Re Lifeplan Australia Friendly Society Limited (No 1)

IN THE SUPREME COURT OF VICTORIA	Not Restricted
AT MELBOURNE COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT CORPORATIONS LIST

No. 6021 of 2009

IN THE MATTER OF LIFEPLAN AUSTRALIA FRIENDLY

SOCIETY LIMITED (ACN 087 649 492)

LIFEPLAN AUSTRALIA FRIENDLY SOCIETY LIMITED	Plaintiff
(ACN 087 649 492)

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	24 April, 8 and 11 May 2009
DATE OF JUDGMENT:	13 May 2009
CASE MAY BE CITED AS:	Re Lifeplan Australia Friendly Society Limited (No 1)
MEDIUM NEUTRAL CITATION:	[2009] VSC 640

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CORPORATIONS – scheme of arrangement – scheme to merge two mutual companies - application to convene meeting – whether explanatory statement discloses all information that is material to the making of a decision by a creditor or member whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the creditors or members as required under s 411(2) of the Corporations Act 2001 – application adjourned to enable further evidence to be tendered and the proposed explanatory statement to be amended

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr J G Santamaria QC with	Hugh Scales
Mr G J Ahern

Cases cited
Alabama New Orleans Texas and Pacific Junction Railway Co [1891] 1 Ch 213
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485
FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69
Pheon Pty Ltd (1986) 11 ACLR 142
Phosphate Co-operative Co of Australia Ltd v Shears (No 3) [1989] VR 665
Westfield Holdings Ltd (2004) 49 ACSR 734
HIS HONOUR:

INTRODUCTION

I have before me an application by Lifeplan Australia Friendly Society Limited (“Lifeplan”) for an order that a meeting be convened, at which the members of Lifeplan may consider a scheme of arrangement between themselves and Lifeplan.
For the following reasons, on the information currently before me, I am not prepared to make the order sought. I am aware that this delay may cause inconvenience to Lifeplan, which I regret. But an approved scheme will bind members who do not agree to it and the Corporations Act 2001 sets out disclosure requirements that must be met. I am prepared to stand the application over to enable further evidence, that I will later describe, to be provided.
The scheme involves a merger between Lifeplan and Australian Unity Limited (“Australian Unity”). Each company is a “mutual” company. They do not have shareholders.
If the scheme is implemented, Australian Unity (and one of its subsidiaries) will become corporate members of Lifeplan. Thereupon, each existing member of Lifeplan (save for certain directors of Lifeplan who will remain in office following the merger) will resign from his or her Lifeplan membership and will become a member of Australian Unity.
The constitution of Lifeplan provides that only financial members of Lifeplan may be directors. It is for this reason that those current directors of Lifeplan, who will continue to hold their office after the merger, are not resigning as members under the proposed scheme.
The result of the scheme, if implemented, is that the existing members of Lifeplan will become members of Australian Unity and Lifeplan itself will become a partially owned subsidiary of Australian Unity. Lifeplan will become a partially owned subsidiary (rather than a wholly owned subsidiary) as the members of Lifeplan, following the proposed merger, will be Australian Unity, one of Australian Unity’s subsidiaries and the continuing directors of Lifeplan.
Since 1 July 1999, Lifeplan has been a company limited by shares and guarantees. Lifeplan has approximately 148,000 members. Lifeplan’s principal activity is the operation of benefit funds (through which it offers investment products such as investment bonds, education saving plans and funeral bonds) and traditional defined benefit fund products (such as accidental death, student and adult accident and funeral and ancillary benefits). Its other business activities include a building society business conducted through its wholly-owned subsidiary, Lifeplan Australia Building Society Limited, and a travel agency business conducted through its wholly-owned subsidiary, Lifeplan Travel Pty Ltd.
Some benefit fund products issued by Lifeplan enable a person who is not a member to receive a benefit and become a member of Lifeplan in the future.
ROLE OF THE COURT
The Court will not ordinarily summon a meeting unless the scheme is of such a nature and cast in such terms that, if it achieves a statutory majority at the meeting of members, the Court will be likely to approve it: see FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd[1] and Australian Securities Commission v Marlborough Gold Mines Ltd.[2] If the statutory requirements are satisfied, the Court will normally approve the scheme if it appears that the scheme is so far fair and reasonable, as that an intelligent and honest person, who is a member and acting alone in respect of his or her own interest as such a member, might approve it.[3]
[1] (1977) 3 ACLR 69 at [72] per Street CJ.
[2] (1993) 177 CLR 485.
[3] See Re Alabama New Orleans Texas and Pacific Junction Railway Co [1891] 1 Ch 213 per Fry LJ (‘Re Alabama’).
At this stage, and without prejudging the issues to be addressed at the approval of the scheme stage, if that is reached, it appears that the scheme is of a nature that would satisfy the Re Alabama test.
The issue that the Court needs to address is whether there is sufficient disclosure, to those persons and entities who will be affected by the scheme, of its details and effects.[4] In the context of a creditors’ compromise scheme, White J in Re Pheon Pty Ltd[5] said that a creditor needs to have before him the “information which bears upon his chances of obtaining a better deal than the one presently being offered under the scheme”.[6] He or she needs to have in his or her possession “sufficient facts to enable him [or her] to make a sensible commercial judgment in his [or her] own interests whether it is better to go along with the scheme or take his [or her] chance of getting say 20 cents, 30 cents, 40 cents etc in the dollar.”[7]
[4] See Re Westfield Holdings Ltd (2004) 49 ACSR 734 at 736 per Barrett J.
[5] (1986) 11 ACLR 142.
[6] Ibid at 147.
[7] Ibid.
Although a friendly society may involve concepts of helping one another and mutuality, the law contemplates that, in considering whether to agree to the scheme, a member will have regard to its effect on his interests: see Brooking J in Phosphate Co-operative Co of Australia Ltd v Shears (No 3).[8] Brooking J went on to say:
A member voting on a scheme is not required to act altruistically and sacrifice what he conceives to be his own interests to the interests of others or of the company as an institution, although of course he may do so if he chooses. The law proceeds on the basis that a member is entitled to consult his own interests and, in considering what is material for the purposes of the explanatory statement or the conduct of the meeting or any purpose relating to the consideration of the arrangement by members, one must always bear
this in mind.[9]
[8] [1989] VR 665 at 689.
[9] Ibid.
These are relevant considerations when the Court looks to whether or not Lifeplan has made sufficient disclosure in the explanatory statement.
Under s 412(1) of the Corporations Act 2001, the explanatory statement must explain the effect of the arrangement and set out “such information as is prescribed and any other information that is material to the making of a decision by a creditor or member whether or not to agree to the compromise or arrangement, being information that is within the knowledge of the directors and has not previously been disclosed to the creditors or members.”
The current explanatory statement provides some information on the financial position of Lifeplan and Australian Unity, including providing a balance sheet for each company that includes consolidated accounts and separate accounts for the respective parent companies. The explanatory statement does not include any expert’s report on the effect of the merger on the financial interests of the members of Lifeplan.
The financial interest that each member has involves two aspects. The first is that members hold investment products in Lifeplan, such as investment bonds and other products as described above. Secondly, members have a contingent financial interest that may be derived by them as a corporate member. The explanatory statement describes the derivation of such benefit as “very unlikely scenarios.”[10] The two principal ones being “a demutualisation or winding up.”[11]
[10] Paragraph 5.3(e).
[11] Ibid.
No attempt has been made in the disclosure statement to quantify these contingent financial interests either as a member in Lifeplan or as a member in the merged Australian Unity. On the other hand, there are general statements about these contingent financial interests.
On the initial hearing of the application, I raised some queries about the possible omission of the financial information I have just referred to. The matter was adjourned to 11 May 2009, when two officers of ASIC, Mr Pearson and Mr Bryant, appeared before me. These officers were involved in reviewing the explanatory statement and making requisitions about it. They did not appear before me as counsel for ASIC, but rather they appeared in the capacity of witnesses. I found their attendance of considerable help.
I was informed that ASIC was initially concerned about the lack of financial information, which the ASIC officers called “quantitive” information. I was informed that they both considered that the explanatory statement might contain information on the value of the contingent financial interests of a member of Lifeplan before the merger and after the merger. They informed me that they interviewed company officers and an officer of APRA, Mr Bingham, and formed the view that the contingent financial interest of a member of Lifeplan would be the same before the merger and after the merger. They told me that they requested Lifeplan to include what they called a “qualitative discussion” about the effects of the merger in the explanatory statement. They considered that a discussion in a qualitative sense would sufficiently disclose that the Lifeplan members’ economic position could only be improved.
They informed me that significant amendments had been made, at their suggestion, to paragraph 4.3 of the explanatory statement on “membership value.” Paragraph 4.3 of the explanatory statement says, in part:
Notwithstanding this point, current Lifeplan members have a contingent interest that could yield direct economic value at some point in time in the event of a demutualisation or a winding up of Lifeplan. Were the merger to proceed, Lifeplan members would exchange their membership and thus their contingent interests, in Lifeplan for membership of and a contingent interest in, Australian Unity. The economic value of this new contingent interest, immediately following the merger, is not different from the economic value of the former Lifeplan members’ contingent interest in Lifeplan immediately before the merger.
This is because the factors that are relevant to the calculation of the economic value of that new contingent interest (such as the products held by the member, the length of their membership and their total contributions made) and the financial position of Lifeplan, do not change simply as a result of the merger occurring. However, if that value were ever to be realised by current Lifeplan members, it would be realised by them in their new capacity as members of Australian Unity along with other Australian Unity members. Furthermore, it is likely that this value would change (and that this change may be an increase or decrease) over time following the merger as a result of a number of factors including the membership profile of the merged organisation and the level of success of its business activities, as well as the prevailing economic environment at the time of any such application.
Should the merger proceed, the economic value brought by Lifeplan will be combined with the economic value brought by Australian Unity into the merged organisation. The proposed merger aims to combine and enhance the economic value of both organisations. If this aim is achieved, this may have a positive impact on the residual value of the contingent interest of Lifeplan members (as well as of Australian Unity members). It is, however possible that if this aim is not achieved, the total residual value of the contingent interests of members of the merged organisation might be lower than the value at the date of the merger.
The paragraph then goes on to discuss, in general terms, how an actuary might go about calculating the membership value and distributing any benefits from demutualisation. After giving this explanation, the paragraph concludes:
Therefore, given these circumstances, the proposed merger does not require any determination at this time of either the respective enterprise values of Lifeplan and Australian Unity or a determination at this time of the allocation of value to current members of Lifeplan or Australian Unity.
In paragraph 3.5(b), the directors inform members that in assessing the current merger opportunity, demutualisation of Lifeplan was again considered. The directors say:
Were Lifeplan to be demutualised in order to facilitate its public listing, Lifeplan’s market capitalisation would be small compared to most other listed financial companies, and so it would again be unlikely that the underlying value of Lifeplan’s assets could be realised for members. Accordingly, the merger is considered a preferable course to demutualisation in the long term interests of Lifeplan’s members.
As the above shows, the directors made the decision that demutualisation is a very unlikely scenario. Also the directors have informed members that the merger is a preferable course to demutualisation in the long term interest of Lifeplan’s members.[12] The directors have expressed the view that Lifeplan’s market capitalisation would be small compared to other listed financial companies. The directors assert that it is unlikely that the underlying value of Lifeplan’s assets could be realised for members if Lifeplan were demutualised.
[12] Paragraph 3.5(b).
In my opinion, the directors have not disclosed sufficient financial information on the consequences of demutualisation or how they came to the views they have expressed. In my opinion, the issue therefore arises of whether or not the directors do have any such information and, if they do, whether they are obliged to disclose it under s 411(2) of the Corporations Act 2001 in the explanatory statement. In particular, does the board have any financial information on the respective enterprise values of Lifeplan and Australian Unity which has not previously been made available to members? Did the board form a view on the underlying value of Lifeplan’s assets that could be realised for members, and if so, how did they come to that view? The question also arises whether or not the board has information, that has not been disclosed to members, on the positive impact on the residual value of the contingent interests of Lifeplan members as a result of the merger.
These matters all involve a consideration of the financial interest of members if the merger does not proceed compared to the position if it does and it appears to me that the board might have made such a comparison.
There is another aspect which I feel might be addressed in the explanatory statement. It concerns the financial position of Lifeplan. The letter from the Chairman refers to the board responding to the current economic environment which has produced deteriorating conditions. He says that the merged organisation would be able to draw on expanded resources to address these conditions. He says that, should the merger not occur, Lifeplan would not have available to it the increased resources of the merged organisation and this would restrict its ability to respond to future external economic shock and volatility, should these difficult times continue. It is not clear from this statement what is the ability of Lifeplan to respond to the existing financial conditions.
The chairman says “Lifeplan’s ability to continue to deliver its products and services in a competitive manner may be reduced if it continues in its current form and this could have an impact on customer benefits.” In my opinion, it is not clear what is meant by this statement. In particular, what does “in a competitive manner” mean? Does this suggest that it may not be able to carry on business or does it mean something else?
Under “Background to the proposal” on page 10 of the statement, the explanatory statement says that the Lifeplan directors have considered a range of alternatives and concluded that becoming part of a larger, more diversified organisation, with greater financial resources and broader skills and experience, would be an important and positive step for members at this time. Under “Advantages and disadvantages” in section 3, the statement says that the merger would proactively strengthen Lifeplan during unprecedented economic times. Under the alternative courses of action, the statement says that if the merger is not made, given the state of current operations, the financial capacity of Lifeplan to handle new opportunities and respond to threats will be constrained. It says that this is likely to limit future growth opportunities and adversely affect the competitiveness of Lifeplan. What does this mean? What growth opportunities?
I have not found it easy to discern precisely what Lifeplan is actually saying in its explanatory statement. Is the statement saying that due to the global financial crisis liquidity constraints Lifeplan’s viability may become an issue and it is therefore beneficial for Lifeplan to merge with a financially stronger entity? I understand that Lifeplan cannot raise equity by issuing shares. Or is the statement saying that it is advantageous to Lifeplan to merge to take advantage of future growth opportunities and to remain competitive? The board may be of the view that it is a combination of these factors.
If the true position is that Lifeplan’s viability may become an issue unless Lifeplan merges with a financially stronger entity, it may be the case that if the merger did not proceed, the residual value of the members contingent interest might be of little value.
After reading the proposed explanatory statement, I have been left to speculate and infer on a number of points, when, in my opinion, the statement should be clear, forthright and unambiguous.
For these reasons, I am not fully satisfied that proper or clear disclosure has been made in the explanatory statement. Accordingly, I am not prepared to order a meeting to be summoned on the material presently before me, but I would be prepared to reconsider the matter if the following further evidence was provided.
The Court would be assisted by an affidavit or affidavits from a director or directors of Lifeplan deposing to whether or not there is financial information or quantitative information within the knowledge of the directors that is material to the making of a decision by members that has not otherwise been made available to members and, in particular:

(a)

any financial information on whether or not Lifeplan faces existing financial constraints that may affect its ability to continue as it is, and whether or not the company is constrained in its future growth prospects and its ability to remain competitive;

(b)

any financial information on the enterprise value of Lifeplan and Australian Unity, as referred to in paragraph 4.3;

(c)

the effect of the merger on the enterprise value of the combined entity, as referred to in paragraph 4.3;

(d)

the effect of the merger on the residual value of the contingent interests of Lifeplan members, as referred to in paragraph 4.3;

(e)

the underlying economic value of Lifeplan’s assets, as referred to in paragraph 3.5;

(f)

the economic value of Lifeplan’s assets that would be realised for members in a demutualisation, as referred to in paragraph 3.5; and

(g)

the underlying economic value of Lifeplan’s assets that would not be realised for members by demutualisation, as referred to in paragraph 3.5.

Further, the Court would be assisted by evidence as to whether or not an expert’s report on the value of a Lifeplan membership before and after the merger would be material to a member making a decision whether or not to agree to the scheme.
Further, the Court would be assisted by evidence from a suitably qualified expert as to whether or not the determination of the respective enterprise values of Lifeplan and Australian Unity is material to a member making a decision whether or not to agree to the scheme.
Finally, the Court would be assisted by evidence from a suitably qualified person as to whether or not the allocation of value to current members of Lifeplan, or an indication thereof, in the event of a winding up or demutualisation, is material to a member making a decision whether or not to agree to the scheme.

[2009] VSC 640

13 May 2009