FEDERAL COURT OF AUSTRALIA

Professional Investment Holdings Limited, in the matter of Professional Investment Holdings Limited [2010] FCA 1193

IN THE MATTER OF PROFESSIONAL INVESTMENT HOLDINGS LIMITED (ACN 074 949 429)

REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

Introduction

1                                             This is the first court hearing of an application to approve four schemes of arrangement (“Schemes”) between Professional Investment Holdings Limited (“PIH”) and four separate classes of shareholders pursuant to s 411 of the Corporations Act 2001 (Cth). 

Outline of Scheme

2                                             The PIH Group is one of Australia’s leading financial planning and product solution providers.  It provides a comprehensive range of financial advice and distributes financial products through one of the largest financial advice networks in Australia, comprising over 1,300 associated branches and over 1,000 financial advisers with an extensive client base, and through its networks in five other countries comprising more than 500 financial advisers. 

3                                             The proposal which was announced in August 2010 provides for PIH shareholders to transfer their shares to Centrepoint Alliance Limited (“Centrepoint”). 

4                                             Centrepoint is a listed public company which provides finance to fund insurance premiums to corporate clients using insurance brokers and agents as intermediaries.  Centrepoint’s activities are referred to in section 5.1 of the Scheme Booklet in which it is pointed out that, in addition to its specialist lending operations, Centrepoint had a surplus cash balance in the order of $15 million prior to a subscription of $5 million under a Convertible Note Subscription Deed, to which I will refer again later.

5                                             The four separate classes of shares in PIH are ordinary shares, A class shares, redeemable preference shares and one Z class share. 

6                                             There are 27,246,701 fully paid ordinary shares, 8,428,583 fully paid A class shares, 11,406,402 fully paid redeemable preference shares.  There is only one fully paid Z class share. 

7                                             The proposed schemes of arrangement provide for PIH shareholders to receive 1.4921 new Centrepoint shares (rounded to the nearest share) for each of their shares in PIH, and for the Scheme to be effected so as to result in PIH becoming a subsidiary of Centrepoint. 

8                                             The economic effect of the proposal is that there will be a “reverse takeover” of Centrepoint.  This is because the term “reverse takeover” is referred to in ASIC’s Regulatory Guide 60 – Schemes of Arrangement, which states at RG 60.36 that a scheme of arrangement results in a reverse takeover if the consideration offered to members of the company proposing the Scheme is shares in the offeror company, and the Scheme results in a change in control of the offeror company, or has a material effect on control of the offeror company. 

9                                             That will occur in this case because PIH will, as a result of the Scheme, have approximately 75% of the new merged entity. 

10                                          The PIH directors unanimously recommend the Scheme. 

Issues arising on the application

11                                          A number of issues were raised this morning on the application to convene Scheme meetings.

Convertible Notes

12                                          The first issue relates to the question of the Convertible Notes to which I referred earlier.  That is described in section 10 of the Scheme Booklet. 

13                                          The Scheme Booklet states that there is an existing relationship between Centrepoint and PIH, because Centrepoint has agreed to provide an advance of $7.5 million to PIH by way of subscription by Centrepoint for the Convertible Notes in accordance with the terms of the Convertible Note Subscription Deed to which I referred earlier. 

14                                          The Convertible Notes are an unsecured debt obligation of PIH, and provide for the payment of interest at the rate of 8% per annum until the Convertible Notes are either redeemed on or before 30 November 2011 by repayment, or converted into ordinary shares in PIH if the Scheme is not implemented.

15                                          It is the provisions which relate to the effect of the possible failure to approve the Scheme that caused me to raise this issue with Mr Oakes SC this morning. 

16                                          The Scheme Booklet states that if the four Schemes are not approved or do not become effective by 28 February 2011, then PIH may redeem the Convertible Notes prior to their due date, but if it does so, PIH is required to pay Centrepoint a fee of $325,000 for early repayment.  If PIH exercises that right, the other provision to which I will refer shortly is not triggered. 

17                                          However, if PIH were not to exercise its right of early repayment, and if the Schemes are not approved, then all of the Convertible Notes will be converted by Centrepoint into shares in PIH, which will have a 12% holding of the fully diluted share capital of PIH.  This would value PIH at approximately $62.5 million, which is less than the valuation ascribed to PIH in the independent expert’s report. 

18                                          Mr Oakes submitted that this arrangement is a separate commercial arrangement from the Merger Implementation Deed and the Schemes, and that accordingly, the question is not to be governed by the considerations which affect “lock-up devices” or deal protection measures which have been discussed by the Takeovers Panel in Guidance Note 7 – Lock Up Devices.

19                                          There is some force in what Mr Oakes says, however what concerns me is the question of whether the rights which were granted under the Convertible Note Subscription Deed, insofar as they are linked to the Schemes not being approved at the Scheme meetings, might amount to an obstacle to shareholders wishing to vote against the Schemes at the Scheme meetings. 

20                                          It was an issue of that type to which Lindgren J referred in Re APN News & Media Limited (2007) 62 ACSR 400 at [52] which caused me to give some consideration to the issue.

21                                          Ordinarily, questions of the effect of break fees or other deal protection measures are considered at the first court hearing rather than at the second Court hearing.  Nevertheless, it seems to me to be appropriate that this matter be addressed by an affidavit to be filed at the second Court hearing because the issue arose for the first time this morning. 

22                                          In my view, the appropriate course is for there to be evidence along the lines of that suggested by Lindgren J in [55] of the decision in Re APN News & Media Limited in respect of the negotiations which culminated in the execution of the Convertible Note Subscription Agreement or Deed.

Independent expert’s valuation methodology

23                                          The second issue which arose was one which seems to me to go to questions of disclosure.  It arises from the terms of the independent expert’s report. 

24                                          The independent expert approached the valuation of PIH upon the basis that the most appropriate valuation methodology to apply is the capitalisation of maintainable earnings.

25                                          The independent expert approached the question of the appropriate methodology to value the shares in the proposed merged entity on a sum of the parts basis.  This includes a valuation of Centrepoint based on the net assets of that company calculated on a going concern basis.   

26                                          The independent expert expressed an opinion in relation to each of the separate schemes of arrangement stating that in the absence of a superior proposal the target share Scheme is fair and reasonable and therefore in the best interests of the shareholders.

27                                          In addressing the question of the fairness of the consideration for the ordinary shares, the A class shares and the redeemable preference shares, the expert set out the comparison of the estimated fair market value of the shares and the estimated fair market value of the consideration in a table which is described as table 1 on page 4 of the report. 

28                                          The table shows that the estimated fair market value of each of those classes of shares is in a range from a low of $1.67 to a high of $1.88.  The table also shows that the estimated fair market value of the consideration offered by Centrepoint is in the range of a low of $1.57 to a high of $1.87.  The expert went on to say the following:

We note that there is a 95.2% overlap between our value range of the consideration and the value range for the relevant PIH Shares which we consider is sufficient overlap to conclude that the Proposed Merger is fair to the holders of ordinary, A class and redeemable preference shares in PIH notwithstanding that the mid-point of our valuation of the consideration offered by Centrepoint is 3.1% below the mid-point of our valuation of these classes of PIH shares.  However, if PIH Shareholders formed the view that the value of these shares was above $1.87 per share, which represents the upper 4.8% of our valuation range, they may not consider the Proposed Merger to be fair.

29                                          It seemed to me that the expression “95.2% overlap” raised two considerations. 

30                                          The first is whether this expression provides a sufficient explanation to shareholders of what is set out in the table. 

31                                          The second is whether this expression provides a sufficient basis for the expert’s opinion that the offer is fair.  ASIC’s Regulatory Guide 111 – Content of Expert Reports at RG 111.10 defines an offer as being fair if the value of the offer price is equal to or greater than the value of the securities which are the subject of the offer. 

32                                          To say that an offer is fair because there is an “overlap” between the value range of the consideration and the value range of the PIH shares, may not tell a shareholder why this is so.

33                                          Of course, a shareholder looking at the table would be able to appreciate that the low end of the value of the consideration is below the estimated fair market value of the relevant classes of shares but that it is only about 5% below that figure.  Shareholders should also be able to see from the table that about 95% of the valuation range for PIH shares falls within the value range of the consideration offered by Centrepoint.  However, it seems to me that this is something which could have been stated in clear and concise language.

34                                          As I said in Seven Network Limited [2010] FCA 220 (“Seven Network”), one of the principal questions to be taken into account in the exercise of the court’s power to convene scheme meetings is the emphasis upon ensuring full disclosure.  That principle was stated by Santow J in Re NRMA Limited (2000) 33 ACSR 595 at [16].

35                                          In my view, what is needed is for those involved in the process of preparing scheme documents and ancillary material to provide explanations of the material in clear and concise terms.  If that is not done there is a risk that the scheme documentation will fail to contain adequate disclosure.    

36                                          As I said at [61] in Seven Network, it is important to bear in mind that the Schemes and the explanatory material were bulky and contained complexities which may not have been apparent other than to the most sophisticated shareholders.  That consideration is also apt in the present case, although the complexity and bulk of the material is less than that which was before the shareholders in Seven Network. 

37                                          The other question to which I have referred is whether the terms of RG 111 are satisfied where there is an “overlap” between the value range of the consideration and the value range of the relevant classes of PIH shares. 

38                                          It is implicit in the statements of the independent expert to which I have referred that the low end of the valuation range of the consideration is only about 5% below the low end of the estimated fair market value of the target shares, and accordingly the terms of RG 111 are satisfied.  It seems to me that it would have been preferable if that were explained in clear and concise terms, but I have come to the view that I ought not to require any amendment to the Scheme Booklet.

Other matters

39                                          I do not think it is necessary to address any of the other issues which were discussed this morning.  Mr Oakes took me through the Scheme documents in some considerable detail. 

40                                          The other matters which arose this morning are sufficiently covered by what is said in Mr Oakes’ written submissions, which I will mark as MFI1.

Conclusion

41                                          For those reasons I will make orders in terms of the short minutes of order which I will sign and date and place with the court papers.

Associate:

Dated:         3 November 2010