commissioned to provide a report. The report was provided in February 1992. In its covering letter Macquarie suggested that, because it contained a number of statements and conclusions “of a very sensitive nature”, the distribution of the report should be confined to Messrs Mackay, Lamble and Willing. Even at this time it was recognised that a restructuring was likely to meet what were called “opposition arguments”, and Macquarie set out “the potential responses of Opposition groups”. These were delay, a counter-proposal with “fairer” distribution of benefits, and a counter-proposal proposing across the board premium reductions for NRMA members. As to delay, it was said, “one tactic would be to stall the implementation process for the recommended proposal through legal objections. Arguments about definition of member or the proposed entitlements to benefits could be possible”.
181 In Macquarie’s opinion, and for reasons it gave in detail, Insurance should demutualise by converting to a company with a share capital, offering its shares to existing members, and listing on the Stock Exchange. The reasons were, in summary, that the mutual structure was no longer appropriate to Insurance’s business and financial position because it restricted members’ access to Insurance’s wealth and did not provide an efficient method for raising capital; that Insurance had a large and increasing capital surplus; and that demutualisation and listing would provide members with “a mechanism which enables them to realise the value inherent in the business” and would give Insurance “a more efficient and flexible structure, particularly in terms of its capitalisation, the provision of owner discipline and overall fairness”.
182 The report also briefly referred to alternatives, including “an integral demutualisation and listing” of both Insurance and Association very broadly of the nature of the later proposal. This alternative was thought unacceptable because, it was said, investors in the new holding company “might query its commercial focus if a motor club (which includes public service activities) is integrated with a commercial insurance operation”, and because the listed public company structure might not be an appropriate structure for Association “as it may inhibit public service activities”.
183 Notwithstanding Macquarie’s suggestion of confidentiality, the Macquarie report was the subject of a presentation to the board of Insurance on 20 February 1992. The presentation was to Mr Mackay, Mr Lamble, and Mr Willing, plus other directors who were also directors of Association, Mr Mark Burrows, Mr Holden, Mr Peter Jack, Dame Leonie Kramer, and Ms Lynn Ralph. Two general managers within Insurance, Mr Richard Cox and Mr Adrian Rees, were also present. The minutes recorded that the board “discussed the work to date by Macquarie and noted that it concentrated on one possible course of action”.
184 A special board meeting was appointed for 12 March 1992 to discuss what was called “a range of strategic options” for Insurance, including its relationship with Association and its structure and management. The NRMA management was asked to prepare a “report on options … with pros and cons”.
185 The Macquarie report was before the board on 12 March 1992, and there was a presentation by Mr Lamble, presumably of management’s report. The board then comprised Mr Mackay, Mr Burrows, Mr Graham Douglass, Mr Jack, Mr Holden, Ms Ralph, Ms Jane Singleton, Mr Lamble and Mr Willing, and Mr Peter Corrigan, Mr Rees, and Mr Daniel Wilkie were also in attendance. Messrs Corrigan and Wilkie were also general managers within Insurance. It seems that the management report was not favourable, and other evidence indicated that Mr Willing thought that Macquarie did good work “but the objective was totally unrealistic as spinning off the insurance operation would have split the group asunder, in terms of people, culture and marketing”.
186 It was resolved that management carry out further work on issues to do with Insurance’s long-term future, and that “any change in capital structure” was contingent on completion of that work. The resolution included that a report to “Council”, that is, the board of Association, should be prepared, and it is easy to see that the matters raised had a significance going beyond Insurance and relevant to Association - as a practical matter, of course, Association knew all that Insurance knew through the common directors and overlapping management.
187 The resolution also included that there should be another special board meeting in April 1992 “to consider some of the above issues further”. So far as the evidence shows, that did not occur. It seems that there was media speculation of floating Insurance, and perhaps this moved the NRMA to kill off any talk of demutualisation in whole or part, as it did in a public announcement in June 1992. The restructuring recommended by Macquarie was not take up, but the issues which had been raised did not go away. Insurance’s review had opened up restructuring the NRMA in general, and from the review, it seems, came consideration of wider restructuring.
The Christmas Project is established
188 It was known that Mr Lamble was to retire, and at least by mid-1992 Mr Willing was known as his successor. Mr Willing officially took over as chief executive officer on 1 October 1992, being replaced as general manager of Insurance by Mr Corrigan. In July 1992 the NRMA established the Future Structure Consultative Group (“the Group”), which provided a report dated 13 August 1992 to Mr Willing as chief executive officer designate. The senior members of the Group were Ms Helen Conway, the NRMA’s secretary and general counsel, and Mr Neville King, its general manager - strategic planning. There were six other members, all it seems from within NRMA management, and the list of acknowledgments in the report showed that they consulted widely within the organisation.
189 The report described the Group’s responsibility as considering the strategic direction of the NRMA and recommending several alternative organisational structures consistent with that strategic direction. The recommendations favoured what was called a customer-based structure, referring to internal organisation of management and support functions, and the report did not directly consider restructuring in the sense of demutualisation. It was said, however, that a number of “strategic imperatives” would be enhanced by changes to the organisational structure as considered in the report, amongst which was “Consolidation of the NRMA and NRMA Insurance”.
190 It is tolerably clear that the report of the Group then flowed on to consideration of demutualisation, as is understandable in the light of the board resolution of 12 March 1992 and the consolidation identified as a strategic imperative. The evidence gave no detail, but demutualisation was a topic at a meeting between Mr Corrigan and a merchant bank in August 1992; a stockbroker wrote to Mr Willing in early November 1992 offering its services in a float of the NRMA (this may have been unsolicited); and at the end of November 1992 Mr Willing was debating which of a number of merchant banks to use for what his memorandum to Mr King dated 30 November 1992 called “restructure of group companies”. The memorandum asked that he and Mr King “get together to begin to scope this project”.
191 By a memorandum dated 3 December 1992 Mr King called a meeting for 9 December 1992 to discuss “the corporate restructure project”. Those attending were to be Mr Willing, Mr King, Ms Conway, and two members of Mr King’s strategic planning department or Ms Conway’s secretariat, Mrs Thomasin Graham and Ms Prudence Godwin. Mrs Graham and Ms Godwin had legal qualifications. A so-called agenda for the meeting, more a list of topics for consideration, asked why undertake a restructure, what were the options, why the preferred option was preferred, how to proceed, and who to involve and when (instancing solicitors and a merchant bank). Attached to the memorandum was a list of possible options, the first of which was “Group unified under one ultimate holding company which is:- (a) company limited by shares; (b) company limited by guarantee; (c) company limited by shares and guarantee”. The other options were that one only of Association or Insurance become subject to a holding company, that Association and Insurance stay the same but their subsidiaries change, or something indicated by “joint venture options?”
192 So began the Christmas Project, the title in the minutes of the meeting of 9 December 1992, it seems chosen for no reason other than the time of year.
The Christmas Project report
193 The minutes of the meeting of 9 December 1992 generally covered the topics in the agenda.194 The reasons for restructuring were to do with capitalisation and governance. It was said that the NRMA was over capitalised and largely confined to a New South Wales membership, and that the mutual structure precluded return of capital and inhibited expansion beyond New South Wales: figures were given. It was said that although members “owned” Association and Insurance respectively they did not have “a direct financial stake” in the companies, so that “governance issues are cumbersome” and members did not see the management of the companies as a matter with which they should concern themselves, and that any restructure should have the aim of “aligning the interests of owners, that is the members at present, more closely with the management and control of the company”.
195 Four options were described, the first and preferred option and some comments being recorded in the minutes -
“ The creation of a holding company which could be either public and listed or public and unlisted.
Money would be ‘released’ from the present NRMA Limited and NRMA Insurance Limited in the form of shares in the new company (or cash if a member did not want shares).
This of course raises a host of issues, most importantly the issue of equity. In other words, what rules would be used to decide who gets what shares or cash.
In this option the mutuality of NRMA Limited and NRMA Insurance Limited would be ‘exchanged’ for shares in the holding company and the two existing companies would become companies limited by shares which would be held by the holding company.”
The other three options were that Association and Insurance become “separately owned”, either as mutuals or with one becoming a company limited by shares; that Association itself become the holding company of Insurance and a company limited by shares; and that one of the subsidiaries, or a new subsidiary, become a vehicle for expansion.196 As to progress and who to involve, it was noted that there should be market research to determine whether there was “members’ permission to embark on such a restructure”, but it was then said, “If we do not have such permission Marketing will determine what we need to do so as to change the climate or attitude of our members in order to obtain that permission”. It was said that Mr King was “the owner of the Christmas Project”, but that “in view of the high level of legal content, Helen Conway is to be involved with all legal aspects of the project”. A steering committee was proposed, comprising Mr Willing, Mr King, Ms Conway, and Messrs Corrigan and Mackay “as necessary”, and a project team was proposed comprising Mr King, Mrs Graham, Ms Godwin, a “financial person” to be named, Mr Rowan Ross, and Mr John Morgan. Mr Ross was from BT Corporate Finance Ltd (“BT”), it seems selected as the merchant bank envisaged in the agenda. Mr Morgan was from AAH, according to the minutes selected as the solicitor envisaged in the agenda “in view of his knowledge of the insurance industry; work for NSW Treasury in relation to the privatisation of the NSW GIO; and his familiarity with the operation of the NRMA Group”.
197 The minutes of the meeting of 9 December 1992 included -
“Persons who are to know of the project - all those present together with the President, Mr D G Mackay, Mr Peter Corrigan, General Manager, Insurance and in the near future Mr Adrian Rees, General Manager, Financial Services.
Neville King will put together a list of financially skilled staff who would be suitable for use on the Christmas Project.
Timetable
March is the first staging post. There will be a meeting in March at which a project plan will be presented. At that time it would be likely that the project will be presented to Dame Leonie Kramer, Ray Kirby, Mark Burrows (who shall probably have had earlier involvement) and Ms Lynn Ralph.”198 The persons last named were long-standing NRMA directors. Mr Ray Kirby had been a director of Association since 1981 and a director of Insurance since 1986, and was Deputy President of Association. Dame Leonie Kramer had been a director of Association since 1984 and a director of Insurance since 1991. Mr Burrows had been a director of Association since 1985 and a director of Insurance since 1986: he was a merchant banker. Ms Ralph had been a director of Association since 1986 and a director of Insurance since 1990. All but Mr Kirby had been at the board meeting in 1992 concerning Insurance’s review of its corporate structure, and Mr Kirby must have been aware of that matter.
199 Mr Willing approached Mr Ross and Mr Morgan. By mid-February 1993 both had been engaged and the bases of their engagements had been settled.
200 As to BT, in an engagement letter its role was said to be to act as financial adviser to the NRMA “in relation to the restructuring of the NRMA and NRMA Insurance”, and it was said that it was envisaged that it would first advise on the most appropriate future corporate and financial structure for the companies which would allow them to best satisfy their aims and objectives, and then if there were a restructuring would advise on implementing the desired restructuring. In relation to the first stage, it was said that it was expected that BT’s role “may include assisting the NRMA in reviewing the options available, assessing the likelihood of being able to successfully implement those options and in preparing the project plan for presentation in March”. In relation to the second stage, it was said that BT’s role “would be likely to include providing advice to the NRMA on appropriate strategies and approvals required to implement the restructuring, member and press relations and valuation considerations”.
201 The role of AAH was not recorded in a similar engagement letter, and the letter to do with its remuneration noted only that it was retained “in relation to … the NRMA Group project known as ‘Project Christmas’”. The unnamed financial person was not followed through, and no additional person joined the project team.
202 It does not seem that the steering committee proposed on 9 December 1992 was formally constituted, and it did not act as such. No doubt the persons proposed as its members were kept informed and were consulted from time to time, but so far as the evidence showed they did not have much to do with the preparation of the Christmas Project report.
203 At the meeting of 9 December 1992 the most important issue seen in the preferred option was the issue of equity, “what rules would be used to decide who gets what shares or cash”. This involved what came to be called the windfall and later the question of entitlements. There was also raised at once the question of how to change Association or Insurance to companies limited by shares under a holding company. A little later there was consideration of the nature of a member’s interest in Association or Insurance, and of what the member would be giving up if there was an “exchange” for shares in the holding company. The consideration of all these matters in the course of preparation of the report provided background to the free shares question and of advice in relation to the risk to the proposal in connection with Gambotto’s case.
204 The project team met on 16 February 1993. The meeting operated as a kind of briefing for BT and AAH, present by Mr Ross and Mr Morgan.
205 Mr Morgan wrote to Mr King in anticipation of the meeting, recording the areas which he considered the briefing should cover and providing a paper on “legal issues relating to Project Christmas”. The paper contained some general observations on a possible restructuring, not a restructuring in the form later adopted but with Insurance as the centrepiece.
206 The paper raised in different terms the issue of equity. After brief reference to the current structure of the NRMA, Mr Morgan noted that on a winding-up of Insurance any surplus went to Association, and said -
“This leads to an interesting question as to who owns the ‘Estate’. On one hand the Estate or surplus has been produced by the business activities of Insurance with its policy holders and the past and present policy holders have largely contributed to the Estate. However on winding up the Estate is notionally owned by the Association. The sharing of the Estate in any proposal may become a critical issued [sic]. However it may be made easier by the fact that the association members and the insurance members have a high decree of overlap. However the Association’s members do not own the Estate of the Association because on a winding up of that entity the surplus or Estate is returned to an entity with similar objects.”
The areas for the briefing set out by Mr Morgan included areas reflecting this issue, namely -
“8. Who do you believe owns the ‘estate’, policy holders or the Association?
9. Is the ‘estate’ to be distributed in anyway [sic]?”207 The paper also raised the question of how to change from a company limited by guarantee, and part of what was said under the heading “Corporations law issues” was -
“A company limited by guarantee may only change its status under Section 167 and the change of status permitted is a conversion to a company limited by both shares and by guarantee. It would appear that the better view is that a company limited by guarantee cannot convert wholly to a company limited by shares through a scheme of arrangement. It may well be necessary for legislative intervention to permit this.
The change of status is achieved effectively by a special resolution of members agreeing to a reconstruction of the entity. There may however be an issue if policy holder members voted to amend the Memorandum & Articles of Insurance so as to change the distribution of the Estate without the approval of the Association. This may either give rise to class rights issues and the need for the consent of Association or alternatively may give rights to the Association to seek relief from oppression.”208 Present at the meeting were Mr Willing, Mr King, Ms Conway, Mrs Graham, Ms Godwin, Mr Ross, and Mr Morgan. According to Ms Godwin’s notes of the meeting, there was general discussion of “ownership and issues which might arise”, the major issues being -
“ Who will get the windfall gain?
How is any windfall meaningfully returned.
What should the ultimate structure be.
Implementation issues particularly political exposures.”
Still according to the notes, it was agreed that Mr Ross and Mr Morgan “would prepare an outline of the subject headings for a report on the Christmas project for the next meeting”, the next meeting being appointed for 23 February 1993.209 An outline for a report was prepared for the meeting of 23 February 1993. It included eight headings and numerous sub-headings. The heading “Aims and Objectives” had subheadings concerned with surplus capital, governance, access to capital, and a national insurer; the heading “Alternative Structures” had subheadings concerned with a holding company and transfer of business to a new company, and within the first subheading alternatives of Association, Insurance and a new company; the heading “Critical Issues” had subheadings “Windfall gain” and “Asymmetry between voting rights and economic interest and winding up”; the heading “Implementation Issues” had many subheadings including subheadings concerning legal, taxation, accounting, financial, operational, and public relations matters, each with further sub-division; and the heading “Risk Analysis” had amongst its sub-headings “Approval of members/policyholders” and “Possible spoiling tactics”.
210 Present at the meeting on 23 February 1993 were Mr Willing, Ms Conway, Mr King, Mrs Graham, Mr Ross, Ms Marianne Birch, Mr Peter Barry, and Mr Morgan. Ms Birch and Mr Barry were also from BT. The minutes of the meeting noted who was to prepare what section of the report, for example, the aims and objectives by Mr King, Ms Conway and Mrs Graham and the critical issues and alternative structures by BT with input from Ms Conway and Ms Godwin. The record of discussion against “Critical Issues” included, “Windfall gain - entitlement discussed - need to be careful on who is required to contribute on a winding up - system to decide who is entitled to the windfall”.
211 The next meeting of the project team was on 2 March 1993. Present were Mr King, Mrs Graham, Mr Ross, Ms Birch, Mr Barry, Mr Morgan, and Mr Mark Schultz. Mr Schultz was a solicitor from AAH with taxation expertise. Prior to the meeting there had been circulated by BT a revised outline for the report, amended in accordance with the discussion on 23 February 1993 (the amendments were mainly to do with the order in which subjects would be dealt with), together with BT’s draft of the critical issues and alternative structures sections of the report. A draft paper on matters to do with companies limited by guarantee had also been circulated by Mr Morgan.
212 In BT’s draft of the critical issues section of the report there was considerable discussion under the sub-heading “Windfall Gain”. Earlier in that section it had been said that the economic interest in the NRMA did not match ownership, and that it was proposed to “align the ownership of NRMA and NRMA Insurance with the holders of the economic interest in each, such that owners are able to participate in the economic interest of the entities during the course of carrying on business and upon winding up”. It was then said -
“Based on the proposal to match the ownership of both the NRMA and NRMA Insurance with the holders of the economic interest, a windfall gain is likely to arise for those parties entitled to participate. This windfall gain will reflect the total value of each of the businesses including the surplus reserves. It is proposed that parties would be provided with the opportunity to participate in the ownership of the entities at no cost or receive a cash equivalent, or alternatively they would be required to provide a nominal contribution compared to the value of the security acquired.”
There were then identified “issues in relation to the windfall gain”, including who was entitled, the basis of entitlement, the timing of entitlement, the treatment of surplus reserves, and the treatment of income on surplus reserves. Each of these was considered.213 In the draft alternative structures section of the report BT put forward three options. One involved changing Association into a company limited by shares and by guarantee, Association acquiring Insurance, and members of both companies being offered shares in Association. Another involved the reverse, with Insurance becoming the holding company of Association. The third involved a new company acquiring both Association and Insurance, with members becoming shareholders in the new company. A number of issues were to be addressed for each alternative.
214 To interpolate, the draft included that members might get whatever they got from the restructuring “at no cost” or receive a cash equivalent: this can be seen, with hindsight, as the beginning of the free shares question. What members could get from the restructuring was left in general terms, described in the passage set out above as “the opportunity to participate in the ownership of the entities”, and how they would participate was not stated but involved them being offered shares in a company or cash. Hence the notion of a windfall, in the sense that the shareholders would have “rights” to the NRMA’s assets which they did not have as members. As members they did not receive dividends, and could not receive a return of capital; the members of Insurance could not receive any surplus on a winding-up of Insurance, since any surplus went to Association, and the members of Association could not receive any surplus on a winding-up of Association, since any surplus went to an institution with similar objects or for charitable purposes. And in another sense, there would be a windfall to some members in comparison to others, for example, in that persons who were members of Association but not of Insurance would end up sharing the wealth of Insurance with members of Insurance: thus the windfall involved the question of entitlements.
215 All this had been foreseen earlier, including by Mr Morgan in his reference to the “Estate”. It was now being brought into focus. The windfall, and the question of entitlements to which it led, then threw up fairness between members as a potential source of complaint of oppression, and as will be seen brought attention to Gambotto’s case.
216 Much of Mr Morgan’s draft paper is not of significance in these proceedings. It was a collection of corporations law topics with reference to the position of companies limited by guarantee, and had no other theme or particular conclusion. It included references to oppression and to changing the status of a company by special resolution on the one hand or by a scheme of arrangement on the other hand.
217 As to oppression, it was said in the draft paper -
“Remedy under the Corporations Law (section 260) in cases of oppression is available within a company limited by guarantee. In establishing oppression, the members have to establish an unfair abuse of powers and an impairment of confidence in the probity with which the company’s affairs are being conducted, rather than resentment on the part of a minority at being outvoted on some issue of domestic policy: Re Ingleburn Horse and Pony Club Limited (1973) 1 NSWLR 641”.
There is no doubt that the NRMA was made aware of the potential for complaint of oppression, and there will be further instances of it being informed on that subject.218 What was said in the draft paper about change of status followed on from the paper for the meeting of 9 December 1993. There was first a description of the steps involved in a change of status by special resolution pursuant to s 167(1) of the Law. Section 167(1) specifically referred to change of status where a company limited by guarantee converted to a company limited both by shares and by guarantee, but did not refer to change of status where a company limited by guarantee converted to a company limited by shares alone. Mr Morgan had suggested in the earlier paper that a company limited by guarantee could not convert to a company limited by shares alone by special resolution pursuant to s 167(1). Could it convert by a scheme of arrangement? In the earlier paper Mr Morgan had suggested that it could not.
219 In the draft paper for the meeting of 2 March 1993 it was said that s 411 of the Law “deals with schemes of arrangement, and there is some judicial disagreement as to whether changes of status not referred to in section 167 may nevertheless be carried out under a scheme approved by a court under section 411”. This was followed by consideration of cases evidencing the judicial disagreement, the last of which was Australian Securities Commission v Marlborough Goldmines Ltd (1993) 11 ACLC 101 in which, in a judgment of the Full Court of the Supreme Court of Western Australia delivered on 14 December 1992, it had been held that s 167 did not cover the field and that s 411 gave power to sanction a scheme of arrangement to convert a limited company to a no liability company. Mr Morgan’s summary of the holding included that -
220 Again to interpolate, at one point it was suggested by the NRMA in these proceedings that this thinking should have brought attention to Gambotto’s case in a different connection, not that of oppression but that of whether Association and Insurance could change their status from companies limited by guarantee by members’ resolutions as distinct from by a scheme of arrangement. It showed that Mr Morgan was alive to whether the status of Association and Insurance could be changed from that of companies limited by guarantee by members’ resolutions, as distinct from by a scheme of arrangement. But at this time Mr Morgan was saying that the status of a company could be changed by members’ resolution to that of a company limited by shares and by guarantee, but not to that of a company limited by shares alone. The question was whether status could be changed to that of a company limited by shares alone by a scheme of arrangement. The question was not one to which Gambotto’s case, then about to be heard in the Court of Appeal, was material, and I do not think it should have directed attention to Gambotto’s case. The thinking did assume that change of status to that of a company limited by shares and by guarantee could be achieved by members’ resolution. The assumption was later expressly questioned, and that was the time for attention to Gambotto’s case, in a connection beyond oppression, if such attention was called for.
“… the difference between section 167 and section 411 is that section 411 involves close control by a court, and section 167 does not require close supervision. The reason that section 167 provides for only five out a larger number of possible changes of status is that the other possible changes involve potential prejudice to creditors or members. Accordingly, those changes of status which may be potentially prejudicial should not occur other than under the supervision of the court (under section 411).”
221 The discussion at the meeting of 2 March 1993 included that tax implications of the alternative structures could be a major issue in determining which option to adopt: that seems to have explained the attendance of Mr Schultz. A particular matter recorded in the minutes of the meeting was “that a fundamental objective would be that the shares vesting in the hands of new shareholders must be free of tax so those new shareholders don’t have to sell shares in order to pay after tax (Capital Gains Tax Issue).” According to the minutes, it was thought that the most likely holding companies were Association or the new company, but it was said that it was necessary to consider “the implementation issues” of each course. It was decided to approach the Corporate Law Reform Committee to seek an amendment to the Law “to allow a company limited by guarantee to change status to a company limited by shares only”, that is, to seek an expansion of the scope of s 167 dealing with change of status by members’ resolution.
222 The next meeting of the project team was appointed for 9 March 1993, and Mr Schultz prepared a preliminary discussion paper for the meeting. I earlier noted, in an interpolation, that what the members could get from the restructuring was left in general terms, but Mr Schultz’s perspective brought attention to what members had and would give up in the restructuring. He asked whether, with the issue of shares on the conversion of Association or Insurance to a company limited both by shares and by guarantee or the interposition of the new company, there was a disposal of an interest by a member. The tentative answer was that there was not, because “a member does not have any fractional interest in a company limited by guarantee unless and until it converts and issues share capital”. It followed that the value of the shares received was not consideration upon disposal of an asset for income tax or capital gains tax purposes. The paper said, “At most, a member has only contractual rights to vote, and to obtain defined services. These rights might even be left in place after the issue of shares to avoid any suggestion of a disposal”. So there was raised what can be seen, again with hindsight, as an element in the free shares question.
223 The meeting of 9 March 1993 was attended by Mr King, Mrs Graham, Ms Godwin, Mr Ross, Ms Birch, Mr Barry, Mr Morgan and Mr Schultz. According to the minutes of the meeting, in the preparation of the report (which seems not to have progressed to a further or more extensive draft, presumably because awaiting the taxation input) Mr Barry was to prepare a draft paper “fleshing out the aims and objectives of the proposed alteration to status and structure”, and Mr Morgan was to “provide comments on the aims and objectives of the restructure and change of status together with an outline of the mechanism for doing so for the two most probable of the proposed structures”. Mr Morgan was also to approach the ASC “on a no-names basis” to discuss change to the Law to make it easier for a company limited by guarantee to convert to a company limited by shares. The minutes described the draft paper as for presentation to a “Board Committee”, I think meaning the group comprising Mr Kirby, Dame Leonie Kramer, Mr Burrows and Ms Ralph foreshadowed on 9 December 1992 - no formal committee had been or was established by the board of either Association or Insurance.
224 The next meeting of the project team was on 16 March 1993. It was attended by Mrs Graham, Ms Godwin, Mr Ross, Ms Birch, Mr Barry, and Mr Morgan. Prior to the meeting BT circulated a further and more extensive partial draft of the report, and Mr Morgan circulated a paper on the aims and objectives of the restructuring and a paper on the legal steps necessary for the restructuring. The expanded draft report included the aims and objectives, and this material was generally as contemplated on 9 March 1993.
225 The draft report followed the earlier outline, and was expressed to set out the issues associated with each key point detailed in the outline and to be preliminary to a more detailed report on the issues and an overall proposal. It incorporated, with slight changes, what had been said about critical issues and a windfall gain in BT’s earlier document, saying that the basis of entitlement should be both simple and equitable and “parties entitled to the windfall gain should be able to understand the basis of entitlement and it should be seen to be fair”. A number of possible bases of entitlement were suggested. As to alternative structures, the same possibilities as before were set out, but the draft simply noted the issues to be addressed in making a choice and the draft report did not yet canvass those issues.
226 Mr Morgan’s paper on aims and objectives included that Association and Insurance had excess capital “and there is no simple solution to its distribution to its members now and in the future without a restructuring of the organisations”. His paper on legal steps took as its basis “that a new holding company (‘Newco’) is established which becomes the direct shareholder in Association and Insurance and Newco issues shares to the members and policyholders of Association and Insurance”. He outlined a procedure for changing the status of Association and Insurance to that of companies limited by shares and by guarantee by special resolutions in general meeting, pursuant to s 167 of the Law. The procedure was general, it was said that as the proposal developed other steps might be identified and greater detail would be provided, and so far as presently relevant the “principal steps” were said to be “the change of corporate status and restructuring of membership and membership rights of Association and Insurance”, “the issue of shares by Association and Insurance to Newco”, and “the offer by Newco of shares to members, policyholders and the public”.
227 When briefly addressing each of these steps in his paper, Mr Morgan said as to the first step that what was required was a general meeting of each of Association and Insurance to approve the change of status to a company limited by shares and by guarantee and appropriate alterations to the memoranda and articles, and that this could be done pursuant to s 167 of the Law. He observed that there were “legal doubts as to whether a change to a company limited by shares is possible” and “Depending on the outcome of current litigation before the High Court, a change of status to a company limited by shares may be possible by way of a Court approved scheme of arrangement”, and referred also to “exploring possibility of legislative change to s 167”. Although not identified, this was a reference to an appeal from the decision of the Full Court of the Supreme Court of Western Australia in Australian Securities Commission v Marlborough Goldmines Ltd: it was not a reference to Gambotto’s case, in which the judgment of the Court of Appeal was then pending.
228 As to the third step, there was no further description of the issue of shares to members, which seemed to be treated as part of the one offering to members, policyholders and the public all governed by a prospectus. In this paper, that members might get whatever they got from the restructuring “at no cost” was not evident, and (perhaps influenced by Mr Schultz’s paper) members would not necessarily give up their membership rights: see the passage -
“The amendment of the Articles of Association will involve an alteration of rights between the existing members of the companies and the shareholder members. Consideration will need to be given to whether existing members should continue to have membership rights at all and, if so, in what form. Whatever is done will require a special resolution of members and would be incorporated into the resolutions for change of status.”
229 It seems that the meeting of 16 March 1993 saw the new holding company as the preferred option, and it may be that Mr Morgan’s reference to continuation of membership was taken up. A note of the meeting included -
· list a new Holding corporation
“Preferred route is
· retain NRMA with membership230 There followed development of the draft report to a further draft without, so far as appears from the evidence, further formal meetings of the project team.
…
This proposition may be most palatable as we can say to members that nothing will change as far as members are concerned.”
231 The NRMA, through Ms Godwin, prepared and circulated a draft introduction to the report intended to explain why a restructuring was thought necessary, and BT incorporated it with amendments into the further draft. Some aspects of the draft introduction may be noted now, as they were said to be material in these proceedings to the disadvantages question.
232 It identified as the major factors “which propel us towards changing the structure of the Group” the evolution of the NRMA’s role and the growth of surplus capital within the group, and then described problems in the distribution of capital (profits), administrative inefficiency, and what was described as misalignment between ownership and control. It continued -
“ SOLUTION - RESTRUCTURE OF THE NRMA GROUP
By listing a holding company which would own NRMA Limited and NRMA Insurance Limited, many of these problems are resolved.
Advantages
Such structure would have the advantage of not requiring any major alteration to the present structure. As far as our members would be concerned there would be little change in the manner of delivering services.
The use of a listed company limited by shares would make the return of capital to members in the form of shares very simple. Furthermore such a structure would provide a means for the equitable distribution of future profits.
The other benefit of using this method for returning capital and future profits is that it can be done without stripping the Group of its assets.
Ownership and control of the Group would become much more aligned. Takeover becomes a far more difficult and expensive exercise. Hence greater stability for the Group is achieved.
Other Issues Resulting from a Restructure
Profit Making Imperative
As a listed company with a need to pay dividends there would be an increased emphasis on the making of profits. This could lead to conflict with some of the Group’s current activities which can be categorised as social or representative in nature and which are not directly profit making.
On the other hand, as the Group’s present strength is due both to financial acumen and the taking of an active role in the community, possible conflict between profit making and non-profit making activities can be viewed as unlikely.
233 BT also incorporated into the further draft report the substance of Mr Morgan’s paper in relation to legal steps and Mr Schultz’s paper on taxation issues. The existing references to windfall gain were retained, with some modifications, and it was emphasised that the classes of people who would be entitled to participate in the windfall gain would need to be determined and that the basis of entitlement should be both simple and equitable.
Loss of ‘Membership’ Feeling
The Group at present has a strong service-based culture. Members feel as though they belong to the organisation. It would be necessary therefore to ensure that any restructure of the Group did not result in members losing this sense of belonging.
Dividends
At the moment the Group does not pay dividends. Profits are therefore retained and can be built upon. As a listed company we would have to pay dividends. However, as our major aim is to return capital and future profits to our owners, the payment of dividends ought not to be viewed as a disadvantage.
Trade Practices Issue
The Trade Practices Commission currently does not prevent us from requiring persons who take out insurance with NRMA Insurance to also be or become members of NRMA Limited. If there is a restructure of the type being considered, it is likely that the Trade Practices Commission would no longer permit us to do this. This would possibly mean a loss of sales of some of our services but need not necessarily do so. Even without a restructure it is quite possible that the Trade Practices Commission may reconsider its view on our current practice and decide that it ought not to continue.
TO SUMMARISE:
The strategic intent of the Group has widened in both a geographic sense and in the range and types of assistance which the Group wishes to provide. A listed company structure is more appropriate for a company which aims to be a national assistance organisation;
The NRMA Group is over-capitalised;
Over-capitalisation in a mutual organisation can lead to:
- mis-alignment of ownership and control
- and inefficiency;The present structure does not easily permit the equitable return of capital or distribution of future profits to the owners of the Group;
The listing of the holding company for the Group solves these problems.”
234 There were a number of other changes and additions to the further draft report, which was a more complete document than its predecessors, although often noting matters for consideration and decision and listing whole sections to be “addressed in detail following discussion with members of the NRMA Council” (ie directors). An addition of possible significance in these proceedings was Section 4.5, headed “Membership Status”.
235 The section began with the bald statement -
236 A table then set out a comparison between current (membership) rights and obligations and proposed (shareholder) rights and obligations, and comments were made including that the proposed rights and obligations "were more favourable than” the current rights and obligations and -
“Under the proposed structure members of the Association and Insurance would give up their current membership rights in exchange for shares in the holding company, as set out in the table below.”
“d. As both Insurance and the Association will still exist, consideration should be given as to the advantages and disadvantages of having existing members retain some membership rights/obligations of the Association and Insurance, in addition to their rights and obligations as shareholders of the new holding company.
Retention of Some Membership Rights/Obligations
Advantages
Disadvantages
1. May facilitate restructure and obligations of existing guarantors.
1. Administration of notice of meetings, maintenance of the membership register
2. Maintain sense of membership of a legal entity.
2. Inconsistency between voting rights and ownership.e. An alternative to members retaining membership of Association and Insurance, is for a contractual relationship to be established between Association and its members. Upon payment of an annual membership fee, members would be entitled to receive the services of the Association in the form currently provided. The distinction being that contractually they are titled ‘members’ and are entitled to receive services, whereas, under the existing membership, the rights and obligations of members are specified in the Memorandum and Articles, and arguably the member has an interest in the economic benefits of the NRMA Group.”
237 The evidence did not reveal the source of the description of giving up membership rights in exchange for shares in the holding company. The comments showed that retention of membership was still a live alternative, and the part of the draft report incorporating the substance of Mr Morgan’s paper in relation to legal steps retained what he had said about existing members continuing to have membership rights. But the notion of giving up membership rights in exchange for shares, previously implicit in Mr Schultz’s paper, had been made express. It later became dominant, and is material to the free shares question.
238 Those involved were working towards a presentation of the report to NRMA management on 1 April 1993, and a further draft was produced. The draft report in its 30 March 1993 version, now entitled the Christmas Report and incorporating comments received from Ms Godwin, Mr Morgan, and Mr Schultz, was presented to and discussed at a meeting attended by Mr Willing, Mr Rees, Mr Corrigan, Mr King, Ms Conway, Mr Doug Pearce, Mrs Graham, Ms Godwin, Mr Ross, Ms Birch, Mr Barry, Mr Morgan, and Mr Schultz. The presentation was described in a memorandum to Ms Conway as a “run through” prior to the presentation to “some members of the Board of NRMA Limited”. Mr Rees was then general manager, financial services, and Mr Pearce was general manager, finance and administration.
239 The draft report as at 30 March 1993 had some changes from the draft which had followed the meeting of 16 March 1993. They included that while the previous Section 4.5 entitled “Membership Status”, now Section 4.2 with the same title, retained the description of giving up membership rights in exchange for shares in the holding company, it now omitted the comments showing that retention of membership was still a live alternative (although the part of the draft report incorporating the substance of Mr Morgan’s paper in relation to legal steps stayed the same).
240 Further, there was now some emphasis on protection from minority groups as an aspect of the asymmetry between voting control and economic interest. This can be seen in particular in two passages in the draft report -
Indeed, an agenda for the meeting of 1 April 1993 - the authorship was probably BT - baldly answered the question , why restructure?, with the word “control”, and the explanation, “The current structure is easily susceptible to minority interest groups taking control of the NRMA’s resources”.
“The lack of ownership interest leaves open the opportunity for minority interest groups to secure control of the Board and management of the Association and Insurance, and to apply the significant financial resources of these organisations for their objectives. Provided such minority groups do not purport to adversely affect members rights to road service or other services provided by the Association, any move to acquire control of the NRMA Group is likely to generate little resistance from members, whether or not it is supported by the existing Board.” “Under the current company structure, control of the surplus capital rests with the NRMA Board. While the extensive membership of NRMA of 2.2 million provides a natural takeover defence, the proportion of members who vote is significantly smaller. It may not prove to be too difficult for a group to achieve control of the NRMA Board and thereby obtain control of the NRMA Group’s resources.”
241 The minutes of the meeting of 1 April 1983, prepared by Ms Godwin, included -
242 The notion of exchange of membership rights for shares seems to have become accepted, although as a general description rather than a legal analysis, and again it was recognised that there could be opposition to the restructuring. As to that, in the incomplete part of the draft report dealing with implementation issues there was an outline -
“Issues arising from the presentation which could be given greater prominence or dealt with in more detail in the report are noted below.
1. The ‘swap’ of the inchoate rights which members presently have in the NRMA Group for the very definite rights which a shareholder in a company which owned the resources would have, results in members having the flexibility and discretion in timing their receipt of financial resources from the company. Currently distribution of those resources to members is totally at the discretion of the Board and Management of the Group. Hence one could say there is a devolution of power from Board and Management to members (ie Shareholders).
…
6. Other issues which will require attention at an early stage are
public relations both internally and externally;
possible attacks on the proposal and information which the company needs to be in a position to provide to counter those attacks;
the accounting issues relating to taxation and ASX scrutiny.”
243 The minutes of the meeting of 1 April 1993 also recorded things to be done before “going to sub-group of directors of the Board”. They included that BT would provide a timetable of events leading up to the proposed restructuring, in particular showing the sequence of events, and a paper setting out options, commenting on the timing, providing a brief “risk analysis” of each option, and giving a budget and internal resource requirements for each option. The options identified were doing nothing, return of capital under the present structure, full listing, and “others”. It was agreed that Mr Morgan should “go to Government on an anonymous basis” with a view to legislative change to s 167 of the Law.
“d. Implications of defeat
In the event that the proposed restructure was to fail, the current Board of Directors of NRMA would be associated with the unsuccessful proposal, and as such their future positions on the Board may be jeopardised. Further the restructuring process invites interest from other action groups as it highlights the value of the NRMA Group and its governance.
e. Possible spoiling tactics
Possible spoiling tactics include:
i. services will be diminished as a result of the restructure;
ii. the NRMA Group will focus on profit making and as a result prices charged will be excessive.
iii. the membership culture will change;
iv. there are other ways to distribute the surplus capital; and
v. the NRMA Group has been successful to date, thus there is no reason to change.”
244 There was then further work on the draft report, with a meeting of the project team on 16 April 1993. Present at the meeting were Mr King, Ms Godwin, Mr Ross, Ms Birch, Mr Barry, and Mr Morgan. Prior to the meeting BT circulated a paper described as “setting out the risks, timing, budget and internal resource requirements of the alternatives”. The paper was a substantial document, later developed in its own right, and I will refer to it as the alternatives paper. Mr Morgan circulated a paper on the payment of dividends by Association and Insurance, and Mr Schultz circulated an expanded paper on taxation issues.
245 The BT alternatives paper covered the options of doing nothing, return of capital under the present structure, and full listing, in the case of full listing saying that the option was described in the draft Christmas Project report. Benefits of each, risks of each, timetables, and budgetary and resource requirements, were stated. The benefits and risks in the case of full listing were broadly the matters already to be found in the draft Christmas Project report. The risks included that non-members might claim that they had not been treated equitably in the allocation of entitlements. That it would be an expensive exercise was clear: BT estimated the costs to float the NRMA Group, based on an average of other public offerings, at $29,100,000 (simple average) or $24,200,000 (weighted average) excluding broker fees, and described the annual costs associated with a public company, including listing fees, the maintenance of a share register, the preparation of annual reports and annual returns, and compliance with the Stock Exchange Listing Rules.
246 Mr Morgan’s paper on the payment of dividends, it seems brought about by speculation at the meeting of 1 April 1993 about whether dividends could be paid under the present structure as a way of distributing surplus capital, came to the conclusion that if the memorandum and articles of a company limited by guarantee so permitted the company could pay a dividend or distribute its profits. But amendments to the NRMA memoranda and articles would be required, and Mr Morgan identified a number of practical difficulties if the NRMA wished to follow that course.
247 Mr Schultz’s expanded paper on taxation issues was consistent with his earlier paper, but did include that it was arguable that “the rights of members to vote, receive free service etc are capital gains tax assets” and that if those rights were disposed of in consideration for shares in Newco “there is a prospect that a capital gains tax liability may arise”. In developing the question whether there would be a taxable disposal of an asset by members, it was said that the main issue was whether members of Association and Insurance had any form of “proprietorial interest” in the company and, if so, whether that interest was a capital gains tax asset, and a preliminary answer in the negative was given. But it was repeated that it was arguable that some part of the consideration for the receipt of shares by members would relate to the disposal of the right to vote, a contractual chose in action.
248 From Ms Godwin’s notes, the alternatives paper was the focus of the meeting of 16 April 1993. It seems that the option of doing nothing was rejected, that Mr Morgan was asked to provide more on “problems with dividends under present structure”, and that there was particular reference to “problems with ‘rearranging’ membership of Insurance to achieve equity of distribution”. There was discussion of the timing of any restructuring, in particular its relationship with the then contemplated expansion of the NRMA’s operations into Victoria. That was further considered after the meeting, and was the subject of a memorandum from Mr King to Mr Willing dated 19 April 1993 in which it was suggested that the expansion should proceed before any disclosure in the public domain of the Christmas Project, in order to keep the NRMA’s resources and attention on the expansion and to reduce uncertainty.
249 Further drafts of the alternatives paper were prepared, still containing the substance of the parts of the earlier draft described above. After the benefits of the third option were now added disadvantages, being that the restructuring process was very complex, that significant management time would be diverted from the day to day management of the organisation and the expansion program to the restructuring process, and that the costs involved in the process would be significantly greater than under the second option.
250 On 22 April 1993 the final alternatives paper was provided to Mr Willing. It was said that while working on the alternatives paper it had been concluded “that the issue of surplus capital was not as important as it had seemed earlier in view of the demands which expansion will place on capital”: presumably this was connected with the expansion into Victoria. It was suggested that less emphasis be placed on the issue of surplus capital in “the major report” (ie the Christmas Project report), and Mr Willing was asked whether he would like a further meeting with BT “to discuss the final slant of the major report”.
251 It seems that Mr Willing let the matter rest for the next month. Mr Morgan was asked to advise on interim steps which could be taken towards a float while the expansion into Victoria proceeded, and provided a paper on the subject of a “staged process”; he was also asked for advice upon whether Insurance could pay a dividend to members without any amendment to its current articles, and advised that the directors could not, but the company in general meeting could, declare a dividend.
252 In mid-May 1993 Mr Willing was reminded of the draft report and paper and the possible staged process, and was asked whether there should be a presentation on the work done so far or further investigation of the staged process and delay of “the larger project”. From what follows, it must have been decided to continue with the larger project.
253 A final draft dated 28 May 1993 of what was described as the Christmas Project report, but entitled “Christmas Project - Analysis of Alternative Options”, was circulated. The evidence did not go into any further meetings of the project team at which it was considered. The report seems to have been a synthesis of the draft Christmas Project report and the draft alternatives paper, but with the possibilities for restructuring limited to the options from the alternatives paper. It still placed emphasis on voting rights and economic interest, and on governance, amongst other matters, and referred to the windfall and the critical issue of entitlements. It now referred under the heading “Membership Status” to members giving up “their indirect ownership interest in exchange for the right to receive shares in the holding company”, two changes in expression which were not explained in the evidence but demonstrate that the way the restructuring might be brought about was still imprecise and fluid.
254 Before going to presentation of the Christmas Project report, I should briefly refer to what was done about legislative change to s 167 of the Law: it was said to be material to what the defendants should have advised in relation to Gambotto’s case. It will be recalled that Mr Morgan’s paper on companies limited by guarantee referred to the possibility of seeking an amendment to s 167 of the Law to permit a company limited by guarantee to change its status to a company limited by shares alone, and that there had been agreement thereafter on anonymous approaches to various authorities or the government.
255 It must have been decided to consider a more forthright approach. On 29 March 1993 Mr Morgan sent to the NRMA, with a copy to Mr Ross, a draft letter to the Attorney General seeking an amendment. The draft letter said that while a company limited by guarantee could convert to a company limited both by shares and by guarantee under the procedure contained in s 167, it was “unclear whether a company limited by guarantee could convert to another type of company under a Section 411 scheme of arrangement”. The draft letter suggested that “It may be that a change of status of a company limited by guarantee to, for example, a company limited by shares, could not be carried out under Section 411 because of the guarantee company’s absence of share capital”, and included -
“Given the uncertain state of the law in relation to Section 411, we believe that the provisions of Section 167 should be amended to permit changes of status not currently expressly permitted, in circumstances where there can be no possible prejudice to creditors. The High Court may determine in the appeal against the Marlborough Gold Mines decision that changes of status not contemplated under Section 167 of the Corporations Law may nevertheless be carried out under Court supervision, under Section 411. Notwithstanding this possibility, we believe that it would be preferable for the scope of Section 167 to be broadened to include other changes of status which could be achieved without prejudice to creditors. The procedure specified in Section 167 is much simpler than that involved in a scheme of arrangement carried out under Section 411.”
256 However, a letter in the form of the draft was not sent at that time. On 6 May 1993 the High Court gave judgment in Australian Securities Commission v MarlboroughGold Mines Ltd (1993) 177 CLR 485. It was held, reversing the decision appealed from, that the Law did not permit the conversion of a limited company into a no liability company, and that s 411 of the Law did not authorise approval of an arrangement which effected such a conversion. The possibility envisaged in the draft letter did not come to pass.
257 Presumably on the instructions of the NRMA, Mr Morgan then sent to the Attorney General a letter dated 8 June 1993, in the form of the earlier draft altered to take account of the decision of the High Court. The letter now said, “It is doubtful whether a company limited by guarantee could convert to another type of company under a Section 411 scheme of arrangement although the High Court did not go this far in its Marlborough judgment”. It went on to suggest the amendment.
258 A letter from the Attorney-General’s Department acknowledged Mr Morgan’s letter, and said that it would be taken into account in the Department’s consideration of the High Court’s decision. This was not encouraging, and it seems that change of the status of Association and Insurance to companies limited by shares alone passed out of consideration. So the scheme of arrangement route instead of the members’ resolution route, as a possible answer to the perceived difficulty where the change was to the status of companies limited by shares alone, fell away. The materiality to what the defendants should have done about Gambotto’s case was, on the NRMA’s case, that Mr Morgan had paid regard to the possible impact on what the NRMA wanted to do of the pending appeal to the High Court from the decision of the Full Court of the Supreme Court of Western Australia, and that a step in connection with the proposal had apparently been deferred to await the result of the appeal.
259 The Christmas Project report was presented to the “Board Committee” on 26 July 1993. In the course of the hearing some of the defendants attributed particular significance to the occasion, suggesting that it was rather clandestine with calculated exclusion of potential opponents to the restructuring. I do not accept that it had that character.
260 The presentation on 26 July 1993 was attended by Mr Mackay, Mr Kirby, Mr Burrows, Dame Leonie Kramer, Ms Ralph (by telephone), Mr Willing, Mr Corrigan, Mr King, Mr Rees, Ms Godwin, Mr Ross and Mr Morgan. It was held not at the offices of the NRMA, but at the offices of the firm of solicitors of which Mr Mackay was a partner. Earlier in July Ms Godwin had prepared an agenda for the meeting, according to which there were to be opening remarks by Mr Willing, a presentation by Mr Ross, and then discussion. There were no minutes of the occasion.
261 The report dated 30 January 1995 of the NRMA’s corporate process review committee (“the Booth report”), established after the Federal Court proceedings to investigate suggested excessive conduct by management, described the meeting -
262 The recollections of those at the meeting were not good, and did not add much to this summation in the Booth report. The summation is itself not necessarily reliable, because the result of enquiries eighteen months later and based on informants and information not now identifiable.
“Triggered by the BT report and timed ahead of the imminent departure of Mr Willing overseas, a meeting was held on 26 July 1993 with the Executive group of the Boards of NRMA Limited and NRMA Insurance Limited. At this meeting, a presentation was given by Rowan Ross of BT. Mr Mark Burrows and members of NRMA management also attended the meeting. Prior to the meeting, Mr Willing consulted with the Chairman, Mr Don Mackay about whether the organisation should continue to develop the proposal. Mr Mackay replied that he would like the Executive group of the Boards to determine this. The meeting held on 26 July 1993 provided management with supportive feedback for the continued development of the proposal”.
263 Mr Kirby had the most concrete recollection, to the extent that he gave evidence that he was “offended” by the proposal, said he was not interested, and left the meeting; he could not recall anything of what was explained at the meeting because he rejected the proposal. I think the firmness evident in Mr Kirby’s evidence may have increased with the passage of time. While he did not favour what was presented, the occasion extended over something like an hour, and I doubt that his reaction at the time was as abrupt as might have been thought from his evidence. Mr Rees recalled what he described as very broad discussion around the purpose of a potential restructure, the alternatives of the form it might take, and that no decisions were taken. Mr Ross recalled giving a presentation on alternative structures, but had no detailed recollection: in general, he recalled some of those present expressing a view that full consideration had not been given to other alternatives, and he did recall that Mr Kirby had a concern which he (Mr Ross) could not specify. Mr Morgan’s entries in his notebook did not enable reconstruction of what occurred at the meeting, but supported that Mr Kirby and Ms Ralph were not receptive to what was presented. There were no other worthwhile recollections.
264 Why was the particular group at the presentation? It was not a last-minute selection, but gave effect to what had been proposed (although the date was later) by the Group in December 1992 and had been reiterated, by the reference to presentation to the “Board Committee”, thereafter.
265 In a chronology prepared by Mr Pearce for the review resulting in the Booth report he said -
266 Mr Pearce did not give evidence, and this recitation of his understanding is not necessarily weighty. But the reasons in his understanding made sense, and it can readily be accepted that the Group thought that a directorial reaction to its work from the senior directors would suffice and that undue dissemination of what became the Christmas Project report should be avoided. It would be unrealistic to think that the general question of restructuring was not known within the NRMA, given the number of people (including some not on the project team) who must have had involvement in the Christmas Project, and the reference to a “Board Committee” does not gain a sinister connotation because there was no formally constituted committee - it could be simply a way of referring to the group. Mr Mackay, who as President would have been central to any illicit limitation in the membership of the group, firmly rejected such a suggestion, and I accept this.
“It is my understanding that this group was selected as they are the senior office bearers of Boards, and from the Executive Committee of the Boards with the one director who has had significant experience in such a proposal. As stated earlier, the aim was to test the acceptability of the proposal before expanding resources. The group was restricted in order to maintain absolute confidentiality over the proposal. It was clear at that stage, any public discussion of the issue could have caused a ‘run’ on memberships to get a ‘piece of the action’. This could have had legal consequences along the lines of insider trading and perhaps more importantly could have significantly diluted the potential entitlement of existing members of both mutuals.”
267 I do not think there was anything more to the particular group at the presentation than I have indicated, and do not accept that there was calculated exclusion of potential opponents to the restructuring.
Change from the Christmas Project to the Legal Status Project
268 The immediate progress on the Christmas Project after 26 July 1993 was slow. Perhaps this simply continued the lesser attention to restructuring than to the expansion into Victoria; perhaps the so-called “supportive feedback” from the presentation of 26 July 1993 included critical comment calling for a fresh approach, as Mr Kirby’s evidence and what next happened might suggest.269 BT prepared a different, shorter, report dated 20 August 1993 entitled “Project Christmas - Alternative Structures”. I will call this the alternative structures report, to be distinguished from the alternatives paper.
270 In its introduction the alternative structures report said that the current structure of the NRMA gave rise to a number of problems, including that being a mutual organisation with a membership base restricted to New South Wales was “not consistent with the vision to become a national assistance organisation”; that it had capital in excess of its current and expected future requirements; that its ownership should be aligned with “the economic interest in the NRMA Group’s earnings and its capital base”; and that its governance should “match the interest of those who participate in the economic benefits of the NRMA Group”. It was specifically noted that under the alternative structures the primary objective of the NRMA would be to maximise the return to shareholders, as a matter material to the future funding requirements of Association if Insurance were no longer to subsidise its activities, including its activities of a community nature.
271 There were then canvassed in point form and with diagrams a number of alternative structures, the points setting out advantages and disadvantages for each. One so-called alternative structure was to retain the existing structure but distribute surplus capital; another was to list the NRMA Group; another was to list Insurance; another was to list Association; another was to merge Association and Insurance. The alternative of listing the NRMA Group was said to involve the creation of a holding company of Association and Insurance, the conversion of those companies to companies limited by shares and by guarantee, and the offering to members and policy holders of an interest in the holding company. This was said to have the advantages of addressing the current structure problems; facilitating access to new capital; maintaining the existing relationship between Association and Insurance; and providing a stable shareholders’ register. It was said to have the disadvantages of being more complex; of being “timely” (presumably time-consuming) and costly compared to alternatives not involving a structural alteration; of the possible need to discontinue “tied selling” between Association and Insurance; that community services provided by Association might need to be specifically enshrined in the holding company’s charter; and that there was a risk of disrupting “the existing ‘mutual’ culture, thus jeopardising the NRMA Group’s comparative advantage”.
272 The alternative structures report did not have the detail of its predecessor, although the work that had gone into the Christmas Project report could be seen. It is evident that there had been a fresh approach, a return to the reasons for restructuring, to more alternatives, and to broader assessment of the pros and cons of the alternatives, and that the focus was on what should be done rather than how it should be done. In a memorandum to Mr King dated 30 August 1993 Mr Willing expressed thanks for the work on the Christmas Project to that time, and said, amongst other things, that it was worthwhile to look at some of the alternatives, including the current structure, in greater detail and that more research was needed to ensure that any decision relating to the NRMA’s structure was in the long term best interests of members and policyholders. He said that it was important to “look hard at the question of entitlements which our members may have”. It is not clear whether Mr Willing had the alternative structures report at this time, but what he said reflected the fresh approach.
273 Consistently with this, Ms Godwin’s reaction to the alternative structures report, as conveyed in a memorandum to Mr Morgan, was that more detailed analysis was required “if we are to succeed in persuading others that these alternatives are unattractive”. More work was done, and the alternative structures report passed through a number of further drafts, principally under the direction of BT but with comments and input from Ms Godwin and Mr Morgan. As well, Ms Godwin and Mr Morgan spent some time discussing the question of entitlements with a view to recommendations for the basis of entitlement. Mr Willing was kept generally informed.
274 By the second half of September 1993 the alternative structures report was in developed form. The Christmas Project had come to be called the Legal Status Project (although some continued to use the old name), and it was proposed that there be a meeting of NRMA management in relation to the project on 8 October 1993.
275 The meeting proposed for 8 October 1993 seems to have been held on 6 October 1993. It was attended by Mr Willing, Mr Rees, Mr Corrigan, Mr King, Mr Pearce, Mr Stuart Salvage, and Ms Godwin. Mr Salvage was in the communications area within the NRMA, and became the initial so-called project manager for the project, in due course with the role of coordinating the activities of all those involved in it. His presence suggests that it was thought that the project would be taken up, and from Ms Godwin’s notes of the meeting the same appears. It seems that there was a wide ranging discussion, preliminary but as if on the assumption that a restructuring proposal of some kind would go forward, touching on questions of market research, public relations, when to “go public”, the timing for any listing, engaging accounting and actuarial assistance, and establishing a steering committee and project management group.
276 Ms Godwin’s notes of the meeting of 6 October 1993 included, “Discussion of project at Terrigal”. On 25 October 1993 the question of restructuring was presented to a wider group of NRMA management as part of their periodical retreat at Terrigal. All general managers attended. There was little detail of the meeting in the evidence, and it seems that the occasion was more one of informing the general mangers than of inviting their contributions; however, no doubt there was discussion. There was no suggestion in the evidence that the Terrigal retreat caused reconsideration of the Legal Status Project at management level.
The proposal in late 1993
277 After all the time and detailed consideration leading to the Christmas Project report, the Legal Status Project was in place with comparative ease: the earlier work, of course, underlay the alternative structures report and its acceptance at management level. The basis of the proposal was now becoming clearer.278 Perhaps to fulfil the desire for a more detailed analysis to which Ms Godwin had referred, BT provided an updated version of the Christmas Project report dated 27 October 1993, said to be for the NRMA’s comments. It appears to have been a combination of elements of the earlier Christmas Project report and the alternative structures report, resulting in a more detailed version of the latter report. This report identified future growth, surplus capital, and governance as the principal issues raised by the current structure, and while it listed and considered a great number of alternatives as before (even more alternatives, but still including retaining the current structure), it expressed a preference, with reasons, for converting the NRMA’s mutual structure into one of shareholding listed on the Stock Exchange.
279 Aspects of the developing proposal material to these proceedings should be brought out.
280 The process for the conversion was described in the executive summary in the report -
281 In the body of the report the same matters were described -
“• Converting the Association (NRMA Limited) and Insurance (NRMA Insurance Limited) into companies limited by shares and guarantee.
• Establishing a holding company (HOLD Co) which is limited by shares only. HOLD Co would hold all of the issued shares in the Association and Insurance.
• Offering to members and other parties deemed to be entitled, shares in HOLD Co on a predetermined equitable basis.
• Those parties who are entitled to participate could be given the choice of subscribing for shares in HOLD Co or renouncing the offer and receiving a cash sum based on the net market value of their entitlement.
• Shares renounced, could be pooled together and offered to institutions though a tender process or underwriting mechanism.
• HOLD Co would be listed on the Australian Stock Exchange.
• A special distribution of the capital surplus to the NRMA Group’s operations and the planned expansion program could be made to shareholders following the allotment of shares in HOLD Co.
• This distribution may either be in the form of a franked dividend, to minimise the amount of tax payable on the distribution, or a capital return.
• Payment of a special distribution should eliminate any discount the market would be likely to attribute to the surplus capital if it were retained in the NRMA Group following listing.
• Members in their capacity as shareholders in HOLD Co, would have the right to:
• The Association ‘membership’ culture could be preserved through the corporate structure of the Association. The Association could be converted into a company limited by shares and guarantee. HOLD Co would own 100% of the shares of the Association and would hold all the voting rights. Members would have no voting rights, but would contribute in the event of a deficiency upon winding up for a sum guaranteed at the time of payment of membership fees. In addition, the provision of community and non-profit services could be specifically provided for as part of the structure.”
- vote
- receive dividends;
- realise the market value of their shareholding at any time; and
- participate in any surplus on winding up.
• Members would have the right to receive services from the Association and Insurance on a contractual basis, following the payment of fees for service.
282 As to the critical issue of the basis of entitlement, the report later said -
“The way in which the preferred structure could be implemented is set out below.
• Members and other parties who are deemed to have an entitlement, could be offered, in proportion to a pre-determined basis of entitlement, the right to either subscribe for shares in HOLD Co or to receive a cash payment.
• Those that accept the offer of shares would be allotted shares in HOLD Co following the payment of a subscription price. The subscription price is likely to be small relative to the market value of the shares.
• Those who elect to take the cash alternative and renounce the offer to subscribe for shares would receive an amount of cash based on the market value of the shares.
• Shares renounced by members/policyholders could be pooled together and offered to institutions through a tender process or underwriting mechanism. For example, institutions could be asked to tender for the available shares (price and volume). Upon the close of the offer period, the price at which all shares would be allocated would be determined and the shares allotted accordingly.
• Upon allotment, moneys subscribed by institutions (less costs associated with the tender/underwriting process) would be distributed to the members/policyholders who renounced their entitlement to subscribe for shares, in proportion to their entitlement to subscribe for shares, in proportion to their entitlement.
• HOLD Co would be listed on the Australian Stock Exchange.
Special Dividend
It is proposed HOLD Co could make a distribution of surplus capital (either through a special dividend or capital distribution), to all shareholders immediately following the allotment of shares. The reasons for distributing surplus capital include:
• the market is likely to discount the value of the surplus capital if it perceives that these funds are not required for the NRMA Group’s core business or to finance the planned expansion program; and
• as a listed company, the NRMA Group will be able to access new capital from the equity market as required. This gives the company the ability to operate on a lower capital base than as a mutual organisation.
Members Rights & Obligations in HOLD Co
Shareholders in HOLD Co would be able to exercise all the rights attaching to a shareholding in a listed company, including the entitlement to:
• one vote per share;
• participate in dividends, as declared;
• participate in any surplus capital on winding up; and
• dispose of their shareholding on market at any time. The value of the shareholding could be readily ascertained by reference to the price at which the NRMA Group is trading on the Australian Stock Exchange.
The Association and Insurance
• The Association and Insurance would be converted to companies limited by both shares and guarantee.
• HOLD Co would own 100% of the issued shares in the Association and Insurance. The Board of Directors of HOLD Co (appointed by the shareholders) would be responsible for both the Association and Insurance.
• The Association’s ‘membership’ culture could be preserved through the corporate structure of the Association. Members would have no voting rights in the Association, but would contribute in the event of a deficiency upon winding up for a sum guaranteed at the time of payment of membership fees. In addition, the provision of community and non-profit services could be specifically provided for as part of the structure.
• Insurance would provide insurance services to policyholders in accordance with the policy of insurance.”
283 Nothing was said about giving up membership in exchange for shares, and there was no equivalent to the “Membership Status” material of earlier reports. It was said, however, when dealing with taxation issues, and referring to AAH’s earlier papers -
“Under the proposed restructuring of the NRMA Group, a windfall gain arises for those parties who are deemed to be entitled to participate. This windfall gain is reflected in the value of the direct ownership interest acquired in exchange for the current indirect interest.
The windfall gain gives rise to the following critical issues:
• who is entitled to participate; and
• on what basis are they entitled to participate.
Each of these issues are [sic] discussed below.
Who is entitled to participate?
The parties who are most likely to be entitled to participate in the allocation of shares in the NRMA Group include:
• current members of the Association and Insurance;
• policy holders; and
• employees.
Preliminary legal advice suggests that the initial offer to subscribe for shares in the NRMA Group must be made to members (reflecting their ownership in a legal sense), unless otherwise agreed by the members. This would exclude policyholders and employees who are not members.
As a consequence, if certain classes of customers are to be treated as members, it will be necessary to ensure they either become members, or alternatively, approval is sought from the members to authorise the participation of non-members in the entitlement process.
On what basis are they entitled to participate?
The prime criteria for determining the basis of allocation of entitlements should be, in our view:
• demonstrably equitable; and
• simple for members to understand and for the NRMA Group to administer.
A cumulative basis of entitlement has been proposed, which effectively rewards loyalty.
The entitlements may be based on a number of criteria, for example:
Members • Current member of the Association.
• Member for more than a predetermined period (eg. 10 or 25 years).Policyholders • Current policyholder.
• Holding more than a predetermined number of policies (eg. 3 or 4 policies).Employees: • Employee of the NRMA Group.
Once the preferred structure is agreed, the legal position on who is entitled to participate and market research would be carried out with a view to finalising the appropriate basis of allocation of entitlements.”
• Number of years service.
284 The report referred to risks of the preferred restructuring in the words -
“A preliminary assessment concluded that the receipt of shares, by members would be a ‘gift’ or ‘windfall’ gain and would not be assessable in the hands of members upon receipt. The preferred view is that a member of the Association or Insurance has no significant ‘proprietary’ interest in the Association or Insurance for capital gains tax purposes. Accordingly, when a member receives newly issued shares in effective substitution for his previous interest, the member should not be regarded as having disposed of an asset for capital gains tax purposes. This opinion, however, should be made the subject of an application for a binding private tax ruling to remove any doubt. The rights of members to vote and to receive vehicle service may possibly be regarded as assets for the purposes of capital gains tax.”
285 Some observations on these aspects, in the light of what I have earlier said, may be made.
“The risks associated with changing the structure of the NRMA Group from a mutual organisation to an organisation limited by shares and listed on the Australian Stock Exchange may include:
• minority interest groups may identify the restructure as a threat to their ability to control the NRMA Group and propose an alternative short term solution;
• some members/policyholders may claim that they have not been treated equitably in the allocation of entitlements;
• the restructuring process invites interest from other action groups as it highlights the lack of proprietorship of the NRMA Group’s substantial financial resources; and
• in the event that the proposed restructure was to fail, the current Board of Directors would be associated with the unsuccessful proposal.
Possible spoiling tactics that may be used by those opposing the restructuring proposal may include claiming that:
• services will be diminished as a result of the restructure;
• the NRMA Group will focus on profit making and as a result the membership fees of the Association and the premiums of Insurance will increase, community programs will be abandoned and the position of many non-profit services will be curtailed;
• the membership culture will change;
• there are other ways to distribute surplus capital; and
• the NRMA Group has been a success to date, therefore there is no reason to change.”
286 First, and material to the free shares question, in general terms the member was seen as receiving shares in exchange for his “previous interest”, but at least for capital gains tax purposes the member’s interest was not regarded as a significant proprietary interest. This still left recognition that the member had rights, in law choses in action, to vote and receive road service, as Mr Schultz had earlier suggested. And although for capital gains tax purposes the receipt of shares might be a gift or windfall gain, members were to pay a subscription price for their shares in HoldCo, and were then to receive a distribution of surplus capital, either as a dividend or as a return of capital. Mr Morgan’s earlier letter to Ms Godwin of 1 October 1993, which I will shortly set out in part, had envisaged that members would subscribe for their shares and pay the par value, and it may be that Mr Morgan and the BT author of the report had spoken on the subject. That the subscription price was “likely to be small relative to the value of the shares” threw up the possible problem of issue of shares at a discount, and Mr Morgan had foreseen this in his letter. The nature of a members’ rights was further addressed by Mr Morgan in early November 1994.
287 Secondly, at this time the implementation of the proposal - the change in status by members’ resolutions - was left up in the air. The earlier consideration of the members’ resolution route and the scheme of arrangement route did not come up, probably because the conversion of Association and Insurance was to be to companies limited by shares and by guarantee, not by shares alone, and the context of the earlier consideration no longer obtained. The two routes came up, in a different context, in early December 1993.
288 Thirdly, entitlements was now considered in more detail, and the risk of complaint that entitlements had not been allocated equitably was more specifically recognised. As will shortly be seen, apart from the report the NRMA had been giving more thought to entitlements, and they were the subject of detailed advice from Mr Morgan in early November 1994. The advice directly linked entitlements and the potential for complaint of oppression.
289 Fourthly, possible disadvantages in the proposal were identified, specifically as matters which might be alleged by those using “spoiling tactics”. They were diminished service, focus on profit making with consequent increase in fees for road service and premiums, and loss of community programmes and non-profit services, plus general change in “membership culture”.
More advisers are engaged
290 The involvement of AAH in the proposal flowed from the engagement of Mr Morgan for the Christmas Project at the end of 1992 or early in 1993. At the end of October 1993 Mr Gregory Bateman of Abbott Tout was brought in to the Legal Status Project.291 The NRMA had been obtaining advice from and through Mr Bateman about the requisitioning and conduct of general meetings, it seems for reasons unconnected with the consideration of restructuring. A memorandum from Ms Godwin to Mr Willing dated 27 October 1993 included, “At the moment, Greg is unaware of the Legal Status Project. I would like to bring him in to it very soon because I think he could contribute a lot, especially as far as the question of possible structure of the Group”. Mr Willing agreed.
292 Mr Bateman was “put into the picture” (the words are taken from another memorandum of Ms Godwin) on 4 November 1993. Within the NRMA Ms Godwin proposed that AAH should “have control of the legal work for the float process” but that AT should advise on structural issues and possibly be engaged for “other aspects of the project”. According to Ms Godwin’s notes of the meeting of 4 November 1993, Mr Bateman was asked “to look at possible structures which would be useful for company to consider. Especially to keep in mind how Association activities of community advocate and community service nature could be funded in such a structure whilst maintaining independence of Association”.
293 Also at this time the NRMA engaged Port Jackson Partners Ltd (“PJP”), in the nature of a merchant bank. Mr Terry Arcus of that company acted as adviser. In due course Mr Ross and Mr Arcus acted in cooperation, but Mr Arcus at times took a more leading role. His initial involvement, not greatly explored in the evidence, was the production in late October 1993 of a document summarising in headings the comparative “risks” of the NRMA changing its structure or doing nothing and some issues to be addressed. What this led to at the time was unclear from the evidence, but the engagement of PJP, as well as the retention of AT, indicated how seriously the NRMA was furthering the Legal Status Project.
Advice on entitlements
294 With the increasing activity in developing the proposal, the question of entitlements became prominent. It had long been recognised as a crucial issue, and was now addressed more fully. It involved considering in more depth the nature of a member’s interest.295 With the alternative structures report, Ms Godwin and Mr Morgan spent some time discussing the question of entitlements with a view to recommendations for the basis of entitlement. In September 1993 Ms Godwin prepared an analysis of factors according to which entitlements could be determined (membership, former membership, policyholder, former policyholder, length of membership or time of holding policy, number of policies held, number of subscriptions, total amount paid in subscriptions, total amount paid in premiums, employment, and many other factors). She asked for advice from Mr Morgan.
296 Mr Morgan provided “draft initial views” by a letter to Ms Godwin dated 1 October 1993. The letter stated that Mr Morgan’s main theme was “a concern about the fact that it may not be appropriate to recognise the customer relationship because what we are really doing is to change ‘ownership’ from being a member to that of a shareholder so that the member can realise either now or in the future the value of your ownership”. His views included -
297 By a letter dated 11 October 1993 Ms Godwin asked Mr Morgan for specific advice. She identified the general question as “whether membership equals ownership”, and the specific questions included -
“Here existing ‘owners’ are to be allocated the economic value of the entity. Shares cannot be issued at a discount and, from this point of view, the likely approach is to offer two options to the ‘owners’;
(a) subscribe the par value for shares and receive a share with a market value greater than par;
(b) renounce right and receive cash equal to amount share sold for (its full value).
Therefore, entitlement issues arise regarding the initial option and, secondly, as to whom the ‘renounced’ shares are offered. Unless the ‘members’ otherwise agree, the first leg must be an offer to members - it reflects ownership in a legal sense.”
Ms Godwin observed that it seemed from the paper on taxation issues that members may have no proprietary interest, and that if this were so it was necessary to explore the benefits and disadvantages of making any allocation on a wider basis. In the memorandum to Mr Willing of 27 October 1993 she linked that with advice on “possible means by which either NRMA Limited or NRMA Insurance could be attacked”, and it is clear that she saw that complaint over the basis of entitlement could be used to claim relief from oppression.
“1. Do members of the Association and the Insurance company have any proprietorial interest in those companies respectively?
…
5. I assume that members’ approval for basis of allocation must be obtained, is this correct? If ‘yes’ must that approval be of a very specific plan or can it be an approval ‘in principle’?”
298 Mr Morgan’s advice was by a lengthy letter dated 4 November 1993. Some importance was attached to the letter in these proceedings, and a number of passages should be noted.
299 Mr Morgan began by addressing the nature of the interest of a member of Association or Insurance generally, saying that the focus was on the type of interest or “property” which the member held by reason of membership. He said -
“In our view the member’s rights are actually described as a ‘chose in action’, a well known of [sic] form of personal property. This form of property is the same form of property that a person has as a party to a contract and it arises essentially by reason of the fact that by becoming a member the member thereby becomes contractually bound to the company and to other members in accordance with the contract set forth in Section 180 of the Corporations Law. The member has a bundle of rights under this contract. The member also has obligations under the contract. Under the Corporations Law the member also has other rights and obligations. However, these rights and obligations arise from statute and are not strictly part of the property of the member.
Membership of a company limited by guarantee may be compared to a shareholding of a company limited by shares. The Courts have found it extraordinarily difficult to define the legal nature of shares despite their familiarity and the Courts have usually described shares as a ‘chose in action’ or as a ‘bundle of rights’. A share is not a form of tangible property but, because a share is usually transferable [sic], is it loosely described as ‘property’ in a more general sense so as to equate it with other types of tangible or transferable property. In reality the type of property held by a member of a company limited by guarantee is essentially the same as the type of property held by a shareholder in a company limited by shares. The real difference between the two arrangements is in the rights and obligations that attach to them.”300 So Mr Morgan answered the first question asked by Ms Godwin on 11 October 1993 in the terms, “that members of both the Association and Insurance have a form of personal property arising from the contract constituted by the Memorandum and Articles of Association of both companies”.
301 Mr Morgan then went to the rights and obligations of a member. He began -
In connection with variation of the rights, he adverted to s 260 of the Law “which prohibits oppressive conduct, this protects a member against the companies’ affairs being conducted oppressively, unjustly or in a discriminatory way and similarly protects class rights”; he adverted also to s 167 of the Law.
“The members’ rights are essentially the right to vote and the principal obligation is to contribute on winding up and to pay membership fees and charges. However, in critical matters, some members have different rights or no rights at all. The power to vary these rights by members is also a critical issue for consideration.”
302 After a brief description of the Christmas Project (as he still called it) structure as one likely to involve the use of a holding company issuing shares, Mr Morgan continued -
“ The Windfall
The position of Project Christmas does not easily fit into any of the normal situations. It is an issue but it is also a ‘sale’ in a sense. This is because the essence of the offering is not a capital raising but rather the transfer of economic ownership to shareholders.
However, shares may not be issued at a discount and for a number of reasons, including tax and doubt as to whether the members have anything in the nature of transferable property to sell, it is proposed that each member ‘transfer’ (or more properly give up) their existing rights for shares.
Shares will be issued at par, say $1.00. Those entitled may take them up or renounce the right and receive the cash consideration received on disposition of the renounced shares. Once issued, the shares would be worth considerably more than $1.00 and this difference is the ‘windfall’ or equivalence of the economic interest in the NRMA Group.
…
Is passing part of the Windfall to non-members valid?
If we assume the requisite majority of members and each relevant class approves a proposal to issue shares on a windfall basis to non-members being policyholders, can dissenting members complain and what is the likelihood of success?
Secondly, could Association members complain if shares are issued on a windfall basis to members of Insurance by reference to their membership of Insurance or to persons who are not members of Association. This could arise, for example, where the number of shares reflected membership of Insurance in some way (eg premiums paid).
In essence, the grounds of complaint would be either:
(a) a fraud on the minority; or
(b) oppression either at general law or under section 260 of the Corporations Law.The argument would be that the majority of members or directors in so acting either misused their power to the detriment of the minority or acted oppressively or in a manner that was unfairly prejudicial to, or unfairly discriminatory against, a member or class of members or contrary to the interests of members as a whole.
If the action involves a fraud on the minority in accordance with the common law principles, it is more than likely that action would also be available under Section 260 of the Corporations Law. That section has a number of advantages for a member pursuing the matter, being procedural advantages and advantages in the scope of the orders that a Court may be able to make in the event that the conduct is found to fall within that section.
…
Likely legal consequences of allocating, or attempting to allocate, shares to non-members
We conclude that there is a danger that, if, as part of the process, shares are allocated to non-members (that is policyholders) on the basis that those members become entitled to the windfall, persons who are members may well have a claim against the companies on the basis of there being a fraud on the minority or, alternatively, a breach of Section 260 of the Corporations Law. The risk of this is far less if the non-members to whom this right is extended come within a class of policyholder who would have been a member but for matters of inadvertence, error or like matter.
…
Is members’ approval for the allocation required and is that approval required specifically or can it be obtained in principle?
The answer to this question depends in part as to exactly what structure is adopted and how the process of approval is carried out. However, regardless of the structure, it appears to us inevitable that the background to the detailed resolutions required to effect a change of status of Association and of Insurance or the acquisition of shares by a Holding Company and the issue of shares by that Holding Company will require detailed explanation to members as to the basis on which the shares will be issued and the way in which they will be allocated. As we have noted, the actual allocation of shares is normally a matter for Directors or Owners but the situation here is different from the norm. We do not believe that members will approve the proposal unless the Directors’ proposals in respect of this matter are made clear at any relevant meeting and, unless that is done fully and frankly, members may truly have a basis for a legal remedy under Section 260.
The Risk Considerations
One of the real concerns of extending the windfall to non-members is the opportunities it provides for ‘spoilers’. If an action is commenced under Section 260 that cannot be quickly disposed of or about which we have a high level of confidence that it will not be successful, it has the real likelihood of catastrophically upsetting the issue and listing process.”303 Mr Morgan did not in terms answer the second question asked by Ms Godwin on 11 October 1993, but clearly conveyed a yes and that there had to be a specific plan. In doing so, however, he acted on the notion of giving up membership rights for shares, at least in relation to the windfall element of the shares and even though there was payment of par value for the shares, and (consistently with the paper on taxation issues) described the membership rights as essentially the right to vote. He made plain that complaint over entitlements could be used to claim relief from oppression, even as a “spoiling” claim. The postulated complaint was not only of giving entitlements to non-members, but of giving entitlements to members of Insurance of which members of Association might complain, and other complaints of unfairness between members would readily have been envisaged. Further, Mr Morgan noted as relevant to oppression that full and frank disclosure of the proposal was required.
304 Ms Godwin sent a copy of Mr Morgan’s letter of 4 November 1993 to Mr Bateman. Her concern at the time seems to have been Mr Morgan’s suggestion that the directors of Insurance might have been a class of members. Ms Godwin said that if the board of Insurance remained as it was “there is likely to be 25% of the Board voting against proposals connected with this project”, and that if a director in favour retired “the proposals would be in jeopardy”. She had already asked Mr Bateman to obtain the opinion of senior counsel on “class rights issues”, specifically whether Association was a class of member in Insurance, and she said the position of the directors of Insurance should be included. Mr Bateman briefed Mr David Bennett QC in early December 1993. Later in the month Mr Bennett provided an advice that the directors were not a class of members, although he said that it was remotely arguable that they were and for more abundant caution their consent should be obtained.
305 By a letter to Ms Godwin dated 9 November 1993 Mr Morgan provided a summary of his advice as to entitlements, so far as relevant being -
Project organisation
“1. The members of both Association and Insurance hold a form of personal property in the relevant company the rights and interests (and, of course, the obligations) arising from the terms of the contract between each other and with the company constituted by the Memorandum and Articles of Association. The members also have, in their capacity as members, common law rights and rights under statute to protect their interest. The principal rights are those to take action in the event of fraud on the minority or in the event of oppression.
2. A policyholder of Insurance who is not a member of Association or Insurance has no such rights or interest.
3. In order to effect an allocation of shares to non-members and to make the offer contemplated by Project Christmas, the Memorandum and Articles of Association of both Association and Insurance need to be changed and these changes will of necessity change the rights of members. Project Christmas involves a transfer of economic ownership and therefore, a windfall to those who are granted ‘entitlements’. The entitlements can be taken in the form of a share or cash if the share right is renounced. This raises two questions:
(a) whether or not different classes of members exist and whether particular consent is required from those classes if the amendments particularly affect them; and
(b) whether dissentient members may have a cause of action if the windfall is passed to non-members.
…On the second question we conclude that, if the windfall is passed to non-members, that [sic] dissentient members may have a right of action for fraud on the minority or for oppression under Section 260 of the Corporations Law…...
5. Although allocation is essentially a matter for Directors, in our view, to obtain approval for the Project, the proposed methods of allocation will need to be explained in detail in order to obtain a relatively informed consent.”
306 On 9 November 1993 BT provided a draft timetable for the restructuring, according to which the proposal would go to the members of the NRMA in the first week of July 1994 and would conclude with listing in the second week of October 1994. The establishment of working groups in the first week of March 1994, with particular responsibilities for offer structure, prospectus/due diligence, and logistics, was suggested. Steps were put in train to “clean up” the data base from which membership of Association and Insurance was taken and to enable various factors for entitlements to be ascertained. Within the NRMA Mr Rees was detailed to head the project, and The Rowland Company Pty Limited (“Rowland”) was engaged to advise on public relations and advertising matters. The market research group often used by the NRMA, Woolcott Research Pty Limited (“Woolcott”), was brought into the project a little later. Confidentiality agreements were prepared, and presumably entered into as necessary.307 A meeting was held on 25 November 1993, attended by NRMA management and representatives of BT, PJP, and Rowland, at which there were discussed various strategic and operational issues, including a project management structure, communications, the roles of the outside advisers, the resources to be brought in by the NRMA, and a timetable and budget. Mr Rees recommended a steering committee comprising Mr Willing and himself, with a project management organisation under his direction. In fact the steering committee was informal at best, and the project management organisation changed as the project continued.
308 An all day “strategic planning conference” was held on 1 December 1993, attended by Mr King, Mr Rees, Ms Conway, Mrs Graham, Ms Godwin, Mr Arcus, and Mr Philip Stern also of PJP. It had been preceded by meetings on 26 and 29 November 1993, at which had been variously present Mr Willing, Mr Ross, Mr Barrett of Rowland, and others additional to those present on 1 December 1993. The meetings had been concerned amongst other things with a detailed timetable from taking the proposal to the boards in the first week of February 1994 to listing in October 1994; with entitlements (the need for a recommended basis of entitlement by the time of the board meetings and board decisions at the March meeting); and with alternative structures.
309 It seems that PJP’s contribution was now being received, and PJP prepared discussion topics for the strategic planning conference calling for a “recap of thinking” in connection with entitlements and the new structure and setting out considerations material to each (the absence of anyone from BT at the meeting may have been intentional). The discussion at the meeting, of which there was not detailed evidence, seems to have brought a number of questions for Mr Morgan and Mr Bateman.
310 At a meeting on 2 December 1993, at which Mr Rees, Ms Conway, Ms Godwin, Mr Morgan, and Mr Bateman were present, Mr Morgan and Mr Bateman were brought up to date on the project (the wording reflects that of Ms Godwin’s file note). Amongst other things, there was discussion of the project management organisation and of the roles Messrs Morgan and Bateman were to play. In general, Mr Morgan was to deal with the prospectus and most of the legal matters, Mr Bateman with specific matters. The immediate attention was to be to the issue of entitlements. A matter particularly mentioned, as recorded in Mr Bateman’s note of the meeting, was “Spoiling tactics are the issue eg, injunction, proceedings on foot”, and Mr Bateman was asked by Ms Conway to “think through what spoiling tactics might be adopted by those opposed to the proposal so that we can understand what they may be, how they should be counteracted and dealt with”.
311 To follow through this request, Mr Bateman responded to it at a meeting with Ms Conway, Mr Barrett, and Mr Ian Cropper also of Rowland on 3 December 1993. It is unnecessary to go in detail into what was said. The tactics forecast by Mr Bateman included allegations that the directors were misleading the members in their notices of meeting, and the bringing of court proceedings, the court proceedings being founded on allegations of oppression, of misleading the members, and of breach of duty on the part of directors. Mr Bateman explained that oppression was “a wide-sweeping concept”, not always capable of precise definition but essentially when actions were taken by a majority to act in their interests at the expense of the minority of shareholders; he said that going to court arguing for oppression would be “a key weapon”, because the very fact of the proceedings would generate publicity, suspicion, and concern. He referred specifically to a spoiling tactic of bringing court proceedings upon the publication of the notice of meeting and its explanatory memorandum, alleging that the documents were misleading, and explained that what was required was that the documents fully and fairly inform the members of everything material to their decision in relation to the matter, of all they needed to know to understand the issues to be voted on.
312 There developed as part of the project management organisation regular meetings known as communications meetings, attended by many of those concerned with the project and intended to ensure that those concerned with one aspect of it knew what was happening in the other aspects. The first meeting of this kind, although at the time more of a general planning meeting, was held also on 3 December 1993. It was attended by Mr King, Mr Rees, Mr Ron Burnstein (general manager, community and customer relations), Mr Pearce, Ms Melanie O’Connor (general manager, human resources), Ms Conway, Ms Godwin, Mr Ross, Mr Barry, Mr Stern, Mr Barrett, Mr Morgan, and Mr Bateman. Ms Godwin’s notes of the meeting recorded a tentative programme for presentation of the proposal to the Board of Management of Association and the board of Insurance on the first Thursday in February, and to the board of Association two weeks later, and 6 December 1993 was appointed for the next meeting with a programme of communications meetings thereafter.
The question of scheme or meeting
313 Prominent in this period was further attention to entitlements, particularly with an eye to the “spoiling” to which Mr Morgan had referred in his advice of 4 November 1993.314 In a letter to Ms Godwin dated 17 November 1993, Mr Morgan recorded a request to consider steps open to persons seeking to obtain control of the NRMA and what difficulties and hurdles that person might face. Although at first sight not entirely responsively to the request, Mr Morgan said that “In the context of Project Christmas” it was necessary to consider potential action that might be taken by a person seeking to gain control of the NRMA or “actions that may be taken by persons seeking to “spoil” proposals supported by the Board or by the members in general meeting”. As to spoiling, Mr Morgan’s observations included, “The defensive opportunities for the Board in an attack upon Association are relatively limited although a dissentient group of members may perhaps be able to bring an 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 as in the best interest of the company as a whole”.
315 A basis of entitlement was set out in a memorandum from Mrs Graham and Mr Peter Worland (assistant general manager, external relations) to Mr Rees dated 19 November 1993. The basis was simple, perhaps simplistic, and was that “any entitlement be offered to all members of NRMA Limited in equal shares”. The basis later adopted was more sophisticated. The notion of oppression must have gained currency, because the reasons for the suggested basis included, under the heading “Oppression Suit” -
“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”.316 A meeting was held on the morning of 6 December 1993, attended by Mr Rees, Mr King, Ms Conway, Ms Godwin, Mr Ross, Mr Barry, Mr Arcus, Mr Stern, Mr Morgan, and Mr Bateman. It examined a structure involving a holding company with Association, Insurance, and other NRMA companies as subsidiaries, and the attention seems to have been on providing for a “Foundation” as the vehicle for the NRMA’s advocacy and community services.
317 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, and according to the record of the meeting the objections to that course included that there might be an oppression action and/or an action under section 260 of the Law.
318 The question of scheme or meeting now specifically arose. The record of the meeting at a later point read -
“ 1.13 Scheme or Meeting
Under the proposal we would be extinguishing the rights of members in Association and Insurance, albeit in return for other benefits, namely, shares in a holding company and/or a cash benefit.
It is possible that of the 1.8 million (approximate) members of Association only a fairly small proportion will vote. Assume, for example, that 200,000 members vote on the proposal. If 75% of those 200,000 voting are in favour this will mean that 150,000 members of the Association have determined the future of the organisation. A possible way of dealing with this issue is to have the proposal embodied as a scheme of arrangement which is then approved by court. The difficulty with that is that opponents of the proposal have the right then to attack the proposal in court. This provides a very public and formal forum for opposition.
It was suggested that the determination of the acceptance or rejection of the proposal by a vote at a meeting is no different from the compulsory acquisition of a minority holding (other than the size of that holding).
A scheme forces us to go to court and virtually seeks opposition to the proposal. (This is not to suggest that there would be no opposition if the proposal were to be dealt with by way of voting at a meeting but it is far less attractive for an opponent to actively bring a case against those putting forward the proposal than to respond to an action which has already been initiated in court by those proposing.)
Benefits of embarking on a scheme approach are the:-
* openness of handling the matter in this way
* the guaranteed success of the proposal if the scheme is approved
* a formal forum for airing the proposalagainst which must be offset the problem of giving a very attractive forum to one’s opposition.
Benefits of a vote/meeting
* Openness of proposal
* Democracy at work
* Less attractive forum for opponents
JM to obtain Sydney Council’s [sic] advice
by 31 December, 1993.”
319 On the NRMA’s case, this question of scheme or meeting provided the first and principal occasion for advice of risk to the proposal from the appeal to the High court in Gambotto’s case. It is important to see how the question arose. There were differing recollections.320 Mr Morgan had earlier advised to the effect that the status of the mutual companies could be changed to that of companies limited by shares and by guarantee under s 167 of the Law, that is, by resolutions in general meeting, but that oppression would have to be avoided. Only if there was to be a change in status to that of companies limited by shares alone did Mr Morgan see a difficulty, and he had also said that there was doubt whether the difficulty could be overcome by a scheme of arrangement - hence the request for legislative change to s 167. Although the proposed restructuring was not settled in detail, it seems to have been regarded as acceptable that Association and Insurance should become companies limited by shares and by guarantee. For Mr Morgan, therefore, there was no occasion to go to a scheme of arrangement, and no point in doing so.
321 According to Mr Morgan, at the meeting of 3 December 1993 someone, probably Mr Ross, asked whether it was necessary to have a scheme of arrangement in order to implement the proposal, and he (Mr Morgan) replied that it could be done by having the members agree to amendments to the memoranda and articles of the companies. In his witness statement dated 28 April 1997 Mr Morgan said that Mr Bateman expressed agreement, and that at the meeting of 6 December 1993 there was a similar exchange and agreement. Mr Morgan gave evidence of his consideration of the matter and his reasoning. In short, he considered that there was power in accordance with the articles of Association and Insurance and the provisions of the Law to amend the articles to provide for extinguishment of membership in a way binding on all members, provided that there was no oppression either under common law principles or within s 260 of the Law: hence Mr Morgan was concerned that the entitlements should be determined in a manner which was fair. Mr Morgan said that he took into account the decision of the Court of Appeal in Gambotto’s case, which he thought stood for the proposition that the cessation of membership rights could be effected so long as any unfairness of a type which could justify complaint of oppression was avoided.
1510 In the same way, in my view, unless it is established that the NRMA paid additional or increased salaries and wages which would not have been paid had the proposal been put on hold, being expenditure properly measured by taking the salaries and wages of the employees who worked on the proposal as set out in the Scott Schedule, the internal costs are not recoverable. As I have said, the NRMA has not established this. The internal costs have not been shown to have been costs which would not have been incurred if the proposal were put on hold. On the contrary, I consider that in the state of the evidence the only proper conclusion is that the amounts of the salaries and wages paid to employees as listed in the Scott Schedule would have been paid in any event. Accordingly, I do not think that the NRMA can recover the internal costs. An “allowance” of $1,269,728 should be made.
1511 I will not go through the detailed submissions as to each employee’s work in connection with the proposal. In the further specific disputes I will restrict consideration to expenditure on external service providers, save as to specific dispute B where reference to the work of the NRMA employees is necessary to understand the dispute.
1512 Specific dispute B was said to be concerned with expenditure in relation to the NRMA’s members registers. Some of the external service providers and some of the NRMA’s employees provided services in relation to, or worked on, revision of the members registers in the period prior to 19 October 1994. The external services included establishing and staffing a Share Information Centre to deal with members’ queries in response to the entitlements letters. The external service providers in question are too numerous to list, and included diverse providers such as professionals, marketers, envelope makers, Telecom, and Australia Post. The defendants said that the expenditure for all these purposes was not recoverable because it had “enduring value” for the NRMA.
1513 Association and Insurance were required by law to maintain registers of members containing the names and addresses of the members, the date at which the name of each person was entered in the register as a member, and the date at which any person who ceased to be a member during the previous seven years so ceased to be a member. Unless the registers themselves constituted indices, they also had to keep indices in convenient form of the names of the members. The registers and indices had to be open for inspection.
1514 The NRMA had a database, the so-called identity database, containing the names and addresses of members of Association and customers of Insurance. The identity database was used, inter alia, to prepare members registers, as the basis for mailing lists for the Open Road, and as the basis for marketing campaigns. It did not throw up an accurate members register for Insurance, principally because members of Association and policy holders were not matched, but also because there was duplication where memberships or policies were in joint names, where there had been changes of name, where there had been changes of address, and for other reasons. Inspection of the registers of members was possible only by accessing the identity database or running a programme to create a hard copy members registers, and in the case of Insurance that could not adequately be done.
1515 Quite apart from the demutualisation, therefore, it was necessary for the NRMA to do work on the identity database and otherwise in order to have the members registers required by law. The proposal was clearly enough the impetus for this work. When the Christmas Project was established it was recognised that the membership records were unsatisfactory. In November 1993 it was decided “that a project be undertaken” to fix the problem of a members register for Insurance. Minutes of a meeting on 23 February 1993 recorded “HC to advance the rationalisation of polyholders [sic] and membership data bases”, and minutes of a meeting on 2 March 1993 referred to “incomplete records of membership” of Insurance and recorded that there was to be “work on fixing the data records”.
1516 Work was done to establish a system for matching members of Association and policyholders in a way which would allow the production of a members register for Insurance, and a so-called clean-up of the identity database to eliminate duplications was carried out by about mid-April 1994. But the work done went much further. Because the entitlements differed according to length of membership and the holding of policies issued by Insurance, separation of members into appropriate categories was required. So as well as the clean-up of the identity database and the production of a membership database, an entitlements database was brought into existence. This was done by the end of May 1994, and the cleaned-up identity database and the entitlements database were used to send out the entitlements letters.
1517 One of the purposes of the entitlements letters was to assist the NRMA to verify memberships and lengths of memberships and insurance policies held, and corrections were thereafter made. With the benefit of the responses to the entitlements letters, the NRMA created voting registers for Association and Insurance which reflected the entitlements.
1518 The defendants submitted that all the services and work were of enduring value because, although they went to creation of the voting registers and entitlements database, they also went to the creation of a more accurate database for use inter alia in mailing the Open Road and for marketing campaigns, and also enabled the NRMA to produce the members registers required by law.
1519 The notion of enduring value, much spoken of in the course of the hearing, was never really made clear. It seemed to be a response to the NRMA’s description of its loss as wasted expenditure. It made more sense in relation to wasted expenditure as claimed for free shares/disadvantages liability than in relation to the expenditure, also described as wasted expenditure, claimed for Gambotto liability. The latter expenditure was more correctly expenditure which would not have been incurred had the proposal been put on hold.
1520 Much of the expenditure in relation to the members registers, understanding that in a wide sense, had been incurred before 28 April 1994. The expenditure thereafter was generally to do with sending out the entitlements letters and the conduct of the intended general meetings, or consequent on the entitlements letters. Had the boards voted to put the proposal on hold towards the end of April 1994, it is clear enough that the entitlements letters would not have gone out. Would the work in relation to the members registers have continued? On the probabilities, I do not think it would. The NRMA had functioned with an imperfect identity database prior to 1994, the imperfection had been largely corrected, and putting the proposal to the members in the general meetings was the occasion for the continuation of the work. There is a degree of speculation in this, as there was no evidence specifically directed to whether the work would have continued as distinct from the notion of enduring value, but I consider that I may properly come to that conclusion.
1521 It is unnecessary to say anything of the extent, at first sight difficult to justify, to which by their B designations in the Scott Schedules the defendants sought to apply this specific dispute: the expenditure after 28 April 1994 so designated totalled $7,039.651. The expenditure of the kind described by the defendants would not have been incurred if the proposal had been put on hold. I do not think any allowance for the so-called “enduring value” in question should be made.
1522 Specific dispute C was concerned with other expenditure said by the defendants to have been of enduring value. The defendants gave this designation to all the BT costs, some of the C & L costs, some of the DTT costs, all the PJP costs, all the costs of SMS Consulting Group Pty Ltd (“SMS”), and all the Grant Samuel costs. The expenditure after 28 April 1994 so designated totalled $2,289,944.
1523 In short, and apart from an additional submission in relation to SMS, the defendants’ submission was that on 27 May 1995 the NRMA had resolved not to proceed with the meeting originally called for 19 October 1994 or with the prospectus, but had remained intent on putting to members a restructuring of the organisation for the reasons set out in the Grant Samuel report; that there was no evidence that this objective, including a possible demutualisation, had been abandoned; and that the work of these external service providers could be reused in a future restructuring and had enduring value to the NRMA. Only part of the relevant expenditure was challenged, in that it was said that the work could be reused in part, and how an apportionment should be made was unclear.
1524 Any enduring value is highly debatable, and even if the submission otherwise had merit the consequence would certainly not be an allowance for all the expenditure to which the defendants gave the C designation - indeed, putting a figure on the enduring value would probably be impossible. It does not matter. As with special dispute B, the true question is whether the NRMA would have incurred the expenditure had the proposal been put on hold on or about 28 April 1994. Some of the expenditure designated as C expenditure would not have been affected by a stay on the demutualisation, and to the extent to which expenditure of that kind would have been incurred it is accommodated by the allowance of $500,000 to which I have earlier referred. No further allowance under specific dispute C should be made.
1525 The C&L costs in the Scott Schedule included the costs for services in connection with the 31 March 1994 audit for inclusion in the prospectus. The NRMA conceded that as a result of the work done in preparing for this audit there was a saving to it in the costs for services in connection with the normal 30 June 1994 audit. The saving was estimated at $100,000. However, since the expenditure preceded 28 April 1994, and is not initially part of the NRMA’s damages now in question, no allowance for the sum should be made.
1526 As to SMS, it was obliquely submitted (as part of specific dispute C, although in truth a separate dispute) that there was no satisfactory evidence “about what SMS did, how satisfactory or otherwise it was, and how it was relied upon”. The point may have been that without such evidence it had not been established that the expenditure did not have enduring value, or it may have been that it had not been established that the expenditure would not have been incurred if the proposal had been put on hold. In case it was the latter, SMS provided the services of Mr Hosking. If the proposal had been put on hold, I consider that on the probabilities his services would have been dispensed with.
1527 Specific dispute D was concerned with the distribution of the Grant Samuel report and the process of consultation at that time. The defendants said that, to the extent that there was no enduring value for the report, any expenditure after the decision of the High Court in Gambotto’s case on 8 March 1995 was “unjustified”, and alternatively that the expenditure was “too remote from the proposal”. Since other expenditure after 8 March 1995 was the subject of a specific dispute, I take the defendants’ position to be confined to expenditure of the kind I have described. The amounts designated D in the Scott Schedule did not include the fees of Grant Samuel itself, those fees being subject to specific dispute C. They covered a number of external service providers, including Telecom, Woolcott and S&S. The expenditure designated D, all after 28 April 1994, totalled $573,038.
1528 When dealing with the facts I have explained why the Grant Samuel report was distributed and, without going into detail, that advertisements were placed, public consultation meetings were held, and market research was undertaken. Justification is not the issue when the NRMA’s damages are the expenditure it would not have incurred had the proposal been put on hold. Had the proposal been put on hold on or about 28 April 1994, there would not have been the distribution of the prospectus, the litigation in the Federal Court, and what was undoubtedly divisive public contention. There may or may not have been occasion for a further report such as the Grant Samuel report, and the specific disputes seemed to accept that there would not have been occasion for that report because challenging the fees of Grant Samuel only on enduring value grounds under specific dispute C. On the probabilities, in my view, there would not have been a report such as the Grant Samuel report, or the Grant Samuel report itself, and there would not have been the process of distribution and consultation involving the other report or the Grant Samuel report. The issue, then, is whether the expenditure on the process of distribution and consultation in fact incurred was too remote - not too remote “from the proposal”, but remote in law.
1529 The expenditure presently in question will not be recoverable as damages for the solicitors’ breaches of contract unless it was such as might fairly and reasonably be considered as arising naturally, that is, according to the usual course of things, from the breaches of contract themselves, or such as might reasonably be supposed to have been in the contemplation of all parties at the time they made the contracts as the probable result of the breaches of the contracts (Hadley v Baxendale (1854) 9 Ex 341 at 355; 156 ER 145 at 151; Koufos v C Czarnikow Ltd (1969) 1 AC 350 at 388, 406, 410-11, 414-5, 425; Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 363-6). Nor will the expenditure be recoverable as damages for the defendants’ breaches of duty unless it was of a class or kind which was reasonably foreseeable as the result of the wrongful act or omission (Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagonmound) (No 1) (1961) AC 388 at 426; Overseas Tankship (UK) Ltd v Miller Steamship Co Pty Ltd (The Wagonmound) (No 2) (1967) 1 AC 617 at 316; Rowe v McCartney (1976) 2 NSWLR 72 at 89; Alexander v Cambridge Credit Corporation Ltd at 360, 366.).
1530 Litigation such as the Federal Court proceedings, and the divisive public contention, were undoubtedly foreseeable, and it is sufficient to recall the concern over spoiling tactics - it does not matter that the particular manifestation so far as it involved free shares and disadvantages may not have been foreseen. That the NRMA would publicise the proposal, even engage in marketing strategies intended to achieve a successful outcome, and would receive and respond to members’ reactions and comments was no doubt also foreseeable. But I do not think that a process of distribution and consultation of the kind in which the NRMA engaged in April-May 1995 was foreseeable, using that word as shorthand for the more accurately stated principles. I consider that specific dispute D should be decided in favour of the defendants on grounds of remoteness.
1531 The NRMA did not say that any of the amounts so designated fell outside specific dispute D if the dispute of principle were determined in favour of the defendants. An allowance of $573,038 should be made.
1532 Specific dispute E was concerned with what was described as corporate advertising. The defendants said that part of the expenditure was “not additional expenditure”. The amounts designated E in the Scott Schedule were the entirety of the payments to S&S, a total of $3,099,360 from March 1994 to February 1995 inclusive, plus $134,838 paid to the NRMA company responsible for The Open Road, The Open Road Pty Limited, at the end of 1994.
1533 The expenditure in favour of S&S incurred prior to 28 April 1994, $162,520, may be put aside, and it should not be forgotten that the dispute challenged only portion of the expenditure. The defendants’ submission was that to a large extent advertising expenditure on the proposal was not additional expenditure, but was merely money which “would have been spent on corporate advertising anyway”.
1534 A marketing plan and budget in relation to the proposal dated 14 April 1994, submitted by Mr Salvage and recording the research and four key issues mentioned when considering whether the proposal would have gained the necessary 75 per cent approval, showed gross expenditure on television advertising of $745,250, but recorded that “the TV media schedule for this campaign will allow a reduction in the normal corporate TV schedule to the value of $536,000”. The total budget was $1,940,000. In early June 1994 Mr Salvage wrote to Mr Rees and Ms Conway about forthcoming advertising for a three week period, recording costs of $180,000 for the production of the television material, $300,000 for the television media, and $100,000 for the press media, and stating that those activities and costs “are substantially replacing normal advertising” so that the net additional cost to the NRMA was not great. On this material, the defendants submitted that it should be inferred that something like 70 per cent of the amounts paid to S&S, through whom the corporate advertising was arranged and paid, would have been incurred for normal advertising if there had been no demutualisation proposal at all. Although not specifically directed to Gambotto liability, the submission would extend to expenditure on normal advertising if the proposal had been put on hold.
1535 The NRMA is entitled to recover only the net expenditure on corporate advertising, after an allowance for the expenditure which was not incurred because the proposal proceeded. While the evidentiary basis was slim, there was nothing of significance to deny the conclusion from the material to which the defendants referred that an allowance should be made. The difficulty is to arrive at an amount.
1536 I was not referred to anything else in the evidence to assist in arriving at an allowance. The ratio of $536,000 to $745,250 may not have applied over the whole of the relevant period, and there was evidence that the advertising plan involved three stages for advertising in relation to the proposal, in March, June and September-October 1994. The reason for these months is obvious. From Mr Salvage’s memorandum, the total of $580,000 for a three week period “substantially” replaced normal advertising, so the normal expenditure on advertising must have been high. Once again, an estimate close to a guess must be made. The corporate advertising in connection with the proposal would not have substantially replaced normal advertising uniformly, and the amounts paid to S&S in the latter part of 1994 and early 1995 may not have been in the same position as the amounts earlier paid when Mr Salvage prepared the marketing plan and budget and wrote the memorandum. In all the circumstances, on my estimation an allowance of 50 per cent of the S&S expenditure incurred after 28 April 1994 should be made, a figure of $1,468,420.
1537 As to the amount paid to The Open Road Pty Ltd, the NRMA conceded that -
The defendants said that the damages should therefore not include this amount, alternatively that the payment was only an intra-group charge and it had not been shown that it represented a production cost actually incurred by The Open Road Pty Ltd.
“With the exception of the costs of external legal sign-off, there was incurred by the plaintiffs in producing material in respect of or in relation to the Share the Future proposal for inclusion in any edition of the ‘Open Road’ magazine no cost additional to that which would have been incurred by the plaintiffs in producing the substitute or alternative material that would otherwise have been included in the ‘Open Road’ magazine.”
1538 I see no sufficient reason to treat the charge as anything other than a proper commercial charge, but on the NRMA’s concession it replaced expenditure which would otherwise have been incurred. The NRMA submitted that the work had nevertheless been wasted. This gave the notion of wasted expenditure a new, and unsustainable, application. An allowance of $134,838 should be made.
1539 Specific dispute F was concerned with $100,000 paid to Were on 1 June 1995. The defendants said that a “credit for any future float in invoiced fees [was] not deducted from plaintiff’s claim”.
1540 Were was engaged in June 1994 as lead manager for the proposed public listing of Holdings. Mr Brad Rees, refrerred to when recounting the facts, was from Were. It was entitled to a particular fee if Holdings was listed and payment on hourly rates if it was not. In May 1995 it submitted an account for a round figure of $100,000, the covering letter stating that it “includes an amount of $29,925.00 in respect of work which can be carried forward to a subsequent NRMA float process and which will therefore be rebated against fees for such a future appointment”. When the account was paid, the NRMA’s covering letter noted this statement.
1541 The expenditure of the full $100,000 would not have been incurred if the proposal had been put on hold. No question of rebating the $29,925 against fees for a future float would have arisen. Assuming nonetheless that regard should be had to the promised rebate, it would only benefit the NRMA in the event of a future float for which Were was engaged. On the evidence, such an event is entirely speculative, and I do not think any allowance should be made in respect of the $29,925.00.
1542 Specific dispute H was concerned with part of the fees paid to AAH and AT. The defendants said that part of the services provided by AAH and AT had enduring value, being work during the due diligence process to ensure that the NRMA complied with the Credit Act and work to do with ownership of the intellectual property in software of one of the NRMA companies. The defendants did not identify any particular amounts; indeed, their submissions (by AT, adopted by AAH and possibly by Mr Heydon) did not refer to any relevant evidence and were little more than as I have stated.
1543 It was accepted, as I understand it, that the relevant services were provided by AAH and AT as part of the work towards the implementation of the proposal. It is far from clear that, in the end, this dispute was maintained. The NRMA’s written submissions in reply included that “AAH Credit Act advice” had been the subject of agreement and adjustment to the amount claimed. There was in fact no designation H in the Scott Schedule. No one indicated whether the relevant work was done before or after 28 April 1994.
1544 Probably the dispute was not maintained, but it does not matter. As before, the question of enduring value is not the correct question. Would the services have been provided if the proposal had been put on hold? The defendants did not refer to any evidence, or any reasoning, by which that conclusion should be reached. As I have said, they did not identify the amounts. I do not think any allowance should be made.
1545 Special dispute J was concerned with expenditure incurred over the approximate period June 1994 - February 1995 inclusive for services provided by SOCOM Public Relations. The dispute as described by the defendants was “no recognition of requirement to give 30 days’ notice of calculation at significant timing dates”. The total amount was $18,822.50.
1546 AAH’s written submissions stated that it would address this dispute orally. It did not. Nor did AT or Mr Heydon. What the dispute was is unknown, it must have been abandoned, and no allowance should be made.
1547 Specific dispute K was described by the defendants as “no or inadequate supporting evidence”. Only one amount was given this designation, $90,029 incurred in favour of Customnet prior to 28 April 1994. It and the dispute are not material to the damages for Gambotto liability.
1548 Specific dispute M was concerned with some of the expenditure incurred for the services of S&S. A number of amounts in the Scott Schedule incurred over the approximate period July 1994 - December 1994 inclusive were designated M, totalling $880,487 and the defendants’ description of the dispute was that the amounts were “not reasonably paid, since the advertisements were the subject of challenge by the Trade Practices Commission or were the corrective advertising consequent on the settlement of the TPC challenge”.
1549 AAH specifically did not take up this dispute. AT said only that it had no responsibility for advertising which the TPC sought to challenge, or for the costs of its correction as a consequence of the compromise between the TPC and the NRMA. Mr Heydon said nothing on the matter.
1550 Despite the designation M of expenditure prior to that time, presumably the expenditure in question was that to do with the advertising which brought objections and corrective advertising in and perhaps after September 1994 (although whether the later designated expenditure was corrective advertising is unclear). It does not matter that AT was not involved in the advertising or its consequences. The expenditure on the advertising would not have been incurred if the proposal had been put on hold. That there would be such expenditure in the course of the proposal was plainly foreseeable. I do not think it was too remote because the initial advertising incurred the displeasure of the TPC, and there was a reasonable resolution of the TPC’s complaint, what happened being amongst the tribulations to be encountered in the course of endeavouring to implement the proposal. No allowance should be made.
1551 Of the potential $25,139,852, therefore, in my opinion a total allowance of $3,946,024 should be made. The recoverable loss suffered by the NRMA for Gambotto liability is $21,193,828. Interest will run on the relevant expenditure.
1552 AAH, AT, and Mr Heydon are each liable in damages to the NRMA for $21,193,828 plus interest. As between themselves, the defendants share this amount equally.
XII THE RESULT1553 It will be necessary for interest to be calculated, and no doubt the parties will wish to put submissions on costs.
1554 The proceedings will be stood over for mention at 9.30 am on 3 June 1999. No less than seven days prior to that date the NRMA should provide to the other parties its calculation of interest, and a statement of the order as to costs it seeks together with a brief outline of the reasons why that order should be made. No less than two days prior to that date the defendants should provide to the NRMA a note of any disagreement with the calculation of interest and the reasons for the disagreement, and a statement of the order or orders as to costs they seek together with a brief outline of the reasons why that order or orders should be made. Directions will be given on 3 June 1999 so far as a further hearing may be necessary to resolve disagreement in these areas, and a date for doing so will be appointed.
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