FEDERAL COURT OF AUSTRALIA

BG & E Management Pty Ltd v de Aboitiz [2016] FCA 1368

ORDERS

THE COURT:

1.    Declares that the terms set out in the notice of compulsory acquisition issued to each of the shareholders in Australian Water Holdings Pty Limited ACN 003 702 832 (excluding the plaintiff) by the plaintiff dated 1 June 2015 (being each of the notices at pages 89 to 907 of Exhibit FC1 to the affidavit of Frank Cerra sworn 30 July 2015) (“the Compulsory Acquisition Notices”) give a fair value for the securities the subject of each of the Compulsory Acquisition Notices.

2.    Approves the acquisition of the securities by the Plaintiff on the terms set out in each of the Compulsory Acquisition Notices.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

(Delivered ex tempore, revised from transcript)

HIS HONOUR:

1    In December 2014, BG & E Management Pty Limited acquired an interest in a tranche of shares in Australian Water Holdings Pty Limited. That acquisition resulted in BG & E holding slightly more than 90 per cent of the issued ordinary shares of AWH. Shortly thereafter, BG & E instigated a procedure available to it under the Corporations Act 2001 (Cth) whereby it could compulsorily acquire the balance of the shares in AWH from the minority shareholders. The first step in that process is the service of a compulsory acquisition notice on the minority shareholders. The notice that BG & E served on the AWH minority shareholders specified an acquisition price their AWH shares of 1.30 cents per share. A number of the shareholders objected to the compulsory acquisition of their AWH shares on the terms set out in the notice. BG & E now applies to the Court for approval of the compulsory acquisition of shares from the AWH minority shareholders pursuant to s 664F of the Corporations Act.

2    There are essentially no contradictors in respect of BG & E’s application. That is because the shareholders who originally objected to the compulsory acquisition, and who are the defendants to the proceeding, have all agreed to transfer their AWH shares to BG & E on the terms set out in the compulsory acquisition notice. All but one of the other shareholders who did not object to the acquisition have also transferred their AWH shares to BG & E.

3    The sole shareholder who has held out did not object to the compulsory acquisition in accordance with the notice. He is accordingly not a party to the proceeding. Perhaps more importantly, he did not appear at the hearing of BG&E’s application or otherwise make any submissions in opposition to the compulsory acquisition.

4    The resolution of BG & E’s application essentially involves two questions. First, has BG & E established that it meets or has complied with the formal and procedural requirements for a compulsory acquisition under Pt 6A.2 of the Corporations Act? Second, and perhaps more fundamentally, has BG & E established that the terms set out in the compulsory acquisition notice give a fair value for the AWH shares in question?

5    For the reasons that follow, the answer to both those questions is in the affirmative. In such circumstances, the Court must approve the acquisition of the shares on those terms.

Formal and procedural requirements

6    The evidence adduced by BG & E (affidavits of Frank Cerra sworn 30 July 2016 and 27 October 2016, together with exhibit FC1; affidavits of Nathan Timosevski and Andrew Fressl sworn 30 July 2015, together with exhibit NT1; affidavit of Alex David Linden sworn 26 October 2016, together with exhibit ADL1 and exhibit A) establish that BG & E meets or has complied with the following formal and procedural requirements for compulsory acquisition under Pt 6A.2 of the Corporations Act.

7    First, BG & E is a 90 per cent shareholder in relation to ordinary shares in AWH: see ss 664A(1) and (3).

8    Second, BG & E lodged a compulsory acquisition notice for the acquisition of the remaining AWH shares with the Australian Securities and Investments Commission on 1 June 2015. This was within six months of the date that BG & E became a 90 per cent holder in relation to the ordinary shares in AWH: see s 664AA.

9    Third, the terms of the compulsory acquisition involved the payment of a cash sum, being 1.30 cents per share: see s 664B.

10    Fourth, the compulsory acquisition notice lodged by BG & E was in the prescribed form, contained the information specified in s 664C(1), was lodged with ASIC and was given to the remaining AWH shareholders at that time, along with an experts report under s 667A and an objection form: see s 664C(2).

11    Fifth, BG & E prepared and lodged with ASIC a list of the shareholders who had objected to the acquisitions: see ss 664E(1), (2) and (3).

12    Sixth, the objectors held about 73 per cent of the shares the subject of the compulsory acquisition notice. BG & E gave everyone to whom the compulsory acquisition notice was sent notice that it had applied to the Supreme Court of New South Wales for approval of the acquisition under s 664F within one month after the end of the objection period: see s 664E(4) and ss 664F(1) and (2). The objection period ended on 6 July 2015 and the notices were given on 31 July 2015. The relevant application was filed in the Supreme Court on the same day that notice was given. The proceeding that was commenced in the Supreme Court was subsequently transferred to this Court.

13    Seventh, the experts’ report that accompanied the compulsory acquisition notice was a report prepared by Messrs Timosevski and Fressl of Crowe Horwath Corporate Finance (Aust) Ltd. Crowe Horwath was nominated by ASIC to prepare the report: see s 667AA. Crowe Horwath was not an associate of BG & E; it had no shareholding or other associations with BG & E: see s 667B(1).

14    Eight, the experts’ report contained a statement by the experts that the terms proposed in the notice gave a fair value for the AWH shares in question and set out the reasons for forming that opinion: see s 667A(1).

A fair value for the AWH shares?

15    A fair value is defined in s 667C in the following terms:

667C Valuation of securities

(1)    To determine what is fair value for securities for the purposes of this Chapter:

(a)    first, assess the value of the company as a whole; and

(b)    then allocate that value among the classes of issued securities in the company (taking into account the relative financial risk, and voting and distribution rights, of the classes); and

(c)    then allocate the value of each class pro rata among the securities in that class (without allowing a premium or applying a discount for particular securities in that class).

(2)    Without limiting subsection (1), in determining what is fair value for securities for the purposes of this Chapter, the consideration (if any) paid for securities in that class within the previous 6 months must be taken into account.

16    The expression “fair value” is a statutory label, the sole meaning of which comes from s 667C itself. The use of the word “fair” does not mean that there is a search for something which is intrinsically fair according to general notions of fairness: see Teh v Ramsay Centauri [2002] NSWSC 456; (2002) 42 ACSR 354 at 357 [12]. Fair value is to be determined by asking what price would be negotiated in a hypothetical transaction between two willing but not anxious parties: see Ramsay at 358 [14]-[16]; Capricorn Diamonds Investments Pty Ltd v Catto (2002) 5 VR 61 at 76-77 [59]-[61].

17    The Corporations Act provides no direct guidance about the appropriate methodology for assessing the “value of the company as a whole”. Typically, however, one or more valuation methods that are generally accepted methods of valuation of companies are adopted. They include discounted cash flow, net realisable assets or an estimate of future earning with a capitalisation factor: see Ramsay at 359-360 [22]-[23]. The expert report in this matter adopted the discounted cash flow methodology for the reasons explained in the report.

18    The value is to be determined at the date of the compulsory acquisition notice: see Ramsay 361 [28]-[29]. The process described in s 667C(1) must be undertaken and a value determined before reviewing that result in light of the material to which s 667C(2) draws attention: see Ramsay at 360 [27].

19    Getting a fair value for the securities is not necessarily the same thing as being fair to an individual shareholder. Section 667C limits the factors which can be taken into account in deciding what is a fair value for securities. In consequence, the individual circumstances and wishes of a shareholder whose shares are acquired are not a matter which enters into the question of whether the terms set out in the compulsory acquisition notice give a fair value for the securities: Dolby Australia Pty Ltd v Catto [2004] NSWSC 1222; (2004) 52 ACSR 204 at 226 [82].

20    When deciding whether the value is fair, the proper approach is to consider whether it is fair to all shareholders, rather than whether it is fair to a particular shareholder or class of shareholders in the peculiar circumstances of the case: see Capricorn Diamonds at 77 [60].

21    The Court’s decision must largely be based on the expert report. If the report contains such deficiencies that it was impossible to determine whether the price was fair, approval would be refused. However, the report does not need to be beyond criticism for a judge to act on it and conclude that the price was fair: CCPI Holdings Proprietary Limited v Joan Hose and Ronald Hose [2011] VSC 34 at [7], quoting Bromley Investments Pty Ltd v Elkington [2003] QCA 407; (2003) 47 ACSR 273 at 279 [18] (per Williams JA).

22    The report prepared by Crowe Horwath in respect of the relevant AWH shares has been read and considered with those principles in mind.

23    The authors of the report assessed the value of AWH’s ordinary shares as at the date of the report to be in the range of nil or nominal to 1.24 cents per share. The valuation range reflected uncertainty at that time arising from various legal disputes which were then facing AWH. The high valuation scenario assumed estimated future costs and damages resulting from those legal proceedings would be covered by AWH’s directors and officers insurance policy. The report noted that if the insurers did not cover all of the estimated costs, the high scenario valuation would be lower and the proposed compulsory acquisition would be fairer.

24    The legal disputes have now all effectively been resolved or settled, although there is no evidence of the terms of the settlement. In any event, the point remains that the settlement of the proceedings against AWH could not have resulted in the shares in AWH having a higher value, but could only have reduced their value: see the observations of Brereton J in Re Australian Water Holdings Pty Limited [2016] NSWSC 254 at [6]-[7].

25    The valuation arrived at by Crowe Horwath should, in all the circumstances, be accepted. As previously noted, the report prepared by Crowe Horwath complies with the Corporations Act. A fair reading of the report reveals no apparent deficiencies or problems with the valuation. There is no doubt that the report directed itself to the relevant statutory provisions, in particular s 667C, and adopted an acceptable valuation methodology.

26    The compulsory acquisition is for a consideration of 1.30 cents per share. That is more than the high scenario valuation of 1.24 cents arrived at by Crowe Horwath. BG & E has accordingly established that the terms set out in the relevant compulsory acquisition notice give a fair value to the securities. The Court must accordingly approve the acquisition of the securities on those terms.

27    Orders will be made accordingly.

Associate:

Dated:    7 November 2016

SCHEDULE OF PARTIES