CSR Limited [2003] FCA 82 (7 February 2003)

Last Updated: 19 February 2003

FEDERAL COURT OF AUSTRALIA

CSR Limited [2003] FCA 82

CORPORATIONS - scheme of arrangement for demerger from publicly listed company of wholly owned subsidiary group to become also publicly listed - overseas shareholders involved - numerous conditions precedent involved - complication of executive's options.

Corporation Act 2001 (Cth) ss 256C, 411 and 412

Corporations Regulation 8302(d), 8302(h) and 8305 (Part 3)

Federal Court (Corporations) Rules 2.15, 3.4 (including 3.4(3)(a) and 5.1.01(1))

Central Pacific Minerals NL [2002] FCA 329 applied

Re Hills Motorway Ltd & Another [2002] 43 ACSR 101 applied

Re NRMA Insurance Ltd [2000] 33 ACSR 523 applied

CSR LIMITED

IN THE MATTER OF CSR LIMITED ABN 90 000 001 276

N 3002 OF 2003

CONTI J

7 FEBRUARY 2003

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 3002 OF 2003

IN THE MATTER OF CSR LIMITED ABN 90 000 001 276

BETWEEN:	CSR LIMITED ABN 90 000 001 276 APPLICANT
JUDGE:	CONTI J
DATE OF ORDER:	7 FEBRUARY 2003
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. Pursuant to s 411(1) of the Corporations Act 2001 (Cth):

(a) the Plaintiff, CSR Limited (CSR), convene a meeting (the Scheme Meeting) of the holders of ordinary shares in CSR for the purpose of considering and, if thought fit, approving a scheme of arrangement (with or without modification) proposed to be made between CSR and the CSR Shareholders (the Scheme), the terms of which are contained in the Explanatory Statement which forms part of the Scheme Booklet which is Exhibit "ANB2" to the affidavit of Alexander Norman Brennan sworn on 5 February 2003 as amended in the terms set out in Annexure A to these Orders (the Scheme Booklet);

(b) the Scheme Meeting be held at the Sydney Convention Centre, Darling Harbour, Sydney, in the State of New South Wales, on Tuesday 25 March 2003, commencing at 10.00am (Australian Eastern Standard Time);

(c) Mr John Powell Morschel or, failing him, Mr Ian David Blackburne, or failing both any other director of CSR (as listed in paragraph 8 of the affidavit of Alexander Norman Brennan sworn on 13 January 2003), be Chairman of the Scheme Meeting;

(d) the Scheme Meeting can resolve to be adjourned;

(e) at the Scheme Meeting, the members of CSR, present and entitled to vote, in person or by proxy or by an attorney under power, shall constitute a quorum;

(f) the Explanatory Statement in the Scheme Booklet be approved;

(g) on or before Monday 24 February 2003, there be:

(i) in the case of CSR Shareholders who have registered addresses in Australia, dispatched by prepaid post addressed to the relevant addresses set out in the CSR register of members; or

(ii) in the case of CSR Shareholders who have no registered address in Australia, dispatched by prepaid airmail post addressed to the relevant addresses set out in the CSR register of members; or

(iii) in either case, personally served:

(A) a document substantially in the form of the Scheme Booklet (which includes the Explanatory Statement);

(B) a proxy form for the Scheme Meeting; and

(C) an envelope addressed to Computershare Investor Services Pty Limited;

(h) the time by which the CSR Shareholders must return their proxy forms for the Scheme Meeting be 11.00 am on Sunday 23 March 2003.

2. Rule 2.15 of the Federal Court (Corporations) Rules 2000 (Cth) shall not apply to the Scheme Meeting.

3. Compliance with Rule 3.4 (3)(a) for Form 6 of the Federal Court (Corporations) Rules 2000 (Cth) be dispensed with.

4. Pursuant to Rule 3.4 of the Federal Court (Corporations) Rules 2000 (Cth), the Scheme Meeting be advertised once in "The Australian" newspaper by an advertisement substantially in the form of Annexure B to these Orders, such advertisement to be published on or before 20 March 2003 in the following terms:

"Notice of Hearing to Approve Compromise or Agreement

TO all creditors and members of CSR Limited ABN 90 000 001 276 (CSR)

TAKE NOTICE that at 9:30 am on 28 March 2003, the Federal Court of Australia at Law Courts Building, Queens Square, Sydney NSW 2000 will hear an application by CSR seeking the approval of a compromise or arrangement between CSR and its members if agreed to by resolution to be considered, and, if thought fit, passed by the meeting of such members to be held at the Sydney Convention Centre, Darling Harbour, Sydney on 25 March 2003 at 10.00 am AEST.

If you wish to oppose the approval of the compromise or arrangement, you must file in the and serve on CSR a notice of appearance, in the prescribed form, together with any affidavit on which you wish to rely at the hearing. The notice of appearance and affidavit must be served on CSR at its address for service by no later than 9.30 am on 27 March 2003.

The address for service of CSR is, c/o Freehills, Level 32, MLC Centre, Martin Place, Sydney, NSW (Reference : Luck Hastings : 29C).

..........................................

Company Secretary"

5. The proceedings be stood over to 9:30 am on 28 March 2003 with liberty to restore on 3 days' notice.

6. These orders be entered forthwith.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 3002 OF 2003

IN THE MATTER OF CSR LIMITED ABN 90 000 001 276

BETWEEN:	CSR LIMITED ABN 90 000 001 276 APPLICANT
JUDGE:	CONTI J
DATE:	7 FEBRUARY 2003
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1 This is an application made pursuant to s 411 of the Corporations Act 2001 (Cth) ("the Act") for orders that CSR Limited ("CSR") convene a meeting of the holders of ordinary shares in CSR for the purpose of considering, and if thought fit approving, a scheme of arrangement, with or without modification, proposed to be made between CSR and its shareholders, being the scheme of arrangement contained within the Scheme Booklet in evidence before me. The scheme of arrangement provides for the demerger of around 30% of the current CSR group, based on pre-tax profit and revenues. The demerger was first foreshadowed by letter to shareholders sent by the Chairman of CSR to CSR's shareholders on 16 December 2002.

2 CSR is one of Australia's largest and most well known companies, having been incorporated on 1 July 1887 under the name The Colonial Sugar Refining Company Limited. CSR is admitted to the Official List of the Australian Stock Exchange ("ASX"), and its shares, all fully paid, are quoted on the stock market of the ASX.

3 As at 31 January 2003, CSR had on issue 938,944,438 fully paid shares held by 111,669 CSR shareholders. Of those shareholders, 98.5253% have registered addresses in Australia. Some of the very small percentage of the remaining shareholders have registered addresses in the United States, the United Kingdom, New Zealand, Singapore, Hong Kong and Abu Dhabi, the significance of which will later appear. As at the close of business on 31 January 2003, CSR's market capitalisation approximated $5,821,455,515, presently representing $6.20 in value per share. Apart from its fully paid ordinary shares, the CSR group has in place a number of share and option incentive plans for executives and other employees.

4 The essence of the scheme of arrangement is the demerger of Rinker Group Limited ("RGL"), a wholly owned subsidiary of CSR, and with it RGL's subsidiaries, from the existing corporate structure of CSR and CSR's other subsidiaries, to be effected by the following steps:

(i) CSR would make a capital reduction in favour of each eligible shareholder, that is, at least the shareholders having registered addresses in Australia or in any of the other countries specified in [3] above, equal to $0.84 for each CSR share held ("Capital Reduction Entitlement") (I say "at least", by reason of what appears in sub-par (v) below);

(ii) CSR would pay in addition to each eligible shareholder the "Demerger Dividend" of A$0.69 for each CSR share held ("Demerger Dividend Entitlement");

(iii) Instead of the receipt in cash of their Capital Reduction Entitlements and Demerger Dividend Entitlements, CSR would automatically apply those amounts on behalf of the CSR eligible shareholders as payment for the RGL shares to be issued to those shareholders;

(iv) CSR would thereupon allot to CSR eligible shareholders one RGL share for each CSR share held on the so-called "Record Date" (expected to be 4 April 2003);

(v) In the case of the relatively small number of CSR shareholders who are not eligible shareholders, that is to say, shareholders not having registered addresses in Australia or in any of the other countries specified in [3] above, their respective shares would be transferred to a nominee to be appointed by CSR and sold, and the net proceeds of sale to be thereafter remitted to them, unless CSR receives legal advice, before the Demerger Date, that the laws of the place of their respective registered addresses permit the issue of RGL shares to an entity resident in that jurisdiction, either unconditionally or after compliance with conditions which CSR regards as acceptable and not unduly onerous; the net proceeds would be remitted in Australian currency, or the currency of the country of the overseas shareholder's address in the CSR registered converted at the exchange rate at a date no more than 15 business days after the sale of the last of all of such ineligible shareholder's entitlement.

(vi) CSR would remain listed on the Sydney Stock Exchange, and RGL would become separately listed thereon; and

(vii) RGL will execute a Deed Poll purportedly in favour of each holder of ordinary shares in CSR Limited to perform the steps ascribed to it under the scheme of arrangement, and otherwise to comply with the same as though each was named as a party thereto, and to apply before the scheme of arrangement becomes effective for admission to the official list of the ASX, and for quotation of RGL shares on the stock market conducted by the ASX.

5 I observe that the course described in [4(v)] above would not produce the consequence that separate classes of shareholders are thereby relevantly affected by or involved in the Scheme. As pointed out by Barrett J in Re Hills Motorway Ltd and Another [2002] 43 ACSR 101 at [12], after citation of longstanding United Kingdom authority, "[t]he test is... not one of identical treatment. It is one of community of interest." There would be here involved a sufficient measure of community interest, in relation to those CSR shareholders who stand to receive RGL shares in specie pursuant to the capital reduction and the demerger dividend, and that small segment of overseas CSR shareholders who would receive instead the proceeds of sale effected at market value of the same number of RGL shares, as would correspond to the respective numbers of CSR shares they would continue to hold after the demerger.

6 The principles that guide me in my consideration of the present application have been summarised by Emmett J in Central Pacific Minerals NL [2002] FCA 239, as follows:

(i) the likelihood or otherwise that the Court will approve the scheme of arrangement, if the statutory majority of shareholders is achieved at the proposed Scheme meeting;

(ii) whether there has been compliance with such preliminary matters as are relevant to the holding of the meeting;

(iii) where there will be sufficient disclosure, to those persons and entities who will be affected by the scheme of arrangement, of its detail and effects; and

(iv) whether there has been reasonable opportunity for the Commission to examine the terms of the scheme of arrangement.

7 Alternatively, as formulated by Santow J (as he then was) in Re NRMA Insurance Ltd (2000) 33 ACSR 523, the court must be able to see, on the material placed before it, that:

(i) the proposal fits within the statutory concept of arrangement or compromise;

(ii) there will be available to the shareholders all the main facts relevant to the exercise of their judgment;

(iii) ASIC has had reasonable opportunity to examine the proposal, and that the scheme of arrangement is so conceived and presented in terms of its structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it should not, in due course, receive the court's approval, if the necessary majority of shareholder's votes is achieved.

Those principles were adopted in Hills Motorway at [5] thereof. Plainly, the essence of what is here proposed constitutes at least an arrangement within Chapter 5 of the Act.

8 The scheme of arrangement is set out in Part 10 of what is described as the "Scheme Booklet", a lengthy document of some 904 pages intended to otherwise serve the function of an explanatory statement as required by s 412 of the Act (which, despite its heading, extends to arrangements per se as well as compromises with creditors). The scheme of arrangement is expressed to be subject to 10 conditions precedent set out in clause 3.1 thereof, reading as follows:

"3.1 Conditions

This Scheme is conditional upon the satisfaction or waiver of each of the following conditions precedent:

(a) Between the date of the Scheme Booklet and the Scheme Meeting, a majority of the directors of CSR recommending and not changing or withdrawing their recommendation to CSR Members to vote in favour of the Scheme;

(b) CSR Members approving this Scheme by the requisite majorities under the Corporations Act and the Constitution;

(c) CSR Members approving the Capital Reduction by the requisite majority under the Corporations Act and the Constitution before the Second Court Date;

(d) All Regulatory Approvals being obtained before 9.00 am on the Second Court Date either unconditionally or on conditions reasonably satisfactory to CSR;

(e) No temporary restraining order, preliminary or permanent injunction or other order being issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the Demerger being in effect at 9.00 am on the Second Court Date;

(f) No Material Adverse Change occurring and still existing at 9.00 am on the Second Court Date;

(g) The financing arrangements of RGL, CSR and their respective subsidiaries being restructured in terms acceptable to RGL and CSR, substantially as described in parts 4.4(b) and 6.4(b) of the Scheme Booklet, including satisfaction of the conditions of the consent solicitations in relation to the US$ bonds that mature in 2004 and 2005;

(h) The CSR Board declaring the Demerger Dividend on or before the Second Court Date and resolving to pay it in accordance with the requirements of the Demerger Documents.

(i) The Court approving this Scheme in accordance with section 411(4)(b) of the Corporations Act and the lodgment with ASIC of an office copy of the order of the Court; and

(j) ASX approving the admission of RGL to the official list of ASX, and granting permission for official quotation of the RGL Shares to be issued under this Scheme on the stock market conducted by ASX, subject only to this Scheme becoming Effective and such other conditions as may be acceptable to both CSR and RGL (acting reasonably)."

By clause 3.2 of the scheme of arrangement, the conditions precedent are stipulated to be for the benefit of CSR, and that only those contained in (a), (f) and (g) above may be waived by CSR, though in the case of those contained in (f) and (g), any such waiver would require additionally the consent of RGL, though such consent of RGL is not to be unreasonably withheld.

9 Clause 6 of the scheme of arrangement provides for the effectiveness and implementation thereof as follows:

"6.1 This Scheme will take effect on and from the Effective Date.

6.2 On the Demerger Date, without the need for any further act by a Scheme Participant:

(a) CSR will provide the Capital Reduction Entitlement and Demerger Dividend Entitlement of each Scheme Participant to RGL on behalf of the Scheme Participants as consideration for the provision by RGL of the Scheme Consideration to the Scheme Participants or the Nominee as required by the Deed Poll; and

(b) CSR will procure that, in consideration of the provision to RGL by CSR of the Capital Reduction Entitlement and Demerger Dividend Entitlement of each Scheme Participant, RGL provides the Scheme Consideration:

(1) in the case of a Scheme Participant who is an Ineligible Overseas Shareholder, to the Nominee on behalf of that Scheme Participant; or

(2) in all other cases, to the Scheme Participant,

in accordance with clause 9.2."

CSR's obligations thus crystallising on the "Demerger Date" mirror those of RGL pursuant to the Deed Poll described in [4(vii)] above.

10 Clause 9 of the scheme of arrangement contains the so-called "General Scheme Provisions", sub-clauses 9.1, 9.2 and 9.3 whereof stipulate as follows:

"9.1 Alterations or conditions

CSR may, by its counsel and with the consent of RGL, consent, on behalf of all persons concerned, to any alterations or conditions to this Scheme as the court thinks just to impose.

9.2 Steps to be taken by RGL

(a) On or before the Effective Date, CSR will procure that RGL applies for admission to the official list of ASX and for the quotation of RGL Shares on the stock market conducted by ASX.

(b) For the purposes of clause 6.2(b) the obligations of CSR to procure RGL to provide the Scheme Consideration to a Scheme Participant shall be discharged by CSR procuring RGL:

(1) to issue to the Scheme Participant or the Nominee (as the case may be) the number of RGL Shares to be issued to that Scheme Participant in accordance with the Scheme;

(2) to procure the entry in the RGL Register:

(A) of the name of each Scheme Participant (other than Ineligible Overseas Shareholders) in respect of the new RGL Shares issued to the relevant Scheme Participant; or

(B) of the name of the Nominee in respect of those RGL Shares that would otherwise be issued to each Scheme Participant who is an Ineligible Overseas Shareholder; and

(3) within five Business Days of the Demerger Date, to send or procure the dispatch to each Scheme Participant by pre-paid post to their address recorded in the CSR Register at the Record Date or the Nominee (as the case may be), uncertificated holding statements for new RGL Shares issued to the Scheme Participant or the Nominee (as the case may be) in accordance with this Scheme. In the case of Scheme Participants who are joint holders of CSR Shares, CSR shall procure that uncertificated holding statements in relation to the new RGL Shares shall be forwarded to the holder whose name appears first in the CSR Register on the Record Date; and

(4) to procure the Nominee to perform the steps attributed to it under clause 7."

The abovementioned Clause 7 provides in more detail for what has been already foreshadowed in [4(v)] above concerning so-called "Ineligible Overseas Shareholders".

11 The scheme or arrangement is expressed to be governed by the laws of the State of New South Wales.

12 The Scheme Booklet incorporating the scheme of arrangement is about 400 pages in length, and is intended to serve the function of an explanatory statement within s 412 of the Act. It is prefaced with a letter from CSR's chairman, which summarises to shareholders the essence of the outcome of the splitting of their existing investment as shareholders in CSR into separate investments in two continuing Australian parent companies, namely of course the demerged CSR and RGL, having the following respective functions and activities:

* RGL comprising a heavy building materials group, consisting of the Rinker Materials Corporation operating in the United States, and Readymix operating in Australia and China as its major undertakings, RGL being already one of the top 10 heavy building material companies in the world which would continue its growth strategy of building strong regional market positions in its key products, being aggregate, concrete, cement and concrete pipe and products.

* CSR comprising a diversified corporate group, with a strong portfolio of businesses involving building products, aluminium and sugar, and operating in Australia, Asia and New Zealand.

13 The Chairman's letter sets out the following objectives of the demerger:

* To complete the separation of the existing heavy building materials businesses of CSR under its existing structure, in order to form two strong companies (ie CSR and RGL), and to assist them to pursue their respective strategies more effectively, and to deliver over time additional value to their respective shareholders from those separated businesses.

* To create the circumstances of two very large companies appealing to different types of investors, RGL having growth characteristics, and CSR pursuing a policy of distributing a higher proportion of profits as dividends.

* To retain RGL as an Australian company, as stated above, as one of the leading 10 heavy building materials companies in the world, based on cash flow generally, and on its positions in the regional markets of the United States, Australia and China which it would enjoy.

* To retain CSR as a diversified Australian company, which would continue to hold Australia's best known household brands including CSR sugar, Gyprock plasterboard, Monier and Wunderlich roof tiles, PGH bricks and pavers and Bradford insulation, all of which presently enjoy prominent market positions.

14 The Scheme Booklet contains fifteen chapters in all, inclusive of independent accountants' reports (to be reviewed below), which will be dispatched to CSR shareholders in advance of the Scheme meeting. The first chapter is headed "Benefits, disadvantages, risks and other relevant considerations". In relation to benefits, it suffices to refer to the seven sub-headings thereof below:

* creation of a focused heavy building materials group and a leading Australian diversified group

* potential improved stock market rating

* improved ability to pursue growth opportunities

* flexibility to offer RGL shares as acquisition consideration

* independent financial policies

* better alignment of employee accountability and compensation plans with shareholder value

* increased investor options

I need not elaborate upon the obvious merits of those postulated advantages.

15 The disadvantages of the demerger, and the risks conceivably involved, require more elaboration, which I will now undertake. The disadvantages are disclosed in the Scheme Booklet as follows:

* Costs of the demerger

These are very substantial, being estimated at $75 million; those costs include technology and retrenchment costs and refinancing costs.

* Lower credit ratings and increased costs of debt funding

In the opinion of each of Standard & Poor's and FitchRatings, there is forecast an expected decline in credit ratings below the current CSR group rating, said to be due to the lower earnings diversification and size of the two new groups compared to CSR before the demerger. This lowering in credit ratings is anticipated to result in a marginally higher cost of borrowing, when compared to CSR's current borrowing costs.

* Reduced franking capacity

This is expected to occur, in the case of CSR, because tax deductions for transaction costs associated with the demerger would normally reduce the amount of Australian tax paid by CSR in respect of the year ending 30 June 2004, and in the case of RGL, partly because it will have no franking credits at the time of the demerger, and partly because of the relatively high proportion of earnings expected to be generated offshore within the RGL group.

16 The risks of the demerger disclosed are more imponderable, involving reservations concerning what is inevitably in commerce an uncertain future, as follows:

* Decrease in combined market value of RGL and CSR shares

This is indicated to be a risk, particularly while the shareholder base for each company evolves following upon the demerger;

* Failure of RGL to achieve an improved stock market rating

This risk is expressed in terms that would normally be anticipated, namely as to the time which might be taken for the expected benefits of the demerger to crystallise;

* Reduction in size and earnings diversification

These circumstances are thought to possibly ensue because the individual structures and operations of each of RGL and CSR would be smaller in size, and have reduced earnings diversification;

* Investor perception of CSR after the demerger

This is anticipated to be unfavourable, mainly because of the greater attention after the demerger which might be given by investors to RGL (of course this risk would be obviated if investors retain both their CSR and RGL shares after the demerger);

* Lower individual index weightings than CSR's current weighting

This risk may crystallise, because of the lower market capitalisation of each of RGL and CSR post merger, with consequential lower levels of institutional investor interest than presently prevail in relation to CSR in its present constituent form; and

* Novation risk

This risk would manifest where existing third parties may not be willing to novate contracts, particularly guarantees, presently held with or from CSR, relating to companies in the RGL group; however if the demerger proceeds, CSR will be indemnified by the RGL group in the usual way in relation to any continuing liability CSR may carry under such instruments falling within the scope of RGL demerger operations and activities.

17 As may be expected of a demerger of the size and scope here involved, there are numerous provisions and conditions required to be implemented of a procedural nature in a temporal sequence. A convenient window into those provisions and conditions involved is to be found in the chronological sequence of planned "Key Dates" set out in the Scheme Booklet under the heading "Summary of the demerger", which I have reproduced below:

"Key dates

Event	Date
Last time and date by which proxy forms for the Scheme Meeting and the General Meeting must be received by CSR	11.00 am 23 March 2003
Time and date for determining eligibility to vote at the Scheme Meeting and the General Meeting	7.00 pm 23 March 2003
Scheme Meeting	10.00 am 25 March 2003
General Meeting	10.20 am 25 March 2003 (or as soon thereafter as the Scheme Meeting has concluded or been adjourned)
Court hearing for approval of the Scheme	27 March 2003
Effective Date	28 March 2003
Last day CSR shares trade on ASX on a cum-entitlement basis	28 March 2003
RGL shares commence trading on ASX on a deferred settlement basis	31 March 2003
CSR shares commence trading on ASX ex-entitlement to RGL shares	31 March 2003
Record Date for determining entitlement to RGL shares	5.00 pm 4 April 2003
Demerger Date - issue of RGL shares	11 April 2003
Last day to dispatch holding statements in respect of RGL shares	22 April 2003
Deferred settlement trading of RGL shares on ASX ceases	22 April 2003
Commencement of normal trading of RGL shares on ASX	23 April 2003
First settlement of all deferred settlement trades and trades on the first day of normal trades"	29 April 2003

The notes to that chronology of events should also be reproduced in their amended form:

"Timing of events is subject to change. All dates after the Scheme Meeting are indicative only, being subject to approval from CSR shareholders and the Court.

If you wish to object to the Scheme at the Court hearing, the Court hearing for approval of the Scheme is expected to be heard at Sydney on [Wednesday 27 March 2003]."

In fact the Court hearing date has been changed by one day, with possible consequential changes.

18 At the general meeting of members, the date of which has not finally been settled, CSR shareholders would be asked to consider, and if thought fit, to pass resolutions to the following effect:

(i) an ordinary resolution approving the capital reduction for the purposes of s 256C of the Act;

(ii) a special resolution to amend rule 52.2(a) of CSR's Constitution so as to reduce the minimum number of non-executive directors from 6 to 5.

A number of other conditions precedent are thereafter set out in the Scheme Booklet which I need not reproduce, the same being stipulated by virtue of the inherent nature of the Scheme.

19 An area of complexity arising from the Scheme Booklet and understandably not yet resolved, concerns CSR's optionholders and RGL's optionholders. There is presently on foot the following CSR and RGL employee share and option plans, as set out and discussed in Part 7 of the Scheme Booklet:

(i) CSR Executive Share Option Plan

(ii) CSR Executive Shares Acquisition Plan

(iii) CSR Executive Share Acquisition Plan

(iv) CSR Universal Share Option Plan

(v) CSR Cash Award Share Plan

(vi) RGL Option Plan

(vii) RGL Employee Share Acquisition Plan

(viii) RGL Universal Share Plan

Presumably because options do not fall within the scope of the scheme of arrangement, it is stated in the Scheme Booklet that it would be in the best interests of both CSR and the CSR option holders (and implicitly of both RGL and the RGL option holders) for the options the subject of these share and option plans to be exercised before the demerger takes effect. For that purpose, and in advance of the demerger, the CSR board would declare a so-called "Special Circumstance", which would have the effect of waiving such present time restrictions upon early exercise of the options as presently exist, and presumably the RGL board would do likewise. In addition it would be declared that the period between the issue of notice of the special shareholder meeting, and implementation of the demerger, would constitute a so-called "trading window". In any event, it is presently proposed that, after the demerger, new issues of options or "awards" of shares under new plans would be made in order to compensate participants for those options which they may have effectively lost. In the meantime, in so far as CSR and RGL shares have already been issued to or held by directors, executives and other employees, the demerger will of course take effect in relation thereto in accordance with its terms. It will therefore be a matter for CSR and RGL to provide for and resolve any issues in a fair and practical way, which Part 7 of the scheme of arrangement duly contemplates. No such matters would appear to arise for resolution in relation to ADR holders, since the ADR Depositary is the registered holder of all CSR shares represented by the ADRs.

20 A major subject for the Court's consideration relates to the implications of the demerger to the existing creditors, as well as shareholders, of CSR. Included in the Scheme Booklet is a comprehensive independent expert report made by KPMG Corporate Finance in relation to the proposed demerger, which extends over some 64 pages. That report concludes that the scheme of arrangement is in the best interests of CSR and its shareholders, is fair and reasonable to its shareholders, and will not materially prejudice CSR's ability to pay its creditors, and that specifically in relation to the capital reduction component involved by virtue of the demerger, the capital reduction per se is fair and reasonable to shareholders, and does not materially prejudice CSR's ability to pay its creditors. As to any conceivable prejudice to CSR's creditors, KPMG took into account, in expressing those conclusions, the opinions of the leading worldwide credit agencies to which I have referred in [15] above, and the expectation that after the demerger, CSR is expected to continue to generate strong operating cash flows, to be conservatively geared, and to have a strong net asset position, thereby enabling CSR to meet in particular any future product liability claims. KPMG further took into account that RGL, whilst being more highly geared on a "stand alone" basis than the current CSR group, is nevertheless expected to generate strong net operating cash flows to service its debt levels and working capital requirements, and to have a strong net asset position.

21 Attached to the KPMG Report and considered therein, and thus also forming part of the Scheme Booklet, is Ernst & Young's so-called "Independent Accountants Report on Reviewed Historical Financial Information", which extends over a further 74 pages. That historical accounting information mainly comprises pro-forma consolidated statements of financial performance and statements of cash flows, reconstructed retroactively and hypothetically, of the intended demerged businesses of CSR and RGL for the years ended 31 March 2000, 2001 and 2002, and the 6 monthly periods ended 30 September 2001 and 2002, and the pro-forma consolidated statements of financial position of those proposed demerged businesses as at 30 September 2002, along with accompanying "notes information" (together referred to as "Pro-Forma Historical Financial Information"). The pro-forma consolidated statements of financial performance have been prepared to the level of "profit on ordinary activities before borrowing costs and income tax expenses", and exclude the impact of the existing capital structure of CSR, reflected in borrowing costs and income taxes, which were not considered relevant by Ernst &Young, given the anticipated changes in debt and equity structures as a result of the demerger. Similarly, the pro-forma consolidated statements of cash flows, presented by Ernst & Young for operating and investing activities only, do not include cash inflows or outflows relating to financing activities or income taxes. That "Pro-Forma Historical Financial Information" does not purport to represent, understandably, what the results of operations and cash flows would actually have been if the demerged businesses had operated on a stand-alone basis during the periods indicated, or to project the result of operations or cash flows for any future period. Moreover the "Pro-Forma Historical Financial Information" has been adjusted by Ernst & Young before finalisation to reflect certain one-off transactions and internal restructure required to give effect to the demerger. In particular, the pro forma consolidated statements of financial performance and statements of cash flows for CSR and RGL relating to the accounting periods of time abovementioned have been adjusted to reflect:

* the exclusion of results of discontinued operations and disposed businesses;

* the exclusion of one-off transactions including non-recurring gains and losses; and

* the inclusion of estimated stand-alone and public company costs which would have been incurred by the demerged businesses had the demerged businesses existed as stand alone entities from 1 April 1999.

22 Ernst & Young have next indicated in their Report that the pro forma consolidated statements of financial position they have prepared have been adjusted to give effect to:

* The internal restructure required to separate the activities of the demerged businesses;

* the conversion of debt amounting to $1,449 million owing by RGL to CSR to "equity" in RGL;

* the allocation of existing CSR debt between RGL ($2,182 million) and CSR following the demerger ($295.8 million);

* the reduction of CSR share capital by $1260.3 million; and

* the issue of new shares in RGL (that is of course one RGL share for each existing CSR share pursuant to the scheme of arrangement).

Thereafter Ernst & Young have further recorded that they reviewed the abovementioned "Pro-Forma Historical Financial Information" in accordance with the Australian Auditing and Assurance Standard AUS 902 "Review of Financial Report", and have also made such inquiries and performed such procedures as they, in their professional judgment, considered reasonable in the circumstances, including six areas of enquiry and review which I need not detail.

23 Most importantly and relevantly, the "bottom line" of the respective pro-forma statements of recent financial performance of RGL and CSR respectively, prepared along the complex lines and upon the hypotheses stated above, was found by Ernst & Young to be as follows (expressed in millions of dollars), upon the critical hypotheses of each having conducted their demerged businesses in respect of the periods of time there stipulated:

" Six months ended

Year ended 31 March 30 September

2000 2001 2002 2001 2002

RGL group:

Profit from ordinary activities before

Borrowing costs and income tax expenses 436.5 558.8 640.6 359.8 373.0

Profit from ordinary activities attributable

to outside equity interests before borrow-

ing costs and income tax expense 0.5 (0.9) 2.5 1.6 3.5

CSR group (same categories) 276.6 246.1 247.6 160.1 162.0

37.8 39.9 30.2 15.3 16.4

24 Ernst & Young next addressed the task of providing an independent accountant's report upon the pro-forma consolidated forecast financial performance and cash flows of the hypothetically demerged businesses of RGL and CSR already made by the directors of CSR for the year ending 31 March 2003, as set out in Parts 4.6 and 6.6 of the Scheme Booklet. This relatively brief review of best-estimate assumptions underlying those forecasts was conducted by Ernst & Young in accordance with the Australian Auditing and Assurance Standard AUS902 "Review of Financial Reports". The procedures adopted included discussions with the directors and management of CSR.

25 In the result, it is readily apparent that the exercises undertaken by Ernst & Yong and the results thereof provide valuable support for the conclusions of the KPMG report which I have earlier reviewed, demonstrating as they do the deduced or reconstructed respective profitabilities of the RGL and CSR group in recent times, in the case of the CSR group of course exclusive of the RGL group.

26 Part 4 of the Scheme Booklet addressed the subject of "Financial information on RGL group after the demerger", and Part 4.6 relates in particular to "Forecast financial information for the year ending 31 March 2003", thus in a sense extending the exercise undertaken as set out in [23] above. It contains a great deal of financial detail in relation to that yearly period concerning the RGL group (which period has not of course as yet expired), and postulated for the RGL group (inter alia) a net profit of $384 million after tax for that period, upon five assumptions as follows:

* AS/US$ exchange forth period of 0.557

* no significant change in the economic conditions prevailing in the markets in which the RGL group companies primarily operate

* no significant change in the legislative regimes and regulatory environments in the jurisdictions in which the RGL group companies or their key customers or suppliers operate;

* no change in applicable accounting standards that would have a material impact on the RGL group's financial reporting; and

* no material acquisitions or disposals in the 6 months to 31 March 2003 (that is, excluding the impact of a certain joint venture).

27 Other provisions of the Scheme Booklet, material to the present application to the Court and concerning the operations of the CSR group and its present subsidiary RGL group in relation to issues of insurance and litigation, may be summarised as follows:

(i) No company in the RGL group is involved in any litigation, the outcome of which is likely to have a material adverse effect on the business or financial position of the RGL group;

(ii) CSR is to be indemnified by RGL and its subsidiary Readymix in relation to litigation costs and liabilities concerning businesses presently being conducted within the CSR group, and which are to be sold to Readymix in the context of implementation of the demerger;

(iii) The RGL group companies are to be indemnified by CSR in respect of any asbestos related liabilities which may arise in the United States (for reasons explained in the Scheme Booklet, any such liabilities are unlikely to crystallise); the Scheme Booklet discloses at length, in Part 5 thereof in particular, the implications of that indemnity;

(iv) CSR is to be indemnified by RGL and its subsidiary Readymix in relation to any proceedings which the Australian Competition and Consumer Commission may bring in the future for penalties arising out of a possible misuse of market power, concerning the market for reinforced concrete pipes, which occurred between January 1997 and July 2002;

(v) CSR is to be indemnified by RGL in relation to liability in respect of a damages claim for about $13.3 million presently advanced by TNT Australia Pty Ltd concerning design and construction defects which allegedly crystallised in 1998, to the extent that CSR's insurer may decline indemnity in whole or in part; and

(vi) RGL and Readymix are to indemnify certain corporate entities presently within the CSR group that are currently defendants to litigation, and which would be selling businesses to Readymix in the context of the demerger, to the extent that those costs and liabilities are not covered by CSR's insurance policies.

28 Exceptions to the scope of the foregoing indemnities by RGL and Readymix in favour of CSR are described in some length in Part 5 of the Scheme Booklet, and chiefly concern asbestos claims for damages for personal injuries and deaths of employees sustained or occasioned in Australia and the US. In that regard, CSR has already compromised its insurance indemnity claims in Australia to a maximum extent, though not so in the case of its insurance indemnity in the US. Having regard to the difficulty of predicting the number of further unresolved claims, the severity and mix of diseases involved, and the costs of litigation, CSR cannot presently determine with precision the amount of its ultimate liability with respect to asbestos claims of individuals, nor the effect thereof on CSR's net profit or loss in future reporting periods; however it is apparent that since CSR's involvement in asbestos ceased many years ago, its exposure may now be reasonably regarded as being in significant decline in terms of numbers of pending or prospective claims.

29 On 18 November 2002, CSR adopted accounting standard AASB 1044, which imposes new requirements for the determination of uncertain liabilities, and CSR has recognised pursuant thereto as an accounting provision the present value of anticipated settlement payments and legal costs arising from asbestos claims, by discounting the same at a pre-tax rate that reflects the current market assessment of the time value of money and risks specific to those liabilities. As a result, CSR has increased its product liability provision as at 1 April 2002 to $205.2 million, and as at 30 September 2000 to $333.8 million; in any event CSR has stated its belief that the asbestos litigation in the US and Australia will not have a material adverse impact on the CSR group's financial condition, results or cash flows.

30 Other provisions of relevance to the making of the orders sought by CSR pursuant to s 411(1) of the Act concern official approvals and waivers which have been granted in relation to the Scheme Booklet and the scheme of arrangement which I think should be recorded for completeness.

31 ASX has granted waivers, and in principle approvals to the waiver, of applicability of the following Listing Rules in connection with the demerger in the terms set out below:

(a) approval in principle to RGL for the waiver of Listing Rule 1.1, to the extent necessary to enable RGL to issue an information memorandum that complies with Appendix 1A of the Listing Rules (except Item 116 on condition that the Scheme Booklet contains the statement set out in Part 9.21 of the Scheme Booklet), and to permit certain parts of the Scheme Booklet to be incorporated as part of the information memorandum in relation to the listing of RGL;

(b) approval in principle to RGL for the waiver of Listing Rule 4.6 to permit RGL not to send a copy of its annual accounts for the financial year ending 31 March 2003 to shareholders, on condition that:

(i) RGL provides ASX with a copy of the instrument of relief obtained by RGL from ASIC (which is referred to in Part 9.2(d) of the Scheme Booklet) for release to the market;

(ii) RGL provides ASX with a copy of its statutory accounts for the year ending 31 March 2003 for release to the market, when such accounts have been lodged at ASIC; and

(iii) RGL makes its statutory accounts for the year ending 31 March 2003 available on its website once such accounts are lodged with ASIC, and provides a copy of such accounts to its shareholders upon request;

(c) a waiver to CSR of Listing Rule 6.23.3 to permit CSR to increase the period for exercise of options under the CSR Executive Share Option Plan, by determining that "Special Circumstances" have occurred for all option holders as a result of the proposal to demerge RGL and its subsidiaries from the CSR group. A waiver of Listing Rule 10.14 has also been granted in connection with the general operation of the CSR Employee Share Acquisition Plan and the CSR Cash Award Share Plan described in the Scheme Booklet;

(d) a waiver to CSR of Listing Rule 6.24 to relieve CSR from the requirement to comply with paragraph 1 of Appendix 6A in connection with the Scheme, to the extent necessary to allow CSR to declare the "Demerger Dividend" five business days prior to the Record Date;

(e) a waiver to CSR of Listing Rule 10.1 to the extent necessary to permit RGL to issue RGL shares under the Scheme, without shareholder approval, to any of CSR's substantial shareholders;

(f) approval in principle to RGL for a waiver of Listing Rule 10.11 to relieve RGL from any obligation to seek shareholder approval to the issue of RGL shares to its related parties (including its directors) pursuant to the Scheme; and

(g) a waiver to CSR of Listing Rule 10.17 to the extent necessary to permit CSR's existing directors' fee cap to be exceeded, on condition that the Scheme Booklet contains a statement of the maximum amount that may be paid to directors of RGL (contained in Part 9.14 of the Scheme Booklet), and approval in principle to RGL for a waiver of that Listing Rule to the extent necessary to permit RGL not to seek shareholder approval from CSR (in CSR's capacity as sole shareholder of RGL) for increase in RGL directors fees prior to the implementation of the Scheme on the condition of inclusion of the statement referred to above.

32 ASX has additionally confirmed the following to CSR and RGL:

(a) that the demerger does not require shareholder approval under Listing Rule 11.1.2 (regarding shareholder approval for a change in the nature or scale of activities of CSR as a result of the demerger);

(b) that the demerger does not require shareholders approval under Listing Rule 11.2 (relating to changes involving the main undertaking of an entity); and

(c) that Listing Rule 14.4 does not require all directors of RGL to retire and seek re-election at RGL's next annual general meeting.

33 ASIC has granted to CSR and RGL exemptions, modifications and consents set out as follows:

(a) Regulation 8302(d) of Part 3 of Schedule 8 of the Corporations Regulations requires the Scheme Booklet to disclose particulars of any payment or benefit that is proposed to be made or given to any director, secretary or executive officer of CSR or a related body corporate of CSR ("Relevant Person") as compensation for loss of office, or as consideration for or in connection with his or her retirement from office.

Pursuant to sub-regulation 5.1.01(1) of the Corporations Regulations, ASIC has allowed CSR to depart from some of those requirements. The effect of the relief granted by ASIC is said to be that:

(1) the Scheme Booklet is not required to disclose particulars of payments or benefits proposed to be made or given to a "Relevant Person" unless:

(A) the person is to lose office or retire from office as a consequence of, or in connection with, the demerger; or

(B) the amount of any payment or benefit which may be made to the "Relevant Person" upon the person's loss of office or retirement from office may be materially affected by the Scheme;

(2) the Scheme Booklet is not required to state the identity of any "Relevant Person" who will lose office or retire from office in connection with the demerger unless that person is a CSR director; and

(3) the Scheme Booklet is not required to state particulars of payments or benefits to "Relevant Persons", other than CSR directors, that would otherwise require disclosure under paragraph 9.2(a)(1) above, provided that:

(A) such payments or benefits are disclosed on an aggregate basis; and

(B) the Scheme Booklet discloses the number of such people who will receive a payment or benefit that is required to be disclosed under paragraph 9.2(a)(1), and which falls within each successive A$10,000 band, commencing at nil, where the number of such people is no less than one.

(b) Regulation 8302(h) of Part 3 of Schedule 8 of the Corporations Regulations requires the Scheme Booklet to set out whether, within the knowledge of CSR directors, the financial position of CSR has materially changed since the date of the last balance sheet laid before the company in general meeting or sent to CSR shareholders in accordance with ss 314 or 317 of the Act and, if so, full particulars of any change.

Pursuant to sub-regulation 5.1.01(1) of the Corporations Regulations, ASIC has granted CSR relief from complying with Regulation 8302(h) of Part 3 of Schedule 8 of the Corporations Regulations on the basis that:

(1) CSR has complied with Division 2 of Part 2M.3 of the Act in respect of the period ended 30 September 2002 (which relates to half yearly accounts);

(2) the Scheme Booklet states that CSR will give a copy of the documents referred to in s 302 of the Act (the half year accounts for the six months ending 30 September 2003) free of charge to anyone who asks for them before the Scheme is approved by order of the Court and will publish and maintain a copy of those documents on its website until after the Scheme Meeting;

(3) the booklet discloses any material change in CSR's financial position occurring after the reporting date of CSR's financial report for the period ended 30 September 2002 and prior to the date of the Scheme Booklet;

(4) CSR discloses by way of announcement to ASX and publishing on its website any material changes in relation to CSR's financial position that are within the knowledge of the directors of CSR and that occur after the date of the Scheme Booklet and before the Scheme is approved by the Court; and

(5) the Scheme Booklet sent to CSR shareholders is substantially in the final form given to ASIC.

(c) ASIC has given its consent for the purposes of Regulation 8205 of Part 3 to Scheme 8 of the Corporations Regulations for the inclusion in the Scheme Booklet of the investigating accountant's report and independent expert's report which contain a forecast of the profits or profitability of CSR.

(d) ASIC has granted RGL relief from the financial reporting requirement contained in Part 2M.2 of the Act to send to shareholders its financial report, directors' report and auditor's report for the financial year ending 31 March 2003 on the basis that RGL:

(1) makes such reports available on its website by no later than 30 June 2003 and notifies its members by that date of the availability of the reports on the RGL's website and their ability to request a hard copy of the reports at no cost if they desire; and

(2) distributes to its member a financial report, directors' report and auditor's report for the half year ending 30 September 2003, by 31 December 2003.

(e) ASIC has granted CSR certain exemptions in connection with the general operation of CSR ESOP and CSR ESAP described in the Scheme Booklet.

34 Specifically as to s 411(17)(b) of the Act, which provides as follows:

"The Court must not approve a compromise or arrangement under this section unless:

...

(b) there is produced to the Court a statement in writing by ASIC stating that ASIC has no objection to the compromise or arrangement;"

ASIC has by letter dated 5 February 2003 informed CSR's solicitors that its policy in relation to statements under s 411(17)(b) is that it will not provide the same until the second or confirmation Court hearing, but nevertheless has also stated in that letter as follows:

"...

However, SIC recognises that proponents of a scheme may reasonably wish for an indication of ASIC's views before committing to the expense of calling a meeting and printing the scheme documentation.

Therefore I advise you that ASIC does not currently propose to appear to make submissions, or intervene to oppose the demerger of Rinker Group Limited (ACN 003 43 118) from CSR Limited (ACN 000 001 276) by way of Scheme of Arrangement, at the first hearing. This current intentions based on the information provided by the applicant to date in relation to whether the scheme has been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Corporations Act 2001. ASIC's position is liable to be changed if ASIC considers it appropriate.

..."

35 In my opinion, the applicant has satisfied the principles enunciated in the authorities earlier reviewed, and the applicable rules and requirements for exercise of the court's authority conferred by virtue of the Act. All material information as required by the Act and Regulations has been, in my opinion, provided to the Court, and the same is set out clearly and comprehensively in the Scheme Booklet, and the scheme of arrangement in particular for CSR's shareholders.

I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Conti.

Associate:

Dated: 14 February 2003

Counsel for the Applicant:	T F Bathurst QC
Solicitor for the Applicant:	Freehills
Date of Hearing:	7 February 2003
Date of Judgment:	7 February 2003