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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.
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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.
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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
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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.
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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.
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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".
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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
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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.
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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.
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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.
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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.
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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).
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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
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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.
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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.
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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.
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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).
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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.
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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
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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.
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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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