FEDERAL COURT OF AUSTRALIA

Manchester Unity Australia Limited, in the matter of; application by Goaley [2008] FCA 1845

ROBERT JOHN GOALEY

NSD 1641 OF 2008

EMMETT J

17 OCTOBER 2008

SYDNEY

IN THE MATTER OF MANCHESTER UNITY AUSTRALIA LIMITED ACN 087 648 711

THE COURT ORDERS THAT:

1.                  Pursuant to s 411(1) of the Act, Manchester Unity convene a meeting (“Scheme Meeting”) of the members of Manchester Unity for the purpose of considering and, if thought fit, agreeing (with or without modification) to a scheme of arrangement to be made between Manchester Unity and its members, being the scheme substantially in the form of the document appearing at Tab 2 of Exhibit 1.

2.                  The Scheme Meeting be held at the Wesley Conference Centre, 220 Pitt Street, Sydney at 2pm (Sydney time) on 15 December 2008, following the Constitutional Change Meeting to be held at 10 am on the 15 December 2008.

3.                  The plaintiff, or failing him, John Charles Barker, be appointed Chairman of the Scheme Meeting.

4.                  The Chairman appointed to the Scheme Meeting have power to adjourn the Scheme Meeting in his absolute discretion.

5.                  All voting at the Scheme Meeting to be by poll as declared by the Chairman.

6.                  The Explanatory Memorandum that is Exhibit 1 (“the Explanatory Memorandum”) be approved for distribution to the members of Manchester Unity.

7.                  On or before 19 November 2008, Manchester Unity despatch by pre-paid post to each member of Manchester Unity who is recorded in the Manchester Unity register of members as at midnight at the end of 27 August 2008:

(a)        a document substantially in the form of the Explanatory Memorandum;

(b)        a letter from the Chairman of Manchester Unity, substantially in the form that appears at tab 10 of Exhibit RJG2 to the affidavit of Robert John Goaley sworn 14 October 2008;

(c)        a proxy form for the Scheme Meeting, substantially in the form that appears at tab 11 of Exhibit RJG2 to the affidavit of Robert John Goaley;

(d)        a payment authority form substantially in the form that appears at tab 13 of Exhibit RJG2 to the affidavit of Robert John Goaley;

(e)        an allocation form, substantially in the form that appears at tab 14 of Exhibit RJG2 to the affidavit of Robert John Goaley;

(f)         a review request form, substantially in the form that appears in Schedule 3, of Attachment 2  to the Explanatory Memorandum;

(g)        a reply paid envelope (for use in Australia only) for the return of the proxy form.

8.                  The time by which members must return their proxy forms, or lodge their electronic proxy forms, for the Scheme Meeting to be no later than 2pm on 13 December 2008.

9.                  Other than regulation 5.6.13 of the Corporations Regulations 2001, rule 2.15 of the Rules shall not apply to the Scheme Meeting.

10.              Notice of the hearing of the application for an order approving the proposed Scheme substantially in the form of Annexure “A” to these orders be published once on or before 15 December 2008 in “The Australian” newspaper, and Manchester Unity otherwise be exempted from compliance with the requirement to publish a notice at least 5 days before the date fixed for hearing of the application pursuant to r 3.4 of the Rules.

11.              This proceeding be stood over to 9.30 am on 19 December 2008 before Justice Emmett for the hearing of any application to approve the Scheme of Arrangement pursuant to s 411(4)(b) of the Act.

12.              Liberty to apply on one day’s notice.

13.              These orders be entered forthwith.

The Court notes the indemnity between the Plaintiff and Manchester Unity referred to in paragraph 6 of the affidavit of Robert John Goaley sworn 14 October 2008.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF MANCHESTER UNITY AUSTRALIA LIMITED ACN 087 648 711

REASONS FOR JUDGMENT

1                     The plaintiff, Mr Robert John Goaley, is a member of Manchester Unity Australia Limited (Manchester Unity).  Mr Goaley has applied to the Court for orders under s 411 of the Corporations Act 2001 (Cth) (the Act), convening a meeting of the members of Manchester Unity for the purpose of inviting its members to consider, and if thought fit, to agree to a scheme of arrangement proposed to be made between Manchester Unity and all of its members. 

2                     The proposed scheme is part of a broader proposal involving the demutualisation of Manchester Unity and its merger with The Hospitals Contribution Fund of Australia Limited (HCF).  The proposal involves the payment of the sum of $256 million by HCF, which will be applied in consideration of the members of Manchester Unity surrendering all rights and entitlements that they have as members.  Members of Manchester Unity are also the holders of policies issued by Manchester Unity, which will not be affected by the proposed scheme. 

3                     Mr Goaley has entered into a deed of indemnity with Manchester Unity whereby he is indemnified in respect of any costs, losses or damages suffered or incurred by him in connection with this application.  The reason for the slightly unusual application by a member, who is also the chairman of directors of Manchester Unity, is to be found in the Constitution of Manchester Unity.  Clause 14.4 of the Constitution provides that an application under s 411 of the Act may only be made by Manchester Unity following the passing of a special resolution authorising the directors to make such an application.  Such a special resolution must be passed in accordance with the special regime contained in clause 14.4 of the Constitution.  No such resolution has yet been passed.

4                     However, it is not intended to bypass the prohibition in clause 14.4.  One of the steps in the broader proposal involves the convening of an extraordinary general meeting of members of Manchester Unity for the purposes of passing a special resolution in accordance with rule 14.4.  The logistics of propounding the scheme and convening meetings are such that it was thought appropriate for Mr Goaley to move the Court in anticipation of the members passing a resolution in accordance with clause 14.4.  If they do not, then the scheme will not proceed. 

5                     Manchester Unity is registered under the Private Health Insurance Act 2007 (Cth) (the Private Health Act) as a not for profit private health insurer.  Manchester Unity operates three businesses as follows. 

(1)        A private health insurance business, which is the ninth largest private health insurance fund in Australia. 

(2)        A financial products business based on friendly society benefit funds. 

(3)        A retirement and aged care services business. 

As at 27 August 2008, Manchester Unity’s health insurance fund had approximately 79,000 members.  That fund provides insurance coverage to more than 185,000 people. 

6                     The HCF Group of companies was established in 1932.  HCF is registered under the Act as a company limited by guarantee.  It is also registered under the Private Health Act as a not for profit private health insurer.  HCF is the third largest private health insurance group in Australia with a national market share of approximately 9.8% of persons who have hospital cover. 

7                     On 27 August 2008, Manchester Unity and HCF entered into a Merger Implementation Deed whereby they agreed to implement procedures to bring about the proposed merger.  The steps involved may be summarised generally as follows. 

(1)        The Constitution of Manchester Unity will be amended to permit the proposed application to be made. 

(2)        The proposed scheme of arrangement will be propounded to the members of Manchester Unity. 

(3)        Manchester Unity will be registered under the Private Health Act as a for profit organisation. 

(4)        HCF will become a member of Manchester Unity.

(5)        The memberships of all other members of Manchester Unity will be cancelled, leaving HCF as the sole member. 

(6)        HCF will subscribe $256 million for 256 million fully paid ordinary shares in Manchester Unity. 

(7)        Manchester Unity will distribute the sum of $256 million to participating scheme members in accordance with allocation rules contained in the proposed scheme. 

8                     The amendments to the Constitution fall into two categories.  First, there are those that will take effect at the meeting.  Secondly, there are those that will take effect after all the conditions of the proposal have been satisfied or waived, including Court approval. 

9                     The proposal is conditional upon a number of factors, including all necessary regulatory approvals.  The Merger Implementation Deed provides for the conditions, some of which cannot be waived.  Under the proposal, the sum of $251 million will be distributed to participating scheme members forthwith.  The balance of $5 million will be retained against the possibility of further payments becoming payable pursuant to any application for review being upheld by a review committee, which is to be established under the proposed scheme.  Any balance of the $5 million that has not been applied by 30 June 2009 will ultimately be paid to members of Manchester Unity.

10                  A member of Manchester Unity has effectively two sets of rights.  First, there are contractual rights arising under policies of insurance, which will be unaffected.  Secondly, there are rights as members, which will be extinguished by the operation of the proposed scheme.  All voting members of Manchester Unity have guaranteed the liabilities of Manchester Unity in the event of a winding up, although that liability is limited to $1.  That obligation will be extinguished by the operation of the scheme.  That is unlikely to have any materially adversely prejudicial effect on Manchester Unity’s ability to pay its creditors as and when its debts fall due. 

11                  The scheme provides for the determination of participating members by reference to dates that are set out in the scheme.  There is also provision for succession to membership in the event of a member’s dying after the date. 

12                  The rules for the allocation of the consideration are not without some complexity.  The number of units allocated to a participating scheme member will be determined as the sum of a base allocation and a duration allocation for each qualifying policy owned by the participating member at the cut off date (as defined), plus as many additional units, if any, as are required to ensure that each participating scheme member has a minimum entitlement of $250.  The base allocation is determined by reference to the type and scale of each qualifying policy held at the cut off date.  The duration allocation is determined by reference to the type and size of each qualifying policy held at the cut off date and is applied in respect of each year of membership of Manchester Unity.

13                  The obligations of HCF under the proposal will be secured by a deed poll, which will be entered into by HCF in favour of the members of Manchester Unity.  The deed poll will record the promises to be given by HCF in favour of members, subject to the scheme’s becoming effective.  The regime contemplated by the scheme ensures that the interests of participating members will be protected by the payment by HCF of the transaction consideration into a trust account prior to the time when the membership rights of participating scheme members are to be cancelled.  The directors of Manchester Unity have unanimously recommended that members vote in favour of the scheme, in the absence of a superior proposal. 

14                  Mr Goaley has, with the assistance of Manchester Unity, prepared a proposed explanatory memorandum for distribution to members.  The explanatory memorandum contains reports by Lonergan Edwards & Associates Limited (Lonergan Edwards) and Ernst & Young ABC Pty Limited (Ernst & Young) in respect of actuarial considerations and by PricewaterhouseCoopers in relation to taxation implications of the proposed demutualisation.  Lonergan Edwards have assessed the value of Manchester Unity on a 100 per cent control basis as being between $216 million and $239 million.  Given that the total consideration of $256 million exceeds the upper end of that valuation by $17 million, they have concluded that the consideration is fair and reasonable and that the proposal is in the best interests of Manchester Unity’s members as a whole. 

15                  Ernst & Young, the appointed actuaries of Manchester Unit, have reviewed the impact of the demutalisation and merger proposal on members’ interests.  They have concluded that the reasonable benefit expectations of policy holders are unlikely to be materially adversely impacted by the proposal, that premium contribution rates are unlikely to be materially adversely affected by the proposal, that the longer term outlook for future premium contribution rates is unlikely to be materially adversely impacted by the proposal, that the security of benefits provided to policy holders in respect of the health insurance business is unlikely to be materially adversely impacted as a result of the proposal and that the security of benefits provided to policy owners in respect of the financial products business is unlikely to be materially adversely impacted as a result of the proposal.

16                  The allocation rules provided for in the proposed scheme were devised by the directors of Manchester Unity with the assistance of the appointed actuaries.  In their report the appointed actuaries have concluded that the allocation rules represent a fair and reasonable basis upon which the financial benefit arising from the proposal will be distributed amongst participating members.   

17                  In their report, PricewaterhouseCoopers have set out the possible tax consequences for members.  There is a particular possible complication arising from the operation of capital gains tax legislation, which is adverted to by PricewaterhouseCoopers in their report. 

18                  The Merger Implementation Deed contains provisions to which the Court’s attention has been expressly drawn by Mr Goaley.  Clause 11 provides that Manchester Unity will ensure that neither it nor any of its related bodies will directly or indirectly engage, in effect, in any inquiries with a view to obtaining any offer in relation to a possible competing transaction.  Manchester Unity also agrees that it will not solicit a competing proposal or negotiate an unsolicited competing proposal, although it is not precluded from negotiating such a proposal if the board determines in good faith and on legal advice that the competing proposal is superior and that failure to respond would be reasonably likely to constitute a breach of the directors fiduciary or statutory obligations. 

19                  Those exclusivity provisions are not, in my view, unnecessarily restrictive.  The exclusivity provisions are limited to an exclusivity period lasts from 27 August 2008, the date of the Merger Implementation Deed, until the date of the implementation of the scheme.  There are overriding qualifications in relation to fiduciary duties.  The exclusivity provisions are set out in full and described in detail in the proposed explanatory memorandum. 

20                  In addition, Manchester Unity may be liable to pay a reimbursement fee of $2,560,000 to HCF in certain circumstances, which are set out in the proposed explanatory memorandum.  Generally, the circumstances are that the Merger Implementation Deed is terminated because Manchester Unity commits certain breaches, or if the Manchester Unity board recommends a competing transaction, or if any director of Manchester Unity ceases to support the proposal or supports a competing transaction.  The Merger Implementation Deed also provides that HCF will pay transaction and marketing costs in an amount of $1,200,000.  On the other hand, HCF is not required to pay that amount if Manchester Unity is called upon to pay the reimbursement fee of $2,560,000 to which I have just referred. 

21                  Such a reimbursement fee is not uncommon in transactions of this nature.  The fee in question was negotiated between Manchester Unity and HCF with legal and other appropriate advice.  The existence of the fee is adequately disclosed in the proposed explanatory memorandum.  On the basis that the total value of the consideration payable by HCF is an indication of the equity value of membership of Manchester Unity, the fee is no more than 1% of that equity value.  It therefore accords with the Takeovers Panel’s view (Guidance Note 7: Lock-Up Devices, issued 7 December 2001) that a reimbursement fee that does not exceed 1% of equity value would be unlikely to be anti-competitive or coercive.  I am satisfied that the fee in question will not have that effect. 

22                  By letter of 17 October 2008 to Mr Goaley and Manchester Unity’s solicitors, Australian Securities and Investments Commission (the Commission) has confirmed that it has had adequate opportunity to consider the draft explanatory memorandum.  The Commission does not currently propose to appear to make submissions or intervene to oppose the orders convening the meeting to consider the proposed scheme.  I have considered the proposed explanatory memorandum, although I have not endeavoured to master it in full detail.  I am satisfied that it provides adequate disclosure to scheme participants.  Clearly enough, the proposal is an arrangement or compromise within the meaning of s 411 of the Corporations Act and Manchester Unity is a Part 5.1 body as defined in the Corporations Act. 

23                  In considering the application I have had regard to the affidavits of Mr Goaley sworn 14 October 2008;  John Charles Barker, sworn 13 October 2008;  Martin John Hall, sworn 15 October 2008;  Warwick Evan Gard, sworn 14 October 2008;  Peter Vincent Kennedy, sworn 13 October 2008;  Dario Molina, sworn 15 October 2008;  Naomi Louise Devenney McRae, sworn 14 October 2008;  Ian McDonald, sworn 15 October 2008;  the second affidavit of Warrick Evan Gard, affirmed on 16 October 2008;  the second affidavit of Peter Vincent Kennedy, sworn 17 October 2008;  a second affidavit of Martin John Hall, affirmed 17 October 2008;  an affidavit of Jane Ann McRae, sworn 17 October 2008;  and a second affidavit of Naomi Louise Devenney McRae, sworn 17 October 2008.

24                  I am satisfied that the scheme is one to which the members of Manchester Unity, properly informed, may well decide to agree.  The scheme is one which, if it is agreed to by the members, is likely to be approved by the Court in the event that it is not opposed.  In all of the circumstances I propose to accede to Mr Goaley’s application to make orders under s 411.  However, there are some minor amendments to be made to the explanatory memorandum.  Accordingly, I propose to stand the matter over to 9.30 am on Monday with a view to making orders pursuant to s 411.

Associate:

Dated:         18 December 2008