Capricorn Diamonds Investments Pty Ltd v. Catto

(2002) 168 FLR 146
(2002) 20 ACLC 931
(2002) 41 ACSR 376
(2002) 5 VR 61
[2002] VSC 105

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(Judgment by: Warren J) Court:

Judge:
Warren J

Judgment date: 10 April 2002

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Judgment by:
Warren J

Introduction

1. The plaintiff made an offer to compulsorily acquire the remaining minority units in a company in which the plaintiff held over 90 per cent of the units in the company. The plaintiff issued these proceedings relying upon new provisions of the Corporations Act 2001, namely s664(3) and s664F(1), to seek court approval of the proposed compulsory acquisition of the remaining minority units in the company.

2. The defendants, being the minority unit holders, oppose the application to the Court principally on the basis that the offer made for the units did not give fair value. The defendants contended, also, that the statutory provisions relied upon by the plaintiff were unconstitutional and, therefore, invalid. The defendants were Robert John Charles Catto, John Warwick Cox, John David Joshua, Ian Edward Morton, Terranora Securities Pty Ltd, Susan Marcia Benny and Colbern Fiduciary Nominees Pty Ltd. The parties called witnesses, tendered evidence and made extensive submissions in support of their respective positions. The Attorney-General of the Commonwealth of Australia intervened to make submissions to the Court on the constitutional issues. The Australian Securities and Investments Commission ("ASIC") provided written submissions to the Court on the construction of the subject legislation. The submissions on behalf of the Attorney-General and ASIC supported the plaintiff's position.

3. At the outset, it is appropriate to set out the background facts.

Background Facts

4. The plaintiff is a subsidiary of Rio Tinto Ltd, ("Rio Tinto") a company engaged in multi-national mining projects, including mines located in Zimbabwe. By way of background, in November 2000 Rio Tinto acquired another mining entity, Ashton Mining Ltd.

5. The plaintiff and its related entities own 96.95 per cent of the units in the Western Australian Diamond Trust ("WADT"). WADT in turn owns a 5 per cent interest in the Argyle Diamond Mine Joint Venture and has other assets. The responsible entity or manager of WADT is AML Nominees Ltd ("AML"). It receives a trust management fee for its services. On 9 May 2001 the plaintiff gave notice of compulsory acquisition to the 927 holders of the minority 3.05 per cent of the WADT units offering $2 per unit.

6. Capricorn's offer was $2.00 for each unit covered by its compulsory acquisition notice. This amount was $0.78 above the highest valuation in the range of values for the units determined by an independent expert appointed under the statute, AMC Corporate Pty Ltd (the independent expert or "AMC"). It is also $0.84 higher than the independent expert's preferred value of $1.16.

7. Of the 927 unit holders, 323 unit holders objected. The objectors hold approximately 60 per cent of the minority units. By way of this proceeding the plaintiff seeks an order approving the acquisition to compulsorily acquire all of the minority, including the 323 objectors. The plaintiff selected the first five defendants as representatives of the entire body of 323 objectors. The sixth and seventh defendants sought to be joined as separate defendants and were joined by order of the Court.

8. The plaintiff, Capricorn, seeks the Court's approval of the terms set out in its notice for the compulsory acquisition of those units in Western Australian Diamond Trust ("WADT") that are not already owned by Capricorn or a related body corporate of Capricorn pursuant to s664F(1) Corporations Act 2001.

The Legislative Scheme - Pt6A.2 Division 1 of the Corporations Act

9. Pt6A.2 Division 1 of the Corporations Act provides for the compulsory acquisition of minority securities by a 90 per cent holder of securities in the subject entity. The procedure is novel and took effect from 13 March 2000. The legislative scheme provides that within a specified period of six months after becoming that holder, a 90 per cent holder can give a notice of compulsory acquisition setting out a cash price for the minority securities (see s664AA(6); s664C(1)). The price must only be cash and not differentiate between minority holders (see s664B). No benefit outside the price formally notified can be offered to any individual holder at any time (see s664D). Under the statutory regime, minority holders are entitled to object to the acquisition (see s664E). Where persons who hold at least 10 per cent of the minority securities object to the acquisition then the acquisition can proceed only if the Court gives approval (see s664F; s664A(3)(b)). The Court must approve the acquisition if the 90 per cent holder establishes that the terms set out in the notice "give a fair value for the securities" (see s664F(3)). Where fair value is not established the Court must confirm that the acquisition will not take place (see s664F(3)).

10. Specifically, the relevant sub-sections of s664F of the Corporations Act provide:

"664F The Court's power to approve acquisition

(1)

If people who hold at least 10% of the securities covered by the compulsory acquisition notice object to the acquisition before the end of the objection period, the 90% holder may apply to the Court for approval of the acquisition of the securities covered by the notice. (2) The 90% holder must apply within 1 month after the end of the objection period. (3) If the 90% holder establishes that the terms set out in the compulsory acquisition notice give a fair value for the securities, the Court must approve the acquisition of the securities on those terms. Otherwise it must confirm that the acquisition will not take place.

.....

(4)

The 90% holder must bear the costs that a person incurs on a legal proceedings in relation to the application unless the Court is satisfied that the person acted improperly, vexatiously or otherwise unreasonably. The 90% holder must bear their own costs."

11. S667A provides that the report of the expert must be prepared by a person nominated by ASIC. The section provides, also, that the expert report must state whether in the opinion of the expert the terms proposed in the notice give a fair value for the securities and set out the reasons for that opinion (see s667A(1)). In this matter AMC was the expert nominated by ASIC and generally referred to as "the independent expert".

12. S667C of the Corporations Act prescribes the method of valuation. It provides:

"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 subs(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."

Background to Legislation

13. PtP6A.2 of the former Corporations Law was inserted in the law of the Australian Capital Territory by the Corporate Law Economic Reform Programme Act 1999 (Cth) ("the CLERP Act"). The amendment was adopted and applied as Victorian Law by virtue of s7 of the Corporations (Victoria) Act 1990 (Vic). Following on from references of power from the States to the Commonwealth under s51(xxxvii) of the Constitution, in particular by Victoria under the Corporations (Commonwealth Powers) Act 2001 (Vic), the Corporations Act re-enacted the provisions of the former Corporations Law as a law of the Commonwealth. Pt6A.2 of the Corporations Act is cast in the same terms of Pt6A.2 of the former Corporations Law of Victoria. The Corporations Act commenced operation on 15 July 2001.

14. The transitional provisions of the CLERP Act are relevant because the present proceeding was pending as of 15 July 2001, the date when the new legislative scheme came into operation. There was agreement between the parties in the present proceeding such that the rights under the Commonwealth Corporations Act were recognised as being substituted for rights that existed before 15 July 2001 as a result of the application of s1383 of the Corporations Act. Arising from s1383 a new proceeding is taken to have been brought in this Court exercising Federal jurisdiction under Pt6A.2 of the Corporations Act. The proceeding brought under Pt6A.2 of the former Corporations Law of Victoria is terminated by virtue of the effect of s7(3) of the Corporations (Ancillary Provisions) Act 2001 (Vic) ("the Ancillary Provisions Act").

15. The Originating Process in the proceeding brought under the former Corporations Law of Victoria was filed by the plaintiff on 13 July 2001. Clearly, s1383 of the Corporations Act applies to a proceeding other than a "federal corporations proceedings" that was commenced in a court before 15 July 2001, that was under a provision of the former Corporations Law of a State or Territory in "this jurisdiction", ^[F1] was not an enforcement, appeal or review proceeding in relation to an order of a court, had not been terminated before 15 July 2001, and was a proceeding in respect of which no final determination of any of the existing rights or liabilities at issue in the proceeding had been made before 15 July 2001. ^[F2] Thus, all the pre-requisites of s1383(1) were satisfied in the present case.

16. Furthermore, the proceeding brought under the former Corporations Law of Victoria was not as at 15 July 2001 a "federal corporations proceeding" as that phrase is used in s1383(1) of the Corporations Act. The expression "federal corporations proceeding" is defined in s1382(1) of the Corporations Act. ^[F3] Para(a), para(b), para(ba), para(bb), para(bd) and para(c) of that definition clearly did not apply. Para(bc) of that definition also did not apply, ^[F4] even though the defendant raise a constitutional issue. Reliance on a provision of the Constitution as a basis for invalidity means that a proceeding involves a matter "arising under [the] Constitution, or involving its interpretation" for the purposes of s76(i) of Constitution. ^[F5] Accordingly, a proceeding involving reliance on such a provision involves the exercise of federal jurisdiction. In the present case, however, there was no reliance on a provision of the Constitution as a basis for invalidity immediately before the commencement of the Corporations Act. Consequently, as at that date, the proceeding brought under the former Corporations Law of Victoria could not have been characterised as being within federal jurisdiction. The proceeding, therefore, was not a "federal corporations proceeding" within the meaning of s1382(1) and s1383(1) of the Corporations Act.

17. The effect of s1383 in the present case is that a new application has been brought to this Court exercising federal jurisdiction under s664F of the Corporations Act. Further, the parties to the proceeding are taken to be the same and all steps taken in the former proceeding are treated as having been taken in the new proceeding. ^[F6] S7(3) of the Ancillary Provisions Act terminates the previous proceeding.

18. It is relevant to consider the explanatory memorandum for the Corporations Bill 2001. Para2.4 of the explanatory memorandum provided:

"The Bill will, in effect, re-enact the Corporations Law as a Commonwealth Act capable of operating throughout Victoria ... Explanatory material for the provisions of the Corporations Law on which the Bill is based may be found in explanatory memoranda for the legislation that enacted or amended those provisions."

19. S15AB of the Acts Interpretation Act 1901 (Cth) applies to the interpretation of the Corporations Act (see s5C of the Corporations Act). The explanatory memorandum to any Bill amending the former Corporations Law, any relevant report of the Company and Securities Advisory Committee and any relevant report of a Parliamentary committee may be considered in the interpretation of a provision of the former Corporations Law. ^[F7]

20. S15AA of the Acts Interpretation Act expressly requires a court to adopt a construction of legislation which would promote the purpose or object of that legislation in preference to one which would not do so. ^[F8] S15AA does not require, as a prerequisite to its operation, any ambiguity in the legislation. ^[F9]

21. The legislative history reveals that it was the primary intention of the new provisions to:

"make it easier for 90 per cent holders to acquire the benefit; and discourage 'greenmailing'."

22. The Explanatory Memorandum to the Corporate Law Economic Reform Bill ^[F10] ("the explanatory memorandum"), in para4.4, states that an aim of the reforms was to "make it easier for majority shareholders to obtain the benefits of 100 per cent ownership".

23. The explanatory memorandum identifies the purpose of the legislative amendments as follows:

"7.30

The Bill will extend the current legislative mechanisms for the compulsory acquisition of securities. These are intended to balance the interests of facilitating changes in corporate ownership with the need to protect the rights of minority shareholders.

7.31

Extending the power to compulsorily acquire securities will:

•

...

•

discourage minority shareholders from demanding a price for their securities that is above a fair value (often referred to as 'greenmailing')

...

7.45

The issue of valuing companies for the purposes of compulsory acquisition is a difficult one and the draft provisions provides (sic) guidance to experts as to how they should go about valuing a company ... It is proposed that experts would not account for premiums on account of the special value of the outstanding securities to the acquirer, or discounts on account of the lack of a market for particular securities." ^[F11]

(Emphasis added).

24. It is also relevant to consider the Report by the Legal Committee on Compulsory Acquisitions for the Companies and Securities Advisory Committee ("the Legal Committee Report"). It expressed the view that compulsory acquisitions:

" ... can be a necessary and desirable means of corporate rationalisation. They may produce considerable economic, administrative and taxation benefits including:

•

facilitating financial restructuring

•

permitting the transfer of tax losses between wholly owned grouped companies;

•

reducing administrative and reporting costs;

•

avoiding greenmailing;

•

protecting the confidentiality of commercial information and otherwise eliminating possible conflicts of interest in partially owned companies." ^[F12]

25. The committee considered, also, that the regularity objective was " ... to balance the interests of all shareholders, to avoid either minority oppression or minority dictation". ^[F13]

26. In relation to the new compulsory acquisition power the Report states:

"10.1 ...

It would assist a controlling entity to achieve the legal and economic advantages of full ownership, ensure equal and fair treatment of minorities and reduce the opportunity for greenmailing.

...

10.21

...

In determining fair value, an independent expert should:

•

Assess the value of the company as a whole and determine the value of each class of issued security, taking into account its relative financial risk and its distribution rights;

•

Expressly disregard whether the remaining securities of the offer class should attract a premium or discount".

(Emphasis added).

27. Thus, the issue of special benefits was specifically discussed in the Explanatory Memorandum ^[F14], the Legal Committee Report ^[F15] and also by the Parliamentary Joint Committee Report. ^[F16]

28. In particular, it is evident from the explanatory memorandum ^[F17] that the legislature was seeking to balance the interests of the two groups of parties that is, the interests of facilitating changes in corporate ownership with the need to protect the rights of the minority shareholders. Part of the process was the discouragement of minority shareholders from demanding a price for their securities that is above a fair value, the practice of greenmailing. The explanatory memorandum ^[F18] shows that part of the objective of the legislative scheme was to remove that potential that is, to remove the matters that would otherwise operate to force a price above fair value were there to be the ordinary commercial bargaining context in which consent of both parties is required before a transaction can be concluded. Furthermore, in the explanatory memorandum ^[F19] the provisions of s667C are explicitly addressed and it is stated that it is proposed that experts would not account for premiums. It is to be noted that the expression "premiums" is cast in the plural. The memorandum refers to premiums on account of the special value of outstanding securities to the acquirer, that is, the extent to which the acquirer may be prepared to pay a sum above fair value in order to secure its objective. This is the classic situation of the anxious buyer rather than non-anxious buyer of the Spencer ^[F20] formulation.

29. Against this legislative background I turn to consider the issues in the present proceeding.

The Issues

30. The first and primary question in the proceeding is whether the terms proposed by Capricorn in the compulsory acquisition notice give "a fair value" for the units covered by the notice. If a finding is reached that the terms proposed give a fair value for the securities then the Court must approve the compulsory acquisition in accordance with s664(3) and s664F(1) of the Corporations Act. The defendants, in their exploration of the meaning of "fair value" expanded the question to include does "fair value" permit or require allowance to be made for "special benefits" to the prospective acquirer or allowance for the benefits of "forcible taking" on the prospective vendor. In determining whether the terms give a "fair value", s667C prescribes that "fair value" is to be determined by assessing the value of the company as a whole (see s667C(1)(a)), by allocating "that value" among the classes of issued securities in the company (taking into account the relative financial risks, and voting and distribution rights, of the classes) and by allocating "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)."

31. The second question concerns the constitutional validity of Pt6A of the Corporations Act. The defendants raised the question that depending upon the answer to the primary question, that is, what is the proper meaning of "fair value", do the relevant provisions provide for the acquisition of property on "just terms"? The defendants contended that if the statutory scheme precludes or inhibits a proper allowance for "special benefits" and the consequences of forcible acquisition on the prospective vendor and allocate those allowances in a way which is unjust in the circumstances then the relevant provisions contravene s51(XXXI) of the Constitution.

32. The defendants raised additional matters. They asked, what information is "material" to be disclosed within the meaning of s664C? They asked, are "special benefits" to the prospective acquirer and potential detriments to the prospective vendor information that is "material"? They asked further, what is the consequence of a failure to disclose material information? In addition, the defendants asked whether the compulsory acquisition notice served by Capricorn disclosed all information that was material within the meaning of s664C?

33. A remaining issue was whether there had been compliance with the requirements of Pt6A. Capricorn answered that it had complied with all the requirements of Pt6A. In any event, Capricorn submitted it should be relieved if needs be from the effects of any alleged non-compliance by orders under s1322 and s1325D of the Corporations Act as sought by Capricorn in the application which it has made in its interlocutory process filed in this proceeding.

The Evidence

34. By way of overview, evidence was given for the plaintiff at trial by Stephen Ernest Creese, a solicitor and director of Capricorn; Geoffrey Robert Appleyard, a geologist and a director of AMC, the independent expert; Gary Michael Wingrove, a chartered accountant and a director of KPMG Corporate Finance Pty Ltd ("KPMG"), who provided assistance to the independent expert; and Paul Perry, an equity partner and director of corporate finance at JB Were Ltd, a licensed securities dealer and investment adviser. An affidavit of Dr Stephan Meyer, geologist, was also relied upon by Capricorn, but Dr Meyer was not required to attend for cross-examination. Wayne Richard Lonergan, a chartered accountant and a director of LEA, was called as the defendants' expert.

35. More specifically, the plaintiff relied upon the independent expert's report retained pursuant to s667A of the Corporations Act as prepared by AMC dated 4 May 2001 ("the May report"). The principal author of the report was Geoffrey Robert Appleyard of AMC. The plaintiff relied, also, upon a supplementary report dated 8 November 2001 prepared by the independent expert, AMC ("the November report"). Appleyard was the principal author of this report, also. The plaintiff relied also upon a report prepared by JB Were Ltd dated 7 November 2001 ("the Were report"). Mr Paul Perry was the principal author of the Were report. The plaintiff relied further upon a report of KPMG Corporate Finance Pty Ltd. (Mr Gary Wingrove was the principal author of that report.)

36. The defendants relied upon the report of Lonergan Edwards & Associates ("LEA"), generally known as "the LEA report". Mr Wayne Lonergan was the principal author of that report. The defendants also filed a number of affidavits setting out their particular interests and exhibiting the various notices of objection. These were adverted to in submissions. The defendants further relied upon internal documents of Capricorn and Rio Tinto, in particular, memoranda of one Albart-Diaz, as to cost savings arising from the acquisition. These matters were referred to in submissions.

37. I turn then to consider the three primary issues of fair value and constitutional validity and thereafter address my findings on the expert evidence.

Fair value

38. The submissions on fair value may be conveniently broken up into three sections: (1) the concept of fair value; (2) the time of determination of fair value; and, (3) the distribution of fair value. I consider each of these sections in that order.

(1) The Concept of Fair Value

39. With respect to the conceptual approach to fair value, it was the case of the defendants that the criteria relevant to determining fair price and fair value generally include five aspects. First, a premium for the acquisition of 100 per cent control of an entity or enterprise. Secondly, a special value of a purchase to a particular purchaser. Thirdly, consideration of the exchange market as evidence of the true market value of the particular shares. Fourthly, the allocation of a liberal estimate compensating a compelled vendor for expected future benefits. Lastly, the recognition of the achievement of total control and the commensurate administrative advantages to the acquirer.

40. Mr S Wheelan QC who appeared with Ms J Dodds-Streeton SC for the defendants, relied upon the observations of Santow J in Holt v Cox, ^[F21] and as approved by the Court of Appeal ^[F22] for the submission that the usual meaning for the fair value of an asset constitutes:

"Its fair equivalent in money ascertained by a supposed sale by a voluntary bargaining between vendor and purchaser, each of whom is both willing and able, but not anxious, to trade and with a full knowledge of all circumstances which might affect value."

41. For the defendants it was argued that where there is a market it can be reasonably expected that fair value would be equivalent to market value. Santow J in Holt v Cox ^[F23] observed:

"It is thus appropriate to look at matters first from the vendor's point of view, in considering the rights of the shares, and what, to the vendor, they may be expected to yield him in the future by way of benefits, for loss of which a fair sale price is compensation. This is particularly when, as here, the vendor has no choice but to sell. It is necessary to ask what a willing, but not anxious vendor would consider a 'fair price' for being deprived of the shares and all [their] existing advantages and with all [their] possibilities ...... not what the purchasers with their greater bargaining power might in reality be able to exact on a compulsory sale ... A liberal estimate of the shares in the approach to be taken.

Furthermore, their value to the purchaser, ignoring the purchaser's expropriatory power (except as justifying a liberal estimate) must reciprocally be taken into account in determining a fair price. This is precisely as [the vendors] continued shareholding rights do detract from the value of the remaining shares."

42. In Holt v Cox Santow J concluded that while he would not go so far as to hold that the forced sale justified a premium for forcible taking, nevertheless, the concept of a fair price in circumstances of expropriation required the valuer to make an estimate on "the liberal side".

43. The defendants relied on the observations in Holt v Cox to support the proposition that the assessment of the value to the purchaser involves the question of special benefit. A special benefit is "some special potentiality which only one person would buy [which] is to be valued on the basis of a notional sale to that person": see Mordecai v Mordecai ^[F24].

44. The argument for the defendants placed much reliance on the observations of McClelland J in Melcann Ltd v Super John Pty Ltd. ^[F25] In that case the company sought to acquire a 100 per cent holding in a target company pursuant to a selective reduction of capital. One of the advantages for the acquiring company was that it would achieve synergies from the merger of its activities with substantial elements of the activities of the target company. McClelland J concluded ^[F26] that such synergies would entail "substantial advantages" for the acquiring company if it obtained 100 per cent ownership so that costs of distribution, integrated marketing and the elimination of a separate board would secure substantial cost savings. McClelland J concluded, therefore, that 100 per cent ownership would give rise to a special value for the acquiring company of considerable significance. The learned judge concluded that the special benefit should be taken into account for the purposes of determining the fair value of the shares that were to be acquired for the very purpose of conferring such special benefits on the acquiring company.

45. In Winpar v Goldfields Kalgoorlie ^[F27], Santow J revisited the subject of "special value" where it is derived from 100 per cent ownership through acquisition. Santow J considered that such special benefit should be included in calculating the total value of a company. In Winpar the Court was concerned with events surrounding an extraordinary general meeting of a company to consider a selective reduction of capital. The capital reduction proposed involved the cancellation of shares of particular shareholders in consideration of payment to them of a nominated sum per share. The resolution for the capital reduction was passed. Winpar brought proceedings challenging the validity of the capital reduction on a number of grounds. Santow J dismissed the proceeding. The judgment was subject to an appeal to the New South Wales Court of Appeal. ^[F28] Consideration of the judgment at first instance in Winpar and subsequently on appeal reveals that the matter was concerned entirely with a selective reduction of capital and, further, was subject to the provisions of the Corporations Law as in force prior to 15 July 2001. ^[F29]

46. At first instance Santow J in Winpar was concerned with the requirements of s256C of the then Corporations Law relating to reduction of capital, whether a scheme of arrangement was required under s411 of the Law, whether the acquisition arising from the reduction of capital was "fair and reasonable to the company's shareholders as a whole" pursuant to s256B(1)(a) of the Law, whether the Gambotto principles were met, whether the capital reduction was not shown to be "fair and reasonable" by reason of the receipt of less value and the non-distribution pro rata of "special benefits", whether "special benefits" had been identified and taken into account, whether there had been satisfactory disclosure of matters relating to value and valuation methods and whether the capital reduction was "fair and reasonable" where a single dominant shareholder could determine the outcome of the vote on the capital reduction and related matters.

47. For the defendants in the present case it was argued that the construction placed by Santow J in Winpar was more in accord with the goals and equitable application of Pt6A.2 of the Corporations Act. It was argued that s667C(1)(a) does not proscribe any particular method for the assessment of the value of a company as a whole. Consequently, it was urged, the method of valuation is at large and hence the fair value crucial to approval under s664F(3) could be determined by reference to any matter that may reasonably relate to the value of the company. As a consequence, it was argued that all relevant factors could be taken into account including assets, market value dividends, the nature of the corporation, its likely future and any other elements that affect the intrinsic or inherent value of the stock. In this way reliance was placed upon the Gambotto principles: see Gambotto v WCP Ltd ^[F30].

48. The defendants urged, also, the apportionment of special benefits. It was argued on their behalf that while permitting special benefits accruing to a 100 per cent holder to be taken into account when assessing the value of the company as a whole, Santow J in Winpar considered that s667C required the value of any such special benefit to be allocated pro rata within the relevant class. The defendants relied upon the following observations of Santow J: ^[F31]

"It is true this premium, or reciprocal discount, may reflect particular special benefits for the acquirer in getting 100% ownership. But I consider that the references to premium (and discount) is primarily directed to the situation where a key holding within the acquired minority (say QBE in this present case) might command a 'premium' price to acquire; that is, absent the statutory definition in s667C of 'fair value' which precludes such circumstances in favour of a pro rata allocation of the total value including any such special benefits ... In that sense, pro rata allocation of value reflected in price paid is certainly the invariable norm within classes where 10% or less is being acquired... But by parity of reasoning, the acquirer's 90% or more is not allowed to command any (notional) premium as against the minorities'] 0% or less, in calculating what is paid for the minority under s667C".

49. His Honour concluded:

"I therefore consider that s667C in its particular context is a clear legislative indication in its context that the collective value of the company as a whole, including any special value derived from 100% ownership is to be allocated without attributing a premium or discount to particular securities first within a class (including for example, a key holding from within this minority holding compulsorily acquired) and second as between majority or minority. Thus that the value should be allocated pro rata though clearly the acquirer may chose to be more generous. Thus while an expert is ordinarily required to take into account the special value 100% ownership may have to be to a majority holder in working out the total value of the company, fairness requires that special value should be allocated pro rata". ^[F32]

50. Hence, in Winpar Santow J, considered that "special benefits" should be taken into account. In that context, the learned judge did not appear to distinguish between the "normal" special benefit of acquiring 100 per cent control and the particular special benefit to an individual acquirer. Santow J referred to both kinds of special benefit. He noted:

"An example would be where the special value derives not only from 100% ownership but also extraordinary efforts on the part of the 100% parent such as to exploit a particular resource. There is also the converse case where 100% ownership is of such unique value to the 100% parent, that it may be arguable that more should be attributed to the minority than the pro-rata amount. Even so one would not expect 100% to go to the minority." ^[F33]

51. His Honour distinguished between special benefits that should lead to the minority shareholders receiving more than a pro rata proportion and the normal advantages of having a wholly-owned subsidiary as against partial ownership. These advantages include the ability to group tax losses for tax purposes and the rationalisation savings derived from combining head offices.

52. On appeal the leading judgment of the Court in Winpar was delivered by Giles JA with whom Beazley JA and Davies AJA agreed. The appeal was dismissed. Giles JA in his reasons was predominantly concerned with the application of s256C of the Corporations Law. He considered, also, the application of s1322 of the Corporations Law to the circumstances of the matter refer to those observations later in these reasons in the context of the application of s1322 of the Corporations Act to the present proceeding.

53. The New South Wales Court of Appeal in Winpar, held that there was no impropriety in the meeting procedure or non-compliance for the purposes of s256C(2) of the Law and, therefore, the challenge to the capital reduction by force of s256D(2) failed. It was held also that in so far as necessary, if non-compliance with statutory requirements had occurred such non-compliance constituted a procedural irregularity capable of remedy by virtue of s1322. In the leading judgment Giles JA held, further, that in any event such irregularity did not cause substantial injustice. It was also held that it was not necessary that the capital reduction be achieved by way of a scheme of arrangement provided the requirements of s256B(1) of the Law were satisfied or more was not required under the Gambotto principles. Giles JA held that the Gambotto principles did not have to be satisfied because the relevant section of the legislation, namely s256A(b) of the Law ensured fairness between shareholders. Giles JA held, in addition, that the matter of inadequate disclosure was not made out because factors relating to subjects such as special value were capable in the context of the case of ready calculation and further detail was unnecessary. For the purposes of the appeal the New South Wales Court of Appeal held that the special value attributable to a factor such as single ownership is an advantage to both the acquiring majority and the acquiring minority as on acquisition the latter obtain an enhanced price for their shares; hence, no unfairness or unreasonableness arose because the advantage is shared. It is to be emphasised that in his judgment in Winpar, Giles JA did not specifically consider the application of special value in a valuation context.

54. For present purposes, the judgments in Winpar both at first instance and on appeal have no or limited application to the present case. This is so primarily because Winpar was concerned with a capital reduction and thereby the construction and application of an entirely separate section, namely s256C of the Law, as distinct from s667C of the Corporations Act. In addition, the allocation of special value at first instance in Winpar prompted observations by way of obiter only. Santow J was not faced by the same statutory regime and imperative as applies here. On appeal in Winpar the Court of Appeal did not consider the relevance of special benefits in the context of a valuation under s667C of the Corporations Act. Hence, whilst Giles JA described and adverted to special benefits he did so on a different basis and for another purpose than that which applies in the present case.

55. It was argued for the defendants that if a pro rata allocation of special benefits was an invariable, inflexible rule, it would allow expropriation on unjust terms. It was said that circumstances might arise where there is a very small minority but there are significant special benefits to be obtained. It was said that in such circumstances the allocation of special benefits pro rata would distort and undermine the fundamental requirement that fair value should be a fair equivalent in money based on a supposed sale by a voluntary bargaining between vendor and purchaser according to general principles.

56. However, the special benefits do not form part of the value of the trust as a whole. The defendant's expert, Lonergan, accepted that the special benefits which he said he had identified were not part of the enterprise that was being valued. The benefits do not exist unless the transaction is consummated and do not exist until after the transaction is consummated. On that basis they cannot be part of the value of the company (here the trust) as a whole. The special benefits are external to the value of trust and they do not exist at the time at which the value is to be established. Nor does the premium for forcible taking form any part of the value of the trust as a whole. It is founded upon idiosyncratic features of particular unit holders not on elements of their unit. Still less is it founded on the assets or elements of the trust as a whole. The alleged premium is, in truth, compensation to a unit holder suffering divestment of the units. The content of the premium must vary according to the characteristics of the unit holder whereas those characteristics form no part of the subject-matter of the valuation addressed by s667C. The suggested premium is akin to the solatium allowed on the occasion of compulsory acquisition of land: solatium is compensation for the distress caused by the taking. It is not part of the value of the land taken; it is a separate amount by way of allowance for inconvenience: see March v City of Frankston. ^[F34] Pt6A confines fair value to the subject matter which is acquired and no allowance for inconvenience or distress is included. Indeed, the express ouster of premia from Pt6A of the Corporations Act ensures that any such ingredient is removed even if it would otherwise have been included.

57. However, any special value derived from 100 per cent ownership that arises because that is the purpose of the acquisition in this case ought be disregarded when determining the "value" of the company for the purposes of s667C(1)(a). Such assessment is consistent with the long-standing common law principle, ^[F35] reflected in Commonwealth land acquisition legislation dating back to federation ^[F36] to the effect that the value of that which is acquired pursuant to a compulsory acquisition should be determined without regard to the purpose for which the acquisition occurs.

58. In any event, authority on the meaning of "fair" or "fair and reasonable" or "fair price" has limited relevance for the construction of s667C. Santow J in Winpar ^[F37] recognised that "fair value" in s667C had a different connotation to the concept of "fair and reasonable" and the like used elsewhere in the Corporations Act. The meaning of "fair value" in s667C was addressed by Douglas J in Pauls Ltd v Dwyer and (in obiter dicta) by Santow J in Winpar. Further general guidance on the question of fairness may be found in Holt v Cox ^[F38] (at first instance) and the cases to which it refers. Consideration of the authorities enables the extraction of a number of principles.

59. First, fair value of an asset is its fair equivalent in money ascertained by a supposed sale by voluntary bargaining between vendor and purchaser, each of whom is both willing and able, but not anxious, to trade and with a full knowledge of all the circumstances which might affect value: Holt v Cox ^[F39]; Gregory v FCT ^[F40]; McCathie v FCT ^[F41]. Secondly, the fact that the units must be disposed of at a fair value should not be a factor leading to a discount or lower valuation than would otherwise obtain: Holt v Cox. ^[F42] Conversely, it should not be a factor leading to a premium or higher valuation. Thirdly, a fair value does not require that any amount should be included in respect of ransom value or a power of veto: Edwards v Minister of Transport. ^[F43] Fourthly, the value of special benefits to the acquirer is not properly to be included in the calculation of the value of the company as a whole: Pauls Ltd. ^[F44] Fifthly, generally, apart from s667C, fairness requires that the value of any special benefits should be allocated pro rata amongst securities in the same class: Winpar. ^[F45] Sixthly, if the value of special benefits is to be included under s667C, their value should be allocated pro rata under s667C: Winpar ^[F46]; Pauls Ltd. ^[F47]

60. The seventh principle to be extracted from the authorities is that when deciding whether the consideration 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: Elkington v Vockbay Pty Ltd. ^[F48] Consequently, a shareholder's individual taxation position and like matters said to give rise to a premium for forcible taking are not relevant to the value of the company as a whole. Nor are the acquirer's individual circumstances relevant. Further, the market price cannot be a safe indicator of fair value as the market may not provide a fair indication of the value of shares in circumstances of limited trading: Catto v Ampol. ^[F49] In addition, the market may not be a fair indicator of value because of the effect of a takeover offer on the market: Kingston v Keprose Pty Ltd [No 2]. ^[F50]

61. Finally, the eighth principle to be extracted from the cases is that fair value may require a more liberal estimate of value within a range of possible values where there is a compulsory acquisition of property (Commissioner of Succession Duties (SA) v Executor Trustee & Agency Co of SA Ltd (Re D Clifford). ^[F51] Nevertheless, it does not permit or require a premium for forcible taking: Holt v Cox. ^[F52] The Australian authorities have not adopted the Canadian concept of a forcing out premium (instead applying a more liberal estimate of value), and indeed that concept has more recently lost support in Canada. ^[F53]

62. Turning then to the statute itself, s667C(1)(a) requires an assessment of "the value of the company as a whole". Hence, no allocation of value may be made that is not included in "the value of the company as a whole". Only that which is within the concept of "that value" is to be allocated among the different classes of securities where there are different classes. The value for each class is then to be allocated among the holders of securities in the different classes of securities concerned. No addition to that value may be made upon the allocation of value among classes of securities and among the holders of securities in a particular class. No additional share of the value to be allocated may be allocated to units held by minority holders disproportionately to the share to be allocated to units held by the majority holders. S667C(1)(c) by its express terms does not allow any premium or discount for particular securities in a class of securities and expressly provides that the allocation must be pro rata amongst all the holders of securities of the class concerned.

63. S667C addresses the determination of fair value for securities, not the securities themselves, but the value of the company as a whole and that value is then dealt with in particular ways. It is apparent that the subject matter of the valuation, namely, the company as a whole, was selected by the Legislature in order that there might be an accommodation of the competing interests of those involved in the compulsory acquisition process. By addressing the value of the company as a whole the Legislature has struck a balance between those interests. When the value of the company as a whole is valued the departures from fair value that a compulsory acquisition is capable of producing are avoided.

64. It might be suggested that valuing the company as a whole can give rise to disadvantages to minorities for two reasons. First, there is the discount that might be said to attend the minority holding because of the fact it is a minority that lacks the controls over management decisions and the like. Secondly, there is the potential factor for a discount for limited negotiability. By selecting the valuation of the company as a whole the potential disadvantages to the minority are avoided. By addressing the value of the company as a whole the entirety of the advantage that the enterprise is capable of generating for the totality of the shareholder base is derived. Further, by selecting the value of the company as a whole the position of the company as an enterprise, its assets and potential revenues are taken into account. In this respect taking the value of the company as a whole excludes the additional greenmail value that might otherwise have been extracted. Thus, the essential role performed by s667C(1)(a) is to achieve this effect.

65. In applying s667C(1) regard must be had to the consideration paid for the securities in the preceding six months: s667C(2). If the trading price has more likely than not been driven by the prospect of a compulsory acquisition at an inflated price, or if there has been insufficient trading to render the trading price a proper indicator of value, or if takeover activity has distorted the market price, or if the trading in the securities has been too thin to provide any reliable indicator even of market value, no adjustment to the value determined in accordance with s667C(1) is required.

66. S667C is concerned with the adjustment of entitlements between the acquirer and the other holders of securities upon a compulsory acquisition proposal. The section leaves to the expert the determination of the appropriate valuation methodology to assess the value of the company as a whole. The independent expert determined the fair market value of the underlying assets of WADT and used well-accepted standard valuation methodology in doing so. The independent expert was entitled to adopt the fair market value of the underlying assets of WADT as the means of determining the value of the company as a whole in the context of determining fair value as required by s667C(1): see BTR plc v Westinghouse Brake & Signal Co (Aust) Ltd; ^[F54] Holt v Cox. ^[F55]

67. Furthermore, where there are different classes of securities, s667C(1)(b) requires an allocation amongst the different classes according to the criteria stated in that paragraph. No such allocation falls for consideration in this case. The WADT units are all of the same class and all enjoy the same rights. S667C(1)(b) requires an allocation amongst different classes of securities according to the criteria stated in that paragraph. The allocation may result in one class having a disproportionate share of the value of the company as a whole than another as recognised by Santow J in Winpar. ^[F56] Here the WADT units are all of the same class and all enjoy the same rights. Santow J in Winpar took the pro rata allocation requirement of s667C as being a fairness aspect of the concept of fair value in s667C, because s667C eliminated any minority discount and any majority premium within a class of securities. ^[F57]

68. In addition, it is to be observed that the prohibition in s667C(1)(c) on allowing any premium for particular securities in a class does not mean that fair value compensation is not full compensation for that which has been lost. ^[F58] Rather, in my view, the prohibition serves to prevent the compensation becoming artificially inflated to take into account the ransom value that minority security holders might otherwise be able to extract for their securities by reason of their minority status. In Edwards v Minister of Transport, ^[F59] it was held that compensation payable in respect of a compulsory acquisition of land was not required to take into account the ransom value to which a person having a power of veto over an acquisition might hold the person acquiring the property. The application of Edwards to the determination of compensation for injurious affection pursuant to s20 of the Acquisition of Land Act 1967 (Qld) was disapproved by the High Court in Marshall v Director-General, Department of Transport, ^[F60] on the basis that the application of Edwards was inconsistent with the plain meaning of the Queensland statute. Marshall did not deal with the so-called ransom value able to be asserted by a person having power of veto. Clearly here s667C(1) requires pro rata allocation of the value of the company as a whole in accordance with para(b) and para(c) of the sub-section, so that shares in the same class are treated in the same way whether held by the 90 per cent holder or the minority holders. ^[F61]

69. S667C(1)(c) requires that the value allocated to a class of securities should be allocated on a pro rata basis amongst the securities in that class without any premium or discount. It adopts the ordinary basis as being the fair basis for such an allocation. Both Douglas J in Pauls Ltd ^[F62] and Santow J in Winpar ^[F63] were of the view that the allocation of value under s667C was required to be made pro rata to all the securities in the relevant class and not disproportionately in favour of either the securities to be acquired or the securities of the acquirer.

70. For the defendants it was argued that s667C(1) of the Corporations Act provides non-exhaustive legislative guidance. Reliance was placed upon an extract of the the Legal Committee Report:

"There should be some non-exhaustive legislative guidance for independent experts on determining fair value in these compulsory acquisitions, given the current uncertainty in the case law." ^[F64]

71. It was argued that s667C(1) is differently expressed from s667C(2) in that the language of subs(1) directs a sequential process. It was argued that consistent with its status as a non-exhaustive guide, the sub-section does not address a number of issues which are highly significant to the valuation of the company as a whole under s667C(1)(a). It was argued, further, that s667C(1)(a) does not state the perspective from where the value of the company as a whole is to be assessed. Reliance was placed upon the fact that the sub-section does not proscribe a particular method of valuation, state whether or not special benefits to a particular purchaser is to be allowed for, state whether a premium for control is to be considered or whether compensation may or must be taken into account.

72. It is appropriate to give consideration to the function of subs(2) of s667C. The defendants by virtue of their arguments seek to breathe into subs(2) a role and operation that is not sustainable. Subs(2) works together with subs(1). The function of subs(2) is to cast light on the value of the company as a whole by having regard to the consideration paid for securities of the relevant class within the previous six month period. The sub-section does not subvert in any way the carefully formulated structure and operation of subs(1) of s667C. Further, subs(2) does not disturb the goal of balance described in the explanatory memorandum. This is borne out by the introductory language of subs(2) that explicitly disavows any limitation on subs(1) by reason of subs(2). It follows that the assessment of the value of the company as a whole, as proscribed by s667C(1)(a) is not supplanted or eroded by subs(2). By virtue of the words used in subs(2) the Legislature has provided other subject matter to which reference must be had in determining what is fair value.

73. The legislative history of s667C shows that the intention of Parliament was to preclude synergies or special benefits from the determination of fair value. ^[F65] The inclusion of s667C is a legislative indication that premiums attaching to minority holdings should not affect an assessment of the fair value of a minority's securities. The explanatory memorandum supports this view, namely that experts determining fair value should not account for premia arising from the special benefits of the outstanding securities to the acquirer or discounts on account of the lack of a market for particular securities.

74. It is to be observed that special benefits are benefits that do not reside in and are not embodied in the company as a whole. They are not part of the asset or the enterprise that is to be valued under s667C(1)(a). They are properly construed as external to that asset for they do not exist at the time when the valuation occurs. Special benefits will only ever exist after the transaction has taken place, if it takes place at all. Accordingly neither an expert reporting in accordance with s667C, nor the Court, would be required, or permitted, to take into account the special value which 100 percent ownership may have to a majority holder in assessing a fair value for a minority's securities in compulsory acquisitions and buyouts under the provisions of Chapter 6A of the Corporations Act. Further, a requirement to attribute value to what might be described as "Melcann" special benefits would be contrary to the intention, demonstrated by s667C(1)(a) that, in determining what is fair value for securities for the purposes of Chapter 6A, an assessment must be made first of the value of the company as a whole.

75. Significantly, recommendation 14 of the Legal Committee Report provided that court appraisal "expressly disregard whether remaining securities of the offer class should attract a premium or discount". This suggests that the exclusion of premiums in s667C was intended to carry with it the exclusion of Melcann type special benefits. ^[F66] The Legal Committee Report recommendation 14 was adopted by Parliament in that the court assessment of a compulsory acquisition procedure under s664F(3) is effectively confined to determining whether the acquisition is for fair value. For that purpose the court, and the relevant expert, must apply the definition of fair value set out in s667C. The definition does not allow for premium referable to the particular value of the outstanding securities to the majority shareholder and which requires an assessment of "the value of the company as a whole". Accordingly it is apparent that Parliament settled upon the particular definition of fair value for the purposes of Chapter 6A of the Corporations Act because it promoted fairness and equity among all shareholders and acted to prevent the exploitation by one or a few shareholders of their minority status.

76. The language of s667C(1)(c) is plain. Neither the value of synergies, nor the value of any other special benefits that might be available to a particular acquirer should be taken into account in the valuation required by s667C. In Pauls Ltd ^[F67] Douglas J relied on the legislative history of s667C in deciding that synergies were not to be taken into account in determining the fair value of securities under s667C. I consider I should adopt the same approach as Douglas J in Pauls Ltd and should not adopt the obiter dicta of Santow J in Winpar to the contrary. In doing so I adopt the approach that promotes uniformity of interpretation of the Corporations Act: Australian Securities Commission v Marlborough Gold Mines Ltd; ^[F68] Hamilton Island Enterprises Pty Ltd v FCT. ^[F69]

77. The most recent authority on s667C and its constitutional validity is Kelly-Springfield Australia Pty Ltd v Green and Ors. ^[F70] There Santow J was concerned with a challenge to the compulsory acquisition of some preference shares. The issues to be determined were whether the price proposed under the acquisition constituted fair value under the statute and, also, whether the provisions of Pt6A.2 of the Corporations Act permitted compulsory acquisition of shares that fell short of just terms. The subject company in Kelly-Springfield was Good Year Australia Ltd, an unlisted Australian public company. About 93.16 per cent of the relevant preference shares in the company were owned by the plaintiff, Kelly-Springfield Australia Pty Ltd. The remaining preference shares, over 20,000 in number, were owned by 23 other shareholders. The defendants in the Kelly-Springfield proceeding launched similar arguments to those pressed by the defendants in the present proceeding. Further, the defendants relied upon the expert evidence of Lonergan who, in essence, postulated the same approach to valuation as in the present case. In Kelly-Springfield Santow J observed the divergent view taken by Douglas J in Pauls case with respect to special value. Santow J acknowledged that in Winpar Holdings his judgment was in the context of a selective reduction of ordinary capital involving no allocation of value between classes such as ordinary and preference shares. ^[F71] As a matter of analysis, Santow J in Kelly-Springfield was generally dismissive or at least allocated little weight to the extrinsic material associated with the legislative scheme. ^[F72]

78. In Kelly-Springfield, Santow J concluded that an allocation of special value should be made albeit under a different name. He held that as the intended outcome of the compulsory acquisition is a single shareholding there will usually be a cost saving eg ASX expenses. As a consequence Santow J held: ^[F73]

"These savings are as much benefits to the company as they are to the would-be 100% shareholder, whose shareholding will be enhanced in value thereby to the extent such savings are material. In that sense, the special value of the purchase to a particular purchaser is simply the reciprocal of the enhanced value of the company, hence my calling it reflexive value. It is clearly to be taken into account under general principle in determining fair value. S667C(1)(a) simply reflects that reality."

79. Further, in the judgment in Kelly-Springfield Santow J adopted the approach that the exclusion of "reflexive value" arising from 100 per cent ownership would not accord with the valuation principles for determining fair value. He held: ^[F74]

"Moreover, to exclude what I will hereafter call in this judgment the reflexive value derived from 100% ownership would not be in accordance with valuation principles for determining fair value. These require a 'liberal estimate' to compensate a compelled vendor for deprivation of its ownership interest and of the capacity to share in any future benefits to the extent those benefits would otherwise enure to that vendor. ... ".

80. The Gambotto principles were considered both at first instance and on appeal in Winpar and to some extent provided the foundation to the reasoning of Santow J in his judgment in Kelly-Springfield. It is appropriate to give consideration to the nature of the matter with which the High Court was concerned in Gambotto. In that case a special resolution passed at a general meeting of the particular company amended the Articles of Association in order to enable a shareholder with 90 per cent or more of the issued shares to compulsorily acquire for a declared price per share the shares of the minority shareholders. The High Court held that the amendment was invalid. The principal judgment was the joint judgment of Mason CJ and Brennan, Deane and Dawson JJ. In the joint judgment focus was placed upon whether the amendment was oppressive and, therefore, beyond the scope and purpose of the power of alteration of the Articles of Association. The principles generally referred to as the Gambotto principles are largely set out in the joint judgment (at 444-447). Having considered the power to amend a company's constitution it was held in the joint judgment:

" ... But it is another thing when a company's constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority ... In our view, such a power can be taken only if (i) it is exercisable for a proper purpose and (ii) its exercise will not operate oppressively in relation to minority shareholders. In other words, an expropriation may be justified where it is reasonably apprehended that the continued shareholding of the minority is detrimental to the company, its undertaking or the conduct of its affairs - resulting in detriment to the interests of the existing shareholders generally - and expropriation is a reasonable means of eliminating or mitigating that detriment."

81. Consideration turned then in the joint judgment to the topic of fairness:

"As noted in the preceding paragraphs, an alteration to the company's articles permitting the expropriation of shares will not be valid simply because it was made for a proper purpose; it must also be fair in the circumstances. Fairness in this context has both procedural and substantive elements. The first element, that the process used to expropriate must be fair, requires the majority shareholders to disclose all relevant information leading up to the alteration [Re John Labatt Ltd (1959) 20 DLR(2d) 159, at p163] and it presumably requires the shares to be valued by an independent expert ...

The second element, that the terms of the expropriation itself must be fair, is largely concerned with the price offered for the shares. Thus, an expropriation at less than market value is prima facie unfair [Nova Scotia Trust Co v Rudderham (1969), 1 NSR(2d) 379, at p398, but cf Phillips v Manufacturers' Securities Ltd (1917), 116 LT 290], and it would be unusual for a court to be satisfied that a price substantially above market value was not a fair value [Re Sheldon; Re Whitcoulls Group Ltd L (1987), 3 NSCLC 100,058 at p100,060]. That said, it is important to emphasise that a shareholder's interest cannot be valued solely by the current market value of the shares [Weinberger v UOP Inc (1983), 457 A 2d 701]. Whether the price offered is fair depends on a variety of factors, including assets, market value, dividends, and the nature of the corporation and its likely future [ibid, at p711]."

82. On appeal in Winpar, Giles JA held that the subject capital reduction did not have to satisfy the Gambotto principles "because the legislature had sought to ensure fairness between the shareholders, in accordance with s256A(b) of the Corporations Law." ^[F75] Giles JA held in this respect ^[F76]:

"So far as the Gambotto principles called for procedural and substantive fairness, as well as seeking to ensure fairness between the shareholders the legislature had required disclosure of all material information (s256A(c)); and it had required that the capital reduction be fair and reasonable to the company's shareholders as a whole (s256B(1)(a)), thereby providing its own test of substantive fairness which looked to the whole rather than to the class selectively affected and leaving it to that class to make its decision upon fairness through the class meeting. A discontented shareholder was not without curial protection, and could apply for relief pursuant to s1324 of the Law: s1324(1B)(a) specifically referred to contravention of s256B(1)(b). The approach to fairness was not identical to that which would flow from the Gambotto principles. But it was comprehensive, and superadded Gambotto principles would be conflicting and confusing".

83. It is apparent that the Gambotto principles are of no or limited application to cases such as the present because the High Court was concerned with a different statutory regime and was not constrained by the particular legislative command enshrined in s667C of the Corporations Act.

84. Ultimately in Kelly-Springfield, Santow J concluded, after placing much reliance upon the observations of the High Court with respect to future events in Gambotto ^[F77]:

"Thus what could be more central to the nature of this corporation and its 'likely future' than that it would become 100% owned by the intended compulsory acquirer of the remaining preference shares? To the extent 100% ownership in the corporate parent would bring about consequential reflexive benefits such as cost savings and other synergies, it is part of fair value.

Nor does it follow that attributing such reflexive benefits to the value of the company is in conflict with such inhibition on greenmailing as the statute lays down."

85. Starting from such analysis, therefore, Santow J in Kelly-Springfield considered the allocation of reflexive benefits or special benefits and concluded that the price proposed under the compulsory acquisition included an ample margin such as to accommodate such portion of the special value, if any, as should be allocated to the preference shares. ^[F78] Finally, having qualified the allocation of a reflexive benefit or special benefit by allocating it on a non-discriminatory basis, Santow J concluded: ^[F79]

"This analysis thus leads to three conclusions. First is that there can be no discrimination in favour of the shares to be compulsorily acquired, as against other shares in the same class. Second is that the allocation of a reflexive benefit is allowable, but only if carried out non-discriminatorily, pro rata within the relevant class and fairly between classes. Third, and in consequence, no premium for forcible taking of the kind Mr Lonergan held to be mandatory is in fact required in order to pay fair value or is indeed allowable, if discriminatory. Such a premium is, on Mr Lonergan's analysis, only to be paid to the shares to be compulsorily acquired. That immediately contravenes the directive in subpara(c) not to allow a premium for particular securities in the class being acquired. That means here, the shares being compulsorily acquired as compared to the shares of the same class earlier acquired or already owned. Such a premium for forcible taking is the very premium by another name which the greenmailer seeks to exact. It does not lose that character as a greenmail exaction because dressed up as a 'premium for forcible taking'."

86. Santow J in Kelly-Springfield approached the matter of fair value in the context of compulsory acquisition from a different perspective to that which I have adopted. In Kelly-Springfield the special benefit or reflective value was of no consequence in light of the price that was the subject of the compulsory acquisition. In the present matter the circumstances are different. In addition, for the reasons already set out, I remain of the view that there is no allowance in the statute for the payment of special benefit or premium for forcible taking payable to the minority shareholders.

87. Before finally disposing of the topic it is appropriate to give some consideration to the role of s667D. It was suggested on behalf of the defendants that s667D performs the work required to dispose of greenmailers and that, as a consequence, s667C should not be regarded as taking on that task. In this respect it was urged that s667C allows a premium for forcible taking and special benefits. I do not accept that submission. S667D addresses the position where an acquirer seeks to give some benefit outside the offer for compulsory acquisition that yields a differential advantage between those who fall within the class of minority security holders. The section is not concerned with the elements that an offer to acquire can or must incorporate.

(2) Time of determination of fair value

88. It was submitted on behalf of the defendants that fair value must be assessed at the date of the approval by the court of the acquisition under s664F of the Corporations Act. It was submitted that this is the natural meaning of the language in s664F(3). It was said that under the sub-section, the 90 per cent holder must establish that the terms set out in the compulsory notice "give a fair value" (emphasis added). It was submitted for the defendants, also, that the procedure under Pt6A.2 is closely analogous to a scheme of arrangement where changes or matters that come into existence after the class meeting may be relevant to approval. It was urged for the defendants that the procedure under Pt6A.2 is more draconian than a scheme of arrangement because of the security holders under a compulsory acquisition do not have the benefit of the safeguard of a meeting and a vote. It was said, also, that the role of the court in protecting the minority from expropriation on terms that have become unfair due to matters arising since the date of the compulsory acquisition notice is of particular significance.

89. The independent expert, Appleyard, made the determination of fair value in early May 2001 in the May report, immediately prior to the date on which Capricorn lodged its compulsory acquisition notice with ASIC. Whether the terms set out in the compulsory acquisition notice give fair value for the securities covered by the notice must be assessed at or about the date the compulsory acquisition notice was lodged with ASIC and the notice was dispatched to unit holders as at or about 9 May 2001. Such proposition is supported by the construction of the provisions of Pt6A of the Corporations Act. It seems to me that the new provisions would be unworkable if it were otherwise.

90. The independent expert's report was addressed to the same issue as the Court is required to decide under s664F. The issue of fair value arises under s664F(2), because the issue to be determined by the Court is whether "the terms set out in the compulsory acquisition notice give a fair value for the securities". It also arises under s664C(2)(b)(ii) and s667A(1)(b) because the expert's report is required to state whether, in the expert's opinion, "the terms proposed in the notice give a fair value for the securities concerned". S667C provides a common methodology to determine what is fair value for the purposes of Chapter 6A, including s664F, s664C and s667A. Because the inquiry as to fair value is directed to the terms set out in the compulsory acquisition notice both in the case of the expert's report and in the case of the Court's determination, the time of the notice is the time at which the issue of "fair value" is to be tested. It is the preparation of the notice that initiates the procedure for compulsory acquisition under s664A(3), and it is the securities to be acquired outstanding at that time that comprise "the securities covered by the compulsory acquisition notice". The fair value inquiry is in relation to those securities.

(3) Distributions

(a) The Statutory Provisions

91. The issue arose as to whether distributions made after 9 May 2001 were relevant. The consideration for the compulsory acquisition of the WADT units was inclusive of distributions that might be made after 9 May 2001. The time when the court should determine the fair value of the consideration is the effective date of the compulsory acquisition. If that date is before a distribution is declared, the right to the distribution may be treated as accruing to the acquirer as the acquirer of the securities as at the effective date. In addition, if the consideration proposed by the acquirer is read in an analogous way to the way in which an offer to purchase securities would be construed, it would be the case in any event that the equivalent monetary benefit of a distribution accrues to an acquirer by way of a reduction in the proposed consideration by the amount of the benefit, unless the provisions of Chapter 6A require otherwise.

92. Clearly there is nothing in s664A to s664G or in s667A or s667C of the Corporations Act that excludes from the term "securities" the right to distributions and other rights attached to them. Accordingly, the benefit of distributions that are undeclared at the time of a compulsory acquisition notice accrues to an acquirer under s664A. The benefit should be seen to have accrued by force of the completion of the compulsory notice procedure under Pt6A.3.

(b) Cum Benefits

93. For the plaintiff it was argued that in the alternative the terms set out in the compulsory acquisition notice are properly to be read as stating a cash sum (s664C(1)(a)) which is cum benefits for which the 90 per cent holder proposes to acquire the securities. The cash sum therefore automatically abates to the extent of and commensurately with any distributions made before the compulsory acquisition procedure is completed. In light of my observations and findings as to the time of determination of fair value it is unnecessary for me to consider the alternative argument of the plaintiff as to cum benefits. However, in the event the argument became relevant it is appropriate that I give it consideration.

94. The WADT units are listed on the Australian Stock Exchange ("the ASX"). The terms set out in the compulsory acquisition notice are appropriate for the acquisition of the securities covered by the compulsory acquisition notice cum distributions rather than ex-distributions. The ASX Listing Rules provide in r6.24 that "an entity must comply with Appendix 6A". The rules provide in para1 of Appendix 6A for specified time limits. Furthermore, at least in the case of listed securities, where a purchase is made on the basis of the quoted price at least 4 business days before the record date announced for a distribution, the purchase is taken to be on a cum basis. That applies where a distribution has been announced. Logically, it also applies where there has been no dividend announced on the basis that the critical time is that from which the securities are quoted on an ex basis, because at all earlier times the market quotation is on a cum basis. However, the issue does not, in substance, arise where the purchase is completed before a dividend is announced. The purchaser is entitled to the later announced dividend because of ownership of the shares, not because the purchase offer was cum any future announced dividends, see also: Chase Securities Ltd v GSH Finance Pty Ltd; ^[F80] Black v Homersham. ^[F81]

95. Accordingly, the ordinary construction of an agreement or offer to buy shares, whether in a listed or unlisted company, is that the purchase or offer is made cum dividend in cases in which the dividend has been declared before the agreement or offer is made.

(c) The Unitholders' interest in the Trust

96. In this case the proposed consideration was for the units in WADT that were the subject of the notice. It was for the whole of the holders' interest in the trust, including the holders' right to distributions and in the corpus and income of the trust. In Charles v FCT ^[F82] the High Court considered a unit trust that was similar to WADT. The Court (Dixon CJ, Kitto and Taylor JJ) in a joint judgment said: ^[F83]

"[A] unit held under this trust is fundamentally different from a share in a company. A share confers upon the holder no legal or equitable interest in the assets of the company; it is a separate piece of property; and if a portion of the company's assets is distributed among the shareholders the question whether it comes to them as income or as capital depends upon whether the corpus of their property (their shares) remains intact despite the distribution: Inland Revenue Commissioners v Reid's Trustees [1949] AC 361, 373. But a unit under the trust deed before us confers a proprietary interest in all the property which for the time being is subject to the trust of the deed: Baker v Archer Shee [1927] AC 844; so that the question whether moneys distributed to unit holders under the trust form part of their income or of their capital must be answered by considering the character of those moneys in the hands of the trustees before the distribution is made."

97. Thus, whereas a share comprises separate property from the debt that arises when a dividend is declared, the distinction does not exist in the case of a unit trust of the Charles v FCT type.

98. Such analysis is consistent with the Constitution of WADT, the ASX Listing Rules and with the authorities. It is also consistent with a construction of Pt6A.2 of the Corporations Act in that it avoids the unfair result that a compulsory acquirer would be exposed to increases in the cash sum proposed for the units or shares as the case may be by reason of distributions made during the course of the compulsory acquisition procedure.

(d) Conclusions as to Distributions

99. Consequently, where a compulsory acquisition of units is approved by the Court it is effective from the time of the acquisition notice and such an acquisition is inherently the compulsory acquisition of the entire interest of the unitholder in the beneficial interest in the Trust, including the unitholder's interest in the fund at that time. On this basis, therefore, the compulsory acquisition notice can be regarded as a notice to acquire the whole of each relevant unitholder's interest in the beneficial interest in the trust at the time of the notice, including the unitholder's interest in the fund and the unitholder's present entitlement to a share of the net income of the Trust and any distributions made after the giving of the notice and before completion of the compulsory acquisition.

100. In this case, a distribution has been paid to the present holders as the WADT Constitution allows. Capricorn is entitled, therefore, to "set off" the amount distributed against its liability to pay the consideration. S666A(1)(a) and s666B(1)(a) of the Act require the payment of "the consideration" rather than some lesser amount. That is because Capricorn is entitled to a substantive equitable set-off of the amount distributed against the amount otherwise payable. That being so, payment of the amount owing after deducting the amount to be set off would count as payment of the gross amount because in equity the moneys due and payable by it would be only so much of the amount owing as remains after the operation of the equitable set-off. ^[F84] Further, the term used in s666A(1)(a) and s666B(1)(a) is "the consideration" and not the cash sum to which the notice under s664C must refer. The consideration stated in the notice is the cash sum less the amount of any distributions rather than the gross cash sum.

101. In any event the topic of distributions was not really developed in final addresses on behalf of the defendant. Nevertheless the position was not abandoned. I observe that the offer made was an offer for the entirety of the rights that attend the units and that captures subsequent distributions including a distribution that happens to be made before the acquisition issue is resolved and is available to the offeror. There were two ways of dealing with the circumstance. Either the plaintiff paid $2 and recovered the distribution from the unitholder or, alternatively, the plaintiff set off the amount of the distribution against the acquisition price of $2. For the reasons stated it seems to me that the appropriate course is the latter.

Conclusions as to Fair Value

102. From these reasons I derive my primary conclusions as to fair value in the present context. It is based upon willing and informed but not anxious parties; there is no allowance for special or ransom value but any such value may be distributed pro rata; the value must be fair to all shareholders; and, there is no premium for forcible taking. Furthermore, the time of the notice of compulsory acquisition is the time when fair value is to be assessed. Finally, the benefit of distributions undeclared at the time of the notice of compulsory acquisition accrue to the acquirer, particularly in the present case.

The Constitutional Arguments

103. The constitutional arguments are capable of dissection. The first issue is whether s667C of the Corporations Act permits unjust terms. The second issue is whether s1350 of the Act can be relied upon if required.

(1) The Just Terms Argument

104. The defendants contended that s51(xxxi) of the Constitution constitutes a constitutional guarantee of just terms, the purpose of which is to ensure "full compensation for what is lost": Smith v ANL Ltd; ^[F85] Georgiadis v Australian and Overseas Telecommunications Corp. ^[F86]

105. The defendants contended that, properly construed, s667C prescribes a non-exhaustive process and requires the taking into account of factors that will produce a fair price and, hence, it was argued, just terms. It was urged that there is no statutory exclusion of factors that are ordinarily relevant to fair price such as special benefits to the purchaser.

106. In the alternative it was argued for the defendants that s667C dictates a valuation process that excludes factors ordinarily relevant to the assessment of a fair price so that the statutorily defined "fair price" in s664F is in substance unfair according to received criteria. On this basis, the defendants contended that s667C is invalid.

107. S51(xxxi) of the Constitution allows the Commonwealth Parliament to make laws with respect to the acquisition of property on just terms from any state or person or for any purpose for which the Parliament has a power to make laws. Authority has it that while s51(xxxi) is framed as an empowering provision, it operates to fetter the legislative power of the Commonwealth by preventing it from making laws that facilitate acquisition of property on terms that are not just: Bank of New South Wales v Commonwealth. ^[F87] It is established, also, that the object of s51(xxxi) reflects a basic principle that the owner of property compulsorily acquired is not required to sacrifice property for less than true worth: Commonwealth v Western Australia. ^[F88]

108. For the defendants it was emphasised that whether compensation is just is determined by considering the fairness of compensation as between the owner of the property in question and the person acquiring that property: Grace Bros Pty Ltd v The Commonwealth ^[F89]; Smith v ANL Ltd; ^[F90] Cf Commonwealth of Australia v State of Western Australia. ^[F91] It was argued that the process of ensuring just terms involves placing an objective determinator of value on both sides of the transaction and specifically that of the hypothetical willing, informed and not anxious buyer and seller: Spencer v the Commonwealth. ^[F92] It was contended for the defendants that in this context, special value to the vendor or the purchaser must be taken into account ^[F93]: Pastoral Finance Association Ltd v the Minister) ^[F94]; Melcann Ltd v Super John Pty Ltd. ^[F95]

109. The defendants relied upon Commonwealth v Western Australia where Kirby J stated ^[F96] that the language of the Constitution requires that federal law should include appropriate terms to ensure economic fairness to the State or person whose property is acquired and that the true costs of the acquisition must be taken into account. The defendants contended that if on its proper construction, s667C precludes a taking into account of special benefits and related matters then it does not require compensation on just terms.

110. Furthermore, it was submitted for the defendants that shares in a company are not fragile statutory rights incapable of existence at common law. A share comprises a "collection of rights and obligations relating to an interest in a company of an economic and proprietary character, but not constituting a debt'': see Borland's Trustee v Steel Brothers & Co Ltd ^[F97] approved by McHugh, Gummow, Hayne and Callinan JJ in Pilmer v The Duke Group (in liq). ^[F98] Thus, it was said, the rights and obligations are derived not only from statute but also from the agreement of the parties. ^[F99] It followed, as the argument was advanced on behalf of the defendants, that it is erroneous to assert that s51(xxxi) is excluded from application because the defendants' interests are created solely by a law of the Commonwealth or pursuant to a legislative scheme which are merely subject to modification or qualification by s667C of the Corporations Act.

111. I turn to consider the just terms argument. In Austrim Nylex Ltd v Kroll, ^[F100] I observed:

" ... s664F of the Corporations Law expressly provides for the payment of compensation to the persons from whom the shares are acquired. There is no basis whatsoever for the argument that the compensation there specified is other than 'just'." ^[F101]

112. In Austrim I adopted the views stated by Douglas J in Pauls Ltd v Dwyer & Ors ^[F102]. Whilst at that point in Austrim I was concerned with an interlocutory application by minority shareholders to stay the proceeding, the fundamental view taken remains appropriate.

113. It is primarily for Parliament to determine that which is the appropriate compensation for a compulsory acquisition. Unlike, for example, legislation concerned with compulsory acquisition of property, ^[F103] here the law allows limited compensation and makes no provision for special compensation over and above value such as solatium. The High Court has stated that the role of the courts is to determine whether that compensation might reasonably be regarded as just: "[i]f that compensation satisfies the requirement of 'just terms', the Court will not declare the terms unjust and the law in excess of power for the reason that the Court entertains an opinion that other terms would have been fairer or more appropriate". ^[F104] Again, as the High Court has made clear, whether compensation is just is determined by reference to whether the compensation is fair as between the owner of the property and the person acquiring the property. ^[F105] From a fundamental perspective there is no statutory solatium provision expressly or impliedly contained in Pt6A.2.

114. Necessarily, if the minority security holders could require a premium for their securities, Parliament's express intention to provide for the compulsory acquisition of property on just terms would be frustrated. In particular, the inclusion of a premium in the determination of "fair value" would suggest a capacity in the minority security holders effectively to veto the compulsory acquisition process by seeking prohibitive prices (based solely on the security holders' minority status) for the acquisition of their securities. In my view, it would run counter to the clearly expressed words of the section and the legislative intent as clarified by the explanatory memorandum to the legislation.

115. An additional point is to be made. Any value beyond "fair value" said to attach to the defendants' securities was validly extinguished in 1999 upon enactment of Pt6A.2 of the former Corporations Law. The securities compulsorily acquired under Pt6A.2 of the Corporations Act therefore do not have any value other than "fair value" and just terms cannot require any value other than "fair value" to be given for them. I observe that neither Pt6A.2 of the former Corporations Law of the ACT nor Pt6A.2 of the former Corporations Law of Victoria was subject to s51(xxxi) of the Constitution or to any equivalent requirement. ^[F106] By reason of s3 and s5 of the Corporations Act 1989 (Cth), Pt6A.2 of the Corporations Law of the ACT was a law made solely for the government of a territory. Pt6A.2 of the Corporations Law of the ACT could not, therefore, be invalid for failure to provide for the compulsory acquisition of property on just terms. As stated by McPherson JA (with whom Williams JA and Jones J agreed) in Pauls Ltd v Elkington: ^[F107]

" ... the notion that, without just terms, rights of private property in Australia are constitutionally immune from acquisition under State legislation plainly received its quietus in Durham Holdings Pty Ltd v New South Wales (2001) 75 ALJR 501. To the many authorities cited there, it is perhaps worth adding a reference to what was said in Jerusalem-Jaffa District Governor v Suleiman Murra [1926] AC 321, 328. A 'right' of private property is certainly recognised, but is is not one that prevails against a statute enacted in the exercise of the plenary power to legislate like that invested in the Parliament of Victoria."

116. In any event, it is usually the case that the Commonwealth can acquire property only under s51(xxxi) of the Constitution. It is well settled that there are some acquisitions of property to which s51(xxxi) does not apply. ^[F108] For example, the Commonwealth is not required to provide "just terms" for any property acquired by a tax or a penalty. Presumably this is because the provision of just terms would defeat the whole purpose of a law for either of these purposes. In a similar vein, in Nintendo Co Ltd v Centronics Systems Pty Ltd ^[F109], the High Court held that s51(xxxi) did not apply when persons were adversely affected by legislation that created new intellectual property rights because ^[F110]:

"It is of the nature of [laws made under s51(xviii) of the Constitution] that they confer [intellectual property] rights on authors, inventors and designers ... and that they conversely limit and detract from the proprietary rights which would otherwise be enjoyed by the owners of affected property. Inevitably, such laws may, at their commencement, impact upon existing proprietary rights. To the extent that such laws involve an acquisition of property from those adversely affected by the intellectual property rights which they create and confer, the grant of legislative power contained in s51(xviii) manifests a contrary intention which precludes the operation of s51(xxxi)."

117. On the authorities it is apparent that as a fundamental approach to legislation, a law that enables the acquisition of property is not to be characterised as a law with respect to the subject matter of s51(xxxi) if the law constitutes no more than the means appropriate for the achievement of an objective where the acquisition of property without just terms is a necessary ^[F111] or characteristic feature of the means prescribed. ^[F112] Furthermore, a law concerned with acquisition does not simultaneously become a law subject to s51(xxxi) where the law merely adjusts the competing rights or claims of persons in a particular relationship or area of activity. ^[F113] In this respect Pt6A.2 is a law concerned with the adjustment of competing rights. It is not properly characterised as a law with respect to the acquisition of property for the purposes of s51(xxxi).

118. This view is borne out by consideration of the extrinsic materials to the legislation. They spell out that the principal objects of Pt6A.2 are to enhance corporate efficiency and to discourage greenmailing ^[F114]. Both of these objects appear to fall squarely within the power conferred on the Commonwealth Parliament by s51(xx) of the Constitution. S51(xx) of the Constitution empowers the Parliament to make laws with respect to "[f]oreign corporations, and trading and financial corporations formed within the limits of the Commonwealth". Hence, any acquisition of property otherwise than on just terms is a necessary incident of the means selected to achieve these objects.

119. Furthermore, the extrinsic materials to the legislation show that Pt6A.2 is directed towards balancing the competing interests of persons in a particular relationship, they being the minority and the majority security holders of a company regulated under the Corporations Act. In particular, the Part is designed "to balance the interests of facilitating changes to corporate ownership with the need to protect the rights of minority shareholders". ^[F115] Hence, in my view, Pt6A.2 can be regarded strictly as "a means of resolving or adjusting competing claims, obligations or property rights of individuals as an incident of the regulation of their relationship" ^[F116].

120. Properly construed, in my view, Pt6A.2 is not a law with respect to s51(xxxi) and the requirement to provide "just terms" does not apply. Accordingly, in my view, the constitutional requirement of "just terms" is not triggered and the invalidity argument of the defendants fails.

(2) The s1350 Argument

121. The defendants argued, that s667C is constitutionally invalid unless preserved by s1350 of the Corporations Act which provides for compensation by the acquirer and the institution of proceedings by the person whose property is acquired where the acquisition would otherwise be constitutionally invalid. Even so, the defendants contended that s1350 did not provide a solution. In the event it was necessary to determine the application of s1350 in the present context I do so.

122. It was argued for the defendants that s1350 suffers from the fatal deficiency that it does not provide a right of action against the Commonwealth. It was said that this is significant for a number of reasons. First, because a private acquirer may not have the capacity to meet its liability for compensation. Secondly, because the entitlement to compensation is a right arising from acquisition and of itself is not a ground upon which to resist or delay acquisition. Thirdly, because the liability is determined, in the absence of agreement, by a court proceeding occurring after the acquisition is complete. Thus, it was argued, the right to compensation is not equivalent to the just value of the property lost in contrast to the position that may obtain where the Commonwealth has the obligation to make compensation. see: Commonwealth v Western Australia ^[F117]; Minister for Primary Industries v Davey. ^[F118]

123. I do not accept these arguments. Even if Pt6A.2 was subject to s51(xxxi) the validity of the Part is assured by virtue of s1350 of the Corporations Act. Under s1350(1), if the operation of Pt6A.2 of the Act would result in an acquisition otherwise invalid by reason of s51(xxxi) of the Constitution, "[the acquirer of the securities] is liable to pay compensation of a reasonable amount to [the minority security holder] in respect of the acquisition". In the absence of agreement on the amount of compensation, by virtue of s1350(2) of the Corporations Act the minority security holder may institute court proceedings to recover from the acquirer "such reasonable amount as the court determines".

124. In my view, s1350 plainly gives effect to the requirements of s51(xxxi) of the Constitution. In this respect I am assisted by the statements of Williams JA in Pauls Ltd v Elkington: ^[F119]

"The provision [ie, s1350], in my view, has the effect that if in law the acquisition must be on 'just terms' because of the provision of the Constitution, that is how the compensation payable must be assessed. In other words the legislation is not rendered invalid by operation of s51(xxxi) of the Constitution, but rather if the provision of the Constitution applies appropriate compensation must be paid."

125. S1350 should be interpreted as consistent with rather than contrary to constitutional requirements see eg Residual Assco Group Ltd v Spalvins. ^[F120] Furthermore, the Full Court of the Federal Court held in Minister for Primary Industries and Energy v Davey that a similarly-worded provision was consistent with s51(xxxi). ^[F121] Yet again, in The Commonwealth v Western Australia, ^[F122] Kirby and Callinan JJ confirmed that a right to seek reasonable compensation in a court provides "just terms".

126. The fact that s1350 (unlike the provision in Davey) requires the compensation to be provided by the acquirer, and not the Commonwealth, is entirely consistent with s51(xxxi). Under Pt6A.2, securities will often be acquired by private persons and the obligation to provide compensation will fall therefore on those private persons. In the context of this matter, s1350 imposes an obligation to provide compensation on an acquirer that has already paid "fair value" for the securities, as assessed under Pt6A.2. ^[F123] Even if there is any difference between "fair value" and "just terms", the possibility that an acquirer could afford to pay "fair value" but could not pay "just terms" is unlikely. There is no question it seems, therefore, of the right to compensation conferred by s1350 being empty or without substance. S1350 does provide for "just terms" and that, in turn, means that Pt6A.2 of the Corporations Act is not invalid by reason of s51(xxxi) of the Constitution.

127. It follows, therefore, that the arguments of the defendants challenging the constitutional validity of s667C of the Corporations Act and the correlative argument that s1350 of the Corporations Act did not apply have failed.

Description of the Evidence

128. Separate from my findings on the issues of fair value and constitutional validity it is appropriate to consider the evidence and the various key components of the expert evidence in the particular case. I turn first to a description of the evidence.

(1) The Evidence of Creese

129. Creese is a director of Capricorn and a solicitor. He gave evidence on affidavit setting out the general background circumstances to Capricorn, Rio Tinto and WADT. He also described the general history of the offers made for the acquisition of the shares. These matters have been summarised already and were not the subject of dispute between the parties. Creese gave evidence, further, as to the manner in which compulsory acquisition notice forms were served on the defendants and the surrounding circumstances including, notice to ASIC and the eventual retainer of the independent expert. Creese was cross-examined at length about potential cost savings and benefits to Rio Tinto arising from the compulsory acquisition. Essentially, he considered that there would be little or no savings.

(2) The Evidence of Appleyard - the May Report

130. Appleyard had formal qualifications including qualifications in geology. He had been engaged in the mining industry for almost 40 years and had extensive experience as a geologist valuer.

131. In assessing the value of WADT Appleyard considered a range of valuation methods. A practice note of ASIC ^[F124] provides that an independent expert for the purposes of the statute is able to consider, among other methods of valuation, asset-based methodologies, the application of earning multiples or discounted cash flow analysis. Appleyard did not apply earnings-based methodologies because of the nature of the interest of WADT. He observed that the principle assets of WADT comprised interest in mining projects and mineral exploration. He noted that mining assets as such are finite and that future profitability depends on the outcome of exploration programmes that are not predictable. He observed, also, that some of the mineral assets of WADT remain at an exploration stage and have not recorded any earnings as yet. For these reasons, Appleyard did not apply the earnings-based methodologies permitted by the ASIC Practice Note. In the opinion of Appleyard the most appropriate method for determining the value of entities such as WADT is based on the fair value of the underlying net assets with the principal assets being valued by way of using the DCF analysis.

132. Whilst Appleyard was the primary author of the main report produced by AMC he was assisted by KPMG Corporate Finance (Aust) Pty Ltd ("KPMG") in relation to prices, exchange rates, discount rates and taxation implications. He was further assisted by Dr Stephan Meyer.

133. In the May report, Appleyard of AMC concluded that the cash payment of $2 for each WADT unit that is not fully beneficially owned by Rio Tinto is fair value for the units the view was premised on the fact that the payment of $2, being the offer price, exceeded the range of assessed value for WADT as a whole of $1.06 to $1.22 per unit. The principal factor Appleyard took into account in forming the opinion was the valuation of the assets of WADT. Appleyard included in the valuation of the assets of WADT its interest in the Argyle Diamond Mine. The value of the WADT interest in the Argyle Diamond Mine was assessed by Appleyard at a low figure of $73,250,000 up to a high value of $82,800,000.

134. In addition, the valuation assessment by Appleyard did not provide for any premium or apply any discount. He noted the primary asset of WADT as being its interest in the Argyle Diamond Mine. Appleyard valued the interest in that mine on a discounted cash flow ("DCF") basis. Appleyard noted that the basis of valuation implied a 100 per cent ownership of the asset and, therefore, inclusion of any control premium. The valuation by Appleyard was not adjusted for any synergies or cost savings that might accrue to Rio Tinto as a result of the acquisition of the remaining WADT units. He observed, also, that the annual management cost of WADT was in the order of $0.5M. He estimated that of the management costs about $.03M might be saved by Rio Tinto if it acquired 100 per cent of WADT. Hence, Appleyard concluded that the impact of the savings on the value of a WADT unit was in the order of $.03. Importantly, Appleyard noted that without the Rio Tinto offer the minority unit holders would be unable to access such management savings.

135. An additional matter considered by Appleyard was the performance of WADT units on the ASX. He noted that the price of WADT units varied between $2.01 and $2.30 during the period from 1 October 2000 to 6 April 2001. He observed, also, that during the period approximately 80,000 units were traded representing 0.13 per cent of the units of WADT. Consequently, Appleyard concluded that the volume of trade was so small and irregular that the recent trading price could not be relied upon to fairly reflect the underlying value of WADT units.

136. Later, Appleyard completed the November report wherein he largely responded to a report prepared on behalf of the defendants. The additional expert evidence given by Perry and Wingrove was largely responsive to the report of the defendants' experts. It is necessary, therefore, to turn next to the expert evidence on behalf of the defendants given by Lonergan.

(3) The Evidence of Lonergan - the LEA report

137. Lonergan holds formal qualifications in economics and has 30 years' experience as a chartered accountant. He practises presently as an independent valuer. He has given valuation evidence on a number of occasions in takeover and acquisition matters over the years. Lonergan has, also, published works concerned with the valuation of shares and related matters.

138. Lonergan was the sole expert witness called on behalf of the defendants. He was the author of the LEA report. The LEA report was prepared partly in response to the May report of Appleyard and, also, for the purposes of evidence at trial. Lonergan rejected the offer price by Rio Tinto of $2 per unit as representing fair value. Rather, Lonergan assessed the fair value of the WADT units at either $2.65 or $2.80 per unit depending upon certain assumptions.

139. Lonergan rejected the assessment of fair value by Appleyard as being too low on eight grounds:

(1)

The valuation was based on an exchange rate of the Australian dollar and the US dollar that was too high;

(2)

there was no allowance in the valuation for the special benefit likely to result from the compulsory acquisition of the WADT units;

(3)

failure to allow for the cost savings resulting from the compulsory acquisition;

(4)

non-consideration of payment of a proportion of the value of special benefits to minority shareholders;

(5)

the lack of provision of a premium value for the minority unit holders for the forced sale;

(6)

the failure to attribute a value to the voting rights of the minority shareholders;

(7)

insufficient regard to the high income yield of the units;

(8)

insufficient allowance for the trading price of WADT units on the ASX in the preceding 12 month period.

140. It was the opinion of Lonergan that the fair value of the units comprised three elements. First, a base value. Secondly, a share of the "special benefit" arising from the acquisition of the remaining units. Thirdly, a premium for forcible taking. The latter two elements were additional to the first element, namely, the base value. the gravamen of the evidence of Lonergan was that it would be unfair if the minority unit holders did not share in the special benefits created by the acquisition of their units and receive a premium for forcible taking by way of compensation for the financial and other disadvantages they would suffer.

141. Lonergan attributed a total value of special benefits in the order of $3.4M to $4.5M consisting of management cost savings of between $3.1M and $4.1M and restructuring benefits between $0.3M to $0.4M. Combined with the advantage of Rio Tinto no longer being required to meet ASX disclosure requirements, Lonergan expressed the opinion that Rio Tinto should be expected to pay a premium above the base value of the units. It was his opinion, also, that the fair share of the value of the special benefits to which the minority unit holders ought be entitled should take account of four factors. First, that the special benefit would not exist without the compulsory acquisition. Secondly, that the minority unit holders would not share in the special value benefit otherwise. Thirdly, the consent of minority shareholders is required so that the majority unit holder can gain access to the benefits of the special value. Fourthly, the majority unit holder is entitled to receive the special value benefits only through the compulsory acquisition process and accordingly they should share the special benefits with minority unit holders. Ultimately, Lonergan concluded that " ... It would be commercially reasonable to apportion the special value benefits equally between controlling and minority unit holders."

142. Lonergan expressed the opinion that the construction imposed by the courts thus far on s667C of the Corporations Act has been inappropriate and in some respects erroneous. Throughout his written report a number of opinions were expressed with respect to the proper construction of the relevant provisions of the Corporations Act. This was an unusual course for an economic expert to pursue, particularly so when the expert was required to give evidence with respect to economic matters as distinct from legal matters. Nevertheless, Lonergan asserted that the objective of the Corporations Act requirements is to ensure that minority unit holders receive "fair compensation" in the circumstances of compulsory acquisition. Starting from such premise Lonergan asserted the opinion that it was appropriate that the allocation or distribution of value between both minority and majority unit holders take into account "all relevant matters". Lonergan regarded as "relevant matters" base value, special benefits value and compensation for forcible taking. He postulated that base value and special benefits value form the total entity value of WADT and that compensation for forcible taking represents compensation for the disadvantages that unit holders may suffer as a result of the compulsory acquisition. These have been outlined already. In his evidence Lonergan acknowledged the difficulty in quantifying the value to be attributed to the consequences of forcible taking. He postulated that it was clear that fair value should incorporate a premium above the base value plus a share of special value.

143. Lonergan concluded that it was commercially reasonable to apportion special value benefits between buyer and seller on a 50:50 basis. On that basis, he postulated that the fair value of each unit could fall in the range between $2.68 and $3.08, well above the offer figure by Rio Tinto to the minority unit holders of $2.

144. Lonergan placed particular emphasis, also, upon the time at which the estimate of fair value was made. He relied upon the fact that the highest price paid for WADT units on the ASX in the preceding six months was $2.39 per unit.

(4) The Evidence of Perry

145. Perry gave evidence on the topic of valuation methodology. Perry is a partner and director of Corporate Finance at JB Were Ltd. He has formal qualifications in economics and extensive experience in valuation and the application of exchange rates.

146. Perry was of the opinion that the main valuation methodologies applied by the market place are DCF, capitalisation of earnings and dividend discount models ("DDM"). His evidence was to the effect that the accuracy of these accepted methodologies vary according to the nature of the forecast cash flows or earnings that are expected to arise from the assets of the entity. It was the opinion of Perry that when considering projects in the extractive industry the cash flows are forecast to cease within a finite period it is generally accepted by the financial community that the DCF method is the most appropriate. The foundation for such preference lies with the fact that the DCF method considers the forecast cash flow of each specific year until the relevant project ceases whilst other methodologies usually value cash flows on the assumption that such flows continue into perpetuity. Furthermore, Perry observed that the DCF method lends itself to cross-checking by alternative methodologies in relation to larger companies. However, with respect to WADT Perry considered that the trust was a specific purpose investment vehicle for a single finite asset and, therefore, alternative methodologies would be inappropriate.

147. Perry noted that the DCF method of valuation valued a security using the present value of estimated future cash flows by taking into account the time value of money. He gave the example that cash flows that are one year away in time are more heavily weighted in the aggregate valuation than cash flows such as those ten years away. He noted that it is generally accepted market practice to adopt the weighted average cost of capital ("WACC") as the discount rate that takes into account the capital structure of the company. He observed that the use of a WACC reflects a weighted average of the required returns for an equity interest in the entity and the required returns of lenders to the equity. He described that the cost of funds is weighted by the proportion of the capital structure of the entity that is represented by each element. Perry gave the example that if an entity has 20 per cent of its capital base in debt then the WACC would equate to 20 per cent of the cost of debt plus 80 per cent of the cost of equity. Perry described in considerable detail the manner in which accepted market practice applies the WACC. He described that the methodology is used by the global financial community and at universities and business schools around the world. He observed that the calculation of the DCF valuation involves a series of projections of the levels of free cash a company will have available after payment of all outgoings and is limited by the finite life of the particular asset, in this case, the Argyle Diamond Mine. Perry said that based on his experience with an entity such as WADT where the main asset is an interest in a project with a finite life the cash flow should be forecast for each year until the cessation or completion of the project. He described that forecast cash flows are then discounted to a present value applying the WACC. Based on such analysis the resulting valuation is taken, the value of liquid assets is added and debt is deducted to determine the residual estimated equity value. On that basis, Perry considered that an assessment could be made as to whether the unit price was over-valued, of fair value or is under valued.

148. In summary, Perry stated the following with respect to the methodology of valuation of WADT:

"We believe that the DCF methodology for the valuation of WADT is the most appropriate as it takes into account the fact that WADT's interest in the Argyle Diamond Mine, which is the main asset of WADT, has a finite life. The forecast of future cash flows allows for the inclusion of the variability of the returns of the operation over its life, and does not magnify errors that might arise from compounding a single year's cash flow. Further, other methods of valuation ... contain implicit assumptions that cash flows will continue into perpetuity, which we believe is clearly not valid in the case of WADT."

149. Perry accepted that the analysis of Lonergan commenced with the DCF valuation of Appleyard but made certain input assumptions and elements derived from methods other than the DCF method. These elements were the base value to which is added a special benefit together with a premium for forcible taking. Perry was of the opinion that the DCF valuation represented the value of a unit in WADT because it fully reflected the value of all future cash flows from the entity which are derived from the underlying assets adjusted for the time value of money. Perry observed that the assumptions and elements inserted by Lonergan to the DCF method included changes to the future estimates of diamond pricing and exchange rates. Certain confidential evidence was lead from Perry as to exchange rates. In order to preserve the confidentiality sought by the plaintiff, and agreed to by the defendants, the evidence is hereafter referred to as the confidential evidence.

150. Perry was critical of a number of aspects of the valuation by Lonergan. He considered the Lonergan valuation did not reflect the lower price for future periods adopted in the draft mine plan on the basis that the economic environment will not suffer following the terrorist events in New York of 11 September 2001. Perry placed particular significance upon the fact that the draft mine plan was dated 5 October 2001, that is, post 11 September 2001. Furthermore, Perry disagreed with the assumption of Lonergan that economic activity would rebound quickly post events of 11 September 2001. Perry said:

" ... It is our opinion that the global economy was already under pressure at the time of the attack [ie 11 September 2001], and that the global uncertainty resulting from the attacks will negatively impact consumer confidence at this already vulnerable time. ... we note the surge in the US unemployment rate in October to 5.4% as businesses slashed payrolls by 415,000 jobs. The broad-based cut was the deepest in the last 21 years. Given that gem quality diamonds tend to be a high-end discretionary item, it would seem proven to revise down future price forecasts - at least for the period forecast by Argyle themselves."

151. Perry went on to express the opinion:

"The issue open to debate is, of course, the likely timeframe for recovery. In our opinion, the level of concern within Argyle regarding this issue is evident from the longer-term pricing assumptions contained in the Draft Mine Plan."

152. Mr Perry considered, also, the exchange rate assumptions adopted by Lonergan with respect to the Australian dollar and the US dollar. He stated the current assumptions adopted by his firm, JB Were, and also another firm, Access Economics Pty Ltd. Perry proceeded to criticise the Lonergan method of incorporating a long-term exchange rate of 0.51 for the Australian dollar against the US dollar. He stated it was inappropriate to do so because of the inconsistency with the estimates derived by market specialists (such as JB Were and Access Economics). Perry said that the DCF valuation derived by Lonergan was inflated as a result of the inappropriate application of the assumption of the exchange rate between the two currencies.

153. As a result of these matters, Perry stated that he preferred the DCF based valuation of Appleyard of a valuation range of $1.06-$1.22 but that his preferred value was $1.16 as representing the value of a WADT unit. Perry was critical, also, of the value of $1.59 chosen by Lonergan as the preferred valuation. He observed that it was usual market practice for an expert to estimate a low and high case value and then adopt a preferred value within the range or identify a mid point. Lonergan did not adopt such an approach, rather, chose the high case value as the preferred valuation. Finally, with respect to the base value, Perry observed that Lonergan assumed an increment to the value of WADT from the utilisation by Rio Tinto in future Argyle Diamond sales. Lonergan made an allowance for undeveloped diamond projects of Rio Tinto in Canada and Zimbabwe. Perry expressed dissatisfaction with this approach but, in any event, observed that the assumption by Lonergan equated to one half of one cent per WADT unit and concluded that it was immaterial.

154. Arising from the assessment by Perry of the various assumptions and elements adopted by Lonergan, Perry rejected the base value of the WADT units as adopted by Lonergan. Perry proceeded, also, to consider the other components of the valuation by Lonergan, namely, special benefits and the premium for forcible taking.

155. With respect to the allocation of special benefits by Lonergan, Perry examined the allowance for management cost savings and restructuring benefits and the apportionment of special benefits. Perry rejected the quantifications by Lonergan of a profit margin charged by Rio Tinto in relation to the WADT management fee. In any event Perry was of the view that it ought be excluded from the calculation of synergies because it represented foregone profit for Rio Tinto as the acquirer of the WADT units. He observed, also, that the actual profit margin received by Rio Tinto could vary significantly from year to year depending upon the net income received by the trust in any given year. As a consequence, Perry rejected the assumption by Lonergan of a 33 per cent profit margin and the saving of the management fee. Furthermore, Perry was critical of the Lonergan approach in that its valuation of synergies reflected special benefits to the majority unit holder in perpetuity. He observed that the assets from which WADT receives its income stream have a finite life, that is, being the life of the Argyle Diamond Mine until the project cease. On that basis, therefore, Perry considered the assumption of perpetuity to be invalid. There were other matters taken into account by Lonergan that were rejected by Perry as being savings that would be available only if WADT was wound up after acquisition.

156. In relation to restructuring benefits, Perry observed that it was unusual for an expert to quantify the internal employee costings of an acquirer and to attempt to value time savings. Perry considered that the savings could have been counted previously under synergies considered elsewhere and were tantamount to double counting. In any event, on the basis of experience, Perry regarded the quantification of restructuring benefits by Lonergan as unusual and speculative. Again, Perry observed that the valuation ascribed to the restructuring benefits elements were equated to approximately one half of one cent per WADT unit and therefore, was immaterial.

157. With respect to the apportionment of special benefits Perry was of the opinion that value should always be apportioned pro-rata across all shares or units in the same class in order to determine a value per share or unit. He said that pro-rata apportionment was regarded as normal market practise by independent valuers. Perry gave the example that to suggest that one BHP ordinary share is worth a higher or lower amount than another BHP ordinary share did not reflect the identical rights and claims of all securities in the "ordinary" class. Perry expressed the opinion that since Capricorn is entitled to 96.95 per cent of the units in WADT it should receive an equivalent amount of the benefit of cost savings that were assumed by Lonergan in any event and that the minority unit holders should receive the balance. He observed, further, that from the perspective of the minority unit holders the value of the cost savings is achieved by virtue of the acquisition price offered by Capricorn; that price represents the full value for the benefits of the assets together with a significant addition amount over the DCF valuations. Perry concluded that as Capricorn was over paying for the minority units it was receiving less than its proper entitlement of 96.95 per cent of the benefit of the cost savings. He considered, therefore, that if the cost savings were to be achieved the savings constituted benefits to which Rio Tinto is already entitled as the major shareholder. For similar reasons Perry rejected the 50:50 split proposed by Lonergan as an alternative or additional method of apportionment.

158. It follows that Perry rejected the second component of the valuation of Lonergan based on special benefits. As for a premium for forcible taking, Perry gave evidence that the inclusion of such a value was not consistent with generally accepted market practice. He gave consideration to recent independent valuations undertaken in the Australian market. He noted that none of the valuations incorporated a premium for forcible taking in the assessment of value. Perry gave evidence that he had been unable to identify any other example of a valuer incorporating such a premium other than that applied by Lonergan in another proceeding. ^[F125]

159. Perry regarded this component of the opinion of Lonergan as highly subjective and imprecise. He considered that each of the elements that Lonergan sought to add to the valuation under the rubric of premium for forcible taking was irrelevant, immaterial or already included in the base case valuation and, in any event, not in accordance with generally accepted market practice. He made the observation, also, that the premium for forcible taking allowed for by Lonergan represented an amount that was equivalent to over 60 per cent of the defendants' assessment of the full value of WADT's principal asset.

160. So far as the timing of compulsory acquisition was concerned, Perry rejected the element on the basis that s664AA of the Corporations Act constrains an acquirer to a period of six months after it became a 90 per cent holder within which to proceed to compulsory acquisition. Perry considered, quite properly, that the time constraint imposed by the section eliminated any ability on the part of an acquirer to control the timing of an acquisition to its advantage. Furthermore, in applying the generally accepted market approach of a DCF based valuation, such valuation is unlikely to be materially affected within the six month window provided by the statute. Perry concluded, therefore, that the prospect of timing be selected by an acquirer to match a low point in valuation was eliminated.

161. In relation to the creation of adverse tax consequences, Perry considered that the quantification by Lonergan was unusual, certainly so far as the quantification was applied on an individual basis. Nevertheless, Perry took the assumptions of Lonergan but rejected the assessment. Perry was of the opinion that in all cases WADT unit holders are in a significantly more advantageous tax position if the units are compulsorily acquired at $2 than if they were to hold the units until the closure of the Argyle Diamond Mine. An analysis by Perry disclosed that if unit holders chose to wait until the closure of the mine they would receive a distribution stream equivalent to the Appleyard valuation of $1.16 per unit. Perry proceeded then to conduct an analysis of applicable taxation including an allowance for superannuation related taxation and capital gains tax. Perry concluded, thereafter:

"The outcome of our analysis is that for all cases the unit holders are significantly better off after tax by selling their units today at $2.00 compared with holding the units until the close of the operation. We have quantified this benefit as a minimum of $0.60 and a maximum of $1.40 per unit."

162. Perry gave consideration, also, to the potential loss, if any, to the minority unit holders of high income yield. Perry rejected the calculation made by Lonergan at the outset as being misleading because the yield relied on referred to the last financial year and ignored the most recent period being the first half distribution for 2001/2002. The more recent distribution produced an annualised yield of 9.2 per cent as against the 12.7 per cent yield identified by Lonergan. Perry rejected, also, any suggestion that the distribution stream from WADT could be treated as similar to a gradual return of capital. He observed that WADT would in all likelihood have no value at the closure of the Argyle Diamond Mine and, therefore, investors could be viewed as receiving the repayment of their investment via an annual distribution stream. Perry concluded, therefore, that an investment in WADT is "materially inferior" to investment in securities with a comparable annual income stream that runs into perpetuity. By way of comparison Perry considered distribution estimates for the ASX listed property trust sector. He noted that the yields in the trust sector are comparable to WADT and available for the current year and, further, that such yields can be reasonably expected to continue into perpetuity. Furthermore, Perry rejected the approach by Lonergan to the effect that the current distribution stream of WADT should be treated as indicative of future distribution streams. Perry considered the distribution history of WADT for the last ten years. He observed that a yield was derived of 7.1 per cent based on the offer price of $2 and which was inferior to the ASX listed property trust sector yields. Perry made the additional observation that the distribution history is in any event highly volatile and would be expected to remain so in light of the nature of cash flows from the Argyle Diamond Mine. He also observed that there had been an abnormally high distribution in 2000/2001 which was explained by the fact that the cash flow included the run down of accumulated stockpiles at the Argyle Diamond Mine from production of prior years.

163. As a consequence, Perry rejected the three components of the premium for forcible taking adopted and applied by Lonergan, namely, the timing of compulsory acquisition, the creation of adverse tax consequences and the loss of high income yields. By way of additional observation Perry said that the Rio Tinto offer price of $2 per unit exceeded the present value of the future distribution stream of $1.06-$1.59 (as derived from the DCF valuations of Lonergan and Appleyard) such that the minority unit holders were materially better off by selling their units at $2 rather than holding them until maturity to receive an inferior income stream.

164. Perry gave consideration, also, to the other factors or elements taken into account by Lonergan they being dislocation costs and disadvantages, voting rights and recent trading history.

165. So far as costs and disadvantages were concerned Perry was of the view that the inclusion of such factors was unusual and not in accordance with accepted market practice. Perry was of the opinion that the only potential additional cost a unit holder might incur would be brokerage charges on re-investment. He observed that a unit holder would not incur any transaction costs upon disposal of units in WADT. Furthermore, he maintained his view that unit holders were significantly better off by selling their units at the over valued compulsory acquisition price offered by Rio Tinto.

166. With respect to voting rights, Perry again considered the allowance of such a factor for the purposes of a valuation to be contrary to accepted market practice. Perry accepted that a different value can be assigned in theory to the value of shares in different classes on the basis of a vote but stated that it was his experience that the significant matter was the liquidity of the share rather than the value of the vote, that is, the ability of large institutional investors to trade shares. Ultimately, Perry concluded that there is no difference between the rights of each WADT unit and that the application of the DCF pro-rata across all units gave rise to the sole issue of whether the compulsory acquisition price is equal to or exceeds a valuation. Significantly, Perry observed in this context that with respect to WADT both Appleyard and Lonergan had identified a DCF value for the WADT units that was below the offer price of Rio Tinto.

167. In completion of a very thorough analysis of the valuation by Lonergan, Perry examined the recent trading history of WADT. It revealed that for the ten years up until 26 October 2001 WADT units had generally traded at significantly lower levels than the $2 compulsory acquisition price offered by Rio Tinto. He observed, further, that the trading history revealed levels closer to the value of the units as derived by the DCF valuation method. Perry noted, also, that an offer by De Beers' for Ashton Mining Ltd and the announcement of that offer had an impact on the WADT unit price at the relevant time. Perry factored in the impact of the De Beers bid. It is to be noted that the De Beers' bid was made on 31 July 2000 and that a subsequent bid was made on 29 August 2000 by Capricorn. Obviously, the circumstances gave rise to competing bids with a commensurate impact on the unit price of WADT units. Taking account of the size, liquidity and limited life of the assets of WADT Perry was of the opinion that but for the two competing bids of De Beers and Capricorn the unit price of WADT would have continued to trade at substantially lower levels likely to be closer to the preferred valuation of Appleyard of $1.16 per unit and consistent with the trading history of WADT otherwise. Furthermore, taking account of these factors, Perry considered that the period chosen by Lonergan for the purposes of his valuation being from 1 October 2000 to 8 October 2001 was unrepresentative or normal trading history for the units in WADT. Perry concluded that the period assessed by Lonergan did not provide an indication of the fair value of the WADT units.

(5) The Evidence of Wingrove

168. Evidence was given on behalf of Rio Tinto by Wingrove with respect to a report prepared by KPMG. Wingrove had formal qualifications in commerce and accounting. He is a director of business valuations at KPMG and previously was employed at Coopers and Lybrand.

169. Specifically, Wingrove gave evidence as to the topics of diamond pricing for the Argyle Mine, exchange rates between the Australian dollar and the US dollar, discount rates for the Argyle Mine and taxation matters.

170. In relation to diamond pricing Wingrove adopted a real long-term average diamond price for the Argyle Mine of US$12.00 per carat. Essentially, the diamond price was based upon historical information about the mine, anticipated production and stockpiling at diamond mines elsewhere, forecast diamond production for the Argyle Mine, global economic conditions and consumer based factors. On the basis of these matters, Wingrove reached the diamond price figure of US$12.00 per carat.

171. So far as the exchange rate was concerned, Wingrove recommended a rate of A$1.00 equalling US$0.55 in 2001, US$0.575 in 2002 and thereafter a long-term rate of US$0.60. The estimates were based upon consideration of historic, current and expected future exchange rates of the Australian dollar. Wingrove expressed the view that the exchange rate selected in valuing the Argyle Mine as a long-life asset ought reflect a long-term average view on a suitable exchange rate that was consistent with the selection of long-term average commodity price.

172. Wingrove was critical of the exchange rate adopted by Lonergan because no attempt was made to support those exchange rates with other external sources. Furthermore, Wingrove observed that the exchange rate applied by Lonergan appeared to resemble a spot exchange rate adopted at the date of the Lonergan report. In the opinion of Wingrove, the use of a spot exchange rate is inappropriate for the purposes of valuing the Argyle Mine for three reasons. First, it is inconsistent with the use of a long-term forecast diamond price. Secondly, the Argyle Mine being a long-life asset enjoys a valuation that contains other long term assumptions about the future. Thirdly, a spot exchange rate does not reflect the views of persons in the industry and did not accord with industry practice.

173. In relation to the discount rate, Wingrove recommended a real after tax discount rate of 6.0 per cent for the open pit operations and 8.0 per cent for the underground mining operations of the Argyle Mine. He interpolated that the higher rate for the underground mining operation was struck because of the higher risk attached to that operation. These rates were adopted by Lonergan in his report. With respect to taxation issues, other than to observe that the calculation of taxation for WADT would require updating to October 2001 to take account of factors such as adjustments to earnings, changes to the depreciable capital expenditure and changes in the WADT tax asset register, he declined to comment upon taxation. Lonergan accepted the treatment of taxation by Appleyard and the approach to valuation.

174. Wingrove considered, also, other assets and liabilities of WADT and proposed that the asset value of WADT should be reduced by 2.3 cents per unit. Wingrove was critical of Lonergan in that the LEA report had not been updated to reflect current balances of other assets and liabilities of WADT. Wingrove rejected the view of Lonergan that any material changes to current balances would be captured in the discounted cashflow valuation. Wingrove considered that the view was incorrect and led to an overvaluation of a WADT unit. Wingrove considered that the better approach was an informed one, that is, assessment of other assets and liabilities as applied by Appleyard and considered by Wingrove.

175. Wingrove gave consideration, in addition, to overheads and costs savings, especially the question of synergies. On the basis of information provided by Rio Tinto, Wingrove was satisfied that the total costs of managing WADT was the sum of $508,000. Wingrove calculated a notional tax shield applying a rate of 30.0 per cent leaving management costs of WADT after tax of $355,600. Thereafter, the costs were discounted by 6.0 per cent for the first six years and 8.0 per cent for the remaining life of the Argyle Mine through to 2018 on a base case and 2022 on an upper case. Wingrove calculated that the savings to Rio Tinto of the acquisition of WADT was approximately $0.03 per unit.

176. Wingrove observed that the application of corporate overheads was consistent between Appleyard and Lonergan. In relation to cost savings and synergies, Wingrove observed that Lonergan created additional value of $0.4M to $0.5M through annual cost savings. However, Wingrove considered that such an approach was flawed as on proper analysis the maximum savings exceeded actual costs. Finally, Wingrove considered that it was inappropriate to allocate the value of special benefits other than on a pro rata basis. It follows that he rejected the distribution on a 50:50 basis between Rio Tinto and the WADT minority unit holders.

177. Wingrove made observations, also, with respect to the premium for forcible taking. At the outset he observed that Rio Tinto offered unit holders $2 compared to an assessed fair value by Appleyard of $1.06 to $1.22 per unit. He noted that Rio Tinto offered, therefore, to pay a "significant level of special value to the minority unit holders of WADT". Wingrove observed that on the basis of his experience valuation practitioners did not apply a premium for forcible taking. He seemed to have difficulty in comprehending how Lonergan did so. Significantly, Wingrove made a number of observations with respect to common practice in relation to fair market value. It is useful to recite a pertinent extract of the KPMG report.

"Commonly accepted definition of fair value

Fair market value is commonly defined as the price that would be negotiated in an open and unrestricted market between a willing, knowledgeable, but not anxious buyer and a willing, knowledgeable but not anxious seller, acting at arm's length.

Valuation practitioners typically interpret this definition of fair market value to mean that a business should be valued assuming 100% ownership, without applying a premium to incorporate additional special value. The business could be valued by applying one or more of the following commonly recognised valuation methodologies:

•

discounted cash flow methodology - involves valuing 100% of the cash flows generated from a business which implicitly includes a premium for control by virtue of a potential acquirer having full access to the cash flows of the business;

•

capitalisation of future maintainable earnings methodology - involves capitalising the estimated future maintainable earnings of a business at a capitalisation multiple that reflects the risk profile and growth prospects attaching to those earnings. We note that the capitalisation multiple that is used in this methodology would be adjusted to incorporate a premium for control for having full access to the cash flows of the business; and

•

asset based methodology involves individually assessing a fair value of the assets and liabilities of a business and adjusting for any realisation costs.

In the context of a takeover situation, certain acquirers may be able to achieve synergistic and/or other benefits by acquiring 100% of the business. In this event, certain acquirers may be able to justify paying a price greater than the assessed value (assuming 100% control) by virtue of being able to achieve these synergistic and/or other benefits.

Valuation practitioners will typically acknowledge that certain acquirers may be able to achieve synergistic and/or other benefits, however these benefits will not usually be included in the assessment of fair value on the basis of -

•

difficulty in estimating the synergies and/or other benefits;

•

uncertainty that a potential acquirer will be able to achieve the synergies and/or other benefits;

•

a differing level of special benefit being available to different bidders; and

•

any synergies and/or other benefits belonging more to the bidder than the target company shareholders."

178. In essence, therefore, Wingrove accepted a DCF methodology as appropriate and common in the conduct of a valuation. Further, He observed that generally benefits based on any potential synergies are not included in the assessment of fair value.

179. Finally, Wingrove gave consideration to the trading history of WADT units since May 2001. He observed that between the period 1 May 2001 to 6 November 2001 the volume weighted average WADT unit price was $2.17; the lowest unit price was $2; the highest price was $2.39. He observed, also, that only 175,000 units of a total of 65.0 million units on issue were traded during the subject six month period.

(6) The Additional Evidence of Appleyard - the November Report

180. The November report was prepared by Appleyard essentially in response to the LEA report prepared by Lonergan. It was also intended to update certain aspects of the May report. To some extent, the November report superseded the May report.

181. Appleyard reiterated in the November report the DCF valuation methodology he applied. The interest of WADT in ventures was valued in accordance with usual methodologies. The value of the remaining tangible assets and liabilities was assessed after a review of the latest balance sheet and a deduction to value was made for ongoing corporate overheads of WADT. In the November report, Appleyard stated that in his opinion such methodology assumed that any hypothetical buyer of WADT would have 100 per cent control of 100 per cent of the cash flows. Appleyard stated that his valuation of WADT did not take into account any of administrative cost savings and additional synergy benefits derived from the acquisition, any value for minority voting rights, particular characteristics of WADT units, a premium for forcible taking or any premium that may be payable for preference shares. He stated that he did not take into account any benefit to Rio Tinto that might be derived from any reduction in the amount of public information about the Argyle Mine that Rio Tinto would need to release if it acquired all of the units in WADT. Appleyard did not include these matters because, in his opinion, to do so would not accord with usual valuation practice. With respect to the valuation of assets, Appleyard stated in the report that he had visited the Argyle Mine site and obtained information from reports issued and from discussion with management at the Argyle Mine.

182. The November report went in some detail into the nature of the mining operation at the Argyle Mine and took account of the expected life of alluvial mining, underground mining methods and re-treatment of earlier mine tailings. Appleyard set out in the November report in considerable detail, also, the way in which a sensitivity analysis of the base case value of the Argyle Diamond Mine was performed. Among other matters, the analysis took account of open pit grade, underground grade, total grade, operating costs and open pit mining costs. The report set out in considerable detail the valuation conducted of exploration assets, other assets and corporate overheads and the like. On the basis of these workings Appleyard reaffirmed the assessed value per WADT unit of a low base of $1.06 and a high of $1.22. The November report of Appleyard was very thorough and set out the major assumptions adopted. They included mining tonnages, the impact of commodity price on oil reserves, long term diamond price, exchange rates and royalties. Appleyard also took account of taxation calculations and the discount rate recommended by Wingrove in the KPMG report. He also considered the other assets and liabilities of WADT and capitalised corporate overheads. Appleyard adopted the assessment of cost savings as analysed by Wingrove. He also took account of the market price of WADT units.

183. In the November report Appleyard analysed additional information provided to him since the May report. The information included operating forecasts that took account of monthly reports, budgets and forecasts and an analysis entitled the "Draft Argyle Mine Plan 2002 to 2006". Appleyard was satisfied that the additional information was generally inconsistent with assumptions made for the purposes of the May report but insofar as there were differences the likely impact on overall value would be small, even immaterial.

184. In the November report Appleyard relied upon the KPMG report prepared by Wingrove with respect to long term diamond price. He also gave consideration to the exchange rate analysis prepared by KPMG. He agreed that the exchange rate as at November 2001 of approximately A$1.00 equalled US$0.510 and was below the exchange rate applied in the May report of US$0.55. In light of developments since the May report, in particular, the terrorist events in New York of 11 September 2001, Appleyard did not regard as unreasonable the application of a lower exchange rate for the remainder of 2001 and 2002 as recommended by Wingrove. Consequently, he accepted an exchange rate of US$0.51 up until 31 December 2001 and an exchange rate of US$0.55 for the 2002 calender year. He accepted, also, the advice of KPMG with respect to the exchange rates of 2003 and beyond of US$0.60. Allowing for the altered exchange rate assumptions Appleyard accepted the calculation of KPMG that the impact on the value of a WADT unit was an increase of approximately 3.3 cents.

185. Appleyard considered, also, the discount rate recommended by KPMG. On the basis of updated information Appleyard accepted as reasonable the selection of 6.0 per cent discount rate for the open pit operations and 8.0 per cent for the underground operations as appropriate when valuing the 5 per cent interest of WADT in the Argyle Mine. Consequently, Appleyard concurred with Wingrove.

186. Appleyard gave close consideration, also, to the assessment of other assets and liabilities of WADT and its corporate overheads. As a result of the analysis Appleyard re-visited cost savings and the potential re-assessed value of WADT units. On the basis of the re-assessment, allowing for the re-assessment, Appleyard considered there should be a reduction in the value of WADT units to the extent of 2.3 cents per unit. So far as corporate overheads were concerned there should be no alteration to his earlier approach.

187. Ultimately, Appleyard concluded that the impact of changes in exchange rate projections, the value of other assets and liabilities, operating costs, diamond recovery and the loss of six or more months production is likely to have a small net impact on value. He considered that the impact is not likely to result in any material increase in value.

188. Appleyard devoted particular attention to the LEA report prepared by Lonergan. Appleyard was critical of the adoption of a spot exchange rate by Lonergan. He considered that the use of such an exchange rate was inappropriate for the same three reasons expressed by Wingrove, namely, inconsistency with the use of a long term forecast diamond price, the fact that the Argyle Mine is a long life asset and its valuation contains numerous long term assumptions and the fact that a spot exchange rate was not consistent with prevailing opinion in the industry.

189. With respect to the impact of exchange rate on all reserves, Appleyard was of the opinion that in his experience mining companies do not adjust ore reserves for short term changes in commodity prices. Rather, it is appropriate to review ore reserves on an annual basis and at that time consider any changes to long term views on commodity prices. In so far as Lonergan used the upper end of its base valuation range as a "base case". It was rejected by Appleyard. Appleyard said that such approach did not accord with usual valuation practice and that a preferred value is usually within the overall value range. Appleyard was critical, further, of Lonergan for failure in updating the LEA valuation to reflect the current balances of other assets and liabilities of WADT. Appleyard considered that the approach of Lonergan effectively resulted in an overvaluation of a WADT unit at October 2001 by 2.3 cents.

190. So far as special benefits were to be derived from cost savings and synergies, similar to Wingrove, Appleyard observed that Lonergan estimated total annual cost savings to Rio Tinto of $563,000. He was critical of the created additional value of annual cost savings imposed by Lonergan. Similar to Wingrove, Appleyard considered that the Lonergan approach in this regard was flawed as the maximum savings exceed actual cost. There is, therefore, an element of artificiality that surrounds or underlies the Lonergan approach with respect to cost savings. In any event, with respect to the allocation of special benefits Appleyard rejected the creation or accrual of cost savings and synergies. He rejected, also, a premium for forcible taking. Appleyard adopted the position of Wingrove.

191. So far as Lonergan attributed additional value based upon the voting rights, the control of confidential information, the special characteristics of WADT units, the application of additional synergy benefits and the price paid in other acquisitions, Appleyard considered that it would be contrary to his valuation methodology to do so. He observed that the valuation was conducted upon an assessment of 100 per cent control and ownership of WADT. Appleyard considered, also, that the base value adopted by Lonergan was at the upper end of the estimated range. He observed, also, that the difference in base values between Appleyard and Lonergan related to the different view on the use of future exchange rates. Appleyard criticised Lonergan for adopting an estimated additional value of $1.20 per unit on the apparent basis of a combination of cost savings and restructuring benefits and an arbitrary allocation of that benefit on a pro rate basis to the minority unit holders. The non-pro rata allocation of special benefits and the premium for forcible taking were not matters that Appleyard considered should be taken into account.

192. Finally, Appleyard emphasised that his valuation of WADT did not place much reliance upon the history of trading of WADT units in the six month period prior to the May report because of the irregularity and thinness of volume of transactions. He considered that as a consequence the trading price during that period was not reliable or truly reflective of the underlying value of the WADT units.

Findings on the Evidence

193. I turn now to my findings on the evidence.

(1) Trading History

194. As the independent expert, Appleyard did not consider that the recent trading price for WADT units in the preceding six months on the Australian Stock Exchange could be relied on to fairly reflect the underlying value of WADT units because prior to the De Beers bid for Ashton Mining Ltd and between that time and the effective date of his May valuation, trading in the WADT units had been irregular and extremely thin. The assessment that the recent trading price for WADT units does not fairly reflect the value of the units being acquired was confirmed in the Were Report prepared by Perry. Since then Appleyard considered the trading history of WADT units for the most recent twelve months and concluded that because the trading in WADT units had been small, the prices do not fairly reflect the underlying value of the WADT units. The Were Report by Perry confirmed that assessment. LEA had earlier expressed the view that the period over which historical prices are taken into account should not be limited to six months and looked at a twelve month period. Lonergan asserted that the volume traded should be measured against the "tradeable units" being those not held by Capricorn or a related body corporate. Lonergan asserted also that since the prices over that twelve month period had exceeded $2.00, and since the prices after Capricorn's compulsory acquisition notice had also exceeded $2.00 this suggested that the $2.00 proposed was too low. In cross-examination at trial, Appleyard maintained his view in the November Report. Perry, an expert in the behaviour of the stock market with extensive valuation experience also maintained the opinions he had expressed in the Were Report.

195. In evidence, Appleyard said that he did not believe that 80,000 units, or between 4 and 5 per cent of the total units to be acquired would be a guide to the market's evaluation of the value of the units that the transactions at the higher value that had occurred had no relevance to fair value, as he assessed it. Appleyard said the reason prices for the units would have increased initially after the De Beers' bid for Ashton was in the expectation of the higher price that had been placed on the value of the underlying asset by the De Beers' bid. He also said that in relation to another price jump in November 2000 after Rio Tinto gained control of Ashton and thereafter, he did not consider the trading relevant to the fair value of the underlying business. Appleyard agreed that after Rio Tinto announced that it intended to acquire the remaining units in WADT buyers may have been looking to the fact that Rio Tinto had a desire to buy units and may have been calculating what they may be able to derive from these units as a price but considered it did not have any relevance to his view of fair value.

196. Perry gave evidence that the volumes of WADT units traded are too thin to be reliable as a guide to the value of the units in WADT. He said that the value of the units relates to the DCF valuation for the underlying assets and that what mattered most is the economic value that is derived from the assets. Perry said that the market in WADT units is too thin to use as a reflection of what that value is and that he had looked at a number of different periods of trading in reaching that conclusion. He agreed that the pool of tradeable WADT units was potentially 1,900,000 or thereabouts, but rejected the proposition that trading in seven or eight per cent of those units gave some guide to value. Perry said that when he considered liquidity, he looked at the liquidity of each equity in comparison with other listed equities and that WADT units would be classed as an extremely illiquid stock. In response to the suggestion that he consider the approach a rational sophisticated investor would adopt Perry stated that he considered such a person would look at the acquisition as likely to occur on a rational basis by the acquirer, and if he was sophisticated, he would know the acquirer would look at the discounted cashflow valuation, and he ought to make his investment decision on that basis. Perry did not accept that the trading history of units in WADT from 9 November to 9 May showed that the prices reflected an assessment by investors of the synergies thought to be available to Rio and for which synergies Rio might be prepared to pay. Perry stated that those prices would be well and truly in excess of any assessed synergy value. Perry did not consider the market for WADT Units from 9 November 2000 was efficient or fair.

197. In any event, Lonergan referred to ASX trading prices in respect of WADT units only as a reasonableness check. He accepted that the units were thinly traded. He agreed with Perry that a bid spread of 30, 40 or 50 per cent was very large and that in the case of a well traded stock on the exchange one might expect a spread between the asking bid and the selling bid of the order of half a percent. Lonergan accepted that trading prices would not give a firm indication of value.

198. There are two aspects of the evidence of Lonergan that are important. First, Lonergan referred to the trading information available to him as constituting no more than a reasonableness check. He did not apply the information or rely upon it as a proper foundation to reach a valuation conclusion. Secondly, he conceded in cross-examination that trading prices do not afford a firm indication of value.

199. It follows from the preceding analysis as to the consideration by the various experts upon the use and application of trading history that I do not accept the evidence of Lonergan. To the extent that Lonergan relied on trading prices of the WADT units from 9 November 2000 to support his conclusions as to fair value, I prefer the views of Appleyard and Perry. Perry is an expert in share market practice and investment behaviour. I consider that Lonergan did not have expertise in respect of investor behaviour commensurate with that demonstrated by Perry. I accept the evidence of the expert witnesses on behalf of the plaintiff and do not consider that the recent trading price for WADT units should be applied.

(2) Special Value

200. If special value existed and formed part of the fair value of the units, and if a pro rata assumption were not made, LEA's opinion was that the fair value of the units was $2.79 (rounded to $2.80) made up of a base value of $1.59 prior to special value and premium for forcible taking and a share of special value and premium for forcible taking of $1.20. Lonergan in cross-examination lowered his values to $2.70 and $2.60. In each case if the suggestion of a premium for forcible taking of $1.00 per unit is disregarded, and if the value of Lonergan's view of special benefits is distributed pro rata, LEA's value would be well below Capricorn's $2.00 proposal.

201. On this analysis, therefore, even allowing for the discount of a premium for forcible taking, the $2.00 offer is reasonable. I will address the premium issue separately.

(3) Value of the Company as a Whole

202. Appleyard assessed "the value of the company as a whole" on the basis of the fair value of WADT's underlying assets. He used DCF valuation methodology to value WADT's interest in the Argyle Diamond Mine, its principal asset, and usual methodologies for valuing exploration properties and accumulated geological data to value WADT's interest in a project known as the Argyle Exploration Joint Venture. He used the sale consideration for WADT's interest in another project known as the Ellendale Project and balance sheet values for WADT's remaining tangible net assets. Appleyard deducted corporate overheads from these values. He made other assumptions made by AMC including assumptions that there would be a long term average diamond price of a particular amount. He further assumed that appropriate discount rates were real after tax rates of six per cent for the open pit phase of the mine and 8 per cent for the underground phase of the mine.

203. The independent expert allocated the fair value of the underlying assets of WADT as determined by the independent expert to be the value of WADT as a whole amongst the only class of units on issue, and pro rata amongst all the units in that class without any further addition to that value, without any premium or discount, and without allocating any disproportionate share of that value to the units to be acquired. In my view, this is the appropriate approach. It follows that I accept the expert evidence on behalf of the plaintiff.

(4) Application of the Exchange Rate

204. At the outset, I consider that Lonergan's approach proceeded on unsound premises for a number of reasons. First, Lonergan did not adopt the appropriate exchange rate after 2002. LEA extracted its exchange rate from a particular source rather than the source and rate adopted by the independent expert. The source and rate at the behest of the parties and the subject information was treated as confidential. At the same time LEA applied the exchange rate adopted by the confidential source over the life of the mine to the higher long term average diamond price adopted by the independent expert. In doing so LEA rejected Argyle's diamond price projections despite Argyle's expertise in this area and accepted Argyle's exchange rate assumptions for the period 2003-6 notwithstanding Argyle's lack of expertise in this area. Thereafter, Lonergan used that same exchange rate for the next 13 years of the forecasting period notwithstanding LEA has no expertise in relation to exchange rates forecasts and obtained no external expert assistance in its assessment. In my view, the effect is to overstate the revenues when they are expressed in Australian dollar terms in a way that is inconsistent with the revenue estimates in the confidential source and the May Report. The effect is to make a 36 or 37 cent difference in the value derived by the DCF analysis.

205. Appleyard said that except for assuming a certain exchange rate of the US dollar for the last two months of 2001, and except for a minor downwards adjustment of the assumed long term exchange rate for 2002, his long term rate remained appropriate. In adopting those rates, Appleyard relied on the KPMG report. At trial the issue of the appropriate exchange rate was identified as a key difference between the DCF value for the Argyle mine derived by the independent expert and the DCF value derived by LEA. The exchange rate is a key element for two reasons. First it is applied to the assumed long term diamond price to produce a forecast of future revenues. Secondly, it was the basis set out in the LEA Report for justifying LEA's adoption of the highest amount in its range of DCF values as its base value. Appleyard and Wingrove were cross-examined on the issue, as was Lonergan.

206. Appleyard said that exchange rates was a field of expertise in valuation that he felt comfortable with. He said that he had relied on KPMG and had adopted their recommendation concerning the long term exchange rate because of their expertise and because it agreed with his own assessment. Appleyard gave evidence that a particular term rate was appropriate because long term price forecasts and long term exchange rates were appropriate in a DCF calculation which used other long term factors. He said that the rate was appropriately derived as the consensus view of analysts brokers. He accepted that in recent years analysts and brokers had made errors in their long term rates "over the last couple of years" but that if these forecasts were assessed "over a longer term, we might find it was the other way". Appleyard said that it would not be unreasonable to adjust the rate for the last two months of 2001 but not to the level as Lonergan had done. He rejected the proposition that he would agree with Lonergan and select a different rate for 2002 and 2003 because he would probably take an average of analysts and brokers' estimates for 2002 and 2003, but that, if he were redoing the rates now, he would accept as reasonable KPMG's recommendation as to the long term rate of that should apply after 2003. Appleyard rejected the proposition that if the experience of the last few years were repeated that would result in a significant undervalue because he said it would depend on the period of the underestimate.

207. Wingrove recommended a particular long term rate because expert commentators and analysts believe the rate will move upward. He believed also that a longer term rate is appropriate as opposed to a rate existing today. He agreed that for the last couple of years analysts' predictions have probably been a bit optimistic, but over time, it has varied both ways. He agreed that the rates used in the source indicated had been used in the LEA Report. Wingrove was not cross-examined on the view expressed in the November Report that it was appropriate to adopt a long term view on a suitable exchange rate consistent with selection of a long term average commodity price. Furthermore, it was not put to him that an alternative approach would be to have regard to spot rates and forward rates in forecasting exchange rates for the life of the Argyle mine.

208. Lonergan admitted in evidence that he had adopted the exchange rate identified in the confidential source from 2003 to 2006 but had not adopted the diamond prices in that source for the third, fourth and fifth years. He admitted that he had extrapolated that exchange rate from those three years for the further 13 years of the mine life period. Significantly, he admitted that he was not competent to evaluate likely future diamond prices. He admitted that he had rejected the information on diamond prices in the confidential source. He said he did not accept the study on exchange rates because it was, as he asserted, contrary to the factual position in the market. However, Lonergan conceded that he would not hold himself out as an economist. He conceded that he was not a forecaster of foreign exchange rates and only looked at exchange rates in the course of valuation tasks. He said that he accepted the study on diamond prices because it came from an outside source but did not accept the study on exchange rates because it came from an economic forecast and said "they are notoriously unreliable". He acknowledged that he was not expert in diamond prices but accepted the study because he had no reason to doubt it. He rejected the Argyle view on price and accepted the outside expert's view, even though the study was done before the events of 11 September 2001 and the confidential source was prepared after 11 September. He rejected the conclusion that he had cherry-picked the exchange rate and diamond price but agreed that he took the prices of the confidential source for the first two years and then swapped to the outside analysis for the balance of the period.

209. He admitted he had adopted the precise rates in the confidential source. He admitted that he adopted the rate that was approximately equal to a spot rate and that the effect of his rate for the totality of the period produced a very significant difference in revenue resulting in a difference of 36 cents to 37 cents in value.

210. In my view, there was nothing in Lonergan's evidence to warrant rejection of the views of Appleyard and Wingrove. Significantly, the proposition that Appleyard and Wingrove were in error by adopting long term exchange rates based on a consideration of expert analysts' considered views rather than the current forward rate was not put to either of them in cross-examination. Further, Lonergan accepted that he did not obtain any expert assistance from those who are expert on exchange rates in forming a view on exchange rates for the purposes of his report. Additionally, Lonergan's evidence concerning the permissible uses of spot rates and forward rates in exchange rate forecasting was misconceived. Lonergan agreed that forward foreign exchange rates represent the current spot rate adjusted for the interest rate differential between the Unites States and Australia. In any event, it was not properly put in cross-examination to either Appleyard or Wingrove the proposition relied upon by Lonergan. In essence, the Lonergan proposition was that there was error in the course adopted by Appleyard and Wingrove because they adopted a long term average rate of exchange rather than adopting effectively a spot rate projected through the mechanisms of forward cover that could be obtained. Furthermore, on close analysis it is to be observed that Lonergan did not have and did not claim to have expertise in respect of foreign exchange rates. I accept the evidence of Appleyard and Wingrove that it is well established that forward rates are not a predictor of exchange rates in future years. In the LEA report there was only one reference to spot rates and no reference whatsoever to forward rates. Lonergan's evidence that forward rates were appropriate to assist him in estimating exchange rates for the 18 year mine life was not credible.

211. It follows that I do not accept the evidence of Lonergan on the application of exchange rates.

(5) Adoption of Highest Value

212. Lonergan stated in the LEA Report that it was appropriate to adopt the highest value in its range for WADT's underlying assets ($1.59) as its base value on the basis that arising from the different exchange rate assumptions adopted there ought be a corresponding increase in the Argyle mine's recoverable reserve estimates. It was asserted that account had to be made on the basis that WADT's results would no longer be available to Rio Tinto's competitors. Appleyard said that adopting the higher value range was not justified and that the change in the exchange rate and its effect on prices expressed in Australian dollar terms is not the driving factor for the evaluation of the Argyle mine's reserves and resources. Importantly, Lonergan is not a geologist. He had not made a detailed study of the Argyle ore body. Furthermore, in Appleyard and Perry's opinions it is not usual valuation practice to choose the upper end of a valuation range as a preferred value.

213. In light of these matters I prefer the expert evidence given on behalf of the plaintiff as to the adoption of the level of value.

(6) Confidentiality Benefits

214. Lonergan considered that Rio Tinto should be prepared to pay an additional consideration for the benefit of being able to maintain confidentiality in respect of the affairs of WADT if all the units in WADT became wholly owned by Capricorn. There was no evidence that Capricorn would be prepared to pay additional monies to secure that benefit. In any event, I consider that such a benefit is well covered by the additional amount over the fair value of the underlying assets of WADT that is included in its $2.00 proposal. Lonergan said that he could not quantify the strategic benefits that he had sought to identify with any reliability.

215. On these bases, therefore, I do not accept that any allocation of value ought be made for the asserted benefit of confidentiality.

(7) Marketing Benefits

216. Lonergan asserted that there were quantifiable marketing benefits with a net present value of $327,000 to be added to the net present value of WADT's other underlying assets. Appleyard and Lonergan agreed that they were inconsequential, adding only one half of one cent if allocated pro rata amongst all the units. Lonergan conceded that he had assumed that revised marketing arrangements would be implemented and that WADT would share in the benefits, if there should be marketing cost savings, through other mines proceeding. He conceded that such savings were not certain but that he did not discount for the uncertainty. He agreed that the premium for forcible taking did not include marketing cost savings and that any such savings were not included in special benefits. Creese said that WADT had no ownership interest in the marketing arrangements for diamonds produced by the Argyle mine or any other mine which Rio Tinto has. He said that Rio Tinto is free to use its marketing network for diamonds produced from non-Argyle sources, whether or not it owns the totality of WADT. He raised the uncertainty that surrounds particular mines in Zimbabwe. In the circumstances, there was uncertainty as to the value of $327,000 that Lonergan attributed to supposed marketing cost benefits. I consider it unsafe to have regard to this matter.

(8) Special Benefits

217. Lonergan said that the value of special benefits to the 100 per cent owner is to be taken into account in determining the value of WADT as a whole. He did not adjust the value of corporate overheads to be deducted in the discounted cash flow valuation of WADT's interest in the Argyle mine. He adopted the same value for corporate overheads as Appleyard determined in May 2001. Appleyard said that the inclusion by Lonergan of restructuring benefits has produced an anomaly in the calculation of the corporate overheads that should be deducted in the application of the discounted cash flow valuation methodology, leading to the 'creation' of additional value of $0.4 million to $0.5 million. Although the per unit adjustment for that amount is small ($0.006 per unit on $400,000 or $0.008 per unit on $500,000) it is sufficient to eliminate the whole amount of the "marketing benefits/cost savings" of $367,000 that were included in the valuation of Lonergan. Lonergan conceded this anomaly in cross-examination. I consider, therefore, that the expert evidence for the plaintiff is to be preferred and that the evidence of Lonergan on the topic of special benefits should be rejected.

(9) Savings and Benefits

218. Lonergan said that there are management cost savings and restructuring benefits which give a special value of $0.05 (low) or $0.07 (high) per unit if allocated pro rata. The evidence was that there are no restructuring savings and that the management cost savings are grossly overstated.

219. Lonergan asserted that the management costs savings were in excess of $159,000 per annum. Creese set out calculations that demonstrated that the management cost savings available to Capricorn were assessed as $159,000, being the costs that could not be avoided after 100 per cent ownership and after eliminating any profit element. In cross-examination Lonergan maintained that the management cost savings should be calculated as a percentage of the trust management fee, rather than by deducting costs from its trust management fee. However, he acknowledged that the costs of providing the trust management service from year to year might not alter and conceded that he would reduce his higher fair value figure from $2.80 to $2.70 and his lower fair value figure from $2.65 to $2.60. Such reduction was consistent both with a reduction in the amount and proportion of management cost savings that LEA had allocated to management cost savings in the LEA Report and and the amount of $300,000 that the independent expert had calculated for synergies in the May Report. Lonergan also agreed that a fair value of $2.60 implied a premium of some $1.01 above LEA's "base value".

220. In cross-examination Creese was asked about the profit element in the trust management fee that element being excised from the amount of the cost savings that otherwise applied because it was not a saving but belonged to Rio already. He said that the management cost savings had been estimated by Rio on the assumption that the Rio Tinto group received the benefit of the profit earned by AML Nominees. Creese acknowledged that from an accounting point of view, the company being 100 percent owned, it will be grouped for accounting purposes. Further, it was apparent from the Annual Report of WADT for 2000 that AML Nominees was appointed the responsible entity for WADT on 30 June 2000 to replace Perpetual Trustees WA Ltd. At that time AML Nominees Ltd was a wholly owned subsidiary of Ashton Mining Ltd. Until 30 June 2001 the manager of WADT was Ashton Mining Ltd. It is also apparent from ASIC documents that AML Nominees was initially a company limited by guarantee and filed annual returns as a "not for profit company". It converted to a company limited by shares pursuant to a resolution passed on 23 March 2000 and adopted a Constitution. The constitution does not restrict its powers to declare dividends to capitalise profits and to make distributions to its members in a winding up. Following the acquisition of Ashton Mining by Rio Tinto in November 2000, AML Nominees became a wholly owned subsidiary of Rio Tinto Ltd. There was no evidence that there is any restriction concerning the payment of dividends or distributions on a winding up. The profit of AML Nominees is consolidated into the accounts of Rio Tinto Ltd in any event. Ultimately, Lonergan conceded that Capricorn would not derive the benefit of management cost savings unless and until the compulsory acquisition was consummated.

221. Lonergan asserted that there were restructuring cost savings of $50,000 per annum. However, on the evidence of Creese, the estimated hours that would be eliminated would not result in any saving to Rio Tinto because the costs of restructuring are not taken into account. Creese believed the amount was immaterial. Again, Lonergan conceded that Capricorn would not achieve this benefit unless and until the compulsory acquisition was consummated. He acknowledged that whether there would be a restructuring depended on a whole range of considerations. He accepted there could be adverse tax and stamp duty problems and that in order to have any reliable view as to whether there were potential restructuring benefits involved he would have to consider taxation consequences. He agreed that adverse tax consequences, if they were to exist, might well negate the labour saving that could arise from restructuring. Ultimately, Lonergan conceded that the savings were inconsequential. Properly construed, the approach of Lonergan was to assume the inevitability of restructuring occurring and thereby allocate an immediate present value to such restructuring advantages. Whilst those advantages are at best of modest dimension in any event Lonergan ignored the circumstance that on the evidence there was no decision taken as to whether restructuring would or would not occur.

222. In my view, it was not open to Lonergan to assume that there would be any restructuring of a complex mining operation without significant investigation and implementation costs. I consider that in all likelihood the net amount of any savings could not properly have been determined without such an investigation. In the circumstances, I do not accept Lonergan's opinion as to restructuring cost savings. Lonergan conceded that he lacked internal knowledge on the subject of management savings. Creese was the person with exclusive knowledge of the internal operation. In summary, he considered there would be little or no saving.

(10) Premium for Forcible Taking

223. LEA considered that a premium for forcible taking of $1.00 per unit should apply. I consider that in cross-examination Lonergan failed to provide a satisfactory explanation for why there should be a premium for forcible taking and why a $1.00 premium for forcible taking was appropriate in this case He attributed 100 cents for the premium but, after agreeing that there was no rule of thumb to apply, he was unable to quantify the several components which he said were included in the premium separately from the amount of any special benefits and accepted the components making up the premium have nothing to do with the value of a unit or the underlying enterprise. Those components were subject to individual variations as between different unit holders had not previously been calculated by him and produce highly variable results. He accepted that there was no scientific basis for precise calculation. He could not satisfactorily explain the $1 premium assessed in this case. He accepted that preference shares (such as in the Kelly-Springfield case) have very different characteristics to units in WADT. He asserted that here the premium was interrelated with special benefits, despite accepting that the premium being concerned with detriments to individual unitholders has nothing to do with special benefits which are concerned with advantages to the acquirer. He admitted that the relationship of such a premium with special benefits is not articulated in accepted and authoritative valuation texts.

224. The premium for forcible taking as described by Lonergan seemed to operate as no more than a rough upward adjustment to fill in the gap between the amount that Lonergan asserted was fair and the sum of his 'base value' and the special value that he allocated to the minority units.

225. It was not apparent that a scientific or methodological foundation was provided to support the assertion by Lonergan. For example, Lonergan could not rely upon a statutory solatium provision in the compulsory acquisition regime as occurs in legislation concerned with the compulsory acquisition of land and the like. The suggested foundation for a premium for forcible taking was unconvincing and contradictory. I do not accept it.

(11) Additional Value Over Base Value

226. The LEA Report considered that the voting rights of the holders of the units to be acquired should be valued at $0.08 and included that sum in the additional amount to be added over the base value. Lonergan did not give any satisfactory reason for including a value of $0.08 for the minority WADT unit voting rights. He conceded that WADT's investment in the Argyle mine was a passive investment and that the responsible entity was responsible for managing the trust. He said that the unit holders do not have the right to participate in the management of the trust, that there was very little upon which the minority might vote, that the minority could neither secure the passage of or block a motion put to vote and that the minority was not called upon to appoint directors or to approve or disapprove distributions. He agreed that units are a very different type of security from a preference share and agreed that unit holders do not vote on the types of matters that shareholders in a company might vote upon. Thus, in the reports Lonergan proceeded on the wrong premise that the minority would vote on the kinds of issues that company shareholders might vote on when he attributed a value to voting rights of the units. No value ought properly to have been allowed. The valuation and allocation methodology adopted by LEA to value these voting rights is speculative. Furthermore, it is not in accordance with generally accepted market practice or usual valuation practice. In addition, neither Appleyard nor Perry were cross-examined on their evidence on this topic. It follows that I do not accept the evidence of Lonergan on the allocation of additional value.

(12) Apportionment of Special Benefits

227. LEA said that the value of special benefits should not only be taken into account but should not be apportioned on a pro rata basis, but in the ratio of 50:50 between the units held by Capricorn and its related bodies corporate on the one hand (97 per cent of the total units) and the units held by the remaining unitholders on the other (3 per cent of the total units) because Capricorn should be prepared to pay at least a minimal amount or, in LEA's view more appropriately, an amount that reflected the commercial value to Capricorn of the special benefits of full ownership. Lonergan was unable to explain how such a concept supported a 50:50 allocation of benefits. Lonergan simply asserted that it would be "commercially reasonable" to apportion the value of special benefits between buyer and seller on a 50:50 basis, that is 50 per cent to the controlling unit holder and 50 per cent to the remaining unit holders. Lonergan relied on certain preference share transactions to provide support for a non-pro rata allocation of any special benefits. Preference shares are security of a different kind to the WADT units. The transactions relied upon by Lonergan were varied and many did not involve compulsory acquisitions.

228. As observed earlier, unusually for an expert witness Lonergan in cross-examination conceded that in adopting a 50:50 allocation of benefits he was not adopting the approach of Santow J in Winpar. Lonergan said that he had not followed or referred to the decision in Pauls Ltd because he thought it was wrong. Lonergan seemed both in the LEA report and his evidence to see himself at liberty to impose his own construction on the legislation.

229. Lonergan agreed that a minority holding would ordinarily attract a discount and might also attract a non-negotiability discount, while the majority might generally speaking attract a control premium. His concept of a commercially negotiated bargain would eliminate these discounts and premium because it would be necessary for the parties to agree. Lonergan was cross-examined on this thesis and conceded that unless arrangement is negotiated where each side consents a transaction is not concluded and so the acquirer does not get 100 per cent; no-one receives any special benefits; and the minority do not get the price that would reflect some part of those benefits. He agreed that none of the cost savings or special value exist unless and until the transaction is consummated. Lonergan's analysis of special benefits was misconceived. First, his analysis was dependent on the premise that a transaction cannot occur unless consent is obtained from the minority unit holders. In fact compulsory acquisition will proceed either in the absence of the relevant number of objections or upon court determination as to fair value and no opportunity arises for negotiation or consent. Secondly, access to special benefits does not arise until the acquirer has 100 per cent ownership of the units and until the purchase of all of the minority holdings there are no special benefits. Furthermore, Lonergan was unable to quantify the premium for forcible taking separately from special benefits and their allocation and was unable to explain how these two kinds of value might be offset against each other.

(13) Conclusions on the Expert Evidence

230. I observe that the LEA Report as prepared by Lonergan was based upon factors that do not usually form a part of valuation methodology or accord with normal market practice. To the extent that Lonergan's evidence relied on a premium for forcible taking or a disproportionate allocation of value in favour of the units to be acquired it was erroneous. To the extent it relied on the addition of the value of items that do not go to the value of WADT as a whole, such as special benefits and synergies, to increase that value, it proceeded on a misconceived basis.

231. It follows from the analysis of the expert evidence that the evidence relied upon by the defendants is rejected. Hence, even if the construction placed upon the statutory regime as to the assessment of fair value was erroneous, I nevertheless do not accept the evidence of Lonergan. In my view, the evidence of Lonergan was not substantiated and was contrary to normal market and valuation practice and methodology. The expert evidence elicited by the plaintiff is to be preferred.

232. I make one additional observation as to the evidence. The expert evidence led by the plaintiff appeared to be more extensive and thorough, if not exhaustive, than the expert evidence before Santow J in Kelly-Springfield. In so far as I have adopted a different approach to that case with respect to special benefits or reflexive value I consider it was open to me to do so on the basis of the evidence led by the plaintiff in this case.

Procedural issues

233. I turn to consider the remaining issue as to whether there was compliance with the requirements of Pt6A of the Corporations Act. In summary, the defendants submitted that there were material matters that had not been properly disclosed to the minority unit holders. As a consequence the defendants challenged whether the compulsory acquisition notice served by Capricorn disclosed all information that was material within the meaning of s664C of the Corporations Act. There were additional matters relating to technical compliance with the requirements of Pt6A.

234. The plaintiff joined five defendants. It did so because it appeared to the plaintiff that the grounds of objection included in the objection notices sent by these five defendants were representative of the grounds of objection relevant to the issue of fair value put forward by the other objectors who objected within the objection period. It appeared to the plaintiff that joining these five objectors as defendants was a convenient way in which to bring the objectors' views on the issue of fair value before the Court.

235. In addition, the plaintiff provided a further notice to the unitholders. The further notice set out additional details of this proceeding, informed the unitholders of arrangements made for the inspection of the court documents, gave notice of the date, time and place of a directions hearing, and informed the unitholders' that if they wished to be heard, or to be made party to the proceeding, they might do so by attending the Court on a specified date personally or by a legal practitioner.

236. I consider that the unitholders were not required to be named as "defendants" in this proceeding. So much is apparent from the terms of s664C, which required the plaintiff to give a copy of the expert's report to each unitholder, from the requirement in s664E(4)(b) that the plaintiff give notice of its application to the court for approval and from the limited question for the court's determination under s664F(2), that is, fair value.

237. It is also apparent from the definition of "defendant" in r1.5 of Chapter V of the Rules of Court and the fact that no relief in the proceeding is sought against any unitholder. The application is for approval of the Court to the compulsory acquisition under s664F of the Corporations Act. Approval by the Court allows the plaintiff to set in train the steps required to complete the compulsory acquisition under Pt6A.3 of the Act. The plaintiff was bound to give all unitholders, including non-objectors, notice of its decision to seek Court approval ^[F126] which the plaintiff did on 13 July 2001. This requirement to give notice under s664E(4)(b) would be unnecessary if, in addition, the plaintiff was required to join all the unitholders, or all the objectors, as defendants in the proceeding, and to serve them all with the originating process and documents filed with the Court in the proceeding.

238. Even if this was not a correct analysis, if all the unitholders were required to be "defendants" for the purposes of r1.5, the Court could give directions for a representative order under r1.8 and r2.13 of Chapter V ^[F127] to relieve the plaintiff from joining more than the five original defendants whom it has named and those two additional defendants whose application to be joined as defendants was granted. All outstanding unitholders are members of the same class. The powers of the Court under r1.8 are sufficient to allow an order which relieves a plaintiff from joining any particular defendants, or which limits the defendants to those named. If necessary, I would make such an order. In exercising that power the Court is entitled to take into account that where there is a class of possible defendants who are "so numerous that they cannot be made parties to the cause, with any chance of bringing it to a hearing ... then you may make two or three of the class Defendants to represent the interests of the class ... in the same way as if the whole class had been brought before the Court": see Bromley v Williams. ^[F128]

239. Clearly it was impractical to join all 944 unitholders to whom the notice of compulsory acquisition was sent, or even those 323 unitholders who lodged their objections within the objection period and bring this proceeding to a prompt hearing. Furthermore, the inequity for the plaintiff if all unitholders, or all unitholders who have objected to the compulsory acquisition, were required to be joined would be magnified due to the potential expense to which the plaintiff would then be exposed pursuant to s664F(3).

240. In any event, the Court is entitled, while taking into account the over-arching requirement that justice should be done ^[F129] to actively manage cases to ensure efficiency in the interests of the parties and the public ^[F130] and to deal with the proceeding efficiently and effectively and with the least cost and delay to the parties. ^[F131] Consistent with the principles of proper case management, the Court can where appropriate circumstances arise, such as the present, limit the number of people joined as plaintiffs or defendants if the number is so large as to make the management of the proceeding difficult and cause delay. ^[F132]

241. The defendants attacked the procedures adopted by the plaintiff in relation to the notice process and, also, the joinder of defendants in a representative capacity. For the defendants particular emphasis was placed upon the recommendation said to be reflected in the CLERP Bill that the procedure contemplated by Pt6A.2 was conditional upon safeguards that balanced the interest of all shareholders, that is, the 90 per cent majority and the minority. The safeguards were described as equality of treatment, the disclosure of the report of the independent expert and access to the Court without penalty as to costs. These protection factors were said to be reflected in the recommendations of an issues paper distributed by CLERP. As a consequence, it was urged for the defendants that Pt6A.2 must be construed in the context of a legal system where the compulsory acquisition of property is not a prevailing norm but an exception and subject to strict observance of prescribed protections. Hence, it was argued, the failure to satisfy a number of statutory matters would operate to disqualify the 90 per cent holder from enforcing compulsory acquisition. Put even higher, it was argued for the defendants that the failure to include prescribed information in a compulsory acquisition notice under s664C(1) is fatal to the power of a 90 per cent majority.

242. Commentators have observed that s664C is framed so that failure to meet its requirements (including disclosure of material information) deprives a majority of the right of compulsory acquisition. Commentators have contemplated that curative relief under s1322 of the Corporations Act is precluded. Nevertheless, the same commentators have observed that the procedural requirements of s664C(2) - s664C(5) (as to service and timing) are cast in different terms and that in all likelihood s1322 would be available to cure procedural defects. ^[F133] Obviously, s1322 is available if needed. The section is cast in terms not confined to any particular part, provision or division of the Corporations Act. In other words, the section is available wherever and whenever an irregularity may arise. In particular, s1322(4) is cast in terms that although it is a section that ordinarily and conveniently is described in terms of dealing with irregularities it extends to the case in which but for the remedial order a step taken under the legislation may be seen to be invalid.

243. In any event, I consider the correct approach with respect to s1322 is that adopted by Douglas J in Pauls case. There the learned judge observed that objections of a procedural nature could be excused by the provisions of s1322, if necessary. ^[F134] A similar approach was adopted although in a different statutory context by the New South Wales Court of Appeal in Kelly-Springfield. ^[F135]

244. The argument for the defendants placed emphasis on the requirements of s664C(1)(e) with respect to disclosure of information in the notice. Particular significance was attached to the expression "material" in relation to the information to be provided in the notice under the sub-section. It was emphasised that the expression "material" is not defined in the Corporations Act. Hence, the argument for the defendants turned to the body of case law on matters such as materiality of disclosure in the context of takeover bids (see s636(1)(m)) and schemes of arrangement (see s412(a)(ii)).

245. Relevant authority indicates that a matter that might reasonably affect or tend to affect the decision of the ordinary investor whether or not to accept the offer is material: Cackett v Keswick. ^[F136] Any information that is necessary to enable an offeree to make an informed assessment of the offer has been regarded as material: Australian Consolidated Investments Ltd v Rossington Holdings Pty Ltd. ^[F137] Further, if the information would have had actual significance to the deliberations of a reasonable offeree, it will be material, even if its disclosure would not have been likely to alter an investor's decision: TSC Industries Inc v Northway Inc. ^[F138]; also Savage Resources Ltd v Pasminco Investments Pty Ltd. ^[F139] A matter is material if it might reasonably affect or tend to affect the decision of the ordinary investor. In applying the general tests, it has been held that material information would include sufficient information to enable an offeree to judge how valuable the acquisition will be to the bidder, permitting an informed assessment of whether the bidder might be prepared to pay more: Pancontinental Mining Ltd v Goldfields Ltd. ^[F140]

246. In the scheme of arrangement context it is well recognised that the proponent must disclose estimates of the value to it of any special benefits: Re Application of a GIO Building Society. ^[F141] The defendants submitted that the compulsory acquisition provisions in Pt6A-2 of the Corporations Act are most closely analogous to schemes of arrangement. They emphasised that a failure to disclose substantial advantages to themselves from the scheme or elements of special or material interests by directors or associates will be fatal to approval of the scheme. Re Pheon Pty Ltd; ^[F142] Re Dorman Long & Co Ltd; ^[F143] Re Hudson Conway Ltd; ^[F144] Re Pheon Ltd. ^[F145]

247. The defendants urged that in apparent contrast, in the takeover context some authorities have indicated that in a cash bid, a bidder need not set out the rationale for the acquisition and the benefits that would accrue to the bidder, see: Aberfoyle Ltd v Western Metals Ltd; ^[F146] SGIO Insurance Ltd v Wesfarmers Insurance Investments Pty Ltd; ^[F147] AAPT Ltd v Cable & Wireless Optus Ltd]; ^[F148] Savage Resources v Pasminco Investments. ^[F149] It was submitted for the defendants that the takeover authorities were influenced by the fact that it is not necessary to include in a bidder's statement material information which has already been disclosed to the security holders whether through a continuous disclosure regime or otherwise. In contrast, under s664C(1)(e) only an expert's report under s667A will exempt 90 per cent holder from the obligation to make disclosure in the acquisition notice.

248. However, I observe that the authorities relied on by the defendants with respect to schemes of arrangement and takeover bids are of a general kind. None of those cases is concerned with the materiality of information in the context of a compulsory acquisition under Pt6A.2 of the Corporations Act. None of the authorities cited consider the inter-relationship of the compulsory acquisition procedures with the determination by the court of fair value under s664F and the remedy given in respect of misleading statements and omissions in takeover documents (defined to include a compulsory acquisition notice) by s670A.

249. The scheme cases are otherwise irrelevant. They are concerned with different issues and different tests. Disclosure with respect to schemes of arrangement is very different to the questions raised by Pt6A or, even, with respect to takeover bids. In those arenas questions of disclosure are concerned with the question as to whether the addressee of the information can achieve or might expect to achieve a better outcome. In the context of a compulsory acquisition a different regime applies. There is a particular offer made by the 90 per cent holder incapable of being altered or varied and to which the court must either give approval or disapproval according to a fixed statutory criterion of fair value. Hence, the disclosure required is not intended to allow some discrete business assessment to be made by a unitholder as to whether a better outcome might be achieved. The disclosure is only to enable a unitholder to decide whether that which has been proffered is in fact fair value or not fair value. In consequence, the materiality of information for a scheme and for a compulsory acquisition under s664C are different.

250. The defendants raised additional contentions that bear on the efficacy of the compulsory acquisition notice given by Capricorn and the procedure adopted in the provision of the report of the independent expert. There was a threshold question whether the plaintiff knew about particular exchange rate information at the time the notice was prepared that being the time at which the disclosure obligation existed. I consider that Capricorn was not obliged to say more about exchange rates. It was the function of the independent expert to select appropriate exchange rates and to inform unitholders about that selection which the independent expert did in the May Report and included sensitivity analysis in respect of exchange rates.

251. The defendants' complaints as to non-disclosure were very wide ranging. There were complaints about the non-disclosure of the potential marketing benefits and arrangements and savings on cost management. These matters were not considered and quantified by the plaintiff as special benefits until the defendants' expert insisted on some calculation being made of them. In this context there is no obligation to create information for the purpose of disclosure rather there is an obligation only to disclose existing information: see by way of analogy Savage Resources Ltd v Pasminco Investments Pty Ltd. ^[F150] In any event the amounts of special benefits quantified are speculative relating as they did to possible mining projects in Zimbabwe. They were not material because the disclosure of speculation as to the future is not required and is to be avoided: Pancontinental Mining Ltd v Goldfields Ltd, ^[F151] Solomon Pacific v Acacia Resources, ^[F152] Cultus Petroleum NL v OMV Australia Pty Ltd. ^[F153] Future plans, matters of speculation and precise estimates of costs savings are not generally required to be disclosed: SGIO Insurance v Westfarmers Insurance Investments Pty Ltd, ^[F154] especially in the context of a cash payment for the acquisition of securities: Aberfoyle Ltd v Western Metals Ltd. ^[F155] In any event the amount of special benefit derived from the Zimbabwe mines was immaterial in the context of Capricorn's proposed $2.00. Indeed, Lonergan considered that the amount was not enough to be concerned about. Furthermore, the independent expert set out its estimate of management cost savings. On my findings as to the expert evidence there will not be savings of the order set out in the LEA Report.

252. Furthermore, Capricorn did not believe that the restructuring cost savings were likely to be saved in fact because the hours purportedly saved were insignificant in the context of the respective duties of the Rio Tinto employees concerned and those employees would use the time saved to deal with other matters. Even if there were such savings of the order set out in the LEA Report, the amount was not material to deciding whether to object to the acquisition because it did not increase the amount of special benefits that Capricorn believed were in fact available to Rio Tinto and because the independent expert in fact excluded all such savings from its valuation of WADT as a whole.

253. There were complaints concerning the basis or reason for the offer amount. Capricorn was not required to include in the notice information as to why it was offering $2.00 per unit. If it had done so, that explanation would not have been material to deciding whether to object to the acquisition because the independent expert's report provided information as to Capricorn's position. Further, the size of the margin Capricorn proposed over the independent expert's assessed range of value of WADT as a whole fully provided for the amount of the special benefits that Capricorn had quantified, even if those benefits were allocated to the minority units to the extent of 50:50 rather than pro rata.

254. There were complaints about non-disclosure concerning internal advantages to Capricorn and Rio Tinto as to publication of results. Capricorn was not obliged to include in the notice a statement that it would obtain a benefit from WADT no longer being required to publish its results. The independent expert disclosed in the May Report that special benefits were not included in its assessment of the value of WADT as a whole and did so in terms that assumed a pro rata allocation of any such benefits amongst all unitholders if such benefits were to be material. Capricorn believed that the value of special benefits if included should be allocated pro rata. It would have been entirely speculative to forecast that a court might in future decide that issue in a different way.

255. Further criticism was levelled at the non-disclosure of a premium for forcible taking. Capricorn was not obliged to include in its notice a statement that there should be a premium for forcible taking. For the reasons stated already that factor is not part of an assessment of fair value. In any case, of the elements said to be included in this concept, the independent expert addressed the most significant in the May Report. In consequence Capricorn was not required to make any further disclosure. Still less was it required to include in its notice a statement effectively contradicting the independent expert.

256. Additional complaint was made as to non-disclosure of the acquisition of all of the unitholders' rights. Capricorn was not required to state in the compulsory acquisition notice that its compulsory acquisition was of all the unitholders' rights in WADT, including distributions that might be made subsequently. For the reasons stated already units are traded cum distributions under the ASX Listing Rules. The proposed consideration was for all of a unitholder's interest in WADT. So much is confirmed by the circumstance that under the ASX Listing Rules the units are traded cum distributions. It was not necessary to say more.

257. The independent expert addressed in the May Report as to whether the $2.00 proposed for the compulsory acquisition was fair value. That was the consideration in fact proposed by Capricorn. The requirements of Pt6A.2 and Pt6A.4 of the Corporations Act for an independent expert's report from a person nominated by ASIC were satisfied. There was innuendo by the defendants that they eventually disavowed that the independence of the expert had been compromised because of the timing and sequence of the retainer and that Capricorn knew of this fact and should have so informed unithholders. Having examined the evidence I do not consider the independence of the independent expert was compromised. As that independence had not been jeopardised, matters relating to the sequence of the retainer, preparation of a draft report, commenting and finalisation of the proposed offer price could not have been material to a unitholder.

258. Ultimately, there was no evidence that any of the matters relied on by the defendants were material to a unitholders' decision to object and cannot be presumed to be material. Nevertheless, the defendants must show knowledge by Capricorn of the information concerned, that it was material to deciding whether to object to the acquisition, and that it was not disclosed in the expert's report. Materiality is not to be determined on the basis of the LEA Report but by reference to the facts as known to Capricorn at the time of preparing the notice and by reference to the significance of the information concerned to deciding whether to object to the acquisition as set out in s664C(1)(e) of the Corporations Act. The evidence showed that Capricorn did not know the amount of marketing savings in May 2001; it did not know the amount of the management cost savings was of the order asserted by Lonergan; it did not know there were restructuring savings; it was debatable whether there was a benefit in WADT no longer having to disclose its results publicly and the value of such a benefit was not known; it did not know that special benefits would be taken into account or that they would be apportioned otherwise than pro rata; and it did not know it might be argued that there should be some forcible taking premium.

259. If in any respects there had been failure by Capricorn to provide material information known to it, then the prescribed form would not have been completed as required by s664C(1)(e)(ii), but there would remain substantial compliance for the purposes of s25C of the Acts Interpretation Act (Cth). Any such failure in this case would constitute a procedural irregularity and Capricorn ought be relieved from any consequences. If any invalidity of the notice were to have resulted, I would validate the notice pursuant to s1322(4).

260. There is a further remedy available in the circumstances. S1325D empowers the court to declare that any act, document or matter is not invalid because of a contravention of Chapters 6, 6A, 6B or 6C of the Corporations Act if satisfied that the contravention ought be excused. If necessary, Capricorn should be granted relief under s1325D on four grounds. First, because that section expressly allows a remedy for contravention of a provision of Chapter 6A. ^[F156] Secondly, there has been no substantial injustice to anyone because the requisite 10 per cent objections were made and the matter is now before the Court. Thirdly, there is an adequate remedy otherwise available pursuant to s670A. Fourthly, such failure was by reason of inadvertence or mistake or Capricorn was not aware of a relevant fact or occurrence or was by reason of circumstances beyond the control of Capricorn.

261. Furthermore, Creese gave evidence that Capricorn complied with s667C(1)(c). I accept that evidence. Even if that were not so, I am satisfied Capricorn should be granted the relief sought in the interlocutory process because its non-compliance has caused no substantial injustice to any unitholder, there having been more than the requisite 10 per cent objections in any event. Furthermore, I observe that the information concerned was not material given the size of the additional amount over the fair market value of the assets of WADT that was included in the $2.00 proposed by Capricorn.

262. Finally, I observe that no substantial injustice has been or is likely to be caused to any unitholder if it was necessary to declare that the steps taken in pursuance of the compulsory acquisition to date are not invalid. Hence, if needs be, s1325DC provides a complete answer to the attack made by the defendants under s1322 of the Corporations Act.

Order

263. It follows from these reasons that I am satisfied that the compulsory acquisition notice gives a fair value for the WADT units the subject of the notice. In accordance with the statutory directive in s664(3) and s664F(1) of the Corporations Act, therefore, I must approve the compulsory acquisition and I will make orders accordingly.