Pancontinental Mining Ltd v Goldfields Ltd

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3114 of 1995 GENERAL DIVISION )

BETWEEN :         PANCONTINENTAL MINING
  LIMITED
  (ACN 009 712 092)
  Applicant

AND :             GOLDFIELDS LIMITED
  (ACN 008 560 978)
  Respondent

CORAM :      TAMBERLIN J
PLACE :      SYDNEY
DATED :      31 MARCH 1995

REASONS FOR JUDGMENT

Introduction

On 1 March 1995, the respondent Goldfields Limited ("Goldfields"), served a Part A Statement on Pancontinental Mining Limited ("Pancontinental") which proposed takeover offers under a takeover scheme of all the issued shares in Pancontinental.

The consideration offered for the share purchase as set out in the offer is one Goldfields share plus $2.10 cash for every three Pancontinental shares. Goldfields is not presently listed on the Stock Exchange.

Goldfields is a subsidiary of Renison Goldfields Consolidated Limited ("RGC"), which is the holding company of a diversified mining and mineral exploration group, which carries on business in Australia, Papua New Guinea and other countries.

Pancontinental has applied to this Court under s 739 of the Corporations Law for a declaration that the Part A Statement dated 27 February 1995 does not comply with the requirements of s 750 of the Corporations Law, together with an order that Goldfields be restrained from making any offer as referred to in the Part A Statement.

Subsequently, on 14 March 1995, Pancontinental filed a Statement of Claim giving details of the grounds on which it challenges the Part A Statement. Goldfields has lodged a Defence which denies the allegations made in the Statement of Claim together with a cross-claim which (in the event of a contravention having taken place), seeks orders pursuant to s 743 of the Corporations Law ("the Law") relieving it of the consequences of any contraventions. Also, it seeks to supply to shareholders in Pancontinental further information under s 739.

Statutory Framework

The relevant provisions of the Law can be summarised as follows:

Section 615(1) prohibits the acquisition of shares which would, immediately after acquisition, entitle the acquirer to more than 20% of the shares in the target company.

Section 616 lifts this prohibition in relation to an acquisition of shares which occurs as the result of the acceptance of an offer made under a takeover scheme. Under s 634 offers to acquire shares are made under a takeover scheme if the requirements of Division 1 of Part 6.3 of the Law have been complied with. Under s 637 the offeror must serve on the target company a Part A Statement relating to the offers, together with a copy of one of the proposed offers to which the Statement relates. Section 750 of the Law imposes the requirement to furnish information in a Part A Statement ("Statement") as specified in that section.

For present purposes the relevant clauses of s 750 are as follows:

"17.The statement shall set out any other information material to the making of a decision by an offeree whether or not to accept an offer, being information that is known to the offeror and has not previously been disclosed to the holders of shares in the target company.

18. If the statement:

(a)is included in a class of Part A statements in relation to which regulations are in force for the purposes of this paragraph ...

the statement shall set out the prescribed matters and contain the prescribed reports..." (Emphasis added)

By regulations 6.12.01 and 6.12.02, offers in which the consideration includes shares must contain information with respect to matters that would be required to be included in the Statement by s 1022 of the Law, if the Statement were a prospectus.

Under s 1022(1) a prospectus must, in addition to the information specifically required in s 1021, contain all such information as investors and their professional advisers would reasonably require and reasonably expect to find in the prospectus for the purposes of making an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the corporation.

Four other provisions of the Law are relevant and relied upon by Pancontinental. The first is s 995(2) which provides that a person shall not in connection with the allotment or issue of securities or with any prospectus issued or notice published in relation to securities or the making of takeover offers, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. The second is s 765 which provides that when a representation is made with respect to any future matter the representation is taken to be misleading unless the person has reasonable grounds for making the representation. In a proceeding concerning a representation by a person concerning a future matter the person shall, unless evidence is adduced to the contrary, be deemed not to have had reasonable grounds for making the representation.
The third is s 739 which gives the Court power, in the event that a Part A Statement contravenes the Law, to make an order that the offeror shall supply the holders of shares in the target company such information as is specified in the order.

The fourth is s 743 which gives the Court power, in the event of a contravention, where it is satisfied that in all the circumstances the contravention ought to be excused, to make an order declaring any act, document or matter not to be invalid because of the contravention and to have effect as if there had been no such contravention. The circumstances to which the Court can have regard under this section include whether the contravention arose due to a person's inadvertence or mistake or to the person not having been aware of a relevant fact or occurrence, or to circumstances beyond the control of the person.

In summary the Law requires that information in a Part A Statement shall include:

×Any information material to the making of a decision by an offeree whether or not to accept an offer, being information that is known to the offeror and has not previously been disclosed to the holders of shares in the target company.

(Section 750 clause 17)

×All such information as investors and their professional advisers would reasonably require and reasonably expect to find in the prospectus for the making of an informed assessment of the assets, liabilities, financial position, profits and losses and prospects of the corporation ..."
(Section 750 clause 18 and s 1022)

In addition the Statement must not be misleading or deceptive either in a positive sense or by silence (s 995).

Case Law

The following general guidelines can be derived from the decisions of the courts:

Materiality is a question for the court although evidence may be tendered to enable the court to understand why certain matters are material or why they are not: ICAL Ltd v County Natwest Securities Aust Ltd (1988) 13 ACLR 129 at 137. It is a question of mixed fact and law and it depends on the facts and is to be determined on a case by case basis.

The underlying policy is the desirability of ensuring that the acquisition of shares in companies takes place in an efficient, competitive and informed market (Section 731 of the Law; Gantry Acquisition Corp v Parker & Parsley Petroleum Australia Pty Limited (1994) 51 FCR 554 at 564 per Sheppard J).

The framework of the takeover legislation assumes that criticism of the commercial desirability of the offer will be dealt with in the offeree's Part B Statement: QIW Retailers Ltd v Davids Holdings Pty Limited (No 1) (1992) 36 FCR 386.
The disclosure of speculation is not required and indeed is to be avoided. See Australian Consolidated Investments Ltd v Rossington Holdings Pty Limited (1992) 35 FCR 226 at 228.

There is a distinction between information which might be useful and relevant for a shareholder in the offeree company and information which is in fact known to the offeror at the date of the Part A Statement. See QIW Retailers Ltd (supra) per Heerey J at 391.

The object is to put shareholders in possession of the information required to enable them to make an informed and critical assessment of the offer and an informed decision whether to accept it. Information is material which could affect the shareholders' assessment of whether the offeror is likely to improve its offer, the prospects of a competing offer, and the prospects of the shares if retained. A relevant question is whether the information would assist shareholders to assess critically the attractiveness of the offer. See Samic Ltd v Metals Exploration Ltd (1993) 60 SASR 300 at 303 per King CJ. That case involved consideration of a Part C Statement but the principles are relevant for Part A Statements. Cf. the standard of "materiality" applied by the US Supreme Court, namely that an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it significant in deciding how to vote or whether the fact would have a significant propensity to affect the voting process. See TSC Industries Inc v Northway Inc (1976) 426 US 438. That decision related to proxy solicitation but the principle has been also applied to merger negotiations: Basic Inc v Levinson (1987) 485 US 224 at 231-232.

Consideration of a Part A Statement involves a question as to whether full and sufficient information has been given to enable the offeree to make a judgment concerning how valuable the acquisition will be to the offeror, and thus of making an informed assessment of whether the offeror may be prepared to pay more for the shares than its offer suggests.

The Court when asked to restrain the making of an offer needs to be astute to see that the breach of the Law relied upon is real and of substance. Otherwise, there is a risk that the public interest, which there is in a competitive market, will suffer. It must be tolerably clear that any breach of s 750, which is alleged to have occurred, involves the withholding of relevant information from shareholders. See Gantry (supra) at 564-565 per Sheppard J.

Section 739 empowers the Court to require an offeror to send with a Part A Statement some document which, though not amending it, contains statements intended to clarify or amplify statements in it or to remove ambiguities or uncertainties. The section lends itself to a liberal construction. It is an enabling provision and is part of, and central to, a statutory scheme which is designed to facilitate the making and consideration of takeover offers and the making of informed decisions in a commercial environment which is often volatile and requires dispatch and efficiency. See Target Petroleum NL v Petroz NL (1987) 16 FCR 1 at 13, which was concerned with s 47 of the Companies (Acquisition of Shares) Act 1980 (Cth) (a precursor to s 739).

10.Materiality of information, where there is a complex proposal, involves difficult questions of commercial judgment and matters of degree as to future conduct about which there can be honest and reasonable differences of opinion. It is necessary to bear in mind that the Statement should illuminate the issues rather than confuse them by canvassing all the pros and cons of every possibility. The objective is to present a document which can be understood by members of the public and which does not confuse. This includes a considerable degree of selectivity designed to confine the information to that which is really useful. See Fraser v NRMA Holdings Ltd (1995) 15 ACSR 590 at 603 (FFC). An avalanche of trivial detail is to be avoided. See TSC Industries Inc v Northway Inc (supra) at 448.

11.Finally, the Part A Statement must be read fairly as a whole and not in discrete parts or selectively.

In the present case the Part A Statement in question is a substantial and complex document which extends to well over 250 pages. It was claimed to be one of the most complicated, if not the most complicated, Part A Statement delivered to date in this country in relation to a takeover proposal. Indeed, the Australian Securities Commission ("ASC") have described the related and substantially similar RGC prospectus of 219 pages as perhaps the largest prospectus ever lodged with the ASC, warranting examination by the "whole of the team".

Alleged Defects in Part A Statement

The Statement of Claim filed by Pancontinental draws attention to a number of matters which are said to invalidate the Part A Statement and amount to contraventions of the Law. Many of these matters overlap and it is convenient to deal with them in groups.

Discounted Present Value or Earnings Information - s 750 cl 17

The claim is that it is necessary in order to satisfy s 750 to provide either a discounted net present value of the future cash flows of the assets of Goldfields or a forecast of earnings and dividends of Goldfields post-acquisition.
Mr Robert Duffin, the expert witness called for the applicant, said in his affidavit that one or both sets of information are necessary to enable a proper decision to be made whether to accept the offer, and in order to make an assessment of the prospects of the new entity. This is all the more necessary where the company has no "track record" in the market or any earnings history.

The applicant points out that the Statement indicates that the directors of Goldfields themselves have relied on a discounted cash flow valuation, in relation to the valuation of the gold assets of Pancontinental, which has both gold and non-gold assets, resulting in a valuation of $165 million. This is made clear in the Statement at p 144 in the report of the investigating accountants, Messrs Coopers & Lybrand (Securities) Limited.

It is submitted that the directors of Goldfields must, in turn, have had available sufficient information to make such an analysis for Goldfields, and therefore that they must be able to make a reliable discounted cash flow valuation ("DCF") for the merged companies. Accordingly, it is said to follow that since such information is often given, and was available to the directors, then it should have been given in the Part A Statement. Such information clearly would be material to the consideration by an offeree whether to accept, refuse or negotiate for a better price.

Further evidence was led from Mr Duffin, who is an experienced mining consultant, that the Part A Statement did not contain any DCF analysis of the total assets of Goldfields, nor did it contain any earnings forecast. This was common ground.

His evidence is that a DCF analysis is the best way to value mining investments, but if one is not provided, it is essential that an earnings and dividend forecast be provided. His understanding is that professional advisers would require such material in order to properly advise a shareholder in Pancontinental as to the offer. He points out that there is no prediction as to future dividends or earnings in the Statement.

In a supplementary affidavit, he exhibits eight recent prospectuses issued over the past two years by producing mining companies. His examination of these shows that in one instance only was there a DCF analysis, namely Western Metals NL, but that in all eight there were earnings forecasts for either the current year in respect of four companies, or for 2 years in respect of the remaining four. In my view, the inclusion in each of these prospectuses of earnings forecasts affords clear and substantial support for the view that earnings and dividend forecasts provide material and information which investors and their advisers would reasonably require and reasonably expect to find in such documents for the making of an informed assessment of the prospects of the corporation.
In cross-examination, Mr Duffin agreed that on past practice a DCF analysis was not something which had been regarded as necessary information, provided that an earnings and dividend forecast is included. He also agreed that a meaningful DCF analysis would effectively require that a forecast of earnings over ten years should be made, with a large number of critical assumptions and which involved considerations which were inherently difficult to predict, such as gold prices, exchange rates, political risks in some cases, production costs and many others. Dependent on the assumptions made, a DCF analysis was capable of giving a wide range of variations. One example given related to Newcrest Mining NL, where a series of DCF analyses by different brokers gave values ranging from $2 to $7 per share.

The Part A Statement, in his view, did not place him in a position of being able to form a view with any certainty as to the gold production of Goldfields for 1995-1996. He said that an earnings forecast should be for one or two years at least, based on the eight companies he examined.

His evidence was that on the information in the Part A Statement there was not sufficient information to deduce an earnings forecast, although on certain assumptions he could "derive" an earnings per share for Goldfields for the next two years. Mr Duffin made it clear that he was unwilling to make the assumptions necessary from the Part A Statement, because it might lead to a misleading result. He agreed, however, that he was suggesting that Goldfields should in effect make some at least of these assumptions to produce an earnings forecast.

Mr Roger Massy-Greene was the expert called by Goldfields. He is a merchant banker and managing director of a corporation which specialises in mining finance.

His evidence was that it would be "helpful" but not essential, to have either or both a DCF analysis or a forecast of Goldfields' earnings in order to form an assessment of the value of the shares in Goldfields post-acquisition. If this information was not available, but information about reserves, resources and likely future operating costs and gold production were available, such information would be sufficient to enable him to form a reasonable view about the likely market value of the shares.

He considered that whilst the usefulness and accuracy of a DCF analysis depends on the reliability of the assumptions made to prepare the forecasts, such an analysis can, in some circumstances, provide reliable results. He agreed that he was not aware of any recent initial public offering of shares in a new mining company which did not include an earnings forecast. Nevertheless, he said, in the context of the Goldfields takeover, not all of the information required is publicly available. Even without the information necessary for an earnings forecast, he says a competent professional adviser can make an assessment as to likely market capitalisation, based on matters such as production forecasts, cash operating costs forecasts and the reserve and resource base. However he cautions that earnings information is less reliable than cash flow information because earnings depend on amortisation and depreciation.

He agreed, however, in cross-examination, that if he had the information to prepare a DCF analysis he believed it would be "helpful" information provided that the constituent assumptions were made clear, and that it is a very useful method of arriving at a valuation.

The valuation literature referred to in the hearing indicates that the use of net present value ("NPV") in the gold sector is controversial and that rules of thumb are sometimes used to assist in its applications. One reason for this is given as the "premium" component to the underlying NPV of assets. Other limitations are perceived to be the reliability of the data sources used for cash flow forecasts, the proper discount rate and the treatment of debt. See "Broker's Rules of Thumb for Mineral Valuation: A Focus on Gold Equities", C K Baker & S F Dodd, a paper given at the Mineral Valuation Methodologies Conference, October 1994, Sydney at p 139, and "A Broker's Overview of Mineral Valuation Methodologies", S D Lee, a paper also given at the same conference, at p 263. In the latter article the author states that cash flow derived valuations mostly based on DCF calculations remain the preferred methodology whenever reliable cash flow projections can be made. See also "Valuation of Businesses, Shares and Other Equity", Wayne Lonergan, Longmans 1992, at pp 45-53, 244-245.

Mr Massy-Greene also agreed that he had included both a DCF analysis and earnings forecast when acting as an independent expert considering the fairness of consideration payable by Pasminco to CRA and North Broken Hill Peko Limited and their subsidiaries prior to a proposed issue of shares. In that case, he added, the forecast was more difficult because it involved a lead zinc company and not a gold company. His qualification however was that a DCF analysis and earnings forecasts can provide helpful information where the material necessary to formulate them is available. In the present case I am not satisfied that sufficient reliable information was available to Goldfields or RGC so as to enable it to prepare a useful DCF analysis of Goldfields post-acquisition.

In relation to the unreliability of the presently available information, it is significant that both Mr Massy-Greene in his evidence in chief, and Mr Duffin in cross-examination, agreed that more reliable information will become available, as to the valuation of Goldfields shares, when the Pancontinental Part B Statement comes out. At transcript pp 102-3 the following exchange took place with Mr Duffin:

"Q."Now, the difference between $1.75 and $1.80 is what one might call the arbitrage cost - it is a cost of buying into Pancontinental so you can accept this offer. What I want to suggest to you is that the figure which the market presently puts on Pancontinental of $1.75 is indicative of the fact that the market is saying that the value of these Goldfields shares when issued will be at least $3.30?

A.I disagree. I think a more reliable way of deriving the answer to the valuation of both Pancontinental shares and Goldfields shares is to wait till the Part B comes out.

Q. Is to what?

A. Wait till the Part B comes out.

Q.I agree with you because then when the Part B comes out there will be information provided by the Pancontinental directors?

A.Yes.

Q.And they will be able to contradict anything which is in this statement which they consider to be misleading?

A.Yes

Q.And they will be able to fill in the gaps of information which is not publicly available to the present directors of Renison?

A.Yes.

Q.And once that has happened the shareholders in Pancontinental will be able to make a fully informed view as to what course they think they should take, having regard to the information which is provided to them by their own directors and also to the information which has been provided in this Part A?

A.They will certainly be in a position to - a better position to make that decision than based on the information in the Part A. The reason I ---

Q.You have got both cases being presented have you not?

A.Yes."

There is no evidence that there has been a consistent practice of providing a DCF analysis in relation to prospectuses issued by mining companies. Indeed the evidence of Mr Duffin is to the contrary. This may be explicable by the number of open-ended and obviously uncertain assumptions which need to be made in the case of mining company operations as opposed to industrial companies. However, the evidence does indicate that a DCF of a gold company may involve fewer variables than in the case of a "mixed" mineral company.

Therefore, I do not consider that such a DCF analysis needs to be included in the Part A Statement in the present circumstances on the evidence presently before me. I do not think that it would be of such material assistance to an offeree, in making a decision whether to accept the offer, as would require provision of such an analysis.

However, I am of the view that Pancontinental and its offeree shareholders are entitled under the Law to the benefit of an earnings forecast over, at least, a two year period. The fact that each of the recent eight mining company prospectuses, referred to by Mr Duffin, contain earnings forecasts supports the view that such forecasts are material information and are regarded as such by mining companies and their advisers. Such a forecast would be likely to be of real and material assistance to show offerees what they may receive. Even if it is based on a number of assumptions, these assumptions and qualifications can be spelt out, as was done, for example, in the Western Metals NL, the Australian Resources and the Aurora Gold Ltd prospectuses exhibited to the affidvait of Mr Duffin. Any assumptions as to an earnings or dividend forecast, of course, will operate over a much shorter term than will the assumptions necessary to found a a more comprehensive DCF analysis.

The thrust of the cross-examination of Mr Duffin was directed to suggesting that an informed investment adviser, such as Mr Duffin, would be able to form an informed opinion as to what would be the prospects of Goldfields post-acquisition on the information scattered throughout the prospectus if an exhaustive correlation exercise was performed. It was not directed to suggesting that such a forecast could not be made at all. Mr Duffin disagreed with the suggestion put to him. However, if the necessary information is to be found in the Statement as the respondent suggests, then one might ask why Goldfields has not drawn it together and clearly set out the result in an appropriate and prominent section of the Statement. Of course, some assumptions will have to be made, but they can readily be stated and cautionary warnings sounded as to the order of accuracy or dangers inherent in such an earnings and dividend forecast.

An offeree, when faced with a complex and lengthy prospectus, such as the present document, should not have to forage through the whole prospectus, seeking out fragments of information in order to piece together the assumptions and construct a forecast of earnings, from a number of disparate and indirect scattered references in a 250 page document. If the information is there the offeror should perform the exercise and not leave it to the offeree to make assumptions. Such a forecast by Goldfields would affect any decision whether to accept the offer or seek a higher price. The offeree is entitled to have the forecast clearly set out, in a lucid and direct form, in a prominent part of the Statement, so that attention can be focussed on the critical matter of earning potential. Not every offeree will have a sophisticated investment consultant at hand when perusing the Statement to perform these arcane exercises.

Qualifications and assumptions can be set out by the offeror to explain or qualify the forecast as has been done in the prospectuses exhibited. It is clearly of importance for a shareholder to have the benefit of the offeror's estimate as to future earnings. Whilst the position will no doubt become clearer, and any assumptions to be made will be able to be more closely assessed and evaluated after the Part B Statement has been provided, it does not follow that an earnings forecast is not material and therefore unimportant for inclusion in the Part A Statement. As the High Court pointed out in Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co. of South Australia Ltd (1947) 74 CLR 358 at 362, in valuing the shares of a company, its earning power is one of the main items to be taken into account.

The Confidential Material

Included in the material presented to me is a miscellaneous bundle of documents produced by Goldfields which became exhibit "C". This bundle is entitled "Pancontinental Bundle of Confidential Documents", and comprises Board papers of RGC, economic assumptions, RGC's weighted average cost of capital and financial statements, correspondence with Bain and Company, correspondence and reports by Macquarie Corporate Finance Limited, the advisers to RGC, together with calculations, internal memoranda of RGC principally in the period January and February 1995, production and reserve forecasts for gold, economic analyses, NPV valuations of Pancontinental, financial statements, return analyses, and data concerning Porgera and Pancontinental, adjustments and financial statements for the RGC group.

There was some cross-examination of Mr Massy-Greene in relation to certain parts of some of these documents, namely documents comprising MFIs 4, 5, 6 and 7 which included cash flow documents relating to Porgera, Pancontinental and the Henty project.

As to the remainder of the documents in that exhibit, I did not have the benefit of hearing cross-examination or evidence in chief of any expert, board member, or other witness by way of explanation of them. This is important because a great deal was sought to be derived in address, particularly by the applicant, in relation to the contents of these documents on their face value. It became evident that they were not, for the most part, documents which could readily be taken at their face value, in the sense that they were readily to be understood, even by an expert such as Mr Massy-Greene.

A number of these documents involved detailed tables and complex calculations and comparisons of results and data with respect to a number of companies relevant to the takeover scheme. In the absence of any expert analyses of these documents it seems to me that they must be approached with considerable reservations as to their importance, reliability and indeed relevance. Some of the calculations referred to were said to be based on "hurdle" figures, primarily directed not to market valuation estimates, but rather to information and assessments for internal use only. One aspect these documents made quite clear was the extremely wide spectrum of predictions as to valuations, premiums, and capitalisation of gold mining assets and companies.

The difficulties with this material are illustrated by the cross-examination. In the course of examining one of these documents, MFI 7, which is a DCF in respect of Porgera, the evidence of Mr Massy-Greene went this way:

"Q. We have looked at the 7th page and you told us that is a DCF calculation?
A.Yes, right.

Q.Are you able to tell us the nature of the material contained in the balance of that document?

A.Well, there are a number of assumptions about commodity prices on the first page and there is a reference to the weighted average cost of capital on line - I think it's 29 of my copy, it's not clear which suggests that this might not be a conventional DCF analysis because the weighted average cost of capital may have been used for hurdle rate purpose or establishing hurdle purposes rather than for measuring a net present value per se.

Q.Sorry for establishing what?

A.Well, there is - a discounted cash flow analysis doesn't necessarily arrive at a net present value and all net present values aren't equal so it might be that in one discounted cash flow analysis you use what you believed (sic) is the appropriate cost of capital to arrive at the net present value of the asset. You could use exactly the same set of numbers other than a different discount rate and if you used the weighted average cost of capital then in my experience a number of companies use, what they believe to be their weighted average cost of capital, not to arrive at what they believe is the value of the assets in a market value sense but really to establish comparative performance between assets, so that the same cost of capital is used throughout the business and since different assets normally attract different costs of capital depending upon the riskiness of the asset, it would follow that the use of a weighted average cost of capital in this case suggests that this document may have been used for a different purpose other than arriving at an estimate of the market value of the asset. Continuing the question or the answer I beg your pardon; there's a statement of depreciation rates, would appear to be production assumptions with respect to the mining asset noted there, a set of operating costs, capital expenditure expectations, depreciation calculations which are set out on a tax basis. It's very difficult to know precisely what's going on there, those are part of the very nature of those calculations are very complicated ones and it wouldn't be possible to be sure exactly what's - reliably what's been done there. There is a page of production assumptions with respect to the mining operation next noted including - no, it's just basically operating assumptions. Once again a depreciation - a set of what appear to be depreciation calculations or
rather the results of depreciation calculations stated on a tax basis ...."

Mr Massy-Greene's evidence continued in relation to the Pancontinental NPV valuation and the other documents which are dated 24 February 1995 in exhibit "C", and which are respectively described as "Discounted Cash Flow - Porgera", "Porgera Sale" and "Discounted Cash Flow - Henty."

"Q.Mr Massy-Green (sic) on the basis of what you have now taken us to in the balance of this document can you agree that the document appears to be an (sic) DCF exercise in relation to whatever is described as Alpha Gold?

A.Yes it is. Yes it does appear to be.

Q.Can I ask you this,are you able to give any indication as to whether a sort of exercise that you would carry out in relation to these assets would result in a figure anything like the figure that is there?

A.I have absolutely no idea.

Q.What about the earlier documents that you looked at, the documents that were marked 4, 5 and 6 for identification?

A.With regard to the same question?

Q.Yes?

A.I simply cannot answer the question; I am unable to say what my - what answer I would arrive at.

Q.Are you able to say from what you have seen from these
documents that they are generally in accordance with what you understand the market approach to a DCF would be?

A.Look they are generally in accordance with DCF analysis but more than that I really can't say. I would need to see the detailed calculations that lie behind each of the documents to know what the answer to the question - to answer the question.

Q.You would agree with this, would you, that there is nothing in the documents that indicates that they are in any way divergent from what you understand the general market approach to a DCF exercise would be?

A.I don't think I've studied them with enough rigour to give you a reliable answer to the question but on the face of it I think I would agree with your answer, your question, yes, which is that - your proposition - thank you....."

The above answers indicate, in substance, that the witness was not able to tell from the documents placed before him, with any degree of reliability, what the figures in fact represented. To a large extent the same problem is present in relation to the Board papers, reports and calculations and communications contained in the rest of that bundle. It has not been established, in my view, that the material contained in that bundle supports the view that there was sufficient material before RGC and Goldfields or their advisers to enable the formulation of a reliable DCF in respect of Goldfields' post-acquisition value, which would be material and of assistance to proposed offerees. A lot of the material presented ranges of possible results and there were a number of inconsistencies which could ultimately be explained or clarified, perhaps, with the guidance of oral evidence. But no such clarification was available.

The applicant also sought to rely on the exhibit "C" documents to establish that the market capitalisation of Goldfields' shares post-acquisition was nothing like the amount of $830 million, referred to at page 25 of the Part A Statement. I am not satisfied that this has been shown. However, what is made clear in that documentation is that the capitalisation figure of $830 million is based squarely on the convertible note issue price as indicated by the underwriters.
Conclusion on DCF and Earnings Forecast

My conclusion on this aspect of the Statement is that a DCF analysis in the present case is not required, but that an earnings forecast for a two year period at least is a material matter which should be included in the Part A Statement in the present case. It has not been included. This is not to say that such information is essential under s 750 in every case as a matter of law. What is material in a takeover scheme is a matter for judgment and assessment in the light of all the evidence, facts and circumstances in each particular takeover context and this will necessarily differ from case to case. Differing circumstances can include, for example, matters such as relevant public information available, material already disclosed by the offeror, the activities of the target company and the location of those activities; and the probable knowledge or awareness of the shareholders in the target company as to particular subject matters.

Non-Gold Assets of Pancontinental

Several matters are raised under this topic. They relate to the way in which the non-gold assets of Pancontinental are proposed to be dealt with under the scheme.

One major purpose of the takeover is to achieve the result that the exclusive business of Goldfields and its subsidiaries will be in effect as a "gold enterprise" engaged in the exploration, production and sale of gold. Since Pancontinental has non-gold assets it is necessary to hive them off.

In the event that there is a 100% acquisition of the shares in Pancontinental by Goldfields, the proposal is to sell all the non-gold assets to RGC at fair market value in accordance with the Bidding Agreement definition of price. There is no estimate given in the Part A Statement as to what is considered is to be a "fair market value" for those assets.

The Bidding Agreement provides that RGC will lend Goldfields the funds to meet the cash component of the consideration for the takeover. The cash component is 70 cents per share. RGC will lend those funds to Goldfields interest free. The scheme is that Pancontinental will sell its non-gold assets and the proceeds of the sale by Pancontinental will be distributed to Goldfields, which will be used by it to satisfy its obligation to repay RGC.

In the event that there is not sufficient funding from the proceeds of the sale of Pancontinental's non-gold assets to repay RGC, then Goldfields will not have to repay the balance.

However, the Bidding Agreement, which is summarised in the Statement, provides that in consideration of RGC giving an indemnity to Goldfields then if the proceeds from the sale of Pancontinental non-gold assets exceed the debt to RGC, the proceeds for the sale by Pancontinental will pass through Goldfields to RGC, and it is speculated on the part of Pancontinental that these funds may possibly exceed the debt. Pancontinental submits that if this possibility occurs then the reference to "fair market value" in the Statement may prove to be illusory because there is the chance that the sale proceeds in excess of the debt, due from Goldfields to RGC for the loan, may go back to RGC, which is the buyer of the assets.

There are three complaints which are said to emerge from this scenario. First, that there is no information in the Statement as to RGC's assessment of the value of the non-gold assets, to see whether there will be a transfer at a price less than "fair market value" in effect. Second, that there is no evidence of what RGC would be prepared to pay for the Pancontinental non-gold assets. Third, that the reference to fair market value is illusory and misleading.

I am not satisfied on the evidence that RGC has firmly decided on a value for the non-gold assets or formed a definite view as to the price it is prepared to offer as a fair market value.

As to price for the non-gold assets it must be noted that the Bidding Agreement provides:

"Price means the fair market value as agreed between the parties having regard to the liabilities, if any, being assumed under sub-clause 5.3 of the Non Gold Assets provided that the terms and conditions of the sale to RGC are no more favourable to RGC than if Goldfields were dealing with RGC at arms length. If the parties cannot agree on the fair market value the matter shall be referred to an Expert for determination in accordance with sub-clause 7.3 except the reference to "allocation" shall be deemed to be a reference to the "fair market value".

A copy of the Bidding Agreement of 23 February 1995 between RGC and Goldfields is available for inspection without charge. See Part A Statement pp 185 and 202. There is no suggestion that it is not accurately summarised at pp 183-185.

It is clear from the above definition that the price must be arrived at having regard to the fair market value and must not be more favourable to RGC than if Goldfields is dealing with RGC at arm's length. There is thus prescribed an objective standard by reference to which the price can be fixed. This is reinforced by the provision for referral to an expert for determination in the event of disagreement.

If the parties agree to a price which is not objectively a fair market value, then the agreed price is open to challenge and the shareholders are protected. In my view description of the mechanism of an objective fair market price coupled with the provision for determination by an expert in the event of dispute, provides sufficient relevant and material information for a shareholder to evaluate this part of the offer. The Part A Statement refers to fair market value at paragraph 1.16.1(b) and to "fair market value" and "arm's length" in the summary of the Bidding Agreement at p 184 of the Statement.

In the event that Pancontinental is not a wholly owned subsidiary, it is made clear that a "best price" tender would be organised using an independent merchant bank to arrange the sale process in order to secure the best price for the assets. Goldfields is therefore clearly leaving the price determination to be determined objectively by the market, and this is made quite clear in the Part A Statement. See Statement, para 1.16.2.

On the approach taken to the valuation of the non-gold assets the price will be determined by the market at the relevant time. The views of Goldfields as to what it might be prepared to consider offering are not matters material to a shareholder in making his or her decision. That figure may in fact bear no relation to the fair market value of the non-gold assets at the relevant time and be a matter of sheer speculation at this stage. The shareholder is informed by the Part A Statement as to the prescribed objective basis of the price calculation. In my view that is sufficient. No doubt when the Part B Statement comes out, a more reliable figure may be available for the offerees and their advisers to consider. This accords with the evidence of Mr Duffin to the effect that a more reliable way of deriving the valuation of both Pancontinental shares and Goldfields shares is to wait until the Part B Statement comes out. When this takes place then there will be information provided by the Pancontinental directors, who will be able to contradict anything in the Part A Statement which they consider misleading and they will be able to fill in any gaps in the information which is not presently publicly available to the directors of RGC and Goldfields. Once that has occurred the shareholders in Pancontinental will be in a better position to make the decision based on the information in the Part A Statement.

My conclusion on these complaints is that there is no material omission in the Part A Statement with respect to the value of the non-gold assets and their disposition. Nor is that part of the Statement dealing with the fair market value misleading or deceptive. The process is sufficiently spelt out in the Statement for examination by the offerees.

Complications and Procedures if less than 100% Acceptance

It is claimed that the Statement does not set out "with sufficient clarity" all the steps that would be involved and the risks, legal and otherwise, which might arise as to whether the proposals could be carried out in relation to disposal of the non-gold assets. This is of central importance, it is said, because the main aim is to get rid of the non-gold assets and create an exclusively gold company, thereby attracting the premium which attaches to an all gold company.

It is clear that the Statement does contain information sufficient, in my opinion, to enable an offeree, to focus on and comprehend the possible problems pointed to by the applicant in this respect and I consider that there has been sufficient disclosure of these matters and the contingencies in the Statement.

The Statement, at pages 10-12, in my view, adequately covers these matters. In particular, there is specific reference to the fact that:

"The preferred option cannot be determined until Goldfields has been able to review Pancontinental's internal financial and accounting records to determine the financial and income basis of the subsidiaries and their underlying assets. Goldfields has not examined and has no knowledge whether and to what extent Pancontinental has entered into contractual arrangements which may give pre-emptive rights to its joint venture partners regarding the Pancontinental Non Gold Assets. Nor is Goldfields able to determine what stamp duty liability may be incurred in selling the Pancontinental Non Gold Assets. Although Goldfields expects to be able to cause the disposal of the Pancontinental Non Gold Assets, this cannot be guaranteed." (Page 12)

The Statement therefore does address the question of the problems in the evaluation of the Pancontinental non-gold assets. This material signals to the offeree that much of the material relating to Pancontinental's non-gold assets is not known to Goldfields and that the destination of the gold assets is not certain. No guarantees are given and this is made clear. The language is clearly that of expectation or intention and it does not seem to me that the matter of the value or proposed price of the non-gold assets can, or needs to be, pursued any further in the Statement. This is a matter which will no doubt be canvassed in the Part B Statement when it issues from Pancontinental.

As to the complexities in the event that all the shares are not acquired, the Statement squarely raises these problems and discusses them in detail in paragraph 1.16.2 and pages 11-12.

Financial Assistance

Further, in relation to the non-gold assets of Pancontinental, it is suggested that the funding involves the giving by Pancontinental of financial assistance, for the purchase of its shares and that this may be a breach of s 205 of the Law. This is a matter which it is said has not been addressed in the Statement.

There is no substance in my view in this submission. In these proceedings the relevant question is whether this possibility should be raised in the Statement. I do not think it needs to be raised by the offeror. The procedures and lines of action proposed to be followed have been set out and if the target company or the offerees consider there is a problem then it should be raised in the Part B Statement or in legal proceedings at the appropriate time. At present there is no declaration sought in relation to the proposal on such a legal basis. For Goldfields to embark on an anticipatory defence of such a possible claim would be to speculate and further complicate the Statement unnecessarily. Moreover, it is apparent that RGC and Goldfields will act after taking appropriate legal and commercial advice.

Section 205(8)(a) and (b) exclude from the prohibition the payment of a dividend by a company in good faith and in the ordinary course of commercial dealing, and also a payment made by a company pursuant to a reduction of capital under s 195. These are two options, which are set out at pp 10 and 11 of the Statement and the possible necessity for meetings and Court appraisal, are spelt out. There is no commitment to any of these options.

The various options which Goldfields is considering for the disposal of Pancontinental non-gold assets, are set out at 1.16.2. at pages 10 and 11. Under 1.16.3 it is made clear that a decision as to which option is chosen has not been made and that it would only be made after taking the advice of legal and financial advisers, and in accordance with all applicable legal requirements, listing rules and directors' fiduciary duties. It is therefore somewhat premature to speculate as to the possible problems which may arise if a particular option is adopted.

There is no contravention of the Law made out in respect of this matter in my opinion.

Consent of Underwriters

One further submission of the applicant must be noted. This is that at page 198 of the Statement, there is a covenant given by each of RGC and Goldfields under the underwriting agreement, that each offer made by Goldfields for shares in Pancontinental will contain a term to the effect that the offer and that any contract resulting from its acceptance is conditional upon Goldfields receiving valid acceptances of offers representing in aggregate not less than 90% of all shares. This condition may be waived or varied with the prior written consent of the underwriters.

The submission is that although the Statement discusses in a variety of places what will happen if Goldfields acquires more than 50% and less than 100%, there is said to be no explanation that the terms of the underwriting agreement effectively confer on the underwriter the power to control whether or not the takeover will proceed in circumstances where Goldfields achieves less than 90% acceptance.

There is in my view no substance in this submission. There are references in the Statement to the underwriting agreement. The covenant in question is set out in the comprehensive summary of the underwriting agreement at page 198. The underwriting agreement itself is available for inspection without charge as set out at p 202.

In my opinion there has been sufficient disclosure of the rights of the underwriter in relation to waiver of the condition of 90% acceptance. I do not think it necessary to provide any additional explanation or discussion of this provision in the Part A Statement supplementary to that which is already contained in it and the documents made available under it for inspection.

Part 3.2A of the Law

A submission is made that as a consequence of the repayment by Goldfields to RGC of the funds lent to purchase Pancontinental shares there is a financial benefit to Goldfields which will require approval by a resolution of Pancontinental shareholders at which Goldfields may not vote. Accordingly, it is said, this matter should be discussed in the Statement.

The Statement states that any sale will be at fair market value based on an arm's length transaction. Moreover, any possible benefit which may flow to RGC is the result of the funding of the cash component and the repayment terms will arise in consideration of RGC giving the indemnity referred to at p 183 in the detailed summary of the Bidding Agreement there given.

The need for shareholder approval and the contingency that Goldfields would not be able to vote is sufficiently adverted to and raised at pp 10 and 11. I do not consider that this matter need be further elaborated in the Part A Statement.

Section 243N (1) provides in substance that a public company may give a financial benefit to a related party on terms and conditions no more favourable than those on which it is reasonable to expect that the company or entity would give the benefit directly, if dealing with the related party at arm's length in the same circumstances. Under the Bidding Agreement in the present case, particularly in respect of the definition of price which has already been referred to, it is made clear that the sale is to be at fair market price as negotiated between parties at arm's length.

The available options are that a director can seek independent advice as to the company's position under this Part, or for more abundant caution may decide to call a meeting.

The question before me is whether the Part A Statement sufficiently discloses the course of action to be undertaken in giving effect to the takeover scheme. The Statement does not have to spell out all the possible legal procedures that may need to be followed in every set of possible circumstances. The target company and offerees who wish to seek legal advice as to the way the takeover is to be implemented can do so.

I think that the Part A Statement in the present case does sufficiently set out the course of action to be followed in the implementation of the takeover to enable Pancontinental and offerees under the scheme to seek meaningful legal advice in relation to such action.

In my view there is no contravention of the Law in respect of Part 3.2A.

Papua New Guinea - Risks

It is also to be noted that at these pages the operation of and compliance with Listing rules 3J(3) and 3S(2) are considered and discussed.

The applicant points out that Pancontinental has no involvement in mining operations in Papua New Guinea at the present time. Hence its shareholders have no particular reason to make themselves aware of these risks. Goldfields, on the other hand, has a very substantial portion of its present gold operations in Papua New Guinea.

The applicant says that there are greater risks in Papua New Guinea mining than in Australia. It is said that the risks should be spelt out in detail, and they have not been. Examples given are the extent to which the underground mining is more complex and technically risky than open-cut mining, due to the fact that a substantial part of Papua New Guinea Porgera Mine is underground. Other risks are referred to, such as the Papua New Guinea economy, possible challenges to the Papua New Guinea Mining Act, the applications of legislation relating to fairness of transactions, risks arising from civil unrest, risks of expropriation, changes in
taxation, claims by owners of the land for its return and foreign exchange.

Paragraph 2.14 of the Statement refers to investment risks. The only matter referred to in that paragraph in relation to sovereign risk is a one line statement.

"× Offshore exploration and mining activities may be subject to political risk".

That of itself is clearly inadequate.

However, in the report of the independent geologist and engineer, Gilfillan Associates Pty Ltd, at page 87 of the Report, the following relevant statements occur in relation to the Porgera Mine.

"Sovereign Risk

It is not possible to place a specific cost factor on the various risks which arise from the operation's location in the PNG Highlands. These risks, grouped together, arise from the possibility of civil unrest and lawlessness, legislative or political action, tax and tariff changes, strikes, etc. We were impressed by the policy of the Porgera JV which is putting considerable effort into developing sound community relations, building up a strong security section and generally being a model "corporate citizen". This policy should minimise the sovereign risk. Current Administration costs are high, reflecting the effort put into this programme. We believe these costs will remain high, with the possibility for some future increase, in real terms....

Kina Exchange Rate
The Porgera JV's performance should not be greatly affected by fluctuations in the value of the Kina, as most supply costs are related to US dollar values."

This material is very general and is short on specifics.

Mr Duffin points out that while 79% of Pancontinental's total production is from open-cut operations, only 24% of Porgera production was from open-cut mining. The balance is underground mining. He says this is a fact which should be pointed out as it is relevant to the matter of the extent of technical risk in extraction and production. I agree that this is material.

He also refers to the specific risks of mining in Papua New Guinea and states that these risks in his view are relevant to his assessment as an investment adviser of the prospects of Goldfields and also as to a consideration whether to accept the offer. He says that he needs more information as to particular risks associated with the mining operations at particular mines and risks arising from the country of operation. Specifically, he says, there is no elaboration on the "industrial dispute" mentioned at page 36 of the Statement, nor is there any discussion relating to the causes and impact of the explosion at Porgera in August 1994 referred to at p 37, when a number of persons were killed. Porgera's resources are estimated as at 30 June 1994, to be 3.7 million
ounces and the reserves at 2.36 million ounces. Therefore, it is a major asset and of critical importance.

The Statement does not satisfactorily raise the potential problems of the Papua New Guinea mining operations, even when read as a whole. In my view the matters raised by the applicant are material and ought to be properly disclosed in paragraph 2.14 under the heading "Investment Risks". It is neither satisfactory nor sufficient to make a bald general assertion such as that on page 26 that "offshore exploration and mining activities may be subject to political risk". That part of the Statement clearly calls for more detailed discussion. It should not be necessary to go through the whole statement to cull out and piece together the picture. Even if this were done the picture would be quite inadequate and poorly focussed.

It was suggested in cross-examination that the unrest and risks in New Guinea were the subject of "wide-spread publicity" in the Australian press, and accordingly, offerees would be most likley on notice of this matter. This is an extremely unsafe assumption to make in my opinion and can only have peripheral weight, if any at all. The question is whether the Statement is sufficient, not whether shareholders can be taken to examine certain newspapers. If Pancontinental shareholders have no operations in New Guinea at the present time, it cannot be readily assumed that they are up to date with their knowledge of the political and investment scene in Papua New Guinea. Neither do I consider that the material at page 87 is adequate to flesh out the risks and dangers.

Indeed a number of documents contained in Exhibit "E" refer to civil unrest in Papua New Guinea at Wau in particular, and over a period of time between May 1993 to August 1994. Moreover, the Department of Foreign Affairs and Trade in considering Papua New Guinea in its September 1994 publication, refers to the need to maintain investor confidence in the industry as a result of investor unease over the Porgera equity renegotiation and CRA's withdrawal from Mt Kare. This material highlights and reinforces the necessity for a detailed description of the risks especially those which have occurred at sites where Goldfields has an interest, together with any views which Goldfields has in relation to those risks.

Attached to the second affidavit of Mr Duffin is a summary of the market gradings for insurance purposes put out by the Export Finance Insurance Corporation ("EFIC"). It refers to political risk and to the fact that Papua New Guinea has recently been re-graded. If one looks at the gradings attached to that circular, it can be seen that Papua New Guinea is in the "D" classification, which, in the international arena, is a comparatively high risk grade. Australian territories are rated "A". This notification was issued by EFIC in its circular of 1 January 1995.

I do not think there is any substance in the complaint concerning the alleged omissions concerning the constitutional validity of the Papua New Guinea Mining Act in the light of the decisions of the Supreme Court of Justice in Lowa v Akipe [1991] PNGLR 265; [1992] PNGLR 399. Nor do I consider that there is any substance in the failure to refer to the Papua New Guinea Fairness of Transactions Act 1993 which has not yet come into operation. As its title indicates that legislation is concerned with reviewing transactions where the Court is satisfied that the transaction was not genuinely mutual or was manifestly unfair to a party. I can see no need to make any reference to this legislation or to the fact that it may at some indefinite time come into operation and in some possible way impact on Goldfields.

In my opinion what is called for is a comprehensive Statement raising and dealing with the political and other risks of mining and operating in Papua New Guinea making particular specific reference to the problems experienced by RGC/ Goldfields. There should be some discussion of the significance attributed by Goldfields to those risks.

It is necessary, in my opinion, to give further and better information on this aspect. In this respect the present Part A Statement falls short of the required test in s 750, and the Statement is in contravention of the Act. However, in my view this is a matter which can be rectified by way of a supplementary statement.
Misleading Conduct - Section 995

The first complaint relates to the fixing and use of a price or value of $3.30 for the Goldfields shares to be issued as part of the takeover consideration. It is said that the converting note underwritten price is not a reliable indicator of the value of such a share. It is also said to be misleading to represent that a Goldfields share when issued will have a value of $3.30.

The second complaint is that the use of the ounce multiplier valuation technique in the table on page 25 of the Statement is misleading.

The third complaint is that the reference to a premium is misleading.

The fourth complaint relates to the non-gold assets.

The fifth complaint relates to the withdrawal of the prospectus by RGC as a result of the position taken by the ASC.

The $3.30 Figure

This figure is represented in the Statement as the calculated future value of a share in the new Goldfields after acquisition. The figure can be deduced from note (1) to the table on page 25 which refers to a market capitalisation of $830 million, and dividing that figure by the anticipated number of shares of the new company which is 251.5 million, on the assumption that the takeover is wholly successful.

As there is no market price for the new Goldfield shares post-acquisition, an assumed price of $3.30 per share has been used. This in turn is used to base the comparison in the table on page 25 and to arrive at an implied capitalisation of Goldfields post-acquisition at $830 million. It is said the use of this figure in itself is misleading and also that it is basic to the comparison exercise on page 25 and therefore that the comparative exercise is also misleading.

On page 15 of the Statement it is said:

"× Goldfields makes a Takeover Offer for 100% of Pancontinental's Shares, offering $2.10 cash and one Goldfields Share for every three Pancontinental Shares. By calculating the value of the Goldfields Shares at the Converting LCB Unsecured Note underwritten price of $3.30, the consideration offered for each Pancontinental Share would be $1.80, which includes $0.70 cash. On this basis, the consideration for all of Pancontinental's share capital would be approximately $440 million. RGC is providing Goldfields with a limited recourse loan to fund the cash component of the Takeover Offer." (Emphasis added)

The takeover scheme and subsequent restructuring process envisages that RGC will make an issue of 47.4 million unsecured notes to RGC shareholders and convertible
noteholders, which will raise approximately $156 million. The issue has been underwritten by Bain Capital Markets Limited. The converting unsecured notes are, until they convert into Goldfields shares, in the nature of debt obligations of RGC backed by letters of credit. They will convert into Goldfields shares if the Pancontinental takeover becomes unconditional and Goldfields owns more than 50% of Pancontinental's shares. If conversion has not occurred by the maturity date, each converting unsecured note will be redeemed for $3.63 in cash, a premium of 33 cents over the subscription price of $3.30.

In relation to the figure of $3.30 Mr Duffin points out that to equate the price of a Goldfields share to the price of an unsecured note is incorrect. Whilst the note may entitle a purchaser to a Goldfields share, it does not follow that the market value of a Goldfields share, when issued, would be $3.30. This will depend on the market fixing the appropriate price by reference to, amongst other things, the value of Goldfields' underlying assets.

Mr Duffin agreed in cross-examination that the underwritten price was one way of looking at what the likely prospective price or value was of the shares in Goldfields when floated. He disagreed that it is the best information presently available concerning the likely price which a purchaser would be paid.

Mr Massy-Greene, on the other hand, considers that the underwritten price of a converting unsecured note does provide guidance as to the likely value of a Goldfields share, because the underwritten price and its underwriting terms provide an assessment of the probable minimum value which the underwriter has placed on the shares. The Statement makes it clear that the assumed price for the Goldfields shares post-acquisition is based on the convertible note conversion price. The confidential material in exhibit "C", particularly the memorandum of 20 February 1995 also indicates that the capitalisation of Goldfields post-acquisition of $830 million is based on the convertible note conversion price as fixed after consultation with the underwriters. Since the Statement makes this quite clear I do not consider that it can be classified as misleading.

However, I do think that there is a significant omission in the Statement as to how the figure is arrived at. Since the figure is of central importance to the takeover scheme, I consider that the offeree shareholders in Pancontinental would regard as material the data and methodology by which this figure was arrived at.

It is not satisfactory simply to suggest that it was in fact calculated by an underwriter who has professional expertise and indeed strong financial motivation to make a close and accurate evaluations of the likely market price. The Pancontinental shareholder must be entitled to know the basis on which the underwriter or Pancontinental arrived at this figure which is being offered as the consideration. In my view the elliptical inferences which are to be derived from the Part A Statement in referring for example to "calculating the value of the Goldfields shares at the converting LCB unsecured note underwritten price of $3.30" is not a useful statement as to the value of those shares, unless the data and methodology used to reach that evaluation is provided. The data and reasoning by which such conclusion is reached should be properly set out and made available in the Part A Statement so that it can be considered by the offerees and the board of Pancontinental. Otherwise the offeree is required to accept the opinion of the underwriter without any information as to how or why that price was chosen.

I consider that the makeup of the $3.30, which is not only the basis of the price but the capitalisation factor used in the comparative table on page 25 of the Statement, is clearly of material importance for a shareholder of Pancontinental when considering whether to accept or reject the offer foreshadowed by the Part A Statement, or in considering whether to take some other position with a view to achieving a higher offer or accepting as to part of the shares.

Accordingly, I consider that whilst the figure of $3.30 is not misleading within s 995 of the Law the omission of any justification as to its basis is a material omission in contravention of the requirements of s 750.
The Ounce Multiple Methodology

The ounce multiple method of evaluation of mining shares first requires the total market capitalisation to be ascertained. This is calculated by the number of issued shares, multiplied by the market price per share. That figure is then divided by, for example, the number of ounces of gold reserves to give a particular market capitalisation per ounce of gold. Other figures used as a division in this calculation as an alternative to the number of ounces of gold reserves can be the number of ounces of gold resources, or a number of ounces of gold production.

Such an exercise is set out in paragraph 2.13 of the Statement and particularly in the table at p 25.

In that paragraph the approach is used to compare the Goldfields prices per ounce on an assumed capitalisation of $830 million, with the average price per ounce of the ten largest Australian gold producers. A third column sets out an implied capitalisation of Goldfields on the basis of the average figures. Dependent on whether the number of ounces of gold reserves, gold resources, or gold production are used, the implied capitalisation figure for Goldfields using that method is $1207 million, $1204 million or $942 million respectively.

Mr Duffin, called by the applicant, argues that the ounce multiple appraisal methodology is often used as a rough rule of thumb to cross-check a valuation arrived at by more accepted and reliable methods such as DCF or earnings and dividend forecast, but it is not in itself an accepted valuation method. The technique has been described as a simple and robust method of providing a preliminary estimate. It is said to be often used in the gold sector where it is relatively easy to compare "apples with apples".

Mr Massy-Greene, called by Goldfields, says that market practice is that similar information to that contained in the tables is used together with other publicly available information as to assets of the comparison companies to determine an implied market capitalisation.

In his eyes, the fundamental considerations are production forecasts, forecasts of relevant operating costs and reserves and the resources base.

In cross-examination, when pressed, Mr Massy-Greene, could not think of any instance where the ounce multiple technique has been used for the purpose of evaluating shares in connection with a prospectus.

From this evidence, I accept that the technique included in the comparative table on page 25 is often used in the market as a practical but rough cross-check on the value of a mining enterprise and that it affords some useful broad indication of valuation, but it is not a widely used or appropriate valuation method in itself.

Although the statement is made on page 25 that the shares in gold mining companies are often valued using multiples of market capitalisation to gold reserves, resources and production, I do not consider that on a fair reading this table is misleading. The purpose of the table is to provide a broad spectrum comparison. On its face it is purporting to be a check or comparative exercise as opposed to a definitive valuation to show that a Goldfields share gives a comparitively cheap entry to a gold producer. It does not purport to pinpoint the market value. Indeed, the more definite figure of $3.30 per Goldfields share is assumed for the purpose of the exercise. I do not think the exercise can be classified as useless or misleading.

It can clearly only be the roughest type of exercise in valuation to make the comparison set out in the table. It would be obvious to any investor or any adviser, that the approach can only be a general guide.

There is clearly, from the material tendered, a wide range of differing relevant factors, operating within each of the ten largest companies which lead to different figures. This is illustrated by the table prepared by financial advisers to RGC in Exhibit "C" of 20 January 1995 which sets out the range of variations between the ten largest Australian gold producers. One matter adverted to in particular is the fact that only two of the ten largest companies operate in Papua New Guinea. See also section 5.3 of the Part A Statement which sets out the proposed capital structure.

There can be no true comparison between an average figure which by definition is an abstract artificial derivative amount, with the operations of a particular specific company. A more appropriate comparison would seem to be to select the most comparable mining company operator to Goldfields and make adjustments from that base using the well-known technique of evaluation from the most comparable bench mark. This was sought to be done at one stage. The averaging comparison technique is generally not favoured as a valuation methodology either in relation to share or land valuations. See Abrahams v Federal Commissioner of Taxation (1944) 70 CLR 23 at 28-29 and McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1 at 15.

However, as stated earlier, I do not consider that the exercise or the table or the statements on page 25, can be described as "misleading".

Premium

In paragraph 2.9 under the heading "Share Market Premium of Gold Producers" it is stated:

"The Australian sharemarket frequently attributes a premium to major Australian Gold Producers in comparison to major diversified mining companies, although the market rating of individual companies varies considerably and not all Australian Gold Producers trade at a premium to all diversified mining companies. This market premium is evidenced by the average multiple of price to prospective cash flow at which the five largest Australian Gold Producers and the five largest diversified miners trade. As at 10 February 1995, the average multiple of price to prospective cash flow for the five largest Australian Gold Producers is estimated to be 20% to 25% higher than the average multiple of price to prospective cash flow for the five largest diversified mining companies.

Goldfields is being restructured as an exclusively-gold company to enable it to attract this potential market premium and to present a more attractive investment opportunity to shareholders."

Mr Duffin says that prior to mid 1994 such a premium did exist. However, in his view a significant premium no longer exists as a general proposition. He says that the illustration of 20-25% is to his mind not of assistance, because there are companies in the list of the five largest diversified mining companies whose prospective price to cash flow multiples are higher than that which applies to some of the companies in the list of the five largest Australian gold producers. He considers it would be of assistance to him to know what the directors thought the prospective price to cash flow multiple for a Goldfields share would be, and the likely premium that a Goldfields share would attract.

Mr Massy-Greene is of the opinion that the merging of the Pancontinental gold assets with the exclusion of the non-gold assets into the new Goldfields company is likely to attract a premium of the sort envisaged in paragraph 2.9.

It is pointed out by Mr Massy-Greene that Mr Duffin, in part of his affidavit, confused the premium referred to in that part from the difference between the implied market capitalisation of assets and the fair market value of those assets.

A fair and reasonable reading of paragraph 2.9 shows that it does not promise or assert that there will be a premium. It refers to the fact that the market frequently attributes a premium. This is consistent with there being no significant premium at any particular time period. It says that the market rating of individual companies varies considerably and not all companies attract a premium. The statement estimates that as at 10 February 1995, the average multiple of price to prospective cash flow for the five largest producers is estimated to be 20-25% higher than for the five largest diversified companies. Goldfields, it is said, is being structured as an exclusively gold company to enable it to attract this potential premium.

The discussion of the question of a premium is cast in moderate qualified language which raises the issue of a premium fairly and gives no assurance or guarantee that such a premium will be attracted but on the contrary refers to the potential premium and envisages the possibility that a premium may not be attracted.

Mr Duffin is critical of the illustration of 20-25% because there are companies in the five largest diversified mining companies where prospective price to cash flow multiples are higher than that which applies to some of the companies in the list of the five largest Australian gold producers. However, the statement is only expressed as an average and in these circumstances I do not consider that the statement can be said to be misleading since the concept and limitations of an "average" figure must be readily apparent to an investor.

In my opinion, paragraph 2.9 cannot be categorised as misleading or deceptive. This proceeding amply illustrates that highly qualified experts in mining finance can have quite different views on the question of whether a premium will be attracted and if so in what amount and these differences can be pursued further and highlighted when the Part B Statement is issued. These are matters of commercial judgment not of law.

The ASC and the Renison Prospectus

As a result of obtaining additional documents from the ASC, Pancontinental sought and obtained leave to amend the Statement of Claim, in order to raise a further contention that the Part A Statement was misleading. That allegation arises in the following way.

An integral part of the takeover scheme viewed as a whole is the issue by RGC of 47.4 million convertible unsecured notes to finance the takeover of Pancontinental by Goldfields.

A prospectus in relation to the matter was lodged with the ASC on 27 February 1995 on behalf of RGC and Goldfields for registration by the ASC. The Part A Statement was also lodged on the same date in relation to the offer by Goldfields for shares in Pancontinental. The prospectus was examined for registration independently of the examination of the Part A Statement.

This prospectus was later withdrawn by RGC after the ASC had made it quite clear on 13 March 1995, that the prospectus would not be registered in its present form. The matters which concerned the ASC are set out in a file note dated 15 March 1995, by Mr Sburlati. The relevant part of that note reads:

"RESULT OF EXAMINATION

......

The overall view of the team was that the prospectus lacked clear information to enable investors and their advisers to form an opinion about the financial position and prospects of Goldfields specifically by reference to the Offer price of $3.30. That is investors were being asked to pay $3.30 for ultimately a share in Goldfields and information was not readily available in the prospectus to assist them in forming an assessment in this regard.

Certain types of information was (sic) provided throughout the prospectus but it was considered that failure of the prospectus to concisely deal with this issue at the forefront of the prospectus constituted an omission.

By way of examples, the financial position of Goldfields following the scheme was not dealt with in any substantial manner before the pro-forma balance sheets on page 139 of the prospectus and there did not appear to be a clear statement of net tangible assets per share at the front of the prospectus. There did not appear to be concise or readily ascertainable information to enable investors to assess the $3.30 price they are asked to subscribe."

The ASC's position was communicated to the solicitors for Goldfields.

By facsimile, dated 17 March 1995, the solicitors for Goldfields replied:

"1. What the ASC believes is missing

The ASC wishes to see a concise statement of "what an investor receives for $3.30", being a statement which gives some indication of value of the Goldfields Shares."

This point is, as I understand it, particularly directed to non-institutional investors on the basis that institutional investors have the resources to process the considerable volume of information in the Prospectus but retail investors, so the ASC believes, require something more simple.
The ASC would therefore like to see the Prospectus contain a forecast per share, (eg earnings or cash flow) or, perhaps, net assets per share in both the scenario where Goldfields comes to own 100% of Pancon and where Goldfields only comes to own 50% of Pancon. As I told you, forecasts present difficulties because Goldfields must rely on public statements by Pancon as to future production and other key financial statistics. Unfortunately, there are some matters, such as depreciation on Pancon gold assets, which are not publicly available.

Finally, it would be useful for us to meet towards the middle of next week so as to clarify the ASC's position. Please confirm whether you are able to do so."

Pancontinental says that the effect of the withdrawal is to render certain statements in the Part A Statement misleading. These are said to be, in the first instance, representations that the cash component of the offer would be lent by RGC to Goldfields and that these funds would be obtained by RGC from the net proceeds of the issue of unsecured notes which RGC proposed to offer its shareholders. It is also said that upon the withdrawal of the prospectus by RGC the statement, that Goldfields would obtain funds from RGC which would be raised by the issue of the notes, became misleading and deceptive.

It is also alleged that the Statement represented that the RGC prospectus would be registered by 10 March 1995 and that as a result of the withdrawal this representation has become misleading.

There is no complaint that the Statement was misleading when it was made or registered in this respect, but the allegation is that because of a subsequent change in circumstances, namely the withdrawal of the prospectus, the Statement has now become misleading.

Goldfields' response is that the issues raised in relation to the prospectus are similar in substance to those which are the subject of the Part A Statement and that this Court's determination of that question favourably to Goldfields will probably be followed in relation to the prospectus.

I agree with the applicant, in relation to the matter that the timetable in the Part A Statement has been disrupted and that this fact and the circumstances in which it occurs should be made known to the offerees, including the reasons for which the ASC foreshadowed its rejections. If this is not done, the timetable is on its face misleading by reason of the withdrawal of the prospectus and calls for correction, regardless of whether the reasons given by the ASC are subsequently found to be sound or not. The fact is that the timetable has been disrupted. Furthermore, I think that the circumstances of the withdrawal and the attitude of the ASC to the prospectus are material information which ought be made known to the shareholders in Pancontinental. The complications and the surrounding circumstances which led to the "withdrawal" of the prospectus would, if not disclosed be a contravention of ss 750 and 995. However, in my view the matter is one which is capable of correction by supplementary statement disclosing and clarifying this aspect. I do not think that it should operate to warrant invalidation of the Statement, but it is a matter which is capable, unless corrected, of being misleading.

Sections 739 and 743 of the Law

Under s 743(1) where a person has contravened a provision of Chapter 6 and the Court is satisfied that the contravention ought to be excused, the Court may make an order declaring the Statement not to be invalid because of the contravention and to have effect as if there had been no such contravention. Among other matters the Court may have regard whether the contravention was made due to the peron's inadvertence or mistake, or to the person not having been aware of a relevant fact or occurrence or to circumstances beyond the control of the person. In the present case there has been no evidence adduced to establish any of these specified circumstances.

Under s 739 the Court has power to protect the interests of a person affected by a takeover scheme, in such way as the Court thinks necessary or desirable. There is specific power in s 739(3) to make an order directing the offeror to supply to the holders of shares in the target company such information as is specified in the order.

The above sections have been the subject of recent comment by the Full Federal Court in Gantry Acquisition Corp v Parker & Parsley Petroleum Australia Pty Ltd (1994) 51 FCR 554. At pp 563-564 Sheppard J said:

"I should also make reference to ss 739 and 743. I have reservations whether s 739 could be applicable to the circumstances of this case. Section 743 provides that, where a person has contravened a provision of Ch 6 of the Law, in which s 750 is to be found, and the Court is satisfied that, in all the circumstances the contravention ought to be excused, the Court may make an order declaring, inter alia, any document not be invalid because of the contravention.

It was suggested by counsel for the appellant that we should consider making an order under s 743. I am not disposed to take this course. If such an application is to be pursued, I think it should be made by a substantive application to a judge of the Court. If it were made, it would be unlikely to succeed unless it were supported by appropriate evidence. But even assuming that it were, there might well be a question whether the breach was one which in all the circumstances ought to be excused. The answer to that question would no doubt depend on what the evidence established and the Court's then view of the possible consequences of the breach."

Burchett J at 570 stated:

"Where there is a serious defect in a Part A Statement, an offeror who wishes to seek an exercise of discretion in his favour has a positive onus to discharge. In the present case, the ambiguities to which I have directed attention would have to be clarified by evidence before the appellant could be found to have taken the first step towards obtaining a decision in its favour under s 739 or 743 of the Corporations Law, or upon the basis that in all the circumstances an injunction ought not to be granted to the party seeking it."

In the present case there are three important material omissions in the Part A Statement. These are:

1.The justification of the $3.30 price
2.Papua New Guinea risks
3.An earnings dividend forecast

In addition, it is necessary to inform offerees of the position with respect to the "withdrawal" of the prospectus in order that the Statement should not have a misleading effect. I do not consider that the there was any intention to contravene the Law on the part of RGC or Goldfields in the present case. Nor is this a case which involves deceptive or misleading conduct or misrepresentations on the part of Goldfields or RGC. No doubt the Part a Statement was issued after considerable checking and examination and clearly after extensive advice both legal and commercial. Notwithstanding this, there are importnat omissions of material information. However, although the omissions go to matters of substance and importance, I do not consider it is appropriate that the Part A Statement should be invalid. What is called for in the interest of the offeree shareholders in my view, is the provision of proper additional information on the matters omitted from the Statement to enable the shareholders to make their decision whether to accept the offer on a fully informed basis.

I can see no useful purpose being served by requiring a new Part A Statement, in circumstances where there is no misleading conduct, and where the offerees can properly be protected by furnishing supplementary information. Accordingly, I propose to exercise my discretion to declare the Statement valid.

Conclusions

My conclusions in this matter can be summarised as follows:

The Part A Statement contravenes clauses 17 and 18 of s 750 of the Law.

Any distribution of the Part A Statement and the offers should be restrained unless accompanied by supplementary information with respect to:

(a)A forecast of future earnings and dividends for at least the first two years of the operation of the new Goldfields;

(b)A justification of the share price of a new Goldfields share at $3.30.

(c)The risks arising from the operations of the new Goldfields in Papua New Guinea.

(d)The circumstances surrounding the withdrawal of the RGC prospectus and the effect of that on the takeover scheme.

(e)Any necessary updating of material, data, or calculations due to lapse of time.

The Part A Statement is not misleading or deceptive.

On the condition that the information in (2) above is distributed with the Part A Statement I would make an order under s 743 of the Law that the Statement is valid.

I propose to make an order under s 739 of the Law in order to protect the interests of persons affected by the takeover scheme, to the effect, that if Goldfields proposes to continue with the takeover, it should supply to the holders of shares in Pancontinental, in writing, the information set forth in (2) above together with the Part A Statement.

I propose to reserve to the parties liberty to apply generally on 24 hours notice.

I propose also to order that Goldfields pay two-thirds of the costs of Pancontinental of these proceedings.

I direct the parties to bring in Short Minutes to give effect to the conclusions set out above and these reasons for judgment.

I certify that this and
the preceding sixty-five (65)
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.

Associate:

Date: 31 March 1995

Counsel for Applicant: Mr A R Emmett QC
Mr R M Smith

Solicitors for Applicant: Clayton Utz

Counsel for Respondent: Mr F M Douglas QC
Mr I M Jackman

Solicitors for Respondent: Allen Allen & Hemsley

Dates of Hearing: 15,16,27,28 March 1995

Date Judgment Delivered: 31 March 1995

[1995] FCA 171

31 Mar 1995