MEDIBANK PRIVATE SALE BILL 2006 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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MEDIBANK PRIVATE SALE BILL 2006

2004-2005-2006 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA HOUSE OF REPRESENTATIVES Medibank Private Sale Bill 2006 EXPLANATORY MEMORANDUM (Circulated by authority of the Minister for Finance and Administration)

Medibank Private Sale Bill 2006 General outline 1. The Commonwealth at present owns Medibank Private Limited, a public company that operates the Medibank Private health benefits fund (Medibank Private Fund). 2. There is no sound policy reason, nor market failure reason, for the Commonwealth to continue to own a health insurance business. 3. The Medibank Private Sale Bill 2006 (the Bill) will authorise and facilitate the sale of the Commonwealth's equity in Medibank Private Limited, to achieve the sale objectives set out on page 2, in the context of a wider process of health insurance industry reform being undertaken by the Australian Government. The Bill gives the Commonwealth the flexibility to use a wide range of approaches to sell its equity in Medibank Private Limited. For example, the sale may involve the formation and sale of a Commonwealth-owned holding company which has taken ownership of the shares in Medibank Private Limited. 4. For the Commonwealth to achieve the sale objectives, it is necessary for Medibank Private Limited, which is currently conducted on a "not for profit" basis, to convert so that it can be conducted on a "for profit" basis. The Bill provides a mechanism for this conversion. 5. The Bill also sets out a range of provisions relating to the conduct of the sale, including providing for exemptions from the Corporations Act 2001 and other legislation. It also imposes restrictions to ensure that, for a period of 5 years following the sale, Medibank Private Limited remains an Australian company and that neither it nor, if there is a holding company, the holding company, is broken up. 6. Economic modelling has found that a privately-owned Medibank Private Limited would become more efficient. This will come through lower management expenses and also through an increased ability to expand into other business areas--such as other forms of insurance and other financial products--and through this expanded business, be a more efficient operation. More efficient operations will help restrain premium growth for the benefit of the contributors to the Medibank Private Fund.

Medibank Private Sale Bill 2006 Explanatory Memorandum Commonwealth objectives for the sale 7. The sale of the Commonwealth's equity in Medibank Private Limited will also reduce the administrative requirements that Medibank Private Limited has because of its status as a Government Business Enterprise and enable it to compete on a more equal basis with other major private health insurers, which are not subject to these obligations. 8. Importantly, the Bill does not affect the obligations of Medibank Private Limited to comply with the capital adequacy and solvency standards under the National Health Act 1953, or the other obligations Medibank Private Limited has under that Act as a registered health benefits organization. 9. On 12 September 2006, the Government announced its intention to sell Medibank Private Limited by a share marked float in 2008. 10. The Department of Finance and Administration will manage the sale process. Commonwealth objectives for the sale 11. The Commonwealth's objectives for the sale of Medibank Private Limited are: (a) to contribute to an efficient, competitive and viable private health insurance industry; (b) to maintain service and quality levels for Medibank Private contributors, including in regional and rural Australia; (c) to ensure the sale process treats Medibank Private Limited employees in a fair manner, including through the preservation of accrued entitlements; (d) to minimise any post sale residual risk and liabilities to the Commonwealth; and (e) having regard to the above objectives, to maximise the net sale proceeds from the sale. page 2

Medibank Private Sale Bill 2006 Explanatory Memorandum Background to the sale Background to the sale Medibank Private Limited and the Medibank Private Fund 12. Medibank Private Limited is a public company limited by shares registered under the Corporations Act 2001. In this respect it is no different to any other public company trading in Australia today. 13. Medibank Private Limited operates, as its only business, a health benefits fund, the Medibank Private Fund, offering health insurance policies. These policies give policy holders (called "contributors") a range of insurance covers against the risk that they will have to pay for health services. In this sense, Medibank Private Limited is just like any other insurer--except that Medibank Private Limited will insure the risk of health expenditure, while other insurers will insure against loss or damage to contributors cars, homes, or businesses. 14. To buy insurance from Medibank Private Limited, just like buying insurance from any other insurer, a contributor pays a premium. Medibank Private Limited invests these premiums, generating surplus that is used to make payouts as contributors make claims under their policies. The premiums and investments form the assets comprising the Medibank Private Fund. 15. All insurers are subject to prudential regulation, designed to ensure that the insurers remain at all times able to meet the expected level of claims that will be made under the insurance policies they issue. Health insurers are prudentially supervised and regulated by the Private Health Insurance Administration Council. Among other things, health insurers--including Medibank Private Limited--must at all times comply with prudential standards made by the Council--a "solvency" standard, and a "capital adequacy" standard. Can the Commonwealth sell the equity in Medibank Private Limited? 16. At present there are 85,000,100 shares in Medibank Private Limited on issue. Since 1997, those shares have been vested legally and beneficially in the Commonwealth. This means that the Commonwealth owns Medibank Private Limited. page 3

Medibank Private Sale Bill 2006 Explanatory Memorandum Background to the sale 17. At present, section 35 of the Health Insurance Commission (Reform and Separation of Functions) Act 1997 prevents the Commonwealth from selling its equity in Medibank Private Limited. Schedule 1 item 3 of the Bill repeals section 35. When that repeal is effected, the Commonwealth will be able to sell its equity in Medibank Private Limited. Who owns the assets of the Medibank Private Fund? 18. The Medibank Private Fund consists of premiums paid by contributors to Medibank Private Limited, and assets built up by Medibank Private Limited by its investment of those premiums. When a contributor pays premiums to Medibank Private Limited, the contributor buys health insurance cover under the terms of the insurance contract that Medibank Private Limited offers. The contributor does not keep any sort of ownership of the premiums he or she pays. Because of this, contributors do not have any sort of ownership of the assets Medibank Private Limited has built up by investing those premiums. Those assets all belong to Medibank Private Limited. 19. The assets comprising the Medibank Private Fund do not belong to contributors. Nor do they belong to the Commonwealth. Although the Commonwealth owns Medibank Private Limited, it is a well established principle of law that the shareholder of a company does not own the assets of the company. The company is a separate legal person from the shareholder, and it is the company (in this case, Medibank Private Limited) that owns the assets comprising the Medibank Private Fund. Do contributors to the Medibank Private Fund have any rights to the assets of the Medibank Private Fund? 20. No. Contributors to the Medibank Private Fund are also called members of the Fund. They are described this way, for example, in the Rules of the Medibank Private Fund, made by Medibank Private Limited. These Rules form part of the insurance policies that Medibank Private Limited issues. But "membership" of the Medibank Private Fund does not give contributors any rights over any assets. There is nothing in the Rules or the National Health Act 19531 that says that contributors have any rights over the assets comprising the Medibank Private Fund. What 1 The Act that regulates health insurers and health insurance. page 4

Medibank Private Sale Bill 2006 Explanatory Memorandum Background to the sale contributors have is a right to have their insurance policies honoured when they make claims. The assets in the Medibank Private Fund are used to honour those claims. 21. Some health insurers (not Medibank Private Limited) are what are called "mutual funds". In these funds, when you take out a health insurance policy, you are, explicitly, also buying an interest in the assets owned by the health insurer--the premiums and the assets they have been invested in. As well as being an insured under a health insurance policy, the contributor also becomes a part owner of the health insurer itself. The rules of these health insurers' funds make this very clear. This is not the case with Medibank Private Limited. At present Medibank Private Limited has approximately 3 million contributors, but only one shareholder. 22. Medibank Private Limited does not in any sense hold the assets comprising the Medibank Private Fund in trust for contributors. Nothing in the way the Fund was established shows that there was any intention to establish a trust, which is an essential requirement for a trust. There are a limited number of circumstances where the law will impose a trust on assets, even where there was no express intention to create a trust, but none of those circumstances exist in the case of the Medibank Private Fund. 23. There is no legal procedure under which a contributor to the Medibank Private Fund could compel Medibank Private Limited to apply any of the assets comprising the Fund in a particular way. Contributors would need to have ownership rights in any of these assets, to form the basis for such a claim. It is sometimes suggested that contributors have the "right" to have assets of the Fund used to provide other benefits (beyond what Medibank Private Limited already provides through policies), to keep premiums at their current rates or even reduce them. Again, as contributors have no ownership rights in any of the Fund assets, and there is nothing in the Fund Rules or the insurance contracts that gives contributors these rights, there is no legal procedure that contributors could use to require Medibank Private Limited to use Fund assets in any of these ways. This emphasises that contributors have no legal rights to have Fund assets used or applied in any particular way. 24. Under the National Health Act 1953 health insurers such as Medibank Private Limited have a number of obligations relating to the assets that comprise their health insurance funds. For example, the Act says that page 5

Medibank Private Sale Bill 2006 Explanatory Memorandum Background to the sale these assets can only be applied in limited ways--chiefly, by paying out claims and running the health insurance business.2 It also says that health insurers must, when dealing with these assets, "give priority to the interests of contributors".3 But these provisions of the National Health Act 1953 do not mean that contributors own the assets comprising the fund, or have any rights in relation to those assets-- other than the "right" to have the health insurer comply with its obligations to pay claims and observe the law. Do contributors have any right to have Medibank Private Limited remain a "not for profit" company? 25. No. Medibank Private Limited is operated on a "not for profit" basis at present because: (a) its constitution prevents it from paying dividends, or returning capital, to its shareholder; and (b) the Rules of the Medibank Private Fund (which form part of the health insurance policies that Medibank Private Limited offers) include clauses saying (essentially) that Medibank Private Limited will only use the assets of the Fund to pay claims and run the Fund. 26. Each of these can be changed. Medibank Private Limited's constitution can be changed (under the Corporations Act 2001) by a special resolution of Medibank Private Limited's shareholder--the Commonwealth. Medibank Private Limited can change the Fund Rules by following the procedure set out in the Fund Rules themselves and, if the change is one to which the National Health Act 1953 applies,4 complying with that Act. Schedule 2 Part 3 of the Bill makes further special provision for these changes.5 It requires at least 60 days notice of these changes to contributors, so that any contributor who wishes to can take out health insurance with another health insurer. 2 National Health Act 1953 section 73AAD. 3 National Health Act 1953 section 73AAC(2). 4 See National Health Act 1953 section 78 which provides that the Secretary of the Department of Health and Ageing must be notified of certain changes listed in that section, and that certain changes can be disallowed. 5 See paragraphs 114 and following, below. page 6

Medibank Private Sale Bill 2006 Explanatory Memorandum Background to the sale 27. When Medibank Private Limited becomes a "for profit" company, it will be able to pay dividends or return capital to its shareholders. This includes using the surpluses already built up in the Medibank Private Fund.6 This will not affect the interests of contributors. Medibank Private Limited will still have to comply with its prudential obligations, including the capital adequacy and solvency standards discussed at paragraph 15 above, to help ensure that it can meet claims under policies as they are made. Because contributors do not have any ownership rights in the assets comprising the Medibank Private Fund, and do not have any other rights in respect of the Fund, their position under a "for profit" Medibank Private Limited will, if they choose to remain with the Medibank Private Fund, be the same as it was while Medibank Private Limited was operated on a "not for profit" basis. Are the contributors to the Medibank Private Fund entitled to any compensation from the sale of the Commonwealth's equity in Medibank Private Limited? 28. No. There is no basis on which contributors could claim compensation from the Commonwealth from the sale of the Commonwealth's equity in Medibank Private Limited. 29. As contributors do not have any property rights (such as ownership) of the assets comprising the Medibank Private Fund, they will not lose anything when the Commonwealth sells its equity in Medibank Private Limited. The Fund assets will still be owned by Medibank Private Limited, their insurance contracts with Medibank Private Limited will still be in force (if they choose to remain contributors) and Medibank Private Limited's obligation to meet all the prudential requirements and safeguards under the National Health Act 1953 will still apply. Of course, if Medibank Private Limited does not meet its obligations to contributors under its health insurance policies, Medibank Private Limited may have to pay compensation to affected contributors. 6 See Schedule 1, items 5 and 6. page 7

Medibank Private Sale Bill 2006 Explanatory Memorandum Financial impact Financial impact 30. The full financial costs and benefits from a future sale or sales of the Commonwealth's equity in Medibank Private Limited are difficult to quantify at this stage. 31. Actual sale proceeds and costs are dependent on a number of future variables, including: (a) overall market conditions; (b) the level of interest from private purchasers in acquiring Medibank Private Limited; (c) the level of demand for Medibank Private Limited shares; and (d) the implementation of regulatory changes for the industry. 32. In particular, the costs of conducting a sale are dependent on the structure and size of a sale. For example, an initial public offering on a stock exchange, as has been announced by the Government, could be expected to be a complex undertaking with a large number of service providers. 33. Costs and benefits from the sale are also difficult to quantify at this stage. Currently, the Commonwealth derives no revenue from Medibank Private Limited. In July 2004, the Commonwealth was required to make a capital injection of $85 million to assist the company to consolidate a capital structure more consistent with industry practice. Since that time, Medibank Private Limited has improved its financial position, and reported retained earnings of $763.2 million as at 30 June 2006. The amount raised on the sale of Medibank Private Limited would be dependent on the sale processes, buyer/investor demand and market circumstances at the time. 34. The Australian Government, as a result of the sale of Medibank Private Limited, has also decided to increase funding for medical research. 35. The impact of the Bill on the operations of businesses other than Medibank Private Limited would largely be indirect. Certain sectors of the business community may be affected by the provision of page 8

Medibank Private Sale Bill 2006 Explanatory Memorandum Financial impact opportunities to be involved in the sale process. The business sector generally may benefit indirectly from the further widening of share ownership in Australia through a listing on the Australian Stock Exchange. 36. The scale of the proposed capital raising, if an initial public offering is conducted, will be small relative to the scale of the Australian equity markets. This may lead to some effects on contemporary capital raising by other firms. These factors will be addressed further when planning a specific sale scheme. 37. None of these impacts are easily quantifiable. However, it is difficult to see that the Bill would have any material adverse impact on the business sector. page 9

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Clause 1 --Short title Notes on individual provisions Clause 1 --Short title 38. Clause 1 provides that the Bill, when enacted, may be cited as the Medibank Private Sale Act 2006. Clause 2 --Commencement 39. Clause 2 provides that various provisions of the Bill, when enacted, will commence on specified days or times. 40. Under items 1 and 2 in the table under subclause 2(1), clauses 1 to 4 of the Bill will commence the day after Royal Assent, as will Schedules 1 and 2. Under item 3 in the table under subclause 2(1), Schedule 3 will commence on the designated sale day.7 Clause 3--Designated sale day 41. A number of Acts apply to or in relation to Medibank Private Limited (they are dealt with in Schedule 3). It is not appropriate that they continue to apply after the sale of Medibank Private Limited has been finalised. The designated sale day declaration will provide certainty as to the date when those Acts cease to apply to Medibank Private Limited. It also provides the starting date for the 5 year period within which Schedule 2 Parts 4, 5 and 6 will apply and the 12 month period during which Schedule 2 item 57 will apply. 42. Clause 3 requires the Minister to fix the designated sale day for Medibank Private. It is the day that is, in his opinion, is the first day after all the shares in Medibank Private Limited cease to be held by the Commonwealth or a wholly-owned Commonwealth company (as defined in Schedule 2 item 5). 7 Schedule 1 amends the Health Insurance Commission (Reform and Separation of Functions) Act 1997 and the National Health Act 1953. Schedule 2 provides for the sale of the Commonwealth's equity in Medibank Private. Schedule 3 makes consequential amendments to several Acts, which will come into effect when the sale of the Commonwealth's equity in Medibank Private has been finalised. page 10

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Clause 3--Designated sale day 43. Under a number of potential sale models the Commonwealth may enter into sale-scheme hybrid securities arrangements or securities lending arrangements. In some cases these may involve the Commonwealth having an obligation to retain shares or reacquire shares it has disposed of. Because of this, the Minister will be in the best position to make an assessment of when the sale of the Commonwealth shares has been completed. 44. Although the declaration of the designated sale day is a legislative instrument under the Legislative Instruments Act 2003, subclause 3(3) provides that the declaration will not be disallowable. Because the Minister will be in the best position to make an assessment of when the sale of the Commonwealth's shares has been completed, it is not appropriate that the Minister's declaration be subject to Parliamentary disallowance. 45. The designated sale day may be earlier than the day on which the declaration is registered under the Legislative Instruments Act 2003 (subclause 3(4)). The Legislative Instruments Act 2003 section 12(2) and (3) provide that (subject to a contrary provision for commencement in the enabling legislation) a legislative instrument has no effect if it would take effect before the date it is registered under that Act and as a result: (a) a person's rights as at the date of registration would be affected to his or her disadvantage; or (b) a person would incur a liability in respect of anything done or omitted to be done before the date of registration. 46. Rights and liabilities of the Commonwealth and Commonwealth authorities are not covered by section 12(2) and (3) of the Legislative Instruments Act 2003. 47. While there is no intention that the Minister's declaration of the designated sale day will have such a result, subclause 3(4) avoids arguments based on the Legislative Instruments Act 2003 section 12(2) or (3) that may prejudice achievement of the Commonwealth's sale objectives. 48. Subclause 3(5) defines "Medibank Private", "Minister" and "wholly- owned Commonwealth company". page 11

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Clause 4 --Schedule(s) Clause 4 --Schedule(s) 49. Clause 4 provides for the making of the amendments to the Acts specified in the Schedules in accordance with the items in the Schedules and for the other items in the Schedules to have effect according to their terms. Schedule 1��Amendments commencing on the day after Royal Assent Part 1--Sale of the Commonwealth's equity in Medibank Private Limited Schedule 1 item 1 --Health Insurance Commission (Reform and Separation of Functions) Act 1997 section 3 50. Part 2 of the Health Insurance Commission (Reform and Separation of Functions) Act 1997 provides for the transfer of the Medibank Private Fund from the Health Insurance Commission to Medibank Private Limited. Section 3 of that Act contains a simplified outline of Part 2. Schedule 1 item 1 amends the simplified outline consequentially on the repeal of section 35 of that Act by Schedule 1 item 3. Schedule 1 item 2 --Health Insurance Commission (Reform and Separation of Functions) Act 1997 section 34 51. Section 34 of the Health Insurance Commission (Reform and Separation of Functions) Act 1997 provides for Ministerial declarations as to matters concerned with the transfer of the Medibank Private Fund from the Health Insurance Commission to Medibank Private Limited. Schedule 1 item 2 amends section 34 by adding new subclauses 34(7) and (8), which confirm that section 34 does not prevent or limit the formulation, entering into, or carrying out, of a Medibank Private sale scheme (defined in Schedule 2 item 5). Schedule 1 item 3 --Health Insurance Commission (Reform and Separation of Functions) Act 1997 section 35 52. Section 35 of the Health Insurance Commission (Reform and Separation of Functions) Act 1997 prohibits, in effect, the Commonwealth transferring its shares in Medibank Private Limited. Schedule 1 item 3 repeals section 35. This is necessary to enable the Commonwealth to sell its equity in Medibank Private Limited. Once page 12

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 1 Part 2 --Other amendments section 35 is repealed, the Commonwealth will be able to sell its equity in Medibank Private Limited. The method of sale will depend on prevailing market conditions. Schedule 1 Part 2 --Other amendments Overview 53. An integral part of the sale of Medibank Private Limited is its conversion from a company conducted on a "not for profit" basis to one conducted on a "for profit" basis. This is expressly provided for in Schedule 2 items 5 and 20. Schedule 1 Part 2 of the Bill clarifies certain aspects of the circumstances in which registered organizations under the National Health Act 1953 Part VI8 can pay dividends, and return capital, from profits generated by their health benefits funds to the owners of the registered organizations. 54. These amendments will apply to Medibank Private Limited when it converts to a company conducted on a "for profit" basis (in addition to amendments provided for in Schedule 2 Part 3). They will also apply to other registered organizations conducted on a "for profit" basis. Schedule 1 item 4--National Health Act 1953 section 68 55. The National Health Act 1953 section 68 deals with applications for registration by organizations that want to conduct health insurance businesses. Subsection 68(3) makes it clear that organizations conducted on a "for profit" basis may apply for registration. Schedule 1 item 4 amends this provision consistently with the amendments to be made to section 73AAD(2)(d) of the National Health Act 1953 (made by Schedule 1 item 5, below). Schedule 1 items 5 and 6--National Health Act 1953 section 73AAD 56. The National Health Act 1953 section 73AAD sets out the purposes for which assets of a health benefits fund can be applied. Paragraph 73AAD(2)(d) specifically allows organizations that have been "established for profit" to distribute profits generated by the conduct of 8 This covers the registration, operation and supervision of organisations operating health benefits funds. page 13

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 1 item 7--National Health Act 1953 new section 73AADA the health insurance business to shareholders in the organization. The provision arguably may not cover organizations that are established on a "not for profit" basis but change to being conducted on a "for profit" basis. Medibank Private Limited would be such an organization. 57. Schedule 1 item 5 amends paragraph 73AAD(2)(d) to remove that unnecessary restriction for all registered organizations conducted on a "for profit" basis. In addition, it clarifies that, for the purposes of paragraph 73AAD(2)(d), profits can be returned to shareholders by a return of capital, rather than by way of dividend. 58. Schedule 1 item 6 also amends section 73AAD of the National Health Act 1953 by adding proposed subsection 73AAD(3). The purpose of this provision is to ensure that profits covered by proposed subparagraph 73AAD(2)(d)(i) include profits generated when the organization was operating on a "not for profit" basis. As with amended paragraph 73AAD(2)(d), new subsection 73AAD(3) will apply to all registered organization conducted on a "for profit" basis. Schedule 1 item 7--National Health Act 1953 new section 73AADA 59. Schedule 1 item 7 inserts new section 73AADA into the National Health Act 1953. For the reasons discussed at paragraphs 25 to 27 above, it is unlikely that paragraph 73AAD(2)(d) or new subsection 73AAD(3) will result in an acquisition of a person's property. Nevertheless, to avoid doubt, new section 73AADA provides a "constitutional safety net" ensuring that, if the operation of paragraph 73AAD(2)(d) or new subsection 73AAD(3) does have such a result, the registered organization concerned is liable to compensate the person. This compensation obligation will not apply if Commonwealth is liable to pay compensation under Schedule 2 item 58(3) (which covers the case where a payment of dividend to the Commonwealth, or a similar action, gives rise to an acquisition of property). 60. Subsections 73AADA(3) and (4) provide that the registered organization is able to make a payment (or a decision to make a payment) from its health benefits fund to pay compensation under new section 73AADA without contravening sections 73AAC or 73AAD of the National Health Act 1953. page 14

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2--Facilitation of sale of Commonwealth's equity in Medibank Private etc Schedule 2--Facilitation of sale of Commonwealth's equity in Medibank Private etc 61. Schedule 2 includes provisions that facilitate the sale of the Commonwealth's equity in Medibank Private Limited. It does not restrict the method or timing of the sale. It deals with a range of mechanisms that may be involved in a Medibank Private sale scheme to help ensure that the Commonwealth's sale objectives9 are achieved. Schedule 2 Part 1--Introduction Schedule 2 items 1 and 2--Definitions 62. Schedule 2 item 1 defines a number of expressions used in Schedule 2. These expressions are explained in more detail when the relevant item in the Bill is discussed. 63. Schedule 2 item 2 defines "designated company" as a wholly-owned Commonwealth company or a body corporate specified in a written declaration by the Minister. Schedule 2 subitem 2(2) provides that a declaration specifying a body corporate for the definition of "designated company" is not a legislative instrument for the purposes of the Legislative Instrument Act 2003. Such a declaration is administrative in character, and therefore a declaration under Schedule 2 item 2 is no more than declaratory of the existing law. Schedule 2 item 3--External Territories 64. Schedule 2 item 3 ensures that the Bill extends to all of the external Territories, such as the Territory of Heard and McDonald Islands. Schedule 2 item 4--Crown to be bound 65. Schedule 2 item 4 ensures that the Crown in all its capacities is bound by the Bill. 9 Set out on page 2. page 15

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 Part 2--Medibank Private sale scheme Schedule 2 Part 2--Medibank Private sale scheme Holding companies and Medibank Private companies 66. To obtain the best value for money for the Commonwealth on the sale of its equity in Medibank Private Limited, it may be desirable to create a holding company to hold Medibank Private Limited shares and offer shares in the holding company, rather than in Medibank Private Limited, for sale. For this reason, Schedule 2 Part 2 expressly addresses this option, through the concept of a "holding company", defined as a wholly-owned Commonwealth company to which the Commonwealth transfers Medibank Private Limited shares (Schedule 2 subparagraph 5(2)(b)(i)). A "wholly-owned Commonwealth company" is itself defined as a company that the Commonwealth controls and in which it owns all the shares (ignoring any sale-scheme hybrid securities issued by the company, to take account of the fact that the hybrid-security issuer company will be able to issue shares in itself that are redeemable in exchange for, exchanged for, or convertible to shares in a Medibank Private company) (Schedule 2 item 1).10 67. Accordingly, Schedule 2 item 1 defines "Medibank Private company" as Medibank Private Limited itself or a holding company. Schedule 2 item 5--Medibank Private sale scheme 68. One object of Schedule 2 item 5 is to define "Medibank Private sale scheme" (Schedule 2 subitem 5(1)). 69. The concept of the Medibank Private sale scheme is central to the operation of Schedule 2.For example, the authorisation for borrowing in Schedule 2 item 711 and the arrangements for requiring and giving assistance in Schedule 2 item 9 all operate in the context of formulating, entering into and carrying out a Medibank Private sale scheme. 70. A "Medibank Private sale scheme" is a scheme the object of which is the transfer of all the Commonwealth's equity in Medibank Private 10 See Commonwealth Authorities and Companies Act 1997 section 34. 11 Borrowing by the Commonwealth or Medibank Private may be necessary in connection with some elements of an initial public offer of shares under a prospectus. page 16

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 5--Medibank Private sale scheme Limited (Schedule 2 subitem 5(2)). "Scheme" is defined in the widest possible way (Schedule 2 item 1), so "Medibank Private sale scheme" has a very broad and flexible meaning, encompassing all the actions that will be necessary or desirable to carry out the sale of the Commonwealth's equity in Medibank Private Limited. This is further emphasised by: (a) Schedule 2 subitem 5(8), which provides that the other provisions of Schedule 2 item 5 that list specific matters that a Medibank Private sale scheme may involve do not limit the broad meaning of the expression; and (b) Schedule 2 subitem 5(7), which provides that, in deciding whether a scheme is a Medibank Private sale scheme, the economic effect of the scheme must be considered. 71. Schedule 2 subitem 5(6) sets out a number of detailed matters that may be involved in a Medibank Private sale scheme. The detailed matters include the following: (a) converting Medibank Private Limited to a company conducted on a "for profit" basis; this will be necessary to obtain buyer interest from the private sector and for any listing on a stock exchange (Schedule 2 paragraphs 5(6)(j), (k)); (b) the issue of securities12 by a Medibank Private company, share transfers, cancellations and buybacks and redemptions of redeemable preference shares held by the Commonwealth (Schedule 2 paragraphs 5(6)(a), (b), (f), (g), (h) and (i)); (c) Medibank Private companies paying dividends, reducing their share capital or returning capital (Schedule 2 paragraphs 5(6)(c), (d) and (e)); (d) the use of sale-scheme hybrid securities and Commonwealth guarantees in relation to them (Schedule 2 paragraphs 5(6)(l), (m) and (n)); 12 Defined by reference to the wide definition in the Corporations Act 2001, and including shares and debentures. page 17

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 6--Sale-scheme hybrid securities (e) securities lending arrangements (Schedule 2 paragraph 5(6)(o)); (f) modifying Medibank Private companies' constitutions (including, in the case of Medibank Private Limited, to provide for the company to be conducted on a "for profit" basis) and the fund rules (Schedule 2 paragraphs 5(6)(j) and(k)); (g) employing market stabilisation measures (Schedule 2 paragraph 5(6)(p)). 72. Schedule 2 subitems 5(4) and (5) enable the Minister to make a written determination setting out rules that are to be complied with by a Medibank Private sale scheme.13 The Minister's determination will be a legislative instrument for the purposes of the Legislative Instruments Act 2003. However, the determination will not be disallowable (Schedule 2 subitem 5(5)) because: (a) the determination is, in effect, a direction to Medibank Private companies (and therefore exempt from disallowance under item 41 of the table in subsection 44(2) of the Legislative Instruments Act 2003); or (b) the determination will deal with action to be taken by the Commonwealth itself; and because it will be important for potential investors and others involved to have commercial certainty in connection with a Medibank Private sale scheme. Schedule 2 item 6--Sale-scheme hybrid securities 73. The ability to issue hybrid securities as part of a Medibank Private sale scheme will provide additional flexibility in the structuring of such a scheme. Hybrid securities are a broad classification for a group of securities that combine both debt and equity characteristics. The additional characteristics, compared to ordinary equity, make these securities attractive to additional groups of investors. Accessing all relevant investor groups may be an important factor in ensuring that the 13 The Minister may vary or revoke such a determination at any time: Acts Interpretation Act 1901 subsection 33(3). page 18

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 6--Sale-scheme hybrid securities Commonwealth's sale objectives14 are met. Typically, a hybrid security will be capable of exchange, redemption for or conversion into the underlying Medibank Private company share or shares at a specified future date. For these purposes, "sale scheme hybrid securities" includes financial products.15 74. Schedule 2 item 6 broadly defines a "sale-scheme hybrid security" as: (a) an interest-bearing security issued on the basis that it will or may be exchanged, redeemed in exchange for or converted to a share or shares in a Medibank Private company; (b) a share (in another company--the hybrid-security issuer company (see Schedule 2 item 5(6)(n)) issued on the basis that it will or may be redeemed in exchange for or converted to a share or shares in a Medibank Private company; (c) any other security or financial product issued on the basis that it will or may be exchanged, redeemed in exchange for, or converted to, a share or shares in a Medibank Private company; (d) an option to acquire a share or shares in a Medibank Private company; or (e) a security, or a financial product, that is specified in a written declaration made by the Minister and relates directly or indirectly to a Medibank Private company. 75. A declaration by the Minister under Schedule 2 paragraph 6(1)(i) will, under Schedule 2 subitem 6(7), be a legislative instrument, but not a disallowable instrument, for the purposes of the Legislative Instruments Act 2003. The declaration is required to maintain flexibility for the Commonwealth to determine the offer structure, at the appropriate time, taking into account relevant commercial issues. Accordingly, it is important that the declaration not be a disallowable instrument to avoid unnecessary timetable delays and associated potential loss of buyer interest and sale value. 14 Set out on page 2. 15 Defined in the same way as in the Corporations Act 2001: see paragraph 78 below. page 19

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 6--Sale-scheme hybrid securities 76. Under Schedule 2 subitem 6(8), "security" is defined, for the purposes of Schedule 2 subitem 6, by reference to Chapter 7 of the Corporations Act 2001, where it means:16 (a) a share in or a debenture of a body; (b) a legal or equitable right or interest in such a share or debenture; (c) an option to acquire, by way of issue, either of these. 77. It does not include an excluded security. 78. Under Schedule 2 item 1, "financial product" is defined by reference to Chapter 7 of the Corporations Act 2001. Under Division 3 of Part 7.1 of the Corporations Act 2001, "financial product" is a broad concept, and includes any arrangement through which, or through the acquisition of which, a person makes a financial investment, manages financial risk or makes non-cash payments. 79. Further to the provisions outlined in paragraphs 73 to 78 above, detailed provisions about sale-scheme hybrid securities include the following. (a) The references to securities, shares or financial products that "will be redeemed" in exchange for a share or shares in a Medibank Private company, "will be converted to" or "will be exchanged for" a share in a Medibank Private company, are references to an issue of the security, share or financial product on the basis that redemption, conversion or exchange will be mandatory (by either the holder or the issuer) after a specified period. (b) The references to securities, shares or financial products that "may be redeemed" in exchange for a share or shares in a Medibank Private company, "may be converted to" or "may be exchanged for" a share in a Medibank Private company are references to an issue of the security, share or financial product on the basis that redemption or conversion will be optional (by either the holder or issuer) after a specified period. 16 Section 761A of the Corporations Act 2001. page 20

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 7--Borrowing for sale scheme hybrid securities (c) A security or financial product mentioned in Schedule 2 item 6 may, but need not, include a charge, lien or pledge (Schedule 2 subitem 6(2)). "Charge" is defined in Schedule 2 item 1 by reference to the Corporations Act 2001, which, in section 9, defines it as a charge created in any way, including a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise. (d) The following may be issued in Australia or overseas and may be denominated in Australian or foreign currency (Schedule 2 subitems 6(3), (4), (5) and (6)): (i) interest-bearing securities issued on the basis that they will or may be redeemed in exchange for or converted to, or will or may be exchanged for, a share or shares in a Medibank Private company; (ii) options to acquire shares in a Medibank Private company, and shares redeemable in exchange for shares in a Medibank Private company; (iii) non-interest bearing securities or financial products redeemable in exchange for, or that may be exchanged for, or be convertible to, shares in a Medibank Private company, or a security or financial product specified in a Ministerial declaration under Schedule 2 paragraph 6(1)(i)). (e) The Commonwealth may give a guarantee of the obligations of a hybrid-security issuer company in relation to sale-scheme hybrid securities (for example, obligations to make payments of interest or dividends or other non-monetary obligations) (Schedule 2 paragraph 5(n)). Schedule 2 item 7--Borrowing for sale scheme hybrid securities 80. The Financial Management and Accountability Act 1997 section 37 provides that an agreement for the borrowing of money by the Commonwealth is of no effect unless the borrowing is authorised by an Act. The use of sale-scheme hybrid securities in a Medibank Private sale scheme may involve the Commonwealth (as selling shareholder) page 21

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 8--Appropriation--costs of Medibank Private sale scheme entering into borrowing arrangements. Schedule 2 item 7 provides the necessary legislative authority for such a borrowing. Schedule 2 item 8--Appropriation--costs of Medibank Private sale scheme 81. Schedule 2 item 8 appropriates the Consolidated Revenue Fund to the extent necessary to pay or meet the costs, expenses and other obligations incurred by the Commonwealth in connection with formulating, entering into or carrying out a Medibank Private sale scheme. Schedule 2 subitem 8(2) is an indicative list of these expenses. Schedule 2 items 9 and 10--Assistance in connection with a Medibank Private sale scheme 82. Schedule 2 subitems 9(1) and (2) provide that a Medibank Private company, or a member of the Board of a Medibank Private company, may, on their own initiative, assist the Commonwealth in connection with formulating, entering into or carrying out a Medibank Private sale scheme. These are standard provisions which are generally included in legislation relating to the sale of Commonwealth assets. 83. It is intended that, as part of the sale process, the Commonwealth will give certain immunities to the directors of Medibank Private companies and the companies themselves in relation to this assistance (the immunities are discussed in paragraph 86 below).17 Schedule 2 subitems 9(3) and (4) confer power on the Minister to issue directions about this voluntary assistance and provide a mechanism to manage the application of these immunities. 84. Schedule 2 subitems 9(5) and (6) provide that the Minister may request specific assistance from a Medibank Private company, or a Board member of a Medibank Private company, in connection with formulating, entering into or carrying out a Medibank Private sale scheme. The assistance must be given as requested. 17 Generally speaking, the Corporations Act 2001 does not impose duties on employees of Medibank Private companies as employees and therefore it is not necessary to make special provision for them in this respect. page 22

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 items 9 and 10--Assistance in connection with a Medibank Private sale scheme 85. Assistance may be provided under Schedule 2 item 9 "in connection with the formulation, entering into, or carrying out, of a Medibank Private sale scheme". The words "in connection with" have typically been given a wide interpretation. It is intended that Schedule 2 subitems 9(1), (2), (5) and (6) include the giving of assistance in relation to matters that are preparatory for and incidental to a Medibank Private sale scheme as well as matters more directly related to a Medibank Private sale scheme. 86. As mentioned in paragraph 83 above, Schedule 2 item 9 provides various immunities where assistance is provided by a director of a Medibank Private company, or by the company itself (including through employees) under Schedule 2 subitems 9(1), (2), (5) and (6), where a direction is issued under Schedule 2 subitems 9(3) or (4) or where a request made under Schedule 2 subitems 9(5) or (6) (Schedule 2 subitem 9(7))). Assistance provided in compliance with a direction issued under Schedule 2 subitems 9(3) or (4) is not referred to in Schedule 2 subitem 9(7). However, given that a direction under those subitems relates to assistance provided under Schedule 2 subitem 9(1) or (2), compliance with a request would attract the immunity granted in Schedule 2 subitem 9(7) in relation to Schedule 2 subitems 9(1) or (2). 87. Schedule 2 subitems 10(1), (2) and (6) make it clear that assistance can be given outside Australia and that it can take a number of forms, including:: (a) providing facilities and information in connection with due diligence procedure or similar processes or marketing briefings (including through employees of the Medibank Private company). The use of the singular "market briefing", "procedure" and "process" in Schedule 2 paragraph 10(1)(d) will not restrict the Commonwealth to only one briefing, procedure or process; (b) giving information; and (c) giving financial assistance, or giving a financial benefit to a related party.18 18 Part 2J.3 of the Corporations Act 2001 defines "financial assistance". Chapter 2E of the Corporations Act 2001 regulates in what circumstances a corporation may give a financial benefit to a related party. page 23

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 items 9 and 10--Assistance in connection with a Medibank Private sale scheme 88. This list does not limit the forms of assistance that may be given (Schedule 2 subitem 10(2)). Requirements to give assistance, however, must not to amount to imposing taxation (Schedule 2 subitem 10(4)). 89. Schedule 2 item 9 does not limit the Commonwealth's rights as shareholder of Medibank Private Limited or a holding company (see Schedule 2 subitem 10(3)), the executive power of the Commonwealth to enter into an agreement or the capacity of a Medibank Private company, or of a member of a Medibank Private Board, to enter into an agreement with the Commonwealth (see Schedule 2 subitem 10(5)). 90. A breach of one of the mandatory provisions in Schedule 2 item 919 is not an offence; however, it will be a ground for the Minister to obtain an injunction in the Federal Court under Schedule 2 Part 7 (Schedule 2 subitem 9(8)). 91. To give appropriate protection to Medibank Private companies and their Boards from liability for the making of a request, the giving of assistance or compliance with a direction under Schedule 2 item 9, Schedule 2 subitem 9(7) gives immunity from breaches of the Corporations Act 200120, the National Health Act 1953 and proceedings at general law (other than a rule of administrative law).21 92. The exemptions from the Corporations Act 2001 under Schedule 2 subitem 9(7) are confined to the provision of information or other assistance in connection with a Medibank Private sale scheme and do not extend to other aspects of the conduct of such a scheme. 93. All Medibank Private Limited's money is, under present arrangements, characterised as money of the Medibank Private Fund. Schedule 2 subitem 10(7) specifically authorises Medibank Private Limited to use its fund to pay expenses related to giving assistance under Schedule 2 item 9 even if it would otherwise not be permitted by the National Health Act 1953 section 73AAD (which sets out the permissible ways in which fund assets can be used). While it is hard to see how such a 19 These are subitems 9(3), (4), (5) and (6). 20 The Bill specifically contemplates, for example, assistance by way of giving financial benefits or financial assistance (Schedule 2 paragraphs 10(1)(b) and (c)), which may in some circumstances be inconsistent with the Corporations Act 2001. 21 For example, a fiduciary duty of company directors to act in the interests of the company as a whole--in this case, however, the Commonwealth is the sole shareholder. page 24

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 11--Reimbursement of expenses incurred in giving assistance payment or a decision in relation to a payment would be inconsistent with section 73AAC (which requires that Medibank Private Limited give priority to contributors' interests in dealing with fund assets), to avoid doubt, Schedule 2 subitem 10(8) ensures that that section will not prevent such payments or decisions made in relation to such payments. Importantly, Medibank Private Limited will still be required to comply with the solvency and capital adequacy standards that apply to it under the National Health Act 1953. Schedule 2 item 11--Reimbursement of expenses incurred in giving assistance 94. Schedule 2 item 11 provides that the Minister may authorise payment by the Commonwealth to a Medibank Private company, or to a Board member, to reimburse expenses the Minister considers reasonably incurred in giving assistance under Schedule 2 item 9. The power of the Minister is a reserve discretionary power and it is anticipated that, ordinarily, Medibank private companies would cover their own costs associated with participating in the sale process. Schedule 2 subitem 11(3) makes it clear that Schedule 2 item 11 does not otherwise limit the executive power of the Commonwealth to make such payments. The Consolidated Revenue Fund is appropriated for the purposes of Schedule 2 item 11 under Schedule 2 item 61 (see paragraph 204 below). Schedule 2 item 12--Use by the Commonwealth of information obtained from a Medibank Private company or a Medibank Private Board 95. Schedule 2 item 12 is intended to ensure that the Commonwealth and an associated person22 are able to use and disclose information provided by a Medibank Private company, a Medibank Private Board or a Medibank Private Board member. (a) Schedule 2 subitems 12(2) and (3) enable the Commonwealth or an associated person to use or disclose the information for the purposes of a Medibank Private sale scheme. 22 Defined in Schedule 2 item 1 as a Minister, Commonwealth officers or other persons performing services on behalf of the Commonwealth in relation to the sale or the Commonwealth's capacity as a shareholder. This is different to "associate" defined for the purposes of Schedule 2 Part 4 in Schedule 2 item 35. page 25

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 13--Agreements relating to the protection of certain information (b) The Commonwealth or an associated person may use or disclose such information, not used for the purpose of a Medibank Private sale scheme, for the purposes of shareholder oversight of a Medibank Private company, as long as that use or disclosure does not involve giving the information to a person who is not an associated person (Schedule 2 subitem 12(4)). 96. To avoid any doubt, Schedule 2 subitem 12(5) ensures that use and disclosure of information in accordance with this item will not result in a contravention of, or give rise to a liability or remedy under, the Corporations Act 2001, the National Health Act 1953 or at general law. Schedule 2 item 13--Agreements relating to the protection of certain information 97. Schedule 2 item 13 allows the Commonwealth to enter into an agreement with a Medibank Private company to protect information provided to the Commonwealth under Schedule 2 item 9 that might reasonably be expected to prejudice the commercial interests of the Medibank Private company. Such an agreement is enforceable as a contract. Schedule 2 subitem 13(3) makes it clear that Schedule 2 item 13 does not limit the general executive power of the Commonwealth to enter into agreements. Schedule 2 item 14--Medibank Private company's obligations to disclose information 98. Schedule 2 item 14 removes any doubt that the mere provision of information by a Medibank Private company to the Commonwealth under Schedule 2 item 9 will not, of itself, trigger any obligation by that company to disclose that information under the listing rules of a securities exchange (such as the continuous disclosure requirements of the Australian Stock Exchange Listing Rules), the Corporations Act 2001 or the National Health Act 1953. Schedule 2 item 15--Information statements 99. It may be necessary or desirable for Medibank Private Limited to communicate with contributors to the Medibank Private Fund in carrying out a Medibank Private sale scheme. Assistance under Schedule 2 item 9 may include such communications. page 26

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 16--Payment etc of expenses of complying with information statements directions 100. Schedule 2 item 15 therefore makes special provision for communications in connection with the Medibank Private sale scheme. It provides that the Minister may prepare written statements about the scheme and direct that Medibank Private Limited post such statements on its website and take all reasonable steps to provide contributors with a copy (Schedule 2 subitem 15(1)). Medibank Private Limited must comply with the direction (Schedule 2 subitem 15(2)). Non- compliance, while not an offence, is a ground upon which the Minister can obtain an injunction in the Federal Court under Schedule 2 Part 7 (Schedule 2 subitem 15(4)). 101. Schedule 2 subitem 15(3) makes it clear that giving of a direction, or compliance with the direction, does not amount to a contravention of the Corporations Act 2001, the National Health Act 1953 or a rule of common law or equity (other than a rule of administrative law). 102. Schedule 2 subitem 15(5) makes it clear that the item does not limit Schedule 2 item 9 (which is about giving assistance in connection with the formulation, entry into and carrying out of a Medibank Private sale scheme). Schedule 2 item 16--Payment etc of expenses of complying with information statements directions 103. Given the membership of the Medibank Private Fund, the cost of complying with a direction to make a mass mailing to contributors would be expected to be substantial. Schedule 2 item 16 enables Medibank Private Limited to make payments, or a decision to make a payment, out of the Medibank Private Fund to cover these costs, without contravening section 73AAC or section 73AAD of the National Health Act 1953. It also provides that the Commonwealth may reimburse Medibank Private Limited the amount that the Minister considers is reasonable in respect of such costs (Schedule 2 subitem 16(3)). The Consolidated Revenue Fund is appropriated for this purpose by Schedule 2 item 61 (see paragraph 204 below). The power of the Minister to make such a payment is a reserve discretionary power and it is anticipated that ordinarily a Medibank Private company would cover its own costs associated with participating in the sale process. 104. Schedule 2 item 16 does not limit the Commonwealth's executive power to make payments to Medibank Private Limited (Schedule 2 subitem 16(4)). page 27

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 17--Commonwealth bound by Corporations Act Chapters 6CA, 6D, 7 Schedule 2 item 17--Commonwealth bound by Corporations Act Chapters 6CA, 6D, 7 105. Schedule 2 item 17 provides that the continuous disclosure provisions in Chapter 6CA, the fundraising provisions in Chapter 6D and the financial services and markets provisions in Chapter 7 of the Corporations Act 2001 bind the Crown in right of the Commonwealth to the extent that those chapters deal with the formulation, entering into, or carrying out of a Medibank Private sale scheme (Schedule 2 subitem 17(1)). This is to be the case despite section 5A(4) and 5A(5) of the Corporations Act 2001 (Schedule 2 subitem 17(1)).23 106. Division 3 of Part 7.10 of the Corporations Act 2001 contains insider trading prohibitions. Subsection 1043A(1) of the Corporations Act 2001 prohibits a person who possesses inside information from buying or selling shares or other financial products. "Inside information" is information that is not generally available but, if it were generally available, a reasonable person would expect it to have a material effect on the price or value of particular shares or other financial products. Section 1043F of the Corporations Act 2001 provides a `Chinese walls' exemption from the insider trading prohibitions for bodies corporate. 107. Schedule 2 subitem 17(3) and (4) make it clear that the Commonwealth will not breach the insider trading prohibitions in the Corporations Act 2001 (see the exemption for bodies corporate in section 1043F of the Corporations Act 2001). Schedule 2 subitem 17(3) provides that the Commonwealth does not contravene the insider trading prohibition in subsection 1043A(1) of the Corporations Act 2001 by entering into a transaction or agreement in relation to shares in a Medibank Private company, sale-scheme hybrid securities or a Medibank Private sale scheme merely because of information in the possession of a Commonwealth employee or a Commonwealth office holder, if: (a) the decision to enter into the transaction or agreement was taken on the Commonwealth's behalf by a person or persons other than that officer or employee; and 23 Section 5A(4) states that the Crown is only bound in a particular capacity in circumstances set out in the regulations to that Act. Section 5A(5) provides that the Crown is not liable to pay a pecuniary penalty or to be prosecuted for an offence. page 28

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 18--Reduction of a Medibank Private company's share capital (b) the Commonwealth had in operation at that time arrangements that could reasonably be expected to ensure that: (i) the information was not communicated to the person or persons who made the decision; and (ii) no advice with respect to the transaction or agreement was given to that person or any of those persons by a person in possession of the information; and (c) the information was not so communicated and no such advice was given. 108. Schedule 2 subitem 17(4) provides that, in this context, "officer of the Commonwealth" includes a reference to the holder of an office under a law of the Commonwealth. Schedule 2 item 18--Reduction of a Medibank Private company's share capital 109. Schedule 2 item 18 applies where there is a reduction of a Medibank Private company's capital as part of a Medibank Private sale scheme, if the reduction involves the replacement of a particular kind of share with another kind of share and the replacement of the reduced capital. 110. The Corporations Act 2001 section 256B requires that a reduction in the share capital of a company be fair and reasonable to the company's shareholders as a whole, not materially prejudice the company's ability to pay its creditors and be approved by shareholders under section 256C. 111. It is possible that one element of a Medibank Private sale scheme could involve a conversion of shares and re-structuring of share capital. If such a Medibank Private sale scheme results in the replacement of the reduced share capital, it would not affect the capital reserves of Medibank Private Limited, the solvency of the company or the interests of creditors. 112. However, to avoid doubt, Schedule 2 item 18 provides that, if the reduction of capital as part of a Medibank Private sale conforms to Schedule 2 item 18, Medibank Private Limited would not be required to give creditors notice of a proposed share capital reduction relating to a page 29

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 19--Rights of certain persons to be subject to this Schedule Medibank Private sale scheme, creditors would not be entitled to object to the reduction and the reduction would not need to be confirmed by the Court. Schedule 2 item 19--Rights of certain persons to be subject to this Schedule 113. Schedule 2 item 19 clarifies that the rights of a Medibank Private Company's shareholders and creditors, and the rights of contributors the Medibank Private Fund, are subject to Schedule 2. Schedule 2 Part 3--Profit status of Medibank Private 114. If the Commonwealth's sale objectives24 are to be achieved, it will be essential to ensure that Medibank Private Limited can operate on a "for profit" basis. Currently, Medibank Private Limited's constitution and fund rules prevent Medibank Private Limited from distributing profits to shareholders. Schedule 2 Part 3 makes provision to enable Medibank Private Limited to amend its constitution and confirm Medibank Private Limited's power to amend its fund rules. Schedule 2 item 20--Change of profit status--modifying Medibank Private's constitution and rules 115. Schedule 2 subitems 20(1) and (3) empower Medibank Private Limited to modify its constitution and the Medibank Private Fund Rules to permit Medibank Private Limited to be conducted on a "for profit" basis, to distribute profits to its shareholders and/or to return capital to its shareholders. Schedule 2 item 20 only authorises this while all the shares in Medibank Private Limited are held by the Commonwealth or the holding company. The modifications may be made despite the provisions of Medibank Private Limited's constitution and the Medibank Private Fund Rules (Schedule 2 subitems 20(2) and (4)). 116. Under Schedule 2 subitem 20(5), the Minister may direct Medibank Private Limited to modify the Medibank Private Fund Rules as part of enabling Medibank Private Limited to operate on a "for profit" basis. Medibank Private Limited must comply with such a direction (Schedule 2 subitem 20(6)). The Commonwealth can itself modify the 24 See page 2 above. page 30

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 21--Payment etc of expenses of modifying constitution etc. Medibank Private Limited's constitution, as it is (or a holding company will be) the only shareholder in Medibank Private Limited. 117. Schedule 2 subitem 20(7) requires Medibank Private Limited, at least 60 days before any of these changes take effect, to take all reasonable steps to inform contributors, in clear language, about the nature of these modifications. The 60 day period of notice is necessary to give contributors an opportunity to choose whether to exercise their portability rights to change from being contributors to the Medibank Private Fund to another health benefits fund. Further, under Schedule 2 subitem 20(8), the Minister may give a direction to Medibank Private Limited in relation to its obligations under Schedule 2 subitem 20(7) and Medibank Private Limited must comply with the direction (Schedule 2 subitem 20(9)). Failure to comply with a direction issued under Schedule 2 subitem 20(6) or (9) is not an offence but is a ground for obtaining an injunction in the Federal Court under Schedule 2 Part 7 (Schedule 2 subitem 20(13)). 118. In light of the 60 day notice period in Schedule 2 subitem 20(7), Schedule 2 subitem 20(10) provides that section 78 of the National Health Act 1953 will not apply to these changes. Section 78 sets out a procedure (including notice to contributors) that a registered organization must follow when changing its fund rules. 119. Schedule 2 subitems 20(11) and (12) clarify that Medibank Private Limited will not be in breach of contract, contravene the Trade Practices Act 1974 or equivalent State and Territory laws, or contravene a rule of common law or equity by modifying its constitution and Fund Rules to convert to operating on a "for profit" basis. Additionally, it will not contravene the Corporations Act 2001 or the National Health Act 1953 by modifying its constitution. Schedule 2 item 21--Payment etc of expenses of modifying constitution etc. 120. Schedule 2 item 21, like Schedule 2 item 15, enables Medibank Private Limited to make payments (or a decision to make a payment) out of the Medibank Private Fund to cover the costs of modifying its rules or constitution or issuing a notice to contributors to the Medibank Private fund under Schedule 2 item 20 without contravening section 73AAC or section 73AAD of the National Health Act 1953. page 31

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 22--Information statements 121. The item also grants to the Minister a power to reimburse Medibank Private Limited for the reasonable costs of modifying its constitution or rules, or informing contributors under Schedule 2 item 20 (Schedule 2 subitem 21(3)). As with other similar provisions, the Minister's power to reimburse Medibank Private Limited is a reserve discretionary power. It is anticipated that ordinarily Medibank Private Limited would cover its own costs associated with participating in the sale process. 122. The Consolidated Revenue Fund is appropriated for this purpose by Schedule 2 item 61 (see paragraph 204 below). 123. Nothing in Schedule 2 item 21 limits the executive power of the Commonwealth to make a payment to Medibank Private Limited (Schedule 2 subitem 21(4)). Schedule 2 item 22--Information statements 124. Schedule 2 item 22 provides that the Minister may direct Medibank Private Limited to take all reasonable steps to ensure that a statement about the fund rule and constitution changes under Schedule 2 item 20 (conversion to operation on a "for profit" basis), prepared by the Minister, is given to contributors and posted on the Medibank Private Limited website.25 125. Medibank Private Limited must comply with the Minister's direction. A failure to do so is not an offence but is grounds for obtaining an injunction in the Federal Court under Schedule 2 Part 7. To avoid doubt, Schedule 2 subitem 22(3) states that giving or complying with the direction does not amount to a contravention of the Corporations Act 2001, the National Health Act 1953 or a rule of common law or equity. Schedule 2 subitem 22(5) ensures that Schedule 2 item 22 does not limit Schedule 2 item 9 (about giving assistance in formulating, entering into or carrying out a Medibank Private sale scheme). Schedule 2 item 23--Payment and reimbursement of expenses incurred in complying with a direction about information statements 126. Schedule 2 item 23, like Schedule 2 item 15, enables Medibank Private Limited to make payments (or a decision to make a payment) out of the 25 Compare Schedule 2 item 15 (paragraph 99). page 32

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 Part 4--Restrictions on ownership of Medibank Private companies etc Medibank Private Fund to cover the costs of providing information statements under Schedule 2 item 22 without contravening section 73AAC or section 73AAD of the National Health Act 1953. 127. The item also grants to the Minister a discretionary power to reimburse Medibank Private Limited for the reasonable costs of complying with a direction under Schedule 2 item 22 and the Consolidated Revenue Fund is appropriated for this purpose under Schedule 2 item 61 (see paragraph 204 below). 128. As indicated, the Minister's power to reimburse Medibank Private Limited is a reserve discretionary power and it is anticipated that ordinarily Medibank Private Limited would cover its own costs associated with participating in the sale process. Nothing in Schedule 2 item 21 limits the executive power of the Commonwealth to make a payment to Medibank Private Limited. Schedule 2 Part 4--Restrictions on ownership of Medibank Private companies etc 129. Schedule 2 Part 4 provides for a number of measures that will ensure that (for a 5 year period after the sale) Medibank Private companies remain widely held, achieved by fixing a maximum limit of a 15% stake that anyone can hold in those companies during the 5 year period. "Stake" is defined broadly: it is not just limited to direct shareholdings and takes into account interests of a person and also of his or her associates. 130. The Bill also: (a) requires that Medibank Private companies continue to be incorporated and based in Australia, that they remain under Australian head office control and that a majority of the directors are Australian citizens (Schedule 2 Part 5); and (b) allows the Commonwealth to prevent the "breakup" of the Medibank Private Fund during the 5 year period, by providing for regulations that may be made restrict the transfer of assets or liabilities of the Medibank Private Fund (Schedule 2 Part 6); and page 33

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 Part 4 Division 1--Introduction (c) provides a range of related enforcement mechanisms, including obligations on Medibank Private companies to ensure compliance with the items in Schedule 2 Part 4 and a power for the Federal Court to make remedial orders to enforce the provisions on application by the Minister or a Medibank Private company (Schedule 2 items 29 and 30). 131. Similar restrictions have been imposed in past privatisations. Schedule 2 Part 4 Division 1--Introduction Schedule 2 item 24 and 25 132. Schedule 2 item 24 provides that Schedule 2 Part 4 ceases to have effect 5 years from the designated sale day.26 After this time, the ownership and other restrictions in that Part will not apply. 133. Schedule 2 item 25 ensures that Schedule 2 Part 4 extends to acts, omissions, matters and things outside Australia, whether or not in a foreign country. This ensures that, for example, a person who entered into a transaction in a foreign country that resulted in a breach of the restrictions in Schedule 2 Part 4 Division 2 could be subject to relevant enforcement and remedial provisions. Schedule 2 Part 4 Division 2--Limits on ownership Schedule 2 item 26 --Application to the holding company 134. Schedule 2 item 26 confirms that Schedule 2 Part 4 Division 2 applies to the holding company even after it ceases to be a wholly-owned Commonwealth company. Schedule 2 item 27 --Meaning of "unacceptable ownership situation" 135. The restrictions on ownership of Medibank Private companies are achieved through prohibiting transactions that result in an "unacceptable ownership situation" (Schedule 2 item 28). This is defined in Schedule 2 item 27 as: 26 This is defined in clause 3. page 34

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 28 --Prohibition on transactions that result in an unacceptable ownership situation (a) the situation where one of more persons each hold a particular type of stake in Medibank Private Limited or the holding company of more than 15% (Schedule 2 paragraph 27(1)(a), 27(3)); (b) the situation where the holding company exists and a person other than the holding company has any type of direct control interest in Medibank Private Limited (Schedule 2 paragraph 27(1)(b) and subitem 27(2))--for this purpose, Schedule 2 subitem 42(6) is to be disregarded.27 136. Schedule 2 items 41 and 42 define the different types of stake in a Medibank Private company to which the Schedule 2 Part 4 limits apply. Schedule 2 item 41 provides that a person's "stake" in a Medibank Private company is the aggregate of "direct control interests" held by the person and by the person's associates. Schedule 2 item 42 enables "direct control interest" to be measured as a percentage of paid up share capital (Schedule 2 subitem 42(1)), voting power (Schedule 2 subitem 42(2)), rights to distribution of capital or profits on winding up (Schedule 2 subitem 42(3)) and right to distribution of capital and profits otherwise than on winding up (Schedule 2 subitem 42(4)) These are the "kinds" of direct control interests the Bill refers to. 137. Schedule 2 item 35 provides that persons will be taken to be an "associate" of another person if they are a relative, partner, employee of the person; a company in which the person is an officer, or an officer in the same company; a co-employee; trustee of a trust where the other person benefits from the trust; a company in accordance with whose directions the directors accustomed to act; a company in which the person has an ownership stake of 15% or more; and a person who holds more than 15% stake in another company. Schedule 2 item 28 --Prohibition on transactions that result in an unacceptable ownership situation 138. Schedule 2 item 28 prohibits a person from entering into a transaction which would have the result that an "unacceptable ownership situation" 27 Schedule 2 subitem 42(6) sets out how to calculate company A's "direct control interest" in company B where it holds that interest through an interposed company, company C: see paragraph 147 below. page 35

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 29 --Compliance by Medibank Private company (as defined by Schedule 2 item 27) comes into existence in relation to a Medibank Private company. The prohibition also extends to transactions in which a stake in a Medibank Private company held by one or more persons is increased beyond 15% (that is, where an unacceptable ownership situation already exists) (Schedule 2 subitem 28(2)). While a contravention of Schedule 2 item 28 is not an offence, it is a ground upon which the Minister can obtain an injunction in the Federal Court under Schedule 2 Part 7 (Schedule 2 subitem 28(3)). Schedule 2 item 29 --Compliance by Medibank Private company 139. Schedule 2 item 29 requires a Medibank Private company to take all reasonable steps to ensure that an unacceptable ownership situation does not exist in relation to the company. A contravention of Schedule 2 item 29 is not an offence, but is a ground upon which the Minister can obtain an injunction in the Federal Court under Schedule 2 Part 7 (Schedule 2 subitem 29(2)). Schedule 2 item 30 --Remedial orders 140. If an unacceptable ownership situation exists in relation to a Medibank Private company, Schedule 2 subitem 30(1) enables the Federal Court, upon application from the Minister or that company, to make such orders as it considers appropriate for the purpose of ensuring that the situation ceases to exist. 141. Schedule 2 subitem 30(2) sets out specific matters that could be covered by Federal Court orders (for example, an order directing disposal of shares or restraining the exercise of rights attaching to shares), while Schedule 2 subitem 30(3) would allow other kinds of orders to be made. 142. Schedule 2 subitem 30(4) enables the Federal Court to make ancillary or consequential orders, including an order directing a person to do or refrain from doing a specified act or thing. 143. Schedule 2 subitem 30(5) enables the Federal court, before making an order, to direct that notice of the Minister's application be given to such persons, or be published in such manner as it thinks fit. page 36

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 31 --Anti-avoidance 144. Schedule 2 subitem 30(6) empowers the Federal Court to rescind, vary, discharge or suspend the operation of orders under Schedule 2 item 30. 145. Schedule 2 subitem 30(7) prevents the Federal Court from making an order if it would result in an acquisition of property from a person other than on just terms or if it would be invalid due to section 51(xxxi) of the Constitution. Schedule 2 subitem 30(8) defines "acquisition of property" and "just terms" to have their meanings under the Constitution. Schedule 2 item 31 --Anti-avoidance 146. Schedule 2 item 31 applies where one or more persons enter into, or begin to carry out, or have carried out, a scheme (very widely defined in Schedule 2 item 33) and it would be concluded that this was done for the sole or dominant purpose of avoiding the ownership limits in Schedule 2 Part 4 Division 2. In these circumstances, the Minister would be empowered under Schedule 2 subitem 31(1) to give the stakeholder a written direction to cease holding that ownership stake within a specified time and the person is required to comply with the direction (Schedule 2 subitem 31(2)). 147. Failure to comply with a direction under Schedule 2 subitem 31(1) is not an offence, but is a ground upon which the Minister can obtain an injunction in the Federal Court under Schedule 2 Part 7 (Schedule 2 subitem 31(3)). 148. A decision of the Minister to issue a direction under Schedule 2 subitem 31(1) may be the subject of an application for review to the Administrative Appeals Tribunal (AAT), with "decision" being defined as in the Administrative Appeals Tribunal Act 1975 (Schedule 2 subitems 31(4) and (5)). A decision by the Minister under Schedule 2 subitem 31(1) could significantly affect the commercial interests of the applicant and it is appropriate that review on the merits be provided in these circumstances. This right of AAT review is in addition to any right of judicial review (for example, an application to the Federal Court under the Administrative Decisions (Judicial Review) Act 1977). page 37

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 32 --Giving of information Schedule 2 item 32 --Giving of information 149. Schedule 2 subitem 32(1) enables the regulations (made under Schedule 2 item 62) to require information relevant to ownership issues to be given to the Minister or a Medibank Private company. his provision may be necessary to enable decisions to be made about enforcing the ownership limits. 150. The regulations may require this information to be verified by statutory declaration (Schedule 2 subitem 32(2)), but will not compel an individual to give information that might tend to incriminate the individual, or expose him or her to a penalty (Schedule 2 subitem 32(3)). None of the ownership restrictions in Schedule 2 Part 4 Division 2 create criminal offences. 151. Schedule 2 subitems 32(4) and (4) state that a person must comply with regulations made for the purposes of Schedule 2 item 32. A failure to do so is not an offence, but is a ground upon which the Minister can obtain an injunction in the Federal Court under Schedule 2 Part 7. 152. Schedule 2 subitem 32(6) enables regulations made under the item to confer discretionary powers on the Minister and give an example of such a provision (the example concerns the Minister calling for information from a Medibank Private company). 153. Schedule 2 subitem 32(7) defines "ownership matter" as a matter relating to whether a person holds a particular stake in a Medibank Private company the level of a person's stake and, if the holding company is in existence, whether a person other than the holding company holds any type of direct control interest in Medibank Private. Schedule 2 Part 4 Division 3--Interpretation Schedule 2 item 33 --Entering into an agreement or arrangement 154. Schedule 2 item 33 defines, for the purposes of Schedule 2 Part 4, particular terms. These are discussed with the provisions to which they are most relevant. page 38

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 34--Entering into an agreement or arrangement Schedule 2 item 34--Entering into an agreement or arrangement 155. Schedule 2 item 34 defines, for the purposes of Schedule 2 Part 4, the expressions "propose to enter into an agreement or arrangement", entering into an agreement or arrangement" and "entering into an arrangement". The last of these expressions is widely defined as including entering into any formal or informal scheme, arrangement or understanding, whether expressly or by implication. However, moneylending agreements (defined as agreements entered into in good faith in the ordinary course of carrying on a business of lending money: Schedule 2 item 33) are not arrangements for these purposes (Schedule 2 subitem 34(4)), as interests held by way of security for moneylending agreements are not intended to be caught under the ownership limits. Schedule 2 item 35 --Associates 156. Schedule 2 item 35 defines, for the purposes of Schedule 2 Part 4, who are "associates" of a person. They include include, among others: (a) a company whose directors are accustomed or under an obligation to act in accordance with the directions, instructions or wishes of the person; (b) a company where the person is accustomed or under an obligation to act in accordance with the directions, instructions or wishes of the company; (c) a company in which the person has a particular type of stake of not less than 15%; (d) if the person is a company, a person who holds a particular type of stake in the company of not less than 15%; and (e) the trustee of a discretionary trust where the person is an object of the trust. 157. In particular, associates of a person include associates of the person's associates. 158. One of the effects of this definition of "associates" is to provide a mechanism for tracing interests through a series of companies, for the page 39

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 36--Power to appoint director purpose of determining whether there is a breach of the ownership limits in Schedule 2 Part 4. For example, if: (a) company A holds a 0.5% ownership stake in a Medibank Private company; and (b) also holds more than a 15% ownership stake in company B; and (c) company B holds a 0.5% ownership stake in a Medibank Private company; company A is taken to hold a 1% share in the Medibank Private company, comprising its direct 0.5% stake and the 0.5% stake attributed to company A because company B being an associate of company A. Schedule 2 item 36--Power to appoint director 159. Schedule 2 item 36 specifies circumstances in which, for the purposes of Schedule 2 Part 4, a person would be taken to have "power to appoint a director". The latter expression is used in Schedule 2 subitem 35(2), under which persons are associates of each other if they enter, or propose to enter, into an arrangement with each other related to their power, by acting together, to appoint or remove a director of a company. Schedule 2 item 37--Meaning of entitled to acquire 160. Schedule 2 item 37 provides that, for purposes of Schedule 2 Part 4, a person is "entitled to acquire" anything that the person is absolutely or contingently entitled to acquire, for any reason. The expression "entitled to enquire" is used in Schedule 2 subitem 38(2). Schedule 2 item 38--Meaning of interest in a share 161. Schedule 2 item 38 specifies the circumstances in which a person is taken to hold an "interest in a share". Under Schedule 2 item 42, the interest of a person in a share is relevant to determining the "direct control interest" of the person in a company, which in turn is relevant to determining under Schedule 2 item 41 the particular stake a person holds in the company. Schedule 2 item 38 provides that any kind of legal or equitable interest in the share results in the holder holding an interest in the share (Schedule 2 subitem 38(1)) and also provides a page 40

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 39--Certain interests in shares to be disregarded number of specific cases that are taken to constitute an interest in a share (Schedule 2 subitem 38(2)). Under Schedule 2 subitem 38(6), it is made clear that remoteness, the way in which the interest arose and conditionality of an interest does not prevent an interest being an interest in a share for the purposes of Schedule 2 Part 4. Schedule 2 item 39--Certain interests in shares to be disregarded 162. Schedule 2 subitem 39(1) requires interests in shares in a Medibank Private company to be disregarded for the purposes of Schedule 2 Part 4 if they are held by the sale scheme trustee in accordance with a sale- scheme trust deed, by a lender in the ordinary course of business, by a person by virtue of holding a prescribed office or the interest is of a kind prescribed by regulations. 163. Schedule 2 subitem 39(2) covers the case where a lender "repossess" a share under the loan security. Here, the lender has up to 90 days (or a longer period approved by the Minister) to dispose of the share before the share is counted towards the lender's stake in the relevant Medibank Private company. 164. Schedule 2 subitem 39(3) is intended to ensure that underwriters and subunderwriters to a Medibank Private sale scheme do not breach the ownership limits in Schedule 2 Part 4 merely because of the temporary acquisition of interests they are obliged to acquire through agreements entered into for the purposes of the Medibank Private sale scheme. 165. "Underwriter" is defined in Schedule 2 item 33 as a person who is a party to an agreement with the company that is issuing shares as part of a Medibank Private sale scheme, where the contract includes provision obliging either of those persons to subscribe for any of the shares in the event of a shortfall in public subscriptions. "Subunderwriter" is defined consistently with that definition. 166. Where the conditions of Schedule 2 subitem 39(3) are satisfied, the interest in Medibank Private company shares held by the underwriter or subunderwriter will not count towards the underwriter's or subunderwriter's stake in the relevant Medibank Private company for the purposes of the ownership limits in Schedule 2 Part 4 for a period of 90 days or a longer period approved by the Minister. page 41

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 40--Voting power 167. A decision of the Minister under Schedule 2 subitems 39(2) or (3) may be the subject of an application for review to the AAT, with "decision" being defined as in the Administrative Appeals Tribunal Act 1975 (Schedule 2 subitems 39(4) and (5)). A decision by the Minister under Schedule 2 subitems 39(2) or (3) could significantly affect the commercial interests of the applicant and it is appropriate that review on the merits be provided in these circumstances. This right of AAT review would be in addition to any right of judicial review (for example, an application to the Federal Court under the Administrative Decisions (Judicial Review) Act 1977). Schedule 2 item 40--Voting power 168. Schedule 2 item 40 defines, for the purposes of Schedule 2 Part 4, the expression "voting power" in a company. Under Schedule 2 item 42, voting power in a company is relevant to determining the "direct control interest" of the person in a company, which in turn is relevant to determining under Schedule 2 item 41 the particular stake a person holds in the company. 169. Schedule 2 subitem 40(1) provides that the "voting power" in a company is the total shareholder rights to vote or participate in decision-making concerning making distributions of capital or profits, the constituent document of the company (which is defined to mean the company constitution or rules or other documents governing its activities � Schedule 2 item 33) or any variation in the company's share capital. 170. Schedule 2 subitem 40(2) defines "control of the voting power" as direct or indirect control, or control exercisable as a result of arrangements or practices (whether having legal or equitable force or based on legal or equitable rights). 171. Schedule 2 subitem 40(3) clarifies that, for the purposes of determining percentage of rights to vote or participate in decision- making, where the percentages differ between different types of voting or decision-making, the higher percentage is to be used. 172. Schedule 2 subitem 40(4) provides that, for a company limited both by shares and guarantee or that does not have a share capital, Schedule 2 item 40 applies as if the members or policy holders were shareholders. However, this does not grant any rights on those members or policy page 42

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 41--Stake in a company holders beyond the application of Schedule 2 item 40. Specifically, it does not have effect to confer any rights or interests in Medibank Private Limited or the assets of the Medibank Private Fund. Schedule 2 item 41--Stake in a company 173. Schedule 2 subitem 41(1) provides that a particular type of stake that a person holds in a company at a particular time is the aggregate of the direct control interests of that type that the person and associates of the person hold at that time. Schedule 2 item 42 specifies the types of "direct control interest". 174. Schedule 2 subitem 41(2) prevents double counting in determining a particular type of stake a person holds in a company. Schedule 2 item 42--Direct control interests in a company 175. Schedule 2 item 42 defines four types of "direct control interest" in a company. 176. Schedule 2 item 42 provides that a person holds a direct control interest in a company at a particular time equal to the percentage: (a) of the total paid-up share capital of the company in which the person holds an interest at that time (Schedule 2 subitem 42(1)); (b) of the voting power in the company that the person is in a position to control at that time (Schedule 2 subitem 42(2)); (c) that the person holds, or is entitled to acquire, at that time, of the total rights to distributions of capital or profits of the company to its shareholders on winding-up (Schedule 2 subitem 42(3)); (d) that the person holds, or is entitled to acquire, at that time, of the total rights to distributions of capital or profits of the company to its shareholders otherwise than on winding up (Schedule 2 subitem 42(4)). 177. In working out the direct control interests that a person holds in a Medibank Private company, Schedule 2 subitem 42(5) requires an page 43

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 Part 5--Australian identity of Medibank Private companies assumption that the Commonwealth does not hold any shares. For this purpose, "share" does not include an interest in a share. 178. Schedule 2 subitem 42(6) provides a mechanism for measuring percentage interests that can be `traced' through a series of companies in a corporate investment chain. Schedule 2 Part 5--Australian identity of Medibank Private companies 179. Schedule 2 Part 5 requires, for 5 years from the designated sale day, that the Medibank Private companies remain under Australian management, maintain an Australian base of operations and remain incorporated in Australia (Schedule 2 items 44, 45 and 46). It also requires that a majority of the directors of a Medibank Private company during that period be Australian citizens (Schedule 2 item 47). Schedule 2 item 43--Sunset provision 180. Schedule 2 item 43 prevents Schedule 2 Part 5 from having any effect after a period of 5 years from the designated sale day28 has expired. Schedule 2 item 44--Head office to be in Australia 181. Schedule 2 item 44 requires Medibank Private companies to ensure that their central management and control is ordinarily exercised at a place in Australia. While a contravention of this requirement is not an offence, it will provide grounds on which the Minister can obtain an injunction under Schedule 2 Part 7 (Schedule 2 subitem 44(2)). To protect the interests of third parties, Schedule 2 subitem 44(3) provides that contraventions do not affect the validity of any transaction. Schedule 2 item 45--Base of operations to be in Australia 182. Schedule 2 item 45 requires Medibank Private companies to maintain a substantial business and operational presence in Australia. This is not to be read as limiting the company's capacity to engage in activities outside Australia. While a contravention of this requirement is not an offence, it will provide grounds on which the Minister can obtain an injunction under Schedule 2 Part 7 (Schedule 2 subitem 45(3)). To 28 Refer to clause 3. page 44

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 46--Medibank Private company to remain incorporated in Australia protect the interests of third parties, Schedule 2 subitem 45(4) provides that contraventions do not affect the validity of any transaction. Schedule 2 item 46--Medibank Private company to remain incorporated in Australia 183. Schedule 2 item 46 requires that Medibank Private companies remain incorporated under the Corporations Act 2001. While a contravention of this requirement is not an offence, it will provide grounds on which the Minister can obtain an injunction under Schedule 2 Part 7 (Schedule 2 subitem 46(2)). To protect the interests of third parties, Schedule 2 subitem 46(3) provides that contraventions do not affect the validity of any transaction. Schedule 2 item 47--Majority of directors must be Australian citizens 184. Schedule 2 item 47 requires Medibank Private companies to ensure that a majority of their directors are Australian citizens. While a contravention of this requirement is not an offence, it will provide grounds on which the Minister can obtain an injunction under Schedule 2 Part 7 (Schedule 2 subitem 47(2)). To protect the interests of third parties, Schedule 2 subitem 47(3) provides that contraventions do not affect the validity of any transaction. Schedule 2 item 48--Application to the holding company 185. Schedule 2 item 48 clarifies that Schedule 2 Part 5 applies to the holding company of Medibank Private even after it ceases to be a wholly-owned Commonwealth company. Schedule 2 item 49--Winding �up of Medibank Private company not prevented by this Part 186. As a company incorporated under the Corporations Act 2001, Medibank Private is (and a holding company, if established, would be) liable to be wound up under relevant provisions of that Act (for example, if it were insolvent). These provisions in the Corporations Act 2001 provide an important protection to the creditors of any company. Schedule 2 item 49 is an "avoidance of doubt" provision intended to remove any implication that Schedule 2 Part 5, particularly those items requiring a Medibank Private company's head office, base of operations page 45

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 Part 6--Restrictions on transfer of assets and liabilities of the Medibank Private fund and place of incorporation to remain in Australia, would prevent a Medibank Private company from being wound up in accordance with the Corporations Act 2001. Schedule 2 Part 6--Restrictions on transfer of assets and liabilities of the Medibank Private fund 187. Schedule 2 Part 6 provides that regulations may be made, within 5 years of the designated sale day, to prevent Medibank Private companies from transferring specified assets or liabilities of the Medibank Private Fund. Schedule 2 item 50--Sunset provision 188. Schedule 2 item 50 prevents Schedule 2 Part 6 from having any effect after a period of 5 years from the designated sale day29 has expired. Schedule 2 item 51--Restriction on transfer of assets and liabilities of the Medibank Private fund 189. To ensure that the Commonwealth has, if necessary, the power to restrict the ability of any purchaser of the Commonwealth's equity in Medibank Private Limited from selling or "breaking up" the Medibank Private Fund, Schedule 2 subitem 51(1) authorises the regulations (made under Schedule 2 item 62) to prevent Medibank Private from transferring assets or liabilities specified in the regulations of the Medibank Private Fund. 190. Schedule 2 subitem 51(2) requires Medibank Private to comply with regulations made under Schedule 2 subitem 51(1). While a contravention of this requirement is not an offence, it provide grounds on which the Minister could obtain an injunction under Schedule 2 Part 7 (Schedule 2 subitem 51(3)). Schedule 2 Part 7--Injunctions 191. Schedule 2 Part 7 confers on the Federal Court power to grant an injunction to enforce Schedule 2 Parts 2, 3, 4, 5 or 6. An injunction can 29 Refer to clause 3. page 46

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 Part 8--Miscellaneous restrain a person from acting in a particular way or require the person to do a particular thing (Schedule 2 item 52). 192. Schedule 2 subitems 52(1) and (2) provides that the Minister for Finance is to be the applicant for an injunction to enforce Schedule 2 Parts 2, 3, 4, 5 or 6. 193. An injunction restraining a person from acting in a particular way may be granted on an interim basis and, in that case, the Minister does not have to give an undertaking to meet any loss that the person may incur if the interim injunction is granted but, in the event, the final injunction is refused (Schedule 2 item 53). 194. Schedule 2 item 55 removes certain other restrictions on the grant of an injunction, permitting the Court to grant an injunction whether or not the relevant conduct (or refusal to act) will be repeated, whether or not it has already taken place and whether or not there is an imminent danger of substantial damage if it occurs. 195. These powers are in addition to the Federal Court's other powers (Schedule 2 item 56). Schedule 2 Part 8--Miscellaneous Schedule 2 item 57--Retained earnings 196. Medibank Private Limited's accounts presently characterise surplus amounts as retained earnings. There is no doubt that, in a practical sense, some of these retained earnings are surplus to Medibank Private Limited's operating requirements, including provision that should be made to satisfy the requirements of the prudential standards under the National Health Act 1953. However, there are a number of complex legal and accounting technicalities about the characterisation of amounts as profits available for distribution by way of dividend. To provide commercial certainty on the question whether these retained earnings are available for distribution, as dividend, Schedule 2 item 57 provides that, for the purposes of Schedule 2 item 20, section 254T of the Corporations Act 200130 and section 73AAD of the National Health 30 This requires dividends to be paid out of profits. page 47

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 58--Compensation for acquisition of property Act 1953, "retained earnings" of Medibank Private Limited are to be taken as profits of Medibank Private Limited. 197. Schedule 2 item 57 is enacted to avoid doubt and does not apply to other companies (Schedule 2 subitems 57(2) and (3)). Nor will it apply to Medibank Private Limited beyond 12 months after the designated sale day31 (Schedule 2 subitem 57(4)) as, from then, Medibank Private Limited's accounts will be drawn on the same basis as other companies operated on a "for profit" basis. Schedule 2 item 58--Compensation for acquisition of property 198. Having regard to the nature of the interests that contributors to the Medibank Private Fund have, it is unlikely that the operation of Schedule 2 Part 2, provisions relating to the payment of a dividend or return of capital (including a buy-back or reduction of capital) to the Commonwealth by Medibank Private, and Schedule 2 items 20 and 57 would have the effect of acquiring any person's property. However, as a precautionary measure only, Schedule 2 item 58 has been included, to provide for just terms in the unlikely event that property is found to have been acquired by the operation of Schedule 2 Part 2, the payment of a dividend or return of capital to the Commonwealth by Medibank Private, or Schedule 2 items 20 or 57. 199. Schedule 2 subitems 58(1) and (2) refer to the operation of Schedule 2 Part 2 of the Bill. In the event that there is an acquisition of a person's property other than on just terms, the Commonwealth is liable to compensate the person. The Consolidated Revenue Fund is appropriated for this purpose under Schedule 2 item 61 (see paragraph 204 below). 200. Schedule 2 subitems 58(3) and (4) refer to a Medibank Private company paying a dividend or returning capital to the Commonwealth, buying back of shares in the Medibank Private company held by the Commonwealth or reducing its share capital and paying the Commonwealth in relation to that reduction. Although this is unlikely, where any of these actions would result in the acquisition of a person's property otherwise than on just terms, the Commonwealth is liable to 31 The day determined by the Minister for Finance and Administration as the day after the sale of all the Commonwealth's equity in Medibank Private has been finalised: see clause 3. page 48

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 59--Delegation compensate the person. The Consolidated Revenue Fund is appropriated for this purpose under Schedule 2 item 61 (see paragraph 204 below). The payment of a dividend or return of capital to other shareholders, the buy back of shares from other shareholders or the reduction of share capital involving other shareholders is not covered by this provision. 201. Schedule 2 subitems 58(5) and (6) refer to the operation of Schedule 2 item 20 (which relates to Medibank Private Limited's change in profit status) and Schedule 2 item 57 (which relates to the treatment of retained earnings). If the operation of either of those items results in an acquisition of a person's property otherwise than on just terms, Medibank Private Limited is liable to compensate the person. Schedule 2 subitems 58(5), (6), (7) and (8) enable Medibank Private Limited to make a payment (or a decision to make a payment) from the Fund in order to provide such compensation without contravening section 73AAC or 73AAD of the National Health Act 1953. Schedule 2 item 59--Delegation 202. Schedule 2 item 59 permits the Minister to delegate his or her powers under Schedule 2 to the Secretary of the Department of Finance and Administration or a Senior Executive Service (SES) employee or acting SES employee in that Department. Schedule 2 item 60--Provision to attract the insurance power and the corporations power 203. To ensure appropriate constitutional authority for the provisions in Schedule 2, Schedule 2 item 60 ensures Schedule 2 only applies if Medibank Private Limited is covered by the insurance power, or the trading and financial corporations power, in the Constitution.32 Schedule 2 item 61--Appropriation 204. Schedule 2 item 61 appropriates the Consolidated Revenue Fund for the purposes of Schedule 2 subitems 11(2), 16(3), 21(3), 23(3), 58(1), 58(2), 58(3) and 58(4). No limit has been set on the appropriations 32 The insurance power is paragraph 51(xiv); the trading and financial corporations power is paragraph 51(xx). page 49

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 2 item 62--Regulations which can be made under Schedule 2 item 61, as this may signal the extent of reasonable expenses contemplated by the Government and not result in the Commonwealth achieving best value for money. Schedule 2 item 62--Regulations 205. Schedule 2 item 62 provides for the making of regulations in connection with Schedule 2, including regulations in relation to formulating, entering into or carrying out a Medibank Private sale scheme (Schedule 2 subitem 62(2)), and to deal with transitional matters (Schedule 2 subitem 62(3)). 206. Schedule 2 subitems 62(2) and (3) do not limit the regulation making power in Schedule 2 subitem 62(1) (Schedule 2 subitem 62(4)). Schedule 3--Amendments commencing on the designated sale day Schedule 3 items 1 and 2--Commonwealth Borrowing Levy Act 1987 207. Schedule 3 items 1 and 2 ensure that, after the Commonwealth's sale of its equity in Medibank Private Limited has been finalised, Medibank Private Limited will no longer be liable to pay the levy imposed by the Commonwealth Borrowing Levy Act 1987 on borrowing made before the designated sale day. However, amounts payable as a levy before that day will still have to be paid. Schedule 3 item 3--Health Insurance Commission (Reform and Separation of Functions) Act 1997 section 45 208. Section 45 of the Health Insurance Commission (Reform and Separation of Functions) Act 1997 provides that section 186 and paragraph 461(d) of the Corporations Act 2001 do not apply to Medibank Private Limited. Schedule 3 item 3 ensures that these provisions will apply to Medibank Private Limited after the Commonwealth's sale of its equity in Medibank Private Limited has been finalised. Schedule 3 item 4--Remuneration Tribunal Act 1973 209. Remuneration for certain officers of Medibank Private Limited is fixed under the Remuneration Tribunal Act 1973. Schedule 3 item 4 repeals page 50

Medibank Private Sale Bill 2006 Explanatory Memorandum Notes on individual provisions Schedule 3 item 4--Remuneration Tribunal Act 1973 paragraph (i) of the definition of principal executive office in subsection 3(1) of that Act, as it will not be appropriate for remuneration to be fixed by the Tribunal after the Commonwealth's sale of its equity in Medibank Private Limited has been finalised. page 51

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