Re Primac Holdings

[1996] QSC 214

IN THE SUPREME COURT

OF QUEENSLAND

No. 9215 of 1996

Before the Hon. Mr Justice Dowsett

[Re Primac Holdings]

IN THE MATTER of the Corporations Law

- and -

IN THE MATTER of PRIMAC HOLDINGS LTD (ACN 010 019 351)

REASONS FOR JUDGMENT - DOWSETT J

Judgment delivered 12 November, 1996

CATCHWORDS: CIVIL LAW - Corporations Law - Company Takeover offer provides for exchange of shares. Adequacy of Part A Statement pursuant to s.750 Corporations Law. Obligations to disclose material information.

ss: 750, 1022, 1022A Corporations Law

Counsel:Mr Morris Q.C. for the applicant.

Mr McMurdo Q.C. for the respondent with him Mr O'Shea.

Solicitors:McCullogh Robertson for the applicant.

Blake Dawson Waldron for the respondent.

Hearing date:               4 and 5 November, 1996

IN THE SUPREME COURT

OF QUEENSLAND  
  No. 9215 of 1996

Before the Hon. Mr Justice Dowsett

[Re Corporations Law]

IN THE MATTER of the Corporations Law

- and -

IN THE MATTER of PRIMAC HOLDINGS LTD (ACN 010 019 351)

REASONS FOR JUDGMENT - DOWSETT J.

Judgment delivered 12 November 1996

INTRODUCTION

Primac Holdings Ltd ("Primac") carries on the business of wool marketing, stock and station agency, insurance agency, rural property and real estate sales, pastoral finance, stud stock, travel agency, feed stock services and rural veterinary and general merchandising.  IAMA Ltd ("IAMA") and IAMA (Qld) Pty Ltd ("IAMAQ") are members of the IAMA Group, the principal activities of which are distributing rural merchandise to the farming industry in Australia and the manufacture and distribution of boomspray equipment, ground engagement tools, animal health products and agricultural chemicals.  The relevant Primac and IAMA shares are listed on the stock exchange.
THE PART A STATEMENT
           On 28 October 1996 a Part A statement pursuant to the Corporations Law was registered with the Australian Securities Commission in Perth. At the date of the statement (25 October 1996), IAMAQ was entitled to 2,855,131 shares in the capital of Primac, representing some 16.81 percent of the issued capital of that company. The statement relates to an offer by IAMAQ to acquire all outstanding shares in the capital of Primac, conditional upon IAMAQ becoming entitled to not less than 50.1 percent of such share capital. Although there are special terms and conditions relating to a small number of shareholders, the offer with which I am presently concerned is of nine fully paid IAMA shares for every ten Primac shares. It will be noted that the offeror is IAMAQ, but the consideration offered is shares in the capital of IAMA. I do not understand either side to have suggested that IAMAQ and its directors should be treated as having any relevantly different state of mind or knowledge from that of IAMA and its directors. Primac now seeks a declaration that the Part A statement fails to disclose material information as required by s.750 of the Corporations Law and consequential injunctions restraining its distribution and the making of any offers pursuant to it.  Although the notice of application sought interlocutory relief, the matter has proceeded as a claim for final determination.
LEGISLATION
Section 750 requires that IAMAQ issue a statement complying with Part A of that section. For present purposes the relevant clauses are cll.17 and 18. Clause 17 provides:

"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."

Clause 18 provides:

"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;

(b)relates to an offer to acquire shares in a class of offers in relation to which regulations are in force for the purposes of this paragraph;  or

(c)relates to an offer to acquire shares where the consideration specified in the offer as the consideration for the acquisition of shares is or includes marketable securities in a class of marketable securities, or is or includes marketable securities of a bodies corporate in a class of bodies corporate, 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, ..."

Regulation 6.12.01 prescribes classes of offer for the purposes of cl.18(b), including "offers in which consideration is or includes shares or debentures". Regulation 6.12.02 then prescribes that for such an offer, if the shares offered as consideration are listed on the stock exchange, the matters required by s.1022A of the Corporations Law to be included in a prospectus are to be included in the Part A statement as if it were a prospectus. Where the shares are not so listed, the regulation requires that the matters required by s.1022 of the Corporations Law to be included in a prospectus are to be included in the Part A statement as if it were a prospectus.  This statement of the broad effect of regulation 6.12.02 is incomplete, but as I understand it, it is sufficiently accurate for present purposes.
S.1022AA(2)(b) requires that a prospectus:-

"contain all such information as investors and their professional advisers would reasonable require, and reasonably expect to find in the prospectus, for the purpose of making an informed assessment of:

(i)the effect of the offer or invitation on the disclosing entity;  and

(ii)the rights attaching to the securities . . ."

It is relevant to note the differing provisions of s.1022. That section requires that a prospectus to which it applies:-

"contain all such information as investors and their professional advisers would reasonably require, and reasonably expect to find in the prospectus, for the purpose of making an informed assessment of:

(a)the assets and liabilities, financial position, profits and losses, and prospects of the corporation; and

(b)the rights attaching to the securities ."

The distinction reflects the fact that corporations with listed shares are obliged to make continuing disclosure to the stock exchange, rendering the more stringent requirements of s.1022 unnecessary.
THE DISPUTE
           On the date on which the offer was announced, Primac shares were trading at $3.00 or above, although evidence indicates that the volume of trading was very small.  Primac shareholders have recently, in effect, rejected an offer of $2.80 per share.  IAMA shares were trading at approximately $2.80.  As the offer provides for the exchange of 10 Primac shares for 9 IAMA shares, the directors of IAMAQ must consider that either the market value of Primac shares is unduly high or that of IAMA shares is unduly low.  In addition, it is well known that an offeror is sometimes willing to pay, and is often expected to pay more than the apparent market price of shares where the effect of acceptance of the offer will be that the offeror obtains control of the corporation in question.  The company secretary of IAMAQ, Ms Paini, said that such a premium for control was factored into the offer. 
           Ms Paini advanced two possible explanations for the apparent expectation on the part of the IAMAQ directors that Primac shareholders might accept an offer which was substantially below the quoted price of their shares.  Firstly, she suggested that Primac shareholders might find IAMA a more attractive investment proposition because of the greater diversity of its operation, particularly after the proposed amalgamation with Primac.  Secondly, she suggested that the quoted price was not a reliable guide to the true value of Primac shares because of the relatively low volume of trading.  In other words, if a substantial parcel of Primac shares were offered for sale, a buyer may not be found at the quoted price, and the price would then fall.  Although this latter explanation is superficially attractive, it cannot, by itself, be the whole answer.  Low trading volume may explain why shares are quoted at a price above their true value, but it does not itself assist in determining that value.
The applicant submits that the Part A statement, which includes substantial accompanying documentation, does not comply with clauses 17 and 18 of Part A of s.750 because it makes inadequate disclosure concerning the relative values of the shares and their relative earning capacities and of the impact of the offer on IAMA. It is reasonable to infer that these matters would be central to a decision to accept or reject the offer.
 RELATIVE SHARE PRICES
           The applicant submits that the directors of IAMAQ must have some reason for valuing the Primac shares at less than market value.  (Counsel did not address the alternative possibility that IAMA shares were under-valued.)  It is difficult to understand why the directors would have refrained from providing any such reason if the offer is genuine.  After all, the disclosure of such information could only help in securing its acceptance.  I have already explained why I do not accept volume of trading, by itself, as a basis for deciding that a price other than the quoted price is appropriate.  The other explanation, that IAMA offers a more diversified investment than does Primac, is also not very convincing.  The current quoted prices for Primac and IAMA are presumably based upon the present operations and prospects of each company.  Another possible explanation is that the price of Primac shares has been temporarily raised by the profit level for 1995-6 which was inflated by the proceeds of abnormal asset sales.  This matter was not explored in any detail at the hearing.   In any event, the IAMAQ directors have provided no information as to how they have valued the shares in both companies for the purposes of the offer.
RELATIVE EARNINGS
           The major thrust of the applicant's argument focussed on this issue.  The information memorandum attached to the Part A statement indicates that for the year ended 30 July 1996, Primac shares earned 25 cents per share.  As I have said, there is evidence that this figure was inflated by the proceeds of abnormal sale of assets.  Without the abnormal items,  earnings were 11 cents per share.         IAMA shares earned 13 cents for the 15 months ended 30 September 1995.  This was the first accounting period after a substantial restructuring of the company and its operations.  For the six months to 31 March 1996, the EPS was 9 cents.  The estimated EPS for the 12 months to 30 September 1996 is 21 cents.  For the 12 months to 30 September 1997, the directors of IAMAQ predict that the figure will be 26 cents. 
           The figures for the years to 30 September 1996 and 30 September 1997 are estimates, and they vary significantly from such actual figures as are available.  Further, as IAMA is required to provide a draft report to the stock exchange within 75 days of the close of its financial year on 30 September 1996, it might reasonably be expected that something more than a forecast should  be available for that year.  That these are budget figures rather than unconfirmed actual figures appears from the evidence of Miss Paini at p.59, although some of the information provided elsewhere suggests that the 1996 figure relies on forecasts for September only, implying that it is based on actual figures for the earlier months.   The bases for the forecasts appear on pp.7, 8 and 9 of the information memorandum.  Relevant  matters are:-

(a)that IAMA has, since mid-1994, consolidated its position "as a major supplier and distributor of services and merchandise to the rural sector throughout Australia";

(b)the results for the 15 months to 30 September 1995 "were achieved on the back of the worst drought experienced by the rural industry in over a decade";

(c)a predicted profit range of 14.5 to 15.25 million dollars for the year to 30 September 1996 is based upon "forecasts for the month of September 1996", suggesting that actual figures have been used other than for that month;

(d)that the year ended 30 September 1996 "has seen a solid recovery in most cropping areas arising from the return of normal seasonal conditions across most of Australia, but a continuing softness in the livestock and wool markets";

(e)       the outlook for 1996-1997 is underpinned by a "return of confidence in the      cotton and cereal cropping sectors, along with assured water supplies for irrigated cotton currently being planted for the 1977 winter season";

(f)it is anticipated that improved profitability will flow from "the increased volume of sales achieved from the existing infrastructure, particularly in the manufacturing businesses owned by IAMA, the roll out of the national computer system and the resulting access to improved management information".

On p.8 are various  "major assumptions" said to form the basis of the directors' forecast for the year ending 30 September 1997.  They are as follows:-

.normal seasonal weather patterns and conditions prevail;

.there is no major deterioration in commodity prices as they relate to the grain and cotton crops;

.there is no major deterioration in dairy farming incomes resulting from a fall in milk prices;

.there is no major deterioration in the current interest rate settings;

.volume sales increases will be achieved in the grain and cotton crops as forecast for those sectors; and

.additional sales and earnings will begin to be generated from the acquisitions that were settled part way through the year ended 30 September 1996 and also from those to be settled early in the forecast period ending 30 September 1997  ...  (Details are provided of the businesses in question.)

At the foot of p.8, under the heading "Business Risks", the following passage appears:-

"The forecast results of IAMA are based on the various assumptions referred to above.  The directors consider these assumptions best reflect the likely outcomes of IAMA's operations.  The actual performance of IAMA may be affected by a number of business risks and may vary from the forecasts.

As stated in the assumptions, the earnings forecast are based on normal seasonal weather patterns and conditions prevailing.  However, as with any organisation involved in the agricultural sector, the results of IAMA will be subject to variations in climatic conditions.  The degree of geographic diversification inherent within IAMA's operations is expected to limit this risk factor.

There are also risks which apply to industrial companies generally and include changes in economic conditions, movements in foreign exchange rates and interest rates, industrial disputes, the risks associated with new product development, competitor initiatives, and changes in government policy."

At the top of p.9 there is a paragraph headed "Sensitivity of Earnings".  It contains the following statement:-

"The following table provides an indication of the sensitivity of the directors' forecast earnings before interest and tax to sales levels and before any corresponding reduction in overheads."

The table suggests that any variation in assumptions concerning sales revenue of plus or minus 1% will result in a change in forecast earnings before interest and tax of plus or minus $1,246,000.00.
           The forecast increase in EPS for the year ended 30 September 1996 demonstrates an increase of 38% over the figure for the 15 months to 30 September 1995.  Obviously, if the figure for the 12 months to that date were available, the percentage increase would be even greater.  The figure also suggests that the second half of the 1995/96 year is expected to be significantly more profitable than the first half.  This may reflect seasonal variations.  The predicted figure for the year ending 30 September 1997 demonstrates an increase of 100% over the figure for the 15 months to 30 September 1995, implying an even larger increase as compared with the figure for the 12 months ended on that date.  This also shows an increase in excess of 23% over the estimated figure for the year to 30 September 1996. 
EFFECT OF OFFER ON IAMA
           The Part A statement does not address this matter in any detail.  The thrust seems to be that predictions as to the future profitability of IAMA do not take account of any likely benefits from the acquisition of Primac and assume no negative impact.  I will discuss this matter in more detail later in this judgment.
STATUTORY OBLIGATIONS
           The meaning of clause 17 is relatively clear, or at least seems to be so.  The Part A statement must set out, "other information material to the making of a decision ... to accept (the) offer", to the extent that such information is known to the offeror and has not been previously disclosed to the Primac shareholders.  The reference to "other information" reflects the fact that earlier provisions of Part A prescribe certain information for inclusion in the statement, which information is not relevant for present purposes.
           Notwithstanding the apparently clear intention of this clause, it was submitted by counsel for the respondent that it should be construed in a quite limited way because of the provisions of clause 18.  Broadly speaking, the latter clause contemplates prescription by regulation of additional matters and reports for inclusion in a Part A statement, but nothing in clause 18 suggests an intention that such regulations should limit the operation of clause 17.  As I have already indicated, regulations have been made as contemplated by clause 18, providing that when unlisted shares are offered as consideration, the Part A statement must contain:-

"... all such information as investors and their professional advisers would reasonably require, and reasonably expect to find in a prospectus, for the purpose of making an informed assessment of . . . the assets and liabilities, financial position, profits and losses, and prospects of the corporation ..."

Where, as here, the shares are listed, the Part A statement must contain:-

"All such information as investors and their professional advisers would reasonably require, and reasonably expect to find in a prospectus, for the purpose of making an informed assessment of . . . the effect of the offer ... on the disclosing entity ..."

Mr McMurdo submitted that where shares are offered as consideration, sections 1022 and 1022AA effectively prescribe the content of Part A statements to the exclusion of clause 17, in so far as concerns the obligation to disclose information about the company in which such shares are held. This would have the effect of limiting the disclosure obligation for present purposes to information required in order to make an informed assessment of the effect of the offer on IAMA, which obligation would obviously be much less extensive than that required in order to comply with clause 17 if that clause is given its ordinary meaning.
In construing a statute, one tries to adopt a meaning which allows all provisions to operate together as harmoniously as possible, giving each a meaning which does not unduly limit or contradict the functions of the others. However the present application of sections 1022 and 1022AA arises, not by force of statute, but because of regulation 6.12.2. On any view of the statute, the primary disclosure obligation for the purposes of a Part A statement (apart from the specific matters provided for elsewhere in Part A) is to be found in clause 17. Clause 18 itself makes no specific provision for further disclosure but merely contemplates the making of regulations which may do so. While it is no doubt appropriate to seek consistency in this very complex system of acts and regulations, I am not persuaded that clause 17 should be read down by reference to clause 18 and the regulations to which it refers. Clause 17 should be given its natural meaning. Clause 18 may operate for present purposes to prescribe additional obligations, but it does not limit the operation of clause 17.

ADEQUACY OF DISCLOSURE - CLAUSE 17
           The applicant submitted that I should infer from the offer itself that there are facts known to the IAMAQ directors justifying a depressed value for Primac shares.  Clearly, they must have some basis for their view as to such value.  The Part A statement records a number of matters derived from Primac's report which might cause some pessimism about the company's future.  In particular, it is made clear that the profit for the 1995/96 year is unlikely to be maintained in following years.  It is said that both Primac and IAMA have been suffering the effects of the drought, but while "the return of normal seasonal conditions across most of Australia" is seen as benefiting IAMA, it is said that there is "continuing softness in the livestock and wool markets", which appear to be areas of particular interest to Primac.  Numerous other matters emerging from Primac's report are included in the Part A statement.  Whilst the statement discloses considerations which would cause concern, there is no attempt to explain the way in which the IAMAQ directors have settled upon the value of Primac shares which underlies the offer. 
           An offeree is therefore faced with an offer which either puts the value of Primac shares at a level below their quoted price or puts that of IAMA shares at a level above their quoted price.  There can be little doubt that an offeree would like to know how the offeror reached the relevant conclusions.  Clause 17, however, is concerned with information, not opinions based on information.  I speak of business judgments rather than expert opinions.  In some circumstances, a valuation exercise of this kind may well resemble little more than an educated guess based upon experience.  In others, the process may involve a detailed evaluation of the assets and liabilities and the profitability of the corporation in question.  It is possible that the IAMAQ directors' view as to the relative values of the shares is based upon the accounting information which has been provided in the Part A statement, discounted to reflect the various matters extracted from the Primac report.  It is also possible that the offer reflects a genuinely held view as to the true value of the shares based upon something less than a detailed and reasoned valuation exercise.  As was pointed out in argument, it is also possible that an unreasonably low offer has been made as an exploratory exercise.  In any case, substantial primary information has been provided in the Part A statement.  There is no reason to infer from the terms of the offer that there has been any non-disclosure of material information known to the IAMAQ directors.  Clause 17 does not compel the disclosure of the judgment process as opposed to the facts upon which it is based.  This leads to the conclusion that there has been no demonstrated breach of clause 17 in so far as concerns relative share values. 
           Turning to the question of earning capacity, the major factor in assessing relative earning capacity would undoubtedly be the reliability of the predicted earnings per IAMA share for the years to 30 September 1996 and 30 September 1997.  For the former year, it might reasonably be anticipated that near-final figures would by now be available.  It is not clear to what extent the predicted EPS for the year ended 30 September 1996 is based on actual information and to what extent it is based on forecasts.  The note on page 7 of the information memorandum suggests that the estimated annual profit is based on forecasts for September, implying, as I have previously observed, that the prediction is otherwise based on actual figures.  One would have expected this to be made clear.  Ms Paini said that the information necessary for the compiling of the September figures was available within the various branches of IAMA, although it has not yet been consolidated.  Since IAMA is obliged to report to the stock exchange within 75 days of the close of the accounting period in question, I infer that the figures must be nearing completion.  Indeed, the duty imposed by Clause 17 would probably itself dictate their being made available for present purposes.  I consider that, in any event, IAMAQ ought at least to have made clear the extent to which its prediction for the 1995/96 year is dependent upon forecasts and the extent to which it is based upon actual figures.  If the forecast is based on budget figures, then the actual figures should have been disclosed to the extent that they are known within IAMA, including its branches.
           As for the EPS for 1996/97, the IAMAQ directors base their prediction upon a return of confidence in the cotton and cereal cropping sectors, assured water supply as a result of the breaking of the drought and increased sales from its existing undertakings,  together with increased organisational efficiency.  Certain significant assumptions underlie the forecast.  I have previously mentioned them.  The assumption of "normal seasonal weather patterns and conditions" is vague enough, but may have some meaning to those in the industry.  The assumptions of no major deterioration in commodity prices as they relate to grain and cotton crops and in dairy farm incomes resulting from any fall in milk prices are somewhat more problematical.
           A Primac shareholder assessing the prediction for 1996/97 would speculate as to the meaning of the term "major deterioration".  Mr Bruton, an accountant who gave evidence on behalf of the respondent, said that he read the reference to major deterioration as importing accounting standards of materiality which would assume no deviation in excess of 10%, presumably from current price levels.  However, it is clear from the cross-examination of Ms Paini that this was not the intention of the IAMAQ directors.   There is, in effect, no explanation of what constitutes a major deterioration, nor is there any indication as to the starting point from which any such deterioration is to be measured. Possibly, what is meant is deterioration from the price at the date of the Part A statement.  Even if this be so, the directors' prediction must be based upon additional background information such as whether current price levels are historically high or low and are currently rising or falling.  There can be little doubt that such information would be within the knowledge of an organisation such as IAMA.  Similar comments apply to the assumption that there will be no major deterioration in current interest rate settings.  Ms Paini said that the effect upon AIMA of fluctuations in these areas would not be direct because it is not primarily concerned in agriculture or pastoral activities, but in support industries.  This ought also to have been explained in the Part A statement.
           An offeree would undoubtedly want to know why profits are expected to increase substantially in the 1996-97 year.  Apart from the possibility of  economies within the existing structure, two sources of increased income are suggested:-

"Volume sales increases will be achieved in the grain and cotton crops as forecast for those sectors;" and

"Additional sales and earnings will begin to be generated from the acquisitions that were settled part-way through the year ended 30 September 1996 and also from those to be settled early in the forecast period ending 30 September 1997 ... ".

An increase in sales volume is assumed, but the extent of the assumed increase in not disclosed.  It would be highly relevant to a Primac shareholder to know the forecast percentage increase and the circumstances  justifying such  forecast. 
           The information memorandum suggests that increased income will also be derived from additional sales and earnings from "acquisitions".   The sources of such additional sales and earnings are specified as Bonlac IAMA, Inoculant Services, new retail branches,  Pratco Industries and Aussigold Produce.  Subsequently, Ms Paini swore, with respect to this assertion, as follows:-

"The assumptions made regarding businesses acquired by IAMAL have been included for the sake of completeness.  In terms of the overall sales revenue and profitability of IAMAL next year, they are individually not material.  In terms of IAMAL's profit for the next financial year, Pratco is likely to account for approximately 2%, Bonlac less than 1.5%, Inoculant Services less than 0.5%, and Aussigold is likely to account for less than 1% of profit.  Similarly, whilst new branches are being added within divisions of IAMAL on a regular basis, the impact of those new branches on sale and profitability is not likely to be significant".

Of the five identified additional sales outlets, four of them are expected to contribute less than 5% of IAMA's forecast profits for 1996/97.  Obviously, these areas can contribute little towards the predicted EPS increase of 23%.  There is no estimate of  additional sales and earnings attributable to new retail branches, but they are also expected to have insignificant impact.      The only other possible source of increased profit appears to be that referred to on page 7, namely, "increased volume of sales achieved from existing infrastructure, particularly in the manufacturing businesses owned by IAMA, the rollout of the national computer system and the resulting access to improve management information."  Again, there is no information as to the extent of, or basis for calculating increased volume of sales nor as to the expected systemic savings.  Given the very substantial predicted increase over the figure for the 1995/96 year, one would expect a rather more detailed factual justification for it. 
           In my view, it would be impossible for a Primac shareholder to assess the reliability of the predicted profit for the 1996/97 year without access to the information upon which the directors base their expectations.  Such limited detail as has been supplied has been shown to be misleading, leaving the prediction without any disclosed factual basis.  The IAMAQ directors must have some realistic basis for their prediction, and that information  should be supplied to the Primac shareholders.  I do not wish to be taken as advocating the making of prediction of this kind in takeover offers, but when they are made, the offerees must be given the information necessary to assess their reliability. 
           I should comment on two other aspects of the information memorandum.  In the section headed "Business Risks" on page 8,  after reciting that the forecast results are based upon the assumptions referred to above, the memorandum states:-

"The directors consider these assumptions best reflect the likely outcomes of IAMA's operations."

This is quite meaningless.  Assumptions as to underlying conditions for operations cannot reflect the likely outcome of those operations. 
           The third sentence of that paragraph is as follows:-

"The actual performance of IAMA may be affected by a number of business risks and may vary from the forecast."

The following paragraphs seek to expand upon that general proposition.  In particular, this statement appears:-

"There are also risks which apply to industrial companies generally and include changes in macro-economic conditions, movements in foreign exchange rates and interest rates, industrial disputes , the risks associated with new product development, competitor initiative, and changes in government policy."

It is reasonable to assume that in providing this catalogue of risks, the IAMAQ directors were seeking to address actually perceived business risks facing IAMA in the coming year.  It is therefore also reasonable to infer that a board with amalgamation in mind would have sought information concerning the magnitude of such risks.  Their predictions must have been based upon an assessment of them, and the Primac shareholders should have the benefit of knowing that assessment to the extend that it affects those predictions.
           My second comment concerns the KPMG report.  The last two paragraphs on page 7 of the information memorandum are as follows:-

"The financial forecasts for the year ending 30 September 1997 were subject to certain agreed-upon procedures by IAMA's auditors KPMG.  A letter from KPMG that refers to the agreed-upon procedures is set out in Annexure C.

KPMG have consented to the letter set out in Annexure C accompanying this Statement and to the above reference to that letter being included in this Statement in the form and context in which it is included."

These paragraphs say nothing about the degree of involvement of KPMG in the preparation or verification of the financial forecasts.  The KPMG "report" does not take the matter much further.  It records that "agreed-upon procedures" have been performed "on the budgeted consolidated profit and loss account of IAMA Ltd ... and its controlled entities for the financial year ending 30 September 1997".  It then records that:-

"The scope, nature and extent of the procedures performed were determined by IAMA and were significantly less in scope than an 'audit' or 'review' as defined by Australian Auditing Standards, and accordingly we did not provide an audit opinion or review statement."

The report then purports to set out the agreed procedures.   They comprised:-

"(i)ensuring, through observation and inquiry:  that the processes and procedures undertaken by local management to compile the financial forecasts conformed with instructions given by IAMA head office and that the forecasts were prepared on a basis consistent with the accounting policies adopted in preparation of the company's financial statements for the year ended 30 September 1995; and that the financial forecasts were prepared on the basis of the key assumptions determined by the Directors ("the key assumptions") as set out below ..." (The assumption discussed above were then recorded.)

"(ii)inquiries of company personnel and analytical procedures applied to the financial forecasts.   The analytical procedures were limited to:

•comparison of the financial forecasts with comparative unaudited prior period financial information; and

•obtaining explanations from management of significant variances."

There is no indication of the extent of the observation and inquiry conducted. Analytical procedures were obviously very limited in scope.  There is no information concerning the number or extent of variations discovered between forecasts and comparative unaudited financial information, nor of any explanations offered for such variations.
           The second last paragraph of the report stated that the accountants' procedures, "did not extend to providing an opinion as to whether the key assumptions provided a reasonable basis for the preparation of the financial forecasts".  The accountants then observed that forecast financial information might vary from actual results, "because events and circumstances frequently do not occur as forecast". 
           In the final paragraph, the accountants recorded that they had reported their detailed findings to the directors on 7 October 1996.  They apparently also reported that no matter had come to their attention which caused them to believe that the financial forecasts for 1996/97 year had not been properly compiled on the basis of the key assumptions and on a basis consistent with previously adopted accounting policies.
           The detailed findings, one would think, would assist substantially in determining the reliability of the forecasts of future profitability.  This information was not disclosed to the Primac shareholders. 
           I am satisfied that there has been a failure to provide information material to the making of a decision by the Primac shareholders whether or not to accept this offer.   That information includes:-

(a)the extent to which the forecast EPS for the year ended 30 September, 1996 is based on  actual as opposed to budget figures;

(b)where budget figures have been used, the extent to which it appears that actual figures will meet the budget predictions;

(c)the true factual basis for the predicted EPS for the year ending 30 September 1997;

(d)the meaning of the term "major deterioration" as used in relation to grain and cotton prices and dairy farm incomes;

(e)information as to whether such prices and incomes are presently historically high,  or otherwise and whether they are currently rising, falling or static;

(f)similar information concerning the term "major deterioration" used in connection with current  interest rate settings;

(g)the directors' assessment of the various "business risks" referred to at pp. 8,9 of the information memorandum as reflected in their predicted EPS for the year ending 30 September 1997;

(h)(i)        the instructions given to KPMG which led to the report of 23 October, 1996;

(ii)the extent of observation and enquiry carried out by KPMG pursuant to those instructions;

(iii)significant variations between financial forecasts and comparative unaudited prior period financial information discovered by KPMG;

(iv)explanations offered by management for such variations;

(v)the detailed findings as reported by KPMG on 7 October, 1996.

I infer from the Part A statement that all of this information is within the knowledge of the offeror.   There is no reason to believe that any of it has been previously disclosed to Primac shareholders.  It is true that some of it may be available to them from other sources, but that is not the point.  The assessment of the IAMAQ directors' predictions should be conducted with knowledge of their perceptions of such information.
ADEQUACY OF DISCLOSURE - CLAUSE 18 AND SECTION 1022 AA  
This leaves the question of whether there has also been a failure to comply with the requirements of section 1022AA. Whereas Clause 17 requires disclosure of material information known to the offeror and not previously disclosed to the Primac shareholders, s.1022AA requires disclosure of all such information as investors and their professional advisers would reasonably require, and reasonably expect to find in the Part A statement for the purpose of making an informed assessment of the effect of the offer on IAMA. Whereas clause 17 is limited to information actually known to the offeror, s.1022AA is not. Section 1022AA clearly contemplates that the offeror will have given consideration to the effect of the offer on the "disclosing entity". This is not an unreasonable assumption. It is impossible to conceive of such an offer being seriously made without some such consideration. The Part A statement and supporting documentation contain very little information on this subject.
           On pp.6 and 7 of the Part A statement, there is some discussion of possible strategic steps to be taken, depending on whether or not the offer is wholly or partially successful.  The IAMA group profit and loss statements appear on p. 6 of the information memorandum.   Primac's profit and loss statements are also provided.  There is a "pro forma" consolidated balance sheet.   At p.18, this passage appears:-

"Having regard to information known to IAMA in relation to Primac's financial position, the assumption that Primac will maintain the same level of after tax profits including abnormals in 1996-97 as it recorded in 1995-96, the market forecast for Primac's future performance and the potential for benefits to flow from Primac becoming a 50.1% owned subsidiary of IAMA, it is expected that the acquisition will not dilute IAMA's earnings per share for 1996-97.

The expectation that the acquisition by IAMA of 50.1% of the issued shares of Primac will not dilute IAMA's earnings per share for 1996-97 has been calculated even before including any benefits from the operational synergies  and opportunities to eliminate duplication and improved efficiencies which may occur following the acquisition.  IAMA has not quantified and believes it will not be in a position to quantify these benefits until it has had the opportunity to conduct a review of the activities, assets and labour force of Primac to evaluate the performance, profitability and prospects of Primac in light of the information available to it."

A number of comments must be made.  Firstly, the directors of Primac have reported that they are not confident of being able to maintain the current level of dividends in 1996-97.  Given that a substantial part of Primac's profits for 1995-96 was attributable to abnormal items, it is difficult to see how IAMAQ could assume that Primac will maintain, "the same level of after tax profits including abnormals in 1996-97."  Secondly, the market forecasts for Primac's future performance have not been disclosed.  Thirdly, there is no identification of the potential for benefit from Primac's becoming a 50.1% owned subsidiary of IAMA.  Hence Primac shareholders are not given any factual basis for the assumption that the acquisition of Primac will not dilute IAMA's earnings per share for 1996-97.
As to the assertion that IAMAQ is not in a position to quantify the likely benefits from, "the operational synergies and opportunities to eliminate duplication and improved efficiencies which may occur following the acquisition", it is difficult to believe that no work has been done in this respect. One would have expected a commercial undertaking such as IAMAQ to have identified with some precision the likely advantages and disadvantages inherent in the proposed acquisition. These matters are a significant part of those advantages. It seems most unlikely that the directors of IAMAQ have decided to acquire Primac on the basis that they will discover the advantages of so doing after the acquisition. It may be that IAMAQ is not presently able to give a detailed quantification of such benefits, but it would be appropriate to give the Primac shareholders the benefit of such knowledge as has been derived to date. Section 1022AA requires as much. As appears from the affidavits of Messrs O'Dwyer and Rogers, there is an expectation that such information should be available to offerees. There has been a breach of the requirements of clause 18 of Part A of s.750.
Orders
           I am mindful of the useful observations made by Sheppard J. in Gantry Acquisition Corp v. Parker & Another (1994) 51 FCR 554 at pp.564-5. His Honour said:-

"... it does seem to me that a court 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. That should not occur unless it is tolerably clear that the breach of s.750 which is alleged to have occurred does involve the withholding of relevant information from shareholders."

It follows from what I have said that I am satisfied that in this case the breaches of s.750 which I have identified have the effect of withholding such information from Primac shareholders. For my part I cannot see how anybody could make an intelligent decision about this offer based upon the information provided in the Part A statement and supporting documentation. In those circumstances I am minded to make a declaration in terms of paragraph 1 of the Notice of Application and to the extent that it may be necessary, to make restraining orders pursuant to para. 2 thereof. I will, however, hear further submissions as to the form of order and as to costs.