An Address by Nicholas Whitlam to the Australian Banking & Finance Lecture Series on 22 November 2000 at the ANA Hotel , Sydney
I have been an industry participant in the development and growth of the Australian banking and finance sector for some time - from my early days at JP Morgan, Banque Paribas and American Express, through the State Bank (where I was a keen advocate of developing our financial system to include off-shore banking) to my current roles with IAG* and Deutsche Bank. As such, it gives me great pleasure to speak to you this afternoon as part of the Australian Banking & Finance Lecture Series.
The reconstruction of the old NRMA Group and the creation of IAG is a terrific story. So, while sections of the press may be distracted this last week by a few internal matters and who said what to whom, I will stick to the topic and speak about what I believe to be one of corporate Australia's most complex, most interesting and most successful transactions – the demutualization and listing of NRMA Insurance Limited: that is, the creation of IAG.
There is much about this process that should be of great value to people working in the finance sector, although only a small proportion of what was involved in this highly complex transaction is widely known.
By the beginning of 2000 the two main companies in the NRMA Group – NRMA Limited, the road service arm, and NRMA Insurance Limited - had existed for almost 80 years. Although it was not widely understood, the two companies were in fact two separate mutuals. This made the proposed explicit separation and restructuring - and the listing of IAG - a unique process. There were no precedents to follow and few guidelines along which to work. This partly explains why schemes of arrangement were used to implement the change. There were requirements for two sets of advisors for the two mutuals. Everything had to be cleared by both entities, adding enormously to the cost, complexity and the time taken to effect the process.
To give you an idea of the complexity of the process, in the recent 1999/2000 financial year and the five weeks to listing in August 2000 alone, there were no less than 10 general meetings of one type or another (including a special general meetings requisitioned by a very small group of members to remove me), 23 NRMA Insurance board meetings, 23 project due diligence committee meetings, 3 project implementation committee meetings, 13 project steering committee meetings, 11 IAG listing committee meetings and 12 IAG due diligence committee meetings. Of the 95 meetings related to the demutualization project, many lasted for several hours - if not all day. Again, given the complexity and uniqueness of the task, it is easy to forget the painstaking detail involved in this process.
To provide some context for this vast undertaking, you need to understand its genesis. I and a number of new directors were elected to the board of NRMA Limited in 1995. Since 1987, when the management of the two separate mutuals was combined into one, there had been considerable debate about the most appropriate structure for the NRMA Group. This debate was driven by a number of factors including the enormous change and growth within the NRMA Group since the establishment of the two mutuals in the 1920s, a global trend towards demutualization, and the need to improve the corporate governance standards that were clearly failing within the NRMA Group. Most of you would be aware that the debate became a debacle when, in 1994, for a variety of reasons, the full demutualization of both mutuals was aborted by court order. This was an expensive and very divisive process. I had not been involved in that earlier aborted process – other than as a rank-and-file NRMA member – but once I joined the NRMA board in 1995 I started to learn some of the lessons.
In early 1998, in an effort to maximize the potential of the NRMA Group, both boards commissioned McKinsey & Co to report on a proposal entitled “One Mutual”, based on rolling the two mutuals into one company.
As part of the process, the two boards received legal advice in June 1998 that before proceeding with the One Mutual option, they were obligated to examine all options for structural reform open to the NRMA Group. To that end, the two boards commissioned Credit Suisse First Boston (“CSFB”) to prepare a report on “Corporate Organisational and Membership Structures for the NRMA Group.”
Five months later, in November 1998, CSFB submitted its report to the two boards, The report contained seven options for structural reform and recommended one – entitled “Remutualisation and Listing”. This option involved retaining the mutual status of NRMA Limited, the road service arm, and demutualizing and listing NRMA Insurance Limited.
On 25 February, by my own casting vote at the NRMA Limited board and overwhelmingly at the NRMA Insurance Limited board, the boards resolved to further develop the recommended option. This included the development of an Information Memorandum based on “Remutualisation and Listing” for further review by the two boards. A cut off date for membership of either mutual was established at midnight that same day, 25 February 1999.
It is important to understand the rationale for the two boards' decisions. This was not a vote to demutualize NRMA Insurance Limited. There never was a board vote to that effect. These were board decisions to put in process an opportunity to enable members – members of the two separate NRMA mutuals – to have their say.
Over the next several months, a team of NRMA staff and advisers began preparation of an Information Memorandum. Separate independent expert reports were prepared for members of the two mutuals. Deloitte Corporate Finance prepared a report for the members of NRMA Limited. Ernst & Young Corporate Finance prepared a report for the members of NRMA Insurance Limited. PricewaterhouseCoopers prepared the consulting actuary's report for the members of both mutuals. And with these reports to hand, at this time those opposed to the proposal activated their opposition.
In November 1999, the NRMA Limited elections were held for half the board. This was a seminal election. It was the first opportunity for members to have a say – not about the demutualization of NRMA Insurance per se, but about their right to consider the proposal to demutualize that company: the Members First ticket, led by me, were insistent that members should be given that right; our opponents wanted to deny the members that opportunity. In a landslide, Members First ticket won all eight board seats. By December 1999, when we took up our new seats, our team held an overwhelming 11-5 majority on the continuing NRMA Limited board.
Following exhaustive review, during that December, the Information Memorandum (of more than 150 pages) was approved by both boards. It was then lodged with ASIC for their approval. A month later, ASIC approved the Information Memorandum. It was then lodged with the NSW Supreme Court as part of the process for schemes of arrangement.
The Information Memorandum outlined in great detail the process and implications of the proposed transaction. Schemes of arrangement were used so as to ensure Court involvement at each significant step of the process. This was important for two reasons: first, to ensure the complete integrity of the transaction; and secondly, to ensure that opposition - and indeed any meaningful feedback - could be obtained and considered by the Court. That is one of the many ironies of the process. A number of oppositionists have claimed, and in some quarters continue to claim, that there was a lack of transparency and accountability of process. The exact opposite was in fact the case.
By the beginning of February 2000, the Supreme Court began hearing the application of the two mutual companies for orders convening scheme of arrangement meetings and approving the distribution of the Information Memorandum. On 24 February 2000, the Court approved both the distribution of the Information Memorandum and the calling of the meetings to allow members to vote on the proposed changes. In what was the largest parcel deliver ever in Australia , 2 million copies of the Information Memorandum were printed and distributed – with voting forms sent to almost every home in NSW and the ACT.
On 19 April 2000, two special general meetings and four Court-ordered meetings were held to allow members to vote for or against the proposed demutualization of NRMA Insurance. More than one million members voted by either proxy or in person, with 82% voting in favour of the proposal.
At the beginning of the following month, the Supreme Court began the second round of schemes of arrangement hearings - to review the member meetings, to allow the airing of any legitimate issues and to approve, if thought appropriate, the schemes.
A number of members, including one NRMA Limited director, used the court hearings to present their views and their opposition to the schemes. This was entirely appropriate. The subsequent appeal to the NSW Court of Appeal, however, and the commencement of Supreme Court Equity Division proceedings were well outside the boundaries of the norm. The Court of Appeal unanimously refused leave to appeal, finding that the proposed appeal had no prospect of success. The Equity Division proceedings have been discontinued.
In June this year, as part of the schemes, a Deemed Proxy meeting was held to allow any member who wished to overturn their vote to do so. The demutualization process continued after only 800 members overturned their deemed proxies. The battle was nearly over.
On 25 June, the Member Share Offer Prospectus was lodged with ASIC and launched publicly. Two million prospectus packs were mailed out. A special facility was established to allow members to buy more shares than their allocation, or sell or keep their shares prior to listing. All this was done under the auspices of Joint Global Co-ordinators CSFB, Macquarie Bank and UBS.
NRMA Insurance Limited formally demutualized on 24 July 2000 when ASIC registered its change in status from a mutual to a company limited by shares. On 6 August the facility price of IAG shares was announced at $2.75, and on 8 August IAG was listed on the Australian Stock Exchange.
The creation of IAG was complete.
* NRMA Insurance Group Limited changed its name to Insurance Australia Group Limited on 15 January 2002, and is now commonly known as IAG. This transcript of the speech has been amended to reflect the new name.