Scheme Booklet - Doctors Health Fund
Transcription
Scheme Booklet - Doctors Health Fund
Scheme Booklet For a scheme of arrangement between The Doctors’ Health Fund Limited (ABN 68 001 417 527) and its members in relation to its proposed acquisition by Avant Group Holdings Limited (ABN 72 077 283 884). The Doctors’ Health Fund Limited (DHF) is a public What you have received company limited by guarantee that operates a Health Benefits Fund. This Scheme Booklet contains details of Scheme Booklet the Proposal for DHF to demutualise and be acquired by Avant Group Holdings Limited (Avant), including reasons for and against the Proposal. This Scheme Booklet is dated 7 March 2012. Scheme Booklet For a scheme of arrangement between The Doctors’ Health Fund Limited (ABN 68 001 417 527) and its members in relation to its proposed acquisition by Avant Group Holdings Limited (ABN 72 077 283 884). The Proposal cannot proceed without the approval of DHF Members who will vote on the Resolutions required to implement the Proposal at an Extraordinary General Meeting and Scheme Meeting, both meetings to be held at the AMA Conference Centre, 69 Christie Your letter from the DHF Board 31st March 2012 Joe Smith 15 Porter Street Lane Cove NSW 2066 Street, St Leonards, NSW on 4 April 2012 commencing at 10.00am. The notices for these meetings, details of the Resolutions to be considered at these meetings, Your Entitlement: Initial Entitlement: $5,246 Residual Entitlement: A small additional amount may also be payable as noted below. Your Member Registration Number (MRN) 345789 Dear Joe, Further to our letter of 11 August 2011, we can now provide you with the Scheme Booklet which contains details of the $29.25 million proposal for The Doctors Health Fund Limited (DHF) to demutualise and to be acquired by Avant Group Holdings Limited (Avant). The Scheme Booklet is being issued to you because, as a contributing member of DHF’s Health Benefits Fund, you are also a member of the DHF company, and it is the members of the company who consider the Avant Proposal and vote on the measures required for its implementation. In this letter and in the Scheme Booklet, members of the company are referred to as DHF Members. If the Avant Proposal is implemented, all the DHF Members at the relevant time, and anyone else the DHF Board determines should have been DHF Members at that time (referred to as Scheme Members), will receive a cash payment. If you continue as a DHF Member until that time, your cash payment as a Scheme Member will be the amount shown at the top of this letter - called your Initial Entitlement. You may also receive a small additional amount (called a Residual Entitlement) in the circumstances explained in the Scheme Booklet. Whether any Residual Entitlement will arise and, if so, the amount you will receive, is not yet known. As of the date of this letter, the DHF Board has not received a proposal which it considers is superior to the Avant Proposal and the Independent Expert we appointed considers that the Avant Proposal is fair and reasonable and in the best interests of Scheme Members in the absence of a current better proposal. In these circumstances, the DHF Board unanimously recommends that you vote for the measures required to implement the Avant Proposal. and how and when DHF Members can vote on these Resolutions, are set out in this Scheme Booklet. Proxy Forms This Scheme Booklet is important and requires your immediate attention. You are advised to read the entire document, using Blue Form Proxy for Extraordinary General Meeting Member Name Member Number Member Number of defined terms or expressions. Barcode Dear Member of DHF If you wish to appoint a proxy to vote on your behalf please read the instructions overleaf, then complete and lodge this form by 10.00am (Sydney time) on 3 April 2012. If you prefer and you are a registered DHF Member on 24 February 2012, you may vote online at www.doctorshealthfund.com.au/AvantProposal/Voting by 10.00am (Sydney time) on 3 April 2012. Alternatively, you may vote in person at the Scheme Meeting to be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW, 10.00am (Sydney time) on 4 April 2012. Appointment of proxy Appointment of proxy I, being a Member of DHF, and entitled to vote, hereby appoint either: I, being a Member of DHF, and entitled to vote, hereby appoint either: The Chair of the Extraordinary General Meeting OR financial or other professional adviser. (mark X in the box here) please write below the name of the person you are nominating (if this person is someone other than the Chair of the Scheme Meeting.) or failing him/her, (or if the box is not marked and no proxy is specified above), the Chair of the EGM, as my proxy to vote for me and on my behalf and to vote in accordance with the following instructions (or, if no directions are given, as the proxy sees fit) at the EGM and at any adjournment of that meeting. or failing him/her, (or if the box is not marked and no proxy is specified above), the Chair of the Scheme Meeting, as my proxy to vote for me and on my behalf and to vote in accordance with the following instructions (or, if no directions are given, as the proxy sees fit) at the Scheme Meeting and at any adjournment of that meeting. Record your vote Record your vote If you wish to direct your proxy how to vote on the Resolution please mark X in the appropriate box below. If you wish to direct your proxy how to vote on the Resolutions please mark X in the appropriate box below. Resolution 1: Approval of Scheme of Arrangement Resolution 1: Constitutional Amendment For Against For Against THAT conditional on the Scheme becoming Effective, the DHF Constitution be amended as set out in Annexure A to the notice of meeting. b) THAT under, and in accordance with, the provisions of Section 411 of the Corporations Act 2001 (Cth), the scheme of arrangement proposed between The Doctors’ Health Fund Limited and the Members as set out in the Scheme Booklet accompanying this Notice is agreed to (with or without any modification as approved by the Court). For Against If you mark both these boxes your vote will be invalid DHF change its company type from a public company limited by guarantee to a proprietary company limited by shares in accordance with Part 2B.7 of the Corporations Act 2001 (Cth) and from the time that the change of company type becomes effective pursuant to section 164(5) of the Corporations Act 2001 (Cth), the company be known as The Doctors’ Health Fund Pty Limited; and You must sign here If you mark both the FOR and AGAINST box for a particular Resolution your vote on that Resolution will be invalid immediately following the change of company type becoming effective pursuant to section 164(5) of the Corporations Act 2001 (Cth), DHF issue ordinary shares in the capital of DHF to Avant in accordance with the terms of the Implementation Deed. IMPORTANT: This section must be signed or authenticated in accordance with the instructions overleaf, otherwise this form will be invalid. Signature of Member You must sign here Date IMPORTANT: This section must be signed or authenticated in accordance with the instructions overleaf, otherwise this form will be invalid. Signature of Member Ground Floor, 69 Christie Street St Leonards, NSW 2065 ABN 68 001 417 527 www.doctorshealthfund.com.au Date Payment Authority Green Form Payment Authority Use this form if you want your cash Entitlement paid directly into an Australian Financial Institution account. Member name ACCOUNT DETAILS DHF Membership Number Please complete Option 1 or Option 2 below Option 1 If you have an Australian Financial Institution account from which DHF currently directly debits your Policy premium contribution payments, and you want your cash Entitlement to be paid into that same account, please mark x in the following box. A detailed payment advice will be provided for each payment. Option 2 Insert details of the Australian Financial Institution, Branch and Account into which you want your cash Entitlement under the Proposal to be paid. A detailed payment advice will be provided for each payment. Name(s) in which your account is held BSB Number Account Number Name of Financial Institution Branch Suburb/Town You must sign here This section must be signed by the person whose name appears at the top of this form (being the DHF Member). If signed by an attorney, the power of attorney must have been previously noted by DHF or a certified copy of the power of attorney must be attached to this form. A solicitor or justice of the peace can certify a copy of the Power of Attorney. Signature of member Date Please send this Payment Authority to: Locked Bag 8100, Kingsgrove, NSW 2208. Privacy clause: Information is collected to administer payments to you under the Proposal and if some or all of the information is not collected then it might not be possible to administer those payments. Your personal information may be disclosed to Avant or their related entities. You can obtain access to your personal information by contacting DHF. Capitalised terms used in this Payment Authority have the meaning given to them in the Glossary in Section 12 of the Scheme Booklet. 2 OR please do not write your own name please do not write your own name a) the Proposal, you should consult your legal, The Chair of the Scheme Meeting please write below the name of the person you are nominating (if this person is someone other than the Chair of the Extraordinary General Meeting.) Resolution 2: Change of Company Type THAT conditional on the Scheme becoming Effective: If you are in doubt as to how to deal with Proxy for Scheme Meeting Dear Member of DHF If you wish to appoint a proxy to vote on your behalf please read the instructions overleaf, then complete and lodge this form by 10.00am (Sydney time) on 3 April 2012. If you prefer and you are a registered DHF Member on 24 February 2012, you may vote online at www.doctorshealthfund.com.au/AvantProposal/Voting by 10.00am (Sydney time) on 3 April 2012. Alternatively, you may vote in person at the Extraordinary General Meeting (EGM) to be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW, 10.00am (Sydney time) on 4 April 2012. (mark X in the box here) the Glossary in Section 12 for an explanation Red Form Member Name Ground Floor, 69 Christie Street St Leonards, NSW 2065 ABN 68 001 417 527 www.doctorshealthfund.com.au Ground Floor, 69 Christie Street St Leonards, NSW 2065 ABN 68 001 417 527 www.doctorshealthfund.com.au Contents Table of Contents What you should do ........................................................... 4 Summary............................................................................. 6 Important steps & dates ....................................................... 9 Organisation structure ......................................................... 10 1. Important notices........................................................... 11 2. Voting on the Proposal.................................................... 13 3. Answers to key questions............................................... 17 4. The Proposal in detail..................................................... 23 5. Reasons to vote in favour of the Resolutions................... 30 6. Reasons to vote against the Resolutions.......................... 32 7. Allocation and Entitlements............................................. 33 8. The Private Health Insurance Industry............................. 39 9. Information about DHF.................................................. 42 10.Information about Avant and Avant’s commitments and current intentions .................................................... 47 11. Additional information..................................................... 51 12.Glossary ....................................................................... 62 Appendix 1 – Notice of EGM............................................... 68 Appendix 2 – Notice of Scheme Meeting............................. 72 Appendix 3 – Scheme of Arrangement................................. 75 Appendix 4 – Allocation Rules.............................................. 82 Appendix 5 – Review Committee Charter............................ 86 Appendix 6 – Deed Poll....................................................... 93 Appendix 7 – Summary of Independent Expert’s Report....... 97 Appendix 8 – Appointed Actuary’s Report............................ 126 Appendix 9 – Independent Actuary’s Report......................... 148 Appendix 10 – Tax Advice Letter.......................................... 154 Appendix 11 – Explanation of Constitutional Changes proposed at the EGM.................................... 158 Corporate Directory............................................................ 164 3 What you should do 1 Read this Scheme Booklet in its entirety carefully 2 You may vote on the Resolutions ■■ in person by attending the EGM and the Scheme Meeting; ■■ online at www.doctorshealthfund.com.au/ AvantProposal/Voting; ■■ by proxy; or ■■ by appointing an attorney under a power of attorney. Scheme Booklet For a scheme of arrangement between The Doctors’ Health Fund Limited (ABN 68 001 417 527) and its members in relation to its proposed acquisition by Avant Group Holdings Limited (ABN 72 077 283 884). 3 Section 2 of this Scheme Booket has full details on how to vote. FOR EASE OF VOTING You may vote online If you are registered as a DHF Member on 24 February 2012, you can vote online by visiting: www.doctorshealthfund.com.au/AvantProposal/Voting. If so, please take advantage of this convenient voting facility before 10.00am on 3 April 2012 ONLINE www.doctorshealthfund.com.au/AvantProposal/Voting 4 lue Form Blue Form Proxy for Extraordinary General Proxy Meeting for Extraordinary General Meeting mber Name Member Name for Extraordinary General Meeting ProxyProxy for Extraordinary General Meeting mber Number Member Number Red Form Red Form Red RedForm Form 4 Proxy for Scheme Meeting Proxy Proxy for Scheme for Scheme Meeting Meeting Proxy for Schem ember of DHF Dear Member of DHF ish to appoint a proxy to vote on your If you behalf wish please to appoint read the a proxy instructions to voteoverleaf, on your then behalf complete please read andthe lodge instructions this overleaf, complete and lodge this Member Name Memberthen Name 10.00am (Sydney time) on 3 April 2012. form by 10.00am (Sydney time) on 3 April 2012. Member Member NameName prefer and you are a registered DHF If youMember prefer and on 24 youFebruary are a registered 2012, you DHF may Member vote online on 24 at February 2012, you may vote online at Member Number Member Number octorshealthfund.com.au/AvantProposal/Voting by 10.00am (Sydney time) on 3 April 2012. by 10.00am (Sydney time) on 3 April 2012. Member Member Number Number www.doctorshealthfund.com.au/AvantProposal/Voting tively, you may vote in person at the Alternatively, Extraordinary may vote Meeting in proxy person (EGM) at the beExtraordinary held at the AMA General Conference Meeting Centre, (EGM)the to be held at the Scheme AMA Conference Centre, If you prefer you toGeneral give your toto someone who will be attending EGM and Meeting complete, Barcode stie Street, St Leonards, NSW, 10.00am 69 Christie (SydneyStreet, time) St onLeonards, 4 April 2012. NSW, 10.00am (Sydney time) on 4 April 2012. euctions instructions overleaf, then complete and lodge this overleaf, then complete and lodge this Barcode sign and date your Blue and Dear Red Member Forms and return them toBarcode DHF no later than the closing time for proxies, of DHF Dearby Member of DHF If you wish to appoint a proxy to vote on your If you behalf wish please to appoint read the a proxy instructions to voteoverleaf, on your then behalfcomplete please read andthe lodge instructions this overleaf, the ointment of proxy Appointment of proxy 10.00am on 3 April 2012. Dear Member Dear Member of DHF of DHF February you vote may online vote online ary 2012,2012, you may at at form by 10.00am (Sydney time) on 3 April 2012. form by 10.00am (Sydney time) on 3 April 2012. If you(Sydney Ifwish you to wish appoint appoint a3proxy a proxy to vote toon vote your onbehalf your behalf pleaseplease read the read instructions the instructions overleaf, overleaf, then complete then complete and lodge and lodge this this 0.00am time) on April 2012. m (Sydney time) on 3toApril 2012. If you prefer and you are a registered DHF If youMember prefer and on 24 youFebruary are a registered 2012, you DHF mayMember vote online on 24 atFebruary 2012, you ma form by form 10.00am 10.00am (Sydney on 3 April on 3 2012. April 2012. of(EGM) DHF, entitled totime) vote, I,hereby being appoint a Member either: of DHF, and entitled to vote, hereby appoint either: lMember Meeting to(Sydney beatheld at thetime) AMA Conference Centre, ting (EGM) tobybeand held the AMA Conference Centre, www.doctorshealthfund.com.au/AvantProposal/Voting www.doctorshealthfund.com.au/AvantProposal/Voting by 10.00am (Sydney time) on 3 April 2012. by 10.00am (Sydney time) on 3 Proxy for Extraordinary General Meeting Proxy for Scheme Meeting Blue Form Red Form If you2012. Ifprefer you prefer and you andare youa are registered a registered DHF DHF Member Member on 24on February 24 February 2012,2012, you may you vote may online vote online at at 4l 2012. April Alternatively, youyou may in person atthethe Alternatively, Scheme youyou may to are bevote held inatperson the AMA at the Conference Scheme Meeting Centre,to be held at the AMA Confer The Chair of the The Chair of the please write below the the(Sydney person please arevote nominating write name of theMeeting person nominating www.doctorshealthfund.com.au/AvantProposal/Voting www.doctorshealthfund.com.au/AvantProposal/Voting byname 10.00am byof10.00am (Sydney time) time) on 3 April onbelow 3 2012. April 2012. 69 Christie Street, St Leonards, NSW, 10.00am 69 Christie (Sydney Street, time) on 4the April 2012. NSW, 10.00am (Sydney time) on 4 April 2012. Extraordinary General Meeting Extraordinary Meeting (if this personGeneral is someone other than the Chair of (if the thisExtraordinary person is someone other than the ChairSt ofLeonards, Extraordinary Alternatively, Alternatively, you may youvote mayinvote person in person at the at Scheme the Scheme Meeting Meeting to be to held beatheld theat AMA the General Conference AMA Conference Centre, Centre, General Meeting.) Meeting.) (mark X in the box here) (mark X in the box here) 69 Christie 69 Christie Street,Street, St Leonards, St Leonards, NSW,NSW, 10.00am 10.00am (Sydney (Sydney time) time) on 4 April on 4 2012. April 2012. You can appoint a proxy OR OR Member Name Member Number Member Name Member Number Barcode Dear Member of DHF If you wish to appoint a proxy to vote on your behalf please read the instructions overleaf, then complete and lodge this form by 10.00am (Sydney time) on 3 April 2012. If you prefer and you are a registered DHF Member on 24 February 2012, you may vote online at www.doctorshealthfund.com.au/AvantProposal/Voting by 10.00am (Sydney time) on 3 April 2012. Alternatively, you may vote in person at the Extraordinary General Meeting (EGM) to be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW, 10.00am (Sydney time) on 4 April 2012. Appointment of proxy Appointment Appointment of proxy of proxy Dear Member of DHF If you wish to appoint a proxy to vote on your behalf please read the instructions overleaf, then complete and lodge this form by 10.00am (Sydney time) on 3 April 2012. If you prefer and you are a registered DHF Member on 24 February 2012, you may vote online at www.doctorshealthfund.com.au/AvantProposal/Voting by 10.00am (Sydney time) on 3 April 2012. Alternatively, you may vote in person at the Scheme Meeting to be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW, 10.00am (Sydney time) on 4 April 2012. Appointment of proxy Appointment of proxy Appointment of proxy I, being a Member of DHF, and entitled to vote, I,hereby being aappoint Member either: of DHF, and entitled to vote, hereby appoint either: below the of name of the person are nominatingplease OR OR the name the person you areyou nominating do not write your own name please do not write your own name n isI,someone other than the Chair of the Extraordinary meone other than the Chair of the Extraordinary please write below the name of the person you please are nominating write below the name of the perso The Chair of the Scheme Meeting The Chair of the Scheme Meeting beingI, abeing Member a Member of DHF, ofand DHF, entitled and entitled to vote, tohereby vote, hereby appointappoint either:either: him/her, (or if the box is not marked and or no failing proxy him/her, is specified (or if the above), box the is not Chair marked of the and EGM, no proxy as myisproxy specified to vote above), for me theand Chair on of the(mark EGM, as the my box proxy to vote other for methan andthe on Chair of ting.) (if this ishere) someone (if the this Scheme person isMeeting.) someone other than the (mark X in the box here) X inperson lf and to vote in accordance with the following my behalf instructions and to vote (or,inifaccordance no directions with arethe given, following as theinstructions proxy sees fit) (or,atif the no directions EGM and are at given, as the proxy sees fit) at the EGM and at please please write below write below the name the of name the of person the person you areyou nominating are nominating Themeeting. Chair The of Chair the of Scheme the Scheme Meeting Meeting of that meeting. urnment of that any adjournment Record your vote Record your vote (if this (if person this person is someone is someone other than otherthe than Chair the of Chair the of Scheme the Scheme Meeting.) Meeting.) (mark X(mark in theXbox in the here) box here) I, being a Member of DHF, and entitled to vote, hereby appoint either: I, being a Member of DHF, and entitled to vote, hereby appoint either: The Chair of the Extraordinary General Meeting (mark X in the box here) please write below the name of the person you are nominating (if this person is someone other than the Chair of the Scheme Meeting.) The Chair of the Scheme Meeting please write below the name of the person you are nominating (if this person is someone other than the Chair of the Extraordinary General Meeting.) (mark X in the box here) OR please do not write your own name please do not write your own name or failing him/her, (or if the box is not marked and no proxy is specified above), the Chair of the Scheme Meeting, as my proxy to vote for me and on my behalf and to vote in accordance with the following instructions (or, if no directions are given, as the proxy sees fit) at the Scheme Meeting and at any adjournment of that meeting. or failing him/her, (or if the box is not marked and no proxy is specified above), the Chair of the EGM, as my proxy to vote for me and on my behalf and to vote in accordance with the following instructions (or, if no directions are given, as the proxy sees fit) at the EGM and at any adjournment of that meeting. OROR OR If you wish to direct your proxy how to vote on the Resolution please mark X in the appropriate box below. If you wish to direct your proxy how to vote on the Resolutions please mark X in the appropriate box below. Resolution 1: Constitutional Amendment Resolution 1: Approval of Scheme of Arrangement For Against For Against THAT under, and in accordance with, the provisions of Section 411 of the Corporations Act 2001 (Cth), the scheme of arrangement proposed between The Doctors’ Health Fund Limited and the Members as set out in the Scheme Booklet accompanying this Notice is agreed to (with or without any modification as approved by the Court). THAT conditional on the Scheme becoming Effective, the DHF Constitution be amended as set out in Annexure A to the notice of meeting. rd your vote Record your vote write your own name our own name Resolution 2: Change of Company Type THAT conditional on the Scheme becoming Effective: For Against please do not write your own name please do not write your own name If you mark both these boxes your vote will be invalid You must sign here or failing him/her, (or if the box is not marked and or no failing proxy him/her, is specified (or if the above), box is the not Chair marked of the and Scheme no proxy Meeting, is specified as myabove), proxy to thevote Chair forof the Schem bove), the of Chair of the as EGM, as my to proxy vote the Chair the EGM, my proxy votetofor mefor andme onand on and on my behalf to vote in accordance me withand theonfollowing my behalf instructions and to vote (or,inifaccordance no directions with arethe given, following as theinstructions proxy sees (or, fit) at if no thedirections are do please notme do write notyour write own your name ownand name no directions are as given, as the sees proxyfit)sees fit) EGM at theand EGM at ections are given, the proxy at the at and please sh to direct your proxy how to vote on Ifthe you Resolutions wish to direct please your mark proxy X in how the to appropriate vote on the box Resolutions below. please mark X in the appropriate box below. Scheme Meeting and at any adjournment of thatScheme meeting. Meeting and at any adjournment of that meeting. sign here or failing or him/her, failing him/her, (or if the (orbox if the is box notYoumarked ismustnot marked and noand proxy no proxy is specified is specified above),above), the Chair the of Chair the of Scheme the Scheme Meeting, Meeting, as my proxy as my proxy to votetofor vote for onme 1: and Constitutional Resolution 1: Constitutional Amendment Forgiven, For Against me onand my on behalf myAmendment behalf and toand votetoinvote accordance in accordance with the with following the following instructions instructions (or, if no (or,directions if no directions are given, are as the Against as proxy the proxy sees fit) sees at the fit) at the Scheme Meeting Meeting and at and any Effective, at adjournment any adjournment of that ofmeeting. that meeting. ditional onScheme the Scheme becoming THAT the DHF conditional Constitution on the Scheme becoming Effective, the DHF Constitution ded as set out in Annexure A to the notice ofbemeeting. amended as set out in Annexure A toRecord the notice of meeting. your vote Record your vote a) b) DHF change its company type from a public company limited by guarantee to a proprietary company limited by shares in accordance with Part 2B.7 of the Corporations Act 2001 (Cth) and from the time that the change of company type becomes effective pursuant to section 164(5) of the Corporations Act 2001 (Cth), the company be known as The Doctors’ Health Fund Pty Limited; and immediately following the change of company type becoming effective pursuant to section 164(5) of the Corporations Act 2001 (Cth), DHF issue ordinary shares in the capital of DHF to Avant in accordance with the terms of the Implementation Deed. If you mark both the FOR and AGAINST box for a particular Resolution your vote on that Resolution will be invalid IMPORTANT: This section must be signed or authenticated in accordance with the instructions overleaf, otherwise this form will be invalid. Signature of Member Date IMPORTANT: This section must be signed or authenticated in accordance with the instructions overleaf, otherwise this form will be invalid. Signature of Member Ground Floor, 69 Christie Street St Leonards, NSW 2065 ABN 68 001 417 527 www.doctorshealthfund.com.au Date Ground Floor, 69 Christie Street St Leonards, NSW 2065 ABN 68 001 417 527 www.doctorshealthfund.com.au Against Against Record your your vote vote you wishProxy to direct your proxy howFor to vote on Ifthe youResolution wishthe to direct please your mark proxy Xname inhow theFor appropriate toyour vote on the boxResolution below. please mark X in the appropriate box onRecord 2: Change of Company Type Resolution 2: Change Company Appoint the Chairofor nameIf Type your Appoint Chair or Proxy ark X appropriate inonthe box below. in the box below. ditional theappropriate Scheme becoming Effective:THAT conditional on the Scheme becoming Effective: Resolution 1: Approval Resolution 1: Approval of Scheme of Arrangement DHF change its company type from a public company a) DHF limited change by guarantee its company to a type proprietary from a company public company limitedofbyScheme guaranteeoftoArrangement a proprietary company Against Against If you wish If youtowish direct to direct your proxy your proxy how toFor how votetoFor onvote theon Resolution the Resolution please please mark Xmark in the X appropriate in the appropriate box below. box below. THAT under, andofthat in with, provisions ofTHAT Section 411 and of that the inyour accordance Corporations with, Act-the 2001 provisions (Cth), the of Section scheme411 of of the Corporations Act 2001 (Cth), the sch Vote limited by shares in accordance with Part Clearly 2B.7 of the mark Corporations limited byyour shares Act 2001 in accordance (Cth)- and with from Part the2B.7 time theaccordance Corporations Actthe 2001 (Cth)Clearly and fromunder, the time mark Vote IfDoctors’ you mark both the FOR Limited If you bothScheme the FORBooklet arrangement proposed The164(5) Health arrangement Fund and the between MembersThe as set Doctors’ outmark in Health the Fund Limited and the Members out in the Scheme the change of company type becomes effective pursuant thetochange sectionof164(5) company of the typeCorporations becomes effective Act 2001 pursuantbetween to section of the Corporations Act proposed 2001 For as setAgainst and AGAINST box for aor Against the Scheme and AGAINST box for a For or Against for each Resolution Resolution Resolution 1: Approval 1: Approval of Scheme of Scheme of Arrangement of Arrangement For Resolution accompanying Notice agreed to (with accompanying any modification this Notice as approved is agreed by the toparticular (with Court). orResolution without any modification as approved by the Court). (Cth), the company be known as The Doctors’ Health (Cth), Fund Pty theLimited; companyand be known as The Doctors’ this Health Fundis Pty Limited; and or without particular Resolution your your THAT under, THAT and under, inthe accordance andchange in accordance the with, provisions provisions of Section of following Section 411pursuant of 411 the oftothe Corporations Act 2001 Act 2001 the (Cth), scheme thevote scheme ofpursuant on thatofResolution vote on that Resolution immediately following ofwith, company type b)thebecoming immediately effective the Corporations change section of company 164(5) oftype the(Cth), becoming effective to section 164(5) of the arrangement arrangement between between The TheFor Doctors’ Health Fund Limited theto and Members the Members as ordinary set out as set inshares the outScheme inin the Booklet will be invalid to Avant in accordance will be invalid ForHealth Against Corporations Actproposed 2001 proposed (Cth), DHF issueDoctors’ ordinary shares Corporations inFund the Limited capital Act 2001 ofand DHF (Cth), Avant DHF in issue accordance the Scheme capital ofBooklet DHF Against For ForAgainstAgainst accompanying accompanying Notice this Notice is agreed isDeed. agreed to (withtoor(with without or the without anyterms modification any modification as approved as approved by the Court). by the Court). with the terms of this the Implementation with of the Implementation Deed. If you mark both these boxes to a proprietary company atee proprietary company must sign here 2001 (Cth) and the time that th) and from thefrom time that You must sign here You must sign here your vote will be invalid You must sign here If you mark If you mark If you bothmark theseboth boxes these boxes If you mark both theboth FORthe FOR 5) of the Corporations Actbe 2001 e Corporations Act 2001 ANT: This section must signed or authenticated IMPORTANT: in accordance This sectionwith mustthe be instructions signed or authenticated in accordance with the instructions IMPORTANT: This section must be signed or authenticated IMPORTANT: ininvalid This accordance with mustthe be instructions signed or authenticated in accordance with the instructions your voteyour will be vote will be section invalid and AGAINST and AGAINST box for abox for a and otherwise this form will be invalid. overleaf, otherwise this form will be invalid. overleaf, otherwise this form will be invalid. overleaf, otherwise form will be invalid. particular Resolution your particular Resolution yourthe Sign and Datethis the form Sign and Date form voteResolution on that Resolution vote on that pursuant to section nt to section 164(5)164(5) of the of the will be invalid will be be invalid DHF inThis accordance FoftoIMPORTANT: AvanttoIMPORTANT: inAvant accordance section This section must be must signed signed or authenticated or authenticated in accordance in accordance with the with instructions the instructions Ground Floor, 69 Christie Street Ground Floor, 69 Christie Street overleaf, overleaf, otherwise otherwise this form thiswill form bewill invalid. be invalid. St Leonards, NSW 2065 St Leonards, NSW 2065 YouYou must must signsign herehere e of Member Signature of Member Date ethe with the instructions instructions Signature Signature of Member of Member 5 Signature of Member Signature of Member Date Date ABN 68 001 417 527 www.doctorshealthfund.com.au ABN 68 001 417 527 www.doctorshealthfund.com.au Date Date Date Floor, 69the Christie GroundGround Floor, 69 Christie Street Street Complete Green St Leonards, NSW 2065 St Leonards, NSW 2065 68 001 527 Payment Authority ABN 68ABN 001 417 527417 www.doctorshealthfund.com.au www.doctorshealthfund.com.au For ease and speed of payment, your Entitlement can be paid directly into an Australian nominated financial institution account. Just complete the Green Form in accordance with the instructions on that form and return it before 5.00pm on 29 May 2012. Green Form Payment Authority Use this form if you want your cash Entitlement paid directly into an Australian Financial Institution account. GroundGround Floor, 69 Floor, Christie 69 Christie Street Street St Leonards, St Leonards, NSW 2065 NSW 2065 ACCOUNT DETAILS ABN 68ABN 001 68 417001 527417 527 Option 1 www.doctorshealthfund.com.au www.doctorshealthfund.com.au Member name Ground Floor, 69 Christie Street St Leonards, NSW 2065 ABN 68 001 417 527 www.doctorshealthfund.com.au DHF Membership Number Please complete Option 1 or Option 2 below If you have an Australian Financial Institution account from which DHF currently directly debits your Policy premium contribution payments, and you want your cash Entitlement to be paid into that same account, please mark x in the following box. A detailed payment advice will be provided for each payment. Option 2 Insert details of the Australian Financial Institution, Branch and Account into which you want your cash Entitlement under the Proposal to be paid. A detailed payment advice will be provided for each payment. Name(s) in which your account is held BSB Number Account Number Name of Financial Institution Branch Suburb/Town You must sign here This section must be signed by the person whose name appears at the top of this form (being the DHF Member). If signed by an attorney, the power of attorney must have been previously noted by DHF or a certified copy of the power of attorney must be attached to this form. A solicitor or justice of the peace can certify a copy of the Power of Attorney. Signature of member Date Please send this Payment Authority to: Locked Bag 8100, Kingsgrove, NSW 2208. Privacy clause: Information is collected to administer payments to you under the Proposal and if some or all of the information is not collected then it might not be possible to administer those payments. Your personal information may be disclosed to Avant or their related entities. You can obtain access to your personal information by contacting DHF. Capitalised terms used in this Payment Authority have the meaning given to them in the Glossary in Section 12 of the Scheme Booklet. Ground Floor, 69 Christie Street St Leonards, NSW 2065 ABN 68 001 417 527 www.doctorshealthfund.com.au 5 Summary Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. This Scheme Booklet contains details of a proposed transaction under which DHF will demutualise and be acquired by Avant by way of a scheme of arrangement which must be approved by the Federal Court of Australia. DHF Members will be asked to vote on the Resolutions which are necessary to implement the Proposal at an EGM and the Scheme Meeting which follows the EGM. These meetings will be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW on 4 April 2012 commencing at 10.00am. The notices for these meetings, the Resolutions to be considered at these meetings, and details of how and when DHF Members can vote, are explained in this Scheme Booklet. In order for the Proposal to be implemented, all of these Resolutions must be approved by DHF Members, various approvals from Government agencies must be obtained and the Scheme must be approved by the Court. You should have received a letter from the DHF Board with this Scheme Booklet, a blue proxy form, a red proxy form and a green Payment Authority. If you have not received each of these, please call the Proposal Hotline on 1800 508 716. This Summary highlights selected information that is described in greater detail elsewhere in this Scheme Booklet. As it does not contain all of the important information, you should carefully read the entire Scheme Booklet, including the documents in the appendices, for a more complete understanding of the Proposal. Background In March 2011, DHF was approached by Avant, which expressed interest in acquiring DHF. The approach by Avant to acquire DHF was not solicited by DHF or the DHF Board. After signing a Confidentiality Deed on 4 April 2011 and holding preliminary discussions, Avant and DHF agreed to proceed to formal due diligence and to negotiate an Implementation Deed. On 11 August 2011, DHF and Avant entered into the Implementation Deed, which was subsequently restated and amended by DHF and Avant on 8 February 2012. Under the terms of the Implementation Deed, the Proposal is subject to the conditions explained in Section 4. The key provisions of the Implementation Deed are summarised in Section 11.1. What could you receive? If the Proposal is implemented, Avant will pay $30 million which will be distributed among Scheme Members. A Scheme Member is a person who is: ■■ a DHF Member at the Scheme Record Time; or ■■ a Prescribed Member. The amount explained in the letter from the DHF Board sent with this Scheme Booklet - called your Initial Entitlement - will be paid to you as long as you remain a DHF Member at the Scheme Record Time. (If you became a DHF Member after the Calculation Date, to receive an Initial Entitlement as a Scheme Member, you must not suspend your Policy.) You may also subsequently receive a small additional amount - called a Residual Entitlement. If you complete and return the green Payment Authority by 5.00pm on 29 May 2012, Entitlements will be paid by direct deposit into your Australian financial institution account (bank, credit union or building society). Otherwise, payment will be made by cheque. Entitlements are determined under Allocation Rules set by the DHF Board on the recommendation of DHF’s Appointed Actuary. The Allocation Rules are explained in Section 7, which includes examples to assist you in understanding how Entitlements have been calculated. The Allocation Rules are set out in full in Appendix 4. A review process has been established if you believe that your Initial Entitlement has not been correctly calculated or for those who believe that they should have an Entitlement. The review process is explained in Section 7.10. 6 What happens to your Policy? Your Policy will continue in accordance with its terms and remain subject to regulatory safeguards. How does the Proposal affect your rights as a DHF Member? If the Proposal is implemented, DHF will convert from a public company limited by guarantee to a proprietary company limited by shares and Avant will then become its sole shareholder. This means that DHF Members will lose the rights that they have as members of the company under the DHF Constitution and under the law. These rights include the right to attend and vote on resolutions at general meetings of DHF, to vote on a resolution on a winding up of DHF and to vote on a resolution to elect or remove a DHF director. Losing these rights as a member of the company will not affect your rights under your Policy. What does the Proposal mean for DHF? If the Proposal is implemented, DHF will demutualise, convert to a proprietary company limited by shares and change from a “not-for-profit” to “for-profit” private health insurer. This means that DHF will be taxed on the profits in its Health Benefits Fund and may distribute dividends and return surplus capital to Avant as its sole member and shareholder. Importantly, under the Corporations Act, DHF can only pay dividends if its assets exceed its liabilities. In addition, no transfer of capital can be made if this would result in a breach of the solvency and capital adequacy prudential standards under the PHIA. Currently, as a mutual, DHF has no access to capital other than through surpluses generated from its operations. If the Proposal is implemented, DHF will benefit from Avant Mutual’s capital strength when pursuing its business plans. Avant Mutual is the parent company of Avant Group and is a mutual organisation with the vast majority of its members being medical practitioners, doctors in training or medical students. DHF will continue to be registered as a restricted access private health insurer. As part of the Proposal, DHF has applied to DoHA to expand its restricted access group to enable DHF to provide private health insurance to additional selected categories of health practitioners and officers, employees and contractors of Avant Insurance and Avant Law Pty Limited. What are Avant’s commitments and intentions? Details about Avant’s current intentions and commitments in relation to DHF are set out in Section 10.5. Will your Entitlement be subject to income tax? PricewaterhouseCoopers has provided the Tax Advice Letter included in Appendix 10. While advising Scheme Members to obtain their own independent professional advice on the income tax implications specific to their own circumstances, in PricewaterhouseCoopers’ opinion the amount received by Scheme Members should not be subject to income tax. Will your Entitlement affect Social Security payments? If you receive social security payments, they may be affected by your Entitlement. Further information is given in Section 4.8. Other Proposals After the Avant offer was announced, DHF received a non-binding indicative offer of $30 million from another private health insurer. Although this Competing Proposal offered consideration that was higher than Avant’s original offer of $28.5 million, it was subject to conditions that, in the view of the DHF Board, made it less favourable. DHF notified Avant of the Competing Proposal and Avant increased its offer to $29.25 million. While the DHF Board sought to negotiate acceptable conditions with the other private health insurer, these negotiations were unsuccessful and the Competing Proposal was eventually withdrawn. After considering DHF’s unaudited results to 31 December 2011, Avant further increased its offer to $30 million. As at the date of this Scheme Booklet, no offer that the DHF Board considers is a Superior Proposal has been received. Expert Reports Independent Expert Lonergan Edwards & Associates Limited was appointed by DHF to consider the Proposal as an independent expert. A summary of the Independent Expert’s report is set out in Appendix 7. The report can be reviewed in full by visiting www.doctorshealthfund.com.au/AvantProposal/SchemeofArrangement or you can request a copy by calling the Proposal Hotline on 1800 508 716. 7 The Independent Expert concluded that the Proposal “is fair and reasonable and in the best interests of Scheme Members in the absence of a current better proposal”. In reaching this conclusion, the Independent Expert considered the Competing Proposal and Avant’s increased offer referred to above, and the unaudited results for DHF to 31 December 2011 set out in Section 9.3. Appointed Actuary David Torrance of KPMG Actuarial Pty Ltd is DHF’s Appointed Actuary. Mr Torrance reviewed the Proposal and concluded, having regard to the matters set out in the Appointed Actuary’s Report, that: ■■ T he Allocation Rules represent a fair and reasonable basis upon which the financial benefit arising from the Proposal will be distributed amongst Scheme Members. ■■ Policy holders’ benefits should remain adequately secure if the Proposal is approved. ■■ Future premium rates are unlikely to be impacted in a material manner by the Proposal. ■■ T he reasonable benefit expectations of Policy holders are unlikely to be impacted in a materially adverse manner by the Proposal. The Appointed Actuary’s Report is set out in Appendix 8. Independent Actuary David Goodsall of Synge & Noble Pty Ltd was appointed by DHF to consider the Proposal as an independent actuary. He concluded that the principles on which the Allocation Rules are based reasonably address relevant considerations for the allocation and that the allocation methodology as represented by the Allocation Rules is fair and reasonable. While noting that the future impact on Policy holders will be a function of future experience and circumstances which cannot be reliably predicted or guaranteed, on the basis of the information available to him, including the report and the opinions of the Appointed Actuary, he considered that: ■■ Policy holders’ benefits should remain adequately secure if the Proposal is approved. ■■ Future premium rates are unlikely to be impacted in a material manner by the Proposal. ■■ T he reasonable benefit expectations of Policy holders are unlikely to be impacted in a materially adverse manner by the Proposal. The Independent Actuary’s Report is set out in Appendix 9. Voting The Notices for the EGM and the Scheme Meeting, the Resolutions to be considered at these meetings and details of how and when DHF Members can vote, are explained in Section 2. Section 5 sets out some reasons why DHF Members might wish to vote for the Resolutions, while Section 6 sets out some reasons why DHF Members might wish to vote against the Resolutions. DHF Board’s unanimous recommendation The DHF Board unanimously recommends that DHF Members vote FOR the EGM Resolutions at the EGM, and FOR the Scheme Resolution at the Scheme Meeting following the EGM, in the absence of a Superior Proposal. The DHF Board has reached this view after considering the Expert Reports and the arguments for and against the Proposal. The reasons for the DHF Board’s recommendation are set out in Section 5. Each DHF director is a DHF Member and intends, in that capacity, to vote for the Resolutions if no Superior Proposal is received. As at the date of this Scheme Booklet, no offer that the DHF Board considers is a Superior Proposal has been received. 8 Important steps & dates Key Event Date Calculation Date The Calculation Date is 5.00pm 17 January 2012. This date has been selected because it is the latest practical time before the EGM and Scheme Meeting to collect all the data necessary to determine Initial Entitlements before finalising this Scheme Booklet. The letter from the DHF Board to DHF Members explaining their Initial Entitlement and enclosing this Scheme Booklet, Notices of Meeting for the EGM and the Scheme Meeting, proxy forms and Payment Authority is sent. 12 March 2012. If you are registered as a DHF Member at the Record Time, you will be entitled to vote at the EGM and the Scheme Meeting. The Scheme Meeting will immediately follow the EGM. The Record Time is 48 hours before the start of the EGM, being 10.00am on 2 April 2012. Latest time and date for lodgement of a completed proxy form or online vote for EGM and Scheme Meeting This is 10.00am on 3 April 2012, being 24 hours before the EGM. EGM and Scheme Meeting The EGM will be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW and will start at 10.00am on 4 April 2012. It will be followed by the Scheme Meeting. Court hearing for approval of the Scheme Expected to be 9.30am, 13 April 2012. Effective Date of the Scheme On approval of the Scheme - expected to be 13 April 2012. Scheme Record Time 5pm on the day two Business Days before the Implementation Date. Implementation Date for the Scheme This is the date on which the Change of Company Type becomes effective and is not known at the date of this Scheme Booklet. Expected payment of Initial Entitlement to Scheme Members On or shortly after the Implementation Date. Lodgement of Review Request Forms On or before 5.00pm on the day which is five Business Days after the Implementation Date. Expected payment to the Scheme Members of any Residual Entitlement 14 August 2012. All dates after the EGM and Scheme Meeting are indicative only and, amongst other things, are subject to the Court approval process. All dates and times are Sydney time. Please refer to the Glossary in Section 12 for an explanation of defined terms and expressions. 9 Organisation structure After the Proposal is implemented ■■ All of Avant’s offer of $30 million in cash will be distributed to Scheme Members in accordance with the Allocation Rules. ■■ DHF will become a subsidiary of Avant. ■■ After the Proposal is implemented, you will remain a DHF Policy holder, if you keep your Policy in force. Avant Mutual Group Limited Avant Group Holdings Limited Avant Insurance Limited The Doctors’ Health Fund Limited Avant Law Pty Limited Doctors’ Health Fund Policy holders 10 Avant Insurance Policy holders 1. Important notices Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. 1.1 Purpose of this Scheme Booklet This Scheme Booklet provides DHF Members with information about DHF’s proposed acquisition by Avant. It explains the Proposal and, if the Resolutions are approved, the manner in which it will be implemented. It also provides information material to the decision of DHF Members as to whether or not to vote in favour of the Resolutions. This Scheme Booklet is also the explanatory statement for the Scheme required under Part 5.1 of the Corporations Act. 1.2 Responsibility Statement DHF has been solely responsible for preparing the DHF Information. The information concerning DHF and the intentions, views and opinions of DHF and its directors contained in this Scheme Booklet have been prepared by DHF and the DHF directors and are the responsibility of DHF. Avant and its directors and Officers do not assume any responsibility for the accuracy or completeness of the DHF Information. Avant has been solely responsible for preparing the Avant Information. The information concerning Avant and the intentions, views and opinions of Avant contained in this Scheme Booklet have been prepared by Avant and are the responsibility of Avant. DHF and its directors and Officers do not assume any responsibility for the accuracy or completeness of the Avant Information. The Independent Expert’s Report in relation to the Proposal, a summary of which is included in Appendix 7 has been prepared by Lonergan Edwards & Associates Limited which takes responsibility for this report. The Appointed Actuary’s Report in relation to the Proposal included in Appendix 8 has been prepared by David Torrance of KPMG Actuarial Pty Ltd. David Torrance and KPMG Actuarial Pty Ltd take responsibility for this report. The Independent Actuary’s Report in relation to the Proposal included in Appendix 9 has been prepared by David Goodsall of Synge & Noble Pty Ltd. David Goodsall and Synge & Noble Pty Ltd take responsibility for this report. The Tax Advice Letter included in Appendix 10 has been prepared by PricewaterhouseCoopers which takes responsibility for this letter. Neither DHF and Avant, nor any of their respective directors, Officers or advisers (other than as referred to above), assume any responsibility for the accuracy or completeness of any of the information in the Independent Expert’s Report, the Appointed Actuary’s Report, the Independent Actuary’s Report or the Tax Advice Letter. 1.3 Read this document carefully This Scheme Booklet is important and should be read in its entirety before deciding whether or not to vote in favour of the Resolutions to be considered at the EGM and the Scheme Meeting. If you are in doubt as to what you should do, you should consult your legal, financial or other professional adviser. 1.4 Role of ASIC A copy of this Scheme Booklet has been given to ASIC pursuant to section 411(2) of the Corporations Act and registered with ASIC pursuant to section 412(6) of the Corporations Act. ASIC has been requested to provide a statement, in accordance with section 411(17)(b) of the Corporations Act, that it has no objection to the Scheme. If ASIC provides the statement, then it will be produced to the Court at the time of the Second Court Hearing Date. Neither ASIC nor any of its officers takes any responsibility for the contents of this Scheme Booklet. 1.5 Important Notice associated with the Court order under subsection 411(1) of the Corporations Act A copy of this Scheme Booklet has been lodged with the Court to apply for an order of the Court convening the Scheme Meeting. The fact that, under subsection 411(1) of the Corporations Act, the Court has ordered that a meeting be convened and has approved the Scheme Booklet required to accompany the notice of the meeting does not mean that the Court: ■■ h as formed any view as to the merits of the proposed Scheme, or as to how DHF Members should vote (on this matter DHF Members must reach their own decision); nor 11 ■■ has prepared, or is responsible for the content of, the Scheme Booklet. If DHF Members approve the EGM Resolutions at the EGM and the Scheme Resolution at the Scheme Meeting, and all of the other conditions precedent to the Scheme (excluding Court approval) have either been satisfied or waived, the Court will be asked to approve the Scheme. The Federal Court Rules provide a procedure for DHF Members to oppose the approval by the Court of the Scheme. If you wish to oppose the approval of the Scheme by the Court at the Second Court Hearing, you may file with the Court, and serve on DHF, a notice of appearance (and any affidavit on which you wish to rely at the hearing) at least one day before the Second Court Hearing Date. The Second Court Hearing Date is currently expected to be 9.30.am on 13 April 2012. Any change to this date will be notified on www.doctorshealthfund.com.au/AvantProposal/ProposalUpdates. 1.6 Forward looking statements Certain statements in this Scheme Booklet are forward-looking in nature. Generally, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “could”, “would”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “projects”, “predicts”, “potential” and other similar expressions. You should be aware that there are a number of risks (both known and unknown), uncertainties, assumptions and other important factors, some of which are beyond the control of DHF and Avant that could cause the actual conduct, results, performance or achievements of DHF or Avant to be materially different from those expressed or implied by such statements, or that could cause future conduct or results to be materially different from the historical conduct or results. Deviations in future conduct, results, performance and achievements are both normal and to be expected. DHF, Avant and their respective directors, Officers and advisers make no representation, nor give any assurance or guarantee, that the occurrence of the events expressed or implied in any forward-looking statements in this Scheme Booklet will occur. DHF, Avant and their respective directors, Officers or advisers are not responsible for any forward-looking statement in the Independent Expert’s Report, the Appointed Actuary’s Report, the Independent Actuary’s Report or the Tax Advice Letter. DHF Members are cautioned about relying on forward-looking statements included in this Scheme Booklet. The forward-looking statements in this Scheme Booklet reflect views held as at the date of this Scheme Booklet, unless otherwise specified. Subject to the Corporations Act and any other applicable laws or regulations, DHF and Avant disclaim any duty to update these statements other than with respect to information which is material to the making of a decision by a DHF Member regarding whether or not to vote in favour of the Resolutions that DHF and Avant respectively become aware of prior to the Scheme Meeting. 1.7 Privacy and personal information DHF will need to collect personal information to implement the Proposal. The personal information may include the name and contact details of DHF Members and their proxies or attorneys at the EGM and the Scheme Meeting. The collection of some of this information is required or authorised by the Corporations Act. DHF will also collect the information provided in the Payment Authority. Individuals in respect of whom personal information is collected have certain rights to access the information collected about them and may contact DHF to exercise those rights. This personal information may be disclosed to Avant, print, registry and mail service providers and to DHF’s and Avant’s advisers pursuant to the Proposal. Personal medical information, however, which is collected by DHF for the purposes of its Health Benefits Fund, is sensitive private information and is not made available to Avant. If the information outlined above is not collected, DHF may be hindered in, or prevented from, conducting the EGM or the Scheme Meeting, or implementing the Proposal effectively, or at all. DHF Members who appoint a proxy or attorney to vote at the EGM or the Scheme Meeting should inform that individual of the matters outlined above. Rights are given under section 173 of the Corporations Act for people to inspect and obtain a copy of DHF’s Register, which contains personal information (but not medical information) about DHF Members. As a restricted access private health insurer, however, DHF has the option of providing the use of a mailing house facility to such a person, rather than providing direct access to the Register. 1.8 Date of this Scheme Booklet This Scheme Booklet is dated 7 March 2012. 12 2. Voting on the Proposal Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. 2.1 Voting is important The Proposal cannot be implemented without the approval of DHF Members, who will be asked to vote on the EGM Resolutions at the EGM, and the Scheme Resolution at the Scheme Meeting. The EGM will be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW on 4 April 2012 commencing at 10.00am. The Scheme Meeting will follow the EGM. 2.2 Who can vote? If you are registered as a DHF Member at the Record Time, you will be entitled to vote on each of the EGM Resolutions at the EGM and the Scheme Resolution at the Scheme Meeting. The DHF Board strongly encourages you to exercise your right as a DHF Member to vote on the Resolutions. Voting on the EGM Resolutions and the Scheme Resolution will be conducted in accordance with the DHF Constitution. Accordingly, if you have a Single Policy (or a Family Policy with single parent family membership), you have one vote on each Resolution. If you have a Family Policy (except single parent family membership), you have two votes on each Resolution. When you vote, the returning officer will register one or two votes, as applicable, by reference to the type of Policy that you hold. Important: If you are not a DHF Member at the Record Time, you cannot vote on the EGM Resolutions or on the Scheme Resolution. If you terminate your Policy, or your Policy lapses, you will cease to be a DHF Member. (The date to which your premium contribution is paid is your “paid-to date”. Under the Fund Rules, as soon as your Policy is more than 2 months’ premium contribution payments in arrears, your Policy will lapse with effect from the paid-to date.) If your Policy is suspended in accordance with the Fund Rules, you are still a DHF Member and entitled to vote. 2.3 Voting on the EGM Resolutions At the EGM, DHF Members will be asked to approve: ■■ A mendments to the DHF Constitution that will allow Avant to become a member of DHF and facilitate the implementation of the Proposal. ■■ D HF changing from a public company limited by guarantee to a proprietary company limited by shares and the issue of shares to Avant. The EGM Resolutions are set out in the Notice of EGM in Appendix 1. To be passed, the EGM Resolutions must be carried by at least 75% of the votes cast on the resolution by DHF Members. 2.4 Voting on the Scheme Resolution At the Scheme Meeting, DHF Members will be asked to approve the Scheme. The Scheme Resolution is set out in the Notice of Scheme Meeting in Appendix 2. To be passed, the Scheme Resolution must be carried by a majority in number of DHF Members present and voting (whether in person, by attorney* or by proxy) at the Scheme Meeting and by at least 75% of the votes cast on the resolution by DHF Members (unless the Court orders otherwise). * You can appoint a person under a power of attorney who can attend and vote on your behalf. Please refer to Section 2.10. 2.5 All Resolutions must be passed If any of the EGM Resolutions, or the Scheme Resolution, is not passed by the required majorities of DHF Members, the Proposal will not proceed. 13 2.6 How to vote? You may vote on the EGM Resolutions at the EGM and the Scheme Resolution at the Scheme Meeting: ■■ in person by attending the EGM and the Scheme Meeting; ■■ If you are registered as a DHF Member on 24 February 2012, online; ■■ by proxy; or ■■ by appointing an attorney under a power of attorney. Each of these options is explained in more detail below. 2.7 Voting in person To vote in person, you must attend the EGM which will be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW on 4 April 2012, commencing 10.00am, and the Scheme Meeting which follows the EGM. Please bring your membership card to assist in registration. 2.8 Voting online If you are registered as a DHF Member on 24 February 2012, you can vote online by visiting www.doctorshealthfund.com.au/AvantProposal/Voting and following the instructions. To vote online, you must do this by no later than 10.00am on 3 April 2012. By voting online, you appoint the Chair of the EGM or the Scheme Meeting (as applicable) as your proxy to cast your vote on your behalf. 2.9 Voting by proxy To vote by proxy, you must complete, sign, date and return your blue proxy form and red proxy form (together with any power of attorney or other authority under which the proxy forms are signed, or a certified copy of that power or authority) so that the proxy forms are received by DHF by no later than the closing time for proxies (10.00am on 3 April 2012). Your blue proxy form and red proxy form are included with this Scheme Booklet. Please read the instructions on each proxy form carefully when completing the form. If you are appointing a proxy, he or she does not need to be a DHF Member. If you appoint but do not name a proxy, or your named proxy does not attend the applicable EGM or the Scheme Meeting, the Chair of the EGM or the Scheme Meeting (as applicable) will be your proxy. You may direct your proxy how to vote by marking the relevant box on each proxy form. If you do not mark a box, your proxy may vote as he or she decides. If the Chair of the applicable meeting is your proxy and you have not directed how she should vote on a Resolution, she intends to vote for the Resolution. If you appoint a proxy but then attend the meeting, your proxy’s powers are suspended while you are present at the meeting. You may return your proxy forms (and any supporting documents) by: Deliver to: Ground Floor, 69 Christie Street, St Leonards NSW Post to: Locked Bag 8100, Kingsgrove, NSW 2208 Fax to: 1300 987 218 Additional or replacement proxy forms may be obtained from DHF by calling the Proposal Hotline on 1800 508 716 or by visiting www.doctorshealthfund.com.au/AvantProposal/Voting. Unlike the forms included with this Scheme Booklet, the replacement forms will not contain your personal details. If you use a replacement proxy form, you will need to include your name and member number in the place indicated. 2.10Appointing an attorney You can appoint a person under a power of attorney who can attend and vote at the EGM and/or the Scheme Meeting on your behalf. If you wish your attorney to attend and vote at the EGM and/or the Scheme Meeting on your behalf, the original or a certified copy of the power of attorney authorising your attorney to attend and vote at the relevant meeting must be lodged with DHF before 10.00am on 3 April 2012. (A solicitor or Justice of the Peace can certify a copy of the power of attorney.) 14 You may lodge the power of attorney (and any supporting documents) by delivering, posting or faxing them to DHF at the address in Section 2.9 for the return of proxy forms. 2.11 Change your mind? If you change your mind after lodging a proxy form, or after voting online, you can still attend the meetings and vote. Your proxy’s powers (which are given to the Chair of the applicable meeting in the case of an online vote) are suspended while you are present at the meeting. If you wish to change your proxy forms, deliver, post or fax your new completed, signed and dated proxy forms to DHF so that they are received by DHF before 10.00am on 3 April 2012. If you wish to change your online vote, you can lodge a new online vote before 10.00am on 3 April 2012. If you have lodged a proxy form or online vote and you no longer wish to vote, you can revoke your proxy forms or online vote by delivering, posting or faxing your written revocation to DHF so it is received before 10.00am on 3 April 2012. Unless you attend the meetings, the latest valid online vote or proxy form which is received by DHF before 10.00am on 3 April 2012 will be regarded as the valid online vote or proxy appointment. 2.12Voting Q&As This Section sets out some questions and answers that you may have in connection with voting on the Resolutions. 1 Question Answer What should I have received? You should have received this Scheme Booklet, a letter from the DHF Board explaining your Initial Entitlement, a blue proxy form, a red proxy form and a green Payment Authority. If you have not received all of these documents, please call the Proposal Hotline on 1800 508 716. 2 When do I need to be a DHF Member in order to vote on the Resolutions? If you are a DHF Member at the Record Time, you will be entitled to vote at the EGM and the Scheme Meeting. 3 How might I cease to be a DHF Member? Under the DHF Constitution, you will cease to be a DHF Member: ■■ automatically if: ■■ you die; or ■■ you validly resign your membership; ■■ on a date specified by the DHF Board if: ■■ y ou cease to be a Contributing Member. (You will cease to be a Contributing Member if you terminate your Policy, or your Policy lapses). For further information, see Section 2.2; ■■ you are expelled from the company; ■■ in the opinion of the DHF Board, you bring the company into serious disrepute. If you are not a DHF Member at the Record Time, you will not be entitled to vote (or if you have voted, your vote will not be counted) at the EGM and the Scheme Meeting. 15 4 Can I vote if my Policy is temporarily suspended? Yes. If your Policy is suspended in accordance with the Fund Rules, you are still a DHF Member and your right to vote remains unchanged. 5 How many DHF Members must vote in favour of each Resolution for it to be passed? Each EGM Resolution, to be passed, must be carried by at least 75% of the votes cast on the resolution by DHF Members. 6 How many votes do I get on each Resolution? Voting on each Resolution will be conducted in accordance with the DHF Constitution. If you have a Single Policy (or a Family Policy with single parent family membership) you have one vote. If you have a Family Policy (except with single parent family membership) you have two votes. When you vote, the returning officer will register one or two votes, as applicable, by reference to the type of Policy that you hold. 7 What happens if the EGM Resolutions, or the Scheme Resolution, are not approved by the requisite majorities? The Proposal will not be implemented and Scheme Members will not receive any Entitlement. 8 What should I do if I am away or otherwise unable to attend the EGM and the Scheme Meeting? If you are unable to attend the EGM and the Scheme Meeting in person, you can vote online (if you are registered as a DHF Member on 24 February 2012), appoint a proxy, or appoint a person to act as your attorney under a power of attorney. 9 Can I vote by mail? Yes. Use the reply paid envelope provided with this Scheme Booklet to post your completed, signed and dated blue and red proxy forms to DHF at Locked Bag 8100, Kingsgrove, NSW 2208 to arrive by no later than 10.00am on 3 April 2012. 10 Can I vote by fax? Yes. Fax your completed, signed and dated blue and red proxy forms to 1300 987 218 by no later than 10.00am on 3 April 2012. 11 Can I vote online? You can vote online if you are registered as a DHF Member on 24 February 2012 by visiting www.doctorshealthfund.com.au/ AvantProposal/Voting and following the instructions by no later than 10.00am on 3 April 2012. By voting online, you appoint the Chair of the applicable meeting as your proxy to cast your vote on your behalf. The Scheme Resolution, to be passed, must be carried by a majority in number of DHF Members present and voting (whether in person, by attorney under a power of attorney or by proxy) at the Scheme Meeting and by at least 75% of the votes cast on the resolution by DHF Members (unless the Court orders otherwise). 2.13Further Information Further information concerning the EGM Resolutions and the voting procedures for the EGM is set out in the Notice of EGM in Appendix 1. Further information concerning the Scheme Resolution and the voting procedures for the Scheme Meeting is set out in the Notice of Scheme Meeting in Appendix 2. If you have any further questions about the EGM, Scheme Meeting or the Proposal, please call the Proposal Hotline on 1800 508 716. If you are in any doubt about anything in this Scheme Booklet, please contact your legal, financial or other professional adviser. 16 This Section sets out the answers to key questions that DHF Members may have in relation to the Proposal. The answers to these questions should be read in conjunction with the other Sections of the Scheme Booklet. 3. Answers to key questions Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. 1 Question Answer What is being proposed? On 11 August 2011, DHF and Avant signed the Implementation Deed concerning the Proposal for DHF to demutualise and become a whollyowned subsidiary of Avant. The Implementation Deed was subsequently restated and amended by DHF and Avant on 8 February 2012. If the Proposal is implemented, Avant will pay $30 million which will be distributed to Scheme Members (see questions 5 and 6). The Proposal cannot proceed without the approval of DHF Members, who will be asked to vote on the EGM Resolutions at the EGM to be held at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW on 4 April 2012, commencing 10.00am, and on the Scheme Resolution at the Scheme Meeting following the EGM. The Proposal will be implemented if: ■■ the EGM Resolutions are approved by DHF Members; ■■ the Scheme Resolution is approved by DHF Members; ■■ the Court approves the Scheme at the Second Court Hearing (see question 23); ■■ the other conditions precedent in the Implementation Deed and Scheme are satisfied, including: ■■ P HIAC approval of the conversion of registration of DHF to a “for-profit” private health insurer; ■■ D oHA approval of the proposed expansion of DHF’s restricted access group to enable DHF to provide private health insurance to additional selected categories of health practitioners and officers, employees and contractors of Avant Insurance and Avant Law Pty Limited; and ■■ a ll other necessary approvals of Government Agencies to permit the Proposal to be implemented. 2 Who is Avant? Avant is a wholly owned subsidiary of Avant Mutual. Avant Mutual is a ”not-for-profit”, mutual organisation that currently provides professional indemnity insurance to over 57,000 health professionals including around 55% of Australia’s medical practitioners. Avant Mutual reported net assets of $693.3 million as at 30 June 2011. 3 Why does Avant want to acquire DHF? Avant is committed to meeting the evolving needs of its members and believes that DHF’s products and services will be beneficial to, and greatly appreciated by, its members. 4 Who is a DHF Member? If you are a Contributing Member of DHF’s Health Benefits Fund, you have a Policy and are a DHF Member. You are still a DHF Member if your Policy is suspended in accordance with the Fund Rules, but you will cease to be a DHF Member if your Policy lapses (see question 7). 17 A DHF Member does not include a person who only holds a travel insurance policy (underwritten by QBE Insurance (Australia) Limited). 18 5 Who is a Scheme Member? To be a Scheme Member, you must be a DHF Member at the Scheme Record Time or a Prescribed Member. Scheme Members receive an Entitlement (see question 25). 6 Who is eligible to receive a payment from the $30 million paid by Avant if the Proposal is implemented? All Scheme Members are eligible to receive an allocation from the $30 million paid by Avant. The amount each Scheme Member receives is determined under the Allocation Rules and is called an Entitlement (see question 25). The Allocation Rules are set by the DHF Board on the recommendation of DHF’s Appointed Actuary and have been reviewed by the Independent Actuary. The Allocation Rules are described in Section 7 and set out in full in Appendix 4. 7 If my Policy is in arrears, will I still receive an Entitlement if the Proposal is implemented? The date to which your premium contribution is paid is your “paidto date”. If your Policy is more than 2 months’ premium contribution payments in arrears, your Policy will lapse with effect from the paid-to date. If your Policy has lapsed at the Scheme Record Time, you will not receive an Entitlement. If your Policy is in arrears by less than 2 months at the Scheme Record Time and you are a DHF Member, you will receive an Entitlement. 8 What happens if I am a member of both DHF and Avant Mutual? Your membership of Avant Mutual does not affect your voting rights as a DHF Member in any way. Avant Mutual members who are not DHF Members are not entitled to vote on the Proposal. 9 Do I need to have my medical indemnity insurance with Avant Insurance to maintain my DHF Policy? No. You may keep your medical indemnity insurance with another medical indemnity insurance provider and retain your DHF Policy. 10 What impact will the Proposal have on my medical indemnity insurance? Whether you have your medical indemnity insurance with Avant Insurance or another organisation, it will not be affected by the Proposal. 11 Who is eligible to vote? There are two meetings to implement the Proposal. The first meeting is the EGM which will be followed by the Scheme Meeting. If you are a DHF Member at the Record Time, you are entitled to vote at both meetings. 12 Should I vote? The DHF Board believes that the Proposal is important for all DHF Members. You are encouraged to vote, but voting is not compulsory. If any of the EGM Resolutions or the Scheme Resolution is not passed by the requisite majorities of DHF Members at the relevant meeting, the Proposal will not proceed. 13 How do I vote? Section 2 explains how you can vote. 14 What level of approval is required to approve the EGM Resolutions? For the EGM Resolutions to be passed they must be carried by at least 75% of the votes cast on the resolution by DHF Members. 15 What level of approval is required to approve the Scheme? For the Scheme to proceed, the Scheme Resolution must be carried by a majority in number of DHF Members present and voting (whether in person, by attorney or by proxy) at the Scheme Meeting and by at least 75% of the votes cast on the resolution by DHF Members (unless the Court orders otherwise). 16 Who else needs to approve the Proposal? The Proposal is subject to a number of approvals from the Court and various Government Agencies (see question 1). 17 What does the DHF Board recommend? The DHF Board unanimously recommends that, in the absence of a Superior Proposal, DHF Members vote for the Resolutions. The reasons for the DHF Board’s recommendation are set out in Section 5. 18 Why might I vote for the Resolutions? Some reasons why you might consider voting in favour of the Resolutions are set out in Section 5. 19 Why might I vote against the Resolutions? Some reasons why you might consider voting against the Resolutions are set out in Section 6. 20 Has the Proposal been reviewed by an independent expert? The Proposal has been independently reviewed by Lonergan Edwards & Associates Limited which concluded that the Proposal “is fair and reasonable and in the best interests of Scheme Members in the absence of a current better proposal”. A summary of the Independent Expert’s Report is set out in Appendix 7. The report can be reviewed in full by visiting www.doctorshealthfund.com.au/ AvantProposal/SchemeofArrangement or you can request a copy by calling the Proposal Hotline on 1800 508 716. 21 What happens if I do not vote, or I vote against the Resolutions to implement the Proposal? Just because you do not vote, or you vote against the Resolutions, it does not necessarily mean that the Scheme will not be implemented. If the EGM Resolutions and the Scheme Resolution are carried and the other conditions precedent (including Court approval of the Scheme) are satisfied, you will receive your Entitlement if you are a Scheme Member (see question 5) in accordance with the Allocation Rules, even if you do not vote, or you vote against the Resolutions. 22 Is the Proposal subject to any conditions? The Proposal is subject to a number of conditions precedent which are set out in the Implementation Deed and Scheme. The conditions precedent that are still to be satisfied at the date of this Scheme Booklet include: ■■ DHF Member approval of the Resolutions; ■■ Court approval of the Scheme at the Second Court Hearing; ■■ P HIAC’s consent to DHF becoming registered as a “for-profit” private health insurer under the PHIA; ■■ D oHA’s approval of the proposed expansion of DHF’s restricted access group. Essentially, these changes are designed to enable DHF to provide private health insurance to additional selected categories of health practitioners and officers, employees and contractors of Avant Insurance and Avant Law Pty Limited; ■■ other necessary approvals of Government Agencies; 19 ■■ n o DHF Prescribed Occurrence or Avant Prescribed Occurrence occurs before 5.00pm on the Business Day prior to the Second Court Hearing Date; and ■■ n o DHF Material Adverse Change or Avant Material Adverse Change occurs prior to 8.00am on the Second Court Hearing Date. 23 What is the role of the Court in the Scheme? The Court has approved DHF sending this Scheme Booklet to DHF Members and the holding of the EGM and the Scheme Meeting. If the DHF Members approve the EGM Resolutions at the EGM, and the Scheme Resolution at the Scheme Meeting by the requisite majorities, final approval of the Scheme will be sought from the Court at the Second Court Hearing. Scheme Members are entitled to attend the Second Court Hearing. DHF will provide notice by newspaper advertisement of the time and place of the Second Court Hearing. The Court has the power to approve the Scheme subject to any alterations or conditions as it thinks fit. 24 What will I receive if the Proposal is implemented? If the Proposal is implemented and you are a Scheme Member (see question 5), you will receive an Entitlement (see question 25). It is important that you keep your Policy premium contribution up to date to receive your Entitlement (see question 7). 25 What is my Entitlement if the Proposal is implemented, how is it calculated and when will it be paid? If you are a Scheme Member (see question 5), and the Proposal is implemented, your Initial Entitlement will be paid on, or shortly after, the Implementation Date. Your Initial Entitlement is explained in your letter from the DHF Board sent with this Scheme Booklet. (If you became a DHF Member after the Calculation Date, to receive an Initial Entitlement as a Scheme Member, you must not suspend your policy.) You might also receive a small Residual Entitlement. This is a payment which may arise if there is any part of the $30 million paid by Avant remaining after paying all Scheme Members their Initial Entitlement (as adjusted pursuant to determinations of the Review Committee made in accordance with the Review Committee Charter). Your Initial Entitlement and any Residual Entitlement are determined under the Allocation Rules, which are described in Section 7 and set out in full in Appendix 4. If you complete and return the green Payment Authority sent with this Scheme Booklet by 5.00pm on 29 May 2012, entitlements will be paid by direct deposit into your Australian financial institution account (bank, credit union or building society). Otherwise, payment will be made by cheque. 26 What can I do if I have any concerns about my Entitlement? You can submit a Review Request Form to the Review Committee if you believe that: ■■ you have not been correctly identified as a Scheme Member; or ■■ your Initial Entitlement is incorrect. Details of how to obtain and lodge a Review Request Form are set out in Section 7.10. 20 You will need to clearly set out the reasons why you believe that you are entitled to be a Scheme Member, or to have your Initial Entitlement corrected, and provide sufficient evidence to support your claim. 27 What are the tax implications of the Proposal for Scheme Members? PricewaterhouseCoopers has prepared the Tax Advice Letter which is set out in Appendix 10. In PricewaterhouseCoopers’ opinion, the amount received by Scheme Members if the Proposal is implemented should not be subject to income tax. Nonetheless, PricewaterhouseCoopers strongly advises Scheme Members to obtain their own independent professional advice on the income tax implications specific to their own circumstances. 28 How will the Proposal impact on any social security entitlements I receive? The payment of your Entitlement if the Proposal is implemented may affect pension or other social security entitlements that you have. It is strongly recommended that you seek professional advice or contact the relevant Government department in relation to your particular circumstances. 29 What happens if the Proposal is not implemented? If the Proposal is not implemented: ■■ no Entitlements will be paid; ■■ D HF Members will continue to be members of DHF, with all of the rights and obligations currently applying to DHF Members; ■■ D HF will continue to be a public company limited by guarantee that is registered under the PHIA as a “not-for-profit” private health insurer; and ■■ in certain circumstances, DHF will be required to repay to Avant some or all of the costs which Avant has reimbursed to DHF in connection with the Proposal. See Section 11.1 for a summary of such circumstances. 30 What will happen to my Policy if the Proposal is implemented? Avant has stated in Section 10.5 that if the Proposal is implemented its current intention is that DHF will retain its existing product range, including DHF’s Top Cover hospital product, and the range of benefits offered under each of DHF’s products. 31 What will happen to my Policy premium if the Proposal is implemented? The Appointed Actuary has concluded that, in his opinion, “future premium rates are unlikely to be impacted in a material manner by the Proposal”. The Appointed Actuary’s Report is set out in Appendix 8. 32 What rights will I lose as a DHF Member if the Proposal is implemented? DHF Members have certain rights under DHF’s Constitution and under the law. These rights include the right to attend and vote on resolutions at general meetings of DHF, to vote on a resolution on a winding up of DHF and to vote on a resolution to elect or remove a DHF director. If the Proposal is implemented, the company memberships of all DHF Members will be cancelled and so, DHF Members will lose their rights as members of the company. 33 Will DHF continue to be registered as a restricted access private health insurer if the Proposal is implemented? Yes. As part of the Proposal, DHF has applied to DoHA to expand its restricted access group to include additional selected categories of health practitioners and officers, employees and contractors of Avant 21 Insurance and Avant Law Pty Limited. See Section 4 for further information on the proposed expansion of the restricted access group. 34 Why are amendments to the DHF Constitution being proposed at the EGM? The changes to the DHF Constitution proposed at the EGM enable Avant to become a member of DHF and facilitate the implementation of the Proposal. They are detailed in the Notice of Meeting for the EGM (Appendix 1) and an explanation of these amendments is set out in Appendix 11. If passed, they will only become effective following Court approval of the Scheme. Further changes to the DHF Constitution will be required to implement the Proposal, but these amendments will be made by Avant when it is the sole member of DHF. The implementation steps are explained in Section 4.5(f). 22 35 Will any current DHF directors be continuing on the DHF Board if the Proposal is implemented? If the Proposal is implemented, Avant must procure, insofar as it is able as a shareholder of DHF to do so, that three of the existing five members of the current DHF Board will continue on the DHF Board (with Patria Mann continuing as Chair) for the Initial Period. Patria Mann, Bruce Foy and Dr Janette Stening have indicated that they are willing to continue as DHF directors on that basis. They will be joined on the DHF Board by four directors appointed by Avant. 36 Will the future DHF Board still have at least two medically qualified directors? Yes. Avant has committed to this requirement remaining in the DHF Constitution following implementation of the Proposal. 37 Will the current Chief Executive Officer (CEO) of DHF continue in that role? It is Avant’s current intention that Peter Aroney will continue as the CEO of DHF. Peter Aroney has indicated that he is willing to continue as CEO. 38 What if I have a question about the Proposal? Information about the Proposal is available on DHF’s website www.doctorshealthfund.com.au/AvantProposal or by calling the Proposal Hotline on 1800 508 716. If you are in any doubt about anything in this Scheme Booklet, or what you should do, please contact your legal, financial or other professional adviser. 39 Is personal medical information disclosed to Avant? Personal medical information which is collected by DHF for the purposes of its Health Benefits Fund is sensitive private information. It is retained by DHF and will not be made available to Avant. 4. The Proposal in detail Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. 4.1 DHF’s Strategic Direction In 2006, DHF conducted a strategic review which considered the following: ■■ the importance of building and diversifying the Policy holder base by attracting younger members; ■■ the small size of its Health Benefits Fund, which meant that management costs relative to premium income were high by comparison with competing funds; ■■ the need to attract and retain key staff; ■■ the need to invest in people and resources to develop DHF’s marketing capability; ■■ the potential to streamline products to a simpler offering; and ■■ the practical constraints of capital and marketing costs. Since then DHF has undertaken a focused marketing effort with the aim of growing its Policy holder base in its chosen medical practitioner market. In the period from 30 June 2006 to 31 December 2011 Policy holder numbers have grown from 4,465 to 7,838. 4.2 Changes in the private health insurance industry DHF operates in a dynamic private health insurance marketplace. The demutualisations of NIB Health Fund Limited, MBF Australia Limited, Manchester Unity Limited and the Australian Health Management Group Limited highlighted the receptiveness of their members to approve changes which unlock member value in mutual organisations. Federal Government policy has a significant impact, raising risks and challenges for private health insurers. The Federal Government has proposed the Fairer Private Health Insurance Incentives legislation which was passed by the House of Representatives on 15 February 2012 and is expected to be passed by the Senate. Please check DHF’s website at www.doctorshealthfund.com.au for up-to-date details. This legislation, if adopted, will means test the private health insurance rebate and increase the Medicare Levy Surcharge, which may cause some Policy holders to downgrade or terminate their cover. If so, this could place upward pressure on premium contribution levels and/or reduce the benefits offered. Further information about the private health insurance industry, and the changes proposed under the Fairer Private Health Insurance Incentives legislation, is set out in Section 8. 4.3 The approach by Avant In March 2011, the DHF Board received an unsolicited approach from Avant, expressing interest in acquiring DHF. The initial approach included an outline of Avant’s intentions and motives for expressing such interest, emphasising the very strong alignment that Avant believed existed between the two organisations. To facilitate discussions, DHF and Avant signed a Confidentiality Deed on 4 April 2011. Importantly, as DHF was concerned not to incur costs in pursuing a proposal that might not eventuate, a Costs Undertaking was negotiated under which Avant would reimburse DHF’s costs, up to an agreed cap, while negotiations took place. The DHF Board sought financial and legal advice to assist it in considering Avant’s approach. After obtaining the relevant advice, the DHF Board determined that the terms of Avant’s approach were worthy of further consideration, which meant Avant permitting DHF limited access to undertake initial due diligence on Avant and DHF permitting Avant limited access to undertake initial due diligence on DHF. After this due diligence, the parties entered into the Implementation Deed on 11 August 2011 and the Proposal was announced to DHF Members. The Implementation Deed was restated and amended by DHF and Avant on 8 February 2012. 23 4.4 Assessment of the Avant approach and alternatives The DHF Board considered the advantages and disadvantages of the Avant approach having regard for expert advice on the potential range of values of DHF and the fairness and reasonableness of the Consideration offered by Avant. The DHF Board determined not to seek competing offers, nor to enter into a public tender process for the following reasons: ■■ the Proposal offered potential for DHF to grow in its chosen medical practitioner market through access to Avant Mutual members; ■■ with medical practitioners as its core membership, Avant Mutual had a compatible culture; ■■ the Proposal provided an opportunity to unlock the value in DHF for DHF Members; ■■ A vant’s stated intentions were viewed as positive for DHF, including the proposed continuation of DHF’s Health Benefits Fund and its existing product range, including DHF’s Top Cover hospital product, and the range of benefits offered under each of DHF’s products; ■■ a competing tender process would involve significant cost to DHF that would not be covered by the Costs Undertaking; ■■ a n Independent Expert would consider whether the Proposal was in the best interests of members and, should the expert find this not to be the case, DHF could withdraw at no cost to DHF; and ■■ it was open to any interested party to make a competing offer after the Proposal was made public. The DHF Board also considered the possibility of merging with another mutual “not-for-profit” private health insurer, although it was thought unlikely that a suitable merger partner could be found - existing potential partners would not have the same restricted access group and DHF’s products might need to be changed to achieve consistency with those of the merger partner. This might not be attractive to DHF Members. (DHFs Top Cover, for example, is not supported as a mainstream product by any other private health insurer.) After the Avant offer was announced, DHF received a non-binding indicative offer of $30 million from another private health insurer. Although this Competing Proposal offered consideration that was higher than Avant’s original offer of $28.5 million, it was subject to conditions that, in the view of the DHF Board, made it less favourable. DHF notified Avant of the Competing Proposal and Avant increased its original offer to $29.25 million. While the DHF Board sought to negotiate acceptable conditions with the other private health insurer, these negotiations were unsuccessful and the Competing Proposal was eventually withdrawn. After considering DHF’s unaudited results to 31 December 2011, Avant further increased its offer to $30 million. The increased Avant offer, and the Competing Proposal, were considered by the Independent Expert when forming its view that the Proposal “is fair and reasonable and in the best interests of Scheme Members in the absence of a current better proposal”. (Further information concerning the Independent Expert’s Report is set out in Section 4.9.) A Listing is not considered viable by the DHF Board for the following reasons: ■■ D HF is thought to be too small for its shares to be actively and broadly sought by mainstream institutional investors, with the result that it would be unlikely to be valued and priced efficiently in a securities market; ■■ g iven DHF’s size, and the scale of its operations, a Listing would be relatively inefficient compared with businesses of a larger size; ■■ the costs involved in a Listing would absorb a material portion of DHF’s capital; ■■ Listing would increase compliance costs; and ■■ the demands of maximising shareholder returns do not align well with a private health insurer established by medical practitioners to manage the health insurance needs of their own profession. 4.5 The Proposal If the Proposal is implemented, Avant will pay DHF $30 million as consideration for the issue of the Subscription Shares by DHF to Avant. The $30 million will be distributed amongst Scheme Members in accordance with the Allocation Rules. 24 (a) Key features: The key features of the Proposal are: ■■ DHF will be acquired by Avant by way of the Scheme; ■■ D HF will change from a public company limited by guarantee to a proprietary company limited by shares, with Avant as its sole shareholder; ■■ w hile retaining all rights and benefits under their existing Policies, DHF Members will lose the company membership rights that they currently have under DHF’s Constitution and the law. At the same time, the limited liability each DHF Member has as a guarantor ($0.10 per DHF Member) on the winding up of DHF will be cancelled; ■■ DHF will convert from a “not-for-profit” to a “for-profit” private health insurer under section 126-42 of the PHIA; ■■ D HF will continue as a restricted access private health insurer, but its restricted access group will be expanded to include additional selected categories of health practitioners and officers, employees and contractors of Avant Insurance and Avant Law Pty Limited. The conditions which must be satisfied or waived before the Proposal can be implemented are set out in the Implementation Deed and Scheme and summarised in Section 11.1. The steps required to implement the Scheme are explained in paragraph(f) below. (b) Approval by DHF Members DHF Members will be asked to vote on the Resolutions to implement the Proposal at an EGM and at a Scheme Meeting. Section 2 contains details of the voting approvals required for the Proposal to be implemented and information on how DHF Members can vote on the Resolutions necessary to implement the proposal. (c) PHIAC and DoHA approvals DHF has applied to PHIAC under section 126-42 of the PHIA for DHF to convert from “not-for-profit” to a “for-profit” private health insurer. PHIAC’s approval of the conversion to “for-profit” registration is a condition precedent to the Proposal that must be obtained if the Proposal is to be implemented. DHF has applied to DoHA for an expansion of its current restricted access group. The proposed expansion (if approved) will enable DHF to issue its health insurance policies to additional selected categories of health practitioners and officers, employees and contractors of Avant Insurance and Avant Law Pty Limited, as explained in Section 11.6. Under the Implementation Deed, DoHA’s approval of the proposed expansion of DHF’s restricted access group is a condition precedent to the Proposal. Avant has the right to waive this condition in the event that this approval for the expanded restricted access group has not been received by DHF prior to the Second Court Hearing Date. At the date of this Scheme Booklet, DHF has not yet received PHIAC’s approval to convert to a “for-profit” private health insurer, nor has DoHA’s approval of the proposed expansion of DHF’s restricted access group been received. DHF will publish updates from time to time in relation to the applications for PHIAC and DoHA approvals on the DHF website: www.doctorshealthfund.com.au/AvantProposal/ImportantInformation. (d)Entitlements If the Proposal is implemented, the $30 million paid by Avant will be distributed amongst Scheme Members in accordance with the Allocation Rules. Only Scheme Members will be eligible to receive an Entitlement. Entitlements are determined under Allocation Rules set by the DHF Board on the recommendation of DHF’s Appointed Actuary and after consideration of the Independent Actuary’s opinion that the Allocation Rules are fair and reasonable. Section 7 explains how the Allocation Rules are applied, and includes examples to assist you in understanding how Entitlements have been calculated. The Allocation Rules are set out in Appendix 4. The Appointed Actuary’s Report contains further information on the Allocation Rules, which were also considered by the Independent Actuary. Further information on the reports of the Appointed Actuary and the Independent Actuary is set out in Section 4.9. 25 The amount explained in the letter from the DHF Board sent with this Scheme Booklet - called your Initial Entitlement - will be paid to you as long as you remain a DHF Member at the Scheme Record Time. (If you became a DHF Member after the Calculation Date, to receive an Initial Entitlement as a Scheme Member, you must not suspend your policy.) You may also subsequently receive a small additional amount - called a Residual Entitlement. If you complete and return the green Payment Authority by 5.00pm on 29 May 2012, Entitlements will be paid by direct deposit into your Australian financial institution account (bank, credit union or building society). Otherwise, payment will be made by cheque. If the Proposal proceeds in accordance with the indicative timing set out on page 9, you will receive your Initial Entitlement on or shortly after the Implementation Date, with any Residual Entitlement expected to be paid during August 2012. A review process has been established if you believe that your Initial Entitlement has not been correctly calculated or for those who believe that they have incorrectly not been allocated an Entitlement. The review process is explained in Section 7.10. (e) Effect of the Proposal on DHF Member rights Under the DHF Constitution, DHF Members have individual rights as well as rights which can be exercised collectively. In the case of collective rights, action is required by a requisite number or percentage of DHF Members, which varies depending on the right which is sought to be exercised. The rights of DHF Members are summarised below: Rights which can be exercised individually ■■ to attend, be heard and vote at meetings of DHF Members; ■■ to nominate, or be proposed by another DHF Member, to be appointed as a director of DHF; ■■ subject to any conditions determined by the DHF Board, to inspect any financial or other records of DHF; ■■ to receive a copy of the financial statements to be disclosed at the annual general meeting, and every other document required, either 21 days prior to the annual general meeting, or within 4 months following the end of the financial year; ■■ to appoint a proxy, or attorney, to attend and vote at any meeting at which the DHF Member is entitled to attend and vote (if the DHF Member has a Family Policy (except single parent family membership), he or she has two votes). Rights which can be exercised with the requisite number or percentage of other DHF Members ■■ if DHF should merge or be wound up, any surplus property must be transferred to another Health Benefits Fund, or an entity that has similar objects and limitations on the transfer of surplus as DHF. The requisite number of DHF Members can select the transferee of the surplus within these restricted categories; ■■ to appoint and remove DHF directors and set their maximum aggregate remuneration and approve reimbursement of expenses; ■■ to convene a meeting of DHF Members if, at any time, there are insufficient directors to constitute a quorum; ■■ to require that a meeting of DHF Members be convened (and, in conjunction with the requisite number of DHF Members requiring the meeting, to call the meeting if it is not convened within two months); ■■ to direct the Chair of a meeting of DHF Members to adjourn the meeting; ■■ to demand a poll on any resolution to be put at a meeting of DHF Members. In addition to the rights under the DHF Constitution described above, each DHF Member also has rights as a member of a company under the law. The DHF Constitution and the law specify the number or percentage of DHF Members required to exercise a right which can be exercised collectively. To obtain a copy of the DHF Constitution, call the Proposal Hotline - 1800 508 716 or visit the DHF website www.doctorshealthfund.com.au/AboutUs/Constitution. If the Proposal is implemented, all DHF Members will have their company membership of DHF cancelled, and Avant will remain as DHF’s only member. Accordingly, all DHF Members will cease to be DHF Members and will cease to have any of these rights. DHF Members have contractual rights under their Policies, and are entitled to receive benefits in accordance with the terms and conditions of their Policies. If the Proposal is implemented, DHF Members will retain all of their contractual rights and benefits under their Policies. 26 (f) Implementation steps If all of the conditions precedent to the Proposal are satisfied or, if applicable, waived, and all necessary approvals are obtained, the following steps will then be taken: ■■ Prior to 8am on the Second Court Hearing Date, Avant will: ■■ apply to become a member of DHF; ■■ pay $30 million into the Trust Account; ■■ apply to DHF for the Subscription Shares. (This application is conditional on the Scheme becoming effective.) ■■ P rior to the Implementation Time, the $30 million paid into the Trust Account by Avant will be held by the Trustee for the benefit of Avant. ■■ On the Effective Date, the EGM Resolutions to change the DHF Constitution take effect. ■■ Immediately after the Effective Date, DHF will register Avant as a member of DHF. ■■ A t the Implementation Time, the Trustee will commence to hold the $30 million in trust for DHF as pre-payment for the issue price for the Subscription Shares and the company membership of all DHF Members will be cancelled, leaving Avant as the sole member of DHF. ■■ O ne minute after the Implementation Time, the conversion of the registration of DHF as a “for-profit” insurer under section 126-42 of the PHIA will take effect and Avant (as the sole member of DHF) will adopt changes to the DHF Constitution to reflect the change to “for-profit” status. ■■ On the Implementation Date: ■■ DHF’s Change of Company Type will take effect; ■■ DHF will issue the Subscription Shares (and share certificate) to Avant; and ■■ D HF will direct the Trustee to distribute, from the Trust Account, Initial Entitlements to each Scheme Member within 10 Business Days after the Implementation Date, in accordance with the Allocation Rules. (g)Termination The Proposal may be terminated by DHF or Avant in accordance with the terms of the Implementation Deed. The termination provisions of the Implementation Deed are summarised in Section 11.1(i). 4.6 What happens if the Proposal is not implemented If the Proposal is not implemented, then: ■■ no Entitlements will be paid; ■■ DHF Members will continue to be members of DHF, with all of the rights and obligations applying to DHF Members; ■■ D HF will continue to be a public company limited by guarantee that is registered under the PHIA as a “not-for-profit” private health insurer; and ■■ in certain circumstances, DHF will be required to repay to Avant some or all of the costs which Avant has reimbursed to DHF in connection with the Proposal. See Section 11.1 for a summary of such circumstances. 4.7 Taxation consequences of receiving an Entitlement PricewaterhouseCoopers has prepared advice on the Australian income tax consequences of the Proposal for Scheme Members, as set out in the Tax Advice Letter in Appendix 10. PricewaterhouseCoopers has indicated that, in its opinion, under the provisions of the Income Tax Assessment Act which relate to demutualisations, the amount received by Scheme Members if the Proposal is implemented should not be subject to income tax. Nonetheless, PricewaterhouseCoopers strongly advises Scheme Members to obtain their own independent professional advice on the income tax implications specific to their own circumstances. 27 4.8 Social security consequences of receiving an Entitlement If you receive social security payments (for example, pensions, allowances or veterans’ affairs payments), then you should consider whether these payments will be affected as a result of receiving your Entitlement. Depending on the amount of your Entitlement, the level of your other income and assets, and whether your pensions and allowances are means-tested, receiving your Entitlement may affect your social security payments. You should carefully consider your personal circumstances, and seek professional advice and/or consult the relevant department from whom you receive your social security payments, to determine the impact of receiving your Entitlement on those payments. If you are entitled to receive an overseas government pension or allowance, you should contact the relevant overseas body to determine the impact of receiving your Entitlement. 4.9 Expert Reports Independent Expert Lonergan Edwards & Associates Limited was appointed by DHF to consider the Proposal as an independent expert. A summary of the Independent Expert’s Report is set out in Appendix 7. The report can be reviewed in full by visiting www.doctorshealthfund.com.au/AvantProposal/SchemeofArrangement or you can request a copy by calling the Proposal Hotline on 1800 508 716. The Independent Expert concluded that the Proposal “is fair and reasonable and in the best interests of Scheme Members in the absence of a current better proposal”. In reaching this conclusion, the Independent Expert considered the Competing Proposal received by DHF and Avant’s increased offer (referred to in Section 4.4) and the unaudited results for DHF to 31 December 2011 set out in Section 9.3. Appointed Actuary David Torrance of KPMG Actuarial Pty Ltd is DHF’s Appointed Actuary. Mr Torrance reviewed the Proposal and concluded, having regard to the matters set out in the Appointed Actuary’s Report, that: ■■ T he Allocation Rules represent a fair and reasonable basis upon which the financial benefit arising from the Proposal will be distributed amongst Scheme Members. ■■ Policy holders’ benefits should remain adequately secure if the Proposal is approved. ■■ Future premium rates are unlikely to be impacted in a material manner by the Proposal. ■■ T he reasonable benefit expectations of Policy holders are unlikely to be impacted in a materially adverse manner by the Proposal. The Appointed Actuary’s Report is set out in Appendix 8. Independent Actuary David Goodsall of Synge & Noble Pty Ltd was appointed by DHF to consider the Proposal as an independent actuary. He concluded that the principles on which the Allocation Rules are based reasonably address relevant considerations for the allocation and that the allocation methodology as represented by the Allocation Rules is fair and reasonable. While noting that the future impact on Policy holders will be a function of future experience and circumstances which cannot be reliably predicted or guaranteed, on the basis of the information available to him, including the report and opinions of the Appointed Actuary, he considered that: ■■ Policy holders’ benefits should remain adequately secure if the Proposal is approved. ■■ Future premium rates are unlikely to be impacted in a material manner by the Proposal. ■■ T he reasonable benefit expectations of Policy holders are unlikely to be impacted in a materially adverse manner by the Proposal. The Independent Actuary’s Report set out in Appendix 9. 28 4.10DHF to demutualise and convert to “for-profit” If the Proposal is implemented, DHF will demutualise and convert from a “not-for-profit” to a “for-profit” private health insurer. This means that DHF will be taxed on the profits in its Health Benefits Fund and may distribute dividends and return surplus capital to Avant as its sole member and shareholder. Importantly, DHF can only pay dividends if its assets exceed its liabilities. In addition no transfer of capital can be made if this would result in a breach of the solvency and capital adequacy prudential standards under the PHIA. If the Proposal is implemented, Avant has committed to procure, insofar as it is able as a shareholder in DHF to do so, that capital is made available to DHF to the extent that it is needed to ensure that: ■■ D HF’s Health Benefits Fund is in a position to meet its capital requirements in accordance with the solvency and capital adequacy prudential standards under the PHIA; and ■■ D HF has sufficient capital to support its business, to the extent that it is conducted in accordance with DHF’s business plan in place as at the date of the Implementation Deed and any subsequent DHF business plan which Avant may approve from time to time. Further information about the solvency and capital adequacy prudential standards under the PHIA is given in Section 8.3. Details about Avant’s current intentions and commitments in relation to DHF are set out in Section 10.5. DHF’s Appointed Actuary considered the impact of DHF converting to “for-profit” in reaching the conclusions set out in Section 4.9. On the basis explained in Section 4.9, the Independent Actuary agreed with the conclusions of the Appointed Actuary. 4.11 DHF Board’s recommendation The DHF Board unanimously recommends that DHF Members vote FOR the EGM Resolutions at the EGM, and FOR the Scheme Resolution at the Scheme Meeting following the EGM in the absence of a Superior Proposal. The DHF Board has reached this view after considering the Expert Reports and the arguments for and against the Proposal. The reasons for the DHF Board’s recommendation are set out in Section 5. Each DHF director is a DHF Member and intends, in that capacity, to vote for the Resolutions if no Superior Proposal is received. As at the date of this Scheme Booklet, no offer that the DHF Board considers is a Superior Proposal has been received. 29 5. Reasons to vote in favour of the Resolutions Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. If you believe that the Proposal is in your best interests, you can choose to vote in favour of the Resolutions. Some reasons why you might consider voting FOR the Resolutions are set out in this Section. 5.1 Scheme Members will receive a cash Entitlement The Proposal represents a means of ‘unlocking’ the value in DHF for Scheme Members. If the Proposal is implemented, each Scheme Member will receive their Entitlement as a payment in return for the cancellation of their rights as DHF Members. (If the Proposal is not implemented, Scheme Members will not receive any payment.) 5.2 The financial benefit for Scheme Members is certain under the Proposal If the Proposal is implemented, each Scheme Member’s Entitlement will be paid in cash by direct deposit to a bank, credit union or building society account, or by cheque. Accordingly, the amount that Scheme Members will receive is not subject to share market or other value fluctuations. 5.3 The DHF Board believes the Proposal provides a superior outcome Having taken into account a range of factors in evaluating the Proposal, the DHF Board believes that the Proposal will deliver a superior outcome to Scheme Members compared with other potential options such as a Listing or merger with another mutual private health insurer where DHF’s identity may be lost and/or no payment is made to Scheme Members. 5.4 The Health Benefits Fund will continue DHF will continue to operate its Health Benefits Fund, rather than be merged with another Health Benefits Fund, or be taken over by another private health insurer. 5.5 No change to existing Policies and benefits The Proposal will not, of itself, result in any change to the Policy benefits currently enjoyed by DHF Members and the other persons insured under their Policies. Existing Policies will continue in accordance with their terms and remain protected by regulatory safeguards, including relevant Federal Government legislation. These safeguards are designed to protect the financial strength and integrity of private health insurers. 5.6 The Independent Expert has concluded that the Scheme is in the best interests of Scheme Members The Independent Expert has concluded that the Proposal “is fair and reasonable and in the best interests of Scheme Members in the absence of a current better proposal”. 5.7 DHF will have access to the capital of Avant Mutual Under its current structure, DHF’s only access to new capital is through surpluses generated from its operations. The availability of capital is a potential constraint on DHF’s ability to grow. Avant has committed to procuring, insofar as it is able as a shareholder in DHF to do so, that capital is made available to DHF to the extent that it is needed to ensure that: ■■ D HF is in a position to meet its capital requirements in accordance with the solvency and capital adequacy prudential standards under the PHIA; and ■■ D HF has sufficient capital to support its business, to the extent that it is conducted in accordance with DHF’s business plan in place as at 11 August 2011 and any subsequent business plan which Avant may approve from time to time. Avant has also committed to procure, insofar as it is able as a shareholder in DHF to do so, that DHF will be able to access its staff, systems and other support as appropriate. Further information on Avant’s current intentions and commitments in relation to DHF and its business if the Proposal is implemented is set out in Section 10.5. 30 5.8 Continued involvement of DHF directors and management If the Proposal is implemented, Avant must procure, insofar as it is able as a shareholder of DHF to do so, that three of the existing five DHF directors will continue on the DHF Board (Patria Mann continuing as Chair) for the Initial Period. Patria Mann, Bruce Foy and Dr Janette Stening have indicated that they are willing to continue as DHF directors on that basis. They will be joined on the DHF Board by four Avant-appointed directors. It is Avant’s current intention that Peter Aroney will continue as the CEO of DHF. Peter Aroney has indicated that he is willing to continue as CEO. This will provide a level of continuity in DHF’s leadership for the Initial Period. Avant has also committed to retaining the requirement in the DHF Constitution that at least two of the DHF directors must be medically qualified. 5.9 DHF will be part of a group focussed on the medical community If the Proposal is implemented, DHF’s ultimate parent company will be Avant Mutual, a mutual, “not-for-profit”, organisation which is, focused on the medical community. Avant Mutual currently has over 57,000 members, the vast majority of whom are medical practitioners, doctors in training or medical students. This means that there is a strong cultural compatibility between DHF and Avant Mutual. 5.10Enhanced growth opportunities If the Proposal is implemented, it is intended that DHF’s products will be marketed to Avant Mutual members, providing an opportunity to grow the Policy holder base at a lower cost. This growth offers the benefits of scale, which may include: ■■ reduced claims volatility arising from a larger pool of insureds; ■■ fixed costs being shared by a larger Policy base which should lower the ratio of management expenses to premium income; ■■ enhanced ability to manage pricing and supply risks around DHF’s service providers; and ■■ enhanced ability to attract and retain quality staff. 5.11 No Superior Proposal has been received by DHF As at the date of this Scheme Booklet, DHF has not received an offer or proposal that the DHF Board considers is a Superior Proposal. In the absence of a Superior Proposal, the DHF Board unanimously recommends that DHF Members vote for the Resolutions to implement the Proposal. 31 6. Reasons to vote against the Resolutions Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. If you do not believe that the Proposal is in your best interests, or in the interests of DHF Members generally, you can vote against the Resolutions. Some reasons why you might consider voting AGAINST the Resolutions are set out in this Section. 6.1 You will no longer have membership rights in the company Although existing Policies will continue in accordance with their terms, your rights as a member of the company will be cancelled. This means that you will not be able to vote or exercise any of the rights that, as a DHF Member, you currently have under the DHF Constitution or under law. Further information on your rights as a DHF Member is set out in Section 4.5(e). 6.2 You might disagree with the basis on which the Allocation Rules have been determined Although both the Appointed Actuary and the Independent Actuary consider (subject to the limitations and qualifications in their respective reports) that the Allocation Rules represent a fair and reasonable basis upon which the financial benefit arising from the Proposal will be distributed amongst Scheme Members, the Allocation Rules necessarily involve value judgements and you might believe that Entitlements should have been determined differently. 6.3 You might disagree with the views of the DHF Board and the Independent Expert You might disagree with the DHF Board and the Independent Expert’s conclusion that the Proposal is in the best interests of Scheme Members in the absence of a current better proposal. You might believe that the $30 million to be paid by Avant and distributed to Scheme Members in accordance with the Allocation Rules does not value DHF highly enough. 6.4 You might believe that DHF’s character, culture and quality of services will change While Avant has stated its current intentions for the conduct of key aspects of the DHF business, there is the risk that under any new ownership structure, the DHF business may take a different direction or that the character, culture and/or quality of service will unfavourably change. 6.5 You might believe that DHF should remain a “not-for-profit” stand-alone mutual private health insurer You might: ■■ be concerned that DHF Members will no longer be members of a stand-alone mutual private health insurer; ■■ b elieve that the quality and/or price of Policies and services may be adversely affected if DHF converts its status from a “not-for-profit” private health insurer to a “for-profit” private health insurer; ■■ b e concerned that DHF will become part of an organisation which currently has, as its primary focus, medical indemnity insurance and that, as a result, Avant might favour the interests of Avant Mutual members over the interests of DHF Policy holders, should any situation arise where these interests are not aligned. 6.6 You might believe that DHF should have pursued an alternative option, or that no change is required You might believe that the DHF Board should have pursued an alternative option, or that DHF does not need to change because it is operating successfully in its current form. 6.7 You might not agree with the changes proposed to the restricted access group You might believe that the proposed expansion of DHF’s restricted access group might adversely impact the range, price and/or quality of Policies and services. 32 7. Allocation and Entitlements Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. Under the Proposal, each Scheme Member will receive an Entitlement which is determined under the Allocation Rules. This Section is a summary of the Allocation Rules and includes examples to help you understand how Entitlements are calculated. The Allocation Rules are set out in full in Appendix 4. You should read the Allocation Rules carefully. If you have any questions in relation to the Allocation Rules, please call the Proposal Hotline on 1800 508 716. If you believe that you should be a Scheme Member, or that the Allocation Rules have not been correctly applied to you, you may request a review as explained in Section 7.10. Any dispute concerning the application of the Allocation Rules will be determined by reference to the Allocation Rules rather than by reference to this Section. 7.1 What is an Entitlement? Scheme Members will receive an Initial Entitlement, which is explained in the letter from the DHF Board sent with this Scheme Booklet. The Initial Entitlement is determined having regard to: ■■ the type of Policy held by the Scheme Member - Family Policy or Single Policy; and ■■ the period of time during which the Policy provided Hospital Cover, or Extras Cover, or both. The way in which it is calculated is explained in Section 7.5. A small additional amount, called a Residual Entitlement, might also be payable. A Residual Entitlement is an allocation from the Final Residual Amount. The Final Residual Amount is the balance of the Residual Amount after: ■■ d educting the Initial Entitlement of Scheme Members whose Join Date is after the Calculation Date and payments made as a consequence of Review Committee determinations; and ■■ a dding the Initial Entitlements previously allocated to DHF Members who ceased to be DHF Members before the Scheme Record Time. The way in which any Residual Entitlement is calculated is also explained in Section 7.5. Note: While other persons may also be insured under a Policy (such as a spouse or dependent child) it is the person to whom the Policy is issued - the Contributing Member - who is the DHF Member. Only Scheme Members - DHF Members at the Scheme Record Time and Prescribed Members - will receive an Entitlement under the Proposal. 7.2 Keeping your Policy up-to-date If your Policy has lapsed or has been terminated at the Scheme Record Time, you will not be a Scheme Member and you will not receive an Entitlement. Your Policy will lapse as soon as your premium contributions are more than two months in arrears, so it is important that you keep your Policy premium contributions up to date. Note: The date to which a premium contribution is paid is the “paid-to date”. When your premium contributions are more than two months in arrears your Policy and contributing membership will lapse with effect from the “paid-to date”. 7.3 What if your Policy is suspended? If your Join Date was before the Calculation Date and you have suspended your Policy in accordance with the Fund Rules, you will receive an Entitlement if you are a Scheme Member, but the period that the Policy is suspended will not be counted when determining tenure under the Allocation Rules, as explained below. If your Join Date was after the Calculation Date, if you suspend your Policy for any period before the Scheme Record Time, you will not receive an Entitlement. 33 7.4 What is ‘tenure’ under the Allocation Rules? (a) How is tenure assessed? Under the Allocation Rules, tenure is assessed from the date that your Policy started, which is called the Join Date in the Allocation Rules. If your Join Date is before the Calculation Date, tenure is assessed from your Join Date to the Calculation Date, with any period during which your Policy was suspended excluded. If your Join Date is after the Calculation Date, and you have not suspended your policy for any period before the Scheme Record Time, your tenure is deemed to be one year. The period of tenure is then classified according to the type of Policy you held - Family Policy or Single Policy - and the type of cover - Hospital Cover and/or Extras Cover - provided under your Policy. (b) Why have a Calculation Date? The Calculation Date was selected as the latest practical time to collect all the data necessary to determine Initial Entitlements before finalising this Scheme Booklet. (c) What if I change my Policy from Family to Single or vice versa? As long as you held a Policy, even if you changed your Policy from a Family Policy or a Single Policy, or vice versa, your Join Date does not change. (d) What happens if my Policy lapsed? If your Policy lapsed, but DHF accepted your premium contributions in full for the period from the date of lapse, your Policy has been reinstated and your Join Date continues unaffected by the lapse. If, however, your Policy lapsed and either: ■■ premium contributions were not paid in full for the period from the date of lapse, or ■■ DHF refused to accept premium contributions for the period from the date of lapse, your Policy has been terminated. If you subsequently took out a new Policy then, even if the membership number for the new Policy is the same as that under the terminated policy, the period that the terminated Policy was in force is not counted as tenure. Your tenure under the Allocation Rules is assessed from the Join Date for your new Policy. (e) What if I terminated my Policy? If you terminated your Policy and subsequently took out a new Policy, even if the membership number for the new Policy is the same as that under the terminated policy, the period that the terminated policy was in force is not counted as tenure. Your tenure under the Allocation Rules is assessed from the Join Date for the new Policy. 7.5 How is each Scheme Member’s Entitlement calculated? (a) How is the Initial Entitlement calculated? Initial Entitlements are calculated as follows: Initial Entitlement = unit allocation x initial unit value rounded down to the nearest whole cent. The unit allocation is the number of units allocated to a Scheme Member, as explained below. The initial unit value is $1.11. This value was calculated by dividing the Initial Amount by the total number of units allocated to all DHF Members at the Calculation Date rounded down to the nearest whole cent. (b) How is any Residual Entitlement calculated? Residual Entitlements are calculated as follows: Residual Entitlement = your unit allocation (including any additional units allocated by the Review Committee in accordance with the Review Committee Charter) x residual unit value rounded down to the nearest whole cent. The residual unit value is the Final Residual Amount divided by the sum of the units allocated (including any additional units allocated by the Review Committee in accordance with the Review Committee Charter) to all Scheme Members, rounded down to the nearest whole cent. 34 If the Review Committee decides that the amount of any Residual Entitlements to be paid to an individual would be nominal (less than $10.00), or the costs of payment would be disproportionate to the amount of the payment, or a surplus arises from the rounding of payments, these amounts will be paid to a Medical Benevolent Funds charity in Australia chosen by the DHF Board that provides for the welfare of medical practitioners. 7.6 How is the Unit Allocation determined? If you are a Scheme Member and the Join Date for your Policy was on or before the Calculation Date, the way that your unit allocation is determined is explained in Section 7.7. If you are a Scheme Member and the Join Date for your Policy was after the Calculation Date, the way in which your unit allocation is determined is explained in Section 7.8. 7.7 Unit Allocation for a Scheme Member whose Join Date was on or before the Calculation Date Step 1 If your Policy has never included Hospital Cover, go to Step 4. Determine your Years of Hospital Tenure Your Years of Hospital Tenure are the years and days from the Join Date to the Calculation Date (both dates inclusive) during which your Policy provided Hospital Cover, less any years and days during which your Policy (while providing Hospital Cover) was suspended. The result is then rounded up to the nearest whole year. This period is then divided into Family Years of Hospital Tenure (if any) and Single Years of Hospital Tenure (if any). Step 2 Determine your Family Years of Hospital Tenure Step 3 Determine your Single Years of Hospital Tenure Your Family Years of Hospital Tenure are the years and days from the Join Date to the Calculation Date (both dates inclusive) during which you held a Family Policy with Hospital Cover, less any years and days during which your Family Policy (while providing Hospital Cover) was suspended. The result is then rounded up to the nearest whole year. Your Single Years of Hospital Tenure are your Years of Hospital Tenure less your Family Years of Hospital Tenure. Step 4 If your Policy has never included Extras Cover, go to Step 7. Determine your Years of Extras Tenure Your Years of Extras Tenure are the years and days from the Join Date to the Calculation Date (both dates inclusive) during which your Policy provided Extras Cover, less any years and days during which your Policy (while providing Extras Cover) was suspended. The result is then rounded up to the nearest whole year. This period is then divided into Family Years of Extras Tenure (if any) and Single Years of Extras Tenure (if any). Step 5 Determine your Family Years of Extras Tenure Step 6 Determine your Single Years of Extras Tenure Step 7 Your Family Years of Extras Tenure are the years and days between the Join Date to the Calculation Date (both dates inclusive) during which you held a Family Policy with Extras Cover, less any years and days during which your Family Policy (while providing Extras Cover) was suspended. The result is then rounded up to the nearest whole year. Your Single Years of Extras Tenure are your Years of Extras Tenure less your Family Years of Extras Tenure. Use the table below to determine your unit allocation: Determine the Unit Allocation 35 Period of tenure Unit Allocation per year of tenure Period of tenure x Unit Allocation Family Years of Hospital Tenure 200 [Your result] Single Years of Hospital Tenure 100 [Your result] Family Years of Extras Tenure 200 [Your result] Single Years of Extras Tenure 100 [Your result] [Your total unit allocation] 7.8 Unit Allocation for a Scheme Member whose Join Date was after the Calculation Date If you are a Scheme Member and the Join Date for your Policy was after the Calculation Date, you will receive an Initial Entitlement if you do not suspend your Policy for any period before the Scheme Record Time. Use the table below to determine your unit allocation: If at the Join Date the Scheme Member had: The Unit Allocation is: A Single Policy providing Hospital Cover only 100 A Family Policy providing Hospital Cover only 200 A Single Policy providing Extras Cover only 100 A Family Policy providing Extras Cover only 200 A Single Policy providing Hospital Cover and Extras Cover 200 A Family Policy providing Hospital Cover and Extras Cover 400 If you do suspend your Policy for any period before the Scheme Record Time, your unit allocation is zero and you will not receive an Entitlement. 7.9 Some Examples The following are some examples which illustrate the application of the Allocation Rules in various situations. They have been included to assist you to understand the Allocation Rules. Hospital Cover only As a young single, Nicholas first took out a Single Policy with Hospital Cover on 1 January 2000. However, after he married, he changed to a Family Policy with Hospital Cover on 1 February 2008. Nicholas’ Join Date is 1 January 2000 and his Unit Allocation is determined as follows: 36 Years of Hospital Tenure 13 years (i.e. 12 years 17 days rounded up) Family Years of Hospital Tenure 4 years (i.e. 3 years 351 days rounded up) x 200 Units = 800 Units Single Years of Hospital Tenure 9 years (i.e. 13 years less 4 years) x 100 Units = 900 Units Years of Extras Tenure Nil Family Years of Extras Tenure Nil Single Years of Extras Tenure Nil Nicholas’ Initial Entitlement = 1,700 Units x $1.11 (initial unit value) = $1,887 Unit Allocation = 1,700 Units Hospital and Extras Cover Katrina first took out a Single Policy with Hospital Cover on 1 July 2006, then added Extras Cover to her Policy on 1 April 2010. Katrina’s Join Date is 1 July 2006 and her Unit Allocation is determined as follows: Years of Hospital Tenure 6 years (i.e. 5 years 201 days rounded up) Family Years of Hospital Tenure Nil Single Years of Hospital Tenure 6 years (i.e. 6 years less 0 years) Years of Extras Tenure 2 years (i.e. 1 year 292 days rounded up) Family Years of Extras Tenure Nil Single Years of Extras Tenure 2 years (i.e. 2 years less 0 years) Katrina’s Initial Entitlement = 800 Units x $1.11 (initial unit value) = $888 x 100 Units = 600 Units x100 Units = 200 Units Unit Allocation = 800 Units Suspension Susan first took out a Single Policy with Hospital Cover on 1 August 1985. She validly suspended her Policy while she was in London from 1 December 1990 to 31 January 1992. Upon her return, she resumed her Hospital Cover, but then, following her marriage, changed to a Family Policy with Hospital and Extras Cover on 1 May 1997. Susan’s Join Date is 1 August 1985 and her Unit Allocation is determined as follows: Years of Hospital Tenure 26 years (i.e. 26 years 170 days, less the 1 year, 62 days suspended, rounded up) Family Years of Hospital Tenure 15 years (14 years 262 days rounded up) x 200 Units = 3,000 Units Single Years of Hospital Tenure 11 years (i.e. 26 years less 15 years) x 100 Units = 1,100 Units Years of Extras Tenure 15 years (i.e. 14 years 262 days rounded up) Family Years of Extras Tenure 15 years (i.e. 14 years 262 days rounded up) x 200 Units = 3,000 Units Single Years of Extras Tenure Nil (i.e. 15 years less 15 years) Susan’s Initial Entitlement = 7,100 Units x $1.11 (initial unit value) = $7,881 Unit Allocation = 7,100 Units 37 New Policy after Lapse Peter first took out a Family Policy with Hospital and Extras Cover on 1 July 1980. His Policy lapsed as his premium contributions were in arrears for 3 months in 2007 and his premium contributions were not paid back to his paid-to date. On 1 December 2007, he took out a new Single Policy with Hospital Cover. Even though his membership number was the same as that under his Policy that lapsed, his Join Date is 1 December 2007 when his new Policy started and his Unit Allocation is determined as follows: Years of Hospital Tenure 5 years (i.e. 4 years 62 days rounded up) Family Years of Hospital Tenure 0 years Single Years of Hospital Tenure 5 years (i.e. 5 years less 0 years) Years of Extras Tenure Nil Family Years of Extras Tenure Nil Single Years of Extras Tenure Nil Peter’s Initial Entitlement = 500 Units x $1.11 (initial unit value) = $555 x 100 Units = 500 Units Unit Allocation = 500 Units 7.10Review process You can submit a request for review to the Review Committee if you believe that: ■■ you have not been correctly identified as a Scheme Member; or ■■ your Initial Entitlement is incorrect. You must complete a Review Request Form available from DHF’s website at www.doctorshealthfund.com.au/ AvantProposal/SchemeofArrangement or by calling the Proposal Hotline on 1800 508 716. You will need to clearly set out the reasons why you believe that you are entitled to be a Scheme Member, or have your Initial Entitlement corrected, and provide sufficient evidence to support your claim. The Review Committee will consider requests in accordance with the Review Committee Charter, but does not have the authority to alter the Allocation Rules. The Review Committee Charter is set out in Appendix 5. The completed Review Request Form must be mailed to: The Company Secretary Entitlement Review Request The Doctors’ Health Fund Limited Locked Bag 8100, Kingsgrove, NSW 2208 The Review Request Form must be received by DHF’s Company Secretary by 5.00pm on the day which is five Business Days after the Implementation Date. 38 8. The Private Health Insurance Industry Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. 8.1Introduction The Australian private health insurance industry operates as part of a mixed public and private health care environment. Private health insurance offers contributors greater choice in accessing a range of hospital and health care services. The latest Operations of the Private Health Insurers Report issued by PHIAC for the financial year 2010-2011 indicates that, at 30 June 2011, there were 34 registered private health insurers operating in the private health insurance industry in Australia. The five largest insurers, or insurer groups, account for 83.7% of the market, with 27 insurers sharing the remaining 16.3% of the market. As a consequence of the conversion of Medibank Private to a “for-profit” insurer in October 2009, approximately 70% of the industry on a market-share basis became “for-profit”. Medibank Private is 100% owned by the Australian Government. The proportion of Australians with private health insurance hospital cover has stabilised in recent years at around 40-50% of the population. From the PHIAC Report referred to above, at 30 June 2011, 10.26 million people had hospital cover representing 45.3% of the population. 8.2 The private health insurance industry regulatory environment The PHIA came into effect on 1 April 2007 and regulates private health insurers and their operations including registration, setting of premiums, benefit coverage, portability, capital and solvency requirements, reinsurance and governance. All private health insurers must operate their Health Benefits Funds in accordance with the PHIA. There are various Federal Government incentives to encourage people to hold private health insurance, including: ■■ T he private health insurance rebate - this provides a rebate of 30% of your premium contribution, increasing to 35% if the oldest person insured under your policy is aged 65 to 69 and 40% if the oldest person insured under your policy is 70 or older, assuming you are eligible for Medicare. Under the Fairer Private Health Insurance Incentives legislation, it is proposed that this rebate will be means tested, reducing on a tiered basis for those on incomes greater than $83,000 for singles and $166,000 combined for families/couples (ultimately reducing to nil for singles on incomes greater than $129,000, and families/couples on combined incomes of greater than $258,000). More information on this legislation is given below. ■■ Lifetime Health Cover, which encourages people to take out private health insurance by 1 July following their 31st birthday. ■■ T he Medicare Levy Surcharge, which has been in place since 1 July 1997 and aims to encourage high income earners to take out private hospital cover by imposing a surcharge of 1% on the Medicare levy liability for those without private hospital insurance. Under the Fairer Private Health Insurance Incentives legislation, it is proposed that the Medicare Levy Surcharge will increase on a tiered basis for those on higher incomes to a maximum of 1.5% for singles with incomes of $129,001 and above (for families/couples with combined incomes of $258,001 and above). The proposed income tiers at which the rebate is reduced, and the Medicare Levy Surcharge is increased, are shown in the table below. (When considering the income tiers, please note that the legislation uses “income for surcharge purposes” as defined in the Income Tax Assessment Act 1997 (Cth).) 39 Income Tiers Singles <$83,000 $83,001-$96,000 $96,001-$129,000 >$129,001 Families <$166,000 $166,001-$192,000 $192,001-$258,000 >$258,001 Rebate Age <65 30% 20% 10% 0% Age 65-69 35% 25% 15% 0% Age 70+ 40% 30% 20% 0% 1.25% 1.50% Medicare Levy Surcharge All Ages 0.00% 1.00% There are varying views as to how these changes, if adopted, will affect the private health insurance industry. The increase to the Medicare Levy Surcharge should continue to act as an incentive for singles on incomes above $83,000 (families/ couples $166,000) to maintain their private health insurance, however these individuals could reduce their level of cover or seek alternative lower priced policies in other health funds. If so, this could place upward pressure on premium contribution levels and/or reduce the benefits offered. The Fairer Private Health Insurance Incentives legislation was passed by the House of Representatives on 15 February 2012 and is expected to be passed by the Senate. Please check DHF’s website at www.doctorshealthfund.com.au for up-to-date details. 8.3 Prudential requirements Under the PHIA, private health insurers must meet minimum solvency and capital adequacy requirements, with the capital adequacy reserve being at least equal to the solvency reserve. The first measure is intended to ensure the basic solvency of the Health Benefits Fund so that, under a wind-up test, the Fund would be able to meet all liabilities as they fall due. The second measure is intended to secure the financial soundness of the Health Benefits Fund on a going-concern basis. Essentially, under these requirements, the insurer must at all times maintain adequate capital within the Health Benefits Fund by ensuring the value of the capital of the Fund equals or exceeds the capital adequacy reserve of the Fund. PHIAC, as the private health insurance industry prudential regulator, monitors these measures for each Health Benefits Fund on a quarterly basis. 8.4 Health insurance product and price changes The PHIA imposes certain requirements on the types of products that can be offered by private health insurers through their Health Benefits Funds and the manner in which they can be made available. PHIAC reviews all pricing applications and provides advice to the Minister for Health in relation to the pricing applications. The Minister must approve applications for price increases. All Health Benefits Fund rule changes must be notified in writing to the Minister for Health. The Minister has the power to direct a private health insurer not to make a rule change if he or she is satisfied that the change might, or would, result in a breach of the PHIA. Community rating Private health insurers must ensure that their rules and actions are consistent with the community rating principle, which aims to eliminate barriers to access to private health insurance by preventing discrimination on the basis of a person’s health, age (other than age at entry under Lifetime Health Cover), race, gender, sexuality or claims history. 40 The community rating principle requires that private health insurers charge the same premium for the same product to all people on the same scale in the same State or Territory. Waiting periods and portability The PHIA specifies the maximum waiting periods that a private health insurer may impose on new policy holders (subject to portability requirements) before paying benefits in respect of hospital treatments. Portability refers to the ability of members to change private health insurers with recognition of waiting periods served. 8.5 Other regulatory obligations Private health insurers are also subject to regulatory frameworks and obligations imposed by legislation such as the Health Insurance Act 1973 (Cth), the Corporations Act, the Competition and Consumer Act 2010 (Cth), the Privacy Act 1988 (Cth), the Criminal Code Act 1995 (Cth) and various State and Territory legislation (such as the fair trading legislation). 41 9. Information about DHF Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. 9.1Introduction DHF commenced operations in 1977 as an initiative of the New South Wales branch of the Australian Medical Association. It operates nationally from its office in Sydney, with the majority of Policy holders residing in the eastern States. It is a “notfor-profit”, restricted access, private health insurer. DHF’s restricted access group (the people who are eligible to take out a Policy) is defined in the Private Health Insurance (Registration) Rules 2007 (No 2) and set out in Section 11.6. It is a signatory to the Private Health Insurance Code of Conduct. DHF is the only Australian private health insurer which is focused on the medical community. Although medical practitioners form the basis of DHF’s eligibility criteria, medical students at an Australian university medical school, employees of medical practitioners and employees of federal or state Australian Medical Associations are also included. It provides personalised service through its call centre which is supplemented with a secure online facility enabling Policy holders to view their cover details at anytime they choose. 9.2 Health insurance products DHF offers a range of quality health insurance products which are designed to meet the requirements of its restricted access group. Hospital products include: ■■ T op Cover - which offers medical benefits up to the AMA list of services and fees, with freedom of choice of doctor, and is not dependent on the doctor’s adherence to any medical gap scheme to be paid by DHF’s Health Benefits Fund; ■■ Prime Choice - which is comparable to other private health insurers’ top hospital products; ■■ S mart Starter - designed for younger, fit and healthy people and has exclusions and restrictions which allow a lower premium to be charged. Prime Choice and Smart Starter provide medical benefits under the Australian Health Service Alliance Access Gap Cover Scheme. All three levels of hospital cover provide access to an extensive list of contracted private hospitals across Australia and comprehensive ambulance cover. DHF offers two levels of general treatment cover. These include cover for a range of services including dental, optical, physiotherapy and pharmaceuticals. DHF also offers travel insurance policies through its website. The policies are issued and underwritten by QBE Insurance (Australia) Limited and offered at a discount to the normal rate. 42 9.3 Financial information Financial Years ended 30 June 2010 and 30 June 2011 The following is a summary of financial information for DHF for the financial years ended 30 June 2010 and 30 June 2011. Detailed disclosures and notes applicable to complete financial statements have not been included. Although presented in a different format, this information was extracted from DHF’s audited annual reports which can be viewed by visiting www.doctorshealthfund.com.au. The annual reports contain details of significant accounting policies, detailed breakdowns of financial positions and discussion of strategy and operations for each period. Income Statement Notes Financial Year Ended 30 June 2011 $’000 Premium Revenue 30 June 2010 $’000 25,044 20,805 Direct claims expense Ambulance levies RETF recoveries (22,340) (290) 2,160 (19,768) (255) 2,779 Net claims incurred (20,470) (17,244) Gross Underwriting Profit 4,574 3,561 Claims handling costs Acquisition costs Other underwriting expenses (756) (757) (1,762) (1,093) (551) (1,102) (3,275) (2,746) Underwriting Profit 1,299 815 Investment income Other income 1,762 26 1,500 48 3,087 2,363 0 278 3,087 2,641 Total management costs Profit before Income Tax Net movement in unexpired risk liabilities Profit for the year 1. 2. Notes 1.The allocation methodology for expense by function changed in 2011 based on DHF management’s interpretation of PHIAC guidance for annual returns. If the same methodology was used for 2010, the claims handling costs, acquisition costs, and other underwriting expenses for 2010 would have been $634,247, $433,471 and $1,678,624 respectively. 2. As a “not-for-profit” company, DHF does not pay income tax. remium revenue has increased during the periods shown as a result of the growth in Policy numbers and premium P rate increases. 43 Balance Sheet As at 30 June 2011 $’000 30 June 2010 $’000 Current Assets Non-current Assets 20,122 10,487 20,720 5,563 Total Assets 30,609 26,283 Current Liabilities Non-current Liabilities 10,672 48 9,431 50 Total Liabilities 10,720 9,481 Net Assets 19,889 16,802 The DHF Board has, with the assistance of DHF’s Appointed Actuary, determined a target capital range which has been set by reference to the PHIA prudential standards. DHF’s capital as at 30 June 2011 fell within that range. Update - 31 December 2011 Unaudited management accounts for DHF have been prepared for the 6 month period to 31 December 2011, and summarised below. Income Statement Notes Half Year Ended 31 December 2011 $’000 14,578 Premium Revenue Direct claims expense Ambulance levies RETF recoveries (11,384) (159) 489 Net claims incurred (11,054) Gross Underwriting Profit 3,524 Claims handling costs Acquisition costs Other underwriting expenses (353) (354) (1,009) Total management costs (1,716) Underwriting Profit 1,808 Investment income Other income Profit before Income Tax Net movement in unexpired risk liabilities Profit for the year 44 954 14 1. 2,776 0 2,776 Notes 1.As a “not-for-profit” company, DHF does not pay income tax. Balance Sheet As at 31 December 2011 $’000 Current Assets Non-current Assets 24,496 8,962 Total Assets 33,458 Current Liabilities Non-current Liabilities 10,654 139 Total Liabilities 10,793 Net Assets 22,665 These unaudited results to 31 December 2011 are favourable compared to budget as claims have been lower than projected over that period. Claims experience is volatile and can vary significantly quarter on quarter in a small private health insurer like DHF. A positive experience for a half-year period does not mean that such results can be expected in the future. As a result of this positive experience, DHF’s capital position has improved by $2.8 million and is currently above the DHF Board’s target capital range. These unaudited results to 31 December 2011 were provided to the Independent Expert and Avant. After considering these results, including the improved capital position: ■■ the Independent Expert adopted a valuation of DHF between $28.4 million and $31.9 million; and ■■ Avant increased its offer to $30 million. The increased Avant offer of $30 million is within the Independent Expert’s valuation range. Please refer to Section 4.9 for further information on the Independent Expert’s Report. Historical results are not necessarily indicative of the results to be expected in the future. 9.4 Alliances and Associations DHF has the following key alliances and associations: HAMBS - HAMB Systems Ltd provides computer software and wide area network services. DHF is a founding member of HAMBS and is one of the 24 private health insurers in the HAMBS community. The nature of the HAMBS arrangement allows DHF access to the specialist software application and online Policy holder services. AHSA - the Australian Health Services Alliance, which is responsible for facilitating arrangements between hospitals, doctors and health service providers on behalf of DHF and other participating private health insurers. HIRMAA - a membership organisation representing Australia’s community based “not-for-profit” private health insurers. If the Proposal is implemented, it is intended that DHF will continue as a member of HIRMAA, however this will be reviewed in light of DHF’s conversion to “for-profit”. 9.5Outlook DHF has been successful in recent years in attracting young medical practitioners and continues to focus on growth and improving services. Recent increases in scale will enable further investment in new technologies, information systems and processes which will enhance DHF’s service to Policy holders while improving efficiency. Enhancements in DHF’s online capabilities are being implemented to modernise the interaction with Policy holders. 45 DHF will need to monitor the financial and operational impact of the Fairer Private Health Insurance Incentives legislation should it be passed by the Senate. This will include monitoring key financial indicators and Policy holder numbers across products. Policy holders will also need to be appraised and computer systems modified. DHF will continue to review its product offerings to ensure that they align with Policy holder expectations, within cost constraints and having regard for the legislative environment. DHF has recently contracted with a provider to access services collectively referred to under the heading ‘Broader Health Cover’. These cover a range of services including ‘hospital in the home’ and ‘hospital substitute’, as well as ‘chronic disease management’ services. This initiative also involves a web portal to provide an online health assessment service for members. 46 10.Information about Avant and Avant’s commitments and current intentions Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. 10.1The Avant Group Avant is a public company limited by guarantee incorporated in Australia and is a wholly-owned subsidiary of Avant Mutual. The Avant Group is headed by Avant Mutual, Australia’s largest medical defence organisation. Avant Mutual is a “not-forprofit” mutual organisation established in July 2007 from a merger of two medical defence organisations, each with a history of providing medical indemnity assistance to medical practitioners for over 100 years. The Avant Group’s vision is: “To partner Australia’s healthcare providers through the provision of professional indemnity insurance and other services so they can achieve their goals and contribute to creating a world leading healthcare system in Australia.” Avant Mutual currently has over 57,000 members, the vast majority of whom are medical practitioners, doctors in training or medical students. Avant Insurance also currently insures around 4,000 Optometrists and around 500 other allied health professionals. Avant Mutual also provides: ■■ medico-legal and risk management advisory services; and ■■ education, research and training programs itself, and in collaboration with medical associations, colleges and training providers. Avant Insurance provides Avant’s members with medical indemnity insurance, comprising support, advice and legal representation in the event of a claim, complaint or disciplinary matter. Avant Insurance also provides or distributes a range of other insurance products including private hospital insurance and life, income protection and total & permanent disablement insurance. Avant Insurance operates nationally with offices in New South Wales, Victoria, Queensland, Tasmania, South Australia and Western Australia, employing over 250 staff. 10.2Avant’s boards and committees As at the date of this Scheme Booklet: * The directors of Avant* are: The directors of Avant Insurance are: Dr Stuart Boland (Chair) Dr Jonathan Burdon (Deputy Chair) Dr Rosemary Ayton Dr Stephen Clarke Professor Simon Willcock Dr Beverley Rowbotham Dr Cherrell Hirst Mr Vyn Tozer Mr Vyn Tozer (Chair) Dr Cherrell Hirst (Deputy Chair) The Hon John Fahey Mr David Nathan (CEO) Mr Peter Beck Mr Terry Williamson Mr Peter Polson Dr Jonathan Burdon Dr Stuart Boland Each of the Avant Directors is also a Director of Avant Mutual. These persons, together with The Hon John Fahey, constitute the board of directors of Avant Mutual. The following Avant Board Committees assist the Avant Mutual, Avant and Avant Insurance Boards in discharging their respective responsibilities: ■■ Group Audit & Risk Committee; ■■ Group Investment Committee; ■■ Group Nominations, Performance & Remuneration Committee. Further information on Avant’s Boards and Corporate Governance at Avant can be viewed at www.avant.org.au. 47 10.3Avant historic financial information* *All financial information is Avant Mutual consolidated financial information unless otherwise stated Avant Mutual’s financial position as at 30 June 2011 can be summarised as follows: Balance Sheet Current Assets Non-current Assets Total Assets Current Liabilities Non-current Liabilities As at 30 June 2011 $398.3 million $1,163.4 million $1,561.7 million $254.3 million $614.1 million Total Liabilities $868.4 million Net Assets $693.3 million Avant Mutual’s net assets of $693.3 million as at 30 June 2011, build on net assets of $628.4 million at the same date in 2010 and $544.5 million in 2009. Avant had net assets of $385.6 million as at 30 June 2011, building on net assets of $281.8 million at 30 June 2010. Historical results are not necessarily indicative of the results to be expected in the future. Additional information about the Avant Group can be viewed at www.avant.org.au. 10.4Avant’s rationale for the Proposal Avant’s vision is as stated in Section 10.1. Avant’s strategic objectives include protecting and growing its core medical indemnity business, diversifying to reduce risk and enhance sustainability and delivering operational excellence and financial sustainability. If the Proposal is implemented, it is expected that DHF will contribute to Avant fulfilling its vision and achieving its strategic objectives by enabling DHF to make its range of private health insurance products available to Avant Mutual’s members and diversifying the Avant Group’s revenues, which currently come predominantly from the sale of medical indemnity products. Avant expects that the Proposal should also benefit Policy holders, due to the growth and scale opportunities which should present themselves through marketing DHF’s products to Avant Mutual members, as growth and scale should result in increased revenue and an overall reduction in management costs (on a per member basis), which may mitigate the need for premium increases. Increases in size and scale should also allow DHF to invest further in resources to enhance member services and make DHF more cost effective. Avant’s current intention is that DHF will continue as a restricted access private health insurer and will provide private health insurance to selected additional categories of health practitioners and officers, employees and contractors of Avant Insurance and Avant Law Pty Limited through an expanded restricted access group. 10.5Avant’s post-implementation intentions and commitments This Section summarises Avant’s current intentions and certain commitments given by Avant in relation to: ■■ the continuation of the DHF business; and ■■ any changes to the DHF business, if the Proposal is implemented. Avant’s intentions are based on the information in relation to DHF, and the circumstances affecting its business, that is known to Avant at the date on which the Implementation Deed was amended and restated. Accordingly, the statements 48 of intention set out in this Section and elsewhere in this Scheme Booklet are statements of Avant’s current intention, which may change. Final decisions in respect of statements of intention will only be made in the light of all material facts and circumstances at the relevant time if the Proposal is implemented. None of Avant’s commitments or statements of current intention referred to in this Section 10.5 requires Avant to take, or not take, or procure that any other person takes or does not take, any action which would cause it or such other person to breach any applicable law or requirement of a Government Agency. Security of benefits and Policies If the Proposal is implemented, Avant’s current intention is that DHF will retain its existing product range, including DHF’s Top Cover hospital product and the range of benefits offered under each of DHF’s products. Access to capital and other resources If the Proposal is implemented, Avant has committed to procure, insofar as it is able as a shareholder in DHF to do so, that capital is made available to DHF to the extent that it is needed to ensure that: ■■ D HF’s Health Benefits Fund is in a position to meet its capital requirements in accordance with the solvency and capital adequacy prudential standards under the PHIA; and ■■ D HF has sufficient capital to support its business, to the extent that it is conducted in accordance with DHF’s business plan in place as at the date of the Implementation Deed and any subsequent DHF business plan which Avant may approve from time to time. DHF as a separate business Avant does not currently have a private health insurance business. If the Proposal is implemented, Avant has committed to procure, insofar as it is able as a shareholder in DHF to do so, that, as mandated under the applicable legislation, rules and prudential standards, DHF’s Health Benefits Fund will be managed separately from Avant’s other businesses, but that DHF will be able to access Avant’s staff, systems and other support as appropriate. DHF employees If the Proposal is implemented, it is Avant’s current intention to encourage DHF employees to continue in employment with DHF on their current terms and conditions, except for certain staff retention benefits which are summarised in Section 11.3(f). Consultants/advisers If the Proposal is implemented, Avant has committed to procure, insofar as it is able as a shareholder in DHF to do so, that DHF will retain its current Appointed Auditor, Appointed Actuary and current internal auditor, for the Initial Period. DHF Governance If the Proposal is implemented, DHF will become a wholly-owned subsidiary of Avant. Avant has committed to procure, insofar as it is able as a shareholder in DHF to do so, that for the Initial Period: ■■ the number of DHF directors will be 7, comprising 3 DHF directors appointed at the date of the Implementation Deed and 4 DHF directors nominated by Avant; ■■ Patria Mann will remain as Chair; and ■■ the quorum for a meeting of DHF directors will be 4, at least 2 of whom must be DHF directors at the date of the Implementation Deed. This commitment does not apply to the extent that a DHF director resigns or dies and does not prevent Avant from removing a DHF director who: ■■ resigns or becomes incapacitated for a period of more than 6 months; ■■ is convicted of any offence involving dishonesty; 49 ■■ is disqualified to act as a director; or ■■ is banned or disqualified from acting as a director in relation to a financial services company. Avant’s current intention is that immediately after the expiry of the Initial Period: ■■ 2 of the DHF directors (being one DHF director appointed by Avant and one director appointed at the date of the Implementation Deed) will resign such that the number of DHF directors will be 5; and ■■ the quorum of a meeting of the DHF Board will be 3. Avant’s current intention is that Dr Peter Arnold and Dr Dominic Barnes will enter into arrangements with DHF such that they will provide: ■■ up to 10 hours of consultancy services to DHF during the Initial Period for a fee of $5,000 (exclusive of GST) each; and ■■ a ny additional consultancy services requested by DHF and agreed to be provided by them for a fee of $500 per hour (exclusive of GST). Avant’s intention regarding DHF’s current Board Committee structure is as follows: ■■ DHF’s Audit, Risk & Compliance Committee will remain separate for the Initial Period; ■■ D HF’s Human Resource, Remuneration & Nominations Committee will be merged as soon as practicable with Avant’s Nomination, Performance & Remuneration Committee, subject to any consents or approvals required from any Government Agency; and ■■ D HF’s Marketing & Business Development Committee will continue so long as the DHF Board considers that DHF continues to derive value from it. Although some DHF Board committees may be merged with Avant Group committees, the DHF Board will retain the right to review and return any decisions or recommendations made in respect of DHF’s activities. If the Proposal is implemented, Avant has committed to procure, insofar as it is able as a shareholder in DHF to do so, that there will be appropriate measures in place to ensure that DHF continues to comply with the Governance Standard set out in the Private Health Insurance (Insurer Obligations) Rules 2009. 10.6Avant’s funding arrangements Avant will fund the Consideration from its own internal financial resources without the need for any external funding. Avant executed the Deed Poll immediately following the Court making the orders under section 411(1) of the Corporations Act to convene the Scheme Meeting. Under the Deed Poll, Avant will undertake to each Scheme Member that it will comply with its obligations under the Implementation Deed and to pay the Consideration to the Trustee in accordance with the Implementation Deed. The Deed Poll is set out in Appendix 6. 50 11. Additional information Defined terms and expressions begin with a capital letter and are explained in the Glossary in Section 12. All dates and times are Sydney time. This Section contains information required under section 411(3) of the Corporations Act, and other additional information related to the Proposal. 11.1 Implementation Deed On 11 August 2011, DHF and Avant entered into the Implementation Deed which was restated and amended by DHF and Avant on 8 February 2012. The Implementation Deed sets out the obligations of both DHF and Avant in relation to the implementation of the Proposal. The key provisions of the Implementation Deed are as follows: (a) Conditions precedent to the Scheme becoming Effective The effectiveness of the Scheme (and therefore the Proposal) is subject to various conditions precedent which must be satisfied or waived (to the extent that a condition precedent can be waived). In summary, these conditions precedent are as follows: ■■ approval by PHIAC for DHF to convert to a “for-profit” private health insurer; ■■ c reation of a rule by the Minister for Health (or her delegate) giving effect to the proposed amendments to DHF’s restricted access group; ■■ a ny other mandatory approvals of a Government Agency being obtained, including ASIC issuing or providing any other consents or approvals or doing other acts necessary or desirable to implement the Proposal; ■■ approval of the EGM Resolutions by the requisite majority of DHF Members; ■■ a pproval of the Scheme Resolution at the Scheme Meeting by the requisite majorities of DHF Members and in accordance with the Corporations Act; ■■ n o DHF Prescribed Occurrence or Avant Prescribed Occurrence occurring before 5.00pm on the Business Day prior to the Second Court Hearing Date; ■■ approval of the Scheme by the Court either conditionally or on conditions acceptable to Avant; ■■ n o legal restraint or prohibition, or action taken (and not withdrawn), prior to 8.00am on the Second Court Hearing Date, having the effect of preventing the implementation of the Scheme or any transaction contemplated by it; ■■ n o DHF Material Adverse Change or Avant Material Adverse Change occurring between the date of the Implementation Deed and 8.00am on the Second Court Hearing Date; ■■ the DHF Warranties and the Avant Warranties being true and correct on the date of the Implementation Deed and at 8.00am on the Second Court Hearing Date; ■■ the Independent Expert’s Report concluding that the Proposal is in the best interests of Scheme Members in circumstances where the Independent Expert does not change its conclusion or withdraw its report prior to 5.00pm on the Business Day prior to the Second Court Hearing Date. (b) Conditions precedent to implementation of the Proposal The issue by DHF of the Subscription Shares to Avant is subject both to the Scheme becoming Effective and to the Change in Company Type. The Scheme will become Effective when the order of the Court approving the Scheme is lodged with ASIC. (c) Key obligations of DHF The key obligations of DHF under the Implementation Deed include: ■■ a pply to the Minister for Health (or her delegate) to make a rule giving effect to the proposed amendments to DHF’s restricted access group; 51 ■■ a pply to PHIAC for conversion of its PHIA registration status from a “not-for-profit” private health insurer to a “forprofit” private health insurer; ■■ a pply to the Court for orders convening the Scheme Meeting and, after approval of the EGM Resolutions and Scheme Resolution by the requisite majorities of DHF Members, approving the Scheme; ■■ convene and hold the EGM and Scheme Meeting; ■■ p rovide the Court with a certificate noting the satisfaction, waiver or otherwise of the conditions precedent in the Implementation Deed; ■■ lodge a copy of the Court orders approving the Scheme with ASIC no later than 5.00pm on the Business Day after the orders are made; ■■ b etween the date of the Implementation Deed and the Effective Date, use all reasonable endeavours to ensure that a DHF Prescribed Occurrence does not occur other than in accordance with the Implementation Deed or with the prior consent of Avant; ■■ from the date of the Implementation Deed up to the earlier of the date of termination of the Implementation Deed and the Implementation Time, conduct its business in the normal and ordinary course in substantially the same manner as previously conducted, unless otherwise agreed by Avant in writing; ■■ g rant company membership to Avant (in accordance with Avant’s application for membership) immediately after the Scheme has become Effective; ■■ apply to ASIC for the Change of Company Type within 5 Business Days of the Effective Date; ■■ a t the Implementation Time, direct the Trustee to hold the Consideration on trust for DHF as pre-payment for the issue price of the Subscription Shares; ■■ a t the Implementation Time, cancel the company memberships of all DHF Members (which will extinguish the liability of each DHF Member as a guarantor on a winding up of DHF); ■■ o n the Implementation Date, issue the Subscription Shares to Avant as fully paid and free from any encumbrance or third party rights, and provide to Avant an appropriate share certificate and certified copy of the register of shareholders of the company; ■■ on the Implementation Date, direct the Trustee to distribute the Initial Entitlements to Scheme Members. (d) Key obligations of Avant The key obligations of Avant under the Implementation Deed are to: ■■ execute the Deed Poll immediately after the Scheme Meeting is ordered by the Court; ■■ verify the Avant Information in this Scheme Booklet; ■■ p rovide the Court with a certificate noting the satisfaction, waiver or otherwise of the conditions precedent in the Implementation Deed; ■■ pay the Consideration to the Trustee prior to 8am on the Second Court Hearing Date. (e) Key joint obligations of DHF and Avant The key joint obligations of DHF and Avant are to appoint the Trustee in accordance with the Implementation Deed and direct the Trustee to establish the Trust Account into which the Consideration will be deposited to be dealt with in accordance with the Scheme. (f) DHF Warranties DHF has provided representations and warranties to Avant regarding its corporate status and capacity and in respect of the accuracy and completeness of the information in this Scheme Booklet. In addition, DHF represents and warrants to Avant that all information relating to DHF that is provided to Avant by or on behalf of DHF is true, complete, and accurate in all 52 material respects and that none of the information provided is misleading in any material respect, nor has DHF intentionally withheld from Avant any information which might reasonably be expected to materially adversely affect the financial position, business, operations, or assets of DHF. (g) Avant Warranties Avant has provided representations and warranties to DHF regarding its corporate status and capacity and that the Avant information provided in this Scheme Booklet, as at the date it is despatched to DHF Members, does not contain any statement that is materially incorrect, misleading or deceptive, including by way of omission from that statement. (h) Exclusivity provisions DHF has agreed with Avant that, during an exclusivity period from the date of the Implementation Deed to the earlier of its termination and the End Date, DHF will not, without Avant’s prior written consent, solicit or invite any Competing Proposal or initiate discussions with any third party which may reasonably be expected to lead to a Competing Proposal. DHF has agreed to promptly notify Avant (within at least 48 hours) of any Competing Proposal received by it or any of its authorised persons. However, the DHF Board may: ■■ r espond to a bona fide unsolicited Competing Proposal which the DHF Board reasonably believes may lead to a Superior Proposal; or ■■ following receipt of an unsolicited third party expression of interest, offer, invitation or proposal, engage in discussions which it reasonably expects to lead to an unsolicited Competing Proposal and which the DHF Board reasonably believes may lead to a Superior Proposal, if, in each case, the DHF Board determines in good faith after receiving legal advice that failing to do so would, or might reasonably be expected to, involve a breach of the DHF Board’s legal obligations (including fiduciary and statutory duties). In the event the DHF Board proposes a resolution, or to do anything, that would result in a Competing Proposal becoming a Superior Proposal, it must provide Avant with at least five Business Days’ written notice setting out details of the proposed resolution or action proposed to be taken by DHF and all material terms of the Superior Proposal. Following receipt of such a notice, Avant has the right to submit a revised proposal to DHF within five Business Days. If this right is exercised, the amended proposal must be considered by the DHF Board in good faith. (i)Termination Either DHF or Avant may terminate the Implementation Deed by providing the other with written notice: ■■ a t any time prior to 8.00am on the Second Court Hearing Date, if the other party is in material breach of any term of the Implementation Deed and the party wishing to terminate has provided to the party in breach a written notice setting out details of the breach and its intention to terminate if that breach continues for five Business Days (or any shorter period ending at 5.00pm on the day before the Second Court Hearing Date) from the date that the notice is given; ■■ a t any time prior to 8.00am on the Second Court Hearing Date, if a Court or Government Agency has taken any action permanently restraining or otherwise prohibiting the Proposal, or has refused to do anything necessary to permit the Proposal, and the action or refusal has become final and cannot be appealed; or ■■ if the conditions precedent set out in the Implementation Deed have not been satisfied or waived by DHF and/or Avant (as applicable) by the End Date, unless the failure to satisfy the condition precedent arose out of a failure to take steps, or to use all reasonable endeavours, by the party purporting to terminate the Implementation Deed. Within five Business Days of DHF or Avant becoming aware of a condition precedent becoming unable to be satisfied (or, if earlier, by 8.00am on the Second Court Hearing Date), and that condition has not been waived, the party entitled to the benefit of the condition may terminate the Implementation Deed by providing to the other party written notice of its intention to terminate prior to 8.00am on the Second Court Hearing Date. 53 Avant may terminate the Implementation Deed by giving DHF written notice: ■■ a t any time before 8.00am on the Second Court Hearing Date, if a DHF director changes, withdraws, or modifies his or her recommendation, or otherwise makes a public statement to the effect that he or she no longer supports the Proposal; ■■ at any time, if DHF is in breach of the exclusivity provisions of the Implementation Deed; or ■■ if the Second Court Hearing Date has not occurred one month before the End Date following approval of the Scheme Resolution by the requisite majority of DHF Members. All of the obligations in the Implementation Deed with respect to the Scheme will terminate automatically in the event that: ■■ the Independent Expert opines that the Scheme is not in the best interests of Scheme Members. However, if the Independent Expert provides such an opinion, Avant may submit a revised proposal and DHF must submit the revised proposal to the Independent Expert with instructions to provide a report on whether the revised proposal is in the best interests of Scheme Members. If the report opines that the Scheme is not in the best interests of Scheme Members, all of the obligations in the Implementation Deed with respect to the Scheme will terminate automatically; ■■ D HF Members fail to approve the EGM Resolutions and the Scheme Resolution by the requisite majorities at the EGM and the Scheme Meeting; ■■ the Court refuses to grant an order convening the Scheme Meeting or approve the Scheme and that decision is not successfully appealed; or ■■ the Court does not approve the Scheme under section 411(4)(b) of the Corporations Act on or before the End Date. The Parties may also agree to terminate the Implementation Deed in writing. (j) Effect of termination If the Implementation Deed is terminated, then excluding some limited provisions relating to confidentiality, the cost reimbursement obligations of Avant, and the cost refund obligations of DHF (described in paragraph (m) below), the obligations of DHF and Avant under the Implementation Deed cease without any liability. (k) End Date All of the obligations of DHF and Avant under the Implementation Deed will terminate automatically in the event that the Implementation Date has not occurred by the End Date. The Parties may agree to change the End Date in writing. (l) Costs reimbursement by Avant Avant has agreed to reimburse DHF for: ■■ the wage or contract fees and on-costs for additional project employees or contractors of DHF who are, with the approval of Avant, engaged for the purpose of assisting DHF with the Proposal; and ■■ a ll fees, costs and expenses payable by DHF to its external professional advisers in respect of services directly related to the Proposal which are incurred in good faith by DHF in connection with the Proposal. This is subject to DHF’s refund obligation explained in paragraph (m) below. (m) Refund to Avant of costs reimbursement amount The following applies in respect of the repayment of the costs reimbursed by Avant to DHF in connection with the Proposal: ■■ if at any time during the term of the Implementation Deed, a Superior Proposal is announced by DHF and subsequently implemented, DHF must refund all costs reimbursed by Avant to DHF in connection with the Proposal, including the costs reimbursed under the Costs Undertaking; ■■ if on or before the Second Court Hearing Date, other than in response to the Independent Expert opining that the Scheme is not in the best interests of Scheme Members, a majority of DHF directors: ■■ makes a public statement withdrawing or adversely modifying their recommendation in regard to the Proposal; or 54 ■■ makes a public statement indicating they no longer support the Proposal or that they support a Competing Proposal, HF must refund all costs reimbursed by Avant to DHF in connection with the Proposal, including the costs D reimbursed under the Costs Undertaking; ■■ if the Independent Expert opines in the Independent Expert’s Report that the Scheme is in the best interests of Scheme Members, but does not report that in its opinion the Scheme is fair, DHF and Avant must meet in good faith to seek to resolve the issue of fairness as soon as practicable and submit any amended proposal to the Independent Expert. If the issue of fairness is not resolved, the DHF Board may terminate the Implementation Deed and, in that event, DHF must refund all costs reimbursed by Avant in connection with the Proposal other than costs reimbursed under the Costs Undertaking; and ■■ if Avant terminates the Implementation Deed either due to an unresolved material breach of the Implementation Deed by DHF, or otherwise pursuant to a breach by DHF of its obligations under the exclusivity provisions in the Implementation Deed noted above, DHF must refund all costs reimbursed by Avant in connection with the Proposal, including the costs reimbursed under the Costs Undertaking. 11.2 Deed Poll Avant executed the Deed Poll immediately after the Scheme Meeting was ordered by the Court. The Deed Poll is set out in Appendix 6. 11.3 Directors and Officers (a) Changes to the Board The following directors will resign with effect from the Implementation Time: ■■ Dr Dominic Barnes; ■■ Dr Peter Arnold. Following implementation of the Proposal, DHF will become a wholly-owned subsidiary of Avant. Avant must procure, insofar as it is able as a shareholder of DHF to do so, that three of the existing five members of the current DHF Board will continue on the DHF Board (Patria Mann continuing as Chair) for the Initial Period. Patria Mann, Bruce Foy and Dr Janette Stening have indicated that they are willing to continue as DHF directors on that basis. They will be joined on the DHF Board by four Avant-appointed directors who Avant currently intends will be: ■■ Dr Stuart Boland; ■■ Mr David Nathan; ■■ Professor Simon Willcock; ■■ Mr Terry Williamson. (b) Directors’ interests in connection with the Scheme All of the DHF directors are DHF Members and will receive an Entitlement in accordance with the Allocation Rules if they remain as DHF Members as at the Scheme Record Time. The Initial Entitlements of the DHF directors are set out in the following table: Director Patria Mann Bruce Foy Dr Peter Arnold Dr Janette Stening Dr Dominic Barnes Initial Entitlement $1,554 $2,664 $8,880 $2,220 $8,436 55 DHF directors may also receive a Residual Entitlement if they remain as DHF Members as at the Scheme Record Time. At the date of this Scheme Booklet, the amount of any Residual Entitlement is not known. Avant’s current intention is that Dr Peter Arnold and Dr Dominic Barnes will each enter into arrangements with DHF to provide: ■■ up to 10 hours of consultancy services to DHF during the Initial Period for a fee of $5,000 (exclusive of GST) each; and ■■ a ny additional consultancy services requested by DHF and agreed to be provided by them for a fee of $500 per hour (exclusive of GST). Other than as described above, no DHF director has any other interest in, or which is contingent upon, the outcome of the Proposal. (c) Directors’ interests in DHF DHF is a public company limited by guarantee and has no share capital. Accordingly, no DHF director holds any marketable securities in DHF. (d) Directors’ interests in Avant Dr Dominic Barnes has medical indemnity insurance, and Dr Peter Arnold has medical indemnity run off insurance, with Avant Insurance. Other than as disclosed, no DHF director, whether directly or indirectly, holds any marketable securities in, or has an interest in, any contract entered into by an Avant Group entity. (e) Retirement benefits Other than as disclosed in this Scheme Booklet, no payment or other benefit is proposed to be made or given to any DHF director or Officer of DHF as compensation for loss of, or as consideration for or in connection with their retirement from office with DHF or as a result of the Scheme becoming Effective. (f) Employee retention arrangements DHF has entered into employee retention arrangements with the employees (including the CEO) it considers are crucial to the continued operation of DHF’s business leading up to, and after, the Implementation Date. Under these retention arrangements, each of the key employees will, subject to their remaining employed by DHF and meeting agreed performance targets, receive payments. A proportion of the amounts payable will be paid in June 2012 and the remaining payments will be made at specified times following the Implementation Date. These retention arrangements will result in a maximum aggregate payment of $375,112. These retention arrangements are common in acquisition transactions in order to ensure key employees and their knowledge are retained. (g) Agreements or arrangements with DHF directors Other than as disclosed in this Section 11.3, no DHF director has, as at the date of this Scheme Booklet, entered into an agreement or arrangement with another person in connection with or conditional on the outcome of the Scheme or the Proposal. (h) Agreements or arrangements with Officers Other than as disclosed in this Scheme Booklet, and rights under Policies, no Officer of DHF has entered into an agreement or arrangement with another person in connection with, or conditional upon, the outcome of the Scheme or the Proposal. (i) Interests in contracts Other than as disclosed in this Scheme Booklet, no DHF director or Officer of DHF has any interest in any contract with DHF. (j) Other payments and benefits Other than as disclosed in this Scheme Booklet, no DHF director has any other interest, whether as a director, member or creditor of DHF or otherwise, which is material to the Scheme or the Proposal. Other than as disclosed in this Scheme Booklet, neither DHF, nor any of its directors has given, or offered or agreed to give, a benefit to another person where the benefit was likely to induce the other person to vote in favour of the EGM Resolutions or the Scheme Resolution, where that benefit has not been offered to all DHF Members. 56 (k) Recommendation by DHF directors Each DHF director recommends, in the absence of a Superior Proposal, that DHF Members vote for each of the Resolutions. (l) DHF directors’ voting intentions Each DHF director intends, in his or her capacity as a member of DHF, to vote for each of the Resolutions to implement the Proposal in the absence of a Superior Proposal. At the date of this Scheme Booklet, DHF has not received any offer or proposal that the DHF Board considers is a Superior Proposal. 11.4 Intentions as to DHF’s business Avant’s current intentions with respect to DHF’s business are set out in Section 10.5. 11.5 Transaction costs DHF will incur various costs associated with the Proposal including fees paid to DHF’s professional advisers, registry costs, printing costs, and other costs associated with conducting the EGM and Scheme Meeting. Under the Cost Undertaking and the Implementation Deed, Avant is obliged to reimburse DHF for certain costs associated with the Proposal (see Section 11.1(l)). This is subject to DHF’s refund obligation in certain circumstances, as explained in Section 11.1(m). Accordingly, it is possible that, in some circumstances, some costs associated with the Proposal will be payable by DHF that either will not be reimbursed by Avant or, if reimbursed, might need to be refunded to Avant. As at the date of this Scheme Booklet, the costs (ex-GST) associated with the Proposal are approximately $1.2 million (of which DHF has been reimbursed, or is entitled to be reimbursed, by Avant approximately $1.2 million). If the Proposal is implemented, DHF expects these costs (ex-GST) to total approximately $2.0 million (of which DHF has been reimbursed, or is entitled to be reimbursed, by Avant approximately $2.0 million). These estimates include employee retention payments to be funded by Avant, as referred to in Section 11.3(f). The Directors consider these costs to be reasonable in the context of the Proposal. 11.6 Regulatory approvals The following regulatory approvals, exemptions and declarations are being sought or have been given in relation to the Proposal. It is possible that some or all of the regulatory approvals being sought might not be given, or if given, might be subject to one or more conditions. (a) PHIAC DHF has applied to PHIAC to convert its registration from a “not-for-profit” to a “for-profit” private health insurer. This application is governed by section 126-42 of the PHIA and PHIAC must approve the application if the formal requirements of that sub-section are satisfied. These requirements include that the application must be in the approved form, it must include the relevant details of the Scheme, and it must be given to PHIAC at least 90 days before the day specified in the application as the day on which DHF proposes that it become registered as a “for-profit” private health insurer. PHIAC must also be satisfied that the Scheme would not result in financial benefits being distributed inequitably between Policy holders. DHF has applied to PHIAC for this approval to take effect at 11.59pm on the Business Day preceding the Implementation Date. The approval of PHIAC to DHF’s application is a condition precedent to the Proposal. This condition cannot be waived by either DHF or Avant and, accordingly, it must be satisfied if the Proposal is to be implemented. As at the date of this Scheme Booklet, DHF has not received the approval from PHIAC. (b)DoHA DHF has applied to DoHA to expand its restricted access group to provide DHF with the ability to provide its health insurance to selected additional categories of health practitioners and officers, employees and contractors of Avant Insurance and Avant Law Pty Limited. 57 Current Restricted Access Group A person who is or was: (a) A medical practitioner (as defined in section 3(1) of the Health Insurance Act 1973 (Cth) “Medical Practitioner”); (b) An employee of a Medical Practitioner or an officer or employee of an incorporated medical practice; (c) A medical student studying at an Australian university medical school or educational institution; (d)An overseas trained doctor enrolled through the Australian Medical Council (the AMC) to sit for the examinations of that Council or of one of the Specialist Colleges affiliated with the AMC; (e) An officer or employee of the federal, or a state, Australian Medical Association; (f)An officer or employee of an associated or subsidiary organisation of the federal, or a state, Australian Medical Association; (g) An officer or employee of any federal or state association of registered Medical Practitioners. Under the PHIA, in addition to the people included in the restricted access group, employees and contractors of DHF, and their respective spouses and close family members, together with some other associated people, may become Contributing Members. DHF’s application to DoHA proposes the following new restricted access group. Proposed Restricted Access Group (a)A person who is, or was, a medical practitioner as defined in section 3(1) of the Health Insurance Act 1973 (Cth) (“Medical Practitioner”); (b) A person who is, or was at any time: i. in one of the following categories of ‘health practitioner’, as listed in the Health Practitioner Regulation National Law Act 2009 (Qld) (whether or not registered or practising in Queensland or any other Australian State or Territory): ■■ medical; ■■ medical radiation; ■■ optometry; ■■ dental; ■■ occupational therapy; ■■ physiotherapy; and ■■ psychology, (“Health Practitioner”) ii.an employee of a Medical Practitioner or a Health Practitioner or an officer or employee of an incorporated practice of a Medical Practitioner or a Health Practitioner; iii.a person studying to become a Health Practitioner at an Australian university medical school or other educational institution; iv.an overseas trained doctor enrolled through the Australian Medical Council (the ‘AMC’) to sit for the examinations of that Council or of one of the Specialist Colleges affiliated with the AMC; v. an officer or employee of the federal, or a state, Australian Medical Association; vi.an officer or employee of an associated or subsidiary organisation of the federal, or a state, Australian Medical Association; vii. an officer or employee of any federal or state association of registered medical practitioners; or viii.an officer or employee (including contractors) of Avant Insurance Limited ABN 82 003 707 471 or Avant Law Pty Limited ACN 136 429 153. 58 The Implementation Deed allows DHF and Avant to revise the changes to the restricted access group proposed above if they both agree and if DoHA approves the changes. As at the date of this Scheme Booklet, no other changes are proposed. The approval of DoHA to the expansion of DHF’s restricted access group is a condition precedent to the effectiveness of the Scheme. Under the terms of the Implementation Deed, Avant has the right to waive this condition prior to the Second Court Hearing Date. As at the date of this Scheme Booklet, the condition has not been satisfied. (c)ASIC As part of the Proposal, DHF will apply to ASIC to change from a public company limited by guarantee to a proprietary company limited by shares under Part 2B.7 of the Corporations Act. 11.7 Material changes in the financial position of DHF A summary statement of the financial position of DHF for the financial year ended 30 June 2011 is set out in Section 9.3. This section also includes information based on unaudited management accounts for DHF which were prepared for the 6 month period to 31 December 2011. To the best of the knowledge and belief of the DHF directors, except as disclosed in this Scheme Booklet, there has been no material change to the financial position of DHF since 30 June 2011. 11.8 Effect on creditors To the best of the DHF directors’ knowledge, the Scheme will not materially affect the interests of creditors of DHF and no material liability will be incurred by DHF under or by reason of the Scheme other than the costs associated with implementing the Scheme. 11.9 Disclosure of fees and benefits received by certain persons The persons named in this Scheme Booklet as performing a function in a professional, advisory or other capacity in connection with the preparation and distribution of this Scheme Booklet are: ■■ Lonergan Edwards & Associates Limited as the Independent Expert; ■■ David Torrance of KPMG Actuarial Pty Ltd as the Appointed Actuary; ■■ David Goodsall of Synge & Noble Pty Ltd as the Independent Actuary; ■■ mackenzie thomas as the legal adviser to DHF; ■■ PricewaterhouseCoopers as the tax adviser to DHF. Each of them will be entitled to receive professional fees charged in accordance with their agreed basis of charging, as estimated in the following table: Name Lonergan Edwards & Associates Limited (Independent Expert) KPMG Actuarial Pty Ltd (Appointed Actuary) Estimated Fee (ex-GST) $175,000 $240,000 - $280,000 Synge & Noble Pty Ltd (Independent Actuary) $26,000 mackenzie thomas (Legal Adviser) and Senior Counsel $700,000 PricewaterhouseCoopers (Tax Adviser) $16,000 59 11.10Interests of persons for disclosure This Scheme Booklet has been prepared by DHF in consultation with its professional advisers set out in Section 11.9 above. Some of the individuals who are principals or partners of, or who are employed or retained by those professional advisers, may be Scheme Members and may therefore receive Entitlements in accordance with the Allocation Rules if the Proposal is implemented. 11.11Consents (a) Consent to be named The following parties have given and have not, before the time of registration of this Scheme Booklet by ASIC, withdrawn their written consent to be named in this Scheme Booklet in the form and context in which they appear: ■■ Lonergan Edwards & Associates Limited as the Independent Expert; ■■ David Torrance and KPMG Actuarial Pty Ltd as the Appointed Actuary; ■■ David Goodsall and Synge & Noble Pty Ltd as the Independent Actuary; ■■ mackenzie thomas as the legal adviser to DHF; ■■ PricewaterhouseCoopers as the tax adviser to DHF. (b) Consents to the inclusion of information The following parties have given and have not, as at the date of this Scheme Booklet, withdrawn their written consent to the inclusion of the following information in this Scheme Booklet in the form and context in which it is included and to all references in this Scheme Booklet to that information in the form and context in which they appear: ■■ Avant in respect of the Avant Information; ■■ Lonergan Edwards & Associates Limited in respect of the summary of the Independent Expert’s Report in Appendix 7; ■■ David Torrance and KPMG Actuarial Pty Ltd in respect of the Appointed Actuary’s Report in Appendix 8; ■■ David Goodsall and Synge & Noble Pty Ltd in respect of the Independent Actuary’s Report in Appendix 9; ■■ PricewaterhouseCoopers in respect of the Tax Advice Letter in Appendix 10. 11.12Disclaimers Each person referred to in Section 11.11 above: ■■ d oes not make, or purport to make, any statement in this Scheme Booklet other than those statements made in the capacity, and to the extent the person has provided the consent, referred to in Section 11.11 above; and ■■ to the maximum extent permitted under law, expressly disclaims and takes no responsibility for any part of this Scheme Booklet other than as described in Section 11.11 with the person’s consent. 11.13Supplementary information If, between the date of lodgement of this Scheme Booklet with ASIC and the Effective Date, DHF becomes aware that: ■■ a material statement in this Scheme Booklet is false or misleading; ■■ there is a material omission from this Scheme Booklet; ■■ a significant change affecting a matter included in this Scheme Booklet has occurred; or ■■ a significant new matter has arisen which would have been required to be included in this Scheme Booklet if it had arisen before the date of lodgement of this Scheme Booklet with ASIC, DHF will prepare a supplementary document to this Scheme Booklet and issue it to all DHF Members. The form which the supplementary document will take will depend on the nature and timing of the new or changed circumstances. 60 11.14Material information Other than as contained in this Scheme Booklet, there is no information material to the making of a decision in relation to the Proposal (being information that is within the knowledge of any DHF director, acting in that capacity) that has not previously been disclosed to DHF Members. 11.15ASIC registration This Scheme Booklet was submitted to ASIC on 28 February 2012 pursuant to section 411(2)(b) of the Corporations Act and has been lodged with ASIC for registration pursuant to section 412(6) of the Corporations Act. 11.16DHF directors’ consent to lodgement Each DHF director has given, and not withdrawn, his/her consent to the lodgement of this Scheme Booklet in relation to the Scheme with ASIC. BY ORDER OF THE BOARD OF THE DOCTORS’ HEALTH FUND LIMITED Patria Mann CHAIR 61 12. Glossary $ means Australian currency. Allocation Rules means the allocation rules set out in Appendix 4 under which the Consideration is allocated to Scheme Members. Appendix means an appendix to this Scheme Booklet. Appointed Actuary means David Torrance of KPMG Actuarial Pty Ltd. Appointed Actuary’s Report means the report by the Appointed Actuary set out in Appendix 8. ASIC means Australian Securities and Investments Commission. Avant means Avant Group Holdings Limited, ABN 72 077 283 884. Avant Information means the information concerning Avant and the Avant Group set out in this Scheme Booklet. Avant Insurance means Avant Insurance Limited, ABN 82 003 707 471. Avant Group means Avant Mutual and each of its controlled entities after implementation of the Scheme, which will include DHF as a wholly-owned subsidiary, if the Proposal is implemented. Avant Material Adverse Change means one or more changes, events, occurrences or matters (whether individually or when aggregated with all such changes, events, occurrences or matters of a like kind) has had, will have or could reasonably be expected to be likely to have the effect of: (a) Avant being unable to carry on its business in substantially the same manner as it is currently carried on; or (b) preventing or being likely to prevent Avant from discharging its obligations under this Deed. Avant Mutual means Avant Mutual Group Limited, ABN 58 123 154 898. Avant Prescribed Occurrence means the occurrence of any of the following on or after the date of the Implementation Deed: (a) an Insolvency Event in relation to Avant; (b) Avant disposing, or agreeing to dispose, of the whole, or a substantial part of its business or property; or (c)any investigation, prosecution, arbitration, litigation or dispute, or any two or more such events which are related, which could reasonably be expected to give rise to a liability or an aggregate liability (as applicable) to Avant or any of its associated entities in excess of $50 million. Avant Warranties means the representations and warranties provided by Avant to DHF under the Implementation Deed, as summarised in Section 11.1(g). Business Day means a day that is not a Saturday, Sunday or a public holiday or bank holiday in Sydney, Australia. Calculation Date is 5.00pm 17 January 2012. This is the date on which the initial unit value (used to determine Initial Entitlements) is calculated. Change of Company Type means the change of DHF’s company type under Part 2B.7 of the Corporations Act from a public company limited by guarantee to a proprietary company limited by shares, with the sole shareholder being Avant. Competing Proposal means a proposed transaction or arrangement under which a person other than Avant will, if the transaction is entered into or completed: (a)acquire (whether directly or indirectly) or become the holder of, or otherwise have a right to acquire or have an economic interest in all or a substantial part of the business of DHF; (b) acquire voting power of 50% or more in DHF; (c) acquire control (as determined in accordance with section 50AA of the Corporations Act) of DHF; (d) otherwise acquire or merge with DHF; (e) require DHF to abandon or otherwise fail to proceed with the Proposal; or (f) result in a Demutualisation of DHF. 62 Consideration means $30 million. Contributing Member means a Qualified Person who has been issued a Policy and is: (a) responsible for the payment of contributions referable to the provision of benefits for persons insured under that Policy; and (b) recorded as a contributing member in the records of DHF. Corporations Act means the Corporations Act 2001 (Cth). Corporations Regulations means the Corporations Regulations 2001 (Cth). Cost Undertaking means the deed in relation to third party costs between Avant Mutual and DHF entered into on or about 15 April 2011 as amended from time to time. Court means the Federal Court of Australia or any other court of competent jurisdiction under the Corporations Act agreed in writing by DHF and Avant. Deed Poll means the deed poll dated 5 March 2012 executed by Avant in the form of Appendix 6, under which Avant covenants in favour of Scheme Members to perform its obligations under the Implementation Deed and the obligations contemplated of it under the Scheme, with such amendments or variations as are agreed to in writing by Avant and DHF and that the Court indicates would not of itself preclude approval of the Scheme in which event Avant will enter into a further deed poll in favour of each Scheme Member giving effect to the amendment or variation. Demutualisation means any arrangement which would have the purpose or effect of: (a) a merger (in any form) of DHF with any other person; or (b) providing an economic benefit to DHF Members or persons associated with them by: (i) creating or issuing transferable shares in DHF; (ii) DHF agreeing to create or issue transferable shares in itself; (iii) varying the rights of DHF Members to the reserves of DHF, the assets of DHF on a winding up, or vote on any kind of resolution of DHF Members; or (iv) transferring, exhausting, surrendering, cancelling or terminating some or all rights of DHF Members. DHF means The Doctors’ Health Fund Limited, ABN 68 001 417 527. DHF Board means the board of directors of DHF. DHF Constitution means the constitution of DHF as amended from time to time. DHF Information - means the information contained in this Scheme Booklet except the: (a) Avant Information; (b) Independent Expert’s Report; (c) Independent Actuary’s Report; (d) Appointed Actuary’s Report; (e) Tax Advice Letter. DHF Material Adverse Change means one or more changes, events, occurrences or matters (whether individually or when aggregated with all such changes, events, occurrences or matters of a like kind) which has had, will have or could reasonably be expected to be likely to have, the effect of: (a) a reduction of $100,000 or more in DHF’s assets; (b) DHF being unable to carry on its business in substantially the same manner as it is currently carried on; or (c) preventing or being likely to prevent DHF from discharging its obligations under the Implementation Deed. DHF Member means each person (other than Avant) who is registered as a member in the Register in accordance with the DHF Constitution and the Fund Rules. A DHF Member does not include a person who only holds a travel insurance policy underwritten by QBE Insurance (Australia) Limited. 63 DHF Prescribed Occurrence means the occurrence of any of the following relating to DHF on or after the date of the Implementation Deed: (a)DHF declaring, paying or distributing any dividend, bonus or other shares of its profits or assets or returning or agreeing to return any capital to its members; (b) DHF issuing shares, or granting an option over any shares, or agreeing to make such an issue or grant such an option; (c) DHF issuing or agreeing to issue, securities or other instruments convertible into shares or debt securities; (d)other than as required by law, the terms of the Implementation Deed, or to give effect to any permissible change or amendment to its Fund Rules, DHF making any change or amendment to the DHF Constitution; (e)other than as required by law or the terms of the Implementation Deed, DHF making any change or amendment to its Fund Rules; (f) DHF disposing of or acquiring any material assets other than in the ordinary course of its business; (g) DHF appointing or terminating the employment of any senior Officer; (h)DHF entering into any contact or commitment or incur any capital expenditure or liability pursuant to which a payment of $100,000 or more is made or to be made; or (i)DHF varying the terms of, or terminating, any contact or commitment pursuant to which payments of $100,000 or more are made or to be made; (j)DHF creating, or agreeing to create, any mortgage, charge, lien or other encumbrance over the whole, or a substantial part, of its business or property; (k) DHF suffering an insolvency event; (l) DHF agreeing to any material restraint of trade or similar limitation relating to the activities of DHF; (m) DHF entering into any incorporated or unincorporated joint venture, partnership or alliance; (n)any investigation, prosecution, arbitration, litigation or dispute, or any two or more such events which are related, which could reasonably be expected to give rise to a liability or an aggregate liability (as applicable) to DHF in excess of $100,000 (Material Proceedings) being notified to or threatened against DHF, or circumstances arising which could reasonably be expected to give rise to Material Proceedings; (o)DHF breaching section 140-15 (Compliance with Solvency Standard) or section 143-15 (Compliance with Capital Adequacy Standard) of the PHIA or related rules under delegated legislation (which includes but is not limited to regulations and rules made pursuant to the PHIA) or the terms and conditions of registration as a private health insurer (if any) imposed upon DHF pursuant to section 126-20 (5)(b) of the PHIA; (p) PHIAC appointing an external administrator of DHF’s Health Benefits Fund under section 217-10 of the PHIA; (q) PHIAC cancelling the registration of DHF as a private health insurer under the PHIA, including under section 126-45; (r) DHF’s Health Benefits Fund is terminated under Division 149 of the PHIA; (s) DHF materially breaching: (i) the Private Health Insurance (Registration) Rules 2009 (No 2); or (ii) the Private Health Insurance (Insurer Obligations) Rules 2009; and such a breach, following written notice from PHIAC, not being resolved to the satisfaction of PHIAC; (t)DHF waiving any material third party default, releasing any third party liability or accepting as a compromise of a matter less than the full amount of compensation due to DHF, where the financial impact upon DHF will be in excess of $100,000; (u) DHF making a donation of greater than $25,000; (v) DHF changing its status from a public company limited by guarantee; (w)DHF entering into any material lines of business or other activities in which it is not engaged as at the date of the Implementation Deed; 64 (x)DHF making any change to its accounting practices or policies, other than to comply with generally accepted Australian accounting standards and any domestically accepted international accounting standards, however, none of the above events will constitute a DHF Prescribed Occurrence if DHF first consults Avant, in reasonable detail, and where Avant has approved in writing of the proposed event, or where DHF is required to undertake the action or event in connection with the Proposal or the Implementation Deed or is an action which is: (y) specifically identified in a business plan or budget disclosed to Avant prior to the date of the Implementation Deed; (z)a reasonable and prudent response to an emergency or disaster (including a situation giving rise to a risk of personal injury or damage to property); (aa)necessary for DHF to meet its legal or contractual obligations in existence as at the date of the Implementation Deed in the ordinary course of carrying on its business; or (bb)payment of a private health insurance claim or proceedings in respect of a private health insurance claim in the ordinary course of business. DHF Warranties means the representations and warranties provided by DHF to Avant under the Implementation Deed, as summarised in Section 11.1(f). DoHA means the Australian Government Department of Health and Ageing, acting through the Minister for Health or her authorised delegate. Effective means, when used in relation to the Scheme, the coming into effect, under section 411(10) of the Corporations Act, of the Court order made under section 411(4)(b) of the Corporations Act in relation to the Scheme. Effective Date means the date on which the Scheme becomes Effective. EGM means the extraordinary general meeting of DHF, to be held immediately before the Scheme Meeting, to consider, and if thought fit, approve the EGM Resolutions. EGM Resolutions means the resolutions set out in the Notice of EGM in Appendix 1. End Date means 5.00pm on 31 May 2012 or such other date and time agreed in writing between Avant and DHF. Entitlement means, for each Scheme Member, the amount (determined in accordance with the Allocation Rules) which is to be paid to each Scheme Member under the Scheme. Extras Cover is cover for general treatment (as defined in the PHIA) provided under a Policy and includes prior versions of this type of cover under the Fund Rules applying in prior periods. Family Policy means a Policy in respect of which the membership category as defined in the Fund Rules is couples membership, single parent family membership or family membership or is the prior equivalent to this class of membership under Fund Rules applying in prior periods. Final Residual Amount is the amount determined under the Allocation Rules. Fund Rules means the Rules of DHF relating to its health insurance business in Australia. Government Agency means any government, regulatory, judicial or administrative agency, entity or body whose approval or consent is required by law to be obtained or given in order for the Proposal to be implemented and includes PHIAC, ASIC and DoHA. Health Benefits Fund means a fund which satisfies the definition of that expression as given in the PHIA. Hospital Cover is cover for hospital treatment (as defined in the PHIA) provided under a Policy and includes prior versions of this type of cover under the Fund Rules applying in prior periods. Implementation Date means the date on which the Change of Company Type becomes effective. Implementation Deed means the Implementation Deed dated 11 August 2011 between DHF and Avant in relation to the Scheme, as restated and amended on 8 February 2012, and summarised in Section 11.1. 65 Implementation Time means 11.58pm on the Business Day immediately preceding the Implementation Date. Independent Actuary means David Goodsall of Synge & Noble Pty Ltd. Independent Actuary’s Report means the report by the Independent Actuary set out in Appendix 9. Independent Expert means Lonergan Edwards & Associates Limited. Independent Expert’s Report means the report prepared by the Independent Expert, a summary of which is set out in Appendix 7. Initial Amount is $29.25 million, as determined by the DHF Board on the advice of the Appointed Actuary. Initial Entitlement means the amount initially determined to be paid to each Scheme Member in accordance with the Allocation Rules. Initial Period means the period immediately following the Implementation Date to 31 October 2013, or such earlier time as DHF reports to its sole shareholder under section 314 of the Corporations Act for the financial period ending on 30 June 2013. Join Date is the date determined for each Scheme Member under the Allocation Rules and explained in Section 7.4. Listing means demutualisation followed by listing as a public company limited by shares on Australian Securities Exchange Limited or another recognised securities exchange. Notice of EGM means the Notice of EGM set out at Appendix 1. Notice of Scheme Meeting means the Notice of Scheme Meeting set out at Appendix 2. Officer means, in respect of a company, any of the following persons: (a) the company secretary; (b)any other person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the company; (c) a person who has the capacity to affect significantly the company’s financial standing; or (d)a person in accordance with whose instructions or wishes the directors of the company are accustomed to act (excluding advice given by a person in their professional or business capacity). PHIAC means the Private Health Insurance Administration Council. Policy means a Policy issued by DHF from its Health Benefits Fund to a Contributing Member. Prescribed Member means a person who was not a DHF Member at the Scheme Record Time, but who the DHF Board has determined should have been a DHF Member at that time, being a person who falls into one of the following categories: (a)a person who was an insured (but not a Contributing Member) under a Policy at the Scheme Record Time and who becomes the Contributing Member of that Policy after the Scheme Record Time, as a result of the death of the previous Contributing Member; or (b)a person who the Review Committee determines, in accordance with the Review Committee Charter, should be a DHF Member (where such a determination is made in accordance with the Review Committee Charter prior to the Scheme Record Time) or should have been a DHF Member (where such a determination is made in accordance with the Review Committee Charter after the Scheme Record Time). Private Health Insurance Act or PHIA means the Private Health Insurance Act 2007 (Cth). Proposal means the proposed acquisition by Avant of DHF under the terms of the Implementation Deed. Qualified Person means: (a) a person who is part of DHF’s restricted access group; and (b) any other person who is eligible under the Fund Rules, or on whom the PHIA confers eligibility to be a DHF Member. 66 Record Time means 48 hours before the commencement of the EGM. Register means the register of corporate members of DHF maintained by DHF. Related Body Corporate has the meaning given in the Corporations Act. Residual Amount is $750,000, as determined by the DHF Board on the advice of the Appointed Actuary. Residual Entitlement means the entitlement (if any) of a Scheme Member to a proportion of the Final Residual Amount determined in accordance with the Allocation Rules. Resolutions means the EGM Resolutions and Scheme Resolution. Review Committee means the Committee established to review Initial Entitlements and Scheme Member status under the Review Committee Charter. Review Committee Charter means the charter setting out the terms of reference of the Review Committee set out in Appendix 5. Scheme means the scheme of arrangement (under Part 5.1 of the Corporations Act), between DHF and the Scheme Members, in the form set out in Appendix 3, subject to any alterations or conditions made or required by the Court and approved in writing by DHF and Avant. (To avoid duplication, Schedule 1 of the Scheme is in the form set out in Appendix 4 of this Scheme Booklet, Schedule 2 of the Scheme is in the form set out in Appendix 6 of this Scheme Booklet and Schedule 3 of the Scheme is in the form set out in Appendix 5 of this Scheme Booklet). Scheme Meeting means the DHF Members’ meeting ordered by the Court to be convened under section 411(1) of the Corporations Act to consider the Scheme. Scheme Member means a DHF Member who is a DHF Member as at the Scheme Record Time or who is a Prescribed Member. Scheme Resolution means the resolution to approve the Scheme set out in the Notice of Scheme Meeting in Appendix 2. Scheme Record Time means 5.00pm on the day two Business Days prior to the Implementation Date. Second Court Hearing Date means the first day on which an application to the Court for orders under section 411(4)(b) of the Corporations Act approving the Scheme is heard or, if the hearing of the application is adjourned for any reason, the first day of the adjourned hearing. Second Court Hearing means the hearing at which the Court is asked to approve the Scheme pursuant to section 411(4)(b) of the Corporations Act. Section means a section of this Scheme Booklet. Single Policy means a Policy in respect of which the membership category as defined in the Fund Rules is single membership or is the prior equivalent to this class of membership under Fund Rules applying in prior periods. Subscription Shares means 30,000,000 fully paid ordinary shares in the capital of DHF following its conversion into a proprietary company limited by shares. Superior Proposal means a bona fide Competing Proposal which the DHF Board has determined in good faith to be superior to the Proposal, taking into account all the terms and conditions of such a Competing Proposal (including price, certainty, conditionality and future benefits to DHF Members) and after giving due consideration to written advice received from DHF’s legal and financial advisers. Tax Advice Letter means the letter from PricewaterhouseCoopers as tax adviser set out in Appendix 10. Trust Account means a trust account to be operated by the Trustee for the purpose of the receipt and distribution of the Consideration in accordance with the Scheme. Trustee means National Australia Trustees Ltd (or such other person or entity agreed between DHF and Avant). 67 Appendix 1 Notice of EGM THE DOCTORS’ HEALTH FUND LIMITED (ABN 68 001 417 527) NOTICE OF EXTRAORDINARY GENERAL MEETING NOTICE IS GIVEN that a general meeting of Members of The Doctors’ Health Fund Limited (DHF) will be held at 10.00am (Sydney time) on 4 April 2012 at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW for the purpose of considering and, if thought fit, approving the following resolutions as special resolutions: Resolution 1: Constitutional Amendment THAT conditional on the Scheme becoming Effective, the DHF Constitution be amended as set out in Annexure A. [An explanation of the amendments to DHF’s Constitution proposed under this Resolution is set out in Appendix 11 of the Scheme Booklet.] Resolution 2: Change of Company Type THAT conditional on the Scheme becoming Effective: (a)DHF change its company type from a public company limited by guarantee to a proprietary company limited by shares in accordance with Part 2B.7 of the Corporations Act 2001 (Cth) and from the time that the change of company type becomes effective pursuant to section 164(5) of the Corporations Act 2001 (Cth), the company be known as The Doctors’ Health Fund Pty Limited; and (b)immediately following the change of company type becoming effective pursuant to section 164(5) of the Corporations Act 2001 (Cth), DHF issue ordinary shares in the capital of DHF to Avant in accordance with the terms of the Implementation Deed. BY ORDER OF THE BOARD Peter Aroney Company Secretary The Doctors’ Health Fund Limited 7 March 2012 Defined terms Capitalised terms used in this Notice of Extraordinary General Meeting (Notice) have the meaning given to them in the Glossary in Section 12 of the Scheme Booklet of which this Notice forms part. Scheme Booklet The resolutions should be read in conjunction with the Scheme Booklet of which this Notice forms part. The Scheme Booklet contains an explanation of the resolutions and further information about the Scheme to enable you to make an informed decision as to how to vote on the resolutions. A copy of the Scheme is set out in Appendix 3 of the Scheme Booklet. A blue personalised proxy form (pre-printed with your name and address) and a reply paid envelope (for use in Australia) also accompanies this Notice. Chairperson In accordance with clause 14.5 of DHF’s Constitution, Patria Mann or, failing her, Bruce Foy will act as Chair of the Extraordinary General Meeting. Entitlement to attend and vote at the Extraordinary General Meeting In order to attend and vote at the Extraordinary General Meeting (or vote on the resolutions online (see details below)), you must be a DHF Member. Each person recorded on the register of Members of DHF as at 10.00am (Sydney time) on 2 April 2012 can vote on the resolutions that will be put to Members at the Extraordinary General Meeting. Members may attend and vote at the Extraordinary General Meeting either in person or by attorney, or appoint a proxy to attend and vote at the Extraordinary General Meeting. If you are registered as a DHF member on 24 February 2012, and are unable or do not wish to attend the Extraordinary General Meeting, you may cast your vote on the resolutions online at www.doctorshealthfund.com.au/AvantProposal/Voting. 68 Voting rights Voting on the resolutions will be conducted on a show of hands or on a poll in accordance with the DHF Constitution. Under clause 15.2 of the Constitution, a Member: ■■ who has a single or single parent family membership has one vote; and ■■ who has couples or family membership has two votes. Required majority Each resolution is a special resolution. A special resolution will be approved if at least 75% of the total votes cast by Members entitled to vote on the resolution are voted in favour of the resolution. Section 136(2) of the Corporations Act allows DHF to modify its constitution, or a provision of its constitution, by special resolution. Section 162(1) of the Corporations Act allows DHF to change to a company of a different type by special resolution. How to exercise your right to vote Members can vote on the resolutions to be put to Members at the Extraordinary General Meeting in one of the following ways: ■■ by attending the Extraordinary General Meeting and voting in person; ■■ by appointing a proxy; ■■ by appointing an attorney under a power of attorney; or ■■ if you are registered as a DHF member on 24 February 2012, by voting online at www.doctorshealthfund.com.au/AvantProposal/Voting. Unless the Member attends the Extraordinary General Meeting, the valid online vote or proxy form which is the latest received by DHF will be regarded as the Member’s vote. Voting in person Members who plan to attend the Extraordinary General Meeting are asked to arrive at the venue at least 30 minutes before the time designated for the Extraordinary General Meeting, if possible, to have their names checked against the register and have their attendance noted. It would assist if Members bring their DHF membership card to assist with registration. Appointing a proxy A Member may appoint a person as their proxy to attend and vote for the Member at the Extraordinary General Meeting. (The person appointed as a proxy need not be a Member.) To vote by proxy, a Member must complete, sign, date and return their blue personalised proxy form accompanying the Scheme Booklet (together with any power of attorney or other authority under which the proxy form is signed or a certified copy of that power or authority) so that the proxy form is received by DHF by no later than the closing time for proxies (10.00am (Sydney time) on 3 April 2012). You may direct your proxy how to vote by marking the relevant box on the proxy form. If you do not mark any of the boxes, your proxy may vote as he or she decides. If the Chair of the Extraordinary General Meeting is your proxy, and she has not been directed how to vote on the EGM Resolutions, she intends to vote in favour of the resolutions. Please read the instructions on the proxy form carefully when completing the form. If a Member appoints a proxy but then attends the meeting, the proxy’s powers are suspended while the Member is present at the meeting. A Member may return their proxy form (and any supporting documents) by delivering, posting or faxing it to: Deliver to: Ground Floor, 69 Christie Street, St Leonards NSW Post to: Locked Bag 8100, Kingsgrove, NSW 2208 Fax to: 1300 987 218 69 A replacement blue proxy form may be obtained by calling the Proposal Hotline on 1800 508 716 or visiting www.doctorshealthfund.com.au/AvantProposal/Voting. Unlike the proxy form included with the Scheme Booklet, the replacement form will not contain the Member’s personal details. If a replacement proxy form is used, the section containing the Member’s personal details must be completed. Appointing an attorney A Member can appoint a person under a power of attorney who can attend and vote on their behalf. If you wish your attorney to attend and vote at the Extraordinary General Meeting on your behalf, the original or a certified copy of the power of attorney authorising your attorney to attend and vote at the meeting must be lodged with DHF before the closing time for proxies (10.00am (Sydney time) on 3 April 2012). A Member may lodge the power of attorney (and any supporting documents) by delivering, posting or faxing it to: Deliver to: Ground Floor, 69 Christie Street, St Leonards NSW Post to: Locked Bag 8100, Kingsgrove, NSW 2208 Fax to: 1300 987 218 Voting online If you are registered as a DHF member on 24 February 2012, you can also vote online. Visit www.doctorshealthfund.com.au/AvantProposal/Voting and follow the instructions. By voting on line, you appoint the Chair of the Extraordinary General Meeting as your proxy to cast your vote on your behalf. To vote online, the Member must complete the voting requirements by no later than the closing time for the receipt of proxies for the EGM and Scheme Meeting (10.00am (Sydney time) on 3 April 2012). 70 ANNEXURE A CONSTITUTIONAL AMENDMENT (a) By deleting clause 7.1 in its entirety and replacing it with the following: ‘7.1 Admitting Members (a)A person who applies to become (or has become) a Contributing Member of a Health Benefits Fund is taken to have applied to become a member of the Company. Subject to clause 7.2, upon becoming a Contributing Member, a person will become a member of the Company. (b)In addition to clause (a) above, while the Implementation Deed is in effect and has not been terminated, Avant may on application be admitted as a member of the Company by the directors or pursuant to a delegation under clause 7.3.’ (b) By deleting the full stop at the end of clause (b)(iii) of clause 11.1 and replacing it with “; or” and inserting a new clause (c) into clause 11.1 as follows: ‘(c)in the case of Avant, if the Implementation Deed is terminated before the Implementation Time or the Implementation Time has not occurred by the End Date.’ (c) By deleting clause 11.3(d) in its entirety and replacing it with the following: ‘(d)For any member (other than Avant), once the member has ceased to be a Contributing Member, the member ceases to be a member of the Company.’ (d) By deleting clause 15.2 in its entirety and replacing it with the following: ‘15.2 Number of votes On a show of hands (or on voices) or on a poll: (a) a member of the Company (being a Contributing Member): (i)who is, under clause 15.1, entitled to vote and who has single or single parent family membership of a Health Benefits Fund, as defined in the Rules, has only one vote; or (ii) who is, under clause 15.1, entitled to vote and who has couples or family membership of a Health Benefits Fund, as defined in the Rules, has 2 votes; and (b) whilst it remains a member of the Company, Avant has one vote. For the avoidance of doubt, a Contributing Member of more than one Health Benefits Fund conducted by the Company is entitled to only one vote as a member of the Company.’ (e) By inserting a new clause 15.13 as follows: ‘15.13 Sole members If the Company has only one member, and the member records in writing his or her decision on a question, it counts as the passing of a resolution. The record also counts as the minutes of the passing of the resolution.’ (f) By inserting at the end of clause 16.3(g) the following: ‘(except this paragraph ceases to apply with effect at and from the Implementation Time)’ (g) By deleting clause 16.4 in its entirety and replacing it with the following: ‘16.4 Director qualifications A director must not be a disqualified person. Until the Implementation Time, each director must be a member of the Company. With effect at and from the Implementation Time, a director need not be a member of the Company. Directors must be appointed in accordance with clause 16.5. At any time no fewer than 2 directors must be Medically Qualified Directors.’ (h) By inserting the following definitions into Schedule 1: ‘Avant means Avant Group Holdings Limited ABN 72 077 283 884. End Date has the meaning set out in the Implementation Deed. Implementation Deed means the implementation deed, dated 11 August 2011 (as amended), between the Company and Avant which sets out the terms and conditions on which the Proposal will be implemented. Implementation Time has the meaning set out in the Implementation Deed. Proposal means the acquisition of the Company by Avant through the granting of membership to Avant and the implementation of the Scheme. Scheme has the meaning set out in the Implementation Deed.’ 71 Appendix 2 Notice of Scheme Meeting THE DOCTORS’ HEALTH FUND LIMITED (ABN 68 001 417 527) NOTICE OF SCHEME MEETING NOTICE IS GIVEN in accordance with an order of the Federal Court of Australia made on 5 March 2012, under section 411(1) of the Corporations Act 2001 (Cth), that a meeting of Members of The Doctors’ Health Fund Limited (DHF) will be held immediately after the Extraordinary General Meeting which commences at 10.00am (Sydney time) on 4 April 2012 at the AMA Conference Centre, 69 Christie Street, St Leonards, NSW, for the purpose of considering and, if thought fit, approving the following resolution: Resolution 1: Approval of Scheme of Arrangement THAT under, and in accordance with, the provisions of Section 411 of the Corporations Act 2001 (Cth), the scheme of arrangement proposed between The Doctors’ Health Fund Limited and the Members as set out in the Scheme Booklet accompanying this Notice is agreed to (with or without any modification as approved by the Court). BY ORDER OF THE BOARD Peter Aroney Company Secretary The Doctors’ Health Fund Limited 7 March 2012 Defined terms Capitalised terms used in this Notice of Scheme Meeting (Notice) have the meaning given to them in the Glossary in Section 12 of the Scheme Booklet of which this Notice forms part. Scheme Booklet The resolution should be read in conjunction with the Scheme Booklet of which this Notice forms part. The Scheme Booklet contains an explanation of the Scheme and further information about the Scheme to enable you to make an informed decision as to how to vote on the resolution. A copy of the Scheme is set out in Appendix 3 of the Scheme Booklet. A red personalised proxy form (pre-printed with your name and address) and a reply paid envelope (for use in Australia) also accompanies this Notice. Chairperson The court has appointed Patria Mann or, failing her, Bruce Foy to act as Chair of the Scheme Meeting and has directed the Chair to report the result of the Resolution to the Court. Entitlement to attend and vote at the Scheme Meeting In order to attend and vote at the Scheme Meeting (or vote on the resolution online (see details below)), you must be a DHF Member. Each person recorded on the register of Members of DHF as at 10.00am (Sydney time) on 2 April 2012 can vote on the resolution that will be put to Members at the Scheme Meeting. Members may attend and vote at the Scheme Meeting either in person or by attorney, or appoint a proxy to attend and vote at the Scheme Meeting. Alternatively, if you are registered as a DHF member on 24 February 2012, and are unable or do not wish to attend the Scheme Meeting, you may cast your vote on the resolution online at www.doctorshealthfund.com.au/AvantProposal/Voting. Voting rights Voting on the resolution will be conducted on a show of hands or on a poll in accordance with the DHF Constitution. Under clause 15.2 of the Constitution, a Member: ■■ who has a single or single parent family membership has one vote; and ■■ who has couples or family membership has two votes. 72 Required majority The Scheme Resolution will be approved if a majority in number of the DHF Members present and voting on the resolution vote in favour of the resolution and at least 75% of the votes cast on the resolution are in favour of the resolution. How to exercise your right to vote Members can vote on the resolution to be put to Members at the Scheme Meeting in one of the following ways: ■■ by attending the Scheme Meeting and voting in person; ■■ by appointing a proxy; ■■ by appointing an attorney under a power of attorney; or ■■ if you are registered as a DHF member on 24 February 2012, by voting online at www.doctorshealthfund.com.au/AvantProposal/Voting. Unless the Member attends the Scheme Meeting, the valid online vote or proxy form which is the latest received by DHF will be regarded as the Member’s vote. Voting in person Members who plan to attend the Scheme Meeting are asked to arrive at the venue at least 30 minutes before the time designated for the Extraordinary General Meeting, if possible, to have their names checked against the register and have their attendance noted. It would assist if Members bring their DHF membership card to assist with registration. Appointing by proxy A Member may appoint a person as their proxy to attend and vote for the Member at the Scheme Meeting. (The person appointed as a proxy need not be a Member.) To vote by proxy, a Member must complete, sign, date and return the red personalised proxy form accompanying the Scheme Booklet (together with any power of attorney or other authority under which the proxy form is signed or a certified copy of that power or authority) so that the proxy form is received by DHF by no later than the closing time for proxies (10.00am (Sydney time) on 3 April 2012). You may direct your proxy how to vote by marking the relevant box on the proxy form. If you do not mark any of the boxes, your proxy may vote as he or she decides. If the Chair of the Scheme Meeting is your proxy, and she has not been directed how to vote on the resolution, she intends to vote in favour of the resolution. Please read the instructions on the proxy form carefully when completing the form. If a Member appoints a proxy but then attends the meeting, the proxy’s powers are suspended while the Member is present at the meeting. A Member may return their proxy form (and any supporting documents) by delivering, posting or faxing it to: Deliver to: Ground Floor, 69 Christie Street, St Leonards NSW Post to: Locked Bag 8100, Kingsgrove, NSW 2208 Fax to: 1300 987 218 A replacement red proxy form may be obtained from DHF by calling the Proposal Hotline on 1800 508 716 or visiting www.doctorshealthfund.com.au/AvantProposal/Voting. Unlike the proxy form included with the Scheme Booklet, the replacement form will not contain the Member’s personal details. If a replacement proxy form is used, the section containing the Member’s personal details must be completed. Appointing an attorney A Member can appoint a person under a power of attorney who can attend and vote on their behalf. If you wish your attorney to attend and vote at the Scheme Meeting on your behalf, the original or a certified copy of the power of attorney authorising your attorney to attend and vote at the meeting must be lodged with DHF before the closing time for proxies (10.00am (Sydney time) on 3 April 2012). 73 A Member may lodge the power of attorney (and any supporting documents) by delivering, posting or faxing it to: Deliver to: Ground Floor, 69 Christie Street, St Leonards NSW Post to: Locked Bag 8100, Kingsgrove, NSW 2208 Fax to: 1300 987 218 Voting online If you are registered as a DHF member on 24 February 2012, you can also vote online. Visit www.doctorshealthfund.com.au/AvantProposal/Voting and follow the instructions. By voting on line, you appoint the Chair of the Scheme Meeting as your proxy to cast your vote on your behalf. To vote online, the Member must complete the voting requirements by no later than the closing time for the receipt of proxies for the EGM and Scheme Meeting (10.00am (Sydney time) on 3 April 2012). 74 Appendix 3 Scheme of Arrangement Pursuant to section 411 of the Corporations Act The Doctors’ Health Fund Limited ACN 001 417 527 of Ground Floor, 69 Christie Street, St Leonards, NSW 2065 (DHF) The Scheme Members OPERATIVE PROVISIONS 1PRELIMINARY DHF 1.1 DHF is a public company limited by guarantee, incorporated in Australia and registered in New South Wales. Avant 1.2Avant is a public company limited by guarantee, incorporated in Australia and registered in New South Wales. Its registered office is at Level 28, 580 George Street, Sydney, NSW 2000. Scheme 1.3The DHF Board considers that this Scheme is in the best interests of DHF and the members of DHF as a whole and does not materially affect the creditors of DHF. Implementation Deed and Deed Poll 1.4 The Implementation Deed sets out the terms on which DHF and Avant have agreed to implement the Proposed Transaction. 1.5 The subscription price of $30,000,000 for the Share Issue will be used to satisfy DHF’s payment obligations under this Scheme. 1.6To facilitate this Scheme, DHF and Avant have entered into the Implementation Deed under which DHF and Avant have agreed to observe all of the provisions of the Scheme which relate to them and take all necessary steps to give full effect to this Scheme. Deed Poll 1.7Avant has executed the Deed Poll in favour of each Scheme Member pursuant to which it has covenanted to perform its obligations under the Implementation Deed and this Scheme of Arrangement, including to make the payment referred to in clause 1.5 as and when the payment falls due under the Implementation Deed. 2 CONDITIONS PRECEDENT Conditions precedent to the Scheme 2.1 This Scheme is conditional on: 2.1.1as at 8.00am on the Second Court Hearing Date, the Implementation Deed not having been terminated in accordance with its terms; 2.1.2all of the conditions precedent set out in clause 2.1 of the Implementation Deed having been satisfied or waived in accordance with the terms of the Implementation Deed; 2.1.3the Court having approved this Scheme, with or without modification, pursuant to section 411(4)(b) of the Corporations Act; and 2.1.4such other conditions made or required by the Court pursuant to section 411(6) of the Corporations Act in relation to this Scheme as are acceptable to DHF and Avant, being satisfied, and the provisions of clauses 3 to 9 will not come into effect unless and until each of these conditions precedent has been satisfied. Certificate in relation to conditions precedent 2.2On the Second Court Hearing Date, DHF will provide and will procure that Avant provides to the Court a certificate confirming whether or not all of the conditions precedent set out in clause 2.1 of the Implementation Deed (other than in relation to this Scheme being approved by the Court pursuant to section 411(4)(b) of the Corporations Act) have been satisfied or waived in accordance with the terms of the Implementation Deed. 75 2.3The giving of a certificate by each of DHF and Avant under clause 2.2 will, in the absence of manifest error, be conclusive evidence of the satisfaction or waiver of the conditions precedent referred to in the certificate. Lapse of the Scheme 2.4This Scheme will lapse and be of no further force or effect if the Implementation Date has not occurred on or before the End Date or such later date as the Court, with the consent of DHF and Avant, may order. 3 LODGEMENT OF THE COURT ORDER 3.1On or before 5.00pm on the first Business Day following approval of this Scheme by the Court pursuant to section 411(4)(b) of the Corporations Act, DHF will lodge with ASIC an office copy of the Court order approving this Scheme. 3.2 The Court order is taken to have effect on and from the time and date specified in that order. 4 IMPLEMENTATION OF THE SCHEME Implementation steps 4.1The following steps will occur at the times and on the dates set out below, subject to Avant making payment of the Consideration into the Trust Account in accordance with the Implementation Deed: 4.1.1at the Implementation Time, the Trustee will commence to hold the moneys standing to the credit of the Trust Account (subject to clause 4.1.2) on trust for DHF as pre-payment of the issue price for the Share Issue; 4.1.2at the Implementation Time, the DHF memberships of all Scheme Members will be cancelled and the liability of each Scheme Member as a guarantor on a winding up of DHF will be extinguished and each Scheme Member will cease to be a member of DHF; and 4.1.3in consideration for the cancellation of the DHF memberships and extinguishment of liability referred to in clause 4.1.2, on the Implementation Date, DHF will pay the Consideration in the manner set out in clause 4.2. Payment of the Consideration 4.2Subject to Avant making payment of the Consideration into the Trust Account in accordance with the Implementation Deed, on the Implementation Date, DHF will direct the Trustee to distribute Entitlements as follows: 4.2.1 within 10 Business Days after the Implementation Date, distribute the Initial Entitlements to the Scheme Members; and 4.2.2 no later than 10 Business Days after 31 July 2012, distribute: (a)any payments the Review Committee has determined are to be made in accordance with the Allocation Rules and the Review Committee Charter; and (b)the balance, if any, of the Residual Amount to Scheme Members (or, if the Review Committee determines that amounts payable to individual Scheme Members would be nominal or the costs of making payment would be disproportionate to the amounts payable, to a charity that provides for the welfare of medical practitioners chosen by the DHF Board), in each case in accordance with the Allocation Rules, with such payments being satisfied from the Trust Account in accordance with clause 5. End Date 4.3 If the Implementation Date does not occur on or before the End Date: 4.3.1 the steps referred to in clauses 4.1 and 4.2 will not occur; and 4.3.2DHF must and must procure that Avant direct the Trustee to immediately repay the Consideration, and all other moneys standing to the credit of the Trust Account to Avant in cleared funds (and otherwise in such manner as Avant directs). 5 PAYMENTS UNDER THE SCHEME Trust Account 5.1The Trust Account must be established on or before the Second Court Hearing Date in accordance with clause 3 of the Implementation Deed. 76 5.2Any interest on amounts standing to the credit of the Trust Account (less bank fees and other charges) shall be to Avant’s account. 5.3The Trust Account must be managed in accordance with clause 3 of the Implementation Deed and this clause 5, and DHF must and must procure that Avant direct the Trustee accordingly. 5.4To the extent there is a surplus in the Trust Account (as a result of rounding of payments) after all amounts required to be paid under this clause 5 have been paid, that surplus must be paid to a charity that provides for the welfare of medical practitioners chosen by the DHF Board. Payments 5.5 Subject to: 5.5.1Avant making the payment of the Consideration into the Trust Account in accordance with the Implementation Deed; and 5.5.2the occurrence of the events described in clause 4.1.1 and 4.2.2, DHF must direct the Trustee to pay from the Trust Account the amounts required to be paid under clause 4.2 by sending those amounts by the relevant Scheme Member’s Preferred Payment Method. Unclaimed monies 5.6 DHF may direct the Trustee to cancel a cheque issued under clause 5.5 if the cheque: 5.6.1 is returned to DHF or the Trustee; or 5.6.2has not been presented for payment within six months after the date on which the cheque was sent. 5.7During the period of one year commencing on the Implementation Date, on request by a Scheme Member, DHF must, or must cause the Trustee to, reissue a cheque that was previously cancelled under clause 5.6. Correction of Allocation 5.8The Initial Entitlement on the Allocation Form sent to the DHF Members may be corrected by DHF with Avant’s agreement, subject only to a decision made under the Review Committee Charter. 6 THE REVIEW COMMITTEE 6.1DHF will establish the Review Committee, perform its obligations under the Review Committee Charter and implement the decisions made by the Review Committee in accordance with the Review Committee Charter. The provisions of the Review Committee Charter are incorporated into and form part of this Scheme. 7 INDEMNITY OF DIRECTORS, OFFICERS AND AGENTS 7.1To the extent permitted by the Corporations Act, DHF must indemnify each director, officer or agent of DHF against any liability incurred as such a director, officer or agent to any other person (other than DHF) arising from anything done or from anything omitted to be done in performance or purported performance of this Scheme unless the liability arises out of conduct involving lack of good faith by such director, officer or agent. 8 POWER OF ATTORNEY Appointment of DHF as agent and attorney 8.1Each DHF Member, without the need for any further act, irrevocably appoints DHF and each of the directors and officers of DHF, jointly and severally, as its attorney and agent for the purpose of executing any document or doing any other act necessary to give full effect to this Scheme and the transactions contemplated by it. DHF Members’ consent 8.2Each DHF Member consents to DHF doing all things and executing all deeds, instruments and other documents as may be necessary or desirable to give full effect to this Scheme and the transactions contemplated by it. 77 9 GENERAL SCHEME PROVISIONS No changes to DHF members after the Scheme Record Time 9.1DHF must not admit any person as a member of DHF (other than Avant in accordance with the Implementation Deed) after the Scheme Record Time and before the Implementation Time. For the avoidance of doubt, this clause does not prevent DHF accepting persons as members of its health benefit fund. Scheme alterations and conditions 9.2If the Court proposes to approve this Scheme subject to any alterations or conditions, DHF may, by its counsel or solicitors, and with the consent of Avant (not to be unreasonably withheld), consent to those alterations or conditions on behalf of all persons concerned, including, for the avoidance of doubt, all DHF Members. Enforcement of the Deed Poll 9.3DHF undertakes in favour of each Scheme Member to enforce the Deed Poll against Avant on behalf of and as agent and attorney for the Scheme Members. As a separate right, and without limiting DHF’s obligations under this clause 9.3, any Scheme Member may enforce the Deed Poll against Avant without DHF joining the proceedings. Effect of the Scheme 9.4This Scheme binds DHF and all DHF Members (including those who do not attend the Scheme Meeting, do not vote at the Scheme Meeting or vote against the Scheme) and, to the extent of any inconsistency and to the extent permitted by law, overrides the DHF Constitution. Notices 9.5Where a notice, transfer, transmission application, direction or other communication referred to in this Scheme is sent by post to DHF, it will not be deemed to be received in the ordinary course of post or on a date other than the date (if any) on which it is actually received at DHF’s registered office or at the place where the Members Register is kept. Further assurances 9.6DHF must execute all deeds, instruments, transfers and other documents and do all acts and things (on its own behalf and on behalf of each DHF Member) as may be necessary or desirable to give full effect to this Scheme and the transactions contemplated by it. Costs and stamp duty 9.7Subject to the terms of the Implementation Deed, DHF will procure that Avant pays the costs and stamp duty and any related fines, interest and penalties in respect of the Scheme and the transactions contemplated by it. Governing law and jurisdiction 9.8 This Scheme is governed by the laws of New South Wales, Australia. 9.9 Each party irrevocably and unconditionally: 9.9.1 submits to the non-exclusive jurisdiction of the courts of New South Wales; and 9.9.2 waives, without limitation, any claim or objection based on absence of jurisdiction or inconvenient forum. 10 DEFINITIONS AND INTERPRETATION Definitions 10.1In this Scheme, unless the context requires otherwise: Allocation Form means the letter or other document which accompanies the Scheme Booklet (or is otherwise provided to a DHF Member) and sets out a DHF Member’s Initial Entitlement or how a DHF Member may calculate the DHF Member’s Initial Entitlement. Allocation Rules means the allocation rules for the Scheme set out in Schedule 1. 78 ASIC means the Australian Securities and Investments Commission. Avant means Avant Group Holdings Limited ACN 077 283 884. Business Day means a day that is not a Saturday, Sunday, public holiday or bank holiday in Sydney, Australia. Change of Company Type means the change of DHF’s company type under Part 2B.7 of the Corporations Act from a company limited by guarantee to a proprietary company limited by shares, with the sole shareholder being Avant. Conditions Precedent means the conditions precedent described in clause 2. Consideration means $30,000,000. Corporations Act means the Corporations Act 2001 (Cth). Court means the Federal Court of Australia or any other court of competent jurisdiction under the Corporations Act agreed in writing by DHF and Avant. Court Approval Date means, if the Court approves the Scheme, the date on which the Court grants the order under section 411(4)(b) of the Corporations Act approving the Scheme. Deed Poll means the deed poll dated 5 March 2012 executed by Avant under which Avant covenants in favour of each Scheme Member to perform its obligations under the Implementation Deed and this Scheme, an unexecuted copy of which is set out in Schedule 2. DHF means The Doctors’ Health Fund Limited ACN 001 417 527. DHF Board means the board of Directors of DHF. DHF Constitution means the constitution of DHF as at the date of the Scheme Booklet. DHF Member means each person who is registered as a member of DHF in the Members Register in accordance with the DHF Constitution. Director means a director of DHF from time to time. Effective means, when used in relation to this Scheme, the coming into effect, pursuant to section 411(10) of the Corporations Act, of the Court order made under section 411(4)(b) of the Corporations Act in relation to this Scheme, but in any event at no time before an office copy of the order of the Court is lodged with ASIC. Effective Date means the date on which this Scheme becomes Effective. EGM means an extraordinary meeting of DHF, to be held immediately before the Scheme Meeting, to consider and, if thought fit, pass the EGM Resolutions. EGM Resolutions means: (a)the special resolution to amend the DHF Constitution to permit Avant to become a member of DHF and any other changes required to facilitate the Proposed Transaction; and (b)the special resolution to change DHF’s company type from a public company limited by guarantee to a proprietary company limited by shares and to authorise DHF to issue the Subscription Shares to Avant immediately following the Change of Company Type becoming effective, each special resolution being subject to this Scheme becoming Effective. End Date means 5.00pm on 31 May 2012 or such other date and time agreed in writing between DHF and Avant. Entitlement means the amount payable in respect of a Scheme Member calculated in accordance with the Allocation Rules and distributed in accordance with clause 4.2. Implementation Date means the date on which the Change of Company Type becomes effective. Implementation Deed means the implementation deed between DHF and Avant, dated 11 August 2011, as amended and restated by DHF and Avant on 8 February 2012. Implementation Time means 11.58pm on the day immediately preceding the Implementation Date. Initial Entitlement has the meaning set out in the Allocation Rules. Members Register means the register of members of DHF maintained in accordance with the Corporations Act. Payment Authority means the form headed “Payment Authority” that accompanies the Scheme Booklet. PHIA means the Private Health Insurance Act 2007 (Cth). 79 Preferred Payment Method means: (a)if the Scheme Member has provided account details to DHF by completing and returning a Payment Authority, electronic funds transfer in Australian currency into that account; or (b)otherwise, a cheque in Australian currency in the name of the Scheme Member, posted to the address to which correspondence is sent for the purposes of DHF membership matters or such other address as the Scheme Member may nominate in writing for this purpose. Prescribed DHF Member means a DHF Member who was not a DHF Member at the Scheme Record Time, but who the DHF Board has determined, should have been a DHF Member prior to the Scheme Record Time, being a person who falls into one of the following categories: (a)a person who was an insured (but not a Contributing Member) under a Policy at the Scheme Record Time and who becomes the Contributing Member of that Policy after the Scheme Record Time, as a result of the death of the previous Contributing Member; or (b)a person who the Review Committee determines, in accordance with the Review Committee Charter, should be a DHF Member (where such a determination is made in accordance with the Review Committee Charter prior to the Scheme Record Time) or should have been a DHF Member (where such a determination is made in accordance with the Review Committee Charter after the Scheme Record Time). Proposed Transaction means the acquisition of DHF by Avant on the terms set out in the Implementation Deed. Residual Amount has the meaning set out in the Allocation Rules. Review Committee means the body established under the Review Committee Charter to determine whether: (a) a person should have been treated as a Scheme Member; or (b) the Initial Entitlement of a Scheme Member was correct. Review Committee Charter means the review committee charter for the Scheme set out in Schedule 3. Rules has the meaning set out in the DHF Constitution. Scheme means this scheme of arrangement under Part 5.1 of the Corporations Act, subject to any alterations or conditions made or required by the Court and approved in writing by the parties. Scheme Booklet means the Scheme Booklet dated 7 March 2012 in respect of this Scheme. Scheme Meeting has the meaning given to it in the Implementation Deed. Scheme Member means each DHF Member (other than Avant): (a) who was a DHF Member at the Scheme Record Time; or (b) who is a Prescribed DHF Member, and Scheme Members means all of them. Scheme Record Time means 5.00pm on the day two Business Days prior to the Implementation Date. Second Court Hearing Date means the first day on which the application made to the Court for an order approving this Scheme pursuant to section 411(4)(b) of the Corporations Act is heard, or if the hearing of the application is adjourned for any reason, the first day of the adjourned hearing. Share Issue means the issue to Avant of the Subscription Shares. Subscription Shares means 30,000,000 ordinary shares in the capital of DHF. Trust Account means the bank account to be established by the Trustee under clause 5. Trustee means National Australia Trustees Ltd ACN 007 350 405. 80 Interpretation 10.2In the interpretation of this Scheme, the following provisions apply unless the context otherwise requires: 10.2.1 The singular includes the plural and conversely. 10.2.2 A gender includes all genders. 10.2.3 If a word or phrase is defined, its other grammatical forms have a corresponding meaning. 10.2.4 A reference to a person, corporation, trust, partnership, unincorporated body or other entity includes any of them. 10.2.5 A reference to a clause, schedule or annexure is a reference to a clause of, or schedule or annexure to, this Scheme. 10.2.6A reference to an agreement or document (including a reference to this Scheme) is to the agreement or document as amended, varied, supplemented, novated or replaced, except to the extent prohibited by this Scheme or that other agreement or document. 10.2.7A reference to a person includes a reference to the person’s executors, administrators, successors, substitutes (including persons taking by novation) and assigns. 10.2.8A reference to legislation or to a provision of legislation includes a modification or re-enactment of it, a legislative provision substituted for it and a regulation or statutory instrument issued under it. 10.2.9 A reference to $ is to the lawful currency of Australia. 10.2.10Words and phrases not specifically defined in this Scheme have the same meanings (if any) given to them in the Corporations Act. 10.2.11 A reference to time is a reference to time in Sydney, Australia. 10.2.12If the day on which any act, matter or thing is to be done is a day other than a Business Day, such act, matter or thing must be done on the immediately succeeding Business Day. 10.2.13The meaning of general words is not limited by specific examples introduced by including, or for example, or similar expressions. 10.2.14A reference to a party using its best endeavours or reasonable endeavours does not include a reference to that party paying money or providing other valuable consideration to or for the benefit of any person (and an obligation on a party to use its best or reasonable endeavours does not oblige that party to pay money or provide other valuable consideration to or for the benefit of any person). Schedule 1 - Allocation Rules [The Allocation Rules are in the form set out in Appendix 4 of this Scheme Booklet.] Schedule 2 - Deed Poll [The Deed Poll is in the form set out in Appendix 6 of this Scheme Booklet.] Schedule 3 - Review Committee Charter [The Review Committee Charter is in the form set out in Appendix 5 of this Scheme Booklet.] 81 Appendix 4 Allocation Rules 1.Object These Allocation Rules set out the basis for determining the Entitlement for each Scheme Member to be distributed in accordance with the provisions of the Scheme. Each Scheme Member will receive an Initial Entitlement as determined under these Allocation Rules and might receive a Residual Entitlement as determined under these Allocation Rules. 2.Definitions Capitalised terms used but not defined in these Allocation Rules have the same meaning as in the Glossary to the Scheme Booklet. In addition: Term Definition Calculation Date 5.00pm on 17 January 2012 Initial Unit Value is determined in accordance with Rule 6. Residual Entitlement Date 31 July 2012 Residual Unit Value is determined in accordance with Rule 10. Unit the measure used to allocate the Consideration in accordance with these Allocation Rules. Unit Allocation is determined in accordance with Rule 7. Years of Extras Tenure is determined in accordance with Rule 8. Years of Hospital Tenure is determined in accordance with Rule 8. 3. Explanation of Some Concepts 3.1Policy and Cover A DHF Member can be issued with a Family Policy or a Single Policy that has Hospital Cover or Extras Cover or both Hospital Cover and Extras Cover. 3.2 Policy lapse The date to which a premium contribution for a Policy is paid is the “paid to date”. When a DHF Member is more than two months’ premium contribution payments in arrears the Policy and contributing membership shall lapse with effect from the paid to date. 3.3 Policy Reinstatement after lapse If a Policy and contributing membership lapses and subsequent to that lapse DHF accepts premium contributions paid in full for the period from the date of lapse, then the Policy and contributing membership is reinstated and the DHF Member’s tenure continues unaffected. 3.4 New Policy after lapse If a Policy and contributing membership for that Policy lapses and, subsequent to that lapse, premium contributions are not paid in full for the period from the date of lapse, or DHF refuses to accept arrears premium contributions, then that Policy ceases. If that person whose contributing membership ceased for a lapsed Policy subsequently becomes a DHF Member for a new Policy then, even if the membership number for the new Policy is unchanged, the DHF Member’s tenure is assessed from the date he or she became a DHF Member for the new Policy. 82 3.5 New Policy after termination If a Policy and contributing membership for that Policy is terminated, then the tenure for that Policy ceases. If a person whose contributing membership ceased for a terminated Policy subsequently becomes a DHF Member for a new Policy then, even if the membership number for the new Policy is unchanged, the DHF Member’s tenure is assessed from the date he or she became a DHF Member for the new Policy. 4. Participation in allocation DHF Members will be allocated an Initial Entitlement but will only receive that Initial Entitlement if they are a Scheme Member. 5. Join Date The Join Date is the date at which the Scheme Member’s Policy started unless the Policy lapsed and was not reinstated or the Policy was terminated. If a Policy lapsed and subsequent to that lapse DHF accepts premium contributions in full for the period from the date of lapse, then the Policy is reinstated. If a Policy lapsed and subsequent to that lapse premium contributions were not paid in full for the period from the date of lapse, or DHF refused to accept arrears premium contributions in full for the period from the date of lapse, and the person whose contributing membership ceased for the Policy subsequently takes out a new Policy, then the Join Date is the date at which the new Policy started, even if the membership number for the new Policy is unchanged. If a Policy is terminated, and the person whose contributing membership ceased for a terminated Policy subsequently takes out a new Policy, then the Join Date is the date at which the new Policy started, even if the membership number for the new Policy is unchanged. 6. Calculation of Initial Entitlement The Initial Entitlement allocated to a Scheme Member is calculated as follows: Initial Entitlement = Unit Allocation x Initial Unit Value rounded down to the nearest whole cent where Initial Unit Value is calculated by dividing the Initial Amount by the total number of Units allocated to DHF Members at the Calculation Date rounded down to the nearest whole cent. 7. Unit Allocation for a Scheme Member’s Years of Tenure The Unit Allocation for a Scheme Member whose Join Date was on or before the Calculation Date is determined in accordance with Rule 8. The Unit Allocation for a Scheme Member whose Join Date was after the Calculation Date is determined in accordance with Rule 9. 8.Unit Allocation for a Scheme Member whose Join Date was on or before the Calculation Date Where a Scheme Member’s Join Date was on or before the Calculation Date, the calculation of the Years of Hospital Tenure, the Years of Extras Tenure and the Unit Allocation for the Scheme Member at the Calculation Date is set out as follows. 8.1 Scheme Member’s Years of Hospital Tenure The calculation of the Years of Hospital Tenure is as follows: (a)determine the number of years and days in the period from the Join Date to the Calculation Date (both dates inclusive) during which the Scheme Member’s Policy provided Hospital Cover and deduct from that number of years and days the number of years and days during which the Policy (while providing Hospital Cover) was suspended in accordance with the Fund Rules applying at the relevant time; 83 (b)the years and days determined under paragraph 8.1(a) are rounded up to the nearest whole year – this number of years is the Years of Hospital Tenure of the Scheme Member. (c)determine the years and days (not including any period during which the Policy was suspended in accordance with the Fund Rules applying at the relevant time) during which the Scheme Member had a Family Policy with Hospital Cover during the Years of Hospital Tenure of the Scheme Member and round that period up to the nearest whole year – this is the Family Years of Hospital Tenure of the Scheme Member. (d)deduct from the Years of Hospital Tenure of the Scheme Member the Family Years of Hospital Tenure of the Scheme Member (if any) – this number of years is the Single Years of Hospital Tenure of the Scheme Member. 8.2 Scheme Member’s Years of Extras Tenure The calculation of the Years of Extras Tenure is as follows: (a)determine the number of years and days in the period from the Join Date to the Calculation Date (both dates inclusive) during which the Scheme Member’s Policy provided Extras Cover and deduct from that number of years and days the number of years and days during which the Policy (while providing Extras Cover) was suspended in accordance with the Fund Rules applying at the relevant time; (b)the years and days determined under paragraph 8.2(a) are rounded up to the nearest whole year – this number of years is the Years of Extras Tenure of the Scheme Member. (c)determine the years and days (not including any period during which the Policy was suspended in accordance with the Fund Rules applying at the relevant time) during which the Scheme Member had a Family Policy with Extras Cover during the Years of Extras Tenure of the Scheme Member and round that period up to the nearest whole year – this is the Family Years of Extras Tenure of the Scheme Member. (d)deduct from the Years of Extras Tenure of the Scheme Member the Family Years of Extras Tenure of the Scheme Member (if any) – this number of years is the Single Years of Extras Tenure of the Scheme Member. 8.3 Unit Allocation for a Scheme Member Calculate the Unit Allocation for a Scheme Member as the sum of: (a) the Family Years of Hospital Tenure of the Scheme Member (Rule 8.1(c)) multiplied by 200 Units; and (b) the Single Years of Hospital Tenure of the Scheme Member (Rule 8.1(d)) multiplied by 100 Units; and (c) the Family Years of Extras Tenure of the Scheme Member (Rule 8.2(c)) multiplied by 200 Units; and (d) the Single Years of Extras Tenure of the Scheme Member (Rule 8.2(d)) multiplied by 100 Units. 9. Unit Allocation for a Scheme Member whose Join Date was after the Calculation Date Where a Scheme Member’s Join Date was after the Calculation Date and that Scheme Member’s Policy has been suspended for any period before the Scheme Record Time, his or her Unit Allocation is nil. Where a Scheme Member’s Join Date was after the Calculation Date and that Scheme Member’s Policy has not been suspended for any period before the Scheme Record Time, his or her Unit Allocation is equivalent to an allocation based on one year of tenure for the relevant policy type and cover and is: (a) If at the Join Date the Scheme Member had a Single Policy providing only Hospital Cover, 100 Units. (b) If at the Join Date the Scheme Member had a Family Policy providing only Hospital Cover, 200 Units. (c) If at the Join Date the Scheme Member had a Single Policy providing only Extras Cover, 100 Units. (d) If at the Join Date the Scheme Member had a Family Policy providing only Extras Cover, 200 Units. (e) If at the Join Date the Scheme Member had a Single Policy providing both Hospital Cover and Extras Cover, 200 Units. (f) If at the Join Date the Scheme Member had a Family Policy providing both Hospital Cover and Extras Cover, 400 Units. 84 10. Calculation and payment of Residual Entitlement The Residual Amount will be used to pay the Initial Entitlement to Scheme Members under Rule 9 and pursuant to the determinations of the Review Committee in accordance with the Review Committee Charter. As required by the Review Committee Charter, these determinations must be made by the Residual Entitlement Date. The Final Residual Amount is the balance of the Residual Amount after paying the Initial Entitlement to Scheme Members under Rule 9 and pursuant to the determinations of the Review Committee in accordance with the Review Committee Charter, increased to include the aggregate amount of Initial Entitlements allocated but not paid to persons who cease to be DHF Members before the Scheme Record Time plus the amount arising from the rounding down of the Initial Unit Value to the nearest whole cent. The Final Residual Amount, if any, will be used to distribute Residual Entitlements to Scheme Members by 14 August 2012. The Residual Entitlement of a Scheme Member is calculated at the Residual Entitlement Date as follows: Residual Entitlement = Final Number of Units x Residual Unit Value rounded down to the nearest whole cent where Final Number of Units is the number of Units allocated to a Scheme Member determined in accordance with these Allocation Rules, including any additional Units allocated by the Review Committee in accordance with the Review Committee Charter; and Residual Unit Value means the Final Residual Amount divided by the sum of the Final Number of Units allocated to all Scheme Members rounded down to the nearest whole cent. However, if the Review Committee decides that the amount of any Residual Entitlement to be paid to an individual would be nominal, or the costs of payment would be disproportionate to the amount of the payment, or a surplus arises from the rounding of payments, these amounts will be paid to a charity chosen by the DHF Board that provides for the welfare of medical practitioners. 85 Appendix 5 Review Committee Charter 1 OBJECTIVE AND DEFINITIONS Charter 1.1This document is the Review Committee Charter referred to in the Scheme and the Scheme Booklet issued by DHF. This Review Committee Charter sets out the role and powers of the Review Committee, the body of persons who together constitute the Review Committee, the procedure for seeking a Request for a review and the procedure for considering such a Request. Definitions 1.2Capitalised terms used but not defined in this Review Committee Charter have the same meaning as those terms have in the Scheme and: Alternate means the alternate of a Review Committee Member. Applicant means a person who is or was: (a)a DHF Member at the Scheme Record Time or a DHF Member who falls within the category of person in paragraph (a) of the definition of Prescribed DHF Member; or (b)in relation to a Request under clause 2.2.2, the Contributing Member of the Policy to which the Request relates. Board Chairperson means the chairperson of the DHF Board. Chairperson means the chairperson of the Review Committee. Company Secretary means the company secretary of DHF. Contributing Member has the meaning set out in the Rules. Policy means a complying health insurance policy issued by DHF. Request means a request for review made by an Applicant in accordance with this Review Committee Charter. Review Committee means the committee constituted under clause 4. Review Committee Member means a member of the Review Committee appointed under clauses 4.1 to 4.6. Review Committee Secretary means the person appointed as secretary to the Review Committee under clause 4.8. Reviewer means the Board Chairperson, or in her absence or if conflicted under clause 8, an alternate who is not a Review Committee Member agreed between DHF and Avant, or such other person as DHF and Avant agree to appoint as a Reviewer. Request Review Form means the form that DHF approves in writing and publishes on its website at www.doctorshealthfund.com.au/AvantProposal/SchemeofArrangement. Requests for review 1.3 The Review Committee may only consider and determine a Request where the Request relates to: 1.3.1the number of Units to be allocated to the Applicant in respect of his or her Entitlement (that is, whether the Allocation Rules have been correctly applied in calculating the number of Units to be allocated to the Applicant); or 1.3.2whether the Applicant should have been treated as a Scheme Member (and is therefore eligible to receive an Entitlement). 1.4The Review Committee may only consider and determine a Request received by the Company Secretary on or before 5.00pm (Sydney Time) on the day that is five Business Days after the Implementation Date. 86 Privacy 1.5DHF and Avant will comply with the Privacy Act in relation to this Review Committee Charter. DHF may provide personal information of an Applicant (including personal information of any other person supplied to DHF by the Applicant) to Avant and to the Review Committee Members and Alternates or to the Reviewer or any experts appointed to assist the Review Committee. 1.6By providing information contained in the Review Request Form or providing any additional information sought in respect of a Request, an Applicant (or that other person in respect of whom the Applicant provides information to DHF) consents to the use and disclosure of his or her personal information for the purpose of considering and making a decision in respect of the relevant Request. An Applicant (or that other person) can generally access personal information that DHF holds about the Applicant (or that other person). Sometimes there will be a reason why full access to that information is not possible, in which case DHF will explain why such access is not possible. To make a request for access to personal information, an Applicant must contact the Company Secretary. Form of Request for review by Applicant 1.7A Request must be made in writing by the Applicant in person by completing a Review Request Form, as described in clause 3. Non-conforming Request 1.8The Review Committee may accept a Request made on behalf of an Applicant if the Request cannot be made by the Applicant in person (for example, where the Applicant has died, lacks mental capacity or where there is some other good reason why the Applicant is unable to make the Request personally). Initiation of Request by DHF 1.9DHF may of its own volition also make a Request on behalf of an Applicant or group of Applicants if DHF in its sole discretion considers it appropriate to do so. 2 SCOPE OF AUTHORITY Material to be considered 2.1In considering a Request, the Review Committee (and where relevant, the Reviewer) must only have regard to this Review Committee Charter, the Allocation Rules, the information provided by the Applicant in the Review Request Form and the records of DHF (including without limitation DHF’s policies). Matters to be considered 2.2 In considering a Request, the Review Committee (and where relevant, the Reviewer) must only consider: 2.2.1whether the number of Units allocated to the Applicant under the Allocation Rules is correct; and/or 2.2.2in the case of a Request that the Applicant be considered to be a Scheme Member, whether the Applicant should be so considered and if so, the number of Units to be allocated to the Applicant. 2.3 For the avoidance of doubt, the Review Committee shall not have the power to alter the Allocation Rules. Review Committee not required to give reasons 2.4 The Review Committee is not required to give reasons to an Applicant for its decision in respect of any Request. No decrease in Units 2.5If the Review Committee (or where relevant, the Reviewer) determines that the Allocation Rules have not been correctly applied to an Applicant such that their correct application in relation to a Request under clause 2.2.1 or clause 2.2.2 would result in a lesser number of Units being allocated to the Applicant, then the Review Committee (or the Reviewer) must dismiss that Request. Factors for consideration – Request under clause 2.2.2 2.6In considering a Request under clause 2.2.2, the Review Committee may have regard to any one or more of the following factors: 87 2.6.1whether the Applicant was, or was entitled to be, a DHF Member at the Scheme Record Time; 2.6.2whether the Applicant falls within the categories of person described in paragraph (a) of the definition of Prescribed DHF Member; 2.6.3whether the Applicant did not know and/or reasonably ought not to have known that the Policy was more than two months in arrears; 2.6.4whether DHF failed to send a notice to the Applicant before the Policy was more than two months in arrears advising the Applicant that the Policy was in arrears; 2.6.5whether the Policy was more than two months in arrears at the time it was cancelled; 2.6.6whether the Applicant sought advice from DHF in relation to the cancellation or alteration of the Policy; 2.6.7information from the records or personnel of DHF as to contacts made by the Applicant with DHF; and 2.6.8such other matters as the Review Committee determines are relevant to considering the Request. 3 REQUEST BY APPLICANT Content of Request 3.1 A Request must: 3.1.1 be made by completing a Review Request Form; and 3.1.2 attach any relevant documents or information in support of the Request. 3.2The Review Committee has the discretion to reject a Request made other than by way of a correctly completed Review Request Form. Statutory declaration 3.3The Company Secretary may require that information supplied or to be supplied by an Applicant in relation to a Request be in the form of a statutory declaration. 4 MEMBERSHIP AND MEETINGS Review Committee membership 4.1The Review Committee will comprise four Review Committee Members or their Alternates, with two persons being nominated by DHF (not including the Board Chairperson) and two persons being nominated by Avant. 4.2An Alternate appointed by DHF or Avant (as the case may be) may act as an Alternate for any Review Committee Member nominated by DHF or Avant respectively. 4.3If a Review Committee Member or an Alternate is unable or unwilling to continue as a member of the Review Committee, he or she must notify DHF or Avant (as the case may be) and DHF or Avant (as the case may be) may appoint another person to the Review Committee in their place. 4.4 Each of DHF and Avant may remove and replace their respective nominees on the Review Committee. 4.5DHF must ensure that the Review Committee Members appointed by DHF and the Reviewer act in accordance with this Review Committee Charter. 4.6Avant must ensure that the Review Committee Members appointed by Avant act in accordance with this Review Committee Charter. Chairperson 4.7The Chairperson will be a Review Committee Member nominated by DHF under clause 4.1 or such other Review Committee Member appointed to the position of Chairperson by DHF and Avant. Review Committee Secretary 4.8 The Review Committee will appoint a person nominated by DHF to act as the Review Committee Secretary who must: 88 4.8.1attend all meetings of the Review Committee and minute proceedings as directed by the Review Committee; 4.8.2notify the Company Secretary of all decisions of the Review Committee as soon as possible and in any case within a period of time that will enable the Company Secretary to respond to Applicants in accordance with clause 8; and 4.8.3maintain records including a register of all Requests received and considered by the Review Committee (or where relevant, the Reviewer), and the decisions made by the Review Committee (or where relevant, the Reviewer) in relation to those Requests. Quorum 4.9A quorum for a meeting of the Review Committee is three, one of whom must be a Review Committee Member or Alternate appointed by DHF and one of whom must be a Review Committee Member or Alternate appointed by Avant. Meetings 4.10The Review Committee will meet at such times, at such places or in such manner as the Chairperson may decide and for this purpose the Review Committee Members may attend meetings by telephone, teleconference, videoconference or other means approved by the Chairperson. Meetings will be scheduled and held with a view to dealing with all Requests consistently with the timetable specified in clause 4.19. Resolutions in writing 4.11A circulating resolution signed by all Review Committee Members is a valid resolution of the Review Committee. A written resolution signed by the Reviewer, in relation to a Request referred to the Reviewer by the Review Committee, will be deemed to be a valid resolution of the Review Committee in relation to that Request. Notice of meetings 4.12The Review Committee Secretary will give notice of meetings of the Review Committee to the Review Committee Members as directed by the Chairperson. Voting 4.13 Each Review Committee Member has one vote. The Chairperson does not have a casting vote. Decisions – reference to Reviewer 4.14If a decision of the Review Committee in relation to a Request is not unanimous (or a quorum cannot be achieved to consider a Request due to the application of clause 8) then the Request must be referred to the Reviewer who will have the same powers and authorities as the Review Committee and whose decision in respect of that Request will be deemed to be the decision of the Review Committee. 4.15The Review Committee Secretary must, subject to clause 2.1, provide the Reviewer with all the information requested by the Reviewer to assist the Reviewer to reach a decision in relation to a Request referred to the Reviewer by the Review Committee. Procedure – stage 1 4.16 On receipt of a Request, the Review Committee Secretary must: 4.16.1obtain data from DHF’s records in relation to the Applicant including the calculation of the Units allocated to the Applicant or any relevant Policy held by the Applicant; 4.16.2seek any additional information from the Applicant that the Review Committee Secretary considers may be relevant to the consideration of the Request by the Review Committee; and 4.16.3provide to the Review Committee the Request together with the information referred to in clauses 4.16.1 and 4.16.2 and may include a recommendation as to how the Request should be dealt with by the Review Committee. 89 Procedure – stage 2 4.17 On considering a Request, the Review Committee may: 4.17.1 determine to reject the Request; 4.17.2if the Request is in respect of whether the Applicant should have been treated as a Scheme Member, determine that the Applicant is a Scheme Member and determine the number of Units to be allocated to the Applicant; 4.17.3if the Request relates to the number of Units allocated to the Applicant, determine to confirm or increase the number of Units allocated to the Applicant; 4.17.4 request that the Review Committee Secretary obtain further information in respect of the Request; 4.17.5if the Applicant does not provide a correctly completed Review Request Form, either determine to reject or accept the Request or request that the Applicant complete a Review Request Form and if such a form is not provided, determine to reject the Request; 4.17.6if the Review Committee Secretary has requested further information in respect of the Request and the Applicant has failed to provide this information, or the Review Committee Secretary is unable to contact the Applicant to obtain the required further information, and the information before the Review Committee is insufficient to enable a decision to be made, determine to reject the Request; 4.17.7request the attendance of relevant DHF employees or senior management at a meeting of the Review Committee to assist in consideration of the Request; 4.17.8 request the provision of expert advice; and 4.17.9 refer the Request to the Reviewer in accordance with clause 4.14. Procedure generally 4.18The Review Committee may determine its procedures subject to this Review Committee Charter and in particular may consider Requests in batches where it is reasonably satisfied that the Requests raise similar issues for decision that would allow the Requests to be considered together and a decision in relation to such a batch of Requests will be a decision in relation to each Request in that batch, subject to any contrary direction of the Review Committee. The Review Committee must act in a fair and equitable manner but is not required to interview any Applicant and may deal with all matters by correspondence. Timing of decisions 4.19 The Review Committee must ensure that a decision is made in respect of all Requests by 31 July 2012. Decisions binding 4.20By making a Request, the Applicant agrees that a decision of the Review Committee (or where relevant, the Reviewer) is final and binding. 5 OBLIGATIONS OF DHF Provision of services 5.1DHF must provide administrative, secretarial and other services that are reasonably required by the Review Committee and the Reviewer for the performance of their respective functions under this Review Committee Charter. Information, data and access to staff 5.2DHF must provide information and data relevant to a Request as required by this Review Committee Charter, the Review Committee and the Reviewer and must at the request of the Review Committee (or where relevant, the Reviewer) make staff and senior management directly available to the Review Committee (or the Reviewer) to assist it in its (or him or her in his or her) deliberations. Expert advice 5.3If requested by the Review Committee (or where relevant, the Reviewer), DHF must arrange for the provision of expert advice to the Review Committee (or the Reviewer) to assist it in its (or him or her in his or her) deliberations. 90 Timetable 5.4DHF must perform its duties and functions having regard to the need for the Review Committee (or where relevant, the Reviewer) to make decisions within the timeframes set out in clause 4.19. Implementations of decisions 5.5 DHF must, on being advised of a decision of the Review Committee, or (where relevant) the Reviewer: 5.5.1if the decision is made before the Scheme Record Time that an Applicant should have been treated as a Scheme Member: (a) where relevant, arrange for the Applicant to be provided with a Proxy Form before the Record Time; and (b)determine the Entitlement of the Applicant based on the number of Units determined by the Review Committee to be allocated to the Applicant; 5.5.2if the decision is made before the Implementation Date that an Applicant is entitled to be allocated additional Units, determine the increased Entitlement of the Applicant; 5.5.3if the decision is made after the Scheme Record Time that an Applicant was entitled to be treated as a Scheme Member, determine the Entitlement of the Applicant based on the number of Units determined by the Review Committee to be allocated to the Applicant; 5.5.4if the decision is made after the Implementation Date that an Applicant is entitled to be allocated additional Units, determine the increased Entitlement of the Applicant; and 5.5.5otherwise ensure that the decisions of the Review Committee are notified to the Applicant and that they are implemented. 5.6DHF must, on being advised of a determination of the Review Committee made in accordance with clause 4.2.2 of the Scheme, direct the Trustee to pay the balance of the Residual Amount in accordance with that determination. 6REPORTING Report 6.1The Review Committee must report to the DHF Board and Avant on matters and decisions arising from its responsibilities as outlined in this Review Committee Charter. Content of report 6.2 Reports under clause 6.1 must include information in relation to the decisions of the Review Committee including: 6.2.1a list of the Requests considered and decisions made by the Review Committee during the relevant period since the last report; 6.2.2the outcome of any Request referred to the Reviewer; and 6.2.3minutes of its meetings. 7 NOTIFICATION OF DECISIONS 7.1The Company Secretary will promptly notify the Applicant in writing of the decision of the Review Committee or the Reviewer, as the case may be. 7.2The Company Secretary may at any time and from time to time delegate the duty to notify the Applicant under this clause 7 to the Review Committee Secretary. 8 CONFLICTS OF INTEREST IN RELATION TO REQUESTS Non-disclosure of names of Applicants 8.1The Review Committee Secretary will not provide to the Review Committee or the Reviewer the name of any Applicant for the purposes of any decision. 91 Review Committee 8.2If a Review Committee Member becomes aware that a Request relates to a relative of the Review Committee Member or a person with whom that Review Committee Member has a personal relationship, that Review Committee Member must advise the Review Committee Secretary and must not participate in the consideration of that Request. If a Review Committee Member is unable to participate by reason of this clause 8.2 then an Alternate for that Review Committee Member may participate so long as this clause does not also apply to that person. Reviewer 8.3If the Reviewer becomes aware that a Request, which has been referred to the Reviewer by the Review Committee, relates to a relative of the Reviewer or a person with whom the Reviewer has a personal relationship, the Reviewer must advise the Review Committee Secretary and require that his or her alternate, or another disinterested person be appointed as a Reviewer to consider that Request. 92 Appendix 6 Deed Poll Date: 5 March 2012 PARTIES Avant Group Holdings Limited ACN 077 283 884 of Level 28, 580 George Street, Sydney, NSW 2000 (Avant) In favour of Name: each Scheme Member BACKGROUND AEach Director of DHF considers that it is in the interests of DHF that the DHF Members be given the opportunity to consider and, if thought fit, approve the Scheme. B Accordingly, the DHF Board has resolved that DHF should propose the Scheme. CThe effect of the Scheme will be that Avant will be granted membership of DHF, the membership of all Scheme Members will be cancelled in consideration for the payment of the Consideration in accordance with the Scheme. D DHF and Avant have entered into the Implementation Deed. EUnder the Implementation Deed, Avant has agreed to take all necessary steps to implement and complete the Scheme as soon as is reasonably practicable, including executing this document. FAvant is entering into this document for the purpose of covenanting in favour of Scheme Members to perform its obligations under the Implementation Deed and the Scheme, including the provision of the Consideration. OPERATIVE PROVISIONS 1. CONDITIONS AND TERMINATION Conditions precedent 1.1Avant’s obligations under clause 2 are subject to the Scheme becoming Effective. Termination 1.2Avant’s obligations under this document will automatically terminate and the terms of this document will be of no further force or effect if: 1.2.1the Implementation Deed is terminated in accordance with its terms prior to the Effective Date for the Scheme; or 1.2.2the Scheme does not become Effective on or before the End Date, unless Avant and DHF otherwise agree in accordance with the Implementation Deed. Consequences of termination 1.3If this document terminates under clause 1.2, then, in addition and without prejudice to any other rights, powers or remedies available to it: 1.3.1Avant is released from its obligations to further perform this document except those obligations under clause 6.1 and any other obligations which by their nature survive termination; and 1.3.2Scheme Members retain the rights they have against Avant in respect of any breach of this document by Avant which occurs before termination. 2. PROVISION OF CONSIDERATION Compliance with Scheme obligations generally 2.1Avant will comply with its obligations under the Implementation Deed and do all acts and things as may be necessary or desirable on its part to perform the acts contemplated of it under the Scheme. 93 Provision of Consideration 2.2Subject to clause 1, Avant undertakes in favour of each Scheme Member to pay the Consideration to the Trustee as and when the Consideration is required to be paid by it under the Implementation Deed in the manner specified in clause 3 of the Implementation Deed. 3 REPRESENTATIONS AND WARRANTIES 3.1 Avant represents and warrants that: 3.1.1 it is a public company limited by guarantee validly existing under the laws of Australia; 3.1.2it has the corporate power to enter into and perform its obligations under this document and to carry out the transactions contemplated by this document; 3.1.3it has taken all necessary corporate action to authorise the entry into this document and has taken or will take all necessary corporate action to authorise the performance of this document and to carry out the transactions contemplated by this document; and 3.1.4 this document is valid and binding upon it and enforceable against it in accordance with its terms. 4 CONTINUING OBLIGATIONS 4.1 This document is irrevocable and, subject to clause 1, remains in full force and effect until: 4.1.1 Avant has fully performed its obligations under this document; or 4.1.2 the earlier termination of this document under clause 1.2. 5NOTICES 5.1 Any notice, demand, consent or other communication (a Notice) given or made under this document: 5.1.1 must be in writing and signed by a person duly authorised by the sender; 5.1.2must be delivered to the intended recipient by prepaid post or by hand or fax to the address or fax number below or the address (being an address in Australia) or fax number last notified by the intended recipient to the sender: Avant Address: Level 28, 580 George Street, Sydney, NSW 2000 Fax: 02 9264 4014 Attention: Chief Executive Officer 5.1.3 will be taken to be duly given or made: (a) in the case of delivery in person, when delivered; (b) in the case of delivery by post: (i) within Australia to an Australian address, two Business Days after the date of posting; and (ii) in any other case, 10 Business Days after the date of posting; and (c)in the case of fax, on receipt by the sender of a transmission control report from the dispatching machine showing the relevant number of pages and the correct destination fax machine number or name of recipient and indicating that the transmission has been made without error, but if the result is that a Notice would be taken to be given or made on a day that is not a Business Day in the place to which the Notice is sent or is later than 4.00pm (local time) it will be taken to have been duly given or made at the commencement of business on the next Business Day in that place. 94 6GENERAL Stamp duty 6.1 Avant will: 6.1.1pay all stamp duty (including fines, penalties and interest) in respect of this document, the performance of this document and each transaction effected by or made under this document; and 6.1.2indemnify each Scheme Member against any liability arising from failure to comply with clause 6.1.1. Waiver 6.2Waiver of any right arising from a breach of this document or of any right, power, authority, discretion or remedy arising upon default under this document must be in writing and signed by the party granting the waiver. 6.3 A failure or delay in exercise, or partial exercise, of: 6.3.1a right arising from a breach of this document; or 6.3.2a right, power, authority, discretion or remedy created or arising upon default under this document, does not result in a waiver of that right, power, authority, discretion or remedy. Variation 6.4A provision of this document may not be amended or varied unless the amendment or variation is agreed in writing by DHF and the Court indicates that the amendment or variation would not of itself preclude approval of the Scheme in which event Avant will enter into a further deed poll in favour of each Scheme Member giving effect to the amendment or variation. Rights cumulative 6.5The rights, powers and remedies of Avant and of each Scheme Member under this document are cumulative and do not exclude any other rights, powers or remedies provided by law independently of this document. Assignment 6.6The rights and obligations of Avant and of each Scheme Member under this document are personal and must not be assigned, encumbered or otherwise dealt with at law or in equity. Further assurances 6.7Avant will, at its own expense, execute all deeds and other documents and do all acts and things as may be necessary or desirable to give full effect to this document and the transactions contemplated by it. 7 GOVERNING LAW AND JURISDICTION 7.1 This document is governed by the laws of New South Wales, Australia. 7.2 Avant irrevocably and unconditionally: 7.2.1 submits to the non-exclusive jurisdiction of the courts of New South Wales, Australia; and 7.2.2waives, without limitation, any claim or objection based on absence of jurisdiction or inconvenient forum. 8 DEFINITIONS AND INTERPRETATION Definitions 8.1Terms that are not defined in this document and that are defined in the Implementation Deed or the Scheme have the same meaning in this document, unless the context makes it clear that a definition is not intended to apply. Interpretation 8.2Clause 10.2 of the Scheme applies to the interpretation of this document except that references to ‘this Scheme’ in that clause are to be read as references to ‘this document’. 95 Nature of Deed Poll 8.3Avant acknowledges that this document may be relied on and enforced by any Scheme Member in accordance with its terms even though the Scheme Members are not party to it. As a separate right, and without limiting DHF’s obligations under this clause 8.3, any Scheme Member may enforce this document against Avant without DHF joining the proceedings. EXECUTION Executed as a deed poll on 5 March 2012. Executed by Avant Group Holdings Limited ACN 077 283 884 acting by the following persons: 96 Signature of director Signature of director/company secretary Name of director (print) Name of director/company secretary (print) Appendix 7 Summary of Independent Expert’s Report The Directors The Doctors’ Health Fund Limited 69 Christie Street St Leonards NSW 2065 27 February 2012 Subject: Demutualisation of The Doctors’ Health Fund and sale to Avant Group Holdings Limited – Concise Report Dear Directors Introduction 1 On 11 August 2011 The Doctors’ Health Fund Limited (DHF) announced that it and Avant Group Holdings Limited (Avant) had signed an Implementation Deed (the Agreement) under which Avant would become a member of DHF, then the memberships of all DHF Members other than Avant would be cancelled in consideration for payments that would be funded by the agreed consideration of $28.5 million payable by Avant. 2 DHF subsequently received and considered an indicative non-binding proposal from an alternative purchaser1 which: (a) proposed consideration for DHF Members of $30.0 million (b) had other conditions and features which caused the DHF Board to have concerns as to whether it was likely to develop into a Superior Proposal2 (c) caused the DHF Board to: (i) have discussions with the alternative purchaser to clarify elements of their proposal; and (ii) receive advice to help assess whether this proposal was likely to become a Superior Proposal. 3 Discussions were ongoing until the alternative purchaser formally withdrew their indicative offer before the DHF Board reached a view as to whether the alternative purchaser’s offer was a Superior Proposal. 4 On 8 February 2012 the Agreement was amended so that : (a) 1 2 the agreed price payable by Avant was increased to $30.0 million; and As discussed in Section 4 of the Scheme Booklet. As defined in the Agreement. 97 (b) Avant was allowed five business days to submit an amended proposal if the Independent Expert provided a formal opinion that the Scheme was not in the best interests of Scheme Members3 (together with paragraph 1, “the Proposal”). 5 The Proposal is subject to conditions precedent including Court, regulatory and member approvals. Details of the conditions are set out in the Agreement (and are summarised in Section I of our full report). DHF will convene two meetings of members on the same day for the purposes of the Proposal. The Proposal cannot be implemented unless the resolutions put to each meeting are passed by the requisite majorities. 6 The notices for these meetings, the Resolutions to be considered at these meetings, and the details of how and when DHF Members can vote, are explained in the Scheme Booklet. The Scheme will also need to be approved by the Court. 7 The DHF Board unanimously recommends that DHF Members vote for the EGM Resolutions at the EGM and for the Scheme Resolution at the Scheme Meeting in the absence of a Superior Proposal. The reasons for the DHF directors’ recommendation are set out in Section 5 of the Scheme Booklet. DHF 8 DHF is a restricted access private health insurer, providing health insurance to Australian medical practitioners, their families and employees. Management have advised us that as at 11 August 2011 (being the announcement date), DHF had 7,629 members. Avant 9 Avant is a wholly owned subsidiary of Avant Mutual Group Limited (Avant Mutual) which is a “not-for-profit”, mutual organisation that currently provides professional indemnity insurance to over 57,000 health professionals including around 55% of Australia’s medical practitioners. Avant Mutual reported net assets of $693.3 million at 30 June 2011. Purpose of report 10 The Agreement requires that DHF appoint an Independent Expert to opine on whether the Proposal is in the best interests of Scheme Members, and an affirmative view is a condition precedent for the Proposal to proceed. 11 Accordingly, the Directors of DHF have requested that Lonergan Edwards & Associates Limited (LEA) prepare an Independent Expert’s Report (IER) stating whether, in our opinion, the Proposal is fair and reasonable and in the best interests of Scheme Members and the reasons for that opinion. 12 LEA is independent of DHF and Avant and has no other involvement or interest in the proposed Scheme. 3 We note that the DHF Members who will receive payments under the Scheme (the Scheme Members) will include all DHF Members who are eligible to vote at the relevant meetings and who remain members at the Scheme Record Date. The Agreement uses the terms “DHF Members” and “Scheme Members”. These terms basically refer to the same group of people, viewed at different times. DHF Members are members of DHF at the Record Time and entitled to vote on the EGM Resolutions at the EGM and the Scheme Resolution at the Scheme Meeting. Scheme Members are DHF Members at the Scheme Record Time and Prescribed Members. Refer to the Scheme Booklet for more details on eligibility. 2 98 13 This is a summary of our IER and will accompany the Scheme Booklet to be sent to Scheme Members. The report can be reviewed in full by visiting www.doctorshealthfund.com.au/AvantProposal/SchemeofArrangement or you can request a copy by calling the Proposal Hotline on 1800 508 716. Overview of opinion 14 In our opinion, the Proposal is fair and reasonable and in the best interests of Scheme Members in the absence of a current better proposal. We have formed this opinion for the reasons set out below. Value of DHF We have assessed the value of DHF on a 100% controlling interest basis to be in the range of A$28.4 million to A$31.9 million, as shown below: Value of 100% of DHF Low A$m 12.1 16.3 28.4 Value of health insurance business Regulatory Surplus Capital(1) Value of 100% of DHF High A$m 15.6 16.3 31.9 Note: 1 Being Regulatory Surplus Capital as at 31 December 2011. Fair and reasonable opinion 15 Pursuant to Australian Securities Investments Commission (ASIC) Regulatory Guides4 a scheme is “fair” if the value of the scheme consideration is equal to or greater than the value of the securities the subject of the scheme. This comparison for DHF is shown below: Position of DHF Value of Scheme Consideration Value of 100% of DHF Extent to which the Scheme Consideration exceeds the value of DHF Low $m 30.0 28.4 1.6 High $m 30.0 31.9 (1.9) Midpoint $m 30.0 30.2 (0.2) 16 As the Scheme Consideration is within our assessed valuation range for DHF on a 100% controlling interest basis, in our opinion, the Scheme Consideration is fair to Scheme Members when assessed based on the guidelines set out in RG 111. 17 Pursuant to RG 111, a transaction is reasonable if it is fair. 4 In particular Regulatory Guide 111 – Content of expert reports (RG 111). 3 99 Best interests 18 In our opinion, the Proposal is in the best interests of Scheme Members in the absence of a current better proposal. In assessing whether the Proposal is in the best interests of Scheme Members, we have had regard to the advantages and disadvantages of the Proposal to Scheme Members, as summarised below. Advantages 19 The Proposal has the following benefits for Scheme Members: (a) the Scheme Consideration of $30.0 million cash is within our assessed value range of DHF on a 100% controlling interest basis (b) the Proposal allows Scheme Members to access the value currently locked inside DHF due to its mutual structure (c) Scheme Members can realise value for their interest in DHF and then apply to join another mutual health fund, if they would prefer to be in a mutual fund (d) the Appointed Actuary’s Report which accompanies the Scheme Booklet concludes that as a result of the Proposal: (i) DHF policyholders benefits should remain adequately secure if the Proposal is approved, (ii) future premium rates are unlikely to be impacted in a material manner by the proposal, and (iii) the reasonable benefit expectations of DHF policyholders are unlikely to be impacted in a materially adverse manner by the Proposal. (e) Avant has also agreed (subject to certain conditions) to reimburse various transaction costs associated with the Proposal in addition to the $30.0 million Scheme Consideration although in certain circumstances, DHF may need to refund reimbursed costs to Avant (f) the ultimate parent (Avant Mutual) has significant similarities to DHF, as it is a mutual organisation focused on health practitioners, with the vast majority of its members being medical practitioners. Disadvantages 20 Scheme Members should note that if the Proposal is approved they will no longer hold an interest in DHF and therefore: (a) will not be able to vote and control the activities of DHF (b) will not participate in any future value created by DHF over and above that reflected in the Scheme Consideration; and (c) will not be able to accept any alternative offers which might otherwise emerge. 4 100 21 Other disadvantages to Scheme Members that may arise are: (a) there might be tax consequences for Scheme Members, although the advice received by DHF (the Tax Advice Letter set out in Appendix 10 of the Scheme Booklet) is that the amount received by Scheme Members should not be subject to income tax (b) there is a risk that this Proposal might have adverse impact on DHF policyholders even though the Appointed Actuary’s Report indicates that a material adverse impact is unlikely. Valuation of DHF Overview 22 We have assessed the value of a 100% interest in DHF on the basis that DHF is demutualised and becomes a “for profit” private health insurer, liable to pay tax on its health insurance profits, as opposed to remaining as a “not-for-profit” mutual. The reasons for our assessment on this basis are as follows: (a) 23 5 6 any monetary value of DHF under a mutual structure is theoretical and not accessible in the form of dividends or capital returns to participating members. As a mutual, DHF would not be able to make any cash distributions to participating members either in: (i) the ordinary course of business; or (ii) in the event that the fund is wound up, DHF’s accumulated net assets must be transferred to another private health insurance fund which must also operate under a mutual structure (b) as a mutual, DHF can pass through to members the benefit of part of its accumulated reserves in the form of increased benefits, or lower premiums and charges. However, only a proportion of such reserves could be passed through in this way due to the need to retain sufficient reserves to cover both the regulatory minimum capital adequacy requirement plus the need to retain an additional capital adequacy buffer to cover unexpected events. Further, a mutual typically retains some reserves as capital for growth5 (c) the Scheme Consideration of $30.0 million against which the value of DHF is compared can become available to DHF Members only if DHF is demutualised. That is, assessing the value of DHF as a demutualised tax-paying entity enables the evaluation of the fairness and reasonableness of the Proposal on a like-with-like basis. Because we have conducted our valuation by using a multiple of underwriting profit based on a listed (tax-paying) health insurer and on transaction prices for other health insurers (that would also become tax-paying post acquisition), our allowance for tax is implicit (i.e. embedded in our assessed multiple range) rather than explicit6. A mutual has only one source of capital, which is from its reserves. Explicit allowance for tax would have been made if we had, for instance, conducted a valuation based on a cash flow projection. 5 101 Value of PHI business 24 We have valued DHF’s Private Health Insurance (PHI) business using the capitalisation of earnings approach. The earnings adopted for valuation purposes is net underwriting profit, which excludes: 25 (a) income from the investment of premiums and previous period’s net surplus7 (b) (notional) income tax. We have then applied an appropriate capitalisation multiple to such (pre-tax) underwriting profit to arrive at a value for the PHI business. Underwriting profit adopted for valuation purposes 26 The underwriting profit adopted for valuation purposes is an exercise of judgement that takes into consideration various factors including the historical (and forecast) level of profitability. In most circumstances more weight is given to the most recent results than to older historic results. We have had regard to the historical and forecast growth and profitability margins, and have discussed the financial performance, operating environment and prospects with DHF management. 27 A summary of the operating performance of DHF’s PHI business for the four years ended 30 June 2011 and the six months ended 31 December 2011 is set out below: Operating performance of PHI business Contribution income Net claims expense(1)(2) Gross underwriting profit Management expenses Underwriting profit(3) Growth in contribution income (%) Gross underwriting margin (%)(4) Management expense ratio (%)(4) Net underwriting profit ratio (%)(4) FY08 $000 15,806 (12,407) 3,399 (3,336) 63 FY09 $000 18,169 (15,117) 3,052 (2,708) 344 FY10 $000 20,805 (17,244) 3,561 (2,746) 815 FY11 $000 25,044 (20,469) 4,575 (3,276) 1,299 6 mths to Dec 11 $000 14,578 (11,054) 3,524 (1,716) 1,808 16.2 21.5 21.1 0.4 15.0 16.8 14.9 1.9 14.5 17.1 13.2 3.9 20.4 18.3 13.1 5.2 16.4 24.2 11.8 12.4 Note: 1 Includes the Risk Equalisation Trust Fund (RETF) recoveries. 2 There was a one-off release of excessive outstanding claims provision during FY11 of some $418,000. If this is excluded, the net claims expense in FY11 equals some $20.887 million and the underwriting profit margin equals some 3.5%. We note that the recognition of the provision in earlier years caused the net underwriting profit in those years to be understated. 3 Excludes the reversal of an unexpired risk liability recognised in FY09 and released in FY10. 4 Calculated as a percentage of contribution income. Totals may not add due to rounding. Source: DHF Annual Reports for FY09, FY10 and FY11 and DHF management accounts for the six months to December 2011. 7 Noting that investment earnings on assets backing policy liabilities will not be significant due to the short-term nature of the health insurance business. 6 102 28 29 Having regard to DHF’s operating performance, we note that: (a) DHF has generated significant increases in contribution income over recent years. This has been driven by the strategic intent for growth adopted by the Board and supplemented with a marketing campaign. Notwithstanding that the lower priced insurance products have experienced more significant growth in recent years, DHF has been able to achieve sales revenue growth at a faster rate than the growth in the number of members through the sale of both hospital and ancillary insurance coverage, mix of family versus single covers and annual rate increases (b) DHF has also generated significant increases in profitability over recent years. This has been driven by economies of scale benefits (resulting from increased business volumes), reductions in the cost of acquisition of new members, steady growth in its most profitable premium products and improved profitability of the relatively new lower priced products. The profitability recognised in FY11 was also affected by the outstanding claims provisions released (referred to above). We have assessed a maintainable level of contribution income and a maintainable underwriting profit margin in order to calculate the net underwriting profit adopted for valuation purposes. Contribution income 30 For the purpose of our valuation, we have adopted maintainable contribution income of $30.0 million. This is higher than contribution income for FY11 due to the full year effect of premium rate increases implemented in April 2011 as well as membership growth to date. The adopted figure of $30.0 million is consistent with DHF’s current budget for FY12 which anticipates further membership growth and a minor effect from further rate increases in April 2012. It is also consistent with DHF’s forecast for FY12 based upon actual results to 31 December 2011. The future outlook for DHF’s contribution income is affected by: (a) DHF plans to maintain its growth strategy in order to continue to build scale and offset the impact of the higher claims expenses associated with an older membership base. DHF management forecasts growth in its membership base by some 13% in 2012. With regards to management’s rapid growth forecasts, we note that: (i) growth in recent years and forecasted growth is primarily in the lower priced hospital cover, which have generally been purchased by younger members. Management have focussed marketing expenditure on these sales. There is a large proportion of these new younger members which purchase general treatment cover in addition to hospital cover (ii) approximately two-thirds of the member base are doctors and the average age of members is almost 50 years. These members are generally in a sound financial position and less susceptible to adverse market conditions. We note that this provides support for steady year-to-year premium income (iii) the utilisation of iSelect as an intermediary of DHF’s insurance products is relatively recent and management are currently reviewing the role of this channel in the future 7 103 (iv) management plans to continue the uplifted marketing expenditure of recent years. We note that this may promote higher general public exposure and awareness of the brand (v) (b) as at 30 June 2011, DHF’s capital adequacy multiple8 of 3.36 was within DHF’s target range of 3.0 to 3.5. If membership growth exceeds the net asset growth rate there is a tendency for a decrease in DHF’s capital adequacy multiple (that is, the capital adequacy requirement would tend to increase at a faster rate than the net assets of the fund) all else being equal, DHF will continue to achieve an increase in contribution revenue through annual rate increases. Underwriting profit margin 31 For the purpose of our valuation, we have adopted a maintainable net underwriting profit margin (before tax) of between 3.75% and 4.25%. In order to assess this range we have had regard to DHF’s underwriting margin in recent years (adjusted for one-off events) as well as the following: (a) the historical changes to the MLS threshold as set out in the Industry overview contained in Section IV of our full report (b) as outlined in the Industry overview, the Federal Government has proposed means testing the Government Rebate. Under the proposed changes, the cost of PHI to policyholders will increase substantially. However, those above the Medicare Levy Surcharge (MLS) threshold would have to pay the MLS if they did not purchase PHI. We note that: (i) a large proportion of DHF’s membership base would be liable for the MLS. The MLS would be equivalent to at least a substantial portion of the premium paid and might exceed the premium. This would deter members from not having private health insurance. However, some members may seek to transfer to DHF’s lower priced products (which currently have lower margins) or to seek cheaper alternatives with other private health insurers (ii) following the introduction of the Government Rebate in January 1999, the membership base in DHF did not experience the substantial growth achieved by other health insurers9 (iii) DHF has a low member termination rate, generally (c) 8 9 over the past four years the drawings from the RETF have on average contributed some 11% of DHF’s total income. DHF has historically heavily relied on the RETF drawings to cover the additional claims experience resulting from its relatively old membership base. Management are not aware of any indications that a change to the current system will be enacted, but acknowledge that DHF is a net drawer from the fund and is exposed to any variation in the legislation Being net assets divided by the capital adequacy reserve (as per the required prudential calculation). Which we are advised was largely due to DHF at that time having significantly less aggressive marketing than many other health funds. 8 104 (d) (e) the long-term net underwriting margin target of private health insurers have risen in recent years. We note that: (i) NIB’s ongoing net underwriting margin target is 5% to 6% of contribution income10 (ii) the growth in younger members has resulted in a growth in the sales of the lower priced hospital products which are less profitable. However, management indicate that these younger members also usually take out general treatment cover, which is currently highly profitable for DHF DHF has achieved a steady reduction in the level of management expenses (as a percentage of contribution income) over recent years. With regards to DHF’s ability to continue to improve operational efficiency, we note that: (i) management expenses have historically been high relative to larger private health insurers due to the small scale of DHF’s operations. DHF’s management expense ratio was some 15% in FY09 and 13% in FY10, compared to the industry average of some 10% in FY09 and 9% in FY10. DHF’s management believe that their Management Expense Ratio (MER) will remain above the industry average as a result of the ongoing costs associated with allocating resources to support growth plans and relatively higher fixed costs as a proportion of revenue (ii) management believe that they can achieve operational efficiencies by closely monitoring their rapid growth as the scale of the business increases through membership growth. We note that DHF is relatively new to the management of a rapidly growing PHI business (iii) a growing membership base and operations will give DHF the opportunity to capitalise on the benefits of economies of scale (iv) DHF has recently undertaken operational initiatives to support continued growth and to improve operational processes (v) DHF has recently reduced acquisition costs per member (based on net growth numbers) as a result of focussing marketing expenditure on younger potential members, which according to management has increased the sales conversion rate. DHF plan to continue this strategy in the foreseeable future (vi) DHF incurs relatively larger acquisition expenses on members gained through iSelect. DHF management is currently reviewing the role of the iSelect channel within its growth strategy (f) management are of the opinion that additional operating costs, which are fixed in nature, will need to be incurred to support the growth of the operations. These include administration support costs and higher rental charges associated with a potential move to a larger office premises (g) DHF expects to incur ongoing capital outlays to support growth, including the enhancement of on-line member services, website development, content management system upgrades and the enhancement of communication and information technology (IT) systems. The larger fixed asset base will result in higher depreciation and amortisation charges. This will limit the cost savings associated with gaining scale 10 As per NIB Limited’s (NIB) 2011 Full Year Results Investor Presentation dated 22 August 2011. 9 105 32 (h) actuarial projections indicate an expectation that DHF’s net underwriting margin for the period FY12 to FY14 will be similar to the 3.5% margin (adjusted for one-off events) achieved in FY11 (i) smaller funds are generally not able to capture high net margins. Having regard to all these factors, we consider a net underwriting profit margin slightly above DHF’s projection, that is, in the range of 3.75% to 4.25% of contribution income, to be appropriate for DHF. In our opinion, without the additional costs associated with rapid growth (that we are not reflecting in our maintainable earnings), DHF should be able to achieve this range of net underwriting margin. Conclusion on underwriting profit 33 Having regard to the above, we have adopted an underwriting profit (before tax) for valuation purposes of between $1.1 million to $1.3 million, calculated as follows: Underwriting profit adopted for valuation purposes Premium revenue adopted for valuation purposes Net underwriting profit margin (before tax) adopted for valuation purposes Underwriting profit (before tax) adopted for valuation purposes Low $m 30.0 3.75% 1.1 High $m 30.0 4.25% 1.3 Underwriting profit multiple 34 The selection of the appropriate underwriting profit multiple to apply is a matter of judgement but normally involves consideration of a number of factors including, but not limited to: (a) the stability and quality of earnings (b) the quality of the management and the likely continuity of management (c) the nature and size of the business (d) the spread and financial standing of customers (e) the financial structure of the company and gearing level (f) the multiples attributed by share market investors to listed companies involved in similar activities or exposed to the same broad industry sectors (g) the multiples that have been paid in recent acquisitions of businesses involved in similar activities or exposed to the same broad industry sectors (h) the future prospects of the business including the growth potential of the industry in which it is engaged, strength of competitors, barriers to entry, etc (i) the cyclical nature of the industry (j) expected changes in interest rates (k) the asset-backing of the underlying business of the company and the quality of the assets (l) the extent to which a premium for control is appropriate 10 106 (m) whether the assessment is consistent with historical and prospective earnings. 35 We discuss below specific factors taken into consideration when assessing the appropriate underwriting profit multiple range for DHF’s PHI business. Listed company multiples 36 The only security exchange listed pure-play health insurer operating in Australia is NIB Limited (NIB). NIB’s historical and forecast underwriting profit multiples are detailed below: NIB’s underwriting profit multiple(1) Shares on issue(2) (million) Share price on 31 December 2011 Market capitalisation Regulatory Surplus Capital as at 30 June 2011 Market capitalisation less Regulatory Surplus Capital $000 466,503 1.50 699,754 (111,629) 588,125 Market capitalisation (with 32.5% control premium on market value in excess of Regulatory Surplus Capital)(3) Regulatory Surplus Capital as at 30 June 2011 Market capitalisation (with control premium) less Regulatory Surplus Capital 890,895 (111,629) 779,266 Recorded underwriting profit Underwriting profit multiple Underwriting profit multiple (with 32.5% control premium) Historical FY11 $000 61,502(4) 9.6 12.7 Forecast FY12 $000 61,628(5) 9.5 12.6 Note: 1 Multiples are calculated using share price and number of shares on issue as at 31 December 2011. 2 There are no vested and exercisable options or performance rights on issue. As per NIB’s Preliminary Final Report 30 June 2011, NIB’s Board currently intends to continue to undertake the on-market buyback program of up to 10% of its issued capital at the time of commencement of the on-market buyback (29 August 2008). As at 31 December 2011, NIB had already bought back 24,288,196 shares, leaving a balance of 27,498,773 shares which NIB would like to buy-back. 3 Empirical evidence undertaken by LEA indicates that the average premium paid above the listed market price in successful takeovers in Australia ranges between 30% and 35%. However, this includes some cases with significant synergies and furthermore, in our view, this premium should not be applied to surplus assets, so we have only adjusted the excess of market value over Regulatory Surplus Capital by this factor. 4 Notwithstanding that significant non-recurring items were incurred in FY11, we have assumed that the stated underwriting result has been calculated before these significant items (that is, the underwriting result does not include significant items). 5 Based on two analysts’ revenue forecasts (Bloomberg) and assuming a net underwriting profit margin of 5.5% (which is the mid-point of NIB’s target margin and consistent with the margin achieved in FY11). 11 107 37 Having regard to the above, we note the following: (a) NIB is a reasonably liquid stock11 (b) NIB’s underwriting profit multiple on any given day (as opposed to over a period of time) is likely to be less volatile than an illiquid stock (c) NIB is substantially larger than DHF, has greater geographical reach and a widely known brand name (as a result of a considerably larger ongoing marketing campaign) (d) the membership base of NIB is not restricted and includes varying occupational demographics. In comparison, DHF’s membership base consists of medical practitioners and associated persons, such as their eligible relatives. 38 We have also considered estimating underwriting profit multiples for Insurance Australia Group (IAG) and QBE Limited (QBE), which are listed insurers operating in the broader industry. However, we concluded that the differences are so substantial as to make the calculated multiples not relevant for assessing the appropriate multiple for DHF. 39 In particular, we note that: (a) QBE and IAG are substantially larger than DHF and more diversified both sectorally and geographically (b) general insurers are exposed to the risk of substantial claims expenses relating to catastrophic events. In recent years, general insurers operating in Australia have been adversely affected by the floods in Queensland and wet weather on the east coast of Australia and the earthquakes in New Zealand (c) in FY11 IAG was significantly affected by net natural peril claim costs and greater than originally anticipated bodily injury claim inflation in the United Kingdom (d) in FY11 QBE also incurred substantial catastrophe claims, including severe tornados in the United States and Cyclone Yasi, as well as a number of large individual risk claims (e) PHI providers are subject to a greater level of regulation than general insurance12 (f) the margins of general insurers are generally larger than private health insurers. The target underwriting margin for FY12 for IAG is between 10% and 12% and for QBE is 14% (g) the assets backing policy liabilities for general insurers (and hence the investment income on those assets) are much larger, compared to premium income, than for health insurers, due to the longer term nature of the liabilities13. 11 Volume traded in 12 months to 31 December 2011 was some 43 million shares, representing some 9.1% of the time weighted average number of shares on issue of the year. 12 Tighter governance exists in relation to types of product offerings and inclusions and pricing. 13 DHF does have material amounts of premiums paid in advance (e.g. annual premium policies) on which it earns investment income, however these amounts are still a relatively small proportion of premium compared to the policy liabilities for some classes of general insurance business. 12 108 NIB’s historic underwriting profit multiples 40 Given that NIB is the only comparable listed company and the underwriting profit multiple may be affected by recent short-term economic volatility, we have also had regard to NIB’s underwriting profit multiple over time. The following table sets out the historic underwriting profit multiple for NIB from FY09 to FY11: NIB – historic underwriting profit multiple Year to 30 Jun 09 Reported underwriting profit ($m) 40.2 Weighted average number of shares (millions)(1) 506.7 Underwriting profit per share ($/share) 0.08 VWAP(2) (1 month following earnings announcement) Less Regulatory Surplus Capital per share(3) VWAP less Regulatory Surplus Capital per share Historical underwriting profit multiple Historical underwriting profit multiple (including a 32.5% control premium on value over surplus) Year to 31 Dec 09 49.9 Year to 30 Jun 10 47.1 Year to 31 Dec 10 57.4 Year to 30 Jun 11 61.5 495.7 0.10 495.8 0.09 493.7 0.12 478.5 0.13 1.09 1.27 1.24 1.39 1.43 (0.25) (0.25) (0.27) (0.29) (0.24) 0.84 1.02 0.97 1.10 1.19 10.5 10.1 10.2 9.5 9.3 14.0 13.3 13.5 12.6 12.3 Note: 1 Based on the diluted weighted average number of shares as per NIB’s Annual Reports and the calculated weighted average number of shares for the relevant year. 2 Volume weighted average price. 3 Being the Regulatory Surplus Capital as at the end of financial year divided by the shares outstanding at the end of the respective period. Totals may not add due to rounding. 41 With regard to the above, we note the following: (a) NIB’s underwriting profit per share has increased steadily and the share price performance has improved over the period (b) we note that the legislation to increase the MLS threshold was enacted in late calendar year 2008 and had an adverse impact on the PHI industry. These adverse impacts were expected to impact performance in the short to medium term (c) NIB’s historical underwriting profit multiple has decreased over the period. We note that the share price is typically determined based on forecast earnings and therefore a fall in the multiple over time may be as a result of reduced growth prospects for the company. 13 109 Transaction evidence 42 Recent transactions in the PHI sector are set out below: Transaction multiples Announcement date Target 28 Aug 08 Manchester Unity 14 Jul 08 Australian Health Management Group 14 Dec 07 MBF 5 Jul 10 IMAN International Acquirer HCF Medibank Private BUPA NIB Purchase price A$m 256 367 2,410 23 Underwriting profit multiples Consideration(1) Valuation(2) 11(3) 12 – 13 14(4) 20 na 12 – 13 17 – 20 na Note: 1 As per the consideration paid for the target. 2 As per the IER valuation. 3 The consideration includes payment for Manchester Unity’s retirement and aged care business and management fund. Since the high range value of Manchester Unity by the Independent Expert is similar to the consideration, we have adopted the high range valuation of the PHI business ($124 million) as a proxy for the consideration paid for the PHI business. The historic (FY08) net underwriting profit was some $11 million. 4 Based on the consideration of $367 million less $145 million of Regulatory Surplus Capital and value of Total Health’s future incremental contribution derived from non-members. AHM’s historic (FY08) net underwriting profit was some $15 million. na – not available. 43 With respect of the above we note that: (a) Manchester Unity’s and Australian Health Management Group’s (AHM) PHI businesses were substantially larger than DHF’s PHI business, and were not restricted health access funds (b) MBF was the second largest private health insurer in Australia prior to its acquisition and Medibank Private was the largest. The acquisition of MBF provided BUPA Australia with a larger national membership base than Medibank Private. In addition, the MBF transaction was announced in December 2007, which was prior to a significant deterioration in financial market conditions. Since then, many aspects of financial market conditions have not recovered to pre global financial crisis (GFC) levels (c) the acquisitions of both Manchester Unity and AHM were conducted during subdued economic conditions, as opposed to pre-GFC. In addition, there was uncertainty at that time with regards to increases in the threshold taxable income for the MLS (d) the underwriting profit multiples calculated based on consideration paid are historic underwriting profit multiples as historic results are adopted. Historic multiples are higher than forecast multiples in an environment where earnings are growing. When determining the appropriate capitalisation rate for valuation purposes, more regard is typically had to forecast earnings (e) all transactions involve PHI businesses acquiring other PHI businesses. The implied multiples may reflect more significant synergies available to an acquiring private health insurer. 14 110 Conclusion on appropriate underwriting profit multiple 44 Having considered the factors set out above, we are of the view that: 45 (a) the smaller size, weaker brand value and restricted access nature of DHF reduce the applicable multiple, compared to both the broadly comparable transactions and NIB (b) a 100% controlling basis would tend to increase the applicable multiple compared to the minority interest (listed price) basis for NIB (c) while DHF have achieved substantial growth in both income and underwriting profit over recent years, continuation of this growth is not assured. On balance, we are of the view that an underwriting profit multiple range of 11 to 12 times (on a controlling interest basis) is appropriate to value DHF’s PHI business. Value of DHF’s health insurance business 46 Based on the above, we have assessed the value of the health insurance business on a 100% controlling interest basis at $12.1 million to $15.6 million, as shown below: Value of 100% of health insurance business Underwriting profit adopted for valuation purposes Underwriting profit multiple Value of health insurance business Low $m 1.1 11.0 12.1 High $m 1.3 12.0 15.6 Regulatory Surplus Capital 47 DHF’s total assets are attributable to its health benefit fund were some $33.4 million as at 31 December 2011. We note that this allowed for Avant agreeing (subject to certain conditions) to reimburse various transaction costs associated with the Proposal in addition to the $30.0 million Scheme Consideration, although in certain circumstances, DHF may need to refund reimbursed costs to Avant. 48 The amount of Regulatory Surplus Capital adopted for valuation purposes is $16.3 million, calculated as follows: DHF’s Regulatory Surplus Capital Total health fund assets(1) Capital Adequacy Requirement(2) Regulatory Surplus Capital $m 33.4 (17.1) 16.3 Note: 1 Sourced from DHF’s balance sheet as at 31 December 2011. 2 Including financial liabilities of $10.8 million and based on DHF’s balance sheet as at 31 December 2011. 15 111 Value of 100% of DHF 49 Based on the above we have assessed the value of DHF on a 100% controlling interest basis at $28.4 million to $31.9 million, as shown below: Value of 100% of DHF Low $m 12.1 16.3 28.4 Value of health insurance business Regulatory Surplus Capital(1) Value of 100% of DHF High $m 15.6 16.3 31.9 Note: 1 Being the Regulatory Surplus Capital at 31 December 2011. Valuation cross-checks 50 We have also considered the following valuation approaches to cross-check our overall assessed value: Methods used to cross-check valuation range Method Implied underwriting profit multiple based on Economic Surplus Capital Implied price to net tangible operating assets (NTOA) multiple Implied value per member Reason • Private health insurers generally hold an additional capital buffer in excess of the regulatory minimum capital adequacy requirement. • Common industry practice in PHI sector • Common industry practice in PHI sector • Number of members is the primary driver of premium income and hence value Implied underwriting profit multiple based on Economic Surplus Capital 51 Although it is common practice for insurance companies to hold an additional capital buffer in excess of the regulatory minimum capital adequacy requirement, the minimum buffers that would be maintained by health insurers are not generally publicly available. 52 However, based on our experience and our discussion with DHF’s management we consider that a reasonable estimate for the additional capital buffer that the private health insurers would hold is equivalent to around 50% of their capital adequacy requirement (though the larger, more diversified insurers may hold a lower percentage excess). Economic surplus capital – DHF Capital adequacy requirement(1) Additional capital buffer(2) Target prudential capital Total health fund assets(1) Economic Surplus Capital [a] [b] [c] = [a] + [b] [d] [e] = [d] – [c] $m 17.1 8.6 25.7 33.4 7.7 16 112 Note: 1 Including financial liabilities of $10.8 million and based on DHF’s balance sheet as at 31 December 2011. 2 Being 50% of $17.1 million. Totals may not add due to rounding. 53 Based on the Economic Surplus Capital of $7.7 million, instead of the Regulatory Surplus Capital of $16.3 million, the underwriting profit multiple implied by our overall valuation of DHF is between 18.8 (times) and 18.6 (times), calculated as follows: Implied underwriting profit multiple based on target prudential capital – DHF Low $m Assessed value of DHF 28.4 Less Economic Surplus Capital (7.7) Value of PHI business including target prudential capital 20.7 Assessed maintainable underwriting profit 1.1 Implied underwriting profit multiple based on target prudential capital 18.8 High $m 31.9 (7.7) 24.2 1.3 18.6 54 The above implied underwriting profit multiples are higher than the underwriting profit multiples of between 11 (times) and 12 (times) adopted under our primary valuation approach. This is because these implied underwriting profit multiples are based on the implied value of the core PHI including the Target Prudential Capital, which is comprised of the regulatory minimum capital adequacy requirement and an additional capital buffer, whereas the underwriting profit multiples adopted under our primary valuation approach are consistent with the value of the core PHI business including only the minimum regulatory capital adequacy requirement. That is, the difference between the two measures of underwriting profit multiples is driven by the additional capital buffer. 55 For comparative purposes, we have calculated the current underwriting profit multiple based on notional target prudential capital for NIB, as follows: Implied underwriting profit multiple based on target prudential capital – NIB Portfolio basis $m Market capitalisation of NIB (as at 31 December 2011) 699.8 Less Regulatory Surplus Capital (111.6) Value of PHI business 588.2 Add additional capital buffer(1) 160.1 Value of PHI business including additional capital buffer 748.3 Forecast underwriting profit(2) 61.6 Implied underwriting profit multiple based on target prudential capital 12.1 Controlling basis $m 890.9 (111.6) 779.3 160.1 939.4 61.6 15.3 Note: 1 NIB’s additional capital buffer is calculated as 50% of the capital adequacy requirement as at 30 June 2011. 2 Based on two analysts’ revenue forecasts (Bloomberg) and assuming a net underwriting profit margin of 5.5% (which is the mid-point of NIB’s target margin and consistent with the margin achieved in FY11). Totals may not add due to rounding. 17 113 56 We have also calculated the relevant underwriting profit multiple based on target prudential capital which are implied by the transactions involving the target companies Manchester Unity, AHM and MBF, as follows: Implied underwriting profit multiple based on target prudential capital – transactions(1) Low x Manchester Unity 16.2 AHM 18.4 MBF 23.3 High x 16.9 18.6 25.8 Note: 1 Based on the Independent Expert’s assessed value of the PHI business. 57 The underwriting profit multiple based on target prudential capital multiple implied by our valuation of DHF is broadly consistent with the relevant multiple implied by NIB (on a controlling basis) and the Manchester Unity transaction, and is equal to the multiple implied by the AHM transaction. While the relevant multiple implied by our valuation of DHF is less than that implied by the MBF transaction, in our view, this is appropriate as the MBF transaction was announced prior to the introduction of the proposed changes in the MLS taxable income thresholds and the subdued post-GFC financial markets. Consequently, we have concluded that the underwriting profit multiple based on target prudential capital multiple implied by our valuation range for DHF is reasonable and appropriate. Implied NTOA multiple 58 The NTOA multiple14 implied by our valuation of DHF is set out below: Implied NTOA multiple – DHF Value of DHF including Regulatory Surplus Capital Value of DHF excluding Regulatory Surplus Capital NTOA(1) including Regulatory Surplus Capital NTOA(1) excluding Regulatory Surplus Capital NTOA multiple – including Regulatory Surplus Capital NTOA multiple – excluding Regulatory Surplus Capital Low $m 28.4 12.1 High $m 31.9 15.6 22.7 6.2 22.7 6.2 1.3 2.0 1.4 2.5 Note: 1 As per DHF’s balance sheet as at 31 December 2011. Due to the short-tail nature of DHF’s PHI operations, we have included cash as an operating asset. 59 For comparative purposes, we have calculated the NTOA multiples implied by the trading price of NIB (including a control premium of 32.5% excluding surplus), as follows: 14 Being enterprise value divided by NTOA. 18 114 Implied NTOA multiple – trading companies(1) DHF NIB NTOA multiple including Regulatory excluding Regulatory Surplus Capital Surplus Capital x x 1.3 – 1.4 2.0 – 2.5 2.4 3.0 Note: 1 Enterprise Value (EV) is calculated as at 31 December 2011. NTOAs are as at 30 June 2011 for NIB and 31 December 2011 for DHF. Due to the short-tail nature of PHI company’s operations, we have included cash as an operating asset. 60 The NTOA multiple implied by our valuation of DHF is less than that of NIB. However, NIB is significantly larger and more diversified than DHF. Also DHF’s surplus capital as a proportion of assets is larger than the industry average which affects the multiple including surplus capital. 61 We have also calculated the NTOA multiples implied by the transactions involving the target companies Manchester Unity , AHM and MBF, which are set out below: Implied NTOA multiple – transactions Manchester Unity(1) AHM(2) MBF(3) NTOA multiple including Regulatory excluding Regulatory Surplus Capital Surplus Capital Low High Low High x x x x 1.8 2.0 2.6 3.2 1.5 1.7 2.7 3.3 2.0 2.3 4.0 5.0 Note: 1 Based on the Independent Expert’s assessed value of Manchester Unity, excluding the retirement and aged care business, and on the net operating tangible assets as per the balance sheet as at 30 June 2008 (net of intangibles and deferred acquisition costs). 2 Based on the Independent Expert’s assessed value of AHM’s PHI business and NTOA as per the balance sheet as at 30 June 2008 (including the impact of a property transaction and net of deferred acquisition costs). 3 Based on the Independent Expert’s assessed value of MBF’s PHI business, and NTOA as per the balance sheet as at 31 December 2007. 62 The NTOA multiple implied by our valuation of DHF is less than that implied by all the broadly comparable transactions. As noted previously, the MBF transaction was announced prior to the changes in the MLS threshold and prior to the GFC, hence we would expect the NTOA multiple for DHF to be less than that implied by the MBF transaction. The higher NTOA multiples implied by the transactions involving Manchester Unity and AHM, may reflect more significant synergies available to an acquiring private health insurer, as opposed to an acquirer operating in a different sector. Further, the operations of the target companies are substantially larger than DHF. In addition, DHF had a higher than average level of regulatory surplus capital so it is unsurprising that it would have a relatively low NTOA multiple on a basis including surplus. Consequently, we have concluded that the NTOA multiple implied by our valuation range for DHF is reasonable and appropriate. 19 115 Value per member 63 The value per member implied by our valuation of DHF’s PHI business is set out below: Value per member – DHF Assessed value of DHF (includes Regulatory Surplus Capital) ($m) Value of DHF’s health insurance business (excludes Regulatory Surplus Capital) ($m) Number of members(1) Low 28.4 High 31.9 12.1 7,838 15.6 7,838 Value per member – including Regulatory Surplus Capital ($) Value per member – excluding Regulatory Surplus Capital ($) 3,623 1,544 4,070 1,990 Note: 1 Based on the number of members as at 31 December 2011. 64 For comparative purposes, we have calculated the value per member implied by the value of NIB (including a control premium of 32.5% on value in excess of surplus capital for the high case) and the value per member implied by the transactions involving the target companies Manchester Unity, AHM and MBF, as follows: Value per member – trading companies and transactions Value per member including Regulatory excluding Regulatory Surplus Capital Surplus Capital Low High Low High $ $ $ $ 3,623 4,070 1,544 1,990 DHF NIB(1) Manchester Unity(2)(3) AHM(2) MBF(2) 1,594 1,783 2,003 2,023 2,029 2,035 2,265 2,399 1,339 1,240 1,101 1,315 1,775 1,497 1,363 1,658 Note: 1 EV is calculated as at 31 December 2011. Number of members are as at 30 September 2011. 2 Based on the value of the PHI business assessed by the Independent Expert. 3 Excludes the value of the retirement and aged care business, which is assessed by the Independent Expert to be some $52.3 million. Rounding errors may exist. 65 The value per member multiple implied by our valuation of DHF is greater than the relevant multiple implied by NIB (even on a controlling basis) and that implied by the Manchester Unity, AHM and MBF transactions. With regard to this we note: (a) value per member can be affected by the type of insurance policies15 and the level of cover subscribed by members (b) the premiums per member and also the net underwriting profit per member achieved by private health insurers has increased in recent years. NIB’s value per member excluding Regulatory Surplus Capital (on a controlling basis) was calculated by the Independent 15 For example, family, single, single parent family or couple. 20 116 Expert’s for Manchester Unity and AHM schemes to be some $1,300 per member at the time of the acquisitions of Manchester Unity and AHM. By comparison, it is approximately $1,700 now, an increase of some 31%. If the Manchester Unity and AHM values per member excluding Regulatory Surplus Capital implied by their transactions are scaled up by a similar percentage, their adjusted values per member ranges would be $1,622 to $1,958 (Manchester Unity) and $1,440 to $1,782 (AHM) which would be comparable with the value per member range implied by our valuation of DHF (c) in general the valuation metric excluding Regulatory Surplus Capital would be more likely to be consistent across insurers given that this valuation metric has allowed for the difference in Regulatory Surplus Capital across private health insurers. We note that DHF’s Regulatory Surplus Capital as a proportion of the total value of the business is significantly larger than that maintained by NIB and the target companies at the time of acquisition. Consequently, we have concluded that the value per member multiple implied by our valuation range for DHF is reasonable and appropriate. Evaluation of the Proposal 66 In our opinion, the Proposal is fair and reasonable and in the best interests of Scheme Members, in the absence of a current better proposal. We have formed this opinion for the following reasons. Assessment of the Scheme Fairness 67 Pursuant to RG 111 the Scheme is “fair” if the value of the scheme consideration is equal to or greater than the value of the securities the subject of the scheme. This comparison is shown below: Comparison of Scheme Consideration to value of DHF Value of Scheme Consideration Value of 100% of DHF Extent to which the Scheme Consideration exceeds (or is less than) the value of DHF 68 Low $m 30.0 28.4 High $m 30.0 31.9 Mid-point $m 30.0 30.2 1.6 (1.9) (0.2) As the Scheme Consideration is within our assessed valuation range for DHF on a 100% controlling interest basis, in our opinion, the Scheme Consideration is fair to Scheme Members when assessed based on the guidelines set out in RG 111. Other qualitative factors 69 Pursuant to RG 111, a transaction is reasonable if it is fair. Further, in our opinion, if the Scheme is “fair and reasonable” it must also be “in the best interests” of Scheme Members as a whole, in the absence of any material detriment to their position as DHF policyholders, and in the absence of a current better proposal. 21 117 70 The Appointed Actuary Report concludes that as a result of the Proposal: (i) DHF policyholders benefits should remain adequately secure if the Proposal is approved, (ii) future premium rates are unlikely to be impacted in a material manner by the proposal; and (iii) the reasonable benefit expectations of DHF policyholders are unlikely to be impacted in a materially adverse manner by the Proposal. 71 Accordingly, in our opinion, the Scheme is also “reasonable” and “in the best interests” of Scheme Members in the absence of a current better proposal. 72 In assessing whether the Scheme is reasonable and in the best interests of Scheme Members LEA, has also considered, in particular: 73 (a) the extent to which Scheme Members are being paid a share of any synergies likely to be generated pursuant to the potential transaction (b) the value of DHF to an alternative offeror and the likelihood of a higher alternative offer being made for DHF prior to the date of the Scheme meeting (c) the advantages and disadvantages of the Scheme from the perspective of DHF Members (d) other qualitative and strategic issues associated with the Scheme. These issues are discussed in detail below. Extent to which Scheme Members are being paid a share of synergies 74 As Avant is much larger than DHF but does not currently operate a health fund, there are likely to be some administrative synergies, but these will be limited in size. It is more likely given the congruence of their target markets (i.e. doctors) that there will be marketing and customer relationship synergies. These are notoriously hard to capture and hence to value. 75 The Scheme Consideration lies within our valuation range for 100% of DHF which implies that DHF Members are not receiving any significant benefit for the potential synergies available to the acquirer. Likelihood of an alternative offer 76 We have been advised by the Directors of DHF that an indicative non-binding proposal from an alternative purchaser was received subsequent to the announcement of the Scheme on 11 August 2011. 77 We have reviewed correspondence between this potential acquirer and DHF and also discussed this proposal with the DHF Board and note that: (a) the alternative purchaser proposed consideration to DHF Members of $30.0 million, which is equal to the current Avant proposal 22 118 (b) the alternative proposal had other conditions and features which caused the DHF Board to have concerns as to whether it was likely to develop into a Superior Proposal16 (c) the DHF Board had discussions with the alternative purchaser to clarify elements of their proposal and also received advice to help assess whether the alternative proposal was likely to become a Superior Proposal. 78 Discussions were ongoing until the alternative purchaser formally withdrew their indicative offer before the DHF Board reached a view as to whether the alternative purchaser’s offer was a Superior Proposal. 79 In our view, the existence of this competing proposal indicates that, were the Avant proposal to be rejected by members, it is likely there would be at least one and possibly other alternative proposals put to the DHF Board. There is, however, considerable uncertainty whether any such alternative proposals would be considered acceptable by the DHF Board and put to members, much less approved by DHF Members. 80 Accordingly, in our view, it would be a high risk strategy for DHF Members to reject the Proposal and expect it to be replaced by a higher alternative proposal (even if no weight was placed on the non-cash factors). Advantages and disadvantages of the Scheme 81 The likely advantages and disadvantages of the Proposal for DHF Members are summarised in paragraphs 19 to 21. Conclusion 82 Given the above analysis, we consider the Proposal for Avant to become a member of DHF and for all other memberships in DHF to be cancelled in return for payment of the Scheme Consideration by Avant under the Scheme is fair and reasonable and in the best interests of Scheme Members in the absence of a current better proposal. General 83 In preparing this report we have considered the interests of Scheme Members as a whole. Accordingly, this report only contains general financial advice and does not consider the personal objectives, financial situations or requirements of individual members. 84 The impact of approving the Scheme on the tax position of Scheme Members may vary with the individual circumstances of each member. Scheme Members should read Appendix 10 of the Scheme Booklet (Taxation Advice Letter) and consult their own professional advisers if in doubt as to the taxation consequences of the Scheme. 16 As defined in the Agreement. 23 119 85 The ultimate decision whether to approve the Scheme should be based on each DHF Members’ assessment of their own circumstances. If DHF Members are in doubt about the action they should take in relation to the Proposal or matters dealt with in this report, Members should seek independent professional advice. For our full opinion on the Proposal and the reasoning behind our opinion, we recommend that DHF Members read our full report. Yours faithfully Martin Hall Authorised Representative Tony Coleman Authorised Representative 24 120 Appendix A Financial Services Guide Lonergan Edwards & Associates Limited 1 Lonergan Edwards & Associates Limited (ABN 53 095 445 560) (LEA) is a specialist valuation firm which provides valuation advice, valuation reports and independent expert’s reports (IER) in relation to takeovers and mergers, commercial litigation, tax and stamp duty matters, assessments of economic loss, commercial and regulatory disputes. 2 LEA holds Australian Financial Services Licence No. 246532. Financial Services Guide 3 The Corporations Act authorises LEA to provide this Financial Services Guide (FSG) in connection with its preparation of an IER to accompany the Scheme Booklet to be sent to DHF members in connection with the Scheme. 4 This FSG is designed to assist retail clients in their use of any general financial product advice contained in the IER. This FSG contains information about LEA generally, the financial services we are licensed to provide, the remuneration we may receive in connection with the preparation of the IER, and if complaints against us ever arise how they will be dealt with. Financial services we are licensed to provide 5 Our Australian Financial Services Licence allows us to provide a broad range of services to retail and wholesale clients, including providing financial product advice in relation to various financial products such as securities, derivatives, interests in managed investment schemes, superannuation products, debentures, stocks and bonds. General financial product advice 6 The IER contains only general financial product advice. It was prepared without taking into account your personal objectives, financial situation or needs. 7 You should consider your own objectives, financial situation and needs when assessing the suitability of the IER to your situation. You may wish to obtain personal financial product advice from the holder of an Australian Financial Services Licence to assist you in this assessment. Fees, commissions and other benefits we may receive 8 LEA charges fees to produce reports, including this IER. These fees are negotiated and agreed with the entity who engages LEA to provide a report. Fees are charged on an hourly basis or as a fixed amount depending on the terms of the agreement with the entity who engages us. In the preparation of this IER, LEA is entitled to receive a fee of approximately $175,000 plus GST. 9 Neither LEA nor its directors and officers receives any commissions or other benefits, except for the fees for services referred to above. 25 121 Appendix A 10 All of our employees receive a salary. Our employees are eligible for bonuses based on overall performance and the firm’s profitability, and do not receive any commissions or other benefits arising directly from services provided to our clients. The remuneration paid to our directors reflects their individual contribution to the company and covers all aspects of performance. Our directors do not receive any commissions or other benefits arising directly from services provided to our clients. 11 We do not pay commissions or provide other benefits to other parties for referring prospective clients to us. Complaints 12 If you have a complaint, please raise it with us first, using the contact details listed below. We will endeavour to satisfactorily resolve your complaint in a timely manner. 13 If we are not able to resolve your complaint to your satisfaction within 45 days of your written notification, you are entitled to have your matter referred to the Financial Ombudsman Services Limited (FOS), an external complaints resolution service. You will not be charged for using the FOS service. Contact details 14 LEA can be contacted by sending a letter to the following address: Level 27, 363 George Street Sydney NSW 2000 (or GPO Box 1640, Sydney NSW 2001) 26 122 Appendix B Qualifications, declarations and consents Qualifications 1 LEA is a licensed investment adviser under the Corporations Act. LEA’s authorised representatives have extensive experience in the field of corporate finance, particularly in relation to the valuation of shares and businesses and have prepared more than 100 independent expert’s reports to shareholders. 2 This report was prepared by Mr Martin Hall and Mr Tony Coleman, who are each authorised representatives of LEA. Mr Hall and Mr Coleman both have over 25 years experience in the provision of valuation advice. Declarations 3 This report has been prepared at the request of the Directors of DHF to accompany the Scheme Booklet to be sent to DHF Members. It is not intended that this report should serve any purpose other than as an expression of our opinion as to whether or not the Scheme is fair and reasonable and in the best interests of DHF Members. Interests 4 At the date of this report, neither LEA, Mr Hall nor Mr Coleman have any interest in the outcome of the Proposal. With the exception of the fee shown in Appendix A, LEA will not receive any other benefits, either directly or indirectly, for or in connection with the preparation of this report. 5 LEA has had no prior business or professional relationship with DHF or Avant prior to the preparation of this report. Indemnification 6 As a condition of LEA’s agreement to prepare this report, DHF agrees to indemnify LEA in relation to any claim arising from or in connection with its reliance on information or documentation provided by or on behalf of DHF which is false or misleading or omits material particulars or arising from any failure to supply relevant documents or information. Consents 7 LEA consents to the inclusion of this report in the form and context in which it is included in the Scheme Booklet. 27 123 Appendix C Glossary Term ACCC Agreement AHM AHSA AIFRS AMA ASIC ASX Avant Avant Mutual CAGR Corporations Act Corporations Regulations DCF Defence Deloitte Demutualisation DHF DHF Member DoHA EBIT EBITA EBITDA EGM EGM Resolutions EV FIRB FOS FSG FYxx GFC GMHBA GST HAMBS HIRMAA IAG IER IT LEA MER MLS NIB NPV Meaning Australian Competition and Consumer Commission Implementation Deed of 11 August 2011 between Avant and DHF, as amended Australian Health Management Group Australian Health Services Alliance Australian equivalents to International Financial Reporting Standards Australian Medical Association Australian Securities & Investments Commission Australian Securities Exchange Avant Group Holdings Limited, a wholly owned subsidiary of Avant Mutual Avant Mutual Group Limited Compound annual growth rate Corporations Act 2001 (Cth) Corporations Regulations 2001 Discounted cash flow Defence Health Ltd Deloitte Touche Tohmatsu The conversion of DHF from a mutual company (a company limited by guarantee) to a company with shareholders (company limited by shares) The Doctors’ Health Fund Limited Each person (other than Avant) registered as a member in DHF’s register in accordance with the DHF Constitution and the Fund Rules. A DHF Member does not include a person who only holds a travel insurance policy underwritten by QBE Insurance (Australia) Limited Australian Government Department of Health and Ageing Earnings before interest and tax Earnings before interest, tax and amortisation Earnings before interest, tax depreciation and amortisation Extraordinary general meeting convened under the Constitution of DHF Amendments to the Constitution of DHF required for the Proposal to proceed Enterprise Value Foreign Investment Review Board Financial Ombudsman Services Limited Financial Services Guide Financial year to 30 June 20xx Global financial crisis GMHBA Ltd Goods and services tax Hospital and Medical Benefits Systems Health Insurance Restricted Membership Association of Australia Insurance Australia Group Independent expert’s report Information technology Lonergan Edwards & Associates Limited Management expense ratio Medicare Levy Surcharge NIB Limited Net present value 28 124 Appendix C Term NTA NTOA PBT PE PHIAC PHI PHI Act Proposal QBE RETF RG 111 Scheme Scheme Consideration Scheme Meeting Scheme Member Taxation Advice Letter Teachers VWAP Meaning Net tangible assets Net tangible operating assets Profit before tax Price earnings Private Health Insurance Administrative Council Private health insurance Private Health Insurance Act 2007 Avant to become a member of DHF and all other memberships in DHF to be cancelled for a total consideration of $30.0 million QBE Limited Risk Equalisation Trust Fund Regulatory Guide 111 – Content of expert reports Scheme of arrangement between DHF and its Members $30.0 million payment by Avant allocated to Scheme Members in accordance with the Allocation Rules Court to be convened under Section 411(i) of the Corporations Act to consider the Scheme A DHF Member as at the Scheme Record Time or a Prescribed Member (as defined in the Scheme Booklet). Letter from PricewaterhouseCoopers attached as Appendix 10 of the Scheme Booklet Teachers Federation Health Ltd Volume weighted average price 29 125 Appendix 8 Appointed Actuary’s Report KPMG Actuarial Pty Ltd Australian Financial Services Licence No. 392050 10 Shelley Street Sydney NSW 2000 ABN: 91 144 686 046 Telephone: +61 2 9335 7000 Facsimile: +61 2 9335 7001 DX: 1056 Sydney www.kpmg.com.au PO Box H67 Australia Square NSW 1215 Australia 31 January 2012 KPMG Actuarial Pty Ltd Australian Financial Services Licence No. 392050 10 Shelley Street Sydney NSW 2000 The Board of Directors PO Box H67 Australia Square NSW 1215 The Doctors’ Health Fund Limited Australia PO Box 1400 31 January 2012 CROWS NEST 2065 ABN: 91 144 686 046 Telephone: +61 2 9335 7000 Facsimile: +61 2 9335 7001 DX: 1056 Sydney www.kpmg.com.au Dear Directors The Board of Directors APPOINTED ACTUARY’S REPORT AND FINANCIAL SERVICES GUIDE The Doctors’ Health Fund Limited PO Box 1400 CROWS NEST 2065 1 Introduction Dear Directors The DHF Board has resolved to unanimously recommend that, in the absence of a Superior Proposal, DHF Members the Resolutions. TheGUIDE DHF Board has APPOINTED ACTUARY’S REPORT vote AND for FINANCIAL SERVICES reached this view after carefully considering the Independent Expert’s Report and the arguments for and against the Proposal. 1 Introduction The purpose of this report is to review the impact of the Proposal on the interests of DHF Members, including the basis upon which the financial benefit arising from the The DHF Board has resolved to unanimously recommend that, in the absence of a Proposal will be distributed amongst Scheme Members. Superior Proposal, DHF Members vote for the Resolutions. The DHF Board has reached this view after carefully considering Independent Expert’s Report and the I am a Fellow of the Institute of Actuaries of the Australia. My working career of 34 years arguments and against the Proposal. includes 22foryears as a consulting actuary and 15 years of actuarial practice within private health insurance. I am a partner of KPMG and an Executive of KPMG Actuarial The purpose of this report is to review the impact of the Proposal on the interests of Pty Ltd. Currently I am the Appointed Actuary of DHF and have been so since October DHF Members, including the basis upon which the financial benefit arising from the 2005. Proposal will be distributed amongst Scheme Members. I am a Fellow of the Institute of Actuaries of Australia. My working career of 34 years includes 22 years as a consulting actuary and 15 years of actuarial practice within private health insurance. I am a partner of KPMG and an Executive of KPMG Actuarial Pty Ltd. Currently I am the Appointed Actuary of DHF and have been so since October 2005. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. 126 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG 2 Disclosures While I am not a DHF Member, and therefore have no right to any Entitlement, in my capacity as Appointed Actuary to DHF I will earn consulting fees from providing this report and other advice pertaining to the Proposal. KPMG Financial Advisory Services (Australia) Pty Ltd (formerly known as KPMG Corporate Finance (Aust) Pty Ltd) has provided corporate advisory services to Avant in regards to various aspects of the Proposal and to date has earned fees on a time cost basis. A fixed success fee of $100,000 is payable to KPMG Corporate Finance (Aust) Pty Ltd on completion of the transaction. KPMG TS Pty Limited (formerly KPMG Transaction Services (Australia) Pty Limited) provided transaction services to DHF and earned fees on a time cost basis of $30,000. Jefferson Gibbs a partner of KPMG and an Executive of KPMG Actuarial Pty Ltd became the Appointed Actuary of Avant Insurance Limited effective 1 November 2011 and the Appointed Actuary of Professional Insurance Australia Pty Ltd effective 1 January 2012. KPMG Actuarial Pty Ltd will earn consulting fees from these engagements. KPMG’s Financial Services Guide is attached to this Report. This Report provides general advice as it does not consider the individual needs of Policy holders. 3 Definitions Terms appearing in this report which are defined in the Scheme Booklet have the same meaning as that indicated in the Scheme Booklet. 4 Overview of the Proposal An overview of the Proposal is contained in Section 2 of the Scheme Booklet. 5 Scope of Report and Overall Basis of Opinion As the Appointed Actuary of DHF, I have been engaged to recommend an allocation basis to the DHF Board and to comment on the fairness and reasonableness of the Allocation Rules established by the DHF Board which set out the basis upon which the financial benefit arising from the Proposal will be distributed amongst Scheme Members. My opinion will be made with regard to: Section 126-42(5) of the Private Health Insurance Act; PHIAC’s requirements for an Application for conversion to for profit status; and The Allocation Rules established by the DHF Board. 2 127 Also, I have been engaged to provide an opinion on the impact of the Proposal on DHF Policy holders in respect of the following areas: Whether the policy benefits would remain adequately secure should the Proposal proceed; Whether future premium rates are likely to be affected by the Proposal; and Whether the Proposal, if approved and implemented, will have an adverse impact on the reasonable benefit expectations of the Policy holders under the policies issued by DHF. The opinions provided in this report rely in part on Avant’s current intentions and certain commitments given by Avant in relation to the continuation of the DHF business and any changes to the DHF business. Section 10.5 of the Scheme Booklet states that Avant’s stated current intentions may change. Accordingly, the opinions contained in this report are subject to and conditional upon Avant’s stated current intentions and commitments, as previously provided and detailed in Section 10 of the Scheme Booklet. 6 Data To assist in my assessment of the key areas described above, I have relied upon the data provided to me. Key sources of data include: The Scheme Booklet. The Implementation Deed. Membership data (de-identified) and financial information from DHF. Avant’s 2011 Financial Year statements. 7 Allocation Rules 7.1 Introduction The allocation basis upon which the financial benefit arising from the Proposal will be distributed amongst Scheme Members, as determined by the Board, is set out in the Allocation Rules (Appendix 4 of the Scheme Booklet). Prior to the Board’s adoption of the Allocation Rules, I raised with the Board a number of considerations which could influence the determination of an allocation basis including: Who should be eligible to participate? What rights, if any, are being forfeited? What contribution has been made to retained profits by each individual or group? Is the method easy to understand? 3 128 Can the allocation basis be readily determined? Is the allocation basis acceptable to those involved? Are there any relevant precedents? The Board of DHF reviewed these considerations in establishing a set of allocation principles. Once the allocation principles were established by the Board, I used these principles to develop potential allocation bases. From the potential bases, I recommended an allocation basis to the Board and the Board accepted this basis. 7.2 Calculation Date A key component of the Allocation Rules is the Calculation Date. To be able to advise each DHF Member of their Initial Entitlement in the letter sent with the Scheme Booklet requires the Initial Entitlement to be calculated prior to the date the Scheme Booklet is sent. The Calculation Date has been selected as the latest practical time to collect all the data necessary to determine Initial Entitlements. Under the Allocation Rules, the length of time a DHF Member had a Policy and the length of time a DHF Member had hospital and/or extras cover (“tenure”) is assessed from the date the DHF Member’s Policy started, which is called the Join Date in the Allocation Rules. If the DHF Member’s Join Date is before the Calculation Date, tenure is assessed from the DHF Member’s Join Date to the Calculation Date, with any period during which the DHF Member’s Policy was suspended excluded. If the DHF Member’s Policy Join Date is after the Calculation Date, and the DHF Member’s policy has not been suspended prior to the Scheme Record Time, the DHF Member’s tenure is deemed to be one year. 7.3 Assessment of Allocation Rules against allocation principles I have assessed the Allocation Rules against the nine allocation principles established by the Board. I believe the allocation principles represent a fair and reasonable basis upon which to assess the Allocation Rules. 1. Company Members (as Contributing Members) should be rewarded Only Scheme Members at the Scheme Record Time will be rewarded. 2. The rights of the Company Members being given up are not considered to be significant to the overall financial benefit. The Allocation Rules reward not only membership rights, but also loyalty and the notion of contribution to the value of DHF. All DHF Members have access to an allocation by virtue of their membership and membership rights being given up. However the size of the allocation is based on the notion of contribution to the value of DHF rather than the membership rights being given up. 4 129 3. The financial benefit can be considered to be in the nature of a windfall gain. The Allocation Rules recognise this and use other principles to guide the allocation rather than determine it precisely. 4. The allocation should take into consideration the contribution to value, but should not be driven by it. In considering the contribution to value: The Allocation Rules should take into consideration the member’s duration of membership on various levels of insurance cover as a Contributing Member. In determining the various levels of insurance cover, consideration should be given to the Fund’s Hospital Cover compared to Extras Cover. Ideally, and data permitting, the membership tenure should extend back to the formation of the DHF health benefits fund in 1977. It should be considered that new members are able to join the health benefits fund after the Calculation Date and up to the Scheme Record Time. I have considered the contribution to value in identifying DHF’s net asset balance at the end of each year to 30 June 2011. However there is insufficient historical data to identify the contribution to value by each level of insurance cover. The Allocation Rules give regard to each Scheme Member’s tenure. The period of tenure is then classified according to the type of Policy held (Family Policy or Single Policy) and the type of cover (Hospital Cover and/or Extras Cover) provided under the Policy. Other than in some respects which are not considered material, relevant data from the establishment of the DHF health benefits fund in 1977 is capable of verification and is of sufficient quality for the purposes of the recommended allocation basis. DHF Members joining after the Calculation Date and not suspending their Policy before the Scheme Record Time get an allocation equivalent to one year’s tenure based on their Policy type and cover on their Join Date. While there is some risk that DHF Members joining after the Calculation Date may select their Policy type and/or cover to maximise their entitlement, the financial incentive is small, and I have assessed the risk of this occurring as very low. In addition, DHF Members joining after the Calculation Date and suspending their Policy before the Scheme Record Time do not get an allocation, reducing the risk of DHF Members joining solely to take advantage of the allocation. 5. The allocation basis should recognise that the contribution to value cannot be accurately determined. The recommended Allocation Rules reflect the notion of both historical contribution to value and expected future contribution, but also recognise that this can only be 5 130 determined approximately and so also consider the desirability of simplicity and industry precedents. 6. The allocation basis should be as simple as practical given the above considerations and based on data that can be verified by the organisation. While the Allocation Rules are slightly more complex than some alternative allocations considered, the basis is relatively straight forward and able to be explained in practical terms. Other than in some respects which are not considered material, the data adopted is capable of verification. 7. The allocation basis should have a mechanism for dealing with issues that may take time to be resolved. We note that prior demutualisations in the private health insurance industry have allowed for an amount to be set aside as a “Residual Amount” held over from the initial allocation to deal with disputes. The Board ask that you form a view in relation to the value that should be assigned to a Residual Amount. A Residual Amount will be set aside so that in the event of a dispute the Review Committee can make good any error in the allocation provided to a Scheme Member. In addition, the Residual Amount will be used to provide an Initial Entitlement to Scheme Members who were not DHF Members at the Calculation Date. Based on my recommendation, the Residual Amount has been set by the Board to be $0.75 million. Subsequently the Residual Amount will be increased to include the aggregate amount of Initial Entitlements allocated but not paid to persons who cease to be DHF Members before the Scheme Record Time plus the amount arising from the rounding down of the Initial Unit Value to the nearest whole cent. The Residual Amount so adjusted is the Final Residual Amount. 8. The allocation rules should represent a normal view of fairness where loyalty to the organisation is recognised and valued. The Allocation Rules are based on tenure as a DHF Member which is consistent with the expectations of the Directors who have expressed this view on behalf of DHF Members. In particular: Consideration has been given to continuous Policy ownership only. For DHF Members who lapsed their Policy or had their Policy terminated and then took out another Policy with DHF (potentially with the same member identification number), any period of membership prior to the Policy lapse or Policy termination will not be counted as tenure for the purposes of the Allocation Rules. For DHF Members joining before the Calculation Date, any period during which a DHF Member’s Policy was suspended is not counted as tenure. 6 131 9. The allocation basis should take into consideration past demutualisations and should not be significantly out of step with the allocation bases that have previously been adopted, without proper reason. The Allocation Rules take into account more historical factors (both Policy type and cover) than other recent industry allocations. Also, there is no base allocation which was adopted in three of the past four demutualisations. However, there are valid reasons for these departures from allocation bases previously adopted and overall the allocation factors are not significantly out of step with the allocation bases that have been adopted previously. 7.4 Assessment of Allocation Rules against Section 126-42 of the Private Health Insurance Act Section 126-42(5) of the Private Health Insurance Act states that in respect of an application of a private health insurer to convert to for profit status, “…the Council must approve the application if: (a) the insurer has complied with subsection (2) in relation to the application, and given to the Council such further information as the Council has required under paragraph (4)(b); and (b) the Council is satisfied that the conversion scheme would not result in a financial benefit to any person who is not a policy holder of, or another person insured through, a health benefits fund conducted by the insurer; and (c) the Council is satisfied that the conversion scheme would not result in financial benefits from the scheme being distributed inequitably between such policy holders and insured persons.” The Private Health Insurance Act was considered when assessing the Allocation Rules. A financial benefit will be paid only to Scheme Members, being Policy holders (as DHF Members) and, in some exceptional cases, insured persons (as Prescribed Members). In addition, I believe the financial benefits from the Scheme will be distributed equitably among Scheme Members. While insured persons who are not Scheme Members are not rewarded directly, the Allocation Rules allow for a higher allocation to be paid in respect of policies where there is more than one person insured. Due to the principles considered above and industry precedents, I believe the Allocation Rules satisfy the requirements of Section 126-42 of the PHI Act as noted above. 7.5 Conclusion On the assessment against the allocation principles established by the Board and Section 126-42 of the PHI Act, I consider the Allocation Rules adopted by the Board represent a fair and reasonable basis upon which the financial benefit arising from the Proposal will be distributed amongst Scheme Members. 7 132 8 Impact of the Proposal on Policy holders 8.1 Introduction In a transaction of this nature, it is important for the Board to consider: whether Policy benefits would remain adequately secure should the Proposal proceed; and the reasonable benefit and premium expectations of Policy holders, and whether these expectations will be impacted in a material or adverse manner by the Proposal. The following sections consider these issues and are based on discussions with the Board and Executive of DHF, investigations performed by me in providing previous advice to the Board of DHF and material provided by Avant (as listed in Section 6 of this Report) as well as the legislative and political environment. PHIAC’s requirements for an application for conversion to for profit status include the requirement for a statement from the Appointed Actuary as to what effect the change of registration is likely to have on the premium under each policy group over the next three years. Effectively, the Private Health Insurance Act defines a policy group as all those policies referable to policy owners who live in the same state or territory of Australia (except for the Australian Capital Territory which for this purpose is considered part of New South Wales). For hospital products, DHF has two “state” prices: one for residents of New South Wales, The Australian Capital Territory, The Northern Territory and Western Australia; and one for residents of Victoria, South Australia, Tasmania and Queensland. Underlying this pricing regime are the different hospital costs by state in Australia. For general treatment products, DHF has one price, irrespective of state of residence, reflecting the more uniform cost structure for general treatment services (e.g. dental, optical, physiotherapy) across the states. For each hospital product, it is current DHF practice to apply the same percentage increase to the premium rate in each state and for the same benefit changes to be applied to a product irrespective of state. Due to various characteristics of private health insurance in Australia, including community rating, guaranteed acceptance and portability, the pricing of health insurance is complex. In determining the premium rates and benefits offered under one DHF product, consideration has to be given to the premium rates and benefits offered under all other DHF products. Consequently in assessing what effect the change of 8 133 registration is likely to have on premiums over the next three years, it is appropriate to consider all Policy holders together, as the premium rate for a particular product is not determined in isolation. Consequently for the purposes of this report, I have not given separate consideration to each policy group as, notwithstanding the two state pricing regime, DHF manages its business as one policy group. Nor have I given separate consideration to each product, as the price of each product is related implicitly to the price of each other product. 8.2 Financial projections To provide advice to the Board of DHF on the potential financial impact of the Proposal, and to meet PHIAC’s requirements for an application for conversion to for profit status, I have performed a number of projections (to June 2015) based on a range of assumptions about future experience, including the alternate assumptions that: the Proposal proceeds, and the Proposal does not proceed. Generally the method and assumptions that form the basis of the financial projections are consistent with those adopted in previous advice to the Board of DHF. The material differences in assumptions between the two projections relate to tax, growth in policyholder numbers and management expenses. If the proposal does not proceed, DHF will continue to be a non-taxed entity. If the proposal does proceed, then future profits of DHF will be taxed at the corporate rate and the future prudential capital requirements of DHF will reduce due to DHF’s ability to recognise future tax losses in the determination of the capital adequacy reserve. If the proposal does not proceed, it has been assumed that the rate at which DHF will continue to attract policyholders will be consistent with recent experience utilising internal marketing resources, supplemented by an internet based broker service. If the proposal does proceed, then it has been assumed that future growth in policyholder numbers will be significantly higher because of the additional marketing resources, brand awareness and client base of the Avant Group to facilitate the marketing and promotion of DHF’s products. If the proposal does not proceed, it has been assumed that management expenses will continue to increase at a modest rate consistent with increases in average weekly earnings (AWE) and CPI. If the proposal does proceed, then it is assumed that future management expenses will increase at a greater rate than either AWE or CPI because of the need to staff a larger organisation to support the assumed higher growth in policyholder numbers. 9 134 In my opinion: The model is suitable, and provides output that is appropriate and sufficient for the purposes of projecting the experience of the health benefits fund. The assumptions adopted in the projection were determined in conjunction with management and are within the range of assumptions that I regard as reasonable and appropriate for projecting the future experience of the health benefits fund. While there are differences in the financial results and the financial position of the health benefits fund under the two scenarios, under both scenarios the health benefits fund continues to be in a sound financial position with surpluses emerging each year, net assets increasing each year and the prudential capital requirements being well covered. 8.3 For profit insurer As set out in the Scheme Booklet, under the Proposal DHF will demutualise and convert to a “for-profit” insurer. This will allow profits from DHF’s Health Benefits Fund to be distributed to Avant as dividends. Some may consider that over time the payment of tax and dividends may lead to a reduction in Policy holder security, an increase in premiums and/or a reduction in Policy holder benefit entitlements. I do not support this view. While my comments on each these issues are addressed in Sections 8.4 to 8.6 below, for clarity, I have summarised some salient points below. While the conversion to a for-profit insurer will result in additional cash outflows from DHF, these outflows will be significant only when the business is making profits and any dividends will be paid from after tax profits. The Proposal to become a for-profit private health insurer owned by a significantly larger organisation should provide increased business opportunities and scope for cost savings which should lead to a reduction in the management expense ratio (i.e. the ratio of management expenses to premium income). This could result in either an increase in the underwriting profit for DHF or lower increases in premiums compared to the outcomes if DHF remains as a small not-for-profit insurer. The need to pay tax will impact the profits available to fund future operations and will result in DHF’s asset base growing more slowly than it may otherwise have done had the Proposal not been implemented. However as the pricing policy of DHF does not incorporate an allowance for investment income, any reduction in investment income associated with a reduced asset base would have no bearing on insurance premiums. 10 135 All DHF Policy holders will continue to be covered by the protections provided under the Private Health Insurance Act, as Policy holders of health insurance products. In particular there is no change to the requirement for DHF to continue to meet the regulatory capital requirements at all times. If the Proposal is implemented it is anticipated that DHF, consistent with its current capital management policy will continue to hold net assets significantly in excess of the regulatory capital requirement. DHF, as part of the larger Avant group, will have access to capital reserves held by Avant Mutual which currently are substantial. Therefore the potential to access capital is a significant advantage of this Proposal. The private health insurance market is already very competitive with both for-profit and not-for-profit insurers competing in the same market with comparable products. Should Policy conditions be changed in an adverse manner, portability provides members with the opportunity to switch to another private health insurer with only minor inconvenience. To reduce benefits unnecessarily without an offsetting factor such as a reduction in premium rates would impact DHF’s competitiveness, would be contrary to the growth strategy of Avant and would risk placing DHF at a commercial disadvantage. 8.4 Whether the Policy benefits would remain adequately secure should the Proposal proceed; 8.4.1 Regulatory capital requirements Private health insurers are subject to regulatory capital requirements in excess of their policy liabilities which are designed to provide security for Policy holders under a range of adverse scenarios. The regulatory capital requirements are structured as a two-tiered system: the Solvency Standard and the Capital Adequacy Standard. The Solvency Standard is intended to ensure, as far as practicable, that at any time the financial position of a health benefits fund is such that the private health insurer will be able to meet all liabilities that are referable to the fund as those liabilities become due. The Capital Adequacy Standard is intended to ensure, as far as practicable, that there are sufficient assets in a health benefits fund to provide adequate capital for the conduct of the fund in accordance with the Private Health Insurance Act and in the interests of the policy holders of the fund. The security of Policy holders’ benefits can be assessed by evaluating the adequacy of DHF’s total capital to meet the regulatory capital standards as specified in the Private Health Insurance Act and accompanying Private Health Insurance (Health Benefits Fund Administration) Rules. 11 136 8.4.2 DHF’s Capital Management Policy While generally a larger asset base provides greater security of benefits, the exact amount necessary to secure benefits is not capable of precise measurement. In addition security cannot be provided with 100% certainty. The concept of capital management is well established within insurance industries and insurance industry practice is to adopt a capital management policy. To ensure its health benefits fund meets the regulatory capital requirements with a high probability of adequacy, DHF has a capital management policy which specifies a target range of net assets above the capital adequacy reserve. 8.4.3 Ongoing security of Policy holders’ benefits The ongoing security of Policy holders’ benefits will be protected through numerous legislative safeguards which are unaffected by this Proposal or other industry transactions. The two-tier regulatory capital system is designed to provide protection under a range of adverse circumstances, and solvency and capital adequacy information is provided to PHIAC quarterly and is subject to audit annually. In assessing the impact of the Proposal upon the security of DHF Policy holders’ benefits, I have considered DHF’s projected solvency and capital adequacy position over a three year period under a range of hypothetical scenarios including: the Proposal is implemented and DHF operates as a for-profit private health insurer and as a subsidiary of Avant; and the Proposal is not implemented and DHF continues as a not-for-profit private health insurer. If the Proposal is implemented: In Section 10 of the Scheme Booklet Avant states: “If the Proposal is implemented, Avant has committed to procure, insofar as it is able as a shareholder in DHF to do so, that capital is made available to DHF to the extent that it is needed to ensure that: DHF’s Health Benefits Fund is in a position to meet its capital requirements in accordance with the solvency and capital adequacy prudential standards under the PHIA; and DHF has sufficient capital to support its business, to the extent that it is conducted in accordance with DHF’s business plan in place as at the date of the 12 137 Implementation Deed and any subsequent DHF business plan which Avant may approve from time to time.” If the Proposal is implemented it is anticipated that DHF, consistent with its current capital management policy will hold net assets significantly in excess of the regulatory capital requirement over the following three years. DHF, as part of the larger Avant group, will have access to capital reserves held by Avant Mutual which currently are substantial. Therefore the potential to access capital is a significant advantage of this Proposal. While as a for-profit insurer, DHF would have the ability to pay dividends or return capital to Avant, I do not believe that this is material in respect of the level of capital likely to remain as: DHF will continue to be required to meet the aforementioned regulatory capital requirements; DHF will be required to advise its Appointed Actuary of such an event (a notifiable circumstance under the Private Health Insurance Act) and such an event is likely to require actuarial advice; and PHIAC monitors a private health insurer’s level of capital on a quarterly basis and has the ability to issue directions to an insurer should their level of capital be deemed insufficient. The conversion to for-profit will also mean DHF becomes subject to income tax. While this will result in additional cash outflows from DHF, these outflows will only be significant in times when the business is making profits. Given DHF must meet regulatory capital requirements and that dividends are paid from after tax profits, I do not believe the additional cost of tax has a materially adverse impact on the security of Policy holder benefits. It should be noted that there is no guarantee that Avant will always have its current structure and ownership or have the same objectives and principles of operation. If the Proposal is not implemented: If the Proposal is not implemented, it is anticipated that DHF, consistent with its current capital management policy, will hold net assets significantly in excess of the regulatory capital requirement over the following three years. However the capital in DHF’s health benefits fund could be eroded because of other strategies, such as aggressive growth programmes or significant adverse experience. In the event of such erosion of capital, DHF would have limited access to external capital. 13 138 8.4.4 Impact of the Proposal on Policy holder’s security of benefits Having considered the points above, including : The security provided by the regulatory capital requirements; DHF’s capital policy to hold capital above regulatory capital standards, which it is anticipated will continue; The ongoing safeguards provided by legislation; and Avant’s commitment to procure, insofar as it is able as a shareholder in DHF to do so, that capital is made available to DHF to the extent that it is needed to ensure DHF’s health benefits fund meets the prudential capital requirements and has sufficient capital to support its business plans, I consider that Policy holders’ benefits should remain adequately secure if the Proposal is approved. 8.5 Whether future premium rates are likely to be affected by the Proposal Over the past few years, premium rates for DHF have been set having regard to pricing principles to achieve appropriate gross and net margins to meet the target level of capital in the context of commercial considerations. Avant has indicated that it is not intending to change DHF’s approach to key aspects of the business as stated in Section 10.5 of the Scheme Booklet: “If the Proposal is implemented, Avant’s current intention is that DHF will retain its existing product range, including DHF’s Top Cover hospital product and the range of benefits offered under each of DHF’s products.” The longer term impact on premiums is harder to assess. It is possible that premiums could be set to achieve a target gross or net margin, or to meet Avant’s capital or dividend policy. I also note that: Private health insurance is a competitive industry where it is easy to change insurer because of the legislative requirement of full portability between insurers, and premium rates must be set having regard to the insurer’s competitive position and the response of customers and competitors to price changes. All changes in premium rates are subject to regulatory review and must be approved by the Commonwealth Minister for Health. For-profit insurers and not-for-profit insurers operate in the private health insurance market, offering comparable competitive products. 14 139 The Proposal to become a for-profit private health insurer owned by a significantly larger organisation should provide increased business opportunities and scope for cost savings which should lead to a reduction in the management expense ratio (i.e. the ratio of management expenses to premium income). This could result in either an increase in the underwriting profit for DHF or lower increases in premiums compared to the outcomes if DHF remains as a small not-for-profit insurer. Changing to a for-profit status will mean that DHF becomes subject to corporation income tax and have the ability to pay dividends to its shareholder (Avant). The need to pay tax will impact the profits available to fund future operations and will result in DHF’s asset base growing more slowly than it may otherwise have done had the Proposal not been implemented. However as noted above, there are likely to be a number of other factors that will ensure that the premium rate increases pursued by DHF will remain competitive. In particular, DHF’s focus on the gross and net margin which does not include investment income means that any reduction in investment income associated with a reduced asset base would have no bearing on insurance premiums. Having considered the relevant statements made by Avant, the competitiveness of and the legislative safeguards in the private health insurance industry, I believe that future premium rates are unlikely to be impacted in a material manner by the Proposal. 8.6 Whether the Proposal, if approved and implemented, will have an adverse impact on the reasonable benefit expectations of the Policy holders under the Policies issued by DHF. Avant has indicated that it is not intending to change the policy conditions of DHF policies and has clearly stated in Section 10.5 of the Scheme Booklet that: “If the Proposal is implemented, Avant’s current intention is that DHF will retain its existing product range, including DHF’s Top Cover hospital product and the range of benefits offered under each of DHF’s products.” Health insurance is a very competitive market and should policy conditions be changed in an adverse manner, portability provides members with the opportunity to switch to another private health insurer with only minor inconvenience. To reduce benefits unnecessarily without an offsetting factor such as a reduction in premium rates would impact DHF’s competitiveness, would be contrary to the growth strategy of Avant and would risk placing DHF at a commercial disadvantage. There is no guarantee that Avant will always have its current structure and ownership or have the same objectives and principles of operation. Nevertheless, the characteristics of the private health insurance market relating to portability, competitive market pressures, Ministerial approval of premium rates, as well as Avant’s size, provide a degree of protection to DHF Policy holders over the longer term. 15 140 I believe that the reasonable benefit expectations of DHF Policy holders are unlikely to be impacted in a materially adverse manner by the Proposal. 8.7 Conclusion I conclude that as a result of the Proposal: Policy holders’ benefits should remain adequately secure if the Proposal is approved. Future premium rates are unlikely to be impacted in a material manner by the Proposal. The reasonable benefit expectations of DHF Policy holders are unlikely to be impacted in a materially adverse manner by the Proposal. 9 Reliances and limitations My review was limited in scope as discussed in Section 5 of this Report. My advice is general in nature and does not take into account the specific circumstances of individual DHF Members. DHF Members should seek appropriate independent professional advice that considers the implication of their own specific circumstances. KPMG Actuarial Pty Ltd and KPMG disclaim all responsibility and liability to any other party (including, without limitation, to each DHF Member) for any loss or liability that the other party may suffer or incur (including, without limitation, any direct or indirect or consequential costs, loss or damage or loss of profits) arising from or relating to or in any way connected with the contents of my advice or the provision of my advice to the other party or the reliance on my advice by the other party. The statements and opinions given in this Report are given in good faith and the belief that such statements and opinions are not false or misleading. In performing my procedures in line with the scope of my work I relied on the accuracy and completeness of all information. In general, reliance was placed on but not limited to the information provided. I have used the information without independent verification. However, it was reviewed where possible for reasonableness and consistency. This review process included comparative analysis with data available from a range of sources. 16 141 Yours sincerely David Torrance Appointed Actuary, DHF Fellow of the Institute of Actuaries Australia Director and Representative 17 142 Financial Services Guide Dated 31 January 2012 What is a Financial Services Guide (FSG)? This FSG is designed to help you to decide whether to use any of the general financial product advice provided by KPMG Actuarial Pty Ltd ABN 91 144 686 046, Australian Financial Services Licence Number 392050 (KPMG Actuarial) or David Torrance as an authorised representative of KPMG Actuarial (Authorised Representative), authorised representative number 406115. This FSG includes information about: KPMG Actuarial and its Authorised Representative and how they can be contacted. The services KPMG Actuarial and its Authorised Representative are authorised to provide. How KPMG Actuarial and its Authorised Representative are paid. Any relevant associations or relationships of KPMG Actuarial and its Authorised Representative. How complaints are dealt with as well as information about internal and external dispute resolution systems and how you can access them; and The compensation arrangements that KPMG Actuarial has in place. The distribution of this FSG by the Authorised Representative has been authorised by KPMG Actuarial. This FSG forms part of the Appointed Actuary’s Report (Report) which has been prepared for inclusion in the Scheme Booklet The purpose of the disclosure document is to help you make an informed decision in relation to a financial product. The contents of the disclosure document, as relevant will include details such as the risks, benefits and costs of acquiring the particular financial product. Financial services that KPMG Actuarial and the Authorised Representative are authorised to provide KPMG Actuarial holds an Australian Financial Services Licence, which authorises it to provide financial product advice for the following classes of financial products: derivatives; general insurance products; debentures, stocks or bonds issued or proposed to be issued by a government; life products including: 18 143 o investment life insurance products as well as any products issued by a Registered Life Insurance Company that are backed by one or more of its statutory funds; and o life risk insurance products as well as any products issued by a Registered Life Insurance Company that are backed by one or more of its statutory funds; interests in managed investments schemes including investor directed portfolio services; securities; and superannuation; to retail and wholesale clients. We provide financial product advice when engaged to prepare a report in relation to a transaction relating to one of these types of financial products. The Authorised Representative is authorised by KPMG Actuarial to provide financial product advice on behalf of KPMG Actuarial. KPMG Actuarial and the Authorised Representative's responsibility to you KPMG Actuarial has been engaged by Doctors’ Health Fund Limited (Client) to provide general financial product advice in the form of a Report to be included in the Scheme Booklet. You have not engaged KPMG Actuarial or the Authorised Representative directly but have received a copy of the Report because you have been provided with a copy of the Scheme Booklet. Neither KPMG Actuarial nor the Authorised Representative are acting for any person other than the Client. KPMG Actuarial and the Authorised Representative are responsible and accountable to you for ensuring that there is a reasonable basis for the conclusions in the Report. General Advice As KPMG Actuarial has been engaged by the Client, the Report only contains general advice as it has been prepared without taking into account your personal objectives, financial situation or needs. You should consider the appropriateness of the general advice in the Report having regard to your circumstances before you act on the general advice contained in the Report. Also you should consider the other parts of the Scheme Booklet before making any decision in relation to the Proposal. 19 144 Fees KPMG Actuarial may receive and remuneration or other benefits received by our representatives KPMG Actuarial charges fees for preparing reports. Usually these fees will be agreed with, and paid by, the Client. Fees are agreed on either a fixed fee or a time cost basis. In this instance, the Client has agreed to pay KPMG Actuarial fees on a time cost basis for preparing the Report. These fees could be in the range $240,000 to $280,000 (exclusive of GST). KPMG Actuarial and its officers, representatives, related entities and associates will not receive any other fee or benefit in connection with the provision of the Report. KPMG Actuarial officers and representatives (including the Authorised Representative) receive a salary or a partnership distribution from KPMG’s Australian professional advisory and accounting practice (the KPMG Partnership). KPMG Actuarial’s representatives (including the Authorised Representative) are eligible for bonuses based on overall productivity. Bonuses and other remuneration and benefits are not provided directly in connection with any engagement for the provision of general financial product advice in the Report. Further details may be provided on request. Referrals Neither KPMG Actuarial nor the Authorised Representative pay commissions or provide any other benefits to any person for referring customers to them in connection with a Report. Associations and relationships Through a variety of corporate and trust structures KPMG Actuarial is controlled by and operates as part of the KPMG Partnership. KPMG Actuarial’s directors may be partners in the KPMG Partnership. The Authorised Representative is a partner in the KPMG Partnership. The financial product advice in the Report is provided by KPMG Actuarial and the Authorised Representative and not by the KPMG Partnership. From time to time KPMG Actuarial, the KPMG Partnership and related entities (KPMG entities) may provide professional services, including audit, tax and financial advisory services, to companies and issuers of financial products in the ordinary course of their businesses. KPMG entities have provided, and continue to provide, a range of advisory services to the Client for which professional fees are received. Over the past two financial years (i.e. to 30 June 2011) professional fees of $130,070 (inclusive of GST) have been received from the Client. None of those services have related to the transaction or alternatives to the transaction. 20 145 As noted in the Report, KPMG Financial Advisory Services (Australia) Pty Ltd (formerly known as KPMG Corporate Finance (Aust) Pty Ltd) has provided corporate advisory services to Avant in regards to various aspects of the Proposal and to date has earned fees on a time cost basis. A fixed success fee of $100,000 is payable to KPMG Corporate Finance (Aust) Pty Ltd on completion of the transaction. KPMG TS Pty Limited (formerly KPMG Transaction Services (Australia) Pty Limited) provided transaction services to DHF and earned fees on a time cost basis of $30,000. In addition, Jefferson Gibbs a partner of KPMG and an Executive of KPMG Actuarial Pty Ltd became the Appointed Actuary of Avant Insurance Limited effective 1 November 2011 and the Appointed Actuary of Professional Insurance Australia Pty Ltd effective 1 January 2012. KPMG Actuarial Pty Ltd will earn consulting fees from these engagements. No individual involved in the preparation of this Report holds a substantial interest in, or is a substantial creditor of, the Client or has other material financial interests in the transaction. Complaints resolution Internal complaints resolution process If you have a complaint, please let either KPMG Actuarial or the Authorised Representative know. Formal complaints should be sent in writing to The Complaints Officer, KPMG, PO Box H67, Australia Square, Sydney NSW 1213. If you have difficulty in putting your complaint in writing, please telephone the Complaints Officer on 02 9335 7000 and they will assist you in documenting your complaint. Written complaints are recorded, acknowledged within 5 days and investigated. As soon as practical, and not more than 45 days after receiving the written complaint, the response to your complaint will be advised in writing. External complaints resolution process If KPMG Actuarial or the Authorised Representative cannot resolve your complaint to your satisfaction within 45 days, you can refer the matter to the Financial Ombudsman Service (FOS). FOS is an independent company that has been established to provide free advice and assistance to consumers to help in resolving complaints relating to the financial services industry. 21 146 Further details about FOS are available at the FOS website www.fos.org.au or by contacting them directly at: Address: Financial Ombudsman Service Limited, GPO Box 3, Melbourne Victoria 3001 Telephone: 1300 78 08 08 Facsimile: (03) 9613 6399 Email: [email protected]. The Australian Securities and Investments Commission also has a freecall infoline on 1300 300 630 which you may use to obtain information about your rights. Compensation arrangements KPMG Actuarial has professional indemnity insurance cover as required by the Corporations Act 2001(Cth). Contact Details You may contact KPMG Actuarial or the Authorised Representative using the contact details: KPMG Actuarial Pty Ltd 10 Shelley St Sydney NSW 2000 PO Box H67 Australia Square NSW 1213 Telephone: (02) 9335 7000 Facsimile: (02) 9335 7200 David Torrance C/- KPMG PO Box H67 Australia Square NSW 1213 Telephone: (02) 9335 7000 Facsimile: (02) 9335 7200 22 147 Appendix 9 Independent Actuary’s Report Synge & Noble Pty Ltd ACN 139 559 096 Level 5, 44 Pitt St Sydney NSW 2000 PO Box R1048 Royal Exchange NSW 1225 1 February 2012 Phone: +61 2 8220 8520 www.SyngeAndNoble.com The Board of Directors Doctors Health Fund Limited PO Box 1400 Crows Nest Dear Directors, Independent Actuary’s Report 1. Introduction The Doctors Health Fund Limited (DHF) proposes to demutualise and to be acquired by Avant Group Holdings Limited (Avant) via a scheme of arrangement with the proceeds of the demutualisation being distributed as cash to Scheme Members in return for giving up their membership rights in accordance with a set of Allocation Rules contained in the Scheme Booklet. As part of this process DHF has engaged Synge & Noble to prepare an independent actuary’s report including opinions as to: n n n n whether or not the proposed allocation methodology is fair and reasonable; whether policy holder benefits remain adequately secure; whether future premium rates are likely to be affected; and whether there will be an adverse impact on policy holder reasonable benefit expectations. I am a Fellow of the Institute of Actuaries Australia with 23 years experience as a consulting actuary and I have been involved in a number of recent demutualisations of Australian health insurers. While I am not a member or policy holder of DHF or Avant and have no entitlement under the Scheme I will receive a fee for preparation of this report. In this report capitalised words, where defined in Section 12 of the Scheme Booklet, have that meaning. 2. Allocation Methodology The proceeds of the demutualisation will be allocated to Scheme Members in accordance with a set of Allocation Rules adopted by the Board of DHF as recommended by the Appointed Actuary, Mr David Torrance of KPMG in his Allocation Rules report dated 31 January 2012. In preparing his recommendation Mr Torrance had regard to a set of allocation principles set by the Board. 148 2 In considering whether the allocation methodology is fair and reasonable I have considered the principles set by the board, and also the rights being forfeited in the demutualisation and who should be eligible for an allocation. Rights of Members and Eligibility A demutualisation usually occurs through a vote of members of the organisation. In considering who is affected it is usual to consider members’ rights on wind up of the entity and member voting rights. DHF is registered as a company under the Corporations Act 2001 and is also registered as a private health insurer under the Private Health Insurance Act 2007 In the case of DHF the members have no rights on wind up to surplus assets as the constitution requires the assets to be given to another similar organisation and not to members. This is very common and the main driver for participation in the demutualisation is therefore the voting rights of members that are being given up in exchange for the proceeds of the demutualisation. The DHF Members, who are members under the constitution, have the right to vote at meetings of members and have the right to elect directors. Through the right to vote the DHF Members can bring about change in the company and are being asked to give up this right to Avant. As they are the only ones giving up rights DHF Members should clearly participate in the allocation. As a result of administrative rules put in place by the Board under the constitution only current Contributing Members of the benefit fund can be DHF Members and, therefore, Contributing Members are also DHF Members and, in turn Scheme Members. As it is the benefit fund that gives rise to the value of DHF, it is appropriate to determine the allocation to Scheme Members having regard to their membership of the benefit fund. Under the Proposal, DHF Members joining after the announcement of the scheme and before the Scheme Record Time are eligible for an allocation. Hence there is an option for people to take out a DHF insurance policy in order to receive an allocation that could be considered unfair. To reduce the risk of DHF Members joining solely to achieve an allocation, no allocation will be paid to DHF Members who join after the Calculation Date and suspend their policy before the Scheme Record Time. The Appointed Actuary does not consider there is a large risk of many people joining to take advantage of the allocation as the benefit is small relative to the effort and cost involved and hence any impact on existing DHF Members will be minimal. I consider this a reasonable view and note the Residual Amount that has been set aside to fund, among other things, the allocation for new members after the Calculation Date. The Board has determined that only DHF Members satisfying the eligibility requirements to be Scheme Members will participate and I consider this to be a fair and reasonable basis for participation. 149 3 Allocation Methodology The allocation methodology is expressed as the Allocation Rules adopted by the Board. These are recommended by the Appointed Actuary in accordance with a set of nine allocation principles determined by the Board. The Allocation Principles set by the Board are: “1. Company Members (as Contributing Members) should be rewarded 2. The rights of the Company Members being given up are not considered to be significant to the overall financial benefit. 3. The financial benefit can be considered to be in the nature of a windfall gain. 4. The allocation should take into consideration the contribution to value, but should not be driven by it. In considering the contribution to value: • The Allocation Rules should take into consideration the member’s duration of membership on various levels of insurance product as a Contributing Member. • In determining the various levels of insurance cover, consideration should be given to the Fund’s Hospital Cover compared to Extras Cover. • Ideally, and data permitting, the membership tenure should extend back to the formation of the DHF health benefits fund in 1977. • It should be considered that new members are able to join the health benefits fund after the Calculation Date and up to the Scheme Record Time. 5. The allocation basis should recognise that the contribution to value cannot be accurately determined. 6. The allocation basis should be as simple as practical given the above considerations and based on data that can be verified by the organisation. 7. The allocation basis should have a mechanism for dealing with issues that may take time to be resolved. We note that prior demutualisations in the private health insurance industry have allowed for an amount to be set aside as a “Residual Amount” held over from the initial allocation to deal with disputes. The Board ask that you form a view in relation to the value that should be assigned to a Residual Amount. 8. The allocation rules should represent a normal view of fairness where loyalty to the organisation is recognised and valued. 9. The allocation basis should take into consideration past demutualisations and should not be significantly out of step with the allocation bases that have previously been adopted, without proper reason.” I have carefully considered these principles and the way they have been addressed in the Appointed Actuary’s Report and the Allocation Rules as well as compared them to those in other health insurance demutualisations. 150 4 I note in particular that the Allocation Rules have had regard to available information and recognise historical changes between family and single status which has generally not been done in other demutualisations. The allocation of the proceeds of a demutualisation is a complex matter because of the need to allocate value built up over a period of time in changing conditions to those members now eligible to participate. It is further complicated by the requirement to use community rating for health insurance that means individual policy holders do not pay a premium that reflects their expected cost to the fund. As a result the contribution to surplus from a product or generation of policy holders cannot be readily determined in total nor allocated to groups of policy holders. Any allocation must necessarily be highly subjective and the use of principles that are generally seen to be fair is a reasonable way of achieving broad equity. While there exists any number of ways of allocating the proceeds of the demutualisation, overall I consider that the allocation principles reasonably address relevant considerations for the allocation and that the Allocation Methodology as represented by the Allocation Rules is fair and reasonable. 3. Impact on Policy holders Rule 12 (1)(d) of the Private Health Insurance (Health Benefits Fund Administration) Rules 2007 requires a report from the Appointed Actuary to be submitted to PHIAC addressing a number of issues including: n how the arrangement will affect the ability of the insurer to comply with the solvency standard, and the capital adequacy standard in the future n what effects the arrangement is likely to have on the premiums for, and benefits under continuing policies. The required considerations and declarations are contained in the Appointed Actuary’s Report which also specifically addresses: n whether Policy benefits would remain adequately secure n whether future premium rate are likely to be affected n whether the Proposal will have an adverse impact on the reasonable expectations of policy holders. Mr Torrance has considered these issues, including the time horizons as required by the Private Health Insurance Act, noting the expected ability of DHF to support the payment of taxes and dividends without unreasonably affecting policy holders’ security, premiums or reasonable expectations. As a result of the Proposal DHF will become a for profit fund paying tax on profits and Avant will become the single shareholder, entitled to dividends out of profits. An important consideration therefore is Avant’s stated intentions in relation to the business which are set out in Section 10.5 of the Scheme Booklet. In summary it is Avant’s current intention, subject to future circumstances and resources, to provide necessary capital support, to manage DHF separately from Avant’s other businesses, and provide continuity of policies, products and range of benefits. Comfort about the future can also be gained by the protection of policy holders provided under the Private Health Insurance Act which sets strict minimum capital requirements for all insurers and also 151 5 5 requires changes to premium rates to be approved by the minister administering the Private Health Insurance Act. I have carefully considered the information made available to me including Mr Torrance’s opinions and the reasoning supporting them. While the future impact on policy holders will be a function of future experience and circumstances which cannot be reliably predicted or guaranteed I consider that: n n n policy holders’ benefits should remain adequately secure if the Proposal is approved future premium rates are unlikely to be impacted in a material manner by the Proposal the reasonable benefit expectations of DHF Policy holders are unlikely to be impacted in a materially adverse manner by the Proposal 4. Summary of Conclusions I summary I consider that: n n n n the Allocation Methodology as represented by the Allocation Rules is fair and reasonable. policy holders’ benefits should remain adequately secure if the Proposal is approved future premium rates are unlikely to be impacted in a material manner by the Proposal the reasonable benefit expectations of DHF Policy holders are unlikely to be impacted in a materially adverse manner by the Proposal 5. Work Performed In reaching my conclusion I had extensive conversations with Mr Torrance regarding his logic in recommending the allocation rules and views on the potential impact of the Proposal on the Scheme Members. I also reviewed a number of documents prepared by Mr Torrance including the Appointed Actuary's Report, the Allocation Rules Report, and the DHF Financial Condition report at 30 June 2011. I also considered a number of other documents such as the Scheme Booklet, the Implementation Deed, the allocation principles set by the board, the Constitution of DHF, the Benefit Fund Rules of DHF and legal advice in relation to the Proposal. I have had regard to the Private Health Insurance Act which sets out a number of requirements for the acquisition of a health fund and conversion to for profits status. Lastly, I considered similar transactions involving NIB, MBF, ahm and Manchester Unity. 6. Reliance and Limitations The advice in this report is general in nature and does not take into account the individual circumstances of DHF Members who should seek their own independent advice as they deem appropriate before deciding how to vote on the Proposal. 152 6 In forming my opinions I have relied on information both written and verbal and my opinions are dependent on the accuracy and completeness of that information. I have used the information without independent verification. My views have been based on the current environment and information which may change in the future and cause my views to be incorrect. This report has been prepared for inclusion in the Doctor’s Health Fund Scheme Booklet. I have not been involved in the preparation or writing of the rest of the Booklet and take no responsibility for it. David Goodsall Fellow of the Institute of Actuaries of Australia Director 153 Appendix 10 Tax Advice Letter The Board of Directors The Doctors' Health Fund Limited Level 5 69 Christie Street ST LEONARDS NSW 2065 30 January 2012 Dear Directors Demutualisation of The Doctors’ Health Fund Limited (DHF) We have been asked to provide an Independent Tax Expert’s Report to individual Members of DHF in relation to the major Australian income tax implications to those Members of the proposed demutualisation of DHF (the Proposal). We have not been requested to provide any taxation advice regarding the taxation implications of the Proposal to the future operations of DHF itself. It is understood that this report will be included in a Scheme Booklet that relates to the Proposal and should be read in conjunction with the information included in the Scheme Booklet. The taxation summary contained in this Report: does not purport to be a complete analysis of the potential tax consequences of the Proposal, is intended as a general guide to the Australian income tax implications only should not be a substitute for advice from an appropriately qualified professional adviser having regard to a Member’s individual circumstances. All Members of the DHF are strongly advised to obtain their own independent professional advice on the income tax implications specific to their own circumstances when considering the consequences of the Proposal. Unless otherwise indicated, all statutory references refer to the Income Tax Assessment Act 1936 (ITAA 1936) or the Income Tax Assessment Act 1997 (ITAA 1997). PricewaterhouseCoopers, ABN 52 780 433 757 PricewaterhouseCoopers Centre, 26 Honeysuckle Drive, PO Box 798, NEWCASTLE NSW 2300 T: +61 2 4925 1100, F: +61 2 4925 1199, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 154 1 The Proposal We understand that the demutualisation is proposed to occur broadly as follows: 1. DHF and Avant Group Holdings Limited (Avant) enter into an Implementation Deed whereby Avant will acquire DHF on the terms and conditions included in that Deed. 2. DHF Members vote to adopt the Proposal, and the Federal Court of Australia approves the arrangement. 3. Avant becomes a Member of DHF. 4. Avant deposits Consideration of $30 million into a Trust Account as pre-payment for the acquisition of shares in DHF. 5. All DHF Membership interests (other than that held by Avant) are cancelled and the liability of each DHF Member (other than Avant) as a guarantor on a winding up of DHF are extinguished in return for release and payment of the Consideration to Members, based upon predetermined allocation principles. 6. DHF changes its structure from a public company limited by guarantee to a private company limited by shares, amends its Constitution to reflect this change in status, and issues shares to Avant for a subscription price of $30 million. 7. DHF obtains approval from the Private Health Insurance Administration Council for conversion of registration to a ‘for-profit insurer’ under the Private Health Insurance Act 2007 (PHIA). 2 Income Tax Consequences 2.1 General Framework Division 315 ITAA1997 applies to the demutualisation of an entity if the conditions set out in section 315-15 are satisfied. The proposed DHF demutualisation should satisfy these conditions as we understand that 1. DHF is, prior to the demutualisation, a private health insurer within the meaning of the PHIA that was not carried on for profit or gain of its individual members; 2. at no time has DHF been registered under the Life Insurance Act 1995; 3. DHF is not, prior to demutualisation, a company limited by shares; and 4. DHF will convert to a ‘for-profit insurer’ under subsection 126-42(5) of the PHIA. 2 155 2.2 Income Tax Consequences for Individual DHF Members Each individual DHF Member will have a capital gains tax event occurring when their DHF Membership interest is cancelled. In the absence of specific concessions, the DHF Member would need to consider whether their membership interest commenced before the introduction of capital gains tax in September 1985 (in which case no capital gain should arise) or alternatively calculate the amount of the capital gain based upon the consideration received and the cost to them of that membership interest. Any capital gain or loss relating to the DHF demutualisation should be disregarded by the Member where the CGT Event happens under a demutualisation to which Division 315 applies (as described above); the individual is, or has been, a policy holder of the demutualising health insurer; and the individual has a membership interest, or an interest as a policyholder, or a right or interest of another kind, in the demutualising health insurer. The taxation legislation also includes provisions to ensure that any amount received as a consequence of the demutualisation is not considered assessable as ordinary income or statutory income. Accordingly, on the basis that the demutualisation of DHF is covered by the general framework detailed above, the amount Members receive from the demutualisation of DHF should not be subject to income tax. 2.3 Non-Resident members The above information has been prepared for taxpayers who are residents of Australia for taxation purposes. Any DHF Members who are taxation residents of another country (a non-resident member) must seek their own independent advice, as the taxation rules of that other country will control how the receipt of Consideration upon demutualisation will be treated in that country. For Australian taxation purposes, the non-resident member will be treated the same as described above, and should not be subject to income tax in Australia on the amount received from the DHF demutualisation. 2.4 Taxation of Benefit Payments There will be no change to the taxation treatment of health insurance benefit payments received by Members under their insurance policies as a result of the Proposal. 3 156 About our Report This advice has been given on the basis that the Proposal will be carried out in the manner described in the Scheme Booklet and other associated documents. In providing this advice we have relied on the facts set out in the Implementation Deed and these facts have not been independently verified or reviewed by PricewaterhouseCoopers. The information contained in this Report does not constitute "financial product advice" within the meaning of the Corporations Act 2001 (Cth) (Corporations Act). The PricewaterhouseCoopers partnership which is providing this advice is not licensed to provide financial product advice under the Corporations Act. To the extent that this Report contains any information about a "financial product" within the meaning of the Corporations Act, taxation is only one of the matters that must be considered when making a decision about the relevant financial product. This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on this material, consider taking advice from a person who is licensed to provide financial product advice under the Corporations Act . Any recipient should, before acting on this material, also consider the appropriateness of this material having regard to their objectives, financial situation and needs, and consider obtaining independent financial advice. The comments above are based on our opinion of the law and understanding of the practice of the tax authorities in Australia as at the date of this document. The law is complex and subject to change periodically as is their interpretation by the courts and the Australian Taxation Office (ATO). We have not sought to have our opinion ruled upon by the ATO and therefore there is a risk that the ATO may not agree with our opinion or aspects of it. It should be noted that although PricewaterhouseCoopers has given its consent to the inclusion of this Report into the Scheme Booklet, we give no assurance or guarantee in respect of the successful operation or performance of DHF or the proposed demutualisation and that consent should not be taken as an endorsement or recommendation. Yours sincerely Murray Evans Partner 4 157 Appendix 11 Explanation of Constitutional Changes proposed at EGM No. Existing Provision Proposed Provision (a) 7.1 Admitting Members By deleting clause 7.1 in its entirety and A person who applies to become (or has become) a Contributing Member of a Health Benefits Fund is taken to have applied to be a member of the Company. Subject to clause 7.2, upon becoming a Contributing Member, a person will become a member of the Company. replacing it with the following: 7.1 Admitting Members (a)A person who applies to become (or has become) a Contributing Member of a Health Benefits Fund is taken to have applied to become a member of the Company. Subject to clause 7.2, upon becoming a Contributing Member, a person will become a member of the Company. Comment on Change Presently, only a Contributing Member can become a DHF Member. Under the proposed clause 7.1, although Avant cannot become a Contributing Member (because it will never hold a Policy), Avant can become a DHF Member while the Implementation Deed is in effect and has not been terminated. (b)In addition to clause (a) above, while the Implementation Deed is in effect and has not been terminated, Avant may on application be admitted as a member of the Company by the directors or pursuant to a delegation under clause 7.3. (b) 11.1Cessation A person ceases to be a member of the Company: [subclauses (a) and (b) set out various circumstances such as death, resignation etc] (c) 11.3Resignation (d) Once a member has ceased to be a Contributing Member, the member ceases to be a member of the Company. (d) 15.2Number of votes On a show of hands (or on voices) or on a poll, a member of the Company (being a Contributing Member): (a)who is, under clause 15.1, entitled to vote and who has single or single parent family membership of a Health Benefits Fund, as defined in the Rules, has only one vote; or (b) who is, under clause 15.1, entitled to 158 By deleting the full stop at the end of clause (b)(iii) of clause 11.1 and replacing it with “; or” and inserting a new clause (c) into clause 11.1 as follows: (c)in the case of Avant, if the Implementation Deed is terminated before the Implementation Time or the Implementation Time has not occurred by the End Date. By deleting clause 11.3(d) in its entirety and replacing it with the following: 11.3Resignation (d)For any member (other than Avant), once the member has ceased to be a Contributing Member, the member ceases to be a member of the Company. By deleting clause 15.2 in its entirety and replacing it with the following: 15.2Number of votes On a show of hands (or on voices) or on a poll: (a)a member of the Company (being a Contributing Member): (i)who is, under clause 15.1, entitled to vote and who has single or single parent family The existing clause sets out when a DHF Member ceases to be a member of DHF. New clause 11.1(c) is inserted so that Avant ceases to be a member of DHF if the Implementation Deed is terminated before the Scheme is implemented or if it is not implemented before the End Date. As Avant will never be a Contributing Member, clause 11.3(d) cannot apply to Avant. Accordingly, Avant has been excluded from its operation. Clause 11.1(c) governs when Avant ceases to be a member of DHF. Presently, only a Contributing Member can become a DHF Member. Under the proposed clause 15.2(b), Avant is given one vote. No. Existing Provision Proposed Provision membership of a Health Benefits Fund, as defined in the Rules, has only one vote; or vote and who has couples or family membership of a Health Benefits Fund, as defined in the Rules, has 2 votes. For the avoidance of doubt, a Contributing Member of more than one Health Benefits Fund conducted by the Company is entitled to only one vote as a member of the Company. Comment on Change (ii) who is, under clause 15.1, entitled to vote and who has couples or family membership of a Health Benefits Fund, as defined in the Rules, has 2 votes; and (b)whilst it remains a member of the Company, Avant has 1 vote. For the avoidance of doubt, a Contributing Member of more than one Health Benefits Fund conducted by the Company is entitled to only one vote as a member of the Company. (e) No equivalent provision By inserting a new clause 15.13 as follows: 15.13 Sole members If the Company has only one member, and the member records in writing his or her decision on a question, it counts as the passing of a resolution. The record also counts as the minutes of the passing of the resolution. (f) 16.3Term of office Each director holds office until the director: By inserting at the end of clause 16.3(g) the following: [subclauses (a) to (f) set out various circumstances such as removal from office, resignation etc] (except this paragraph ceases to apply with effect at and from the Implementation Time) (g)ceases to be a member of the Company; 16.3Term of office Clause 16.3 will relevantly appear as follows: Each director holds office until the director: From the time that the memberships of DHF Members (other than Avant) are cancelled, Avant will be the only member of DHF and this clause enables DHF to pass resolutions as the only member of DHF by preparing a written resolution. The clause will not apply before that time. This power enables Avant to finalise the implementation of the Scheme efficiently. The words underlined at the end of subclause (g) are added because, from the Implementation Time, there is proposed to be no obligation for directors of DHF to be a member of DHF (because Avant will be the only member of DHF). [subclauses (a) to (f) set out various circumstances such as removal from office, resignation etc] (g)ceases to be a member of the Company (except this paragraph ceases to apply with effect at and from the Implementation Time); 159 No. Existing Provision (g) 16.4Director qualifications A director must: Proposed Provision By deleting clause 16.4 in its entirety and replacing it with the following: (a) be a member of the Company; and (b) not be a disqualified person. 16.4Director qualifications Directors must be appointed in accordance A director must not be a disqualified person. with clause 16.5. At any time no fewer than 2 directors must be Medically Qualified Directors. Until the Implementation Time, each director must be a member of the Company. With effect at and from the Implementation Time, a director need not be a member of the Company. Comment on Change The proposed clause 16.4 maintains the requirement for a director to be a member of the Company until the Implementation Time and, from that time, that requirement ceases to apply. The other director qualification requirements continue. Directors must be appointed in accordance with clause 16.5. At any time no fewer than 2 directors must be Medically Qualified Directors. (h) No equivalent definitions By inserting the following definitions into Schedule 1: Avant means Avant Group Holdings Limited ABN 72 077 283 884. End Date has the meaning set out in the Implementation Deed. Implementation Deed means the implementation deed, dated 11 August 2011 (as amended), between the Company and Avant which sets out the terms and conditions on which the Proposal will be implemented. Implementation Time has the meaning set out in the Implementation Deed. Proposal means the acquisition of the Company by Avant through the granting of membership to Avant and the implementation of the Scheme. Scheme has the meaning set out in the Implementation Deed. 160 These are definitions used in the proposed provisions that were not previously defined in the Constitution. _NOTES _ _................................................................................................................................................................................... _................................................................................................................................................................................... _................................................................................................................................................................................... _................................................................................................................................................................................... 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_................................................................................................................................................................................... _................................................................................................................................................................................... _................................................................................................................................................................................... _................................................................................................................................................................................... 163 Corporate Directory The Doctors’ Health Fund Limited (DHF) Ground Floor 69 Christie Street St Leonards NSW 2065 Legal Advisers to DHF mackenzie thomas Level 5 44 Pitt Street Sydney NSW 2000 Tax Adviser to DHF PricewaterhouseCoopers PricewaterhouseCoopers Centre 26 Honeysuckle Drive Newcastle NSW 2300 Independent Expert Lonergan Edwards & Associates Limited Level 27 363 George Street Sydney NSW 2000 Appointed Actuary to DHF David Torrance of KPMG Actuarial Pty Ltd 10 Shelley Street Sydney NSW 2000 Independent Actuary David Goodsall of Synge & Noble Pty Ltd Level 5 44 Pitt Street Sydney NSW 2000